<PAGE>
As filed with the Securities and Exchange Commission on May 21, 1997
Registration No. 333-24881
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
OPTEL, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 4841 95-4495524
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1111 W. Mockingbird Lane
Dallas, Texas 75247
(214) 634-3800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
Louis Brunel, President and Chief Executive Officer
OpTel, Inc.
1111 W. Mockingbird Lane
Dallas, Texas 75247
(214) 634-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
Ralph J. Sutcliffe, Esq. Michael E. Katzenstein, Esq.
Kronish, Lieb, Weiner & Hellman LLP OpTel, Inc.
1114 Avenue of the Americas 1111 W. Mockingbird Lane
New York, New York 10036-7798 Dallas, Texas 75247
(212) 479-6000 (214) 634-3800
---------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after
the effective
date of this
Registration
Statement.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
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======================================================================================================
Proposed
Proposed Maximum
Title of Securities Amount to be Maximum Aggregate Amount of
to be Registered Registered Offering Price(1) Offering Price Registration Fee
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
13% Senior Notes Due 2005,
Series B .................. $225,000,000 100% $225,000,000 $68,182(2)
======================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date or dates as the Commission, acting pursuant to said
Section 8(a), may determine.
===============================================================================
<PAGE>
OPTEL, INC.
CROSS-REFERENCE SHEET
Showing Location in Prospectus of
Information Required by Items in
Part I of Form S-4
<TABLE>
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Registration Statement Item Number and Caption Caption or Location In Prospectus
- ------------------------------------------------------- ----------------------------------------------------
<S> <C>
1 Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus ............ Outside Front Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus ....................................... Inside Front Cover Page; Outside Back Cover
Page
3 Risk Factors, Ratio of Earnings to Fixed Charges,
and Other Information .............................. Prospectus Summary; Risk Factors; Selected
Consolidated Financial and Operating Data
4 Terms of the Transaction ........................... Prospectus Summary; Risk Factors; The Exchange
Offer; Description of the Notes; Plan of Distribu-
tion; Certain Federal Income Tax Consequences
5 Pro Forma Financial Information .................. *
6 Material Contacts with the Company Being
Acquired .......................................... *
7 Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters ...... *
8 Interests of Named Experts and Counsel ............. Legal Matters; Independent Auditors
9 Disclosure of Commission Position on Indemnifi-
cation for Securities Act Liabilities ...............
10 Information With Respect to S-3 Registrants ....... *
11 Incorporation of Certain Information by
Reference .......................................... *
12 Information With Respect to S-2 or S-3
Registrants ....................................... *
13 Incorporation of Certain Information by Reference.... *
14 Information With Respect to Registrants Other
Than S-3 or S-2 Registrants ........................ Prospectus Summary; Risk Factors; Capitaliza-
tion; Selected Financial and Other Operating
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Description of the Notes
15 Information With Respect to S-3 Companies .......... *
16 Information With Respect to S-2 or S-3 Companies..... *
17 Information With Respect to Companies Other
Than S-2 or S-3 Companies ........................... *
18 Information if Proxies, Consents or Authorizations
Are to be Solicited ................................. *
19 Information if Proxies, Consents or Authorizations
Are Not to be Solicited, or in an Exchange Offer .... Management; Principal Stockholders; Certain
Transactions
</TABLE>
- ------------
* Omitted because item is inapplicable or answer is in the negative.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to the registration or qualification under the securities laws of any such
State.
Subject to Completion, Dated May 21, 1997
PROSPECTUS
OFFER TO EXCHANGE
13% Senior Notes Due 2005, Series B
for Any and All Outstanding 13% Senior Notes Due 2005
of
OpTel, Inc.
The Exchange Offer will expire at 5:00 P.M.,
New York City time, on [30 days from notice], 1997, unless extended
OpTel, Inc., a Delaware corporation (the "Issuer") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange $1,000 principal amount of 13% Senior Notes Due 2005,
Series B of the Issuer (the "New Notes") for each $1,000 principal amount of the
issued and outstanding 13% Senior Notes Due 2005 of the Issuer (the "Old Notes",
and, collectively with the New Notes, the "Notes"). As of the date of this
Prospectus, $225,000,000 principal amount of the Old Notes were outstanding. The
terms of the New Notes are substantially identical in all material respects
(including interest rate and maturity) to the Old Notes except for certain
transfer restrictions and registration rights relating to the Old Notes.
The Exchange Offer is being made to satisfy certain obligations of the
Issuer under the Registration Agreement, dated as of February 14, 1997, among
the Issuer and the other signatories thereto (the "Registration Agreement").
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their Old
Notes will not have any registration rights under the Registration Agreement
covering such Old Notes not tendered and such Old Notes will continue to be
subject to the restrictions on transfer contained in the legend thereon. If the
Exchange Offer is not consummated, or a shelf registration statement is not
filed or is not declared effective or, after either this registration statement
or the shelf registration statement has been declared effective, such
registration statement thereafter ceases to be effective or usable (subject to
certain exceptions) in connection with resales of Old Notes or New Notes in
accordance with and during the periods specified in the Registration Agreement,
additional interest will accrue and be payable on the Notes until so declared
effective or consummated. See "Exchange Offer; Registration Rights."
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Issuer believes that the New Notes issued pursuant to
the Exchange Offer in exchange for the Old Notes may be offered for resale,
resold and otherwise transferred by holders thereof (other than any holder which
is an "affiliate" of the Issuer within the meaning of Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act")) without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that the New Notes are acquired in the ordinary course of the
holders' business, the holders have no arrangement with any person to
participate in the distribution of the New Notes and neither the holder nor any
other person is engaging in or intends to engage in a distribution of the New
Notes. Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of New Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of the New Notes
received in exchange for the Old Notes where such New Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. Broker-dealers may not exchange Old Notes which are part of an
unsold original allotment in the Exchange Offer. The Issuer has agreed that,
starting on the Exchange Date (as defined) and ending on the close of business
on the earlier of the first anniversary of the Exchange Date or the date upon
which all such New Notes have been sold by such participating broker-dealer, it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
<PAGE>
The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture (as defined). For a more complete
description of the terms of the New Notes, see "Description of the Notes." There
will be no cash proceeds to the Issuer from the Exchange Offer. The New Notes
will be senior unsecured obligations of the Issuer, ranking pari passu in right
of payment with all present and future senior unsecured obligations of the
Issuer and will rank senior to all present and future subordinated indebtedness
of the Issuer. As of February 28, 1997, the Issuer had outstanding approximately
$121.0 million of 15% convertible notes (the "Convertible Notes") due to VPC
Corporation ("VPC"), its principal stockholder. The Convertible Notes are
subordinated in payment to the Notes in the event of a liquidation, dissolution,
reorganization, receivership or winding-up of the Issuer 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. The Issuer is a holding company that
derives all of its operating income and cash flow from its subsidiaries and
claims in respect of the New Notes will be effectively subordinated to all
existing and future indebtedness and liabilities of such subsidiaries. As of
February 28, 1997, the total indebtedness and other liabilities of subsidiaries
of the Issuer (excluding any indebtedness owed to the Issuer) were $27.3 million
and the Issuer's subsidiaries are expected to incur substantial additional
indebtedness in the future. See "Capitalization" and "Description of the Notes -
Ranking."
The Old Notes were originally issued and sold on February 14, 1997 (the
"Offering") in a transaction exempt from registration under the Securities Act
in reliance upon the exemptions provided by Rule 144A and by Section 4(2) of the
Securities Act. Accordingly, the Old Notes may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an exemption from the registration requirements of the
Securities Act and applicable state securities laws is available.
The Issuer has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer and to
the best of the Issuer's information and belief, each person participating in
the Exchange Offer is acquiring the New Notes in its ordinary course of business
and has no arrangement or understanding with any person to participate in the
distribution of the New Notes to be received in the Exchange Offer.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Exchange Offer will expire
at 5:00 p.m., New York City time, on , 1997, unless extended (the
"Expiration Date"), provided that the Exchange Offer shall not be extended
beyond 60 days from the date of this Prospectus. The date of acceptance for
exchange of the Old Notes for the New Notes (the "Exchange Date") will be the
first business day following the Expiration Date. Old Notes tendered pursuant to
the Exchange Offer may be withdrawn at any time prior to the Expiration Date;
otherwise such tenders are irrevocable.
Prior to this Exchange Offer, there has been no public market for the
Notes. The Old Notes have traded on the PORTAL Market. If a market for the New
Notes should develop, the New Notes could trade at a discount from their
principal amount. The Issuer does not currently intend to list the New Notes on
any securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active public market for the
New Notes will develop.
See "Risk Factors" beginning on page 15 for a description of certain
factors that should be considered by participants in the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Financial Statements and the notes thereto, appearing
elsewhere in this Prospectus. As used in this Prospectus, the terms the
"Company" or "OpTel" mean OpTel, Inc. and its subsidiaries, except where the
context otherwise requires. References to fiscal years throughout this Offering
Memorandum are to the Company's fiscal years which end on August 31 of each
calendar year. This Prospectus contains certain "forward-looking statements"
concerning the Company's operations, economic performance and financial
condition, which are subject to inherent uncertainties and risks, including
those identified under "Risk Factors." Actual results could materially differ
from those anticipated in this Prospectus.
The Company
Overview
OpTel 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 seven years as of
February 28, 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, Denver and Miami-Ft. Lauderdale. As of February 28,
1997, the Company had 125,090 cable television subscribers and 4,791
telecommunications subscribers with 6,039 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.
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. See "Business
- -- Network Architecture -- Telecommunications Architecture."
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")
3
<PAGE>
and fiber optic networks and non-networked Satellite Master Antenna Television
("SMATV") systems. As of February 28, 1997, approximately 130,000 of the 239,801
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 by the Company in its markets. 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 and PBX
switches to central office switches by the end of fiscal 1999. The Company
anticipates that this will require between $25 and $35 million in capital
expenditures of which between $3 and $5 million will be required for conversion
of the PBX switches. Conversion costs exclude the costs of headends and central
office switches which, while necessary for the conversions, are part of the
Company's planned network infrastructure. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." The Company anticipates completing the conversion of
approximately half of the units currently served by SMATV systems and PBX
switches from existing funds and will require between $12 and $18 million of
additional funds to complete the conversion. Failure to raise sufficient funds
may require the Company to delay or abandon some of its future expansion or
expenditures, which may have a material adverse effect on its growth and its
ability to compete in the cable television and telecommunications industries in
some or all of its markets.
The Company believes that there are several benefits to converting its
SMATV systems to 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.
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.
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. See "Business -- Markets."
4
<PAGE>
OpTel operated in the following geographic markets as of February 28, 1996:
<TABLE>
<CAPTION>
Units Under
Estimated Contract Units Passed Tele-
Number of Units Under Cable for Tele- for Tele- communica-
MDU Units Contract for Units Passed Television communica- communica- tions
Market in Market(1) Cable(2) for Cable(3) Subscribers tions(2)(4) tions(3) Lines
- ------------- -------------- -------------- -------------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston 305,961 80,267 79,199 29,492 6,816 6,654 2,122
Dallas-
Fort Worth 366,646 44,233 34,385 17,173 11,421 5,026 1,720
Chicago 333,442 23,117 21,765 11,378 400 -- --
Phoenix 143,674 22,987 21,856 9,884 -- -- --
San Diego 295,375 22,960 21,628 14,853 1,486 768 299
San
Francisco 202,698 22,886 22,643 16,196 243 -- --
Denver 97,056 18,867 15,804 8,876 2,975 877 214
Los Angeles 270,006 13,921 8,531 6,095 1,791 -- --
Miami-Ft.
Lauder-
dale 275,202 12,849 10,559 9,142 1,241 91 62
Tampa 151,724 2,777 2,777 1,435 -- -- --
Austin 63,811 654 654 566 1,000 1,000 1,622
---------- -------- -------- -------- ------- ------- ------
2,505,595 265,518 239,801 125,090 27,373 14,416 6,039
========== ======== ======== ======== ======= ======= ======
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(1) Represents units in MDUs with greater than 150 units. For rental units,
market data has been estimated by REIS Reports, Inc. For the Tampa and
Miami-Ft. Lauderdale markets, the rental unit data has been adjusted based
on Company estimates to include condominium units.
(2) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into Rights
of Entry for the provision of cable television services and
telecommunication services, respectively, but which the Company has not yet
passed and which the Company expects to pass within the next five years.
(3) 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 anticipates passing
approximately 15,800 and 8,700 additional units currently under contract for
cable television and units currently under contract for telecommunications,
respectively, by the end of calendar 1997.
(4) At this time substantially all units under contract for telecommunications
are also units under contract for cable television.
The Company has recently entered into Rights of Entry with respect to
approximately 5,500 units in the Las Vegas market, has begun construction of
certain of these units and is considering further expansion in this market.
Strategy
The Company intends to grow its business and increase its market
concentration by attracting MDUs currently served by other operators, providing
services to newly-constructed MDUs and, as appropriate, acquiring existing
private cable operators and entering new markets. See "-- Recent Developments:
Proposed Phonoscope Acquisition." 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, including payment on
Rights of Entry execution and long-term revenue sharing. 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.
5
<PAGE>
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 a 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. Subject to receipt of regulatory
approvals, the Company intends to deploy its first central office switch in the
Houston market by mid-1997 and to have installed central office switches in
substantially all of its markets by the end of calendar 1999. See "Business --
Business Strategy."
Principal Stockholder and Management
The Company has benefited and expects to continue to benefit from the
management and technical expertise of its principal stockholder, Le Groupe
Videotron Ltee ("GVL"), Canada's third largest cable television company which
holds, indirectly, 76.1% of the outstanding Common Stock of OpTel. Key members
of the Company's management team gained experience in developing and operating
cable television and combined cable television/telecommunications businesses
while serving as executives of GVL or its affiliates in Canada and the United
Kingdom. From inception, OpTel's owners have invested over $200 million in the
Company in the form of equity and subordinated convertible notes.
Competitive Strengths
The Company has certain strengths that position it well to compete in its
markets, including the following:
Strong Relationships with MDU Owners. The Company believes that its
formation of strategic relationships with MDU owners is the key to its potential
long-term success. Under its long-term Rights of Entry with MDU owners, the
Company is effectively the exclusive multichannel television operator in the
covered MDUs and, where Rights of Entry extend to telecommunications services,
the only wire-line alternative to the LEC for telecommunications services in
those MDUs. By providing services that are attractive to MDU residents, the
Company endeavors to enhance the rental performance of the MDUs that it serves.
The Rights of Entry provide MDU owners with financial incentives to work closely
with the Company to promote its products and services. The Company believes that
its maintenance and development of strategic relationships with MDU owners will
help the Company to maintain a preferred competitive position even if the
exclusivity of the Rights of Entry becomes limited by future developments. See
"Risk Factors -- Risks Associated with Rights of Entry" and "Business --
Regulation."
Established Presence in Favorable Markets. The Company focuses on major
markets with favorable characteristics and is a leading provider of private
cable television services to residents of MDUs in substantially all of its
markets. The Company is expanding the
6
<PAGE>
telecommunications services it offers to MDU residents. As of February 28, 1997,
the Company had 265,518 units under contract for cable television and 27,373
units under contract for telecommunications. See "Business -- Markets."
Ability to Offer Bundled Services. The Company's ability to offer bundled
cable television and telecommunications services affords a number of potential
benefits to MDU residents and owners, enhancing the Company's competitive
position. MDU residents and owners benefit from the simplicity of dealing with a
single service provider. Management believes that the Company typically offers a
superior, or at least comparable, range of products and level of customer
service than its competitors at a lower total price. The Company also believes
that bundling services results in better collection experience versus
non-bundled services. The Company plans to offer MDU residents access to
additional bundled services, including Internet access, intrusion alarm, utility
monitoring, and PCS, cellular and paging services. During fiscal 1997, the
Company plans to test market paging services to residents on a re-sale basis and
to make third party operators' water sub-metering services and security services
offerings available to MDU owners on a test basis. The Company intends to
provide Internet services, either as a re-seller or as a sales agent for an
existing provider, concurrently with the roll out of its central office
switches. The Company is in the early stages of developing its plans, which it
expects to complete by the end of fiscal 1998, for the resale of cellular and
PCS services. The Company intends to introduce integrated billing of its bundled
services in fiscal 1998.
Network Design Advantages. Private cable systems utilizing 18GHz technology
do not require the large networks of coaxial or fiber optic cable and amplifiers
that are utilized by traditional hard-wire cable television operators or the
installation of a headend facility at each MDU as is required for SMATV systems.
Thus, private cable television operators using 18GHz technology are able to
provide services at lower per unit capital and maintenance costs than franchise
cable or SMATV operators. The Company can deliver as many as 72 channels of
programming in uncompressed analog format over its networks which, in most of
the Company's markets, exceeds the number of channels offered by other
multichannel television service providers. Additional capacity, if required, can
be provided through the application of available digital compression technology.
The point-to-point nature of the networks enables the Company to customize the
programming to be delivered to any MDU based on the demographics of the MDU's
residents. The Company's networks will also facilitate delivery of voice signal
from each MDU to the central office switches to be deployed by the Company in
each of its markets. The Company intends to license additional spectrum, which
it currently anticipates will principally be in the 23GHz band, to provide
bi-directional voice transmission. As of February 28, 1997, approximately 54% of
units passed for cable television were served by the Company's 18GHz or fiber
optic networks. Substantially all other units were served by non-networked SMATV
systems. The Company estimates that the cost of converting these SMATV systems
to networks will be between $20 and $30 million. Conversion costs exclude the
costs of headends which are part of the Company's planned network
infrastructure.
Focus on Customer Service. The Company seeks to attain excellence in
customer service in all aspects of its operations. The Company is upgrading its
networks and support systems to ensure reliable, high quality delivery of a
range of cable television and telecommunications services and expanding its
offerings to encompass a broad range of value-added telecommunications services.
The Company has a national customer service center staffed with knowledgeable
representatives to address the needs of customers 24-hours-a-day,
seven-days-a-week. The Company has established direct lines to facilitate rapid
response to calls initiated by MDU owners and managers. The Company has also
established stringent staff training procedures, including its Operational
Excellence continuous improvement program, and internal customer service
standards, which management believes meet, and in many respects exceed, those
established by the National Cable Television Association.
7
<PAGE>
Minimal Regulation of Cable Television Operations. In most of its markets,
the Company is not subject to most of the regulations applicable to a typical
franchise cable television operator. Consequently, the Company has significantly
greater flexibility in determining its target markets and customizing its
programming offerings. Specifically, by contrast to franchise cable television
operators, as a private cable television operator, the Company (i) does not face
regulatory constraints on the geographic areas in which it may offer video
services, (ii) does not pay franchise and Federal Communications Commission
("FCC") subscriber fees, (iii) is not obligated to pass every resident in a
given area, (iv) is not subject to rate regulation, and (v) is not subject to
"must carry" and local government access obligations. Even in those markets
where the Company is a franchise cable television operator, the Company is not
subject to rate regulation or the obligation to provide universal service. In
addition, 18GHz licenses are available to the Company in all of its markets
without any significant regulatory restrictions. See "Business -- Regulation."
Recent Developments: Proposed Phonoscope Acquisition
The Company entered into a Summary of Terms (the "Letter of Intent"), in
January 1997, relating to its proposed acquisition (the "Phonoscope
Acquisition") of the residential portion of the franchise cable television
system business of Phonoscope, Ltd. and the capital stock of three affiliated
companies (collectively "Phonoscope"). The purchase price for Phonoscope set
forth in the Letter of Intent was approximately $35 million, subject to certain
adjustments (including a dollar for dollar downward adjustment for the value of
any liabilities assumed), payable in cash at closing. All the provisions of the
Letter of Intent, other than the confidentiality provisions, have expired and
are not binding. However, negotiations are continuing. There can be no assurance
that the Phonoscope Acquisition will be consummated on the terms contemplated by
the Letter of Intent or otherwise. The Exchange Offer is not conditioned on the
consummation of the Phonoscope Acquisition. See "Risk Factors -- Consummation of
the Phonoscope Acquisition."
Phonoscope, which operates in the greater Houston metropolitan area,
provides its services over a fiber optic and coaxial cable distribution system.
Phonoscope operates no SMATV systems and has no telecommunications customers or
PBX switches. If the Phonoscope Acquisition is consummated. the Company expects
to use its existing franchise with the City of Houston to serve Phonoscope
subscribers within the City of Houston, and, where required to serve acquired
Rights of Entry, to seek assignment of the appropriate municipal franchises.
Based on information made available to the Company, the Company believes that,
as of November 30, 1996, Phonoscope had Rights of Entry or subscriber agreements
covering approximately 59,000 units (principally at MDUs, but including certain
single family units within the footprint of its network) and approximately
27,000 subscribers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Proposed Phonoscope Acquisition" and
"Business -- Markets."
8
<PAGE>
The Exchange Offer
<TABLE>
<S> <C> <C>
Securities Offered ...... Up to $225,000,000 principal amount of 13% Senior Notes
Due 2005, Series B of the Issuer. The terms of the New
Notes and the Old Notes are substantially identical in all
material respects, except for certain transfer restrictions
and registration rights relating to the Old Notes which will
not apply to the New Notes. See "Description of the
Notes."
The Exchange Offer ...... The Issuer is offering to exchange $1,000 principal
amount of New Notes for each $1,000 principal amount of
Old Notes. See "The Exchange Offer" for a description of
the procedures for tendering Old Notes. The Exchange
Offer satisfies the registration obligations of the Issuer
under the Registration Agreement. Upon consummation of
the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did
not tender their Old Notes will not have any registration
rights under the Registration Agreement with respect to
such non- tendered Old Notes and, accordingly, such Old
Notes will continue to be subject to the restrictions on
transfer contained in the legend thereon.
Tenders, Expiration Date;
Withdrawal ............ The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1997, or such later date and
time to which it is extended, provided that the Exchange
Offer shall not be extended beyond 60 days from the date
of this Prospectus. Tenders of Old Notes pursuant to the
Exchange Offer may be withdrawn and retendered at any
time prior to the Expiration Date. Any Old Notes not
accepted for exchange for any reason will be returned
without expense to the tendering holder as promptly as
practicable after the expiration or termination of the
Exchange Offer.
Federal Income Tax
Considerations ......... The Exchange Offer will not result in any income, gain or
loss to the holders of Notes or the Issuer for federal
income tax purposes. See "Certain Federal Income Tax
Considerations."
Use of Proceeds ......... There will be no proceeds to the Issuer from the exchange
of the New Notes for the Old Notes pursuant to the
Exchange Offer. See "Use of Proceeds."
Exchange Agent ......... U.S. Trust Company of Texas, N.A., the Trustee under the
Indenture, is serving as exchange agent (the "Exchange
Agent") in connection with the Exchange Offer.
</TABLE>
9
<PAGE>
Consequences of Exchanging or Failing to Exchange Old Notes Pursuant to the
Exchange Offer
Generally, holders of Old Notes (other than any holder who is an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act) who exchange their Old Notes for New Notes pursuant to the Exchange Offer
may offer their New Notes for resale, resell their New Notes, and otherwise
transfer their New Notes without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided such New Notes are acquired
in the ordinary course of the holders' business, such holders have no
arrangement with any person to participate in a distribution of such New Notes
and neither the holder nor any other person is engaging in or intends to engage
in a distribution of such New Notes. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of its New Notes. Broker-dealers may not exchange Old
Notes which are part of an unsold original allotment in the Exchange Offer. See
"Plan of Distribution." To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale or register the New Notes
prior to offering or selling such New Notes. The Issuer is required, under the
Registration Agreement, to register the New Notes in any jurisdiction requested
by the holders, subject to certain limitations. Upon consummation of the
Exchange Offer, holders that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any registration
rights under the Registration Agreement with respect to such non-tendered Old
Notes and, accordingly, such Old Notes will continue to be subject to the
restrictions on transfer contained in the legend thereon. In general, the Old
Notes may not be offered or sold (except in private transactions), unless
registered under the Securities Act and applicable state securities laws. See
"The Exchange Offer -- Consequences of Failure to Exchange."
Summary Description of the Notes
<TABLE>
<S> <C>
Securities Offered ......... Up to $225,000,000 principal amount of 13% Senior Notes
due 2005, Series B of the Issuer. The terms of the New
Notes and the Old Notes are substantially identical in all
material respects, except for certain transfer restrictions
and registration rights relating to the Old Notes which will
not apply to the New Notes. See "Description of the Notes."
Maturity ..................... February 15, 2005.
Interest Payment Dates ...... Each February 15 and August 15, commencing on August
15, 1997.
Escrow Proceeds ............ At the closing of the Offering, the Issuer deposited with an
escrow agent (the "Escrow Agent") $79.6 million; which,
together with the proceeds from the investment thereof,
will be sufficient to pay when due the first six interest
payments on the Notes, with any balance to be retained
by the Issuer. See "Description of the Notes --
Disbursement of Funds; Escrow Account."
</TABLE>
10
<PAGE>
<TABLE>
<S> <C> <C>
Ranking .................. The Notes rank pari passu in right of payment with all
present and future senior unsecured obligations of the
Issuer and rank senior in right of payment to all present
and future subordinated indebtedness of the Issuer. The
Notes are effectively subordinated to all existing and future
indebtedness and liabilities of the Issuer's subsidiaries. As
of February 28, 1997, the total indebtedness and other
liabilities of the Issuer's subsidiaries (excluding any
indebtedness owed to the Issuer) were $27.3 million and
such subsidiaries are expected to incur substantial
additional indebtedness in the future.
Sinking Fund ............ None.
Optional Redemption ...... On or after February 15, 2002, the Notes will be
redeemable at the option of the Issuer, in whole or in part
at any time, at the redemption prices set forth herein, plus
accrued and unpaid interest, if any, to the date of
redemption. In addition, in the event, prior to February 15,
2000, of one or more Equity Offerings (as defined) and/or
sales of Common Stock (as defined) of the Issuer to one
or more Strategic Equity Investors (as defined) for gross
proceeds of $100.0 million or more in aggregate, the
Issuer may redeem up to 35% of the initially issued
aggregate principal amount of Notes at a redemption price
of 113% of the principal amount, together with accrued
and unpaid interest thereon to the date of redemption,
provided that at least $145.0 million aggregate principal
amount of Notes are outstanding following such
redemption. See "Description of the Notes --
Redemption."
Change of Control ......... Upon the occurrence of a Change of Control (as defined),
each holder of Notes will have the right to require the
Issuer to make an offer to purchase all or any part of such
holder's Notes at 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, through the date
of purchase. The Issuer may not have sufficient funds or
the financial resources necessary to satisfy its obligations
to repurchase the Notes and other debt that may become
repayable upon a Change of Control. See "Description of
the Notes -- Certain Covenants -- Change of Control."
Certain Covenants ......... The indenture governing the Notes (the "Indenture")
contains covenants relating to, among other things, the
following matters: (i) incurrence of additional indebtedness;
(ii) restricted payments; (iii) limitations on liens; (iv)
disposition of proceeds of asset sales; (v) dividend and
other payment restrictions affecting subsidiaries; (vi)
mergers, consolidation or sales of assets; and (vii)
limitations on transactions with affiliates. See "Description
of the Notes -- Certain Covenants."
</TABLE>
For additional information concerning the Notes and the definitions of
certain capitalized terms used above, see "Description of the Notes."
11
<PAGE>
Summary Consolidated Financial and Operating Data
The summary consolidated financial data presented below as of and for the
periods ended December 31, 1993 and 1994 and August 31, 1995 and 1996 have been
derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by Deloitte & Touche LLP,
independent auditors. The summary financial data presented below as of and for
the six month periods ended February 29, 1996 and February 28, 1997 have been
derived from unaudited consolidated financial statements of the Company. In the
opinion of management, the unaudited consolidated financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
the fair presentation of the Company's financial position and results of
operation for these periods. 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 Prospectus.
<TABLE>
<CAPTION>
Period from
April 20,
1993 (date Eight Month
of inception) Year Ended Period Six Month Six Month
to December December Ended Year Ended Period Ended Period Ended
31, 31, August 31, August 31, February 29, February 28,
--------------- ------------ ------------- ------------ -------------- -------------
1993 1994 1995 1996 1996 1997
--------------- ------------ ------------- ------------ -------------- -------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Cable television ............ $ 12 $ 240 $ 8,782 $ 25,893 $ 11,570 $ 17,208
Telecommunications ............ -- 202 788 1,712 718 1,414
-------- ---------- ---------- ---------- --------- ----------
Total revenues ............... 12 442 9,570 27,605 12,288 18,622
-------- ---------- ---------- ---------- --------- ----------
Operating Expenses:
Cost of services ............ 6 470 4,557 11,868 5,266 8,702
Customer support, general
and administrative ......... 304 7,733 8,235 17,319 7,499 12,267
Depreciation and
amortization ............... 8 117 2,420 8,676 3,804 5,820
Nonrecurring reorganization
costs(1) .................. -- -- 3,820 2,318 826 --
-------- ---------- ---------- ---------- --------- ----------
Total operating
expenses .................. 318 8,320 19,032 40,181 17,395 26,789
-------- ---------- ---------- ---------- --------- ----------
Loss from operations ......... (306) (7,878) (9,462) (12,576) (5,107) (8,167)
Interest expense on
Convertible Notes due
to stockholder (2) ............ -- -- (919) (5,342) (1,890) (6,907)
Other interest expense, net ... (1) (66) (249) (512) (245) (1,218)
-------- ---------- ---------- ---------- --------- ----------
Loss before income taxes ...... (307) (7,944) (10,630) (18,430) (7,242) (16,292)
Income tax benefits (3) ...... -- -- 469 -- -- --
-------- ---------- ---------- ---------- --------- ----------
Net loss ..................... $ (307) $ (7,944) $ (10,161) $ (18,430) $ (7,242) $ (16,292)
======== ========== ========== ========== ========= ==========
Loss per share(4) ............ $ (6.89) $ (8.30) $ (3.37) $ (7.01)
========== ========== ========= ==========
Cash dividends declared ...... -- -- -- -- -- --
Financial Data:
EBITDA(5) ..................... $ (298) $ (7,761) $ (7,042) $ (3,900) $ (1,303) $ (2,347)
Net cash flows used in
operating activities ......... $ (183) $ (3,332) $ (3,494) $ (452) $ (4,361) $ (3,048)
Net cash flows used in
investing activities ......... (517) (10,576) (72,144) (72,037) (28,916) (107,229)
Net cash flows provided by
financing activities ......... 741 18,886 72,655 72,131 32,060 243,615
Capital expenditures(6) ...... 517 9,278 22,170 62,121 23,122 24,925
Acquisition of private cable
businesses .................. -- 1,298 49,974 9,916 5,793 2,500
Deficiency of earnings to
fixed charges(7) ............ 307 7,944 10,630 20,280 7,876 17,276
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
As of
February 28, 1997
-----------------------
(In thousands
except per share data)
<S> <C>
Balance Sheet Data:
Cash and cash equivalents (excluding Escrow Account) ...... $135,015
Escrow Account(8) ....................................... 79,804
Property, plant and equipment, net ........................ 122,041
Intangible assets ....................................... 75,471
Total assets ............................................. 417,681
13% Senior Notes Due 2005 ................................. 218,036
Convertible Notes due to stockholder(9) .................. 121,006
Total liabilities ....................................... 367,693
Stockholders' equity .................................... 49,988
Book value per share .................................... 19.76
</TABLE>
<TABLE>
<CAPTION>
As of As of
August 31, February 28,
------------------------- -------------
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
Operating Data:(10)
Cable Television:
Units under contract(11) .................. 173,324 241,496 265,518
Units passed(12) ........................ 170,336 225,433 239,801
Basic subscribers ........................ 75,944 114,163 125,090
Basic penetration(13) ..................... 44.6% 50.6% 52.2%
Premium units ........................... 39,753 60,641 74,441
Pay-to-basic ratio(14) .................. 52.3% 53.1% 59.5%
Average monthly cable revenue per
subscriber(15) ........................ $ 22.84 $ 24.29 $ 24.02
Telecommunications:
Units under contract(11) .................. 10,322 20,945 27,373
Units passed(12) ........................ 9,116 12,364 14,416
Subscribers .............................. 2,207 4,080 4,791
Lines(16) ................................. 2,650 5,166 6,039
Penetration(17) ........................... 24.2% 33.0% 33.2%
Average monthly telecommunications revenue
per subscriber(15) ..................... -- $ 59.08 $ 53.16
</TABLE>
- ----------------
(1) During the eight month period ended August 31, 1995 and fiscal 1996, the
Company relocated its corporate headquarters, began relocating its customer
services centers and completed several acquisitions. As a result of these
actions, significant nonrecurring reorganization costs were incurred
primarily relating to severance costs of former employees at the previous
locations and relocation and recruiting costs of employees at the new
location.
(2) Interest expense on Convertible Notes due to stockholder, is reported net
of interest capitalized in property, plant and equipment. In connection
with the Offering, the stockholder, VPC Corporation ("VPC"), agreed to
subordinate the Convertible Notes to the prior payment of the Notes in the
event of a liquidation, dissolution, reorganization, receivership or
winding-up of the Issuer 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. See "Certain Transactions -- Convertible Notes."
(3) The Company has not had 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. See note 8 of notes to the Consolidated Financial
Statements.
(4) Loss per share information is not presented for the periods the Company was
organized as a partnership.
13
<PAGE>
(5) EBITDA represents earnings before interest expense, income tax benefits,
depreciation and amortization. EBITDA includes nonrecurring reorganization
costs of $3.8 million, $2.3 million and $0.8 million for the eight month
period ended August 31, 1995, the year ended August 31, 1996 and the six
month period ended February 28, 1996, respectively. 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.
(6) Capital expenditures include expenditures on property, plant and equipment
together with intangible assets.
(7) For the purposes of calculating the deficiency of earnings to fixed
charges, (i) earnings consist of loss before income taxes plus fixed
charges and (ii) fixed charges consist of interest expense on all debt,
amortization of deferred financing costs and the portion of operating lease
rental expense that is representative of the interest factor (deemed to be
one third of minimum operating lease rental). On a pro forma basis, after
giving effect to the Offering (excluding interest earned on the Escrow
Account), the deficiency of earnings to fixed charges for the periods ended
August 31, 1996 and February 28, 1997 would have been $49.5 million
(including $7.2 million in respect of Convertible Notes) and $31.9 million
(including $7.9 million in respect of Convertible Notes), respectively.
(8) Of the net proceeds of the Offering, $79.6 million was deposited in the
Escrow Account to fund the first six interest payments due in respect of
the Notes. See "Description of the Notes -- Disbursement of Funds; Escrow
Account."
(9) The Convertible Notes mature six months following the maturity or
indefeasible payment in full of the Notes and are subordinated in right of
payment to the Notes under certain circumstances. See "Certain
Transactions."
(10) Information with respect to the periods ended December 31, 1993 and 1994 is
not meaningful and not presented.
(11) 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. The Company anticipates passing
approximately 15,800 and 8,700 additional units currently under contract
for cable television and units currently under contract for
telecommunications, respectively, by the end of calendar 1997.
(12) 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.
(13) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(14) Pay-to-basic ratio is calculated by dividing the total number of premium
units subscribed for by the total number of basic subscribers.
(15) 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.
(16) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line.
(17) Penetration is calculated by dividing the total number of
telecommunications subscribers at such date by the total number of units
passed.
14
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered in evaluating the Company and its
business in connection with the Exchange Offer.
Consequences of Failure to Exchange
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their Old
Notes will not have any registration rights under the Registration Agreement
with respect to such non-tendered Old Notes and, accordingly, such Old Notes
will continue to be subject to the restrictions on transfer contained in the
legend thereon. In general, the Old Notes may not be offered or sold, unless
registered under the Securities Act and applicable state securities laws, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuer does not intend
to register the Old Notes under the Securities Act.
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Issuer believes that the New Notes issued pursuant to
the Exchange Offer in exchange for the Old Notes may be offered for resale,
resold or otherwise transferred by holders (other than any holder that is an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that the New Notes are acquired in the ordinary
course of the holders' business, the holders have no arrangement with any person
to participate in the distribution of the New Notes and neither the holder nor
any other person is engaging in or intends to engage in a distribution of the
New Notes. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of the New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the New Notes received in exchange for the Old Notes where such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. Broker-dealers may not exchange Old
Notes which are part of an unsold original allotment in the Exchange Offer. The
Issuer has agreed that, starting on the Exchange Date (as defined) and ending on
the close of business on the earlier of the first anniversary of the Exchange
Date or the date upon which all such New Notes have been sold by such
participating broker-dealer, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." The New Notes may not be offered or sold unless they have been
registered or qualified for sale under applicable state securities laws or an
exemption from registration or qualification is available and is complied with.
The Registration Agreement requires the Issuer to register or qualify the New
Notes for resale in any state (if required) as may be requested by their
holders, subject to certain limitations.
Lack of Public Market
Prior to this Exchange Offer, there has been no public market for the Old
Notes. If a market for the New Notes should develop, the New Notes may trade at
a discount from their principal amount, depending upon prevailing interest
rates, the market for similar securities and other factors including general
economic conditions and the financial condition of the Company. The Issuer does
not currently intend to apply for a listing or quotation of the New Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. No assurance can be given as to the liquidity of the trading
market for the New Notes.
The liquidity of, and trading market for, the New Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
15
<PAGE>
Negative Cash Flow and Continuing Net Losses
The Company has incurred substantial losses since it commenced operations
in 1993, primarily attributable to entering into Rights of Entry, the
development and expansion of its networks and the integration of acquisitions.
The Company reported net losses of approximately $0.3 million, $7.9 million,
$10.2 million, $18.4 million and $16.3 million for the nine months ended
December 31, 1993, year ended December 31, 1994, eight months ended August 31,
1995, year ended August 31, 1996 and six months ended February 28, 1997
respectively. In addition, the Company has reported negative EBITDA of
approximately $0.3 million, $7.8 million, $7.0 million, $3.9 million and $2.3
million respectively, for such periods. 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. See other cash flow information at "Selected
Consolidated Financial and Operating Data." The Company expects to incur
continuing net losses as it incurs substantial additional costs in introducing
its telecommunications services and expanding its private cable television
services. There can be no assurance that it will be able to achieve or sustain
profitability or positive cash flow.
Effect of Substantial Leverage; Ability to Service Debt
Following the Offering, the Company became highly leveraged. The Company
expects to incur substantial additional indebtedness as described under "--
Future Capital Needs." At February 28, 1997, the Company had total consolidated
indebtedness of approximately $348.3 million (including approximately $121.0
million of Convertible Notes which are subordinated in right of payment to the
Notes in the event of a liquidation, dissolution, reorganization, receivership
or winding-up of the Issuer 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, as described under "Certain Transactions") and stockholders' equity
of approximately $50.0 million. After giving pro forma effect to the Offering
(excluding interest earned on the Escrow Account), the Company's earnings would
have been insufficient to cover its fixed charges by approximately $49.5 million
(including approximately $7.2 million in respect of the 15% convertible Notes
due to VPC (the "Convertible Notes") for the year ended August 31, 1996 and
$31.9 million (including approximately $7.9 million in respect of Convertible
Notes) for the six month period ended February 28, 1997. See "Capitalization"
and "Selected Consolidated Financial and Operating Data."
The Company's ability to make scheduled payments of principal of, or to pay
interest on, or to refinance, its indebtedness (including the Notes) depends
upon the success of its business strategies and its future performance, which to
a significant extent are subject to general economic, financial, competitive,
regulatory and other factors beyond its control. There can be no assurance that
the Company will be able to generate the substantial increases in cash flow from
operations that will be necessary to service its indebtedness. In the absence of
such operating results, the Company could face substantial liquidity problems
and might be required to raise additional financing through the issuance of debt
or equity securities. Further, the Company expects that it will need to
refinance the Notes at their maturity. There can be no assurance that the
Company will be successful in raising such financing when required, or that the
terms of any such financing will be attractive. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including the following: (i) the
Company will have significant cash interest expense and principal repayment
obligations with respect to outstanding indebtedness, including the Notes; (ii)
the Company's degree of leverage and related debt service obligations may make
it more vulnerable than some of its competitors to the effects of an economic
downturn or other adverse developments in its business; and (iii) the Company's
ability to obtain additional financing for working capital, capital
expenditures, technology investments, acquisitions, general corporate purposes
or other purposes could be impaired.
16
<PAGE>
The Indenture imposes certain restrictions on the operations and activities
of the Company. In addition, the Company in the future may enter into
instruments governing additional indebtedness which may contain financial
maintenance requirements. The ability of the Company to comply with any of the
foregoing restrictions and covenants will be dependent on the future performance
of the Company, which will be subject to prevailing economic conditions and
other factors including factors beyond the Company's control, such as interest
rate fluctuations, regulatory changes and changes in technology and the level of
competition.
Holding Company Structure and Need to Access Subsidiaries' Cash Flow
The Issuer is a holding company with limited assets that conducts all of
its operations through its subsidiaries. The Issuer derives substantially all of
its revenue from the operations of its subsidiaries. The Notes are effectively
subordinated to the indebtedness and other liabilities and commitments of the
Issuer's subsidiaries. The ability of the Issuer's creditors, including the
holders of the Notes, to participate in the assets of any of the Issuer's
subsidiaries upon any liquidation or bankruptcy of any such subsidiary will be
subject to the prior claims of the subsidiary's creditors, including trade
creditors. As of February 28, 1997, the claims of holders of Notes are
effectively subordinated to approximately $27.3 million of indebtedness
(excluding any indebtedness owed to the Issuer) and other liabilities of the
Issuer's subsidiaries. However, the Issuer's subsidiaries are expected to incur
substantial additional indebtedness as described under "-- Future Capital
Needs." In addition, the ability of the Issuer's creditors, including the
holders of Notes, to participate in distributions of assets of the Issuer's
subsidiaries will be limited to the extent that the outstanding shares of any of
its subsidiaries are either pledged to secure other creditors of the Issuer or
are not owned by the Issuer.
The Notes are obligations solely of the Issuer. The ability of the Issuer
to pay interest on the Notes or to repay the Notes at maturity or otherwise will
be dependent upon the cash flows of its subsidiaries and the payment of funds by
those subsidiaries to the Issuer in the form of repayment of loans, dividends,
management fees or otherwise. The Issuer's subsidiaries have no obligation,
contingent or other, to pay amounts due pursuant to the Notes or to make funds
available therefor, whether in the form of loans, dividends or other
distributions. Accordingly, the Issuer's ability to repay the Notes at maturity
or otherwise may be dependent upon the Issuer's ability to refinance the Notes,
which will depend, in large part, upon factors beyond the control of the
Company. The agreements governing future indebtedness of the Issuer's
subsidiaries may contain covenants prohibiting subsidiaries from distributing or
advancing funds to the Issuer under certain circumstances, including to fund
interest payments in respect of the Notes.
The Company's future indebtedness may be expected to be secured, which
could have material consequences to investors in the Notes, which are unsecured.
Such security may include substantially all of the fixed assets of the Company
and all of the capital stock of the Issuer's subsidiaries. The value of a
substantial portion of the Company's fixed assets is derived from the employment
of such assets in a cable television and telecommunications business. These
assets are highly specialized and, taken individually, can be expected to have
limited marketability. Consequently, in the event of a realization by the
Company's secured creditors on the collateral securing the Company's secured
debt, creditors would likely seek to sell the business as a going concern
through a sale of pledged capital stock of subsidiaries, either in its entirety,
or by franchise or other business unit, in order to maximize the proceeds
realized. The price obtained upon any such sale could be adversely affected by
the necessity of obtaining approval of the sale from the applicable regulatory
authorities and compliance with other applicable governmental regulations.
Future Capital Needs
The Company will require substantial capital on a continuing basis to
finance cable television and telecommunications network expansion related to
subscriber and market growth, to upgrade existing facilities to desired
technical and signal quality standards and to finance any acquisitions of other
operators. The Company believes that the $130.2 million net proceeds from the
Offering
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<PAGE>
available for use by the Company will be sufficient to finance the Company's
capital requirements through January 1998. The Company anticipates that it will
require approximately $250 million in capital expenditures in fiscal 1997 and
fiscal 1998 of which approximately $40.9 million had been expended as of April
30, 1997. However, the Company's future capital requirements will depend upon a
number of factors, including the Company's success in entering into new Rights
of Entry, the extent of its telecommunications roll out, the size and timing of
any acquisitions, marketing expenses, staffing levels and customer growth, as
well as other factors that are not within the Company's control, such as
competitive conditions, changes in technology, government regulation and capital
costs. The Company expects to fund additional capital requirements through
internally generated funds and debt and/or equity financing. The Issuer's
stockholders have no commitment to fund any future capital requirements of the
Company and, prior to the earlier of an initial public offering or July 31,
1999, the Issuer's voting stockholders have agreed among themselves to fund all
investments in the Issuer in the form of "Deeply Subordinated Shareholders Loans
(as defined under "Description of the Notes -- Certain Definitions") rather than
equity. See " -- Control by GVL." There can be no assurance that the Company
will be successful in producing sufficient cash flow and raising sufficient debt
and/or equity capital when required or on terms that it will consider
acceptable. Failure to raise sufficient funds may require the Company to delay
or abandon some of its future expansion or expenditures, which may have a
material adverse effect on its growth and its ability to compete in the cable
television and telecommunications industry or on its ability to meet its
obligations in respect of its indebtedness, including the Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business."
Risk Associated with Telecommunications Strategy
The Company is currently introducing telecommunications services to MDUs
served by its existing networks. The Company believes that a successful
introduction of its telecommunications services is important to its long-term
growth. Its success will be dependent upon, among other things, the Company's
ability to assess markets, design and install telecommunications networks,
including switches, and obtain any required government authorizations and
permits, all in a timely manner, at reasonable costs and on satisfactory terms
and conditions, and the willingness of MDU residents to accept a new provider of
telecommunications services. There can be no assurance that the Company will be
able to successfully introduce its telecommunications services in a timely
manner in accordance with its strategic objectives, but it expects to spend
capital to acquire and construct the necessary telecommunications
infrastructure. Specific risks associated with the Company's telecommunications
strategy include:
Switch Installation and Network Reconfiguration; Lack of Redundant
Switches. An essential element of the Company's telecommunications strategy is
the provision of switched local exchange service. The Company is in the process
of ordering central office switches which it intends to install and test in
early 1997. In connection with the implementation of central office switches,
the Company will be reconfiguring its microwave networks so that they can
deliver bi-directional transmissions. The Company intends to use certain
components of its existing infrastructure to deliver bi-directional transmission
utilizing frequencies, principally in the 23GHz band. While the Company believes
this frequency and other required frequencies are available for license on the
paths that will be required, the Company has not yet commenced frequency
coordination and there can be no assurance as to availability. Moreover,
although the Company believes that it can implement its telecommunications plan
using these frequencies and that equipment will be readily available from
several sources for such purposes, the Company has not yet concluded field
trials. There can be no assurance, that the installation of the required
switches and the reconfiguration of the network will be completed on time or
that, during the testing of the switches and the reconfigured networks, the
Company will not experience technological problems that cannot be resolved. The
failure of the Company to successfully reconfigure its microwave networks and to
have its switches operational on a timely basis could have a material adverse
effect upon the Company's ability to expand its telecommunications services. In
addition, the Company intends to initially install only one switch in
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<PAGE>
each market. As a result, a switch failure may have a material adverse effect on
the Company's ability to provide telecommunications services in the affected
market. The Company intends to enter into contracts with other
telecommunications service providers to provide backup capabilities in the event
of a switch failure. However, there can be no assurance that the Company will be
able to successfully negotiate such agreements or that such agreements will be
available on favorable terms.
Interconnection Agreements. As part of its telecommunications
configuration, the Company may transport telephone traffic across municipal
boundaries or LATAs which may require that Company to have multiple
interconnection agreements. The Company is currently negotiating agreements for
the interconnection of its networks with the network of the incumbent LEC in
certain of the metropolitan areas the Company serves. There can be no assurance
that the Company will successfully negotiate these agreements for
interconnection with the LEC or that it will be able to do so on favorable
terms. The failure to negotiate the interconnection agreements could have a
material adverse effect upon the Company's ability to expand its
telecommunication services. Currently, the Company provides local telephone
service as an STS provider. STS providers generally use the LEC's facilities
(although in many states competitive local exchange carriers ("CLECs") can now
supply STS operators with facilities) to provide local telephone service,
subject to state regulation. If LECs were no longer required to provide tariffed
services to STS providers or if STS-type service classifications were to be
eliminated, the Company's telephone operations would be materially adversely
affected.
Products and Services. The Company expects to continue to enhance its
systems in order to offer its customers switched local exchange and enhanced
products and services in all of its networks as quickly as practicable and as
permitted by applicable regulations. The Company believes its ability to offer,
market and sell these additional products and services will be important to the
Company's ability to meet its long-term strategic growth objectives but is
dependent on the Company's ability to obtain needed capital, favorable
regulatory developments and the acceptance of such products and services by the
Company's customers. No assurance can be given that the Company will be able to
obtain such capital or that such developments or acceptance will occur.
Consummation of the Phonoscope Acquisition
The Company signed a Letter of Intent in January 1997 relating to the
acquisition of the private cable television assets of Phonoscope by the Company.
All of the provisions of the Letter of Intent, other than the confidentiality
provisions, have expired and are not binding. However, negotiations are
continuing. The significant conditions to closing the Phonoscope Acquisition as
set forth in the Letter of Intent were (i) receipt of municipal consents and
approvals, principally in respect of franchise transfers or changes of control;
(ii) receipt of third party consents to the assignment of various contracts,
including Rights of Entry, and (iii) expiration or earlier termination of the
waiting period under applicable antitrust law. There can be no assurance that
the Company will be able to successfully negotiate and enter into definitive and
binding agreements for the Phonoscope Acquisition, or that if such definitive
agreements are entered into, the Phonoscope Acquisition will be completed on the
terms contemplated by the Letter of Intent or otherwise. The terms of the Letter
of Intent provided, and the Company believes that any negotiated agreement would
provide, for the acquisition by the Company of certain (but not all) of the
purchased assets if certain third party consents are not obtained. There can be
no assurance that there will not be material changes in the information
presented herein with respect to Phonoscope and that the Phonoscope Acquisition
will nevertheless be consummated or that there will not be sigificant changes in
the terms of the Phonoscope Acquisition. The Exchange Offer is not conditioned
upon the consummation of the Phonoscope Acquisition on the terms described
herein or otherwise. See "Prospectus Summary -- Recent Developments: Proposed
Phonoscope Acquisition," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "-- Proposed Phonoscope
Acquisition."
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<PAGE>
Risks Associated with Rights of Entry
The Company's business depends upon its ability to enter into and exploit
favorable new long-term Rights of Entry for demographically attractive MDUs and
to exploit and renew its existing Rights of Entry. Its success in doing so may
be affected by a number of factors, including (i) the extent of competition in
the provision of multichannel television and telecommunications services (see
"Business -- Competition"), (ii) its ability to identify suitable MDUs and
contract with their owners, (iii) the continuing demographic attractiveness of
the markets in which the Company has chosen to focus its business, (iv) high
occupancy rates in the MDUs to which it provides services, (v) its ability to
maintain superior levels of customer service, (vi) the absence of material
adverse regulatory developments (see "Business -- Regulation"), and (vii) the
enforceability of the material terms of its Rights of Entry, including
exclusivity provisions.
The Company's Rights of Entry generally provide that the Company will have
the exclusive right to provide residents within the applicable MDU with
multichannel television services and, where Rights of Entry extend to
telecommunications services, subject to the legal right of residents to utilize
the services of the incumbent LEC and certain other carriers, wire-line
telecommunications services. While the Company believes that these exclusivity
provisions are now generally enforceable under applicable law, current trends at
the state and federal level suggest that the future enforceability of these
provisions may be uncertain. Certain states in which the Company operates,
including Illinois and Florida (for condominiums only), and Nevada, where the
Company intends to commence operations, and the cities of Scottsdale and
Glendale, Arizona and Lewisville, Texas (where the Company operates) have
adopted "mandatory access" laws that provide that no resident of an MDU may be
denied access to programming provided by incumbent franchise cable systems,
regardless of any rights granted by an MDU owner to another multichannel
television operator. Texas has adopted a "mandatory access" law for certified
telecommunications service providers. In addition, the FCC has initiated a
review of the rights of various multichannel television service providers to
obtain access to MDUs and other private property. While the constitutionality of
present "mandatory access" laws is uncertain, there can be no assurance that
such laws will not be adopted elsewhere or on bases which may be upheld as
constitutional. While the Company does not consider the exclusivity provisions
in its Rights of Entry to be essential to its future success, there can be no
assurance that legislative, regulatory or judicial actions which challenge the
enforceability of these provisions will not have a material adverse effect on
the Company's business. Broad mandatory access would likely increase the
Company's capital costs associated with new Rights of Entry if overbuilding were
required. It should also be noted that in a number of instances Rights of Entry
are subordinate by their terms to indebtedness secured by the MDU, with the
effect that enforcement of the security interest or default under the
indebtedness could result in termination of the Rights of Entry. Bankruptcy of
an MDU owner could also result in rejection of the Rights of Entry as an
"executory contract."
Availability of Transmission Sites
The Company's microwave network expansion plans require the Company to
lease or otherwise obtain permission to install equipment at rooftop and tower
transmission sites in substantially all of its markets. The availability of
these sites is subject to market conditions and may be subject to zoning and
other municipal restrictions. The Company believes that as additional wireless
video and telecommunications providers emerge, competition for such transmission
sites will continue to increase. There can be no assurance that the necessary
sites will be available or that the terms upon which access to such sites may be
obtained will be acceptable.
Rapid Technological Changes and Uncertain Market Development
The multichannel television and telecommunications industry is subject to
rapid and significant changes in technology and frequent service innovations.
The effect on the business of the Company of future technological changes, such
as changes relating to emerging transmission technologies,
20
<PAGE>
cannot be predicted. The Company believes that its future success will depend on
its ability, as to which no assurance can be given, to enhance its existing
systems or implement new systems to respond to new technologies and to develop
and introduce in a timely fashion new products and services on a competitive
basis.
The markets in which the Company competes are constantly evolving. The
convergence of traditional telecommunications services and multichannel
television services is a recent trend in the industries within which the Company
competes. As part of this trend, many telecommunications and cable television
operators are attempting to integrate network components. For example, video
distribution equipment is being considered for voice and data telecommunications
and vice versa. The convergence of these traditional services towards integrated
multimedia services presents both opportunity and material risk to companies
such as OpTel. The Company will face enhanced competition from competitors with
much greater financial, technical, marketing and other resources. Many of these
competitors may offer packages of services that are more extensive than the
services which the Company plans to offer. See "Business -- Competition." There
can be no assurance that the Company will be able to predict accurately the
direction of this evolving market or be able to respond effectively to the
highly competitive environment.
Management of Growth and Dependance on Qualified Personnel
The Company has undertaken a rapid expansion of its networks and services.
This growth has increased the operating complexity of the Company as well as the
level of responsibility for both existing and new management personnel. The
Company's ability to manage its expansion effectively will require it to
continue to implement and improve its operational and financial systems and to
expand, train and manage its employee base and attract and retain highly skilled
and qualified personnel. The Company's inability to effectively manage its
growth and attract and retain qualified personnel could have a material adverse
effect on its business.
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 competitive access providers ("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.
See "-- Regulation." 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 and to enroll
subscribers. In most markets serviced by the Company, franchise cable television
operators now offer revenue sharing and access fee
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<PAGE>
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. See "-- Risks
Associated with Rights of Entry." 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. See "Business -- Competition."
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 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.
Dependence Upon Program Material
The Company has fixed-term contracts with various program suppliers. The
average term of such contracts is four years and such contracts are typically
renewed upon expiration. If the contracts were terminated or not renewed, the
Company would be required to seek program material from other sources, which
could place the Company at a competitive disadvantage. Although federal law and
FCC regulations require that vertically integrated franchise cable television
system operators and cable television programmers sell programming to other
video distributors, such as the Company, on fair and non-discriminatory terms,
the Company has been denied certain popular sports programming by certain
providers who claim that the programming is not required to be licensed to the
Company. These denials have, and any such denials in the future could, adversely
impact the Company's activities in the affected markets. There can be no
assurance that the equal program access laws and regulations will not be
invalidated or repealed, in which case programmers could charge the Company
higher prices than those charged other multichannel television operators or make
their programs unavailable to the Company. In addition, one aspect of the equal
program access laws -- the prohibition on the sale of exclusive distribution
rights by certain programmers -- 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 to promote competition in the multichannel
television market. See "Business -- Regulation."
Regulation
The cable television and telecommunications industries are subject to
extensive regulation at the federal, state and local levels. 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, the results of which the Company is unable to predict. The United
States Congress and the FCC have in the past, and may in the future, adopt new
laws, regulations and policies regarding a wide variety of matters, including
rulemakings arising as a result of the Telecommunications Act of 1996 (the
"Telecommunications Act"), that could, directly or indirectly, affect the
operation of the Company's business. The business prospects of the Company could
be materially adversely affected (i) by the
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<PAGE>
application of current FCC rules or policies in a manner leading to the denial
of applications by the Company for FCC licenses or a change in the regulatory
status of the Company's private cable television and telecommunications
operations, (ii) by the adoption of new laws, policies or regulations, (iii) by
changes in existing laws, policies or regulations, including changes to their
interpretations or applications, that modify the present regulatory environment
or (iv) by the failure of certain rules or policies to change in the manner
anticipated by the Company. See "Business -- Regulation."
Among other things, the FCC has initiated a review of the rights of various
multichannel television service providers to obtain access to MDUs and other
private property. One possibility raised by the FCC is the establishment of a
federal MDU mandatory access requirement, which would require property owners to
open their MDUs to any service provider. 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 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. Any such action would tend to undermine the exclusivity provisions of the
Company's Rights of Entry with MDU owners. See "-- Risks Associated with Rights
of Entry."
States also have, in some cases, enacted various forms of MDU access
statutes that inhibit the Company's ability to obtain exclusive Rights of Entry
from MDU owners. Some of these state laws require MDU owners to provide
franchise cable television operators with access to their MDUs. The Company
currently operates in two such states, Florida (where the mandatory access
requirement applies only to condominiums) and Illinois. The Company also intends
to commence operations in Nevada, which has a mandatory access law. In addition,
Virginia, where the Company does not currently operate, prohibits private cable
television operators from entering into revenue sharing or up front incentive
payment arrangements with MDU owners. There can be no assurance that future laws
or regulations will not restrict the ability of the Company to offer revenue
sharing or access payments, limit MDU owners from receiving revenue sharing, or
prohibit MDU owners from entering into exclusive access agreements, any of which
could have a material adverse effect on the Company's business. See "Business --
Sales, Marketing and Customer Service" and "-- Regulation."
The majority of states currently permit STS services with relatively few
regulatory barriers. However, several states require certification and place
some conditions or restraints on the provision of STS services. Additionally,
STS providers must comply with the conditions of service set forth in the LEC's
tariffs under which STS providers receive service. There can be no assurance
that the regulatory environment will continue to be favorable for STS providers
or that regulatory changes will not slow or stop the Company's planned migration
from an STS provider into a CLEC. Although the current regulatory environment
enables competition for local exchange services, there is no assurance that the
Company will be able to compete successfully against established providers and
new entrants in that marketplace. In addition, various state and federal laws
and regulations limit the Company's ability to enforce exclusivity provisions of
Rights of Entry so as to exclude other telecommunications providers from an MDU.
The Company uses a substantial number of point-to-point microwave paths,
using frequencies in the 18GHz range, in its network architecture. In addition,
the Company intends to license frequencies, principally in the 23GHz range, in
the future. Both 18GHz and 23GHz paths are licensed by the FCC. After paths are
licensed by the FCC, FCC rules require that facilities utilizing such paths must
be constructed and fully operational within 18 months of the grant of the
license. There can be no assurance that the Company will be able to acquire a
license for the microwave paths that it seeks in the future, or that changes in
the FCC's regulations will not limit the Company's ability to use the 18GHz,
23GHz and other desirable frequencies for the distribution of its services or
otherwise impair the Company's microwave licenses. If the Company cannot license
the necessary paths on the desired frequencies, it may be necessary to utilize
other frequencies for signal transport
23
<PAGE>
or other means of signal transport. There can be no assurance that the cost of
such alternate means of transport will not exceed those associated with the
desired microwave frequency. Further, even if the FCC grants the desired
licenses, the Company may not have the financial resources to construct the
necessary facilities within the mandated 18 month period. See "-- Future Capital
Needs." Failure to complete the construction within the mandated period may
result in forfeiture of the license. In addition, state and local zoning and
land use laws may impede the efficient deployment of the Company's microwave
antennas.
Control of Licenses by Unaffiliated Company
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, to
permit the Company to use its frequency licenses to provide "common carrier"
telecommunications services in the event that the Company should desire to do so
in the future, the Company has assigned substantially all of its frequency
licenses to Transmissions Holding, Inc. ("THI"), a Delaware corporation
controlled by United States citizens. THI is not an affiliate of the Company.
The ownership of these licenses by THI is subject to a number of risks,
including the risk that acts or omissions of THI or its stockholders could
result in the revocation of such licenses or the unavailability of such licenses
to the Company and the risk that THI may be subject to bankruptcy or similar
proceedings which could result in the rejection or termination of the
arrangements between THI and the Company with respect to the use of such
licenses. While THI and its stockholders have made various affirmative and
negative covenants intended to limit the risk to the Company, there can be no
assurance that such covenants will not be violated or will be adequate to
protect the Company. See "Certain Transactions -- License Holding Company."
Use of the Name OpTel
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 a third party claiming that
the Company's trademark is confusingly similar to the mark used by that party 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 a 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.
Control By GVL
VPC, an indirect wholly-owned subsidiary of GVL, owns 1,923,977 shares of
the Issuer's Class B Common Stock, $.01 par value (the "Class B Common"),
representing 83.5% of the voting rights of the Issuer. Accordingly, VPC can and
will continue to be able to elect a majority of the Board of Directors of the
Issuer and to control the vote on matters submitted to the vote of the Issuer's
stockholders. The interests of GVL as a beneficial owner of an equity interest
in the Issuer may differ in material respects from those of the holders of the
Notes, and there can be no assurance that actions taken by GVL or on its behalf
will not materially adversely affect the holders of the Notes.
In addition to its investment in the Issuer, GVL, through other
subsidiaries, currently holds interests in wireless cable systems in a number of
U.S. markets including San Francisco and San
24
<PAGE>
Diego, California and Tampa, Florida. These subsidiaries employ multipoint
multichannel distribution systems, SMATV systems or hard wire franchise cable
television systems. In November 1995, GVL entered into an agreement for the sale
of all such interests to an unrelated third party. In November 1996, the
prospective purchaser terminated the agreement. GVL is now seeking damages as a
result of such termination or, in the alternative, contesting the termination.
Under an agreement with Vanguard Communications, L.P. ("Vanguard"), one of the
Issuer's minority stockholders, GVL and its affiliates are generally barred from
competing with the Company; however, GVL's wireless cable business is excluded
from the restriction. Affiliates of GVL may continue to hold and develop these
interests and, in doing so, may compete with the Company in markets where their
services overlap.
GVL is party to an indenture which limits the aggregate amount of
indebtedness which can be incurred by GVL and its subsidiaries, including the
Company taken as a whole (based upon a ratio of total consolidated indebtedness
to consolidated operating cash flow). As a result, GVL's strategies and the
operating results of its subsidiaries other than the Company may affect the
ability of the Company to incur additional indebtedness. As of February 28,
1997, GVL was able to incur approximately Cdn $600 million (approximately $440
million based on an exchange rate of $1.00 = Cdn$ 1.3682 as reported by the Wall
Street Journal on February 28, 1997) of indebtedness under its indenture but
there can be no assurance that this number may not decrease substantially in the
future. There can be no assurance that GVL will not restrain the Company's
growth or limit the indebtedness incurred by the Company so as to ensure GVL's
compliance with the terms of its debt instruments.
The principal shareholders of GVL entered into an amended and restated
shareholders agreement, dated as of May 10, 1995 (the "GVL Shareholders'
Agreement"), pursuant to which they have agreed they shall not allow the Issuer
to take certain actions without the consent of Caisse de dep-t et placement du
Quebec, a portfolio manager owned by the government of the Province of Quebec
("Caisse"), which is the holder of equity in GVL representing approximately
18.71% of the voting rights. Such actions include 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, and 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. See "Principal Stockholders -- GVL Shareholders' Agreement." The
Issuer has been advised that Vanguard has reached an agreement in principle for
the sale of its interest in the Issuer to Capital Communications CDPQ, Inc.
("CDPQ"), a wholly-owned subsidiary of Caisse. In connection with such sale GVL,
VPC, Caisse, CDPQ and the Issuer have reached an agreement in principle with
respect to certain changes to be made to the Issuer's Certificate of
Incorporation and the Stockholders' Agreement (as defined). As provided by the
agreement in principle, if such transactions are consummated, certain rights
granted to Caisse with respect to the Issuer pursuant to the GVL Shareholders'
Agreement will be terminated. However, Caisse would retain its veto rights with
respect to certain material transactions, including material acquisitions and
the incurrence of additional indebtedness, under a new stockholders agreement
which would be executed by the Issuer and its principal stockholders. No
assurance can be given as to when, or if, the parties to such agreements in
principle will agree upon definitive documentation of the transactions
contemplated therein or that, if such definitive documentation is executed, the
consummation of the transactions contemplated therein in fact will occur. See
"Certain Transactions -- Possible Sale of Vanguard Interest."
A transfer by VPC of the Class B Common or a transfer by GVL of its
interest in VPC, may result in a "Change of Control" under the Indenture, which
could require the Issuer to offer to purchase the Notes. There can be no
assurance that the Issuer would have the financial resources to meet this
obligation. Neither VPC nor GVL is under any obligation to prevent a "Change of
Control." The occurrence of a "Change of Control" could have a material adverse
effect on the Company, including the loss of GVL's strategic involvement with
the Company.
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Potential 911, E-911 and Intrusion Alarm Liability
The Company delivers local exchange service, including access to emergency
("911") services, to MDU residents through switches installed by the Company at
each property. Mechanical or electrical defects, power failures or catastrophic
events may temporarily disrupt operation of the Company's switch, preventing,
delaying or impeding access to 911 service. In many jurisdictions,
telecommunications carriers are required to implement services which permits a
911 operator to immediately identify the location of the caller ("E-911
service"). To provide E-911 service at an MDU, the telecommunications service
provider or its agent must maintain a database with certain information relating
to the MDU residents. The failure of the Company or its agent to maintain such
database in a timely and accurate manner could prevent, delay or impede the
operation of E-911 service. In addition, because of the configuration of the
Company's telecommunications networks, the Company's telecommunications traffic
may cross more than one E-911 jurisdiction. This will require the Company to
coordinate among these various jurisdictions. There can be no assurance that the
Company will not be liable for damage to property or personal injuries that may
directly or indirectly result from any failure of 911 or E-911 service to
operate properly. Moreover, the Company may provide 911, E-911 or operator
services by contracting such services from other carriers in its markets. The
providers of these services will generally require the Company to indemnify them
for any losses or liability incurred in connection with such services except for
those caused exclusively by the gross negligence or malfeasance of the carrier.
The Company currently provides all its intrusion alarm monitoring through
subcontractors. There can be no assurance that the Company will not be liable
for any property damage or personal injuries that may result from intrusion
alarm malfunctions or from a subcontractor's failure to appropriately monitor
the intrusion alarm systems under contract.
Bankruptcy Risks Related to Escrow Account
The right of the Trustee (as defined) under the Indenture and the Escrow
Agreement (as defined) to foreclose upon and sell Collateral (as defined) upon
the occurrence of an Event of Default (as defined) on the Notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against the Company or one or
more of its subsidiaries. Under applicable bankruptcy law, secured creditors
such as the holders of the Notes are prohibited from foreclosing upon or
disposing of a debtor's property without prior bankruptcy court approval. See
"Description of the Notes -- Disbursement of Funds; Escrow Account."
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THE EXCHANGE OFFER
Purpose of the Exchange Offer
The Old Notes were originally issued and sold on February 14, 1997 in
reliance upon the exemptions from registration under Rule 144A and Section 4(2)
of the Securities Act. Pursuant to the Registration Agreement, the Company
agreed to register with the Commission a series of notes with substantially
identical terms as the Old Notes, to be offered in exchange for the Old Notes.
The purpose of the Exchange Offer is to satisfy the Company's obligations under
the Registration Agreement. Upon consummation of the Exchange Offer, holders
that were not prohibited from participating in the Exchange Offer and did not
tender their Old Notes will not have any registration rights under the
Registration Agreement with respect to such non-tendered Old Notes and,
accordingly, such Old Notes will continue to be subject to the restrictions on
transfer contained in the legend thereon.
Terms of the Exchange
The Company offers to exchange, subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal accompanying this Prospectus, the
same principal amount of New Notes for the Old Notes tendered for exchange. The
terms of the New Notes are substantially identical to the Old Notes in all
material respects (including interest rate and maturity), except that (i) the
New Notes will not be subject to the restrictions on transfer (other than with
respect to holders who are affiliates) and (ii) the Registration Agreement
covenants regarding registration and the related Liquidated Damages (other than
those that have accrued and were not paid) with respect to Registration Defaults
will have been deemed satisfied. The New Notes will evidence the same debt as
the Old Notes and will be entitled to the same benefits of the Indenture. See
"Description of the Notes." The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes being tendered for exchange.
The Company believes that New Notes tendered in exchange for Old Notes may
be offered for resale, resold and otherwise transferred by any holder (other
than any holder which is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery requirements of the Securities Act, provided that the New
Notes are acquired in the ordinary course of the holder's business, the holder
has no arrangement or understanding with any person to participate in the
distribution of the New Notes and neither the holder nor any other person is
engaging in or intends to engage in a distribution of the New Notes. Any holder
who tenders in the Exchange Offer for the purpose of participating in a public
distribution of the New Notes must comply with registration and prospectus
delivery requirements of the Securities Act in connection with the distribution.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
Broker-dealers may not exchange Old Notes which are part of an unsold original
allotment in the Exchange Offer.
Tendering holders of the Old Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the Exchange Offer.
Expiration Date; Termination; Amendment
The Exchange Offer will expire on the Expiration Date. The term "Expiration
Date" means 5:00 p.m., New York City time, on __________, 1997, or such later
date and time, if any, to which it is extended by the Company, provided that the
Expiration Date shall not be extended beyond 60 days
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<PAGE>
from the date of this Prospectus. In connection with the Exchange Offer, the
Company will comply with all applicable requirements of the federal securities
laws, including, but not limited to, Rule 14e-1 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
The Exchange Date will be the first business day following the Expiration
Date. The Company expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any Old Notes if either of the events set
forth under "--Conditions to the Exchange Offer" shall have occurred and shall
not have been waived by the Company and (ii) amend the terms of the Exchange
Offer in any manner which, in its good faith judgment, is advantageous to the
holders of the Old Notes, whether before or after any tender of the Old Notes.
Unless the Company terminates the Exchange Offer prior to 5:00 p.m., New York
City time, on the Expiration Date, the Company will exchange the New Notes for
the Old Notes on the Exchange Date.
Procedures for Tendering Old Notes
The Exchange Offer is subject to the terms and conditions set forth in this
Prospectus and the Letter of Transmittal.
Old Notes may be tendered by properly completing and signing the Letter of
Transmittal and delivering the Letter of Transmittal to the Exchange Agent at
its address set forth in this Prospectus on or prior to the Expiration Date,
together with (i) the certificate or certificates, if any, representing the Old
Notes being tendered and any required signature guarantees, (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of the Old
Notes, if such procedure is available, into the Exchange Agent's account at The
Depository Trust Company (the "Book-Entry Transfer Facility" or "Depositary")
pursuant to the procedure for book-entry transfer described below, or (iii) the
completion of the procedures for guaranteed delivery set forth below. See
"--Guaranteed Delivery Procedures."
If the New Notes (and any untendered Old Notes) are to be issued in the
name of the registered holder and the registered holder has signed the Letter of
Transmittal, the holder's signature need not be guaranteed. In any other case,
the tendered Old Notes must be endorsed or accompanied by written instruments of
transfer in form satisfactory to the Exchange Agent and duly executed by the
registered holder and the signature on the endorsement or instrument of transfer
must be guaranteed by a commercial bank or trust company located or having an
office or correspondent in the United States, or by a member firm of a national
securities exchange or of the NASD (an "Eligible Institution"). If the New Notes
and/or Old Notes not exchanged are to be delivered to an address other than that
of the registered holder appearing on the register for the Old Notes, the
signature on the Letter of Transmittal must be guaranteed by an Eligible
Institution.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER
INSURANCE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal, the
Old Notes or a Book-Entry Confirmation and all other required documents are
received by the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company in its sold discretion, which determination will be
final and binding. The Company reserves the right to reject any or all tenders
not in proper form or the acceptance for exchange of which may, in the opinion
of the Company's counsel, be unlawful. The Company also reserves the right to
waive any of the conditions of the
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Exchange Offer or any defect, withdrawal, rejection of tender or irregularity in
the tender of any Old Notes. Neither the Company, the Exchange Agent nor any
other person will be under any duty to give notification of any defects,
withdrawals, rejections or irregularities or incur any liability for failure to
give any such notification.
Terms and Conditions of the Letter of Transmittal
The Letter of Transmittal contains, among other things, the following terms
and conditions, which are part of the Exchange Offer:
The holder tendering Old Notes exchanges, assigns and transfers the Old
Notes to the Company and irrevocably constitutes and appoints the Exchange Agent
as the holder's agent and attorney-in-fact to cause the Old Notes to be
assigned, transferred and exchanged. The holder represents and warrants to the
Company and the Exchange Agent that (i) it has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire the New Notes
in exchange for the Old Notes, (ii) when the Old Notes are accepted for
exchange, the Company will acquire good and unencumbered title to the Old Notes,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim, (iii) it will, upon request, execute and deliver
any additional documents deemed by the Company to be necessary or desirable to
complete the exchange, assignment and transfer of tendered Old Notes and (iv)
acceptance of any tendered Old Notes by the Company and the issuance of New
Notes in exchange therefor will constitute performance in full by the Company of
its obligations under the Registration Rights Agreement and the Company will
have no further obligations or liabilities thereunder to such holders (except
with respect to accrued and unpaid Liquidated Damages, if any). All authority
conferred by the holder will survive the death or incapacity of the holder and
every obligation of the holder will be binding upon the heirs, legal
representatives, successors assigns, executors and administrators of the holder.
Each holder will also certify that it (i) is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or that, if it
is an "affiliate," it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable, (ii) is acquiring
the New Notes offered in the ordinary course of its business, (iii) has no
arrangement with any person to participate in the distribution of the New Notes
and (iv) is not a broker-dealer, or that if it is a broker-dealer, the Old Notes
tendered for exchange are not part of an unsold allotment from the Offering.
Withdrawal Rights
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
To be effective, a written notice of withdrawal must be timely received by
the Exchange Agent at its address set forth in this Prospectus by mail, courier,
telegraphic, telex or facsimile transmission. Any notice of withdrawal must
specify the person named in the Letter of Transmittal as having tendered Old
Notes to be withdrawn, the certificate numbers of the Old Notes to be withdrawn,
the principal amount of the Old Notes to be withdrawn, a statement that the
holder is withdrawing its election to tender the Old Notes for exchange, and the
name of the registered holder of the Old Notes, and must be signed by the holder
in the same manner as the original signature on the Letter of Transmittal
(including any required signature guarantees) or be accompanied by evidence
satisfactory to the Exchange Agent that the person withdrawing the tender has
succeeded to the beneficial ownership of the Old Notes being withdrawn. The
Exchange Agent will return the properly withdrawn Old Notes promptly following
receipt of notice of withdrawal. If the Old Notes have been tendered pursuant to
a book-entry transfer, any notice of withdrawal must specify the name and number
of the account at the Book-Entry Transfer Facility to be credited with the
withdrawn Old Notes and otherwise comply with the procedures of the Book-Entry
Transfer Facility. All questions as to the validity of notices of withdrawals,
including time of receipt, will be determined by the Company,
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<PAGE>
and such determination will be final and binding on all parties. Any Old Notes
which have been tendered for exchange but which are not exchanged will be
returned to the holder thereof without cost to the holder (or, in the case of
Old Notes tendered by book-entry transfer by crediting an account maintained
with the Book-Entry Transfer Facility for the Old Notes) as soon as practicable
after withdrawal, rejection of tender or termination of the Exchange Offer.
Properly withdrawn Old Notes may be retendered at any time on or prior to the
Expiration Date. Any Old Notes so withdrawn and not retendered will not be
exchanged for New Notes under the Exchange Offer.
Acceptance of Old Notes for Exchange; Delivery of New Notes
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of the Old Notes validly tendered and not withdrawn and
issuance of the New Notes will be made on the Exchange Date. For the purposes of
the Exchange Offer, the Company shall be deemed to have accepted for exchange
validly tendered Old Notes when, as and if the Company has given oral or written
notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of the Old
Notes for the purpose of causing the Old Notes to be assigned, transferred and
exchanged for the New Notes. Upon the terms and subject to the conditions of the
Exchange Offer, delivery of the New Notes in exchange for the Old Notes will be
made by the Exchange Agent promptly after acceptance for exchange of the
tendered Old Notes by the Company. Tendered Old Notes not accepted for exchange
by the Company will be returned without expense to the tendering holders (or, in
the case of Old Notes tendered by book-entry transfer, crediting an account
maintained with the Depositary) promptly following the Expiration Date, or, if
the Company terminates the Exchange Offer prior to the Expiration Date, promptly
after the Exchange Offer is terminated.
Book-Entry Transfer
The Exchange Agent will establish an account at the Book-Entry Transfer
Facility for purposes of the Exchange Offer within two business days after the
date of this Prospectus, and any financial institution that is a participant in
the Book-Entry Transfer Facility's systems may make book-entry delivery of the
Old Notes by causing the Book-Entry Transfer Facility to transfer the Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with the Book-Entry Transfer Facility's procedure for transfer. The
Letter of Transmittal with any required signature guarantees and any other
required documents must be received by the Exchange Agent on or prior to the
Expiration Date for any book-entry transfers.
Guaranteed Delivery Procedures
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other documents required hereby to the Exchange Agent prior
to the Expiration Date, must tender their Old Notes and follow the guaranteed
delivery procedures. Pursuant to such procedures: (i) such tender must be made
by or through an Eligible Institution; (ii) prior to the Expiration Date, the
Exchange Agent must have received from the Eligible Institution a properly
completed and duly executed notice of guaranteed delivery (a "Notice of
Guaranteed Delivery") (by facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby and guaranteeing
that, within five business days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof), together with the certificate(s)
representing the Old Notes (or a confirmation of electronic delivery or
book-entry delivery into the Exchange Agent's account at the Depositary) and any
of the required documents will be deposited by the Eligible Institution with the
Exchange Agent; and (iii) such properly completed and executed Letter of
Transmittal (or facsimile thereof), as well as all other documents required by
the Letter of Transmittal and the certificate(s) representing all tendered Old
Notes in proper form for transfer (or a confirmation of
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<PAGE>
electronic mail delivery or book-entry delivery into the Exchange Agent's
account at the Depositary), must be received by the Exchange Agent within five
business days after the Expiration Date. Any holder of Old Notes who wishes to
tender its Old Notes pursuant to the guaranteed delivery procedures described
above must ensure that the Exchange Agent receives the Notice of Guaranteed
Delivery prior to 5:00 p.m., New York City time, on the Expiration Date.
Conditions to the Exchange Offer
Notwithstanding any other provision of the Exchange Offer, the Company will
not be required to issue New Notes in exchange for any properly tendered Old
Notes not previously accepted and may terminate the Exchange Offer (by oral or
written notice to the holders and by timely public announcement communicated,
unless otherwise required by applicable law or regulation, by making a release
to the Dow Jones News Service), or, at its option, modify or otherwise amend the
Exchange Offer, if any of the following events occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been issued
by, any court or governmental agency or other governmental regulatory or
administrative agency or commission (i) seeking to restrain or prohibit the
making or consummation of the Exchange Offer or any other transaction
contemplated by the Exchange offer, or assessing or seeking any damages as a
result thereof, or (ii) resulting in a material delay in the ability of the
Company to accept for exchange or exchange some or all of the Old Notes
pursuant to the Exchange Offer, or any statute, rule, regulation, order or
injunction shall be sought, proposed, introduced, enacted, promulgated or
deemed applicable to the Exchange Offer or any of the transactions
contemplated by the Exchange Offer by any government or governmental
authority, domestic or foreign, or any action shall have been taken, proposed
or threatened, by any government, governmental authority, agent or court,
domestic or foreign, that in the sole judgment of the Company might directly
or indirectly result in any of the consequences referred to in clause (i) or
(ii) above or, in the sole judgment of the Company, might result in the
holders of New Notes having obligations with respect to resales and transfers
of New Notes which are greater than those described in the interpretation of
the Commission referred to on the cover page of this Prospectus, or would
otherwise make it inadvisable to proceed with the Exchange Offer; or
(b) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company, taken as a whole, that, in the sole judgment of the
Company is or may be adverse to the Company, or the Company shall have become
aware of facts that, in the sole judgment of the Company, have or may have
adverse significance with respect to the value of the Old Notes or the New
Notes; which, in the sole judgment of the Company in any case, and regardless
of the circumstances (including any action by the Company) giving rise to any
such condition, makes it unlawful to proceed with the Exchange Offer and/or
with such acceptance for exchange or with such exchange.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date if
any of the conditions set forth above occur. Moreover, regardless of whether any
of such conditions has occurred, the Company may amend the Exchange Offer in any
manner which, in its good faith judgment, is advantageous to holders of the Old
Notes.
These conditions are for the sole benefit of the Company and may be waived
by the Company, in whole or in part, in its sole discretion; provided, however,
that in the event that the Company waives any of such conditions that is
material to the Exchange Offer on a date (the "Waiver Date") that is fewer than
five business days prior to the Expiration Date, the Company will extend the
Exchange Offer to five business days from the Waiver Date. Any determination
made by the Company that any of these conditions has occurred will be final and
binding on all holders of the Notes, absent manifest error.
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In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened or in effect with respect to the
Registration Statement of which this Prospectus constitutes a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act").
Exchange Agent
U.S. Trust of Texas, N.A., the Trustee under the Indenture, has been
appointed as the Exchange Agent for the Exchange Offer. All executed Letters of
Transmittal, questions and requests for assistance and requests for additional
copies of this Prospectus or of the Letter of Transmittal should be directed to
the Exchange Agent as follows:
If by Mail: U.S. Trust Company of Texas, N.A.
P.O. Box 841
Cooper Station
New York, NY 10276-0841
If by Hand: U.S. Trust Company of Texas, N.A.
111 Broadway
Lower Level
New York, NY 10006-1906
If by Overnight Courier: U.S. Trust Company of Texas, N.A.
770 Broadway
13th Floor -- Corporate Trust Operations
New York, NY 10003-9598
Confirm by Telephone: 1-800-225-2398 Bondholder Inquiry
or
212-420-6668 Tony Nista
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID
DELIVERY.
Solicitation of Tenders; Expenses
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus and the Letter of Transmittal. If given or made, such
information or representations should not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any
exchange made thereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Company since the respective
dates as of which information is given herein. The Exchange Offer is not being
made to (nor will tenders be accepted from or on behalf of) holders of Old Notes
in any jurisdiction in which the making of the Exchange Offer or the acceptance
thereof would not be in compliance with the laws of such jurisdiction. The
company may, however, at the reasonable request of any holder, take such action
as it may deem necessary to make the Exchange Offer in any such jurisdiction and
extend the Exchange Offer to holders of Old Notes in such jurisdiction.
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Transfer Taxes
Holders who tender their Old Notes in exchange for New Notes will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register New Notes in the name of, or request that
Old Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer taxes thereon.
Consequences of Failure to Exchange
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their Old
Notes will not have any registration rights under the Registration Agreement
with respect to such non-tendered Old Notes and, accordingly such Old Notes will
continue to be subject to the restrictions on transfer contained in the legend
thereon. In general, the Old Notes may not be offered or sold, unless registered
under the Securities Act and the applicable state securities laws, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not intend
to register the Old Notes under the Securities Act. Based on interpretations by
the staff of the Commission, New Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale, resold or otherwise
transferred by holders (other than any holder that is an "affiliate" of the
Company within the meaning of rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery requirements of the
Securities Act provided that the New Notes are acquired in the ordinary course
of the holders' business, the holders have no arrangement with any person to
participate in the distribution of the New Notes and neither the holder nor any
other person is engaging in or intends to engage in a distribution of the New
Notes. If any holder has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer, the
holder (i) could not rely on the applicable interpretations of the staff of the
Commission and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transactions.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes, where such Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the New Notes.
Broker-dealers may not exchange Old Notes which are part of an unsold original
allotment in the Exchange Offer. See "Plan of Distribution." In addition, to
comply with the securities laws of certain jurisdictions, if applicable, the New
Notes may not be offered or sold unless they have been registered or qualified
for sale in such jurisdiction or an exemption from registration or qualification
is available and is complied with. The Company has agreed under the Registration
Agreement to register or qualify the New Notes for resale in any jurisdictions
requested by any holder, subject to certain limitations.
Other
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their Old
Notes will not have any registration rights under the Registration Agreement
with respect to such non-tendered Old Notes and, accordingly, such Old Notes
will continue to be subject to the restrictions on transfer contained in the
legend thereon.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer and to
the best of the Company's information and belief, each person participating in
the Exchange Offer is acquiring the New Notes in its ordinary course of business
and has no arrangement or understanding with any person to
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<PAGE>
participate in the distribution of the New Notes to be received in the Exchange
Offer. The Company will make each person participating in the Exchange Offer
aware (through this Prospectus or otherwise) that any holder using the Exchange
Offer to participate in a distribution of New Notes to be acquired in the
registered Exchange Offer (i) may not rely on the staff position enunciated in
Morgan Stanley and Co. Inc. (avail. June 5, 1991) and Exxon Capital Holding
Corp. (avail. May 13, 1988) or similar letters and (ii) must comply with
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Accounting Treatment
The New Notes will be recorded at the same aggregate carrying value as the
Old Notes, approximately $218.0 million, as reflected in the Company's
accounting records on the Exchange Date. Accordingly, no gain or loss for
accounting purposes will be recognized by the Company. The expenses of the
Exchange Offer will be amortized over the term of the New Notes.
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USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
The net proceeds of the Offering, after discounts and expenses, were
approximately $219.8 million. Of such amount, (i) approximately $95.2 million of
the net proceeds will be used by the Company to finance capital expenditures
associated with the continued expansion of the Company's networks and the
implementation of the Company's telecommunications strategy, including the
acquisition of central office switches, and for general corporate purposes,
including working capital, (ii) $79.6 million was deposited with the Escrow
Agent to fund the Escrow Account (see "Description of the Notes -- Disbursement
of Funds; Escrow Account"), (iii) approximately $10 million of the net proceeds
was used to repay Convertible Notes from VPC to the Issuer and (vi)
approximately $35 million will be used either to effect the Phonoscope
Acquisition or for the purposes in the preceding clause (i) (see Prospectus
Summary -- Recent Developments: Proposed Phonoscope Acquisition"). In addition,
approximately $2.3 million of the proceeds was used to consummate a small
acquisition within one of the Company's existing markets. The Company has signed
a letter of intent with respect to another small acquisition within its existing
markets for which the purchase price is not expected to exceed $2.5 million and
for which a portion of the proceeds may be used.
35
<PAGE>
CAPITALIZATION
The following table sets forth, on an unaudited basis, the capitalization
of the Company as of February 28, 1997. This table should be read in connection
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and the
notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
February
28, 1997
---------------
(in thousands)
<S> <C>
Cash and cash equivalents (excluding Escrow Account) ........................... $135,015
Escrow Account(1) ............................................................... 79,804
--------
Total ........................................................................ $214,819
========
Indebtedness:
13% Senior Notes Due 2005(2) ................................................ $218,036(2)
Convertible Notes due to stockholder(3) .................................... 121,006
Notes payable and long-term liabilities ....................................... 2,579
Deferred acquisition liabilities ............................................. 6,716
--------
Subtotal .................................................................. 348,337
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and
outstanding ............................................................... --
Class A common stock, $.01 par value; 8,000,000 shares authorized; none issued
and outstanding ............................................................ --
Class B common stock, $.01 par value; 6,000,000 shares
authorized; 2,304,561 issued and outstanding(4) ........................... 23
Class C common stock, $.01 par value (the "Non-Voting Common"); 300,000
shares authorized; 225,000 issued and outstanding, as adjusted(5)(2) ...... 2
Additional paid in capital ................................................... 95,064
Accumulated deficit ......................................................... (45,101)
--------
Subtotal .................................................................. 49,988
--------
Total capitalization ................................................... $398,325
========
</TABLE>
- ------------
(1) Of the net proceeds of the Offering, $79.6 million was used to purchase U.S.
government securities pledged to secure the Notes and held in escrow for
payment of the first six interest payments on the Notes. See "Description of
the Notes -- Disbursement of Funds; Escrow Account."
(2) Reflects $7.0 million allocated to the shares of Non-Voting Common issued in
connection with the Offering which constitutes original issue discount.
(3) In connection with the Offering, VPC agreed (i) to extend the maturity of
the Convertible Notes until six months following the maturity or
indefeasible payment in full of the Notes and (ii) to subordinate the
Convertible Notes in right of payment to the Notes in the event of a
liquidation, dissolution, reorganization, receivership or winding-up of the
Issuer 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.
See "Certain Transactions -- Convertible Notes."
<PAGE>
(4) Each share of Class B Common is convertible into one share of Class A
Common. The rights of the holders of the Class A Common and Class B Common
are identical except that holders of Class A Common are entitled to one vote
for each issued and outstanding share and holders of Class B Common are
entitled to 10 votes for each issued and outstanding share. The Class B
Common shares may only be held by VPC, Vanguard and their respective
affiliates. As used herein, the term "Common Stock" refers collectively to
the Class A Common, Class B Common and Non-Voting Common. The Issuer has
been advised that Vanguard has reached an agreement in principle for the
sale of its interest in the Issuer to CDPQ. In connection with such sale
GVL, VPC, Caisse, CDPQ and the Issuer have reached an agreement in principle
with respect to certain changes to the Issuer's Certificate of Incorporation
and the Stockholders' Agreement, including changes to the permitted holders
of, and transferability restrictions on, shares of Class B Common. See
"Certain Transactions -- Possible Sale of Vanguard Interest."
(5) Each share of Non-Voting Common will automatically convert into the Class A
Common or any other class of common stock of the Issuer that is registered
with the SEC or is listed on a national securities exchange or authorized
for quotation on Nasdaq or otherwise subject to registration under the
Exchange Act, provided the terms thereof are no less favorable to holders
than were the Shares. See "Description of Capital Stock." The rights of the
holders of the Class A Common, Class B Common and the Non-Voting Common are
identical except as to voting rights. Holders of Non-Voting Common are not
entitled to notice of, or to vote at, any meeting of the stockholders or
action taken by written consent, except as required by Delaware law.
36
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data presented below as of and for the
periods ended December 31, 1993 and 1994 and August 31, 1995 and 1996 have been
derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by Deloitte & Touche LLP,
independent auditors. The selected financial data presented below as of and for
the six month periods ended Fenruary 29, 1996 and February 28, 1997 have been
derived from unaudited consolidated financial statements of the Company. In the
opinion of management, the unaudited consolidated financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
the fair presentation of the Company's financial position and results of
operation for these periods. 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 Prospectus.
<TABLE>
<CAPTION>
Period from
April 20,
1993 (date Eight Month Six Month Six Month
of inception) Year Ended Period Period Period
to December December Ended Year Ended Ended Ended
31, 31, August 31, August 31, February 29, February 28,
--------------- ------------ ------------- ------------ -------------- -------------
1993 1994 1995 1996 1996 1997
--------------- ------------ ------------- ------------ -------------- -------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues:
Cable television ............... $ 12 $ 240 $ 8,782 $ 25,893 $ 11,570 $ 17,208
Telecommunications ............... -- 202 788 1,712 718 1,414
-------- ---------- ---------- ---------- ---------- -----------
Total revenues .................. 12 442 9,570 27,605 12,288 18,622
-------- ---------- ---------- ---------- ---------- -----------
Operating Expenses:
Cost of services ............... 6 470 4,557 11,868 5,266 8,702
Customer support, general and
administrative ............... 304 7,733 8,235 17,319 7,499 12,267
Depreciation and amortization . 8 117 2,420 8,676 3,804 5,820
Nonrecurring reorganization
costs(1) ..................... -- -- 3,820 2,318 826 --
-------- ---------- ---------- ---------- ---------- -----------
Total operating expenses ...... 318 8,320 19,032 40,181 17,395 26,789
-------- ---------- ---------- ---------- ---------- -----------
Loss from operations ............ (306) (7,878) (9,462) (12,576) (5,107) (8,167)
Interest expense on
Convertible Notes due
to stockholder (2) ............... -- -- (919) (5,342) (1,890) (6,907)
Other interest expense, net ...... (1) (66) (249) (512) (245) (1,218)
-------- ---------- ---------- ---------- ---------- -----------
Loss before income taxes ......... (307) (7,944) (10,630) (18,430) (7,242) (16,292)
Income tax benefits (3) ......... -- -- 469 -- -- --
-------- ---------- ---------- ---------- ---------- -----------
Net loss ........................ $ (307) $ (7,944) $ (10,161) $ (18,430) $ (7,242) $ (16,292)
======== ========== ========== ========== ========== ===========
Loss per share(4) ............... $ (6.89) $ (8.30) $ (3.37) $ (7.01)
========== ========== ========== ===========
Cash dividend declared ............ -- -- -- -- -- --
Financial Data:
EBITDA(5) ........................ $ (298) $ (7,761) $ (7,042) $ (3,900) $ (1,303) $ (2,347)
Net cash flows used in operating
acitivies ........................ $ (183) $ (3,332) $ (3,494) $ (452) $ (4,361) $ (3,048)
Net cash flows used in investing
activities ..................... $ (517) $ (10,576) $ (72,144) $ (72,037) $ (28,916) $ (107,229)
Net cash flows provided by
financing activities ............ $ 741 $ 18,886 $ 72,655 $ 72,131 $ 32,060 $ 243,615
Capital expenditures(6) ......... 517 9,278 22,170 62,121 23,122 24,925
Acquisition of private cable
businesses ..................... -- 1,298 49,974 9,916 5,793 2,500
Deficiency of earnings to fixed
charges(7) ..................... 307 7,944 10,630 20,280 7,876 17,276
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
As of As of As of
December 31, August 31, February 28,
------------------ --------------------- -------------
1993 1994 1995 1996 1997
------ --------- --------- --------- -------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents
(excluding Escrow Account) ...... $ 41 $ 5,019 $ 2,036 $ 1,677 $135,015
Escrow Account .................. -- -- -- -- 79,804
Property, plant and
equipment, net .................. 509 11,379 48,060 103,800 122,041
Intangible assets ............... -- 16,189 55,443 65,876 75,471
Total assets ..................... 588 33,820 108,072 175,978 417,681
13% Senior Notes Due 2005 ......... -- -- -- -- 218,036
Convertible Notes due to stock-
holder(8) ........................ -- 15,000 17,950 89,414 121,006
Total liabilities ............... 206 31,007 39,527 116,698 367,693
Stockholders' equity ............ 382 2,813 68,545 59,280 49,988
Book value per share(4) ......... 31.89 25.72 19.76
</TABLE>
<TABLE>
<CAPTION>
As of As of
August 31, February 28,
------------------------- -------------
1995 1996 1997
----------- ----------- -------------
<S> <C> <C> <C>
Operating Data:(9)
Cable Television:
Units under contract(10) ........................ 173,324 241,496 265,518
Units passed(11) ................................. 170,336 225,433 239,801
Basic subscribers .............................. 75,944 114,163 125,090
Basic penetration(12) ........................... 44.6% 50.6% 52.2%
Premium units .................................... 39,753 60,641 74,441
Pay-to-basic ratio(13) ........................... 52.3% 53.1% 59.5%
Average monthly cable revenue per subscriber(14) $ 22.84 $ 24.29 $ 24.02
Telecommunications:
Units under contract(10) ........................ 10,322 20,945 27,373
Units passed(11) ................................. 9,116 12,364 14,416
Subscribers .................................... 2,207 4,080 4,791
Lines(15) ....................................... 2,650 5,166 6,039
Penetration(16) ................................. 24.2% 33.0% 33.2%
Average monthly telecommunications revenue per
subscriber(14) ................................. -- $ 59.08 $ 53.16
</TABLE>
- ----------------
(1) During the eight month period ended August 31, 1995 and fiscal 1996, the
Company relocated its corporate headquarters, began relocating its customer
services centers and completed several acquisitions. As a result of these
actions, significant nonrecurring reorganization costs were incurred
primarily relating to severance costs of former employees at the previous
locations and relocation and recruiting costs of employees at the new
location.
(2) Interest expense on Convertible Notes due to stockholder, is reported net
of interest capitalized in property, plant and equipment. In connection
with the Offering, the stockholder, VPC, agreed to subordinate the
Convertible Notes to the prior payment of the Notes in the event of a
liquidation, dissolution, reorganization, receivership or winding-up of the
Issuer 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. See "Certain Transactions -- Convertible Notes."
(3) The Company has not had 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. See note 8 of notes to the Consolidated Financial
Statements.
<PAGE>
(4) Loss per share and book value per share information is not presented for
the periods the Company was organized as a partnership.
(5) EBITDA represents earnings before interest expense, income tax benefits,
depreciation and amortization. EBITDA includes nonrecurring reorganization
costs of $3.8 million, $2.3 million and $0.8 million for the eight month
period ended August 31, 1995, the year ended August 31, 1996 and the six
month period ended February 28, 1996 respectively. EBITDA is not intended
to represent cash flow from operations or an alternative to net loss, each
as defined by generally
38
<PAGE>
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.
(6) Capital expenditures include expenditures on property, plant and equipment
together with intangible assets.
(7) For the purposes of calculating the deficiency of earnings to fixed
charges, (i) earnings consist of loss before income taxes plus fixed
charges and (ii) fixed charges consist of interest expense on all debt,
amortization of deferred financing costs and the portion of operating lease
rental expense that is representative of the interest factor (deemed to be
one third of minimum operating lease rental). On a pro forma basis, after
giving effect to the Offering (excluding interest on the Escrow Account),
the deficiency of earnings to fixed charges for the periods ended August
31, 1996 and February 28, 1997 would have been $49.5 million (including
$7.2 million in respect of Convertible Notes) and $31.9 million (including
$7.9 million in respect of Convertible Notes), respectively.
(8) The Convertible Notes mature six months following the maturity or
indefeasible payment in full of the Notes and are subordinated in right of
payment to the Notes under certain circumstances. See "Certain Transactions
-- Convertible Notes."
(9) Information with respect to the periods ended December 31, 1993 and 1994 is
not meaningful and not presented.
(10) 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. The Company anticipates passing
approximately 15,800 and 8,700 additional units currently under contract
for cable television and units currently under contract for
telecommunications, respectively, by the end of calendar 1997.
(11) 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.
(12) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(13) Pay-to-basic ratio is calculated by dividing the total number of premium
units subscribed for by the total number of basic subscribers.
(14) 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.
(15) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line.
(16) Penetration is calculated by dividing the total number of
telecommunications subscribers at such date by the total number of units
passed.
39
<PAGE>
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 six month periods ended February 29, 1996 and
February 28, 1997 and for the year ended December 31, 1994, for the eight month
period ended August 31, 1995 and for the fiscal year ended August 31, 1996. This
discussion should be read in conjunction with the Consolidated Financial
Statements and notes thereto appearing elsewhere in this Prospectus.
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 265,518 at February 28, 1997. Of such increase,
approximately 193,000 units were attributable to acquisitions. 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 130,000 units representing approximately 54% 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 February 28, 1997, the Company had invested approximately $209
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 $27.6 million for fiscal 1996 and from $12.3 million to $18.6 million
for the six month periods ended February 29, 1996 and February 28, 1997,
respectively. Results of operations for fiscal 1996 include negative EBITDA of
$(3.9) million as compared with $(7.0) million for the eight month period ended
August 31, 1995. 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. See other cash flow information at "Selected Consolidated
Financial and Operating Data."
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
40
<PAGE>
$12.6 million, $9.5 million and $7.9 million for fiscal 1996, the eight months
ended August 31, 1995 and the year ended December 31, 1994, respectively, as its
cable television and telecommunications customer base has grown. In general,
negative EBITDA has decreased substantially over this period. The Company
reported negative EBITDA of $(3.9) million, $(7.0) million and $(7.8) million
for fiscal 1996, the eight months ended August 31, 1995 and the year ended
December 31, 1994, 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. See
"Business--Network Architecture--Telecommunication Architecture". 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
sales and marketing 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 accummulated 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 units. 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. The Company's cable
television churn for fiscal 1996 was 67.4%. Despite this level of cable
television churn, the Company's basic cable television penetration rate
increased from 44.6% at August 31, 1995 to 50.6% at August 31, 1996. Churn as
calculated, is the number of basic cable television subscribers disconnected
during the relevant period divided by the average number of basic cable
television subscribers during such period.
Proposed Phonoscope Acquisition
The Company entered into a Letter of Intent in January 1997 relating to its
proposed acquisition of the residential portion of the franchise cable
television system business of Phonoscope. All the provisions of the Letter of
Intent, other than the confidentiality provisions, have expired and are not
binding. However, negotiations are continuing. Based on information made
available to the Company, the Company believes that, as of November 30, 1996,
Phonoscope had Rights of Entry or subscriber agreements covering approximately
59,000 units of which approximately 87% were in MDUs.
41
<PAGE>
The purchase price for Phonoscope, as set forth in the Letter of Intent was
approximately $35 million, subject to certain adjustments (including a dollar
for dollar reduction for the value of any liabilities assumed), payable in cash
at closing. If consumated, the Phonoscope Acquisition would be financed with the
proceeds of the Offering or, if proceeds are required for the Company's
operations before the Phonoscope Acquisition is consummated, with other sources
(which may include Deeply Subordinated Shareholders Loans (as defined)).
There can be no assurance that there will not be significant changes in the
information presented herein with respect to Phonoscope and that the Phonoscope
Acquisition will nevertheless be consummated. There can be no assurance that the
Phonoscope Acquisition will be consummated on the terms contemplated by the
Letter of Intent or otherwise. The Exchange Offer is not conditioned on the
consummation of the Phonoscope Acquisition. See "Risk Factors -- Consummation of
the Phonoscope Acquisition."
The Company believes that the consummation of the Phonoscope Acquisition
would allow the Company (i) to expand its subscriber base; (ii) cross sell the
Company's telecommunications services at MDUs currently served by Phonoscope;
and (iii) achieve operating efficiencies and improved field service in the
Houston market. The Company intends to offer telecommunications services to MDUs
served by the Phonoscope network in a manner consistent with its overall
telecommunications roll out plan.
Results of Operations
The following table sets forth, for the periods indicated, certain
information derived from the Company's Consolidated Statements of Operations,
included elsewhere in this Prospectus, expressed as a percentage of total
revenues. Information with respect to the period ended December 31, 1994 is not
included herein because the percentages do not convey meaningful information.
<TABLE>
<CAPTION>
Eight Month Six Month Six Month
Period Ended Year Ended Period Ended Period Ended
August 31, August 31, February 29, February 28,
1995 1996 1996 1997
-------------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Cable television ..................... 91.8% 93.8% 94.2% 92.4%
Telecommunications .................. 8.2 6.2 5.8 7.6
---------- --------- --------- ---------
Total revenues ........................ 100.0% 100.0% 100.0% 100.0%
---------- --------- --------- ---------
Operating Expenses:
Cost of services ........................ 47.6 43.0 42.9 46.7
Customer support, general and adminis-
trative .............................. 86.1 62.8 61.0 65.9
Depreciation and amortization ......... 25.3 31.4 31.0 31.3
Nonrecurring reorganization costs ...... 39.9 8.4 6.7 --
---------- --------- --------- ---------
Total operating expenses ............ 198.9 145.6 141.6 143.9
---------- --------- --------- ---------
Loss from operations .................. (98.9) (45.6) (41.6) (43.9)
Interest expense on Convertible Notes
due to stockholder .................. (9.6) (19.4) (15.3) (37.1)
Other interest expense, net ............ (2.6) (1.8) (2.0) (6.5)
---------- --------- --------- ---------
Loss before income taxes ............... (111.1) (66.8) (58.9) (87.5)
Income tax benefit ..................... 4.9 -- -- --
---------- --------- --------- ---------
Net loss .............................. (106.2)% (66.8)% (58.9)% (87.5)%
========== ========= ========= =========
Other Data:
EBITDA ................................. (73.6)% (14.1)% (10.6)% (12.6)%
========== ========= ========= =========
</TABLE>
42
<PAGE>
Six Month Period Ended February 28, 1997 Compared with Six Month Period Ended
February 29, 1996
Operating information for the six month period ended February 28, 1997 included
the following:
o Cable television subscribers grew to 125,090 at February 28, 1997, an
increase of 10% from 114,163 at August 31, 1996.
o Telecommunications subscribers grew to 4,791 at February 28, 1997, an
increase of 17% from 4,080 at August 31, 1996.
o The Company's market presence in San Francisco was strengthened by the
acquisition of a private cable business with approximately 4,300 cable
television subscribers.
Revenues. Revenues were $18.6 million for the six month period ended
February 28, 1997, an increase of $6.3 million or 51% over revenues of $12.3
million for the six month period ended February 29, 1996. Of the revenues
generated in the six month period ended February 28, 1997, 92.4% and 7.6%
represented revenues from cable television and telecommunications, respectively,
compared to 94.2% and 5.8%, respectively, for the six month period ended
February 29, 1996.
Cable television revenues were $17.2 million for the six month period ended
February 28, 1997, an increase of $5.6 million, or 48%, over cable television
revenues of $11.6 million for the six month period ended February 29, 1996. The
growth in cable television revenues was principally attributable to an increase
in the average number of cable television subscribers, which accounted for
approximately $5.4 million of the increase.
Telecommunications revenues were $1.4 million for the six month period
ended February 28, 1997, an increase of $0.7 million, or 100%, over the six
month period ended February 29, 1996. This growth was largely due to an increase
in the average number of telecommunications customers.
Operating Expenses and Margins. Operating expenses (excluding depreciation
and amortization and nonrecurring reorganization costs) were $21.0 million for
the six month period ended February 28, 1997, an increase of $8.2 million, or
64%, over operating expenses of $12.8 million for the six month period ended
February 29, 1996. As a percentage of revenues, operating expenses increased to
112.6% for the six month period ended February 28, 1997 from 103.9% for the six
month period ended February 29, 1996 as a result of the expansion of the
Company's operations.
Cost of services were $8.7 million for the six month period ended February
28, 1997, an increase of $3.4 million, or 64%, from $5.3 million for the six
month period ended February 29, 1996. These expenses represent variable costs of
the Company, including programming, interconnection costs and revenue sharing
with property owners, and these increases in costs were primarily attributable
to the growth in the number of cable television subscribers and
telecommunications lines. Gross margins, which represent total revenues less
cost of services, decreased from 57.1% for the six month period ended February
29, 1996 to 53.3% for the six month period ended February 28, 1997. The decrease
in gross margins is partly attributable to an increase in programming fees
resulting from expanded channel line ups as properties are converted to the
18GHz or fiber networks in advance of price increases to customers and increased
premium channel penetration, which have lower gross margins. Gross margins also
decreased as a result of higher revenue sharing payments to property owners due
to new properties being added to the Company's systems with revenue sharing
arrangements.
Customer support, general and administrative expenses were $12.3 million
for the six month period ended February 28, 1997, an increase of $4.8 million,
or 64%, over customer support, general and administrative expenses of $7.5
million for the six month period ended February 29, 1996. The increase in
customer support, general and administrative expenses was largely due to an
increase in personnel associated with the expansion of the Company's operations,
the telecommunications roll out and the rapid growth in the size of the cable
television and telecommunications networks and the number of subscribers.
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Depreciation and Amortization. Depreciation and amortization expenses were
$5.8 million for the six month period ended February 28, 1997, an increase of
$2.0 million, or 53%, over depreciation and amortization expenses of $3.8
million for the six month period ended February 29, 1996. This increase was due
primarily to increased depreciation expenses associated with capital
expenditures for the continuing construction of the Company's cable television
and telecommunications networks.
Nonrecurring reorganization costs. Nonrecurring reorganization costs of
$0.8 million were incurred for the six month period ended February 29, 1996.
These costs represent the costs of assimilating the acquisitions made by the
Company and include severance, relocation and recruitment costs. Since the
Company has substantially completed the reorganization of its operations and
plans only to make acquisitions on a limited basis for strategic purposes in the
future, these costs are not expected to be significant in future periods.
Loss from Operations and EBITDA. For the reasons discussed above, loss from
operations was $8.2 million for the six month period ended February 28, 1997, an
increase of $3.1 million, or 61%, over loss from operations of $5.1 million for
the six month period ended February 29, 1996. Negative EBITDA increased to
$(2.3) million for the six month period ended February 28, 1997 from $(1.3)
million for the six month period ended February 29, 1996. The increase in
negative EBITDA is the result of higher programming fees and revenue sharing,
and the expansion of the Company's operations in anticipation of the roll out of
telecommunications services partially offset by a reduction in nonrecurring
reorganization costs. Negative EBITDA represented (12.6)% of total revenues for
the six month period ended February 28, 1997 compared to (10.6)% of total
revenues for the six month period ended February 29, 1996.
Interest and Income Taxes. Total net interest expense was $8.1 million for
the six month period ended February 28, 1997, an increase of $6.0 million over
total net interest expense of $2.1 million for the six month period ended
February 29, 1996. This increase was primarily attributable to additional loans
from the stockholder and to a lesser extent the issuance on February 14, 1997 of
$225 million of 13% Senior Notes Due 2005 to finance the Company's ongoing
investment in its networks.
The Company recorded no income tax expense for the six month period ended
February 28, 1997. The Company has significant tax loss carryforwards which can
be carried forward for up to fifteen years and does not anticipate paying any
income taxes for the next several years. Deferred tax assets are fully reserved
as realization is uncertain.
Year Ended August 31, 1996 Compared with Eight Months Ended August 31, 1995
Operating information for fiscal 1996 included the following:
o Cable television subscribers grew to 114,163 at August 31, 1996, an
increase of 50% from 75,944 at August 31, 1995.
o Telecommunications subscribers grew to 4,080 at August 31, 1996, an
increase of 85% from 2,207 at August 31, 1995.
o New markets in San Francisco and Tampa were entered through acquisition
of properties from other GVL subsidiaries, acquiring approximately
12,000 and 1,500 cable television subscribers, respectively.
o Completed the acquisition of a private cable business in Dallas with
approximately 5,000 cable television subscribers to strengthen the
Company's presence in that market.
Revenues. Revenues were $27.6 million for fiscal 1996, an increase of $18.0
million or 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.
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Cable television revenues were $25.9 million for fiscal 1996, an increase
of $17.1 million, or 194%, over cable television revenues of $8.8 million for
the eight months ended August 31, 1995. The growth in cable television revenues
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 revenues were $1.7 million for fiscal 1996, an increase
of $0.9 million or 113%, over the eight months ended August 31, 1995. This
growth was largely due to an increase in the average number of
telecommunications subscribers.
Operating Expenses and Margins. Operating expenses (excluding depreciation
and amortization and nonrecurring reorganization costs) were $29.2 million for
fiscal 1996, an increase of $16.4 million, or 128%, over operating expenses of
$12.8 million for the eight months ended August 31, 1995. As a percentage of
revenues, operating expenses decreased to 105.8% for fiscal 1996 from 133.7% for
the eight months ended August 31, 1995.
Cost of services were $11.9 million for fiscal 1996, an increase of $7.3
million, or 159%, from $4.6 million for the eight months ended August 31, 1995.
These expenses represent variable costs of the Company, including programming,
interconnection costs and revenue sharing with property owners, and these
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.
Customer support, general and administrative expenses were $17.3 million
for fiscal 1996, an increase of $9.1 million, or 111%, over customer support,
general and administrative expenses of $8.2 million for the eight months ended
August 31, 1995. The increase in customer support, general and administrative
expenses was largely due to an increase in personnel associated with the
expansion of the Company's operations and the rapid growth in the size of the
cable television and telecommunications networks and the number of subscribers.
Depreciation and Amortization. Depreciation and amortization expenses were
$8.7 million for fiscal 1996, an increase of $6.3 million, or 263%, over
depreciation and amortization expenses of $2.4 million for the eight months
ended August 31, 1995. This increase was due primarily to increased depreciation
expenses associated with acquisitions and capital expenditures for the
continuing construction of the Company's cable television and telecommunications
networks.
Nonrecurring reorganization costs. Nonrecurring reorganization costs were
$2.3 million for fiscal 1996 and $3.8 million for the eight months ended August
31, 1995. These costs represent the costs of assimilating the acquisitions made
by the Company and include severance, relocation and recruitment costs. Since
the Company has substantially completed the reorganization of its operations and
plans only to make acquisitions on a limited basis for strategic purposes in the
future, these costs are not expected to be significant in future periods.
Loss from Operations and EBITDA. For the reasons discussed above, loss from
operations was $12.6 million for fiscal 1996, an increase of $3.1 million, or
33%, over loss from operations of $9.5 million for the eight months ended August
31, 1995. 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 the 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.
Interest and Income Taxes. Total net interest expense was $5.9 million for
fiscal 1996, an increase of $4.7 million over total net interest expense of $1.2
million for the eight months ended August 31, 1995. This increase was
attributable to additional loans from the stockholder to finance the Company's
ongoing investment in its networks.
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The Company recorded no income tax expense for fiscal 1996. 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 due
to increased tax losses being available. The Company has significant tax loss
carryforwards which can be carried forward for up to fifteen years and does not
anticipate paying any income taxes for the next several years. Deferred tax
assets are fully reserved as realization is uncertain.
Eight Months Ended August 31, 1995 Compared with Year Ended December 31, 1994
Operating information for the eight months ended August 31, 1995 included the
following:
o Cable television subscribers grew to 75,944 at August 31, 1995.
o Telecommunications subscribers grew to 2,207 at August 31, 1995.
o Acquisitions were completed in Houston, Chicago, Denver, Miami and
Dallas. These acquisitions generated approximately 119,300 units passed
for cable television and 48,400 cable television subscribers at the date
of acquisition.
o GVL acquired the controlling interest in OpTel.
o Corporate headquarters were transferred from Los Angeles to Dallas and
a new management team was recruited with experience in the development
and operation of the cable television and telecommunications companies
owned or affiliated with GVL.
Revenues. Revenues were $9.6 million for the eight months ended August 31,
1995, an increase of $9.2 million over revenues 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 revenues were $8.8 million for the eight months ended
August 31, 1995, an increase of $8.6 million over cable television revenues of
$0.2 million for the year ended December 31, 1994. The growth in cable
television revenues was primarily attributable to an increase in the average
number of cable television subscribers.
Telecommunications revenues were $0.8 million for the eight months ended
August 31, 1995, an increase of $0.6 million over the year ended December 31,
1994. This growth was primarily due to an increase in the average number of
telecommunications subscribers.
Operating Expenses and Margins. Operating expenses (excluding depreciation
and amortization and nonrecurring reorganization costs) were $12.8 million for
the eight months ended August 31, 1995, an increase of $4.6 million, or 56%,
over operating expenses of $8.2 million for the year ended December 31, 1994. As
a percentage of revenues, operating expenses were 133.7% for the eight months
ended August 31, 1995.
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 property owners and their
increase was primarily attributable to the growth in the number of cable
television subscribers and telecommunications lines. Gross margins increased
from negative (6.3)% for the year ended December 31, 1994 to 52.4% for the eight
months ended August 31, 1995.
Customer support, general and administrative expenses were $8.2 million for
the eight months ended August 31, 1995, an increase of $0.5 million, or 6%, over
customer support, general and administrative expenses of $7.7 million for the
year ended December 31, 1994. The increase in customer support, general and
administrative expenses was largely due to an increase in personnel
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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.
Depreciation and Amortization. Depreciation and amortization expenses were
$2.4 million for the eight months ended August 31, 1995, an increase of $2.3
million over depreciation and amortization expenses of $0.1 million for the year
ended December 31, 1994. This increase was due primarily to increased
depreciation expenses associated with acquisitions and capital expenditures for
the continuing construction of the Company's cable television and
telecommunications networks.
Nonrecurring reorganization costs. Nonrecurring reorganization costs were
$3.8 million for the eight month period ended August 31, 1995. These costs
represent the costs of assimilating the acquisitions made by the Company and
include severance, relocation and recruitment costs.
Loss from Operations and EBITDA. For the reasons discussed above, loss
from operations was $9.5 million for the eight months ended August 31, 1995, an
increase of $1.6 million, or 20%, over loss from operations of $7.9 million for
the year ended December 31, 1994. Negative EBITDA increased to $(7.0) million
for the eight months ended August 31, 1995. The improvement in negative EBITDA
represents an increase of $0.8 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.
Interest and Income Taxes. Total net interest expense was $1.2 million for
the eight months ended August 31, 1995, an increase of $1.2 million over total
net interest expense of $0.1 million for the year ended December 31, 1994. This
increase was attributable to loans from the stockholder to finance the
acquisitions and investments in the Company's networks.
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 $45.1 million as of February 28, 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 was $2.5
million in the six month period ended February 28, 1997, $9.9 million in fiscal
1996, $50.0 million in the eight months ended August 31, 1995 and $1.3 million
in the year ended December 31, 1994. The decrease in funds used for acquisitions
between 1995 and the first three months of fiscal 1997 is the result of the
Company's having identified fewer appropriate acquisition targets. As a result,
the Company consummated fewer and smaller acquisitions during such period. Net
cash used in building the Company's cable television and telecommunications
networks and related business activities was $24.9 million in the six month
period ended February 28, 1997, $62.1 million in fiscal 1996, $22.2 million in
the eight months ended August 31, 1995 and $9.3 million in the year ended
December 31, 1994.
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 funding from its principal stockholder of
$23.7 million in the six month period ended February 28, 1997, $73.4 million
during fiscal 1996, $79.5 million during the eight months ended August 31, 1995
and $25.4 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 connection with the Offering, VPC agreed
(i) to extend the maturity of the Convertible Notes until six months following
the maturity or indefeasible payment in full of the Notes and (ii) to
subordinate the Convertible Notes in right of payment to the Notes in the event
of a liquidation, dissolution,
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reorganization, receivership or winding-up of the Issuer 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. See "Certain Transactions --
Convertible Notes."
The Company's future results of operations will be materially impacted by
its ability to finance its planned business strategies. The Company anticipates
that it will require approximately $250 million in capital expenditures in
fiscal 1997 and fiscal 1998 of which approximately $40.9 million had been
expended as of April 30, 1997. The key elements of the Company's business
strategies requiring financing include the roll out of its telecommunications
networks including central office switches, the conversion of SMATV systems to
networks, the connection of additional properties to the networks and the
implementation of addressable interdiction devices in substantially all of the
MDUs served. The Company believes that the $130.2 million net proceeds from the
Offering available for use by the Company (which excludes the $79.6 million of
U.S. Government Securities held in escrow that will be used to fund the first
six interest payments on the Notes and the $10.0 million used to repay certain
Convertible Notes) will be sufficient to finance the Company's capital
requirements through January 1998. See "Use of Proceeds." If the Company
consummates the Phonoscope Acquisition, it will defer the buildout of MDU's
arising from new or existing Rights of Entry. Such deferral will be made with
regard to competitive conditions, the Company's presence in its markets and
contractual requirements. As a result, whether or not the Phonoscope Acquisition
is consummated, the Company believes that it will have sufficient funds to
finance the Company's capital requirements through January 1998. The Company
anticipates that it will need to raise approximately $100 million to finance its
planned, capital expenditures through fiscal 1998. The foregoing estimates are
based on certain assumptions, including the timing of the signing of Rights of
Entry, the conversion of MDUs currently served by SMATV systems to the networks
and the telecommunications roll out, each of which may vary significantly from
the Company's plan. After utilizing the net proceeds of the Offering, the
Company expects to fund its capital requirements through the end of fiscal 1998
through a combination of cash available from operations, bank or vendor
financing or other available debt or equity financings. Failure to raise
sufficient funds on terms acceptable to the Company may require the Company to
delay implementation of portions of its networks and to delay pursuit of its
telecommunications strategy. As of the date hereof, the Company has no agreement
or agreement in principle with any bank, vendor or other person to provide any
such debt or equity financing. There can be no assurance that the Company will
be successful in obtaining any necessary financing on reasonable terms or at
all. See "Risk Factors -- Future Capital Needs."
In addition, both GVL and Caisse have the power to prevent the Company from
obtaining additional debt or equity financing. See "Risk Factors--Control by
GVL." GVL is party to an indenture which limits the aggregate amount of
indebtedness which can be incurred by GVL and its subsidiaries, including the
Company taken as a whole (based upon a ratio of total consolidated indebtedness
to consolidated operating cash flow). As a result, GVL's strategies and the
operating results of its subsidiaries other than the Company may affect the
ability of the Company to incur additional indebtedness. As of February 28,
1997, GVL was able to incur approximately Cdn $600 million (approximately $440
million based on an exchange rate of $1.00 = Cdn $1.3682 as reported by the Wall
Street Journal on February 28, 1997) of indebtedness under its indenture but
there can be no assurance that this number may not decrease substantially in the
future. There can be no assurance that GVL will not restrain the Company's
growth or limit the indebtedness incurred by the Company so as to ensure GVL's
compliance with the terms of its debt instruments.
The Company benefits from the fact that it does not require a substantial
capital investment in its cable television and telecommunications networks in
advance of connecting subscribers to its networks since a significant proportion
of the costs comprises the internal wiring and the erection of microwave
transmitting and receiving equipment specific to the MDU. Of the $250 million in
capital expenditures budgeted through fiscal 1998, approximately $180 million is
related to the wiring and connection of MDUs not yet served by the Company's
Networks or for which Rights of Entry have not yet been executed. These
expenditures are, to a large extent, discretionary and will only be incurred
when
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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, totaling
approximately $70 million, 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 expansion of its networks.
Following fiscal 1998, the Company expects to continue to require
significant capital investment and additional financing. Such additional
financing may be obtained through additional equity or debt financing, including
senior bank credit facilities at one or more subsidiaries of the Company and
further securities offerings. See "Risk Factors -- Holding Company Structure and
Need to Access Subsidiaries Cash Flow." To the extent that the Company
determines to pursue further acquisitions or negative cash flow from operations
continues, substantial additional funds may be required. To the extent that
these or any other funds are not obtained on a timely basis, it may be necessary
for the Company to delay the implementation of portions of its networks and to
delay pursuit of its telecommunications strategy. There can be no assurance that
the Company will be successful in obtaining the requisite debt and/or equity
financing on reasonable terms or at all.
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. Other than the non-binding
Letter of Intent with respect to the Phonoscope Acquisition, no agreement has
been reached for any material acquisition by or strategic investment in the
Company. See "Business -- Business Strategy."
Impact of New Accounting Standards
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", which is effective for fiscal years beginning after December
15, 1995, 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 is expected to be
insignificant 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, which is effective for fiscal years beginning after December
15, 1995, 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 will disclose 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.
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 its earnings per
share computations.
Inflation
The Company does not believe that inflation has had a material effect on
its results of operations to date. However, there can be no assurance that the
Company's business will not be adversely affected by inflation in the future.
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BUSINESS
Overview
OpTel is the largest provider of private cable television services to
residents of 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 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 seven
years as of February 28, 1997 (assuming the Company's exercise of available
renewal options). 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, Denver and Miami-Ft. Lauderdale. As of February 28,
1997, the Company had 125,090 cable television subscribers and 4,791
telecommunications subscribers with 6,039 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 obligation and generally does not incur capital costs to build
its networks until it has entered into Rights of Entry from which it reasonably
expects to build an appropriate customer base.
The Company offers a full range of multichannel video programming to the
MDUs it serves (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 an STS operator through PBX switches. The Company offers customers
access to services comparable in scope and price to those provided by the
incumbent LEC and long distance carrier. The Company's telecommunications
strategy includes replacing its PBX switches with networked central office
switches. See "Network Architecture -- Telecommunications Architecture."
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 18GHz and fiber optic networks and non-networked
SMATV systems. As of February 28, 1997, approximately 130,000 of the 239,801
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
intends to convert substantially all of its SMATV systems to 18GHz or fiber
optic networks by the end of fiscal 1999. The Company's networks will also
facilitate delivery of voice signal from each MDU to the central office switches
to be deployed by the Company in its markets. The Company intends to license
additional spectrum, which it currently anticipates will principally be in the
23GHz band, which it will use to provide bi-directional voice transmission.
GVL, Canada's third largest cable television company, holds a 76.1% equity
interest in OpTel through VPC, its indirect wholly-owned subsidiary. The Company
has benefited and expects, in the future, to continue to benefit from the
management and technical expertise of GVL. Key members of the Company's
management team gained experience in building out and operating cable television
networks and combined cable television/telecommunications networks while working
for GVL or its affiliates in Canada and the United Kingdom. From inception,
OpTel's owners have invested over $200 million in the Company in the form of
equity and Convertible Notes.
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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.
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 20 to 40 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.
Private cable systems utilizing 18GHz technology do not require the large
networks of coaxial or fiber optic cable and amplifiers that are utilized by
traditional hard-wire cable television operators or the installation of a
headend facility at each MDU as is required for SMATV systems. Thus, private
cable television operators using 18GHz technology are able to provide services
at lower per unit capital and maintenance costs than franchise cable or SMATV
operators. In addition, private cable television operators are not subject to
the regulatory constraints of a typical franchise cable television operator.
Specifically, as a private cable television operator, the Company (i) does not
face regulatory constraints on the geographic areas in which it may offer video
services, (ii) does not pay franchise and FCC subscriber fees, (iii) is not
obligated to pass every resident in a given area, (iv) is not subject to rate
regulation, and (v) is not subject to "must carry" and local government access
obligations.
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 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. See "--
Regulation -- Telecommunications Regulation."
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.
51
<PAGE>
Business Strategy
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 key components of the Company's
strategy to achieve this objective are:
Maintain Long-Term Relationships with MDU Owners. The Company believes that
the strategic relationships it forms with MDU owners are the key to the
Company's long-term success. By providing services that are attractive to MDU
residents, the Company endeavors to enhance the rental performance of the MDUs
that it serves. The Rights of Entry provide MDU owners with financial incentives
to work closely with the Company to promote its products and services. The
Company believes that its strategic relationships with MDU owners will enable
the Company to maintain its preferred competitive position even if the
exclusivity of the Rights of Entry becomes limited by future developments. See
"-- Regulation."
Increase Market Share in Existing Markets. In order to increase its market
share, the Company markets its services to owners of national, regional and
local portfolios of MDUs who own demographically desirable MDUs within the
Company's existing (or future) markets and to owners of individual
demographically desirable MDUs located within the coverage of the Company's
existing networks. In addition, from time to time the Company considers
acquiring private cable television systems within its markets. See "Prospectus
Summary -- Recent Developments: Proposed Phonoscope Acquisition." The Company
believes that the demographics of particular MDUs, especially the level of
household income of the tenants, can have a significant impact on the
penetration rate within that MDU.
Increase Penetration at MDUs. Upon executing Rights of Entry, the Company
aggressively markets its services to actual and potential subscribers within the
MDU in order to increase penetration rates for basic and ancillary services. The
Company believes that its best opportunity for a sale arises when a tenant first
signs a lease and takes occupancy in an MDU. The Company therefore enlists
on-site property managers and leasing agents to market its services. The Company
believes that its presence at the leasing office and its sponsorship by the MDU
owner assist it significantly in its marketing efforts.
Expand Coverage of Company Networks. Upon entering into Rights of Entry for
an MDU, the Company seeks to link the MDU to the Company's 18GHz or, in Houston,
fiber optic networks. Private cable systems utilizing 18GHz technology do not
require the large networks of coaxial or fiber optic cable and amplifiers that
are utilized by traditional hard-wire cable television operators or the
installation of a headend facility at each MDU as is required for SMATV systems.
Thus, private cable television operators using 18GHz technology are able to
provide services at lower per unit capital and maintenance costs than franchise
cable or SMATV operators. The Company can deliver as many as 72 channels of
programming in uncompressed analog format over its networks which, in most of
the Company's markets, exceeds the number of channels offered by other
multichannel television service providers. Additional capacity, if required, can
be provided through the application of available digital compression technology.
The point-to-point nature of the networks enables the Company to customize the
programming to be delivered to any MDU based on the demographics of the MDU's
residents. The Company's networks will also facilitate delivery of voice signal
from each MDU to the central office switches to be deployed by the Company in
its markets. The Company intends to license additional spectrum, which it
anticipates will principally be in the 23GHz band, to provide bi-directional
voice transmission.
Roll out Telecommunications Services. The Company currently provides
telecommunications services in Houston, Dallas-Fort Worth, Austin, Denver and
Miami-Ft. Lauderdale. 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 its networks, the Company intends to replace
its PBX switches located at the MDUs with networked central office switches.
Subject to receipt of regulatory approvals, the Company intends to deploy its
first central office switch in the Houston market by mid-1997 and to have
installed central office switches in substantially all of its markets by the end
of calendar 1999.
52
<PAGE>
Bundle and Differentiate Product Offering. The Company offers MDU owners
and residents bundled cable television and telecommunications services. MDU
residents and owners benefit from the simplicity of dealing with a single
service provider. Management believes that the Company typically offers a
superior, or at least comparable, range of products and level of customer
service than its competitors at a lower total price. The Company also believes
that bundling services results in better collection experience versus
non-bundled services. The Company plans to offer MDU residents access to
additional bundled services, including Internet access, intrusion alarm, utility
monitoring, and PCS, cellular and paging services. During fiscal 1997, the
Company plans to test market paging services to residents on a re-sale basis and
to make third party operators' water sub-metering services and security services
offerings available to MDU owners on a test basis. The Company intends to
provide Internet services, either as a re-seller or as a sales agent for an
existing provider, concurrently with the roll out of its central office
switches. The Company is in the early stages of developing its plans, which it
expects to complete by the end of fiscal 1998, for the resale of cellular and
PCS services. The Company also intends to introduce integrated billing of its
bundled services in fiscal 1998.
Provide Superior Customer Service. 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 residents is by providing high quality
subscriber service, including: a 24-hours-a-day, seven-days-a-week customer call
center; direct lines to facilitate rapid response to calls initiated by MDU
owners and managers; flexible, seven-day-a-week installation and service
appointments; 80% of installations completed within three business days of
receiving the initial installation request (often within 24 hours) and service
calls generally made the same day the subscriber indicates a service problem. In
addition, the Company has established stringent staff training procedures,
including its Operational Excellence continuous improvement program, and
internal customer service standards, which management believes meet, and in many
respects exceed, those established by the National Cable Television Association.
Markets
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. 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.
As of February 28, 1997, the Company operated in the following geographic
markets:
<TABLE>
<CAPTION>
Estimated
Number of Units Under
MDU Units Date of Contract for
Market in Market(1) Entry Cable(2)
- ---------------------- -------------- --------- --------------
<S> <C> <C> <C>
Houston ............ 305,961 1/95 80,267
Dallas-Fort Worth . 366,646 9/94 44,233
Chicago ............ 333,442 8/95 23,117
Phoenix ............ 143,674 12/94 22,987
San Diego ......... 295,375 12/94 22,960
San Francisco ...... 202,698 8/96 22,886
Denver ............ 97,056 7/95 18,867
Los Angeles ......... 270,006 5/94 13,921
Miami-Ft.
Lauderdale ......... 275,202 6/95 12,849
Tampa ............... 151,724 8/96 2,777
Austin ............ 63,811 7/94 654
---------- --------
2,505,595 265,518
========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Units
Under Units
Contract Passed Tele-
Cable for Tele- for Tele- communi-
Units Passed Television communi- communi- cations
Market for Cable(3) Subscribers cations(2)(4) cations(3) Lines
- ---------------------- -------------- ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Houston ............ 79,199 29,492 6,816 6,654 2,122
Dallas-Fort Worth . 34,385 17,173 11,421 5,026 1,720
Chicago ............ 21,765 11,378 400 -- --
Phoenix ............ 21,856 9,884 -- -- --
San Diego ......... 21,628 14,853 1,486 768 299
San Francisco ...... 22,643 16,196 243 -- --
Denver ............ 15,804 8,876 2,975 877 214
Los Angeles ......... 8,531 6,095 1,791 -- --
Miami-Ft.
Lauderdale ......... 10,559 9,142 1,241 91 62
Tampa ............... 2,777 1,435 -- -- --
Austin ............ 654 566 1,000 1,000 1,622
-------- -------- ------- ------- ------
239,801 125,090 27,373 14,416 6,039
======== ======== ======= ======= ======
</TABLE>
53
<PAGE>
- ------------
(1) Represents units in MDUs with greater than 150 units. For rental units,
market data has been estimated by REIS Reports, Inc. For the Tampa and
Miami-Ft. Lauderdale markets, the rental unit data has been adjusted based
on Company estimates to include condominium units.
(2) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into Rights
of Entry for the provision of cable television services and
telecommunication services, respectively, but not yet passed and which the
Company expects to pass within the next five years.
(3) 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 anticipates passing
approximately 15,800 and 8,700 additional units currently under contract for
cable television and units currently under contract for telecommunications,
respectively, by the end of calendar 1997.
(4) At this time substantially all units under contract for telecommunications
are also units under contract for cable television.
The Company has recently entered into Rights of Entry with respect to
approximately 5,500 units in the Las Vegas market, has begun construction of
certain of these units and is considering further expansion in this market.
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 82% of
its units passed for cable television with the remainder serviced via SMATV
systems. As of February 28, 1997, the Company had 79,199 units passed for cable
television and had 29,492 cable subscribers for a penetration rate of 37.2%. The
penetration rate is low when compared to the overall cable television
penetration rate for the Houston market of 53% as reported in the TV & Cable
Factbook No. 63 (the "Factbook"). The Company believes that this low penetration
is largely the result of the lower than average household incomes of certain
MDUs for which Rights of Entry were acquired. The Company believes that as new
Rights of Entry are signed and activated, and as the remaining SMATV systems are
converted to the fiber optic/coaxial cable network thereby improving the picture
quality and channel line up, the penetration rate will increase. In addition,
the Company intends to utilize customized channel line ups combined with an
entry level package to increase penetration rates. The Houston market generates
one of the Company's highest revenue per cable subscriber figures. As of
February 28, 1997, the Company had 6,654 telecommunications units passed and had
1,672 telecommunications subscribers for a penetration rate of 25.1%. The
Company intends to install its first central office switch in the Houston market
in the second half of fiscal 1997.
Phonoscope, which operates in the greater Houston metropolitan area,
provides its services over a fiber optic and coaxial cable distribution system.
If the Phonoscope Acquisition is consummated, the Company expects to use its
existing franchise with the City of Houston to serve Phonoscope subscribers
within the City of Houston, and, where required to serve acquired Rights of
Entry, to seek assignment of the appropriate municipal franchises. Phonoscope
provides cable television services principally under Rights of Entry in
competition with traditional franchise cable television operators, and aside
from these franchise cable television operators is second only to the Company in
number of MDUs served in the greater Houston area. Based on information made
available to the Company, the Company believes that, as of November 30, 1996,
(i) Phonoscope had Rights of Entry or subscriber agreements covering
approximately 59,000 units (principally at MDUs, but including certain single
family units within the footprint of its network) and approximately 27,000
subscribers and (ii) the weighted average unexpired term of the Rights of Entry
held by Phonoscope 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.
Following the consummation of the Phonoscope Acquisition, the Company intends
to, over time, interconnect the acquired network with the Company's existing
Houston network. There are no material technical obstacles to the
interconnection of the networks.
54
<PAGE>
The Company believes that the consummation of the Phonoscope Acquisition
would allow the Company (i) to expand its subscriber base; (ii) cross sell the
Company's telecommunications services at MDUs currently served by Phonoscope;
and (iii) achieve operating efficiencies and improved field service in the
Houston market. The Company intends to offer telecommunications services to MDUs
served by the Phonoscope network in a manner consistent with its overall
telecommunications roll out plan. There can be no assurance that the Phonoscope
Acquisition will be consummated on the terms contemplated herein or otherwise.
The Exchange Offer is not conditioned on the consummation of the Phonoscope
Acquisition. See "Risk Factors -- Consummation of the Phonoscope Acquisition."
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 service center for all of its markets is located in Dallas-Fort Worth.
The Company utilizes 18GHz networks to service approximately 32% of its units
passed for cable television in the Dallas-Fort Worth market with the remainder
serviced via SMATV systems. As of February 28, 1997, the Company had 34,385
units passed for cable television and had 17,173 cable subscribers for a
penetration rate of 49.9%. This penetration rate is comparable to the overall
cable television penetration rate for the Dallas-Fort Worth market of 49% as
reported in the Factbook. As of February 28, 1997, the Company had 5,026 units
passed for telecommunications and had 1,372 telecommunications subscribers for a
penetration rate of 27.3%. The Company intends to install a central office
switch in the Dallas-Fort Worth market by early fiscal 1998.
Chicago
The Company entered the Chicago market in August 1995 through an
acquisition. In the Chicago market, the Company currently services substantially
all of its units passed for cable television via SMATV systems. The Company
intends to convert substantially all of these SMATV systems to 18GHz networks by
the end of fiscal 1999. As of February 28, 1997, the Company had 21,765 units
passed for cable television and had 11,378 cable subscribers for a penetration
rate of 52.3%. Despite the use of SMATV systems, this penetration rate is
comparable to the overall cable television penetration rate for the Chicago
market of 56% as reported in the Factbook and the revenue per subscriber is the
highest in the Company. The Company believes that this is the result of the
quality demographics of the MDUs served. The Company intends to commence
telecommunications service offerings and install a central office switch in the
Chicago market by the end of fiscal 1999. The Company has recently consummated
an acquisition of a private cable operator in the Chicago market having
approximately 5,600 units passed for cable television and 5,000 cable television
subscribers.
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 utilizes 18GHz networks to
service approximately 42% of its units passed for cable television in the
Phoenix market with the remainder serviced via SMATV systems. As of February 28,
1997, the Company had 21,856 units passed for cable television and had 9,884
cable subscribers for a penetration rate of 45.2%. This penetration rate is low
when compared to the overall cable television penetration rate for the Phoenix
market of 54% as reported in the Factbook. The Company believes that the low
penetration rate is largely the result of the limited channel line ups offered
by the acquired operator and that as the remaining SMATV systems are converted
to 18GHz networks
55
<PAGE>
thereby improving the picture quality and channel line up, the penetration rate
will increase. The Company intends to commence telecommunications service
offerings and install a central office switch in the Phoenix market by the end
of fiscal 1998.
San Diego
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 utilizes 18GHz networks to service approximately 72% of its units passed
for cable television in the San Diego market with the remainder serviced via
SMATV systems. As of February 28, 1997, the Company had 21,628 units passed for
cable television in the San Diego market and had 14,853 cable subscribers for a
penetration rate of 68.7%. This penetration rate is low when compared to the
overall cable television penetration rate for the San Diego market of 79% as
reported in the Factbook. The Company believes that the low penetration rate is
largely the result of the limited channel line ups offered by the acquired
operator and that as SMATV systems are converted to 18GHz networks thereby
improving the picture quality and channel line up, the penetration rate will
increase. As of February 28, 1997, the Company had 768 units passed for
telecommunications and had 247 telecommunications subscribers for a penetration
rate of 32.2%. The Company intends to install a central office switch in the San
Diego market by the end of fiscal 1998.
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. The Company intends to convert substantially
all of these SMATV systems to 18GHz networks by the end of fiscal 1999. As of
February 28, 1997, the Company had 22,643 units passed for cable television and
had 16,196 cable subscribers for a penetration rate of 71.5%. This penetration
rate is comparable to the overall cable television penetration rate for the San
Francisco market of 68% as reported in the Factbook. Approximately 41% of the
units passed for cable television represent subscribers served via bulk sales
agreements and, as a result, the revenue per subscriber is relatively low. The
Company believes that as new Rights of Entry are signed and activated and as the
SMATV systems are converted to 18GHz networks revenue per subscriber will
increase. The Company intends to commence telecommunications service offerings
and install a central office switch in the San Francisco market by the end of
fiscal 1999.
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 utilizes 18GHz networks to service
approximately 68% of its units passed for cable television in the Denver market
with the remainder serviced via SMATV systems. As of February 28, 1997, the
Company had 15,804 units passed for cable television and had 8,876 cable
subscribers for a penetration rate of 56.2%. This penetration rate is comparable
to the overall cable television penetration rate for the Denver market of 58% as
reported in the Factbook. As of February 28, 1997, the Company had 877 units
passed for telecommunications and had 143 telecommunications subscribers for a
penetration rate of 16.3%. The Company intends to install a central office
switch in the Denver market by the end of fiscal 1998.
Los Angeles
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 utilizes 18GHz
networks to service approximately 71% of its units passed for cable television
in the Los Angeles market with the remainder serviced via SMATV systems. As of
February 28, 1997, the Company had 8,531 units passed for cable television and
had 6,095 cable subscribers for a penetration rate of 71.4%. This penetration
rate is high compared to the overall
56
<PAGE>
cable television penetration rate for the Los Angeles market of 60% as reported
in the Factbook. The Company believes that this is the result of the quality
demographics of the MDUs served. The Company will determine the timing of its
offering of telecommunications services and the installation of a central office
switch based on its success in entering into a sufficient number of Rights of
Entry in the Los Angeles Market. The Company may install a single switch to
serve both the Los Angeles and San Diego markets. The Company has recently
entered into a letter of intent to acquire certain Rights of Entry in the Los
Angeles Market.
Miami-Ft. Lauderdale
The Company entered the Miami-Ft. 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 utilizes 18GHz networks to
service approximately 76% of its units passed for cable television in the
Miami-Ft. Lauderdale market, with the remainder serviced via SMATV systems. As
of February 28, 1997, the Company had 10,559 units passed for cable television
and had 9,142 cable subscribers for a penetration rate of 86.6%. This
penetration rate is high compared to the overall cable television penetration
rate for the Miami-Ft. Lauderdale market of 66% as reported in the Factbook due
to the high proportion of units served under bulk sales agreements. The Company
began telecommunications operations in the Miami-Ft. Lauderdale market in
November 1996 and intends to install a central office switch in this market by
the end of fiscal 1998.
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 convert substantially all of these systems to 18GHz networks by the end of
fiscal 1999. As of February 28, 1997, the Company had 2,777 units passed for
cable television and had 1.435 cable subscribers for a penetration rate of
51.7%. This penetration rate is low when compared to the overall cable
television penetration rate for the Tampa market of 69% as reported in the
Factbook. The Company believes that this is primarily because approximately
1,200 of the units passed for cable television are situated within mobile home
parks where penetration rates are typically low. The Company will determine the
timing of its offering of telecommunications services and the installation of a
central office switch based on its success in entering into a sufficient number
of Rights of Entry in the Tampa market.
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. As
of February 28, 1997, the Company had 654 units passed for cable television and
had 566 cable subscribers for a penetration rate of 86.5%. As of February 28,
1997, the Company had 1,000 units passed for telecommunications and had 1,312
telecommunications subscribers for a penetration rate of 131.2%. The penetration
rate is greater than 100% due to one property which is a college residence which
has more than one tenant in each unit with separate telephone lines. If this
property were excluded, the penetration rate would be 58.8%. The Company will
determine the timing of the installation of a central office switch based on its
success in entering into a sufficient number of Rights of Entry in the Austin
market.
57
<PAGE>
Network Architecture
The Company's networks use technologies that are capable of bi-directional
transmission. MDU residents receive service through internal wiring to
conventional wall-mounted cable outlets and telephone jacks.
The diagram below depicts the Company's network architecture for a typical
18GHz cable television network as it might be enhanced to support
telecommunications services:
[Picture of Network Architecture]
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.
58
<PAGE>
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 February 28,
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.
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.
The Company'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. As well, it will permit
integration of video, voice and data into a single signal.
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 state
regulations for STS operators 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. The Company
intends to seek certification as a CLEC in each of the states in which it
operates. CLEC certification procedures are substantially similar in all states
in which the Company's markets are located. The certification process typically
runs three to nine months from the date of filing of an application. Certain
states also require a contest period to elapse before CLEC certification is
deemed effective. The Company has already been granted CLEC certification in
Texas and Florida and has applications pending in Arizona, California and
Illinois. See "-- Regulation." The Company believes CLEC certification will be
available in a timely manner in all its markets. However, if certification were
not granted in a market 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 plans to offer a high
level of reliability by building redundant routes and providing for redundant
switches where appropriate. 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 Company envisions
using automatic route selection to connect its subscribers to the most price
advantageous long distance provider at any time.
The Company's planned telecommunications network architecture includes a
national network operations center which will monitor the telecommunications
switches and networks in each market. The Company further plans to have its
network operations center receive backup monitoring from GVL's planned network
operations center once the two centers are in operation.
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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. The
Company currently intends to use 23GHz as its principal frequency to carry
telecommunications traffic to and from MDUs from hubs and 6 and 11 Gigahertz as
its principal frequencies to carry traffic from hubs to central office switches.
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.
The Company has selected this frequency because it believes that 23GHz has
been used successfully to carry other forms of telecommunications traffic. The
Company believes that using 23GHz will enable it to utilize proven equipment
manufactured by several vendors. The Company intends to transmit and receive
23GHz signals generally using its existing 18GHz dishes and will be conducting
field trials in the near future. The Company may also examine the use of other
available frequencies licensed by the FCC for use in telecommunications
services, the availability of which cannot be assured. If the Company cannot
obtain the necessary paths on the desired frequencies, the Company will utilize
other means of transport, including possibly leased fiber, for the transport of
its telecommunications traffic. See "Risk Factors -- Risks associated with
Telecommunications Strategy" and "- Regulation.
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.
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.
Network Services
Cable Television Services
The Company seeks to offer 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 channels of programming to 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 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 to 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
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premium television services and regional sports channels. 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 following table lists, as of February 28, 1997, the programming line-up
on one of the Company's Phoenix networks which is typical of the programming
line-up available on the Company's networks (except that Pay-Per-View services
are not offered in all of the Company's markets).
2 PREVUE GUIDE 31 COURT TV 55 E! ENTERTAINMENT TV
3 KTVK (IND) 32 INTERNATIONAL CHANNEL 56 TURNER CLASSIC MOVIES
4 KNXV (ABC) 33 THE WEATHER CHANNEL 57 BRAVO
5 KPHO (CBS) 34 ESPN 58 BET
6 KPAZ (TBN) 35 ESPN 2 59 HOME & GARDEN
7 KTVW (UNIVISION) 36 ARIZONA SPORTS TELEVISION
8 KAET (PBS) NETWORK 60 FXM
9 KUPN (IND) 37 THE GOLF CHANNEL 61 THE DISCOVERY
10 KSAZ (FOX) 38 TNT CHANNEL
11 KASW (IND) 39 WGN/CHICAGO 62 THE LEARNING CHANNEL
12 KPNX (NBC) 40 WTBS/ATLANTA 63 THE HISTORY CHANNEL
13 PROPERTY INFORMATION 41 WWOR/NEW YORK 64 NOSTALGIA CHANNEL
14 HBO* 42 MTV 65 TV FOOD NETWORK
15 HBO 2* 43 VH-1 66 GALAVISION
16 HBO 3* 44 THE NASHVILLE 67 PAY-PER-VIEW
17 CINEMAX* NETWORK (REQUEST 1)
18 CINEMAX 2* 45 COUNTRY MUSIC 68 PAY-PER-VIEW
19 QVC TELEVISION (REQUEST 4)
20 ADVERTISING CHANNEL 46 USA 95 PAY-PER-VIEW
21 SHOWTIME* 47 TV LAND (REQUEST 2)
22 SHOWTIME 2* 48 NICKELODEON 96 PAY-PER-VIEW (VC 1)
23 THE MOVIE CHANNEL* 49 LIFETIME 97 PAY-PER-VIEW
24 THE DISNEY CHANNEL* 50 A&E (ACTION PPV)
25 ENCORE* 51 THE FAMILY CHANNEL 98 ADULT PAY-PER-VIEW
26 CNN 52 COMEDY CENTRAL (ADAM & EVE)
28 CNBC 53 SCI-FI CHANNEL 99 ADULT PAY-PER-VIEW
29 C-SPAN 54 CARTOON NETWORK (SPICE)
30 C-SPAN 2
- ------------
* Premium Service
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 via bulk sale agreements. 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. See "-- Regulation." Although the Company has generally
been able to obtain the programming it requires, the Company has been denied
certain programming in limited markets by certain providers who claim that the
programming is not required to be licensed to the Company. These denials have,
and any future denials could have, a material adverse impact on the Company's
activities in the affected market. In addition, 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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The Company plans to take advantage of several industry developments which
it believes will enable it to stay competitive with franchise cable television
operators.
Interdiction. The Company has recently completed field testing interdiction
devices and has begun deploying them in several of its current systems. With
interdiction devices, basic service, Pay-Per-View and premium channel services
can be activated at a subscriber's residence without a service call. Without
such devices, each time a customer requests activation or adds a premium
channel, a service representative must visit the customer's residence to
activate the service or channel.
Compression. The Company's network design is digital-capable and many of
its components are hybrid digital-analog. The Company currently utilizes digital
compression to provide telecommunication services, however, the Company does not
currently compress its video programming. The Company intends to implement
digital compression of its video programming when economical and required by the
marketplace.
Pay-Per-View. Pay-Per-View service allows subscribers to select
programming, consisting primarily of professional boxing matches, movies,
concerts and certain special sporting events, for a separate charge per event.
The Company anticipates adding Pay-Per-View services to additional networks over
the next few years. It is anticipated that Pay-Per-View subscriptions will
increase in the future as additional exclusive events become available for
distribution.
Advertising. In recent years, there has been an increase in advertising
direct to cable television subscribers. Previously, advertising was generally
provided by program suppliers, who sell national advertising time which then is
included in the video programming they deliver to operators. However, cable
networks have begun placing advertisements on channels dedicated exclusively to
advertising, as well as in "avails," i.e. time (typically two minutes each hour)
set aside by program suppliers for local advertisement insertions. Use of
advertising "avails" requires automatic "spot insertion" equipment, which is
readily available today at a minimal capital cost. The Company is currently
selling advertising time on its Houston and Miami-Ft. Lauderdale systems, and
management anticipates the Company will offer advertising on its other systems
at a later date. Management does not expect the revenue generated by the sale of
advertising on its networks to be material.
MDUs served by SMATV systems, which as of February 28, 1997 represented
approximately 46% of units passed for cable television, receive fewer channels
than do MDUs on networks. Typically, such MDUs receive between 33 and 45
channels. Although the SMATV programming line-ups do not provide as many
channels as network line-ups, their line-ups cover the full range of broadcast
programming and cable programming, including premium channels.
The following table lists the programming line-up of a 44-channel SMATV of
a typical MDU in Dallas:
2 KDTN (PBS) 16 NICKELODIAN 31 A&E
3 KDAF (IND) 17 SHOWTIME 32 AMC
4 KDFW (FOX) 18 LIFETIME 33 COMEDY CENTRAL
5 KXAS (NBC) 19 THE DISNEY CHANNEL 34 CARTOON NETWORK
6 KUVN (UNIVISION) 20 THE MOVIE CHANNEL 35 TNT
7 KDFI (IND) 21 CINEMAX 36 THE DISCOVERY CHANNEL
8 WFAA (ABC) 22 BET 37 C-SPAN
9 KTTV (FOX) 23 WGN/CHICAGO 38 FOX SPORTS SOUTHWEST
10 PREVUE GUIDE 24 WTBS/ATLANTA 39 COUNTRY MUSIC
TELEVISION
11 KTVT (IND) 25 ESPN 40 HEADLINE NEWS
12 KIXA (IND) 26 CNN 41 THE NASHVILE NETWORK
13 KERA (PBS) 27 CNBC 42 BRAVO
14 HBO 28 VH-1 43 WEATHER CHANNEL
15 USA 29 MTV 44 KFWD (TELEMUNDO)
30 THE FAMILY CHANNEL 45 ESPN 2
Interdiction and pay-per-view technologies are both economically and
technically feasible on SMATV systems. Digital compression and advertising
insertion generally require equipment to be connected to a head end.
Consequently, although it is technically feasible to do so, it is generally
uneconomical to implement these technologies on SMATV systems.
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Telecommunications Services
The Company currently provides its telecommunications services as an STS
operator through PBX switches. The Company offers customers access to services
provided by regulated telecommunications companies, such as local, long
distance, international and "800" telephone services and telephone calling
cards. The Company's basic telephone service package includes voice mail,
three-way calling and call forwarding. The Company typically provides services
at rates which are competitive with or lower than those which customers could
otherwise obtain from the LEC.
The Company currently provides telecommunications services in Houston,
Dallas-Fort Worth, Austin, Denver and Miami-Ft. Lauderdale. 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, the Company intends to replace its PBX switches
located at the MDUs with networked central office switches. The Company intends
to deploy its first central office switch in the Houston market by mid-1997 and
to have installed central office switches in substantially all of its markets by
the end of calendar 1999.
Commencing in the first half of fiscal 1998, the Company intends to offer
high speed Internet access services to MDU residents then receiving the
Company's telecommunications services in markets where the Company delivers
telecommunication services using the Company's central office switches. The
Company also intends to introduce various mobile telecommunications offerings,
including paging, cellular and PCS, over the next several years. The Company is
in the early stages of developing its plans, which it expects to complete by the
end of fiscal 1998, for the resale of cellular and PCS services. The Company
plans to offer these services on a re-sale basis or as agent for an existing
provider and therefore it believes that the offering of these services will not
require the Company to incur significant capital or operating costs. The Company
plans to explore the possibility of providing additional network-based services
to the residents, owners and managers of the MDUs it serves. These may include
utility management and intrusion alarm signal transmission.
Strategic Relationships with MDU Owners
A critical aspect of the Company's growth strategy is the development of
strategic relationships with owners of MDU portfolios. These relationships
encourage the MDU owner to promote and sell the Company's cable television and
telecommunications services to MDU residents.
The Company solicits and negotiates Rights of Entry with owners of
national, regional and local portfolios of MDUs, as well as with institutions
such as hospitals, universities and hotels. The Company's Rights of Entry
typically have original terms 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 seven years as of
February 28, 1997 (assuming the Company's exercise of available renewal
options).
Many Rights of Entry provide MDU owners with financial incentives to work
closely with the Company to promote its products and services. Financial
incentives include revenue sharing and payment of up-front inducements to MDU
owners. In addition, the Company believes that the delivery of special services
tailored to MDU owners and residents provides marketing advantages to the MDU
owner in leasing its units. The Rights of Entry acquired by the Company through
its various acquisitions (which represent approximately 74% of the Company's
Rights of Entry as of February 28, 1997) have not always contained all of the
foregoing terms and provisions.
The long-term Rights of Entry negotiated with MDU owners effectively make
the Company the exclusive multichannel television provider, leaving MDU
residents with the option of receiving multichannel television from the Company
or receiving off-air programming from local broadcasters. Rights of Entry
covering telecommunications services effectively make the Company the only
wire-line alternative to the LEC for telecommunications services. The Company
believes that the development of strategic relationships with MDU owners will
enable the Company to maintain its
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preferred competitive position even if the exclusivity of the Rights of Entry
becomes limited by future developments. However, statutory limitations on
exclusivity could adversely effect the Company's ability to form new strategic
relationships with MDU owners and associations and could increase the capital
costs associated therewith. See "Risk Factors -- Risks Associated with Rights of
Entry."
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, and (iii)
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.
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.
To market to owners of MDUs, the Company maintains a full-time professional
sales force which as of February 28, 1997 included 37 sales representatives.
Many of the Company's sales representatives have previous experience in
commercial real estate sales and leasing. Sales personnel receive incentive
compensation in the form of commissions, the level of which is determined by the
size of the MDU, the term of the Rights of Entry and the expected revenue per
subscriber.
Marketing to MDU owners is conducted primarily by (i) using established
relationships with property developers, owners and management companies, (ii)
direct mail campaigns to owners and apartment managers, (iii) door-to-door
canvassing within the coverage of the Company's existing networks, and (iv)
attendance at and participation in trade shows, conventions and seminars
targeted to the MDU industry. The Company recently has commenced additional
marketing activities including compiling a detailed database of potential
clients and sales efforts.
When marketing to MDUs, the Company emphasizes its advantages over
competing multichannel television services including:
New Revenue Source for MDU Owner. An MDU owner who enters into Rights of
Entry with the Company often receives a percentage of the revenue generated by
the MDU. The percentage generally ranges between 6 and 10 percent of such
revenue based on penetration. The Company sometimes advances all or part of the
revenue participation at the time the Rights of Entry is executed and, in the
case of MDUs with strategic significance, may from time to time pay up-front
"key-money" in lieu of or in addition to the revenue participation.
Property Enhancements. The Company often installs a package of
telecommunications and security enhancements at the MDUs it serves, at a nominal
cost or at no cost to the MDU owner. For example, the Company can install a
monitoring camera at the main entrance that permits MDU residents to identify
guests by tuning his or her television set to the building's security channel.
In addition, the Company often provides a dedicated information channel that
permits the building's management to send messages to the MDU residents over the
private cable television system. At current prices, these enhancements are
relatively inexpensive for the Company to provide and can be important to MDU
owners and property managers concerned with security and emergency
communications.
New Marketing Tool and Amenity to Rent Apartments. The principal concern of
an MDU owner is to rent apartments. The Company's services and property
enhancements can serve as an important marketing tool for prospective tenants
because such services are generally provided at a
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lower price than those charged by the franchise cable television operator and
the incumbent LEC and long distance carriers. The Company works with on-site
managers to emphasize the benefits of the Company's services and the added value
and convenience provided by the Company.
Once an MDU owner executes Rights of Entry, the Company aggressively
markets its services to actual and potential subscribers within the MDU in order
to increase penetration rates for basic and additional services. The Company
believes that its best opportunity for a sale arises when a subscriber first
signs a lease and takes occupancy in an MDU. The Company has therefore developed
orientation and incentive programs for on-site property managers and leasing
agents, with the objective of enlisting them as the Company's subscriber sales
force. In addition, the Company markets to MDU residents through (i) direct mail
campaigns, (ii) special promotions and sign-up parties, (iii) establishment of a
physical presence at a building (e.g., by setting up a small booth) and (iv)
distribution of point-of-sale marketing materials. The Company stresses the
following themes when marketing its services to MDU tenants:
Simplicity and Convenience. In general, a subscriber can order any of the
Company's services through the MDU's leasing agent at the time of lease signing.
In addition, in certain of its markets, the Company is able to provide one stop
shopping for both cable television and telecommunications services.
Superior Channel Capacity and Customized Programming. The number of
channels provided by the Company at an MDU generally equals or exceeds that of
the local franchise operator in that market. In addition, the programming
selections available at an MDU can be tailored to the demographics of the 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 programming.
Lower Price. The Company offers a competitive channel line-up (often
including Pay-Per View and premium services) at prices that are generally below
those charged by the local franchise cable television operator.
Better Service and Picture Quality. The Company seeks to distinguish itself
by providing better and more convenient service to its customers. The Company
also emphasizes the generally better picture quality and reliability of its
microwave delivery system.
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.
The Company has developed operational excellence standards for virtually
every aspect of the Company's interaction with MDU owners and subscribers. The
Company's standards of subscriber service and satisfaction meet or exceed the
published standards of the National Cable Television Association. The Company's
Operational Excellence Director reports directly to the Chief Operating Officer
and has the authority to cross organizational boundaries to achieve results.
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
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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,
DBS, stand-alone satellite service providers and, to a lesser extent, off-air
broadcasters. The Company's local telephone service competes with other STS
operators, the incumbent LEC, CLECs and CAPs. In addition, future
telecommunications offerings, including PCS, 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. See "-- Regulation." Similarly, mergers, joint ventures and
alliances among franchise, wireless or private cable television operators and
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 and to enroll
subscribers. 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. See "Risk Factors -- Risks Associated with
Rights of Entry."
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 and subscribers 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 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
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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. However, due to the experimental nature of the technology and the
capital costs of building a system, LMDS licensing and system construction in
the Company's markets are not expected by the Company to occur in the near term.
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 20 to 40 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.
DBS systems generally offer a significantly larger number of channels and
broader programming line-up than offered by the Company. 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 right direction to receive video programming from the satellite.
Perhaps more important, 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.
There is considerable debate in the cable industry as to the ultimate
market share that DBS systems will achieve and there can be no assurance as to
the Company's ability to compete with DBS. The Company has been involved in
discussions with several DBS providers regarding the possibility of distributing
DBS programming on the Company's cable television networks. No assurance can be
given as to the outcome of any such discussions.
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 incumbent LECs 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
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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.
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. See "-- Regulation."
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. See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Overview."
Telecommunications Act of 1996
On February 8, 1996, the President signed into law the Telecommunications
Act which amended the Communications Act of 1934 (the "Communications Act"). The
Telecommunications Act has
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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 LECs, 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, which currently is
under review by the United States Court of Appeals for the Eighth Circuit.
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 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. Those of 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
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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.
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 the need to obtain 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.
Elimination of the Telco-Cable Cross-Ownership Restriction. The
Telecommunications Act repealed the telecommunications-cable television
cross-ownership restriction, which prohibited telecommunications companies from
providing multichannel television directly to subscribers in their
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telecommunications service areas. This change may increase the level of
competition in the multichannel television market. Telecommunications companies
now have several options for entering and competing in the multichannel
television marketplace. Telecommunications companies 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 telecommunications companies.
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 a Cable System should have a
rate structure for the provision of cable service that is 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 non-predatory bulk discounts offered to MDUs from
the uniform rate requirement. Consequently, the franchise cable television
operators with which the Company competes now have increased pricing flexibility
with respect to MDU bulk discounts. The Company expects franchised cable
television operators to take full advantage of this change and to compete on
price with the Company for MDU bulk contracts.
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.
The FCC is in the process of implementing these statutory changes. There
can be no assurance that the FCC will not promulgate implementing regulations
that will further expand the ability of franchise cable television operators or
others to compete with the Company.
In addition, 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, which would require property owners to open their property to any
number of service providers. In another
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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 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, although regulation in each state differs in some respects, a
number of states 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 laws effectively eliminate the ability of the property
owner to enter into exclusive Rights of Entry. To the best of the Company's
knowledge, the states which have enacted cable mandatory access statutes in some
form are: Connecticut, Delaware, Illinois, Kansas, Maine, Minnesota, 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 condominium
mandatory access statute, 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's statute on its face
permits property owners to exclude whomever they wish as long as the owner
accepts no compensation from whomever is permitted to serve the property. The
constitutionality of these statutes has been and is being challenged 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
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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. The Company's business in Illinois to date has not been
affected adversely by the mandatory access right of the franchise operators.
Individual cities and counties also have the authority to enact cable
mandatory access ordinances. To the Company's knowledge, other than as noted
above, there are no cities or counties in its markets which have such
ordinances.
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.
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
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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.
Telecommunications Regulation
The Telecommunications services provided by the Company are subject to
regulation by federal, state and local government agencies. The Company
currently provides its telecommunications services as an STS operator through
PBX switches. As the Company implements its telecommunications strategy, which
includes replacing its 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") have 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. In some states, PUCs have issued detailed
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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.
Although resale of local exchange service is now permitted in most states,
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 have 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.
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
incumbent monopoly LECs (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.
As a result of these changes, the Company anticipates that it will, in the
future, increasingly compete in the telecommunications market as a CLEC. For
purposes of the Telecommunications Act, CLECs are subject to all requirements
applicable to LECs. However, certain additional obligations imposed on incumbent
LECs are not applicable to 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 LECs and CLECs to provide
interconnection to their networks as well as wholesale rates to resellers of
services so that others may compete in the local exchange markets. In addition,
LECs and CLECs must provide competing carriers with access to poles, conduits,
and rights-of-way and, to the extent feasible, number portability (the ability
of a customer switching service providers to retain his or her telephone
number).
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Federal, state and local authorities will share responsibility for
regulating the terms and conditions under which CLECs may enter the local
exchange markets. For example, the FCC recently issued a series of guidelines
that will provide the basis for interconnection agreements between CLECs and the
facilities of the incumbent LECs. Among other things, the Telecommunications Act
and the FCC's first implementing order require the following:
Interconnection. Each telecommunications carrier is now required to
interconnect directly or indirectly with the facilities and equipment of other
telecommunications carriers. Incumbent LECs are further required to provide
interconnection, which is of a quality at least equal to that provided by the
incumbent LEC to itself or its affiliates, to any requesting carrier at any
technically feasible point in the incumbent LEC's network, on rates, terms and
conditions that are just, reasonable and nondiscriminatory. The
Telecommunications Act contemplates that interconnection agreements will be
negotiated by the parties and submitted to state regulatory authorities for
approval. In addition, state authorities may become involved, at the request of
either party, if negotiations fail. If the state regulator refuses to act, the
FCC may act on the matter.
Resale. LECs and CLECs are prohibited from imposing unreasonable or
discriminatory conditions or limitations on the resale of their
telecommunications services.
Number Portability. LECs and CLECs are required to provide, to the extent
technically feasible, number portability that will allow customers switching
among and between service providers to retain their telephone number.
Dialing Parity. LECs and CLECs are required to provide dialing parity to
competing providers of local exchange service and toll service, and to permit
all such providers to have nondiscriminatory access to telephone numbers,
operator services, directory assistance, and directory listing, with no
unreasonable delay. Dialing parity means an equal number of digits is required
for access to all providers.
Access to Rights-of-Way. LECs and CLECs are required to afford access to
the poles, ducts, conduits, and rights-of-way to competing carriers of
telecommunications services on rates, terms, and conditions that are not
unreasonable or unreasonably discriminatory.
Reciprocal Compensation. LECs and CLECs are required to establish
reciprocal compensation arrangements with other carriers for the transport and
termination of traffic.
Unbundled Access. In addition to the above, incumbent LECs are required to
provide, to any requesting carrier, nondiscriminatory access to network elements
on an unbundled basis at any technically feasible point in the incumbent LECs
network on rates, terms and conditions that are just, reasonable and
nondiscriminatory.
Universal Service. All telecommunications carriers are required to
contribute to a universal service fund to be established by the FCC.
Utility Companies. Finally, the Telecommunications Act provided that
registered utility holding companies may provide telecommunications services
(including cable television) notwithstanding the Public Utility Holding Company
Act. Utilities must establish separate subsidiaries and must apply to the FCC
for operating authority. It is anticipated that large utility holding companies
will become significant competitors both to cable television and other
telecommunications companies.
The FCC and various state PUCs are in the process of defining the precise
contours of these requirements which 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. In addition, several parties have sought
reconsideration of the FCC's first implementing order and a number of parties
have petitioned for review of the order in several federal courts of appeal.
Those petitions have been consolidated before the United States Court of Appeals
for the Eighth Circuit, which on October 15, 1996, stayed substantial portions
of the FCC's order
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pending judicial review. It is not possible for the Company to predict the
outcome of these proceedings. 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 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 301(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 agreed to assign substantially all of its frequency licenses to 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. See "Certain Transactions -- License
Holding Company."
Employees
As of February 28, 1997, the Company employed a total of 452 full-time
employees. The Company believes that its continued success will depend in large
part on its ability to attract and retain highly skilled and qualified
personnel. The Company has nondisclosure agreements with all of its senior
executive officers. The Company also regularly uses the services of contract
technicians for the installation and maintenance of its networks. None of the
Company's employees are currently represented by a collective bargaining
agreement. The Company believes that its relationships with its employees are
good.
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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 February 28, 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.
The Company is negotiating for the purchase of a building proximate to its
executive offices. The Company intends to relocate certain administrative
functions to the new facility and to install a central office switch in the
building.
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, SMATV
receivers, PBX switches and 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.
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. See "Risk Factors --
Use of the Name OpTel."
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MANAGEMENT
The following table sets forth certain information regarding the directors
and executive officers of OpTel at May 15, 1997:
<TABLE>
<CAPTION>
Directors Age Position with OpTel
- --------- ----- -------------------
<S> <C> <C>
Claude Chagnon ............... 42 Chairman of the Board and Director
Alain Michel .................. 48 Vice Chairman of the Board and Director
Louis Brunel ............... 55 Director; President and Chief Executive Officer
Christian Chagnon ............ 41 Director
Pierre Collins ............... 40 Director
Barry Porter ............... 39 Director
Gary Winnick ............... 49 Director
Executive Officers Age Position with OpTel
- ------------------ ----- -------------------
Louis Brunel ............... 55 President, Chief Executive Officer and Director
Rory O. Cole ............... 37 Chief Operating Officer
Bertrand Blanchette ......... 39 Chief Financial Officer
Vinod Batra .................. 53 Vice President Engineering and Construction
Stephen Dube ............... 41 Vice President Marketing and Corporate
Development
Michael E. Katzenstein ...... 37 Vice President Legal Affairs and General
Counsel
William Shepherd ............ 44 Vice President New Business and Product
Development
Lynn Zera .................. 49 Vice President Human Resources
Thomas Watson ............... 41 Vice President Information Services
John Czapko .................. 56 Vice President Sales
</TABLE>
Claude Chagnon has served as a Director since August 1996. Since October 1996,
he has served as 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 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.
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 September 1994, as Senior Vice President and Chief Financial Officer. Mr.
Michel also serves as a director of Groupe Goyette Inc., a Canadian public
company which provides transportation and storage services.
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, Director, Chief Executive Officer and Group Managing Director of
Videotron Holdings Plc ("VHP"), a UK cable television/telecommunications company
and recently divested subsidiary of GVL. While at VHP, Mr. Brunel was
responsible for launching 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 as 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 Ltee. Mr. Chagnon also serves as a Director of GVL.
Pierre Collins has served as a Director since December 1995. Mr. Collins is also
the President of CDPQ. From October 1994 to November 1995, Mr. Collins was
Executive Vice President of CF
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Telecom Inc. a Canadian telecommunications company. From March 1994 to October
1994, he was Vice President of Telesysteme Enterprise Ltee. Prior to February
1994, Mr. Collins was Executive Vice President and General Manager of Optinet
Telecommunications Inc. Mr. Collins also serves as a Director of GVL. Mr.
Collins serves on the board of Teleglobe Inc., a company which is publicly
traded in Canada, and on the board of several private companies.
Barry Porter has served as a Director since July 1994. Since December 1993, Mr
Porter has served as a Managing Director of Pacific Capital Group, Inc., an
affiliate of Vanguard Communications, Inc., the general partner of Vanguard.
Prior to that, Mr. Porter was Senior Managing Director at Bear, Stearns & Co.
Inc. in the investment banking group. In addition, Mr. Porter serves as a
Director of Vanguard, Campuslink Communications Systems, Inc., Dycam Inc. and
Styles on Video, Inc.
Gary Winnick has served as a Director since March 1994. Mr Winnick serves as the
Chairman of Pacific Capital Group, Inc. He is a Director of Veritas Holdings
GmbH and Campuslink Communications Systems, Inc. Mr. Winnick serves on the Board
of Directors of the United States Holocaust Museum and the Simon Wiesenthal
Center for Humanitarian Studies, and also serves on the Board of Trustees of
Tufts University, the International Board of Governors of Hillel and the Board
of Directors of the Sherry-Netherland, Inc.
Rory O. Cole was appointed Chief Operating Officer in March 1995. From September
1994 to March 1995, Mr. Cole was Vice President New Market Development of VIL.
From September 1990 to September 1994, he was Chief Financial Officer of VHP.
From February 1990 to August 1990, he was Corporate Controller of VHP. Prior to
this, Mr. Cole held various management positions with Cox Cable, Time Warner and
Ernst & Young.
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.
Vinod Batra was appointed Vice President Engineering and Construction in June
1996. From March 1995 to June 1996, he was President of and a Senior Consultant
at Advanced Communication Consultants, a provider of consulting services
relating to business and technical issues for clients in the cable television
and telecommunications industries. From August 1986 to March 1995, Mr. Batra was
President of American Communication Consultants. Mr. Batra also formerly served
as Chairman and CEO of American Communication Consultants.
Stephen Dube has served as Vice President Marketing and Corporate Development
since April 1997 and as a Vice President of VIL since May 1995. From July 1995
to April 1997, Mr. Dube served as Vice President Acquisitions and Strategic
Planning 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 was appointed Vice President New Business and Product
Development in June 1996. From September 1994 to December 1995, Mr. Shepherd was
Vice President Sales and Marketing of Great Lakes Telecommunications Corporation
("Great Lakes"). From December 1995 to February 1996, Mr. Shepherd was Chief
Operating Officer of Great Lakes. Great Lakes filed for Chapter 11 Bankruptcy in
April, 1996. From January 1992 to September 1994, Mr. Shepherd was President of
Continental Communications Corporation, a provider of communications consulting
and international transmission resale. From June 1990 to January 1992, Mr.
Shepherd was President of North American Telecommunications Corp., a Texas based
long distance telephone company.
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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.
Thomas Watson was appointed Vice President Information Services in September
1996. From January 1992 to September 1996, Mr. Watson held various positions at
GTE Telephone Operations, a local exchange carrier, 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.
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.
Board of Directors
Number and Term of Office. All of the Issuer's directors have been elected
by VPC and Vanguard pursuant to a Stockholders' Agreement, dated as of December
22, 1994, between VPC, Vanguard, Vanguard Communications, Inc., the general
partner of Vanguard (the "General Partner"), and the Issuer, as amended to date
(the "Stockholders' Agreement"). Pursuant to the Stockholders' Agreement, the
Board of Directors ("Board") shall consist of at least seven members which shall
be designated as follows: (i) for so long as Vanguard's owns at least 30% of the
outstanding Common Stock, VPC shall designate at least four nominees and
Vanguard shall designate three nominees (the "Vanguard Nominees") and (ii) for
so long as Vanguard's owns at least 10% of the outstanding Common Stock, VPC
shall designate at least five nominees and Vanguard shall designate two
nominees. For so long as Pacific Capital Group, Inc. ("Pacific"), an affiliate
of the General Partner, has an economic interest in Vanguard, Pacific shall be
entitled to designate the Vanguard Nominees. In addition the Stockholders'
Agreement provides that no action of the Board shall be taken without the
affirmative vote or consent of at least two of VPC's nominees. Messrs. Claude
Chagnon, Brunel, Christian Chagnon, Collins and Michel were appointed by VPC and
Messrs. Porter and Winnick were appointed by Vanguard. Mr. Collins was appointed
as the nominee of Caisse pursuant to the GVL Shareholders' Agreement.
Powers of the Directors. The directors may exercise all of the powers which
may be exercised by the Issuer and which are not by law, the Certificate of
Incorporation, or the Bylaws reserved or required to be performed by
Stockholders. A majority of the directors then in office shall constitute a
quorum and an act of a majority of the directors present at a meeting at which
there is a quorum shall be an act of the Board with respect to any matter,
provided, however, that no action of the Board shall be taken without the
affirmative vote or consent of at least two of the members nominated by VPC.
Committees. The Board may delegate any of its powers and authority to one
or more committees. Each committee shall consist of one or more of the directors
of the Issuer. The Board may designate one or more directors as alternate
members of any committee to replace any absent or disqualified member at any
meeting of any such committee.
The Stockholders' Agreement, provides for an Executive Committee but none
has been formed to date. To the extent permitted by law, the Executive Committee
has all of the powers and may exercise all of the authority of the Board in the
management of the business and affairs of the Issuer.
The Board has an Audit Committee and a Compensation Committee. The
functions of the Audit Committee include recommending to the Board the retention
of independent public accountants, reviewing the scope of the annual audit
undertaken by the independent public accountants and the
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progress and results of their work and reviewing the financial statements of the
Company and its internal accounting and auditing procedures. The Audit Committee
is composed of Messrs. Claude Chagnon, Collins and Porter. The functions of the
Compensation Committee are to supervise the Company's compensation policies,
administer the employee incentive plans, review officers' salaries and bonuses,
approve significant changes in employee benefits and consider other matters
referred to it by the Board. The Compensation Committee is composed of Messrs.
Claude Chagnon, Collins, Brunel and Winnick.
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, 1996
and the eight months ended August 31, 1995. None of the named executive officers
were employed by the Company prior to December 31, 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------------------------------
Name and Principal Year/Period Salary Bonus Other Annual All Other
Position(1) Compensation Compensation(2)
<S> <C> <C> <C> <C> <C>
Louis Brunel 1996 $ 35,095(3) $ -- $ -- $ --
President and Chief 1995 $ -- $ -- $ -- $ --
Executive Officer
Rory Cole 1996 $ 175,000 $ 37,505(8) $ 18,389(16) $ 4,750
Chief Operating Officer 1995 $ 102,980(4) $ 22,405(9) $ -- $ --
Michael Katzenstein 1996 $ 135,346(5) $ 133,706(10) $ 10,050(17) $ 3,334
Vice President Legal 1995 $ -- $ -- $ -- $ --
Affairs and General Counsel
Julian Riches(23) 1996 $ 130,000 $ 3,900(11) $ 17,550(18) $ --
Treasurer 1995 $ 36,006(6) $ 31,599(12) $ 1,500(19) $ --
William O'Neil(24) 1996 $ 120,000 $ 12,000 $ 7,056(20) $ 4,620
Vice President Western 1995 $ 69,230(7) $ 13,757(13) $ -- $ --
Region
Harry Nicholls(25) 1996 $ 150,000 $ 22,571(14) $ 17,640(21) $ 4,500
Vice President Marketing 1995 $ 71,875 $ 32,494(15) $ 2,500(22) $ --
</TABLE>
- ------------
(1) 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. During the fiscal year
ended August 31, 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.
(2) Represents 401(k) matching funds.
(3) During the fiscal year ended August 31, 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.
(4) Mr. Cole commenced employment with the Company in February 1995, at an
annual salary of $175,000.
(5) Mr. Katzenstein commenced employment with the Company in November 1995, at
an annual salary of $170,000.
(6) Mr. Riches commenced employment with the Company in April 1995, at an
annual salary of $130,000.
(7) Mr. O'Neil commenced employment with the Company in February 1995, at an
annual salary of $120,000.
(8) $1,005 represents relocation payments.
(9) The entire amount represents relocation payments.
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(10) $93,706 represents relocation payments and the remainder represents a
signing bonus.
(11) The entire amount represents relocation payments.
(12) The entire amount represents relocation payments.
(13) The entire amount represents relocation payments.
(14) $3,621 represents relocation payments.
(15) The entire amount represents relocation payments.
(16) $10,076 represents an automobile allowance and $8,313 represents tax
reimbursements resulting from relocation.
(17) The entire amount represents an automobile allowance.
(18) $11,550 represents tax reimbursements resulting from relocation and $6,000
represents an automobile allowance.
(19) The entire amount represents an automobile allowance.
(20) $6,000 represents an automobile allowance and the remainder represents tax
reimbursements resulting from relocation.
(21) $11,640 represents tax reimbursements resulting from relocation and $6,000
represents an automobile allowance.
(22) The entire amount represents an automobile allowance.
(23) Mr. Riches currently serves as the assistant to the Chief Financial
Officer.
(24) Mr. O'Neil currently serves as Director of Operational Support.
(25) Mr. Nicholls is no longer employed by the Company.
Compensation of Directors
None of the Directors of the Company are compensated for their service as
directors of the Company. However, all directors are reimbursed for actual
out-of-pocket expenses incurred by them in connection with their attending
meetings of the Board or any committees of the Board.
Employment Agreements
Louis Brunel is employed as President and Chief Executive Officer of the
Company pursuant to an at will employment agreement. Under the employment
agreement, Mr. Brunel currently receives an annual base salary of $275,000, a
Company automobile and a housing allowance. In addition, Mr. Brunel is entitled
to participate in the Company's Incentive Stock Plan, Bonus Plan (as defined)
and Performance Plan (as defined). If Mr. Brunel's employment is terminated by
the Company for other than cause, Mr. Brunel will receive a severance payment
equal to two year's base salary.
Rory Cole is employed as Chief Operating Officer of the Company pursuant to
an at will employment agreement. Under the employment agreement, Mr. Cole
currently receives a base salary of $185,000 and a Company automobile. In
addition, Mr. Cole is entitled to participate in the Company's Incentive Stock
Plan, Bonus Plan and Performance Plan. If Mr. Cole's employment is terminated
for any reason, Mr. Cole will receive a severance payment equal to one year's
base salary.
Michael Katzenstein is employed as Vice President Legal Affairs, General
Counsel and Secretary of the Company pursuant to an employment agreement
expiring in November 1998. Under the employment agreement, Mr. Katzenstein
currently receives an annual base salary of $170,000 and a Company automobile.
Mr. Katzenstein received a signing bonus of $40,000 in 1996. In addition, Mr.
Katzenstein is entitled to participate in the Company's Incentive Stock Plan,
Bonus Plan and Performance Plan.
Julian Riches currently serves as the assistant to the Chief Financial
Officer of the Company pursuant to an employment agreement expiring May 1998.
Under the employment agreement, Mr. Riches currently receives an annual base
salary of $130,000 and an automobile allowance. In addition, Mr. Riches is
entitled to participate in the Company's Incentive Stock Plan and Bonus Plan. If
Mr. Riches' employment is terminated by the Company for other than cause, Mr.
Riches will receive a severance payment equal to one year's base salary and
reimbursement of expenses relating to his relocation to the United Kingdom.
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Incentive Stock Plan
In fiscal 1997, the Company adopted an Incentive Stock Plan (the "Plan"),
pursuant to which options to acquire a maximum of 95,137 shares of Class A
Common may be granted to certain executives of the Company. 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 Common on the date of the grant and (ii) the options vest
in equal installments on each of the second, third, fourth and fifth
anniversaries of the date of grant. In the event of a "change of control," all
options shall vest and become immediately exercisable. The exercise price may be
paid in cash, certified or bank check, through the delivery of shares of Class A
Common pursuant to a broker-assisted "cashless exercise" program if established
by the Company or by such other method as the Committee may deem appropriate.
Subject to certain exceptions, during the period of 45 days after the
termination of an executive's employment with the Company, the Company shall
have the right to purchase all, but not less than all, of the shares of Class A
Common acquired by such executive pursuant to the exercise of options issued
under the Plan at the fair market value of such shares as of the date on which
such executive's employment was terminated (the "Call") and the executive shall
have the right to sell to the Company all, but not less than all, of the shares
of Class A Common acquired by such executive pursuant to the exercise of options
issued under the Plan at the fair market value of such shares as of the date on
which such executive's employment was terminated (the "Put"). Both the Call and
the Put shall expire on the date of an initial public offering of the equity
securities of OpTel (the "IPO Date").
Prior to the IPO Date, holders of Class A Common shares issued upon the
exercise of options issued under the Plan may not transfer or sell any of such
shares except pursuant to a bona fide written offer to purchase such shares for
an all cash purchase price ("third party offer") and only after such shares have
first been offered to the Company. The Company shall have the option to purchase
all (but not less than all) of the Class A Common shares subject to the third
party offer at the price per share set forth in the third party offer.
Annual Bonus Plan and Medium Term Performance Plan
The Company has adopted an Annual Bonus Plan (the "Bonus Plan") and a
Medium Term Performance Plan (the "Performance Plan") pursuant to which the
Board is authorized to grant cash bonuses to certain officers of the Company.
Bonuses are payable only if the Company achieves certain performance targets
approved by the Compensation Committee at the beginning of the fiscal year, in
the case of the Bonus Plan, or three year period, in the case of the Performance
Plan.
Limitation of Director's Liability; Indemnification; Insurance
The Issuer's Certificate of Incorporation provides that the Issuer shall,
to the fullest extent permitted by the General Corporation Law of the State of
Delaware, as amended from time to time (the "DGCL"), indemnify all persons whom
it may indemnify pursuant thereto (i.e., directors and officers) and shall
advance expenses incurred in defending any proceeding for which such right to
indemnification is applicable, provided that, if the DGCL so requires, the
indemnitee provides the Issuer with an undertaking to repay all amounts advanced
if it is determined by a final judicial decision that such person is not
entitled to indemnification pursuant to this provision. The Issuer's Certificate
of Incorporation also contains a provision eliminating, to the fullest extent
permitted by Delaware law, the personal liability of the Issuer's directors for
monetary damages for breach of any fiduciary duty. By virtue of this provision,
under current Delaware law, a director of the Issuer will not
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be personally liable for monetary damages for breach of his fiduciary duty as a
director, except for liability for (i) any breach of the director's duty of
loyalty to the Issuer or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) dividends or stock purchases or redemptions that are unlawful under
Delaware law, and (iv) any transaction from which a director derives an improper
personal benefit. However, this provision of the Issuer's Certificate of
Incorporation pertains only to breaches of duty by directors as directors and
not in any other corporate capacity such as officers, and limits liability only
for breaches of fiduciary duties under Delaware corporate law and not for
violations of other laws, such as the federal securities laws. As a result of
the inclusion of such provision, stockholders may be unable to recover monetary
damages against directors for actions taken by them that constitute negligence
or gross negligence or that are in violation of their fiduciary duties, although
it may be possible to obtain injunctive or other equitable relief with respect
to such actions. The inclusion of this provision in the Issuer's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
the Issuer and its stockholders.
The directors and officers of the Company are insured (subject to certain
exceptions and deductions) against liabilities that they may incur in their
capacity as such, including liabilities under the Securities Act, under a
liability insurance policy carried by GVL. Such policy provides coverage in an
aggregate amount of $50 million (subject to a $250,000 retention) and expires on
October 24, 1997.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of February 28, 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 February 28, 1997, securities convertible into, or
exercisable for, approximately 1,970,434 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 provide
in the terms of the Convertible Notes if no initial public offering were to
occur by such date).
<TABLE>
<CAPTION>
Number of Shares Percentage of Common Stock
Name and Address of Beneficial Owner Beneficially Owned Beneficially Owned
- --------------------------------------------------- -------------------- ---------------------------------
Voting Rights Equity Interest
--------------- ----------------
<S> <C> <C> <C>
Le Groupe Videotron Ltee(1) ..................... 1,923,977 83.49 76.06
300 Viger Avenue East Class B Common
Montreal, Quebec H2X3W4
Vanguard Communications, Inc. (2) ............... 429,521(3) 18.25(3) 16.66(3)
150 El Camino Drive, Suite 204 Class B Common
Beverly Hills, California 90212
All directors and executive officers as a group 0 0 0
(17 persons)
</TABLE>
- ------------
(1) Such shares are owned by the VPC, an indirect wholly-owned subsidiary of
GVL. As described below, 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 GVL Shareholders'
Agreement for as long as GVL controls the Company, Caisse will have certain
rights with respect to the Company as described below.
(2) Such shares are owned by Vanguard for which Vanguard Communications, Inc. is
the general partner. As described below, Vanguard has agreed to certain
restrictions on its ability to transfer or otherwise dispose of such shares.
Gary Winnick, the Chairman of the Board of Directors of Vanguard
Communications, Inc. and its President and Chief Executive Officer has a
controlling interest in Vanguard Communications, Inc. Prior to VPC acquiring
control of the Company, Pacific and its affiliates, including Vanguard
Communications, Inc. founded, controlled and financially sponsored the
Company. The Issuer has been advised that Vanguard has reached an agreement
in principle for the sale of its interest in the Issuer to CDPQ. In
connection with such sale, GVL, VPC, CDPQ, Caisse and the Issuer have
reached an agreement in principle with respect to certain changes to be made
to the Issuer's Certificate of Incorporation and the Stockholders'
Agreement. No assurance can be given as to when, or if, the parties to such
agreements in principle will agree upon definitive documentation of the
transactions contemplated therein or that, if such definitive documentation
is executed, whether consummation of the transactions contemplated therein
will in fact occur. See "Certain Transactions -- Possible Sale of Vanguard
Interest."
(3) Includes 48,937 shares of Class B Common issuable upon exercise of the
Vanguard Option (as defined). Without giving effect to the Vanguard Option,
Vanguard beneficially owns 16.51% of the voting rights and 15.05% of the
outstanding equity interest. See "Certain Transactions."
Stockholders' Agreement
Transfer Restrictions/Rights of First Refusal. Pursuant to the terms of the
Stockholders' Agreement, the holders of the Issuer's Common Stock are prohibited
from transferring any shares of Common Stock, other than transfers to affiliates
of such holder with the consent of the Board. In addition, except to the extent
required by law, Vanguard and the General Partner are prohibited from
transferring or distributing any of the Common Stock owned by Vanguard to
Vanguard's partners prior to the IPO Date.
Prior to the IPO Date, Vanguard may, subject to certain conditions, solicit
offers from Institutional Investors (as defined in the Stockholders' Agreement)
to purchase all, but not less than all, of the shares of Common Stock held by
Vanguard. Any such offer, however, is subject to a right of first refusal, in
favor of VPC and the Issuer, pursuant to which VPC or the Issuer may purchase
the Common Stock offered on the same terms and conditions. The Issuer has been
advised that Vanguard has reached an agreement in principle for the sale of its
interest in the Issuer to CDPQ. In
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connection with such sale, GVL, VPC, CDPQ, Caisse and the Issuer have reached an
agreement in principle with respect to certain changes to be made to the
Issuer's Certificate of Incorporation and the Stockholders' Agreement. No
assurance can be given as to when, or if, the parties to such agreements in
principle will agree upon definitive documentation of the transactions
contemplated therein or that, if such definitive documentation is executed,
whether consummation of the transactions contemplated therein will in fact
occur. See "Certain Transactions -- Possible Sale of Vanguard Interest."
In addition, certain holders of partnership interests in Vanguard have
agreed not to transfer their interests, subject to limited exceptions. If a
holder of an interest in Vanguard who is not subject to this restriction,
proposes to dispose of their interest in Vanguard, the General Partner shall
provide notice to the Issuer and VPC of such proposed transfer, and VPC, or at
VPC's election, the Issuer shall have the right to purchase such interest at the
price and terms provided for in Vanguard's Partnership Agreement, dated as of
April 15, 1993, as amended to date. If VPC or the Issuer acquires any interest
in Vanguard pursuant to these agreements, if VPC or the Issuer, as the case may
be, so elects, Vanguard will redeem or purchase the partnership interests in
exchange for shares of Common Stock which would be distributed with respect to
such partnership interests if Vanguard were then liquidated.
Preemptive Rights. Until the earlier of the IPO Date and July 31, 1999, the
Issuer shall not issue or sell to VPC or Vanguard or any of their respective
affiliates any additional shares of capital stock of the Issuer, or any options
or other rights to acquire any such capital stock, except with the consent of
both VPC and Vanguard in each instance. All investments during such period by
VPC or Vanguard are expected to be generally in the form of the Convertible
Notes, except they will include subordination terms that will cause them to be
"Deeply Subordinated Shareholders Loans" for purposes of the Indenture. Subject
to the foregoing, if the Board requests as necessary for the financing of the
Company and VPC so elects, VPC may purchase from the Issuer one or more
convertible promissory notes on substantially the same terms as the outstanding
Convertible Notes (except they will include subordination terms that will cause
them to be "Deeply Subordinated Shareholders Loans" for purposes of the
Indenture), subject to Vanguard's right to participate, after providing written
notice to Vanguard (the "Purchase Notice"). Within 60 days after receipt of a
Purchase Notice, Vanguard may elect to participate in such financing in
proportion to its ownership interest in the Issuer at the time of the Purchase
Notice, except that Vanguard may not exercise such right in any instance as to
less than 10% of the aggregate principal amount of the convertible promissory
notes to be sold.
If, prior to the IPO Date but after July 31, 1999, the Board determines to
issue additional shares of Common Stock, VPC may require that such shares be
Class B Common and, subject to Vanguard's right to participate, VPC may
purchase, after providing a Purchase Notice to the Issuer and Vanguard, any or
all of such additional shares at the Valuation Price (as defined in the
Stockholders' Agreement). Within sixty days after receipt of a Purchase Notice,
Vanguard may elect to participate in such financing in proportion to its
ownership interest in the Issuer at the time of the Purchase Notice, in which
event the number of additional shares to be purchased by VPC shall be reduced by
the number of shares purchased by Vanguard.
Drag Along/Tag Along Rights. If, prior to the IPO Date, VPC elects to sell
a controlling interest in the Issuer, VPC may require Vanguard to join in such a
sale in the same proportion and on the same terms. If VPC elects to sell ten
percent or more of the Common Stock owned by it (other than in a public
offering), Vanguard has the right to join in such sale in the same proportion
and on the same terms. If VPC elects to sell fifty percent or more of the Common
Stock owned by it (other than in a public offering), Vanguard has the right to
join in such sale and may sell all of its shares on the same terms.
If, prior to the IPO Date, VPC ceases to be an affiliate of GVL, then for a
period of 120 days after such change in control, Vanguard may sell all or any
part of the Common Stock owned by it to the entity then controlling VPC on terms
no less favorable than those in the transaction which resulted in such entity
acquiring control of VPC.
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Tag Along/Drag Along Rights of Non-Voting Common
Subject to certain exceptions, until the consummation of a public offering
of the Common Stock, as a result of which at least 15% of the outstanding shares
of Common Stock are listed on a national securities exchange or on the Nasdaq
National Market (a "Qualified Offering"), and provided that GVL beneficially
owns more shares of Common Stock (assuming the conversion of the Convertible
Notes on April 30, 1999 at a formula provided for in the terms of the
Convertible Notes if no initial public offering were to occur by such date) than
any other person, then in the event of any transfer of beneficial ownership of
Common Stock or Convertible Notes by GVL to any person (a "Proposed Purchaser"),
each holder on Non-Voting Common or securities issued or issuable with respect
to the Non-Voting Common ("Registrable Securities") may require the Proposed
Purchaser to purchase on the same terms the proportion of the Registrable
Securities held by such holder equal to the number of shares of Common Stock
(and, in the case of Convertible Notes, the number of shares of Common Stock
then represented thereby) that GVL proposes to transfer divided by the total
number of shares of Common Stock beneficially owned by GVL.
If the transfer by GVL results in GVL owning less than a majority of the
Common Stock (assuming the conversion of the Convertible Notes on April 30, 1999
at a formula provided for in the terms of the Convertible Notes if no initial
public offering were to occur by such date), each holder of Registrable
Securities has the right to require the Proposed Purchaser to purchase all of
the Registrable Securities owned by such holder.
Until the consummation of a Qualified Offering, and provided that GVL
beneficially owns a majority of the outstanding Common Stock (assuming the
conversion of the Convertible Notes on April 30, 1999 at a formula provided for
in the terms of the Convertible Notes if no initial public offering were to
occur by such date), if GVL determines to sell all of the Common Stock and
Convertible Notes beneficially owned by GVL to any person other than an
affiliate or a Permitted Holder, GVL has the right to require the holders of
Registrable Securities to sell all of the Registrable Securities to the
purchaser at the same price per share paid by the purchaser to GVL.
GVL Shareholders' Agreement
In connection with an investment by Caisse and CDPQ in GVL, Caisse, CDPQ,
Sojecci Ltee and Sojecci (1995) Ltee, the principal shareholders of GVL, and
Andre Chagnon entered into 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. See "Certain Transactions --
Possible Sale of Vanguard Interest."
Registration Rights
Vanguard has the right, subject to certain conditions, to cause the Issuer
to register under the Securities Act not more than one-half of the shares of
Class A Common issuable upon conversion of the Class B Common then owned by
Vanguard. This demand right may be exercised at any time on or after the earlier
of (i) September 30, 1997 or (ii) one year after the IPO Date. If Vanguard
exercises its demand registration right, VPC has the option to purchase all of
the securities proposed to be offered by Vanguard in such registration (the
"Purchase Option"). In the event that VPC exercises the Purchase Option,
Vanguard will be entitled to one additional demand registration right,
exercisable not earlier than one year after the exercise of the Purchase Option,
which demand right shall permit Vanguard to register all of the Class A Common
issuable upon conversion of the Class B Common then owned by Vanguard.
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In the event that the Issuer proposes to register any of its equity
securities under the Securities Act, including in connection with an initial
public offering, Vanguard will be entitled to notice of such registration and
to include therein the shares of Class A Common issuable upon conversion of the
Class B Common held by them, provided that Vanguard may not exercise this right
with respect to less than 20% of the securities held by it. Vanguard shall be
entitled to such "piggyback" registration rights in the Issuer's initial public
offering and in each of the two subsequent Issuer offerings. The managing
underwriter of any such offering, however, may limit the number of shares to be
included in such registration by Vanguard if, in the opinion of the managing
underwriter, the distribution of all or a portion of the securities requested to
be included in the registration by Vanguard would materially adversely affect
the distribution of securities by the Issuer. Notwithstanding the foregoing,
Vanguard will have priority over the Issuer with respect to the inclusion of any
such cutback securities in the registration for the purpose of satisfying any
exercise of an underwriters' over-allotment option.
In addition, in the event that the Issuer proposes to register any of its
equity securities under the Securities Act, including in connection with an
initial public offering, Mr. Kofalt, a former director and Chairman of the Board
of the Company, will be entitled to notice of such registration and to include
therein the shares of Class A Common issuable upon exercise of the Kofalt
Warrant. Mr. Kofalt shall be entitled to one such "piggyback" registration. The
managing underwriter of any such offering, however, may limit the number of
shares to be included in such registration by Mr. Kofalt if in the opinion of
the managing underwriter the distribution of all or a portion of the securities
requested to be included in the registration by Mr. Kofalt would materially
adversely affect the distribution of securities by the Issuer.
Generally, the Issuer is required to bear the expenses of all requested
registrations, provided that any selling stockholder will be required to bear
their pro rata share of the underwriting discounts and commissions and certain
other specified expenses.
The holders of one-third or more of the Registrable Securities have the
right, subject to certain conditions, to cause the Issuer to effect one
registration under the Securities Act of the Registrable Securities. This demand
right may be exercised at any time after the earlier to occur of (i) February
15, 2002, (ii) the date immediately prior to a Change of Control, (iii) the 90th
day after a primary public offering of Common Stock or (iv) other than as a
result of an initial public offering, the date on which a class of common equity
securities of the Issuer is listed on a national securities exchange, is
authorized for quotation on the Nasdaq National Market or is otherwise subject
to registration under the Exchange Act. In the event that the demand right is
exercised, the Issuer may satisfy its obligations with respect to such demand by
making and consummating an offer to purchase all Registrable Securities at a
price at least equal to the current market value of the Registrable Securities.
In the event that the Issuer proposes to register Common Stock under the
Securities Act, the holders of Registrable Securities are entitled to notice of
such registration and to include such Registrable Securities therein, subject to
certain exceptions. The number of Registrable Securities to be included therein
is subject to the terms of certain other existing registration rights agreements
and to a pro rata reduction to the extent that the Issuer is advised by the
managing underwriter therefor that the total number or type of Registrable
Securities and other securities proposed to be included therein is such as to
materially and adversely affect the success of the offering.
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CERTAIN TRANSACTIONS
Convertible Notes
The Company has financed a large portion of its capital needs by borrowing
from its majority stockholder, VPC. As of February 28, 1997, the Issuer had
outstanding $121.0 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 not paid gets added to
principal on an annual basis. In connection with the Offering, the maturity of
the Convertible Notes was extended to six months after the final maturity of the
Notes and the Convertible Notes were subordinated in right of payment to the
Notes in the manner described below.
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, 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 Issuer, the holders of the Notes and the Trustee will be
entitled to the prior payment in full of all obligations owing under the
Indenture 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) 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, particularly the covenant "Limitation on Restricted Payments."
See "Description of the Notes -- Certain Covenants."
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 Issuer 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 Issuer 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.
Vanguard-Related Transactions
In August 1996, in connection with a negotiated settlement of certain
disputes between the Company's principal stockholders, the Issuer granted
Vanguard a non-transferable option (the
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"Vanguard Option") to purchase 48,937 shares of Class B Common at an exercise
price of $53.55 per share, subject to adjustment. The Vanguard Option is
exercisable at any time after August 31, 1996 and expires on the earlier to
occur of (i) July 31, 1999 or (ii) 180 days after the IPO Date.
In September 1996, the Company entered into a consulting agreement with
James A. Kofalt, a former director of the Issuer 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
Issuer 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 rights
comparable to those applicable to the Common Stock held by Vanguard. See
"Principal Stockholders -- Stockholders' Agreement."
Management Fees
In connection with a negotiated settlement of certain disputes between the
Company's principal stockholders, in August 1996, VPC and Pacific have agreed to
provide, at the specific request of the Board, such reasonable consultant,
advisory and management services as the Company may reasonably require. This
arrangement terminates on the earlier to occur of (i) the IPO Date or (ii) the
date on which any public or institutional financing obtained by the Company
restricts the payment of fees or charges to affiliates of the Company. The
Company pays each of VPC and Pacific $350,000 per annum (plus travel expenses)
for such services. The Company accrued a liability of $29,167 payable to each of
VPC and Pacific for general consulting services, during fiscal 1996. Pacific was
paid such amounts during fiscal 1997. Such amounts have not yet been paid to
VPC.
License Holding Company
The Company has agreed to assign substantially all of its frequency
licenses (the "Assigned 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 Rory O. Cole, each U.S. citizens, each own one-third of the
outstanding equity interests in THI. Mr. Cole is the Chief Operating Officer 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
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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.
Possible Sale of Vanguard Interest
The Issuer has been advised that Vanguard has reached an agreement in
principle (the "Vanguard Agreement in Principle") for the sale of its interest
in the Issuer to CDPQ, a wholly-owned subsidiary of Caisse. In connection with
such sale, GVL, VPC, CDPQ, Caisse and the Issuer have reached an agreement in
principle (the "Issuer Agreement in Principle") with respect to certain changes
to be made to (a) the Issuer's Certificate of Incorporation, including granting
preemptive rights to the holders of the Class B Common and eliminating the
transfer restrictions on the Class B Common and (b) the Stockholders' Agreement,
including customary minority shareholder reciprocal rights of first refusal,
board representation rights, drag-along/tag-along rights, veto rights with
respect to certain material transactions (including the incurrence of additional
debt and material acquisitions or divestitures) and demand and piggy-back
registration rights. In addition, the Issuer Agreement in Principle provides for
(i) VPC to grant CDPQ a right to put its shares to VPC at fair market value if,
five years after the date CDPQ purchases its interest from Vanguard, OpTel has
not undertaken a public equity offering, (ii) VPC and Vanguard each to renounce
its respective right to receive management fees (see "Certain Transactions --
Management Fees"), (iii) CDPQ to receive certain rights granted to any new
shareholder if CDPQ, in its reasonable discretion, believes them to be more
advantageous than those granted to CDPQ, and (iv) the possible conversion of
certain outstanding Convertible Notes into shares of Class B Common at a
conversion price not less than $82.18 per share. No assurance can be given as to
when, or if, the parties to the Vanguard Agreement in Principle or Issuer
Agreement in Principle will agree upon definitive documentation of the
transactions contemplated therein or that, if such definitive documentation is
executed, whether consummation of the transactions contemplated therein will in
fact occur.
Acquisitions of Class B Common
Between December 22, 1994 and March 31, 1995, VPC invested $60.0 million in
the issuer under a senior secured convertible note (the "Senior Convertible
Note") of the Issuer with a maturity date of June 30, 1996. The Senior
Convertible Note, along with the accrued interest thereon, was converted into
1,120,985 shares of Class B Common on March 31, 1995, in accordance with its
terms. Concurrently with the conversion of the Senior Convertible Note, VPC
purchased 105,667 shares of Class B Common from Vanguard for $5.7 million.
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On July 26, 1995, VPC purchased from the Issuer (i) 311,652 shares of Class
B Common for $16,687,656 and (ii) a $8,311,848 15% convertible note. On April 1,
1996, the note was converted into 155,229 shares of Class B Common (after giving
effect to the contribution, in connection with the settlement of certain
disputes between the principal stockholders, of certain shares received by VPC
as accrued interest on the note to the Issuer).
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 amount paid represented the seller's
historical cost. 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.
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DESCRIPTION OF THE NOTES
Set forth below is a summary of certain provisions of the Notes. The New
Notes, like the Old Notes, will be issued under the Indenture dated as of
February 14, 1997 between the Issuer and U.S. Trust Company of Texas, N.A., as
trustee (the "Trustee"), a copy of the form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
terms of the New Notes are substantially identical in all material respects
(including interest rate and maturity) to the Old Notes except for certain
transfer restrictions and registration rights relating to the Old Notes. The
following summary of certain provisions of the Indenture does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and to
all of the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part of the Indenture by reference to the
Trust Indenture Act, as in effect on the date of the Indenture. The definitions
of certain capitalized terms used in the following summary are set forth below
under "Certain Definitions." As of the date of this Prospectus, $225,000,000
principal amount of Old Notes were outstanding.
General
The Notes are general senior obligations of the Issuer. The Notes are
collateralized by a first priority security interest in the Escrow Account
described under "--Disbursement of Funds; Escrow Account." Like the Old Notes,
the New Notes will be issued only in fully registered form without coupons, in
denominations of $1,000 principal amount and integral multiples thereof.
Principal of, premium, if any, and interest on the Notes are payable, and the
Notes are exchangeable and transferable, at the office or agency of the Issuer
in the City of New York maintained for such purposes (which initially will be
the corporate trust office of the Trustee). See " -- Book-Entry; Delivery and
Form." No service charge will be made for any registration of transfer, exchange
or redemption of the Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed in connection therewith.
Maturity, Interest and Principal
The Notes are limited to $225,000,000 aggregate principal amount and mature
on February 15, 2005. Interest on the Notes accrues at a rate of 13% per annum
and is payable semi-annually in arrears on each February 15 and August 15 (each,
an "Interest Payment Date"), commencing August 15, 1997 to registered holders of
Notes, on the February 1 or August 1, as the case may be, immediately preceding
such Interest Payment Date. Interest accrues from the most recent Interest
Payment Date to which interest has been paid or duly provided for or, if no
interest has been paid or duly provided for, from the Issue Date. Cash interest
is computed on the basis of a 360-day year of twelve 30-day months. If the
Issuer defaults on any payment of principal and/or premium (whether upon
redemption or otherwise), cash interest will accrue on the amount in default at
the rate of interest borne by the Notes. Interest on overdue principal and
premium and, to the extent permitted by law, on overdue installments of interest
will accrue at the rate of interest borne by the Notes.
As discussed under "Exchange Offer; Registration Rights," pursuant to the
Registration Rights Agreement, the Issuer has agreed, for the benefit of the
holders of Notes, to effect at its expense a registered exchange offer under the
Securities Act to exchange the Old Notes for New Notes. The failure to comply
with such agreement in certain respects may result in an increase in the
interest rate applicable to the Notes.
Redemption
Optional Redemption. The Notes are redeemable, at the option of the Issuer,
in whole or in part, at any time on or after February 15, 2002, upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued
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and unpaid interest to the redemption date, if redeemed during the 12-month
period beginning February 15 of the years indicated below:
Year Redemption Price
- ----- ----------------
2002 ........................... 110%
2003 ........................... 107
2004 and thereafter ............ 100
Notwithstanding the foregoing, in the event prior to February 15, 2000 of
(i) one or more Equity Offerings and/or (ii) a sale or series of related sales
by the Issuer of its Common Stock to one or more Strategic Equity Investors for
aggregate gross proceeds of $100.0 million or more, the Issuer may redeem, at
its option, up to a maximum of 35% of the initially outstanding aggregate
principal amount of Notes from the net proceeds thereof at a redemption price
equal to 113% of the principal amount of the Notes (determined at the redemption
date), together with accrued and unpaid interest to the date of redemption;
provided that not less than $145.0 million aggregate principal amount of Notes
are outstanding following such redemption. Any such redemption may only be
effected once and must be effected upon not less than 30 nor more than 60 days'
notice given within 30 days after the last such Equity Offering or sale to a
Strategic Equity Investor, as the case may be, resulting in gross proceeds of
$100.0 million or more.
Mandatory Redemption. The Issuer is not required to make any mandatory
sinking fund payments in respect of the Notes. However, (i) upon the occurrence
of a Change of Control, each holder of the Notes will have the right to require
the Issuer to make an offer to purchase all outstanding Notes at a price of 101%
of the principal amount thereof (determined at the date of purchase), plus
accrued interest thereon, if any, to the date of purchase, and (ii) upon the
occurrence of an Asset Sale, the Issuer may be obligated to make an offer to
purchase all or a portion of the outstanding Notes at a price of 100% of the
principal amount, thereof (determined at the date of purchase), plus accrued and
unpaid interest, if any, to the date of purchase. See " -- Certain Covenants --
Change of Control" and "-- Disposition of Proceeds of Asset Sales,"
respectively.
Selection; Effect of Redemption Notice. In the case of a partial
redemption, selection of the Notes for redemption will be made pro rata, by lot
or such other method as the Trustee in its sole discretion deems appropriate and
just; provided that any redemption pursuant to the provisions relating to one or
more Equity Offerings and/or sales to a Strategic Equity Investor shall be made
on a pro rata basis or on as nearly a pro rata basis as practicable (subject to
DTC procedures). No Notes of a principal amount of $1,000 or less shall be
redeemed in part. Notice of redemption shall be mailed by first-class mail at
least 30 but not more than 60 days before the redemption date to each holder of
Notes to be redeemed at its registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in a
principal amount equal to the unredeemed portion thereof will be issued in the
name of the holder thereof upon surrender for cancellation of the original Note.
Upon giving of a redemption notice, interest on Notes called for redemption will
cease to accrue from and after the date fixed for redemption (unless the Issuer
defaults in providing the funds for such redemption) and such Notes will cease
to be outstanding.
Disbursement of Funds; Escrow Account
The Notes are collateralized, pending disbursement pursuant to the Escrow
Agreement dated as of February 14, 1997, among the Issuer, the Trustee and U.S.
Trust Company of Texas, N.A., as Escrow Agent (the "Escrow Agreement"), by a
pledge of the Escrow Account (as defined in the Escrow Agreement), into which
the Issuer deposited $79.6 million of the net proceeds from the Offering (the
"Escrow Collateral"), representing funds that, together with the proceeds from
the investment thereof, will be sufficient to pay interest on the Notes for six
scheduled interest payments.
The Issuer entered into the Escrow Agreement which provided for the grant
by the Issuer to the Trustee, for the benefit of the holders, of security
interests in the Escrow Collateral. All such security interests collateralize
the payment and performance when due of all obligations of the Issuer under
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the Indenture and the Notes, as provided in the Escrow Agreement. The Liens
created by the Escrow Agreement are first priority security interests in the
Escrow Collateral. The ability of holders to realize upon any such funds or
securities may be subject to certain bankruptcy law limitations in the event of
the bankruptcy of the Issuer.
Pursuant to the Escrow Agreement, funds may be disbursed from the Escrow
Account only to pay interest on the Notes (or, if a portion of the Notes has
been retired by the Issuer, funds representing the lesser of (i) the excess of
the amount sufficient to pay interest through and including February 15, 2000 on
the Notes not so retired and (ii) the interest payments which have not
previously been made on such retired Notes for each Interest Payment Date
through the Interest Payment Date to occur on February 15, 2000 shall be paid to
the Issuer if no Default then exists under the Indenture).
Pending such disbursements, all funds contained in the Escrow Account have
been invested in U.S. Government Securities. Interest earned on the U.S.
Government Securities will be placed in the Escrow Account. Upon the
acceleration of the maturity of the Notes, the Escrow Agreement will provide for
the foreclosure by the Trustee upon the net proceeds of the Escrow Account.
Under the terms of the Indenture, the proceeds of the Escrow Account shall be
applied, first, to amounts owing to the Trustee in respect of fees and expenses
of the Trustee and, second, to all obligations under the Notes and the
Indenture. Under the Escrow Agreement, assuming that the Issuer makes the first
six scheduled interest payments on the Notes in a timely manner with funds or
U.S. Government Securities held in the Escrow Account, all of the U.S.
Government Securities will be released from the Escrow Account.
Ranking
The indebtedness of the Issuer evidenced by the Notes ranks senior in right
of payment to all subordinated indebtedness of the Issuer and pari passu in
right of payment with all other existing and future unsubordinated indebtedness
of the Issuer.
The Issuer is a holding company with limited assets and no business
operations of its own. The Issuer operates its business through its
subsidiaries. Any right of the Issuer and its creditors, including holders of
the Notes, to participate in the assets of any of the Issuer's subsidiaries upon
any liquidation or administration of any such subsidiary will be subject to the
prior claims of the subsidiary's creditors, including trade creditors. For a
discussion of certain adverse consequences of the Issuer being a holding company
and of the terms of potential future indebtedness of the Issuer and its
subsidiaries, see "Risk Factors -- Holding Company Structure and Need to Access
Subsidiaries' Cash Flow."
Certain Covenants
Set forth below are certain covenants that are contained in the Indenture.
Limitation on Additional Indebtedness. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume, issue, guarantee or in any manner become
directly or indirectly liable for or with respect to, contingently or otherwise,
the payment of (collectively, to "incur") any Indebtedness (including any
Acquired Indebtedness), except for Permitted Indebtedness; provided that (i) the
Issuer will be permitted to incur Indebtedness and (ii) a Restricted Subsidiary
will be permitted to incur Acquired Indebtedness, if, in either case, after
giving pro forma effect to such incurrence (including the application of the net
proceeds therefrom), the ratio of (x) Total Consolidated Indebtedness (as of the
date of incurrence) to (y) Annualized Pro Forma Consolidated Operating Cash Flow
(based upon the two most recent fiscal quarters for which consolidated financial
statements of the Issuer are available preceding the date of such incurrence)
would be less than or equal to (A) 8.0 to 1.0 if such incurrence is prior to
August 31, 2000 or (B) 7.0 to 1.0 if such incurrence is on or after August 31,
2000 and prior to August 31, 2002 or (C) 6.0 to 1.0 if such incurrence is on or
after August 31, 2002.
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Limitation on Restricted Payments. The Indenture provides that the Issuer
will not, and will not permit any of the Restricted Subsidiaries to, make,
directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or upon
giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the Issuer
would be able to incur $1.00 of Indebtedness under the proviso of the covenant
"Limitation on Additional Indebtedness"; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after the
Issue Date and all Designation Amounts does not exceed an amount equal to the
sum of (a) the difference between (x) the Cumulative Available Cash Flow
determined at the time of such Restricted Payment and (y) Cumulative
Consolidated Interest Expense determined at the time of such Restricted Payment,
plus (b) the aggregate net cash proceeds received by the Issuer either (x) as
capital contributions to the Issuer after the Issue Date or (y) from the issue
and sale (other than to a Restricted Subsidiary of the Issuer) of its Capital
Stock (other than Disqualified Stock) on or after the Issue Date, plus (c) the
aggregate net proceeds received by the Issuer from the issuance (other than to a
Restricted Subsidiary of the Issuer) on or after the Issue Date of its Capital
Stock (other than Disqualified Stock) upon the conversion of, or in exchange
for, Indebtedness of the Issuer (other than the Convertible Notes), plus (d) in
the case of the disposition or repayment of any Investment constituting a
Restricted Payment made after the Issue Date (other than an Investment made
pursuant to clause (v), (vi), (vii) or (xii) of the following paragraph), an
amount equal to the lesser of the return of capital with respect to such
Investment and the cost of such Investment, in either case, less the cost of the
disposition of such Investment, plus (e) in the case of any Revocation with
respect to a Subsidiary of the Issuer that was made subject to a Designation
after the Issue Date, an amount equal to the lesser of the Designation Amount
with respect to such Subsidiary or the Fair Market Value of the Investment of
the Issuer and the Restricted Subsidiaries in such Subsidiary at the time of
Revocation. For purposes of the preceding clauses (b)(y) and (c), as applicable,
the value of the aggregate net proceeds received by the Issuer upon the issuance
of Capital Stock either upon the conversion of convertible Indebtedness or in
exchange for outstanding Indebtedness or upon the exercise of options, warrants
or rights will be the net cash proceeds received upon the issuance of such
Indebtedness, options, warrants or rights plus the incremental amount received,
if any, by the Issuer upon the conversion, exchange or exercise thereof.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit (i) the payment of any
dividend or other distribution within 60 days after the date of declaration
thereof if at such date of declaration such payment would be permitted by the
provisions of the Indenture; (ii) the purchase, redemption, retirement or other
acquisition of any shares of Capital Stock of the Issuer in exchange for, or out
of the net cash proceeds of the substantially concurrent issue and sale (other
than to a Restricted Subsidiary of the Issuer) of, shares of Capital Stock of
the Issuer (other than Disqualified Stock); provided that any such net cash
proceeds are excluded from clause (iii)(b) of the preceding paragraph; (iii) so
long as no Default shall have occurred and be continuing, the purchase,
redemption, retirement, defeasance or other acquisition of Subordinated
Indebtedness (other than the Convertible Notes and Deeply Subordinated
Shareholders Loans) made by exchange for, or out of the net cash proceeds of, a
substantially concurrent issue and sale (other than to a Restricted Subsidiary
of the Issuer) of (x) Capital Stock (other than Disqualified Stock) of the
Issuer or (y) other Subordinated Indebtedness to the extent that its stated
maturity for the payment of principal thereof is not prior to the 180th day
after the final stated maturity of the Notes; provided that any such net cash
proceeds are excluded from clause (iii)(b) of the preceding paragraph; (iv) the
purchase, redemption, retirement or other acquisition of the Convertible Notes
or Deeply Subordinated
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Shareholders Loans to the extent made by exchange for (upon conversion in
accordance with their terms or otherwise), or out of the net cash proceeds of, a
substantially concurrent issue and sale (other than to a Restricted Subsidiary
of the Issuer) of Capital Stock (other than Disqualified Stock) of the Issuer;
provided that any such net proceeds or net cash proceeds, as applicable, shall
be excluded from clause (iii)(b) of the preceding paragraph; (v) so long as no
Default shall have occurred and be continuing, Investments by the Issuer or any
Restricted Subsidiary in a person (including any Unrestricted Subsidiary) in an
amount, at any time outstanding, not to exceed $25.0 million less the amount of
Investments then outstanding under clause (xii) of this paragraph; (vi) the
extension by the Issuer and the Restricted Subsidiaries of trade credit to
Unrestricted Subsidiaries, represented by accounts receivable, extended on usual
and customary terms in the ordinary course of business; (vii) any renewal or
reclassification of any Investment in any Unrestricted Subsidiary outstanding on
the Issue Date or subsequently made in accordance with the provisions described
herein; (viii) purchases or redemptions of Capital Stock (including cash
settlements of stock options) held by employees, officers or directors upon or
following termination of their employment with the Issuer or one of its
Subsidiaries, subject to any put arrangements, provided that payments not
subject to such puts shall not exceed $1.0 million in any fiscal year in the
aggregate; (ix) so long as no Default shall have occurred and be continuing,
Investments in Unrestricted Subsidiaries to the extent promptly made with the
proceeds of a substantially concurrent (1) capital contribution to the Issuer or
(2) issue or sale of Capital Stock (other than Disqualified Stock) of the Issuer
(other than to a Restricted Subsidiary of the Issuer); provided that any such
proceeds are excluded from clause (iii)(b) of the preceding paragraph; (x) the
redemption or purchase of the Richey Warrant for an amount not to exceed $1.0
million; (xi) the payment of management fees to each of VPC and Pacific in an
amount not to exceed $350,000 (plus out-of-pocket travel expenses relating to
the management of the Issuer) in any fiscal year; (xii) Investments in an amount
at any time outstanding not to exceed $25.0 million less the amount of
Investments then outstanding under clause (v) of this paragraph so long as such
investment is in the form of senior loans having a maturity of not more than one
year made in any person ("target") engaged in a Cable/Telecommunications
Business with respect to which the Issuer or a Restricted Subsidiary has entered
into a definitive acquisition agreement for the acquisition by the Issuer or a
Restricted Subsidiary of target such that target will become a Restricted
Subsidiary as a result of such acquisition; provided any such acquisition is
consummated or such Investment is repaid within one year of the making of any
such Investment; and (xiii) the use of proceeds from the issue and sale of the
Notes to repay up to $10.0 million aggregate principal amount of Convertible
Notes as described under "Use of Proceeds."
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (v), (viii), (xii) and, to
the extent not deducted in arriving at Cumulative Available Cash Flow, (xi)
above shall be included as Restricted Payments.
Limitation on Liens Securing Certain Indebtedness. The Issuer will not, and
will not permit any Restricted Subsidiary to, create, incur, assume or suffer to
exist any Liens of any kind against or upon (i) any of property or assets of the
Issuer or any Restricted Subsidiary, whether now owned or hereafter acquired, or
any proceeds therefrom, which secure either (x) Subordinated Indebtedness unless
the Notes are secured by a Lien on such property, assets or proceeds that is
senior in priority to the Liens securing such Subordinated Indebtedness or (y)
Indebtedness of the Issuer that is not Subordinated Indebtedness, unless the
Notes are equally and ratably secured with the Liens securing such other
Indebtedness, except, in the case of this clause (y), Permitted Liens or (ii)
the Escrow Account.
Limitation on Certain Guarantees and Indebtedness of Restricted
Subsidiaries. The Indenture provides that the Issuer will not permit any
Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any
other manner become liable with respect to (i) any Subordinated Indebtedness or
(ii) any Indebtedness of the Issuer that is not Subordinated Indebtedness (other
than, in the case of this clause (ii), (x) Indebtedness under any Senior Bank
Facility to the extent constituting Permitted Indebtedness or (y) Indebtedness
under any Vendor Credit Facility to the extent constituting Permitted
Indebtedness), unless such Restricted Subsidiary simultaneously executes and
delivers a
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supplemental indenture providing for the guarantee of payment of the Notes by
such Restricted Subsidiary on a basis senior to any such Subordinated
Indebtedness or pari passu with any such other Indebtedness referred to in
clause (ii), as the case may be. Each guarantee created pursuant to such
provisions is referred to as a "Guarantee" and the issuer of each such
Guarantee, so long as the Guarantee remains outstanding, is referred to as a
"Guarantor."
Notwithstanding the foregoing, in the event of the unconditional release of
any Guarantor from its obligations in respect of the Indebtedness which gave
rise to the requirement that a Guarantee be given, such Guarantor shall be
released from all obligations under its Guarantee. In addition, upon any sale or
disposition (by merger or otherwise) of any Guarantor by the Issuer or a
Restricted Subsidiary of the Issuer to any person that is not an Affiliate of
the Issuer or any of its Restricted Subsidiaries which is otherwise in
compliance with the terms of the Indenture and as a result of which such
Guarantor ceases to be a Subsidiary of the Issuer, such Guarantor will be deemed
to be released from all obligations under its Guarantee; provided that each such
Guarantor is sold or disposed of in accordance with the "Disposition of Proceeds
of Asset Sales" covenant.
Change of Control. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), the Issuer shall make an
offer to purchase (the "Change of Control Offer"), on a business day (the
"Change of Control Payment Date") not later than 60 days following the Change of
Control Date, all Notes then outstanding at a purchase price equal to 101% of
the principal amount thereof on any Change of Control Payment Date, plus accrued
and unpaid interest, if any, to such Change of Control Payment Date. Notice of a
Change of Control Offer shall be given to holders of Notes, not less than 25
days nor more than 45 days before the Change of Control Payment Date. The Change
of Control Offer is required to remain open for at least 20 business days and
until the close of business on the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction which may be highly leveraged.
The occurrence of the events constituting a Change of Control under the
Indenture may result in an event of default in respect of other Indebtedness of
the Issuer and its subsidiaries and, consequently, the lenders or holders
thereof may have the right to require repayment of such Indebtedness in full or,
as permitted by the covenant "Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries," to prevent the distribution,
advance or transfer of funds by the Restricted Subsidiaries to the Issuer. See
"Risk Factors -- Holding Company Structure and Need to Access Subsidiaries' Cash
Flow." If a Change of Control Offer is made, there can be no assurance that the
Issuer will have available funds sufficient to pay for all of the Notes that
might be delivered by holders of Notes seeking to accept the Change of Control
Offer. The Issuer shall not be required to make a Change of Control Offer
following a Change of Control if a third party makes the Change of Control Offer
in the manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Issuer and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
If the Issuer is required to make a Change of Control Offer, the Issuer
will comply with all applicable tender offer laws and regulations, including, to
the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and
any other applicable securities laws and regulations.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Issuer will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
enter into or cause to become effective any consensual encumbrance or
restriction of any kind on the ability of any Restricted Subsidiary to (a) pay
dividends, in cash or otherwise, or make any other distributions on its Capital
Stock or any other interest or participation in, or measured by, its profits to
the extent owned by the Issuer or any Restricted Subsidiary, (b) pay any
Indebtedness owed to the Issuer or any Restricted Subsidiary, (c) make any
Investment in the
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Issuer or any Restricted Subsidiary or (d) transfer any of its properties or
assets to the Issuer or to any Restricted Subsidiary, except for (i) any
encumbrance or restriction existing on the Issue Date, (ii) any encumbrance or
restriction applicable to a Restricted Subsidiary at the time that it becomes a
Restricted Subsidiary that is not created in contemplation thereof, (iii) any
encumbrance or restriction existing under any agreement that refinances or
replaces an agreement containing a restriction permitted by clause (i) or (ii)
above; provided that the terms and conditions of any such encumbrance or
restriction are not materially less favorable to the holders of Notes than those
under or pursuant to the agreement being replaced or the agreement evidencing
the Indebtedness refinanced, (iv) any encumbrance or restriction imposed upon a
Restricted Subsidiary pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary and (v) any customary encumbrance or
restriction applicable to a Restricted Subsidiary that is contained in an
agreement or instrument governing or relating to Indebtedness contained in any
Senior Bank Facility or Vendor Credit Facility provided that the provisions of
such agreement permit the payment of interest and principal and mandatory
repurchases pursuant to the terms of the Indenture and the Notes and other
indebtedness that is solely an obligation of the Issuer, but provided further
that such agreement may nevertheless contain customary net worth, leverage,
invested capital and other financial covenants, customary covenants regarding
the merger of or sale of all or any substantial part of the assets of the Issuer
or any Restricted Subsidiary, customary restrictions on transactions with
affiliates, and customary subordination provisions governing indebtedness owed
to the Issuer or any Restricted Subsidiary.
Disposition of Proceeds of Asset Sales. The Issuer will not, and will not
permit any Restricted Subsidiary to, make any Asset Sale unless (a) the Issuer
or such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the Fair Market Value of the shares or
assets sold or otherwise disposed of and (b) at least 80% of such consideration
consists of cash or Cash Equivalents; provided that the following shall be
treated as cash for purposes of this covenant: (x) the amount of any liabilities
(other than Subordinated Indebtedness or Indebtedness of a Restricted Subsidiary
that would not constitute Restricted Subsidiary Indebtedness) that are assumed
by the transferee of any such assets pursuant to an agreement that
unconditionally releases the Issuer or such Restricted Subsidiary from further
liability ("assumed liabilities"), (y) the amount of any notes or other
obligations that within 30 days of receipt, are converted into cash (to the
extent of the cash received) and (z) the amount (valued based upon the reported
closing sale price or average of the closing bid and ask prices, as the case may
be, on the principal securities or trading market on the date of the Asset Sale)
of any Publicly Traded Stock received as consideration in such Asset Sale. The
Issuer or the applicable Restricted Subsidiary, as the case may be, may (i)
apply the Net Cash Proceeds from such Asset Sale within 365 days of the receipt
thereof to repay an amount of Indebtedness (other than Subordinated
Indebtedness) of the Issuer or any Guarantor in an amount not exceeding the
Other Senior Debt Pro Rata Share and elect to permanently reduce the amount of
the commitments thereunder by the amount of the Indebtedness so repaid, (ii)
apply the Net Cash Proceeds from such Asset Sale to repay any Restricted
Subsidiary Indebtedness and elect to permanently reduce the commitments by the
amount of the Indebtedness so repaid or (iii) apply such Net Cash Proceeds
within 365 days thereof, to an investment in properties and assets that will be
used in a Cable/Telecommunications Business (or in Capital Stock and other
securities of any person that will become a Restricted Subsidiary as a result of
such investment to the extent such person owns properties and assets that will
be used in a Cable/Telecommunications Business) of the Issuer or any Restricted
Subsidiary ("Replacement Assets"). Any Net Cash Proceeds from any Asset Sale
that are neither used to repay, and permanently reduce the commitments under,
any Restricted Subsidiary Indebtedness as set forth in clause (ii) of the
preceding sentence or invested in Replacement Assets within the 365-day period
as set forth in clause (iii) shall constitute "Excess Proceeds." Any Excess
Proceeds not used as set forth in clause (i) of the second preceding sentence
shall constitute "Offer Excess Proceeds" subject to disposition as provided
below.
When the aggregate amount of Offer Excess Proceeds equals or exceeds $10.0
million, the Issuer shall make an offer to purchase (an "Asset Sale Offer"),
from all holders of the Notes, that
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aggregate principal amount of Notes as can be purchased by application of such
Offer Excess Proceeds at a price in cash equal to 100% of the principal amount
thereof on any purchase date, plus accrued and unpaid interest, if any, to any
purchase date. Each Asset Sale Offer shall remain open for a period of 20
business days or such longer period as may be required by law. To the extent
that the principal amount of Notes tendered pursuant to an Asset Sale Offer is
less than the Offer Excess Proceeds, the Issuer or any Restricted Subsidiary may
use such deficiency for general corporate purposes. If the principal amount of
Notes validly tendered and not withdrawn by holders thereof exceeds the amount
of Notes which can be purchased with the Offer Excess Proceeds, Notes to be
purchased will be selected on a pro rata basis. Upon completion of such Asset
Sale Offer, the amount of Offer Excess Proceeds shall be reset to zero.
Notwithstanding the two immediately preceding paragraphs, the Issuer and
the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets, cash or Cash
Equivalents (including obligations deemed to be cash under this covenant) and
(ii) such Asset Sale is for Fair Market Value; provided that any consideration
constituting (or deemed to constitute) cash or Cash Equivalents received by the
Issuer or any of the Restricted Subsidiaries in connection with any Asset Sale
permitted to be consummated under this paragraph shall constitute Net Cash
Proceeds subject to the provisions of the two preceding paragraphs.
If the Issuer is required to make an Asset Sale Offer, the Issuer will
comply with all applicable tender offer rules, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable securities laws and regulations.
Limitation on Issuances and Sales of Preferred Stock by Restricted
Subsidiaries. The Indenture provides that the Issuer (i) will not permit any
Restricted Subsidiary to issue any Preferred Stock (other than to the Issuer or
a Restricted Subsidiary) and (ii) will not permit any person (other than the
Issuer or a Restricted Subsidiary) to own any Preferred Stock of any Restricted
Subsidiary.
Limitation on Transactions with Affiliates. The Indenture provides that the
Issuer will not, and will not permit, cause or suffer any Restricted Subsidiary
to, conduct any business or enter into any transaction (or series of related
transactions which are similar or part of a common plan) with or for the benefit
of any of their respective Affiliates or any beneficial holder of 10% or more of
the Common Stock of the Issuer or any officer or director of the Issuer or any
Restricted Subsidiary (each an "Affiliate Transaction"), unless the terms of the
Affiliate Transaction are set forth in writing, and are fair and reasonable to
the Issuer or such Restricted Subsidiary, as the case may be. Each Affiliate
Transaction (and each series of related Affiliate Transactions which are similar
or part of a common plan) involving aggregate payments or other Fair Market
Value in excess of $500,000 shall be approved by a majority of the Board, such
approval to be evidenced by a Board Resolution stating that the Board has
determined that such transaction or transactions comply with the foregoing
provisions. In addition to the foregoing, each Affiliate Transaction involving
aggregate consideration of $5.0 million or more shall be approved by a majority
of the Disinterested Directors; provided that, in lieu of such approval by the
Disinterested Directors, the Issuer may obtain a written opinion from an
Independent Financial Advisor stating that the terms of such Affiliate
Transaction to the Issuer or the Restricted Subsidiary, as the case may be, are
fair from a financial point of view. For purposes of this covenant, any
Affiliate Transaction approved by a majority of the Disinterested Directors or
as to which a written opinion has been obtained from an Independent Financial
Advisor, on the basis set forth in the preceding sentence, shall be deemed to be
on terms that are fair and reasonable to the Issuer and the Restricted
Subsidiaries, as the case may be, and, therefore, shall be permitted under this
covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit of,
the Issuer and/or any of the Restricted Subsidiaries, (ii) transactions pursuant
to agreements and arrangements existing on the Issue Date, including payments of
management fees to each of VPC and Pacific in an aggregate amount not to exceed
$350,000 (plus travel expenses incurred in providing management services) in any
fiscal year
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of the Issuer, (iii) the making of Deeply Subordinated Shareholders Loans
pursuant to and in compliance with the covenant "Limitation on Additional
Indebtedness," (iv) dividends paid by the Issuer pursuant to and in compliance
with the covenant "Limitation on Restricted Payments," (v) customary directors'
fees, indemnification and similar arrangements, consulting fees, employee
salaries, loans and bonuses or legal fees and (vi) transactions contemplated by
the License Co. Documents.
Notwithstanding any provision of the Indenture to the contrary, the Issuer
will not, and will not permit any Restricted Subsidiary to, amend, modify or
waive any provision of the License Co. Documents in a manner that is adverse,
from the perspective of creditors of the Issuer and the Restricted Subsidiaries,
in any material respect.
Reports. Whether or not the Issuer has a class of securities registered
under the Exchange Act, the Issuer shall furnish without cost to each holder of
Notes and file with the Trustee and (following the effective date of the
Registered Exchange Offer or Shelf Registration Statement, as applicable) file
with the SEC (i) within 135 days after the end of each fiscal year of the
Issuer, the information required by Form 10-K (or any successor form thereto)
under the Securities Act of 1933, as amended, with respect to such period, (ii)
within 60 days after the end of each of the first three fiscal quarters of each
fiscal year of the Issuer, the information required by Form 10-Q (or any
successor form thereto) under the Securities Act with respect to such period and
(iii) within 15 days after it would be required to be filed with the SEC, the
information required by Form 8-K (or any successor form thereto).
Limitation on Designations of Unrestricted Subsidiaries. The Indenture
provides that the Issuer will not designate any Subsidiary of the Issuer (other
than a newly created Subsidiary in which no Investment has previously been made)
as an "Unrestricted Subsidiary" under the Indenture (a "Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) immediately after giving effect to such Designation, the Issuer would
be able to incur $1.00 of Indebtedness under the proviso of the covenant
"Limitation on Additional Indebtedness"; and
(c) the Issuer would not be prohibited under the Indenture from making an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the Fair Market
Value of the net Investment of the Issuer or any other Restricted Subsidiary
in such Restricted Subsidiary on such date.
In the event of any such Designation, the Issuer shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount. The Indenture further provides that neither the Issuer nor
any Restricted Subsidiary shall at any time (x) provide credit support for, or a
guarantee of, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness); provided
that the Issuer may pledge Capital Stock or Indebtedness of any Unrestricted
Subsidiary on a nonrecourse basis such that the pledgee has no claim whatsoever
against the Issuer other than to obtain such pledged property, (y) be directly
or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z)
be directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except in the case of
clause (x) or (y) to the extent permitted under the covenants "Limitation on
Restricted Payments", and "Limitation on Transactions with Affiliates."
The Indenture further provides that the Issuer will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation")
unless:
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(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time, have
been permitted to be incurred for all purposes of the Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
Consolidation, Merger, Sale of Assets, Etc.
The Indenture provides that the Issuer will not consolidate or combine with
or merge with or into or, directly or indirectly, sell, assign, convey, lease,
transfer or otherwise dispose of all or substantially all of its properties and
assets to any person or persons in a single transaction or through a series of
transactions, or permit any of the Restricted Subsidiaries to enter into any
such transaction or series of transactions if it would result in the disposition
of all or substantially all of the properties or assets of the Issuer and the
Restricted Subsidiaries on a consolidated basis, unless (a) the Issuer shall be
the continuing person or, if the Issuer is not the continuing person, the
resulting, surviving or transferee person (the "surviving entity") shall be a
company organized and existing under the laws of the United States or any State
or territory thereof; (b) the surviving entity shall expressly assume all of the
obligations of the Issuer under the Notes and the Indenture, and shall, if
required by law to effectuate such assumption, execute a supplemental indenture
to effect such assumption which supplemental indenture shall be delivered to the
Trustee and shall be in form and substance reasonably satisfactory to the
Trustee; (c) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), the Issuer or the
surviving entity (assuming such surviving entity's assumption of the Issuer's
obligations under the Notes and the Indenture), as the case may be, would be
able to incur $1.00 of Indebtedness under the proviso of the covenant
"Limitation on Additional Indebtedness"; provided that, in addition to the
foregoing, (1) if immediately prior to such transaction or series of
transactions the ratio of Total Consolidated Indebtedness of the Issuer to
Annualized Pro Forma Consolidated Operating Cash Flow of the Issuer (based upon
the two most recent quarters for which consolidated financial statements are
available immediately preceding the date of such transaction or series of
transactions) (the "Pre-Transaction Ratio") equals or exceeds 6.0:1.0, then,
after giving pro forma effect to such transaction or series of transactions, the
ratio of Total Consolidated Indebtedness of the Issuer or the surviving entity
on a pro forma basis to Annualized Pro Forma Consolidated Operating Cash Flow of
the Issuer or the surviving entity (based upon the two most recent quarters for
which consolidated financial statements are available immediately preceding the
date of such transaction or series of transactions) (the "Post-Transaction
Ratio") must not be any higher than the Pre-Transaction Ratio or (2) if the
Pre-Transaction Ratio is less than 6.0:1.0, then (x) the Post-Transaction Ratio
must be less than 6.0:1.0 and (y) the Annualized Pro Forma Consolidated Coverage
after giving pro forma effect to such transaction or series of transactions must
be greater than or equal to 1.75:1.0; (d) immediately after giving effect to
such transaction or series of transactions on a pro forma basis (including,
without limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions), no
Default shall have occurred and be continuing; and (e) the Issuer or the
surviving entity, as the case may be, shall have delivered to the Trustee an
Officers' Certificate stating that such transaction or series of transactions,
and, if a supplemental indenture is required in connection with such transaction
or series of transactions to effectuate such assumption, such supplemental
indenture complies with this covenant and that all conditions precedent in the
Indenture relating to the transaction or series of transactions have been
satisfied.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Issuer in accordance with the foregoing in which the
Issuer or the Restricted Subsidiary, as the case may be, is not the continuing
corporation, the successor corporation formed by such a consolidation or into
which the Issuer or such Restricted Subsidiary is merged or to which such
transfer is made,
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will succeed to, and be substituted for, and may exercise every right and power
of, the Issuer or such Restricted Subsidiary, as the case may be, under the
Indenture with the same effect as if such successor corporation had been named
as the Issuer or such Restricted Subsidiary therein; and thereafter, except in
the case of (i) a lease or (ii) any sale, assignment, conveyance, transfer,
lease or other disposition to a Restricted Subsidiary of the Issuer, the Issuer
shall be discharged from all obligations and covenants under the Indenture and
the Notes.
The Indenture provides that for all purposes of the Indenture and the Notes
(including the provision of this covenant and the covenants "Limitation on
Additional Indebtedness," "Limitation on Restricted Payments" and "Limitation on
Liens"), Subsidiaries of any Surviving Entity will, upon such transaction or
series of related transactions, become Restricted Subsidiaries or Unrestricted
Subsidiaries as provided pursuant to the covenant "Limitation on Designations of
Unrestricted Subsidiaries" and all Indebtedness, and all Liens on property or
assets, of the Issuer and the Restricted Subsidiaries in existence immediately
prior to such transaction or series of related transactions will be deemed to
have been incurred upon such transaction or series of related transactions.
Events of Default
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest on the Notes when it becomes due
and payable and continuance of such default for a period of 30 days or more
(provided such 30 day grace period shall be inapplicable for the first six
interest payments due on the Notes); or
(ii) default in the payment of the principal of, or premium, if any, on
the Notes when due; or
(iii) default in the performance, or breach, of any covenant described
under " -- Certain Covenants -- Change of Control," " -- Disposition of
Proceeds of Asset Sales" or " -- Consolidation, Merger, Sale of Assets,
Etc."; or
(iv) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i), (ii) or (iii) above),
and continuance of such default or breach for a period of 30 days or more
after written notice to the Issuer by the Trustee or to the Issuer and the
Trustee by the holders of at least 25% in aggregate principal amount of the
outstanding Notes (in each case, when such notice is deemed received in
accordance with the Indenture); or
(v) failure to perform any term, covenant, condition or provision of one
or more classes or issues of Indebtedness in an aggregate principal amount of
$5.0 million or more under which the Issuer or a Material Restricted
Subsidiary is obligated, and either (a) such Indebtedness is already due and
payable in full or (b) such failure results in the acceleration of the
maturity of such Indebtedness; provided that, in the case of a termination or
expiration of an Interest Rate Obligation requiring that the monetary
liability thereunder be paid, no Event of Default shall occur if such payment
is made within 30 days after such payment is due; or
(vi) any holder of at least $5.0 million in aggregate principal amount of
Indebtedness of the Issuer or any Material Restricted Subsidiary shall
commence judicial proceedings or take any other action to foreclose upon, or
dispose of assets of the Issuer or any Material Restricted Subsidiary having
an aggregate Fair Market Value, individually or in the aggregate, of $5.0
million or more or shall have exercised any right under applicable law or
applicable security documents to take ownership of any such assets in lieu of
foreclosure provided that, in any such case, the Issuer or any Material
Restricted Subsidiary shall not have obtained, prior to any such foreclosure
or disposition of assets, a stay of all such actions that remains in effect;
or
(vii) one or more judgments, orders or decrees for the payment of money
of $5.0 million or more, either individually or in the aggregate, shall be
entered into against the Issuer or any
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Material Restricted Subsidiary or any of their respective properties and
shall not be discharged and there shall have been a period of 60 days or more
during which a stay of enforcement of such judgment or order, by reason of
pending appeal or otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, dissolution (in the case of the
Issuer or License Co. only), insolvency, reorganization, administration or
similar proceedings with respect to the Issuer or any Material Restricted
Subsidiary or License Co. shall have occurred; or
(ix) failure by License Co. or its shareholders to perform any material
term, covenant, condition or provision of the License Co. Documents; or
(x) the Issuer shall assert or acknowledge in writing that the Escrow
Agreement is invalid or unenforceable.
If an Event of Default (other than an Event of Default specified in clause
(viii) above with respect to the Issuer) occurs and is continuing, then the
Trustee or the holders of at least 25% in principal amount of the outstanding
Notes may, by written notice, and the Trustee upon the request of the holders of
not less than 25% in principal amount of the outstanding Notes shall, declare
the principal amount of, premium (if any) on, and any accrued and unpaid
interest on, all outstanding Notes to be immediately due and payable and upon
any such declaration such amounts shall become immediately due and payable. If
an Event of Default specified in clause (viii) above with respect to the Issuer
occurs and is continuing, then the principal amount of, premium (if any) on, and
any accrued and unpaid interest on, all outstanding Notes shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding Notes may, by notice to the Trustee, rescind
such declaration of acceleration if all existing Events of Default, other than
nonpayment of the principal of, premium (if any) on, and any accrued and unpaid
interest on, the Notes that has become due solely as a result of such
acceleration, have been cured or waived and if the rescission of acceleration
would not conflict with any judgment or decree. The holders of a majority in
principal amount of the outstanding Notes also have the right to waive past
defaults under the Indenture, except a default in the payment of principal of,
premium (if any) on, or any interest on, any outstanding Note, or in respect of
a covenant or a provision that cannot be modified or amended without the consent
of all holders of Notes.
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in principal amount of the outstanding Notes have made written
request, and offered reasonable security or indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within 60 days after receipt of such notice and the Trustee has not
within such 60-day period received directions inconsistent with such written
request by holders of a majority in principal amount of the outstanding Notes.
Such limitations do not apply, however, to a suit instituted by a holder of a
Note for the enforcement of the payment of the principal of, preimum (if any)
on, or any accrued and unpaid interest on, such Note on or after the respective
due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default shall occur and be continuing, the Trustee is
not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount of the outstanding Notes have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
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The Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
provided that the Trustee shall be protected in withholding such notice if it
determines in good faith that the withholding of such notice is in the interest
of such holders.
The Issuer is required to furnish to the Trustee annually a statement as to
its compliance with all conditions and covenants under the Indenture.
Defeasance
The Issuer may at any time terminate all of its obligations with respect to
the Notes ("defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes as required by the Indenture and to maintain agencies in respect of
Notes. The Issuer may at any time terminate its obligations under certain
covenants set forth in the Indenture, some of which are described under " --
Certain Covenants" above, and any omission to comply with such obligations shall
not constitute a Default with respect to the Notes ("covenant defeasance"). To
exercise either defeasance or covenant defeasance, the Issuer must irrevocably
deposit in trust, for the benefit of the holders of the Notes, with the Trustee
money (in United States dollars) or U.S. government obligations (denominated in
United States dollars), or a combination thereof, in such amounts as will be
sufficient to pay the principal of, and premium, if any, and interest on the
Notes to redemption or maturity and comply with certain other conditions,
including the delivery of a legal opinion as to certain tax matters.
Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Notes)
as to all outstanding Notes when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes that have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Issuer and thereafter
repaid to the Issuer or discharged from such trust) have been delivered to the
Trustee for cancellation; or (b)(i) all such Notes not theretofore delivered to
the Trustee for cancellation have become due and payable and the Issuer has
irrevocably deposited or caused to be deposited with the Trustee as trust funds
in trust for the purpose an amount of money sufficient to pay and discharge the
entire indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal amount, premium, if any, and accrued interest to the
date of such deposit; (ii) the Issuer has paid all sums payable by it under the
Indenture; and (iii) the Issuer has delivered irrevocable instructions to the
Trustee to apply the deposited money toward the payment of the Notes at maturity
or on the redemption date, as the case may be. In addition, the Issuer must
deliver an Officers' Certificate and an Opinion of Counsel stating that all
conditions precedent to satisfaction and discharge have been complied with.
Amendment and Waivers
From time to time, the Issuer, when authorized by resolutions of the Board,
and the Trustee, without the consent of the holders of the Notes, may amend,
waive or supplement the Indenture or the Notes for certain specified purposes,
including, among other things, curing ambiguities, defects or inconsistencies,
maintaining the qualification of the Indenture under the Trust Indenture Act or
making any change that does not adversely affect the rights of any holder. Other
amendments and modifications of the Indenture and the Notes may be made by the
Issuer and the Trustee by supplemental indenture with the consent of the holders
of not less than a majority of the aggregate principal amount of the outstanding
Notes; provided that no such modification or amendment may, without the consent
of the holder of each outstanding Note affected thereby, (i) reduce the
principal amount of, extend the fixed maturity of, or alter the redemption
provisions of, the Notes, (ii) change the currency in which any Notes or any
premium or the accrued interest thereon is payable, (iii)
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reduce the percentage of the aggregate principal amount outstanding of Notes
which must consent to an amendment, supplement or waiver or consent to take any
action under the Indenture or the Notes, (iv) impair the right to institute suit
for the enforcement of any payment on or with respect to the Notes, (v) waive a
default in payment with respect to the Notes, (vi) reduce the rate or extend the
time for payment of interest on the Notes, (vii) following the occurrence of a
Change of Control or an Asset Sale, alter the Issuer's obligation to purchase
the Notes in accordance with the Indenture or waive any default in the
performance thereof, (viii) affect the ranking of the Notes in a manner adverse
to the holder of the Notes, (ix) release any Guarantee except in compliance with
the terms of the Indenture or (x) release any Liens created by the Escrow
Agreement except in strict accordance with the terms of the Escrow Agreement.
Regarding the Trustee and Escrow Agent
U.S. Trust Company of Texas, N.A. is serving as Trustee under the Indenture
and Escrow Agent under the Escrow Agreement.
Governing Law
The Indenture and the Escrow Agreement provide that the Indenture and the
Notes and the Escrow Agreement, respectively, will be governed by and construed
in accordance with laws of the State of New York without giving effect to
principles of conflicts of law.
Certain Definitions
Set forth below is a summary of certain defined terms used in the Indenture
or the Escrow Agreement. Reference is made to the Indenture for the full
definition of all such terms, as well as any other capitalized terms used herein
for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a person existing at the time
such person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by such person and not incurred in connection with, or in
anticipation of, such person becoming a Restricted Subsidiary or such Asset
Acquisition.
"Affiliate" of any specified person means any other person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
"Annualized Pro Forma Consolidated Coverage" means, as of any date of
determination, the ratio of (1) Annualized Pro Forma Operating Cash Flow to (2)
Consolidated Interest Expense for the four quarter period immediately preceding
the date of determination for which financial statements are available;
provided, that (1) if the Issuer or any of the Restricted Subsidiaries has
incurred any Indebtedness (whether through an Asset Acquisition, Asset Sale or
otherwise) since the beginning of such period and through the date of
determination that remains outstanding or if the transaction or series of
transactions giving rise to the need to calculate such ratio involves an
incurrence of Indebtedness, Consolidated Interest Expense for such period shall
be calculated after giving effect on a pro forma basis to (A) such Indebtedness
as if such Indebtedness had been incurred on the first day of such period
(provided that if such Indebtedness is incurred under a revolving credit
facility (or similar arrangement or under any predecessor revolving credit or
similar arrangement) only that portion of such Indebtedness that constitutes the
one year projected average balance of such Indebtedness (as determined in good
faith by senior management of the Issuer shall be deemed outstanding for
purposes of this calculation), and (B) the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtednes as if such discharge had occurred on the first day of such
period and (2) if since the beginning of such
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period any Indebtedness of the Issuer or any of the Restricted Subsidiaries has
been repaid, repurchased, defeased or otherwise discharged (whether through an
Asset Acquisition, Asset Sale or otherwise) (other than Indebtedness under a
revolving credit or similar arrangement unless such revolving credit
Indebtedness has been permanently repaid and has not been replaced),
Consolidated Interest Expense for such period shall be calculated after giving
pro forma effect thereto as if such Indebtedness had been repaid, repurchased,
defeased or otherwise discharged on the first day of such period.
"Annualized Pro Forma Consolidated Operating Cash Flow" means Consolidated
Operating Cash Flow for the latest two fiscal quarters for which consolidated
financial statements of the Issuer are available multiplied by two. For purposes
of calculating "Consolidated Operating Cash Flow" for any two fiscal quarter
period for purposes of this definition, (i) any Subsidiary of the Issuer that is
a Restricted Subsidiary on the date of the transaction (the "Transaction Date")
giving rise to the need to calculate "Annualized Pro Forma Consolidated
Operating Cash Flow" shall be deemed to have been a Restricted Subsidiary at all
times during such two fiscal quarter period and (ii) any Subsidiary of the
Issuer that is not a Restricted Subsidiary on the Transaction Date shall be
deemed not to have been a Restricted Subsidiary at any time during such two
fiscal quarter period. In addition to and without limitation of the foregoing,
for purposes of this definition, "Consolidated Operating Cash Flow" shall be
calculated after giving effect on a pro forma basis for the applicable two
fiscal quarter period to, without duplication, any Asset Sales or Asset
Acquisitions (including, without limitation, any Asset Acquisition giving rise
to the need to make such calculation as a result of the Issuer or one of the
Restricted Subsidiaries (including any person who becomes a Restricted
Subsidiary as a result of the Asset Acquisition) incurring, assuming or
otherwise being liable for Acquired Indebtedness) occurring during the period
commencing on the first day of such two fiscal quarter period to and including
the Transaction Date (the "Reference Period"), as if such Asset Sale or Asset
Acquisition occurred on the first day of the Reference Period.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Issuer or any
Restricted Subsidiary in any other person, or any acquisition or purchase of
Capital Stock of any other person by the Issuer or any Restricted Subsidiary, in
either case pursuant to which such person shall become a Restricted Subsidiary
or shall be merged with or into the Issuer or any Restricted Subsidiary or (ii)
any acquisition by the Issuer or any Restricted Subsidiary of the assets of any
person which constitute substantially all of an operating unit or line of
business of such person or which is otherwise outside of the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) to any person other than
the Issuer or a Restricted Subsidiary, in one transaction or a series of related
transactions, of (i) any Capital Stock of any Restricted Subsidiary, (ii) any
material license or other authorization of the Issuer or any Restricted
Subsidiary pertaining to a Cable/Telecommunications Business (other than the
disposition to License Co. of the licenses and authorizations on terms identical
to or at least as favorable to the Issuer and the Restricted Subsidiaries as
those set forth in the License Co. Documents (provided such new documents shall
also constitute License Co. Documents for all purposes hereunder) so long as the
Issuer or a Restricted Subsidiary has the ability (pursuant to contract or
otherwise) to fully exploit such license or authorization in a
Cable/Telecommunications Business), (iii) any assets of the Issuer or any
Restricted Subsidiary which constitute substantially all of an operating unit or
line of business of the Issuer and the Restricted Subsidiaries or (iv) any other
property or asset of the Issuer or any Restricted Subsidiary outside of the
ordinary course of business. For the purposes of this definition, the term
"Asset Sale" shall not include (i) any disposition of properties and assets of
the Issuer that is governed under " -- Consolidation, Merger, Sale of Assets,
Etc." above, (ii) sales of property or equipment that have become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Issuer or any Restricted Subsidiary, as the case may be, and
(iii) for purposes of the covenant "Disposition of Proceeds of Asset Sales," any
sale, conveyance, transfer, lease or other disposition of any property or asset,
whether in one transaction or a series of related transactions occurring within
one year, either (x) involving assets with a Fair Market Value not in excess of
$250,000 or (y) which constitutes the incurrence of a Capitalized Lease
Obligation.
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"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments;
provided that, in the case of any Capitalized Lease Obligation, all calculations
hereunder shall give effect to any applicable options to renew in favor of the
Issuer or any Restricted Subsidiary.
"Board" means the Board of Directors of the Issuer.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Issuer to have been duly adopted by the Board
and to be in full force and effect on the date of such certification, and
delivered to the Trustee.
"Cable Subscriber" means, as of any determination date, any individual
customer or bulk or commercial account (computed on an equivalent customer
basis) to whom the Issuer or any Restricted Subsidiary provides subscription
basic video programming services as well as accounts to whom the Issuer or any
Restricted Subsidiary provides other video services for a fee (computed on an
equivalent customer basis based on the basic programming service subscriber
fee), in each case as of such date.
"Cable/Telecommunications Business" means any business operating a cable
and/or telephone and/or telecommunications system (delivered by any means,
including, without limitation, cable, microwave, satellite or radio frequency)
in the United States or otherwise delivering or expected to deliver services
over the networks or systems of the Issuer and the Restricted Subsidiaries
(including, without limitation, any business conducted by the Issuer or any
Restricted Subsidiary on the Issue Date) and, for all purposes of the Indenture
other than clauses (c) and (d) of the definition "Permitted Indebtedness," any
business reasonably related to the foregoing (including, without limitation, any
television programming, production and/or licensing business and any programming
guide or telephone directory business). Any company holding a license or
licenses to conduct any of the foregoing businesses that is not conducting any
material business other than a Cable/Telecommunications Business shall also be
considered a Cable/Telecommunications Business. A good faith determination by a
majority of the Board as to whether a business meets the requirements of this
definition shall be conclusive, absent manifest error.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of Indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and, for the purpose of the Indenture, the amount of such obligation
at any date shall be the capitalized amount thereof at such date, determined in
accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity
of 365 days or less issued or directly and fully guaranteed or insured by the
United States or any agency or instrumentality thereof (provided that the full
faith and credit of the United States is pledged in support thereof or such
Indebtedness constitutes a general obligation of such country); (ii) deposits,
certificates of deposit or acceptances with a maturity of 365 days or less of
any financial institution that is a member of the Federal Reserve System, in
each case having combined capital and surplus and undivided profits (or any
similar capital concept) of not less than $500.0 million and whose senior
unsecured debt is rated at least "A-1" by S&P or "P-1" by Moody's; (iii)
commercial paper with a maturity of 365 days or less issued by a corporation
(other than an Affiliate of the Issuer) organized under the laws of the United
States or any State thereof and rated at least "A-1" by S&P or "P-1" by
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Moody's; and (iv) repurchase agreements and reverse repurchase agreements
relating to marketable direct obligations issued or unconditionally guaranteed
by the United States Government or issued by any agency thereof and backed by
the full faith and credit of the United States Government maturing within 365
days from the date of acquisition.
"Change of Control" is defined to mean the occurrence of any of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), excluding Permitted Holders, is
or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act, except that a person shall be deemed to have "beneficial
ownership" of all securities that such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of more than 50% of the total Voting Stock of the
Issuer; or (b) the Issuer consolidates with, or merges with or into, another
person or sells, assigns, conveys, transfers, leases or otherwise disposes of
all or substantially all of its assets to any person, or any person consolidates
with, or merges with or into, the Issuer, in any such event pursuant to a
transaction in which the outstanding Voting Stock of the Issuer is converted
into or exchanged for cash, securities or other property, other than any such
transaction where (i) the outstanding Voting Stock of the Issuer is converted
into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the
surviving or transferee corporation and/or (2) cash, securities and other
property in an amount which could be paid by the Issuer as a Restricted Payment
under the Indenture and (ii) immediately after such transaction no "person" or
"group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange
Act), excluding the Permitted Holders, is the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 50% of the total
Voting Stock of the surviving or transferee corporation; or (c) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the stockholders of the Issuer was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason (other than by
action of the Permitted Holders) to constitute a majority of the Board then in
office; provided that (i) to the extent that either (x) one or more regulatory
approvals are required for the consummation of one or more of the events or
circumstances described in clauses (a) through (c) above to become effective
under applicable law or (y) in the good faith judgment of the Board, one or more
regulatory approvals are desirable prior to making one or more of the events or
circumstances described in clauses (a) through (c) above to become effective
under applicable law (provided, in the case of this clause (y), such approvals
are sought on a reasonably prompt basis), then such events or circumstances
shall be deemed to have occurred at the time such approvals have been obtained
and become effective under applicable law, and (ii) any event or circumstance
which would constitute a Change of Control solely by reason of the acquisition
of "beneficial ownership" of securities of GVL shall not constitute a Change of
Control with respect to the Issuer, unless it would result in a mandatory
prepayment (by tender offer or otherwise) of Indebtedness, or an event of
default under Indebtedness, of GVL or any of its Subsidiaries (other than the
Issuer and its Subsidiaries). The good faith determination by the Board, based
upon advice of outside counsel, of the beneficial ownership of securities of the
Issuer within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall
be conclusive, absent contrary controlling judicial precedent or contrary
written interpretation published by the SEC.
"Common Stock" means, with respect to any person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such person's common stock whether
outstanding at the Issue Date, and includes, without limitation, all series and
classes of such common stock.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for United States corporation, local, foreign and other income taxes
of the Issuer and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
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"Consolidated Interest Expense" means without duplication, the sum of (i)
the interest expense of the Issuer and the Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP, including,
without limitation, (a) any amortization of debt discount, (b) the net cost
under Interest Rate Obligations (including any amortization of discounts), (c)
the interest portion of any deferred payment obligation, (d) all commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing and (e) all accrued interest, (ii) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Issuer and the Restricted Subsidiaries during such period
as determined on a consolidated basis in accordance with GAAP and (iii) the
amount of dividends in respect of Disqualified Stock paid by the Issuer and the
Restricted Subsidiaries during such period. Notwithstanding the foregoing, in no
event shall Consolidated Interest Expense include interest expense arising under
the Convertible Notes or any Deeply Subordinated Shareholders' Loans to the
extent incurred prior to the Termination Date.
"Consolidated Net Income" means, with respect to any period, the
consolidated net income of the Issuer and the Restricted Subsidiaries for such
period, adjusted, to the extent included in calculating such consolidated net
income, by excluding, without duplication, (i) all extraordinary, unusual or
nonrecurring gains or losses of such person (net of fees and expenses relating
to the transaction giving rise thereto) for such period, (ii) income of the
Issuer and the Restricted Subsidiaries derived from or in respect of all
Investments in persons other than Subsidiaries of the Issuer or any Restricted
Subsidiary, (iii) the portion of net income (or loss) of such person allocable
to minority interests in unconsolidated persons for such period, except to the
extent actually received by the Issuer or any Restricted Subsidiary, (iv) net
income (or loss) of any other person combined with such person on a "pooling of
interests" basis attributable to any period prior to the date of combination,
(v) any gain or loss, net of taxes, realized by such person upon the termination
of any employee pension benefit plan during such period, (vi) gains or losses in
respect of any Asset Sales (net of fees and expenses relating to the transaction
giving rise thereto) during such period and (vii) except in the case of any
restriction or encumbrance permitted under clause (v) of the covenant
"Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries," the net income of any Restricted Subsidiary for such period to
the extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Net Income of the Issuer and the Restricted Subsidiaries for such
period increased, to the extent deducted in arriving at Consolidated Net Income
for such period, by the sum of (i) the Consolidated Income Tax Expense of the
Issuer and the Restricted Subsidiaries accrued according to GAAP for such period
(other than taxes attributable to extraordinary gains or losses and gains and
losses from Asset Sales); (ii) Consolidated Interest Expense for such period;
(iii) depreciation of the Issuer and the Restricted Subsidiaries for such
period; (iv) amortization of the Issuer and the Restricted Subsidiaries for such
period, including, without limitation, amortization of capitalized debt issuance
costs for such period, all determined on a consolidated basis in accordance with
GAAP; and (v) for purposes of the covenant "Limitation on Additional
Indebtedness" only, other non-cash charges decreasing Consolidated Net Income.
"consolidation" means, with respect to the Issuer, the consolidation of the
accounts of the Restricted Subsidiaries with those of the Issuer, all in
accordance with GAAP; provided that "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the accounts
of the Issuer. The term "consolidated" has a correlative meaning to the
foregoing.
"Convertible Notes" means all 15% convertible subordinated promissory notes
of the Issuer due six months after the final maturity of the Notes that are
outstanding on the Issue Date (after giving effect to the application of
proceeds of the Offering).
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"Cumulative Available Cash Flow" means, as at any date of determination,
the positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on the Issue Date and ending on the last day of the most
recent fiscal quarter immediately preceding the date of determination for which
consolidated financial information of the Issuer is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
amount by which cumulative Consolidated Operating Cash Flow is less than zero.
"Cumulative Consolidated Interest Expense" means, at any date on which a
Restricted Payment is proposed to be made, the sum of the Quarterly Consolidated
Interest Expense Amounts for each quarter after the Issue Date (with the first
quarter commencing on the Issue Date and ending on May 31, 1997) through the
most recent quarter immediately preceding such Restricted Payment for which
consolidated financial statements of the Issuer are available. The "Quarterly
Consolidated Interest Expense Amount" for any quarter (the "Subject Quarter")
will be the product of (a) Consolidated Interest Expense for the Subject Quarter
times (b) the Applicable Percentage for the Subject Quarter, where the
"Applicable Percentage" for the Subject Quarter will be (1) 150% of the
Consolidated Interest Expense of the Issuer for the Subject Quarter if Total
Consolidated Indebtedness for each day of the Subject Quarter is less than 6.0
times the Annualized Pro Forma Consolidated Operating Cash Flow of the Issuer
(based upon the two most recent quarters for which consolidated financial
statements of the Issuer are available immediately preceding the Subject
Quarter) or (2) 200% of the Consolidated Interest Expense of the Issuer for the
Subject Quarter if Total Consolidated Indebtedness for any day of the Subject
Quarter is equal to or greater than 6.0 times the Annualized Pro Forma
Consolidated Operating Cash Flow of the Issuer (based upon the two most recent
quarters for which consolidated financial statements of the Issuer are available
immediately preceding the Subject Quarter).
"Deeply Subordinated Shareholders Loans" means any Indebtedness of the
Issuer for money borrowed from either (x) a Permitted Holder or (y) another
person whose obligations have been guaranteed by a Permitted Holder, provided
such Indebtedness of the Issuer (i) has been expressly subordinated in right of
payment and postponed as to all payments of interest and principal to the Notes,
(ii) provides for no payments of interest or principal prior to the earlier of
(a) the end of the sixth month after the final maturity of the Notes and (b) the
indefeasible payment in full in cash of all Notes (or due provision therefor
which results in the discharge of all Obligations under the Indenture); provided
that the terms of the subordination agreement are in the form annexed to the
Indenture and the Issuer has received one or more Opinions of Counsel as to the
validity and enforceability of such subordination agreement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designation" has the meaning set forth under " -- Certain Covenants --
Limitation on Designations of Unrestricted Subsidiaries."
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the Board of Directors of the Issuer other
than a director who (i) has any material direct or indirect financial interest
in or with respect to such transaction or series of related transactions or (ii)
is an employee or officer of the Issuer or an Affiliate that is itself a party
to such transaction or series of transactions or an Affiliate of a party to such
transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is exchangeable for Indebtedness at the option of
the holder thereof, or is redeemable at the option of the holder thereof, in
whole or in part, on or prior to the final maturity date of the Notes; provided
such Capital Stock shall only constitute Disqualified Stock to the extent it so
matures or is redeemable or exchangeable on or prior to the final maturity date
of the Notes.
"Equity Offering" means an underwritten public offering of Common Stock of
the Issuer which has been registered under the Securities Act.
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"Existing Market Asset Acquisition" means an Asset Acquisition of a
Cable/Telecommunications Business (other than the Phonoscope Acquisition) to the
extent subscribers or customers are located in the metropolitan areas of
Houston, Texas; Dallas-Fort Worth, Texas; San Diego, California; Phoenix,
Arizona; Chicago, Illinois; Denver, Colorado; San Francisco, California; Los
Angeles, California; Miami-Ft. Lauderdale, Florida; Tampa, Florida; or Austin,
Texas (it being understood that where a Cable/Telecommunications Business
subject to an Asset Acquisition is conducted in more than one market, an
allocation of Indebtedness being incurred pursuant to clause (c) of the
definition of Permitted Indebtedness may be made on the basis of the latest 12
months of revenues of the Cable/Telecommunications Business immediately
preceding the date of incurrence in a particular metropolitan area).
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board acting in good
faith and shall be evidenced by a Board Resolution delivered to the Trustee.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States and which are applicable as of the
date of determination and which are consistently applied for all applicable
periods.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit.
"GVL" means Le Groupe Videotron Ltee.
"Incremental Qualifying Cable Subscribers" means, as of any date of
determination, the aggregate number of Qualifying Cable Subscribers of the
Issuer and the Restricted Subsidiaries minus (i) the number of Qualifying Cable
Subscribers of the Issuer and the Restricted Subsidiaries as of the Issue Date
(94,944) and minus (ii) the number of Qualifying Cable Subscribers acquired
pursuant to the Phonoscope Acquisition to the extent and only to the extent
Indebtedness is incurred under clause (d) of the definition of "Permitted
Indebtedness" to finance the Phonoscope Acquisition.
"Indebtedness" means, with respect to any person, without duplication, (i)
any liability, contingent or otherwise, of such person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
person or only to a portion thereof) or (B) evidenced by a note, debenture or
similar instrument or letter of credit (including a purchase money obligation)
or (C) for the payment of money relating to a Capitalized Lease Obligation or
other obligation relating to the deferred purchase price of property or (D) in
respect of an Interest Rate Obligation or currency agreement; or (ii) any
liability of others of the kind described in the preceding clause (i) which the
person has guaranteed or which is otherwise its legal liability; or (iii) any
obligation secured by a Lien (other than (x) Permitted Liens of the type
described in clauses (b), (d) or (e) of the definition of Permitted Liens;
provided that the obligations secured would not constitute Indebtedness under
clauses (i) or (ii) or (iii) of this definition, and (y) Liens on Capital Stock
or Indebtedness of any Unrestricted Subsidiary) to which the property or assets
of such person are subject, whether or not the obligations secured thereby shall
have been assumed by or shall otherwise be such person's legal liability (the
amount of such obligation being deemed to be the lesser of the value of such
property or asset or the amount of the obligation so secured); (iv) all
Disqualified Stock valued at the greater of its voluntary or involuntary maximum
fixed repurchase price plus accrued and unpaid dividends; and (v) any and all
deferrals, renewals, extensions and refundings of, or amendments, modifications
or supplements to, any liability of the kind described in any of the preceding
clauses (i),
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(ii), (iii) or (iv). In no event shall "Indebtedness" include trade payables and
accrued liabilities that are current liabilities incurred in the ordinary course
of business, excluding the current maturity of any obligation which would
otherwise constitute Indebtedness. For purposes of the covenants "Limitation on
Additional Indebtedness" and "Limitation on Restricted Payments" and the
definition of "Events of Default," in determining the principal amount of any
Indebtedness to be incurred by the Issuer or a Restricted Subsidiary or which is
outstanding at any date, (x) the principal amount of any Indebtedness which
provides that an amount less than the principal amount at maturity thereof shall
be due upon any declaration of acceleration thereof shall be the accreted value
thereof at the date of determination and (y) the principal amount of any
Indebtedness shall be reduced by any amount of cash or Cash Equivalent
collateral securing on a perfected basis, and dedicated for disbursement
exclusively to the payment of principal of and interest on, such Indebtedness.
"Independent Financial Advisor" means a United States investment banking
firm of national standing in the United States (i) which does not, and whose
directors, officers and employees or Affiliates do not have, a direct or
indirect financial interest in the Issuer and (ii) which, in the judgment of the
Board, is otherwise independent and qualified to perform the task for which it
is to be engaged.
"Interest Rate Obligations" means the obligations of any person pursuant to
any arrangement with any other person whereby, directly or indirectly, such
person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount and shall include without limitation, interest rate swaps, caps, floors,
collars, forward interest rate agreements and similar agreements.
"Investment" means, with respect to any person, any advance, loan, account
receivable (other than an account receivable arising in the ordinary course of
business), or other extension of credit (including, without limitation, by means
of any guarantee) or any capital contribution to (by means of transfers of
property to others, payments for property or services for the account or use of
others, or otherwise), or any purchase or ownership of any stocks, bonds, notes,
debentures or other securities of, any other person. Notwithstanding the
foregoing, in no event shall any issuance of Capital Stock (other than
Disqualified Stock) of the Issuer in exchange for Capital Stock, property or
assets of another person constitute an Investment by the Issuer in such other
person.
"Issue Date" means February 14, 1997.
"License Co." means Transmission Holdings, Inc., a Delaware corporation.
"License Co. Documents" means, collectively, (i) the Assignment Agreement
dated as of the Issue Date among TVMAX Telecommunications, Inc. ("TVMAX"),
Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc. and
IRPC Arizona, Inc., as assignors, and License Co., as assignee, (ii) the
Equipment License and Services Agreement dated as of the Issue Date between
TVMAX and License Co. and the Promissory Note of License Co. in favor of TVMAX
annexed thereto, (iii) the Option Agreement dated as of the Issue Date between
TVMAX and License Co., (iv) each Shareholders Option Agreement dated as of the
Issue Date between TVMAX and a License Co. Shareholders (as defined below), (v)
the Subscription and Shareholders Agreement dated as of the Issue Date among
Rory O. Cole, Henry Goldberg and Russell B. Berman (collectively, the "License
Co. Shareholders") and License Co. and (vi) any other agreements identical to
the foregoing in all material respects and entered into for the same purposes
that the Issuer or any Restricted Subsidiary may enter into in the future, as
each of the foregoing documents referred to in clauses (i) through (v) may be
amended, modified or supplemented in compliance with the covenant "Limitation on
Transactions with Affiliates."
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any property of any
kind. A person shall be deemed to own subject to a Lien any property which such
person has acquired or holds subject to the interest of a vendor or lessor under
any conditional sale agreement, capital lease or other title retention
agreement.
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"Material Restricted Subsidiary" means any Restricted Subsidiary of the
Issuer, which, at any date of determination, is a "Significant Subsidiary" (as
that term is defined in Regulation S-X issued under the Securities Act), but
shall, in any event, include (x) any Guarantor, (y) TVMAX or (z) any Restricted
Subsidiary of the Issuer which, at any date of determination, is an obligor
under any Indebtedness in an aggregate principal amount equal to or exceeding
$10.0 million if another Material Restricted Subsidiary is also obligated in
respect of such Indebtedness.
"Maturity Date" means, with respect to any Note, the date specified in such
Note as the fixed date on which the principal of such Note is due and payable.
"Moody's" means Moody's Investors Service.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash (including assumed liabilities and other items
deemed to be cash under the proviso to the first sentence of the covenant
"Disposition of Proceeds of Asset Sales") or Cash Equivalents including payments
in respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Issuer or any Restricted Subsidiary) net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel and investment bankers) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale, (iii) amounts
required to be paid to any person (other than the Issuer or any Restricted
Subsidiary) owning a beneficial interest in or having a Permitted Lien on the
assets subject to the Asset Sale and (iv) appropriate amounts to be provided by
the Issuer or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the Issuer or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as reflected in an Officers' Certificate delivered to the
Trustee.
"Other Senior Debt Pro Rata Share" means the amount of the applicable
Excess Proceeds obtained by multiplying the amount of such Excess Proceeds by a
fraction, (i) the numerator of which is the aggregate accreted value and/or
principal amount, as the case may be, of all Indebtedness (other than (x) the
Notes and (y) Subordinated Indebtedness) of the Issuer outstanding at the time
of the applicable Asset Sale with respect to which the Issuer is required to use
Excess Proceeds to repay or make an offer to purchase or repay and (ii) the
denominator of which is the sum of (a) the aggregate principal amount of all
Notes outstanding at the time of the applicable Asset Sale and (b) the aggregate
principal amount or the aggregate accreted value, as the case may be, of all
other Indebtedness (other than Subordinated Indebtedness) of the Issuer
outstanding at the time of the applicable Asset Sale Offer with respect to which
the Issuer is required to use the applicable Excess Proceeds to offer to repay
or make an offer to purchase or repay.
"Pacific" means Pacific Capital Group, Inc.
"Permitted Holder" means (i) any of GVL, Caisse de depot et placement du
Quebec or any of their respective controlled Affiliates, (ii) a Strategic Equity
Investor that, prior to August 31, 1999, invests on a primary basis in Capital
Stock (other than Disqualified Stock) representing not less than 15% of the
fully diluted Common Stock of the Issuer at the time of issuance by the Issuer;
provided that only the first such Strategic Equity Investor shall be a Permitted
Holder, or (iii) Andre Chagnon, his spouse or any of his lineal descendants and
their respective spouses (collectively, the "Chagnon Family"), whether acting in
their own name or as one or as a majority of persons having the power to
exercise the voting rights attached to, or having investment power over, shares
of Capital Stock held by others, or (iv) any controlled Affiliate of any member
of the Chagnon Family or (v) any trust principally for the benefit of one or
more members of the Chagnon Family (whether or not any member of the Chagnon
Family is a trustee of such trust) or (vi) any charitable foundation a majority
of whose members, trustees or directors, as the case may be, are persons
referred to in (iii) above. For purposes of this definition, "lineal descendant"
shall include at any time any person that is treated as being adopted or is in
the process of being adopted by any member of the Chagnon Family at such time.
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"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness of the Issuer and/or any Restricted Subsidiary outstanding
on the Issue Date;
(c) Indebtedness, including under any Senior Bank Facility or Vendor Credit
Facility, of the Issuer and/or any Restricted Subsidiary to the extent that
the proceeds of such Indebtedness are used to finance or support working
capital (including to fund operating losses) for, or the construction of, a
Cable/Telecommunications Business of the Issuer or any of the Restricted
Subsidiaries or the acquisition of properties or assets (tangible or
intangible) to be used in a Cable/Telecommunications Business of the Issuer
or any of its Restricted Subsidiaries (other than for an Asset Acquisition to
the extent that it is not an Existing Market Asset Acquisition) or for an
Existing Market Asset Acquisition; provided that, after giving effect to the
incurrence of any such Indebtedness, the aggregate outstanding Indebtedness
incurred under this clause (c) and incurred pursuant to any Refinancings
(whether the initial Refinancing or any successive Refinancing) thereof
incurred under clause (h) below does not exceed the sum of (i) $100.0
million, plus (ii) the product of the number of Incremental Qualifying Cable
Subscribers times $1,200; provided that no Indebtedness may be incurred under
this clause (c) in reliance on the immediately preceding clause (ii) on any
date on or after February 15, 2001;
(d) to the extent not funded with the net proceeds from the sale of the
Notes, Indebtedness incurred by the Issuer or any Restricted Subsidiary to
finance the Phonoscope Acquisition;
(e) (i) Indebtedness of any Restricted Subsidiary owed to and held by the
Issuer or a Restricted Subsidiary and (ii) Indebtedness of the Issuer owed to
and held by any Restricted Subsidiary; provided that an incurrence of
Indebtedness shall be deemed to have occurred upon (x) any sale or other
disposition (excluding assignments as security to financial institutions) of
any Indebtedness of the Issuer or a Restricted Subsidiary referred to in this
clause (f) to a person (other than the Issuer or a Restricted Subsidiary) or
(y) any sale or other disposition of Capital Stock of a Restricted
Subsidiary, or Designation of a Restricted Subsidiary, which holds
Indebtedness of the Issuer or another Restricted Subsidiary such that such
Restricted Subsidiary, in any such case, ceases to be a Restricted
Subsidiary;
(f) Interest Rate Obligations of the Issuer and/or any Restricted
Subsidiary relating to (i) Indebtedness of the Issuer and/or such Restricted
Subsidiary, as the case may be (which Indebtedness (x) bears interest at
fluctuating interest rates and (y) is otherwise permitted to be incurred
under the "Limitation on Additional Indebtedness" covenant), and/or (ii)
Indebtedness (which Indebtedness would bear interest at fluctuating interest
rates) for which a lender has provided a commitment (subject to customary
conditions) in an amount reasonably anticipated to be incurred by the Issuer
and/or a Restricted Subsidiary in the following 12 months after such Interest
Rate Obligation has been incurred, but only to the extent, in the case of
either subclause (i) or (ii), that the notional principal amount of such
Interest Rate Obligations does not exceed the principal amount of the
Indebtedness (and/or Indebtedness subject to commitments) to which such
Interest Rate Obligations relate;
(g) Indebtedness of the Issuer and/or any Restricted Subsidiary in respect
of performance bonds of the Issuer or any Restricted Subsidiary or surety
bonds provided by the Issuer or any Restricted Subsidiary incurred in the
ordinary course of business in connection with the construction,
implementation or operation of a Cable/Telecommunications Business;
(h) Indebtedness of the Issuer and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"Refinancing") of outstanding Indebtedness of the Issuer and/or of any
Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b)
(other than the Convertible Notes), (c) or (d) of this definition or the
proviso of the covenant
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"Limitation on Additional Indebtedness"; provided that (1) Indebtedness of
the Issuer may not be Refinanced to such extent under this clause (h) with
Indebtedness of any Restricted Subsidiary and (2) any such Refinancing shall
only be permitted under this clause (h) to the extent that (x) it does not
result in a lower Average Life to Stated Maturity of such Indebtedness as
compared with the Indebtedness being Refinanced and (y) it does not exceed
the sum of the principal amount (or, if such Indebtedness provides for a
lesser amount to be due and payable upon a declaration of acceleration
thereof, an amount no greater than such lesser amount) of the Indebtedness
being Refinanced plus the amount of accrued interest thereon and the amount
of any reasonably determined prepayment premium necessary to accomplish such
Refinancing and such reasonable fees and expenses incurred in connection
therewith;
(i) Indebtedness of the Issuer under Deeply Subordinated Shareholders Loans
to the extent incurred prior to the Termination Date; and
(j) in addition to the items referred to in clauses (a) through (i) above,
Indebtedness of the Issuer and any Acquired Indebtedness of any Restricted
Subsidiary having an aggregate principal amount not to exceed $50.0 million
at any time outstanding.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) loans and
advances to employees made in the ordinary course of business; (d) Interest Rate
Obligations; (e) bonds, notes, debentures or other securities received as a
result of Asset Sales pursuant to and in compliance with the covenant
"Disposition of Proceeds of Asset Sales"; (f) Investments made in the ordinary
course of business as partial payment for constructing a network relating
principally to a Cable/Telecommunications Business; (g) Investments in License
Co. contemplated by the License Co. Documents; and (h) Investments in companies
owning or managing multiple dwelling units (or an Affiliate thereof) with which
the Issuer or any Restricted Subsidiary have Rights of Entry in the ordinary
course of business in lieu of (in whole or in part) other customary financial
inducements to property owners.
"Permitted Liens" means (a) Liens on property of a person existing at the
time such person is merged into or consolidated with the Issuer or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger, consolidation
or acquisition and do not secure any property or assets of the Issuer or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger or consolidation; (b) Liens imposed by law, such as
carriers', warehousemen's and mechanics' Liens and other similar Liens arising
in the ordinary course of business which secure payment of obligations not more
than 60 days past due or are being contested in good faith and by appropriate
proceedings; (c) Liens existing on the Issue Date, including to secure the note
in the amount of $1.0 million in favor of International Richey Pacific
Cablevision Ltd.; (d) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith by
appropriate proceedings promptly instituted and diligently conducted; provided
that any reserve or other appropriate provision as shall be required in
conformity with GAAP shall have been made therefor; (e) easements, rights of
way, restrictions and other similar easements, licenses, restrictions on the use
of properties, or minor imperfections of title that, in the aggregate, are not
material in amount and do not in any case materially detract from the properties
subject thereto or interfere with the ordinary conduct of the business of the
Issuer or the Restricted Subsidiaries; (f) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (g)
Liens securing any Senior Bank Facility or Vendor Credit Facility to the extent
it would constitute "Permitted Indebtedness"; (h) Liens to secure any
Refinancing of any Indebtedness secured by Liens referred to in the foregoing
clauses (a) or (c), but only to the extent that such Liens do not extend to any
other property or assets and the principal amount of the Indebtedness secured by
such Liens is not increased; (i) Liens to secure the Notes; and (j) Liens on
real property incurred in connection with the financing of the purchase of such
real property (or incurred within 60 days of purchase) by the Issuer or any
Restricted Subsidiary.
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"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock whether now outstanding, or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such person.
"Publicly Traded Stock" means any Common Stock of an issuer that is listed
and traded on either the New York Stock Exchange or the American Stock Exchange
or the Nasdaq National Market System.
"Qualifying Cable Subscribers" means, as of any date of determination, the
aggregate number of Cable Subscribers for the Issuer and the Restricted
Subsidiaries as of the last day of the most recent month ending not more than 45
days prior to the date of determination.
"Refinancing" has the meaning set forth in clause (h) of the definition of
"Permitted "Indebtedness."
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the Issuer
or any payment made to the direct or indirect holders (in their capacities as
such) of Capital Stock of the Issuer (other than dividends or distributions
payable solely in Capital Stock (other than Disqualified Stock) of the Issuer or
in options, warrants or other rights to purchase Capital Stock (other than
Disqualified Stock) of the Issuer); (ii) the purchase, redemption or other
acquisition or retirement for value of any Capital Stock of the Issuer (other
than any such Capital Stock owned by the Issuer or a Restricted Subsidiary);
(iii) the purchase, redemption, defeasance or other acquisition or retirement
for value of any Subordinated Indebtedness (other than any Subordinated
Indebtedness held by a Restricted Subsidiary); (iv) the making of any payment
(whether of principal or interest (other than the payment of interest in the
form of additional Deeply Subordinated Shareholders Loans)) in respect of the
Convertible Notes or the Deeply Subordinated Shareholders Loans; or (v) the
making of any Investment (other than a Permitted Investment) in any person
(other than an Investment by a Restricted Subsidiary in the Issuer or an
Investment by the Issuer or a Restricted Subsidiary in either (x) a Restricted
Subsidiary engaged principally in a Cable/Telecommunications Business or (y) a
person engaged principally in a Cable/Telecommunications Business that becomes a
Restricted Subsidiary as a result of such Investment). Notwithstanding the
foregoing, the payment of compensation to Le Groupe Videotron Ltee, Pacific or
any of their respective Subsidiaries pursuant to the Settlement Agreement dated
as of August 1, 1996 between Vanguard Communications, L.P., Pacific, VPC, the
Issuer and Le Groupe Videotron Ltee, as in effect on the Issue Date, shall not
constitute a Restricted Payment to the extent, and only to the extent, that such
amounts are deducted in arriving at Cumulative Available Cash Flow of the
Issuer.
"Restricted Subsidiary" means any Subsidiary of the Issuer that has not
been designated by the Board, by a Board Resolution delivered to the Trustee, as
an Unrestricted Subsidiary pursuant to and in compliance with the covenant
"Limitation on Designations of Unrestricted Subsidiaries." Any such designation
may be revoked by a Board Resolution delivered to the Trustee, subject to the
provisions of such covenant.
"Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted
Subsidiary (i) which is not subordinated to any other Indebtedness of such
Restricted Subsidiary and (ii) in respect of which the Issuer is not also
obligated (by means of a guarantee or otherwise) other than, in the case of this
clause (ii), Indebtedness under any Senior Bank Facility or Vendor Credit
Facility to the extent constituting "Permitted Indebtedness."
"Revocation" has the meaning set forth under " -- Certain Covenants --
Limitation on Designations of Unrestricted Subsidiaries."
"Richey Warrant" means the Warrant dated December 29, 1994 to purchase B
Units of Limited Partnership Interest of Vanguard Communications, L.P.
"S&P" means Standard & Poor's Corporation.
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"Senior Bank Facility" means any senior commercial term loan and/or
revolving credit facility (including any letter of credit subfacility) entered
into principally with commercial banks and/or other financial institutions
typically party to commercial loan agreements.
"Strategic Equity Investor" means (i) any company (other than GVL and its
affiliates) which is engaged principally in a Cable/Telecommunications Business
and which has a rating from Moody's of Baa3 (or the equivalent thereof) or
higher or from S&P of BBB- (or the equivalent thereof) or higher or (ii) any
controlled Affiliate of any company referred to in the preceding clause (i).
"Subordinated Indebtedness" means any Indebtedness of the Issuer or any
Guarantor which is expressly subordinated in right of payment to any other
Indebtedness of the Issuer or such Guarantor.
"Subsidiary" means, with respect to any person, (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such person, or (ii) any other person of which at
least a majority of voting interest is at the time, directly or indirectly,
owned by such person.
"Termination Date" means the earlier to occur of (i) July 31, 1999 and (ii)
an Equity Offering.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Issuer and the
Restricted Subsidiaries outstanding as of the date of determination, provided
that Total Consolidated Indebtedness shall exclude the Convertible Notes and any
Deeply Subordinated Shareholders Loans to the extent incurred prior to the
Termination Date.
"Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as
such pursuant to and in compliance with the covenant "Limitation on Designations
of Unrestricted Subsidiaries." Any such designation may be revoked by a Board
Resolution delivered to the Trustee, subject to the provisions of such covenant.
"U.S. Government Securities" means securities that are direct obligations
of the United States of America for the payment of which its full faith and
credit is pledged.
"Vendor Credit Facility" means, collectively, any credit facility entered
into with any vendor or supplier (or any financial institution acting on behalf
of or for the purpose of directly financing purchases from such vendor or
supplier) to the extent the Indebtedness thereunder is incurred for the purpose
of financing the cost (including the cost of design, development, site
acquisition, construction, integration, manufacture or acquisition) of personal
property (tangible or intangible) used, or to be used, in a
Cable/Telecommunications Business.
"VPC" means VPC Corporation.
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BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the New Notes sold will be
issued in the form of one or more registered notes in global form (the "New
Global Note," together with the Global Note representing the Old Notes, the
"Global Note"). On the Exchange Date, the New Global Note will be deposited
with, or on behalf of, the Depository and registered in the name of the
Depository or its nominee. Except as set forth below, the Global Note may be
transferred, in whole and not in part, only to the Depository or another nominee
of the Depository. Investors may hold their beneficial interests in the Global
Note directly through the Depository if they have an account with the Depository
or indirectly through organizations which have accounts with the Depository.
New Notes that were (i) originally issued to or transferred to
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act) who are not qualified institutional buyers
("QIBs") or (ii) issued as described below under "--Certificated Notes" will be
issued in definitive form. Upon the transfer of a Note in definitive form, such
Note will, unless the applicable Global Note has previously been exchanged for
Notes in definitive form, be exchanged for an interest in the Global Note
representing the principal amount of Notes being transferred.
The Depository has advised the Issuer as follows: The Depository is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Access to the
Depository's book-entry system is also available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, whether directly or indirectly.
Upon the issuance of the New Global Note, the Depository will credit, on
its book-entry registration and transfer system, the principal amount of the
Notes represented by such New Global Note to the accounts of participants.
Ownership of beneficial interests in the Global Note will be limited to
participants or persons that may hold interests through participants. Ownership
of beneficial interests in the Global Note will be shown on, and the transfer of
those ownership interests will be effected only through, records maintained by
the Depository (with respect to participants' interest) and such participants
(with respect to the owners of beneficial interests in the Global Notes other
than participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Notes.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the Notes for all purposes
of such Notes and the Indenture . Except as set forth below, owners of
beneficial interests in the Global Note will not be entitled to have the Notes
represented by the Global Note registered in their names, will not receive or be
entitled to receive physical delivery of certificated Notes in definitive form
and will not be considered to be the owners or holders of any Notes under the
Global Note. The Issuer understands that under existing industry practice, in
the event an owner of a beneficial interest in the Global Note desires to take
any action that the Depository, as the holder of the applicable Global Note, is
entitled to take, the Depository would authorize the participants to take such
action, and that the participants would authorize beneficial owners owning
through such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
Payments in respect of the Notes represented by the Global Note registered
in the name of and held by the Depository or its nominee will be made to the
Depository or its nominee, as the case may be, as the registered owner and
holder of the Global Note.
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The Issuer expects that the Depository or its nominee, upon receipt of any
payment in respect of the Notes will credit participants' accounts with payments
in amounts proportionate to their respective beneficial interests in the Global
Note as shown on the records of the Depository or its nominee. The Issuer also
expects that payments by participants to owners of beneficial interests in the
Global Note held through such participants will be governed by standing
instructions and customary practices and will be the responsibility of such
participants. The Issuer will not have any responsibility or liability for any
aspect of the records relating to, or payments made on account of, beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between the Depository and its participants or
the relationship between such participants and the owners of beneficial
interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated Notes
in definitive form, the Global Note may not be transferred except as a whole by
the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Issuer will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated Securities
The Notes represented by the Global Note are exchangeable for certificated
Notes in definitive form of like tenor as such Notes in denominations of $1,000
and integral multiples thereof if (i) the Depository notifies the Issuer that it
is unwilling or unable to continue as Depository for the Global Notes or if at
any time the Depository ceases to be a clearing agency registered under the
Exchange Act and a successor depository is not appointed by the Issuer within 90
days, (ii) the Issuer in its discretion at any time determines not to have all
of the Notes represented by the Global Note or (iii) a default entitling the
holders of the Notes to accelerate the maturity thereof has occurred and is
continuing. Any Note that is exchangeable pursuant to the preceding sentence is
exchangeable for certificated Notes issuable in authorized denominations and
registered in such names as the Depository shall direct.
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EXCHANGE OFFER; REGISTRATION RIGHTS
The Issuer has entered into the Registration Agreement pursuant to which it
agreed to file the registration statement of which this Prospectus forms a part
(the "Exchange Offer Registration Statement") and to use its best efforts to
cause the Exchange Offer Registration Statement to be declared effective under
the Securities Act not later than June 13, 1997. Upon the effectiveness of the
Exchange Offer Registration Statement, the Issuer will promptly offer the New
Notes in exchange for surrender of the Old Notes. See "The Exchange Offer."
Under existing SEC interpretations, the New Notes would be freely transferable
by holders other than affiliates of the Issuer after the Exchange Offer without
further registration under the Securities Act if the holder of the New Notes
represents that it is acquiring the New Notes in the ordinary course of its
business, that it has no arrangement or understanding with any person to
participate in the distribution of the New Notes and that it is not an affiliate
of the Issuer, as such terms are interpreted by the SEC; provided that
broker-dealers receiving New Notes in the Exchange Offer will have a prospectus
delivery requirement with respect to resales of such New Notes. The SEC has
taken the position that broker-dealers may fulfill their prospectus delivery
requirements with respect to New Notes (other than a resale of an unsold
allotment from the original sale of the Notes) with the prospectus contained in
the Exchange Offer Registration Statement. Broker-dealers may not exchange Old
Notes which are part of an unsold original allotment in the Exchange Offer.
Under the Registration Agreement, the Issuer is required to allow broker-dealers
and other persons, if any, with similar prospectus delivery requirements to use
the prospectus contained in the Exchange Offer Registration Statement in
connection with the resale of such New Notes for a specified period of time.
A holder of Old Notes (other than certain specified holders of Old Notes)
who wishes to exchange such Notes for New Notes in the Exchange Offer is
required to represent that any New Notes to be received by it will be acquired
in the ordinary course of its business, that at the time of the commencement of
the Registered Exchange Offer it has no arrangement or understanding with any
person to participate in the distribution (within the meaning of the Securities
Act) of the New Notes, that it is not an "affiliate" of the Company, as defined
in Rule 405 of the Securities Act, or if it is an affiliate, that it will comply
with the registration and prospectus delivery requirements of the Securities Act
to the extent applicable and that it is not a broker-dealer or, if it is a
broker-dealer, that the Old Notes tendered for exchange are not part of an
unsold allotment from the Offering.
In the event that applicable interpretations of the staff of the SEC do not
permit the Issuer to effect the Exchange Offer, or if for any other reason the
Exchange Offer is not consummated by July 13, 1997, or if Salomon Brothers Inc.
or Merrill Lynch, Pierce, Fenner & Smith Incorporated, the initial purchasers of
the Offering, so request with respect to Old Notes not eligible to be exchanged
for New Notes in the Exchange Offer, or if any holder of Old Notes is not
eligible to participate in the Exchange Offer or participates in but does not
receive freely tradeable (except for prospectus delivery requirements) New Notes
in the Exchange Offer the Issuer will, at its cost, (a) as promptly as
practicable, file a shelf registration statement (the "Shelf Registration
Statement") covering resales of the Old Notes or the New Notes, as the case may
be, (b) use its best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act by August 12, 1997 and (c) keep the
Shelf Registration Statement effective until three years after its effective
date (or shorter period that will terminate when all Old Notes or New Notes, as
the case may be, covered by the Shelf Registration Statement have been sold
pursuant to the Shelf Registration Statement). The Issuer will, in the event a
Shelf Registration Statement is filed, among other things, provide to each
holder for whom such Shelf Registration Statement was filed copies of the
prospectus which is a part of the Shelf Registration Statement, notify each such
holder when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales of the Old
Notes or the New Notes, as the case may be. A holder selling such Old Notes or
New Notes pursuant to the Shelf Registration Statement generally would be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the Registration Agreement which are
applicable to such holder (including certain indemnification obligations).
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If (i) by June 13, 1997, the Exchange Offer Registration Statement has not
been declared effective; (ii) by July 13, 1997, the Exchange Offer has not been
consummated or by August 12, 1997, the Shelf Registration Statement has not been
declared effective; or (iii) after either the Exchange Offer Registration
Statement or the Shelf Registration Statement has been declared effective such
Registration Statement thereafter ceases to be effective or usable (subject to
certain exceptions) in connection with resales of Old Notes or New Notes in
accordance with and during the periods specified in the Registration Agreement
(each such event referred to in clauses (i) through (iii), a "Registration
Default"), additional interest ("Liquidated Damages") will accrue on the Old
Notes and the New Notes (in addition to the stated interest on the Old Notes and
the New Notes) from and including the date on which any such Registration
Default shall occur but excluding the date on which all Registration Defaults
have been cured. Liquidated Damages will be payable in cash semi-annually in
arrears each February 15 and August 15, commencing August 15, at a rate per
annum equal to 0.50% of the principal amount of the Notes during the 90-day
period immediately following the occurrence of any Registration Default and
shall increase by 0.25% per annum of the principal amount of the Notes at the
end of each subsequent 90-day period, but in no event shall such rate exceed
2.00% per annum in the aggregate regardless of the number of Registration
Defaults.
The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and is subject to and is qualified in its entirety by
reference to all the provisions of the Registration Agreement, a copy of which
has been filed as an exhibit to the Exchange Offer Registration Statement.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The exchange of New Notes for Old Notes will not constitute a recognition
event for federal income tax purposes. Consequently, no gain or loss will be
recognized by holders upon receipt of the New Notes. For purposes of determining
gain or loss upon the subsequent sale or exchange of New Notes, a holder's basis
in the New Notes will be the same as the holder's basis in the Old Notes
exchanged therefor. Holders will be considered to have held the New Notes from
the time of their original acquisition of the Old Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Notes were acquired as a result of market-making activities or other
trading activities. The Issuer has agreed that, starting on the Exchange Date
(as defined) and ending on the close of business on the earlier of the first
anniversary of the Exchange Date or the date upon which all such New Notes have
been sold by such participating broker-dealer (the "Registration Period"), it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. In addition, until , 1997, all dealers effecting
transactions in the New Notes may be required to deliver a Prospectus.
The Issuer will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker-dealer that participates in a distribution of New
Notes may be deemed to be an "underwriter" within the meaning of the Securities
Act and any profit on any resale of New Notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation under
the Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
During the Registration Period, the Issuer will promptly send additional
copies of this Prospectus and any amendment or supplement to this Prospectus to
any broker-dealer that requests such documents in the Letter of Transmittal. The
Issuer has agreed to pay all expenses incident to the Exchange Offer (including
the expenses of one counsel for the holders of the Notes) other than commissions
or concessions of any brokers or dealers and will indemnify the holders of the
Notes (including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
The Issuer has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer and to
the best of the Issuer's information and belief, each person participating in
the Exchange Offer is acquiring the New Notes in its ordinary course of business
and has no arrangement or understanding with any person to participate in the
distribution of the New Notes to be received in the Exchange Offer.
124
<PAGE>
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon and
certain other legal matters in connection with the sale of securities offered
hereby will be passed upon for the Issuer by Kronish, Lieb, Weiner & Hellman
LLP, 1114 Avenue of the Americas, New York, New York 10036-7798. Certain federal
regulatory matters related to the Exchange Offer or described herein will be
passed upon for the Issuer by Goldberg, Godles, Weiner & Wright, the Company's
FCC counsel. Russell S. Berman of Kronish, Lieb, Weiner & Hellman LLP and Henry
Goldberg of Goldberg, Godles, Weiner & Wright each hold one-third of the
outstanding equity interests in THI (see "Certain Transactions -- License
Holding Company").
EXPERTS
The Consolidated Financial Statements of the Company for the year ended
August 31, 1996, for the period January 1, 1995 to August 31, 1995, the year
ended December 31, 1994 and the period April 20, 1993 (inception) to December
31, 1993, the Combined Statements of Operations and Cash Flows of Richey Pacific
Cablevision for the years ended December 31, 1993 and December 28, 1994, the
Statements of Revenues and Expenses and Statements of Cash Flows of EagleVision
for the years ended December 31, 1993 and 1994, and the Statement of Operations
and Cash Flows of Triax Associates V, L.P. for the year ended August 31, 1995
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their reports included herein and have been so included in reliance upon their
authority as experts in accounting and auditing.
125
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OPTEL, INC. AND SUBSIDIARIES:
<TABLE>
<S> <C>
Independent Auditors' Report ............................................................ F-2
Consolidated Balance Sheets as of August 31, 1995 and 1996 and
February 28, 1997 (Unaudited) ......................................................... F-3
Consolidated Statements of Operations for the period from April 20, 1993 (Date of
Inception) to
December 31, 1993, the year ended December 31, 1994, the period from January 1, 1995 to
August 31, 1995, and the year ended August 31, 1996 and the six month periods ended
February 29, 1996 and February 28, 1997 (Unaudited) .................................... F-4
Consolidated Statements of Stockholders' Equity for the period from April 30, 1993 (Date
of Inception) to December 31, 1993, the year ended December 31, 1994, the period from Janu-
ary 1, 1995 to August 31, 1995, and the year ended August 31, 1996 and the six month
period ended February 28, 1997 (Unaudited) ............................................. F-5
Consolidated Statements of Cash Flows for the period from April 20, 1993 (Date of
Inception) to December 31, 1993, the year ended December 31, 1994, the period from
January 1, 1995 to August 31, 1995, and the year ended August 31, 1996 and the six month
periods ended February 29, 1996 and February 28, 1997 (Unaudited) ...................... F-6
Notes to Consolidated Financial Statements ............................................. F-7
ACQUIRED COMPANIES:
Richey Pacific Cablevision:
Independent Auditors' Report ............................................................ F-17
Combined Statements of Operations for the years ended December 31, 1993 and Decem-
ber 28, 1994 ........................................................................ F-18
Combined Statements of Cash Flows for the years ended December 31, 1993 and Decem-
ber 28, 1994 ........................................................................ F-19
Notes to Combined Financial Statements ................................................ F-20
EagleVision:
Independent Auditors' Report ............................................................ F-22
Statements of Revenues and Expenses for the years ended December 31, 1993 and 1994 . F-23
Statements of Cash Flows for the years ended December 31, 1993 and 1994 ............... F-24
Notes to Financial Statements .......................................................... F-25
Triax Associates V, L.P.:
Independent Auditors' Report ............................................................ F-27
Statement of Operations for the year ended August 31, 1995 ........................... F-28
Statement of Cash Flows for the year ended August 31, 1995 ........................... F-29
Notes to Financial Statements ......................................................... F-30
</TABLE>
F-1
<PAGE>
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, 1995 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from April 20, 1993 (date of inception) to December 31, 1993, the
year ended December 31, 1994, the period from January 1, 1995 to August 31,
1995, and the year ended August 31, 1996. 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, 1995 and 1996 and the results of their operations and their cash
flows for the period from April 20, 1993 (date of inception) to December 31,
1993, the year ended December 31, 1994, the period from January 1, 1995 to
August 31, 1995, and the year ended August 31, 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
November 7, 1996
(February 7, 1997 as to Note 13)
F-2
<PAGE>
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 31, February 28,
------------------------------------
1995 1996 1997
----------------- ----------------- ----------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ........................ $ 2,035,980 $ 1,677,332 $ 135,015,397
Restricted investments (Note 14) .................. -- -- 79,803,740
Accounts receivable (net of allowance for doubtful
accounts of $473,218, $542,134 and $819,999
(unaudited), respectively) ........................ 1,594,110 3,063,719 3,639,963
Prepaid expenses, deposits and other assets ...... 939,119 1,020,055 1,574,323
Amounts due from stockholder, net (Note 9) ......... -- 541,586 136,702
Property and equipment, net (Note 4) ............... 48,059,601 103,799,650 122,040,687
Intangible assets, net (Note 5) .................. 55,443,266 65,876,003 75,470,578
-------------- -------------- -------------
TOTAL ............................................. $ 108,072,076 $ 175,978,345 $ 417,681,390
============== ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................. $ 2,370,976 $ 5,647,024 $ 3,276,664
Accrued expenses and other liabilities ............ 8,925,009 10,506,586 13,643,562
Deferred revenues and customer deposits ............ 1,258,120 2,167,253 2,436,370
Convertible notes payable to
stockholder (Notes 6 and 9) ..................... 17,949,690 89,414,364 121,006,370
Notes payable and long-term
obligations (Notes 6 and 14) ..................... 2,849,423 2,443,341 220,615,287
Deferred acquisition liabilities (Notes 3 and 6) ... 6,174,295 6,520,022 6,715,733
-------------- -------------- -------------
Total liabilities ........................... 39,527,513 116,698,590 367,693,986
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 7)
STOCKHOLDERS' EQUITY (Notes 9, 10, 13 and 14):
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 outstand-
ing .......................................... -- -- --
Class B common stock, $.01 par value; 6,000,000
shares authorized; 2,149,332, 2,304,561 and
2,304,561 (unaudited) issued and outstanding,
respectively ................................. 21,493 23,046 23,046
Class C common stock, $.01 par value; 300,000
shares authorized; 225,000 (unaudited) issued
and outstanding ................................. -- -- 2,250
Additional paid-in capital ..................... 78,902,382 88,065,805 95,063,555
Accumulated deficit .............................. (10,379,312) (28,809,096) (45,101,447)
-------------- -------------- -------------
Total stockholders' equity ..................... 68,544,563 59,279,755 49,987,404
-------------- -------------- -------------
TOTAL ............................................. $ 108,072,076 $ 175,978,345 $ 417,681,390
============== ============== =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period From
April 20, 1993
(Date Of
Inception) To Year Ended
December 31, December 31,
1993 1994
---------------- -----------------
<S> <C> <C>
REVENUES:
Cable television ......... $ 12,106 $ 240,193
Telecommunications ......... -- 201,467
----------- --------------
Total revenues ......... 12,106 441,660
----------- --------------
OPERATING EXPENSES:
Cost of services ......... 5,662 469,952
Customer support,
general and adminis-
trative .................. 303,814 7,732,610
Depreciation and
amortization ............ 8,224 117,020
Nonrecurring reorganiza-
tion costs (Note 1) ...... -- --
----------- --------------
Total operating
expenses ............... 317,700 8,319,582
----------- --------------
LOSS FROM OPERATIONS .......... (305,594) (7,877,922)
OTHER INCOME
(EXPENSE):
Interest expense on con-
vertible notes payable
to stockholder (Notes 4
and 9) .................. -- --
Other interest expense ...... (2,658) (76,367)
Interest income and
other, net ............... 1,408 10,112
----------- --------------
LOSS BEFORE INCOME
TAXES ..................... (306,844) (7,944,177)
INCOME TAX BENEFIT
(Note 8) .................. -- --
----------- --------------
NET LOSS ..................... $ (306,844) $ (7,944,177)
=========== ==============
NET LOSS PER COMMON
SHARE (Notes 2, 13 and
14) ........................
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
(Notes 2, 13 and 14) .........
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Period From
January 1, 1995
To August 31, Year Ended February 29, February 29,
1995 August 31, 1996 1996 1997
--------------- ----------------- --------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Cable television ......... $ 8,782,610 $ 25,893,401 $ 11,569,880 $ 17,208,297
Telecommunications ......... 787,788 1,711,446 718,232 1,413,420
--------------- -------------- ------------- --------------
Total revenues ......... 9,570,398 27,604,847 12,288,112 18,621,717
--------------- -------------- ------------- --------------
OPERATING EXPENSES:
Cost of services ......... 4,557,609 11,867,960 5,265,797 8,701,471
Customer support,
general and adminis-
trative .................. 8,234,755 17,317,890 7,499,115 12,266,597
Depreciation and
amortization ............ 2,420,397 8,676,262 3,804,088 5,820,354
Nonrecurring reorganiza-
tion costs (Note 1) ...... 3,819,916 2,318,383 825,741 --
--------------- -------------- ------------- --------------
Total operating
expenses ............... 19,032,677 40,180,495 17,394,741 26,788,422
--------------- -------------- ------------- --------------
LOSS FROM OPERATIONS .......... (9,462,279) (12,575,648) (5,106,629) (8,166,705)
OTHER INCOME
(EXPENSE):
Interest expense on con-
vertible notes payable
to stockholder (Notes 4
and 9) .................. (918,501) (5,342,208) (1,889,955) (6,907,852)
Other interest expense ...... (349,297) (656,925) (321,008) (1,693,910)
Interest income and
other, net ............... 99,936 144,997 75,426 476,116
--------------- -------------- ------------- --------------
LOSS BEFORE INCOME
TAXES ..................... (10,630,141) (18,429,784) (7,242,166) (16,292,351)
INCOME TAX BENEFIT
(Note 8) .................. 469,502 -- -- --
--------------- -------------- ------------- --------------
NET LOSS ..................... $ (10,160,639) $ (18,429,784) $ (7,242,166) $ (16,292,351)
=============== ============== ============= ==============
NET LOSS PER COMMON
SHARE (Notes 2, 13 and
14) ........................ $ (6.89) $ (8.30) $ (3.37) $ (7.01)
=============== ============== ============= ==============
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
(Notes 2, 13 and 14) ......... 1,474,554 2,219,770 2,149,332 2,323,207
=============== ============== ============= ==============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
Common Stock
(Note 13)
-------------------------
Partnership Shares Par
Capital Outstanding Value
---------------- ------------- ----------
<S> <C> <C> <C>
BALANCE, INCEPTION (APRIL
20, 1993) ........................ $ -- -- $ --
Contributions .................. 688,582 -- --
Net loss ........................ -- -- --
------------- ---------- --------
BALANCE, DECEMBER 31, 1993 688,582 -- --
Contributions .................. 10,375,012 -- --
Net Loss of Partnership ......... -- -- --
Reorganization from partner-
ship ........................... (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 transac-
tion 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 (unaudited) ..... -- -- --
Net loss (unaudited) ............ -- -- --
------------- ---------- --------
BALANCE, FEBRUARY 28, 1997
(unaudited) ........................ $ -- 2,304,561 $ 23,046
============= ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Class C
Common Stock
(Notes 13 and 14)
----------------------- Additional
Shares Par Paid-In Accumulated
Outstanding Value Capital Deficit
------------- -------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE, INCEPTION (APRIL
20, 1993) ........................ -- $ -- $ -- $ --
Contributions .................. -- -- -- --
Net loss ........................ -- -- -- (306,844)
-------- ------- ------------ --------------
BALANCE, DECEMBER 31, 1993 -- -- -- (306,844)
Contributions .................. -- -- -- --
Net Loss of Partnership ......... -- -- -- (7,725,504)
Reorganization from partner-
ship ........................... -- -- 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 transac-
tion 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 (unaudited) ..... 225,000 2,250 6,997,750 --
Net loss (unaudited) ............ -- -- -- (16,292,351)
-------- ------- ------------ --------------
BALANCE, FEBRUARY 28, 1997
(unaudited) ........................ 225,000 $2,250 $95,063,555 $ (45,101,447)
======== ======= ============ ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period From
April 20, 1993
(Date Of
Inception) To Year Ended
December 31, December 31,
1993 1994
------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .............................. $ (306,844) $ (7,944,177)
Adjustments to reconcile net loss to net
cash flow used in operating activities:
Depreciation and amortization ......... 8,224 117,020
Deferred tax benefit .................. -- --
Noncash interest expense ............... -- --
Increase (decrease) in cash from
changes in operating assets and
liabilities, net of effect of business
combinations:
Accounts receivable .................. (19,657) (58,300)
Prepaid expenses, deposits and
other assets ........................ (19,025) (1,007,641)
Deferred revenue and other
liabilities ........................ 11,059 164,106
Accounts payable and accrued
expenses ........................... 142,863 5,397,128
------------ --------------
Net cash flows used in
operating activities ............... (183,380) (3,331,864)
------------ --------------
INVESTING ACTIVITIES:
Purchases of businesses ............... -- (1,297,818)
Acquisition of intangible assets ...... -- (3,210,994)
Purchases and construction of property
and equipment ........................ (516,894) (6,067,215)
Purchase of restricted investments
(Note 14) .............................. -- --
------------ --------------
Net cash flows used in investing
activities ........................ (516,894) (10,576,027)
------------ --------------
FINANCING ACTIVITIES:
Proceeds from convertible notes
payable .............................. -- 15,000,000
Proceeds from issuance of
common stock ........................... -- --
Payment on notes payable and
long-term obligations .................. -- (6,488,888)
Contributions received from
partners .............................. 688,582 10,375,012
Proceeds from notes payable and
long-term obligations .................. 52,394 --
Net proceeds from issuance of Senior
Notes and common stock (Note 14) ........ -- --
------------ --------------
Net cash flows provided by
financing activities ............... 740,976 18,886,124
------------ --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................. 40,702 4,978,233
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ..................... -- 40,702
------------ --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ........................... $ 40,702 $ 5,018,935
============ ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION (Notes 3
and 9):
Cash paid during the period for:
Interest .............................. $ 2,658 $ 38,836
============ ==============
Taxes ................................. $ -- $ --
============ ==============
Increase in capital lease obligations ... $ -- $ --
============ ==============
Conversion of convertible debt and
partnership capital to common stock:
Partnership capital .................. $ -- $ (3,031,246)
============ ==============
Convertible debt and accrued interest $ -- $ --
============ ==============
Common stock ........................... $ -- $ 7,167
============ ==============
Additional paid-in capital, net of
transaction costs ..................... $ -- $ 3,024,079
============ ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Period From
January 1, 1995 Six Month Period Ended
To August 31, Year Ended February 29, February 29,
1995 August 31, 1996 1996 1997
----------------- ----------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss .............................. $ (10,160,639) $ (18,429,784) $ (7,242,166) $ (16,292,351)
Adjustments to reconcile net loss to net
cash flow used in operating activities:
Depreciation and amortization ......... 2,420,397 8,676,262 3,804,088 5,820,354
Deferred tax benefit .................. (488,402) -- -- --
Noncash interest expense ............... 1,146,713 5,661,026 2,069,323 7,103,593
Increase (decrease) in cash from
changes in operating assets and
liabilities, net of effect of business
combinations:
Accounts receivable .................. (1,004,576) (1,369,646) (638,345) (566,244)
Prepaid expenses, deposits and
other assets ........................ 180,363 (126,370) (369,387) (554,268)
Deferred revenue and other
liabilities ........................ 894,993 906,413 565,957 269,117
Accounts payable and accrued
expenses ........................... 3,517,250 4,229,678 (2,550,085) 1,171,500
--------------- --------------- ------------- --------------
Net cash flows used in
operating activities ............... (3,493,901) (452,421) (4,360,615) (3,048,299)
--------------- --------------- ------------- --------------
INVESTING ACTIVITIES:
Purchases of businesses ............... (49,974,397) (9,916,038) (5,793,484) (2,500,000)
Acquisition of intangible assets ...... (608,345) (7,903,979) (3,994,366) (4,830,086)
Purchases and construction of property
and equipment ........................ (21,561,505) (54,217,352) (19,127,978) (20,095,260)
Purchase of restricted investments
(Note 14) .............................. -- -- -- (79,803,740)
--------------- --------------- ------------- --------------
Net cash flows used in investing
activities ........................ (72,144,247) (72,037,369) (28,915,828) (107,229,086)
--------------- --------------- ------------- --------------
FINANCING ACTIVITIES:
Proceeds from convertible notes
payable .............................. 62,823,304 73,437,817 32,523,994 23,700,000
Proceeds from issuance of
common stock ........................... 16,687,656 84 -- --
Payment on notes payable and
long-term obligations .................. (6,855,767) (1,306,759) (464,393) (308,081)
Contributions received from
partners .............................. -- -- -- --
Proceeds from notes payable and
long-term obligations .................. -- -- -- --
Net proceeds from issuance of Senior
Notes and common stock (Note 14) ........ -- -- -- 220,223,531
--------------- --------------- ------------- --------------
Net cash flows provided by
financing activities ............... 72,655,193 72,131,142 32,059,601 243,615,450
--------------- --------------- ------------- --------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................. (2,982,955) (358,648) (1,216,842) 133,338,065
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ..................... 5,018,935 2,035,980 2,035,980 1,677,332
--------------- --------------- ------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ........................... $ 2,035,980 $ 1,677,332 $ 819,138 $ 135,015,397
=============== =============== ============= ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION (Notes 3
and 9):
Cash paid during the period for:
Interest .............................. $ 119,725 $ 289,509 $ 141,190 $ 161,735
=============== =============== ============= ==============
Taxes ................................. $ 18,900 $ -- $ -- $ --
=============== =============== ============= ==============
Increase in capital lease obligations ... $ -- $ (878,988) $ 286,400 $ 480,026
=============== =============== ============= ==============
Conversion of convertible debt and
partnership capital to common stock:
Partnership capital .................. $ -- $ -- $ -- $ --
=============== =============== ============= ==============
Convertible debt and accrued interest $ (60,792,115) $ (9,165,805) $ -- $ --
=============== =============== ============= ==============
Common stock ........................... $ 11,210 $ 1,712 $ -- $ --
=============== =============== ============= ==============
Additional paid-in capital, net of
transaction costs ..................... $ 59,193,763 $ 9,163,264 $ -- $ --
=============== =============== ============= ==============
</TABLE>
See notes to consolidated financial statements.
F-6
<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. VPC has contributed additional capital and acquired OpTel's stock from
Vanguard which has increased its interest in the Company to 83.49% at August 31,
1996 (see Note 9).
During 1995 and 1996, the Company relocated its corporate headquarters,
began relocating its customer service centers and completed several
acquisitions. As a result of these actions, significant nonrecurring costs were
incurred primarily relating to severance costs of former employees at the
previous locations and relocation and recruiting costs of employees at the new
location.
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.
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:
F-7
<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
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 ..................Term of indebtedness
Other .............................................1 to 5 years
Management routinely evaluates its recorded investments for impairment
based on projected undiscounted cash flows 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 will be included in VPC's consolidated federal income tax
return. For purposes of financial reporting, the Company records 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 and revenue sharing with owners of MDUs for
which OpTel provides cable television and/or telecommunications service.
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. No loss per share information is presented for the period the Company
was organized as a partnership. 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. (See Note 13).
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.
F-8
<PAGE>
Interim Financial Statements (Unaudited) -- The accompanying financial
statements for the interim periods ended February 29, 1996, and February 28,
1997 and related disclosures are unaudited and have been prepared in accordance
with generally accepted accounting principles for condensed interim financial
statements and pursuant to the rules and requirements of the Securities and
Exchange Commission. In the opinion of the Company, the unaudited information
reflects all adjustments that are of a normal recurring nature and that are
necessary to fairly present the financial position, results of operations, and
cash flows for the periods ended February 29, 1996, and February 28, 1997.
Reclassifications -- Certain reclassifications of prior year amounts have
been made to conform to the current year presentation.
New Accounting Pronouncements -- SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
which is effective for fiscal years beginning after December 15, 1995, 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 is expected to be
insignificant to its financial condition and results of operations.
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, 1996.
Additionally, the $1,000,000 secured note payable was due to IRPC one year after
closing and is subject to adjustment based on the actual amount of assumed
liabilities. Based on the Company's current estimate of adjustments, no amount
has been paid as of August 31, 1996. 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 period from January 1,
1995 to August 31, 1995 and the year ended August 31, 1996, OpTel paid
$2,114,431 and $392,403, respectively, to repurchase certain partnership
obligations.
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
F-9
<PAGE>
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 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, 1996, the estimated payment due was $6,000,000 with a net
present value at August 31, 1995 and 1996 of $3,928,500 and $4,502,770,
respectively. EagleVision's operations are located in the Houston, Texas, area.
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 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.
Effective as of July 31, 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.
The purchase price of certain of the above acquisitions are subject to
final adjustments for such items as working capital balances and number of
subscribers (see Note 6).
The pro forma effect of the acquisitions of Telecom, Wireless Holdings,
Inc., and Videotron (Bay Area) Inc. would have an insignificant impact on the
consolidated results of operations of the Company for the eight months ended
August 31, 1995 and the year ended August 31, 1996.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
August 31, February 28,
--------------------------------- --------------
1995 1996 1997
-------------- ---------------- --------------
(Unaudited)
<S> <C> <C> <C>
Headends .................................... $ 18,281,508 $ 32,115,973 $ 39,839,545
Telephone switches ........................ 2,535,497 4,976,699 6,163,888
Distribution systems and enhancements ...... 15,337,808 36,372,848 42,819,704
Computer software and equipment ............ 1,205,405 4,957,123 6,491,098
Other ....................................... 2,183,117 5,813,345 6,792,364
Construction in progress .................. 9,903,862 25,434,861 29,360,714
------------- -------------- -------------
49,447,197 109,670,849 131,467,313
Less accumulated depreciation ............... (1,387,596) (5,871,199) (9,426,626)
------------- -------------- -------------
$ 48,059,601 $ 103,799,650 $ 122,040,687
============= ============== =============
</TABLE>
Total interest expense for 1995 and 1996 was $1,267,798 and $7,848,674,
respectively. Interest expense of $1,849,541 was capitalized during 1996.
F-10
<PAGE>
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
August 31, February 28
1995 1996 1997
---------- ----------- ---------------
(Unaudited)
<S> <C> <C> <C>
Goodwill ....................................... $ 41,907,574 $ 47,344,322 $ 49,504,464
Licensing fees and rights-of-entry costs ...... 13,378,382 22,173,500 26,538,544
Deferred financing costs ........................ -- -- 4,776,469
Other .......................................... 1,322,382 1,649,989 2,129,529
------------- ------------- -----------
56,608,338 71,167,811 82,949,006
Less accumulated amortization .................. (1,165,072) (5,291,808) (7,478,428)
------------- ------------- ------------
$ 55,443,266 $ 65,876,003 $ 75,470,578
============= ============= ============
</TABLE>
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consisted of the following:
<TABLE>
<CAPTION>
August 31, February 28,
1995 1996 1997
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
Installment notes payable bearing interest at
rates ranging from 7.75% to 13% per annum,
substantially all collateralized by certain trans-
portation equipment or private cable television
systems .......................................... $ 1,022,408 $ 511,145 $ 359,265
Limited Partner Obligations (Note 3) ............... 991,071 633,134 671,362
Obligations under capital leases, net of amounts
representing interest of $273,455, 355,236
and $402,242 (unaudited) for 1995, 1996 and
February 28, 1997, respectively .................. 835,944 1,299,062 1,548,202
13% Senior Notes due 2005 (unaudited)
(Note 14) .......................................... -- -- 218,036,458
------------ ------------ -------------
$ 2,849,423 $ 2,443,341 $220,615,287
============ ============ =============
</TABLE>
Aggregate maturities of the Company's indebtedness are as follows as of
August 31, 1996:
<TABLE>
<CAPTION>
Notes Payable Convertible Deferred
and Notes Payable Acquisition
Long-term to Stockholder Liabilities
Obligations (Note 11) (Note 3) Total
--------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Fiscal year ending:
1997 ............ $ 1,288,992 $ 89,414,364 $ 1,017,252 $ 91,720,608
1998 ............ 510,444 -- 1,000,000 1,510,444
1999 ............ 455,523 -- -- 455,523
2000 ............ 169,191 -- 4,502,770 4,671,961
2001 ............ 17,802 -- -- 17,802
Thereafter ...... 1,389 -- -- 1,389
------------ ------------- ------------ -------------
Totals ......... $ 2,443,341 $ 89,414,364 $ 6,520,022 $ 98,377,727
============ ============= ============ =============
</TABLE>
Convertible notes payable to stockholder includes $6,436,131 of accrued but
unpaid interest at August 31, 1996.
F-11
<PAGE>
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,
--------------------------
1995 1996
----------- ------------
<S> <C> <C>
Amount of equipment under capital leases ...... $ 925,105 $ 1,717,161
Less accumulated amortization .................. (93,962) (297,548)
---------- ------------
$ 831,143 $ 1,419,613
========== ============
</TABLE>
Minimum future obligations on operating leases at August 31, 1996, consist
of the following:
Operating
Leases
-------------
Fiscal year ending:
1997 .............................. $ 1,546,033
1998 .............................. 1,481,102
1999 .............................. 1,359,637
2000 .............................. 1,086,160
2001 .............................. 896,703
Thereafter ........................ 4,051,377
-------------
Total minimum lease payments ...... $ 10,421,012
=============
Rental expense under operating leases for the periods ending August 31,
1995 and 1996 was $616,000 and $1,208,000, respectively.
7. COMMITMENTS AND CONTINGENCIES
Employment and Consulting Agreements -- Employment agreements with certain
executive employees provide for separation payments equal to 3 to 12 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 $1,590,000 and
$297,000 in severance during 1995 and 1996, respectively, related to such
employment agreements. The severance costs are substantially the result of the
Company's acquisitions and the acquisition of the Company by VPC (see Notes 1
and 3).
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.
F-12
<PAGE>
Income tax expense (benefit) consists of the following for the period from
January 1, 1995 to August 31, 1995 and the year ended August 31, 1996:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current:
Federal ....................................... $ -- $ --
State .......................................... 18,900 --
------------ ------------
Total current tax expense ..................... 18,900 --
Net deferred tax expense (benefit) ............... (3,451,805) (4,470,008)
Change in deferred tax valuation allowance ...... 2,963,343 4,470,008
------------ ------------
Total income tax expense (benefit) ............ $ (469,562) $ --
============ ============
</TABLE>
A reconciliation of income taxes on reported pretax loss at statutory rates
to actual income tax expense (benefit) for the period from January 1, 1995 to
August 31, 1995 and the year ended August 31, 1996, is as follows:
<TABLE>
<CAPTION>
1995 Rate 1996 Rate
--------------- ---------- --------------- ---------
<S> <C> <C> <C> <C>
Income tax at statutory rates ...... $ (3,614,248) (34)% $ (6,266,127) (34)%
State income taxes, net of federal tax
benefit ........................... 12,474 0 (833) 0
Valuation allowance .................. 2,963,343 28 4,470,008 24
Non-deductible interest on convertible
notes .............................. 312,290 3 1,773,527 10
Other ................................. (143,421) (1) 23,425 0
-------------- ------- -------------- -------
Total income tax benefit ............ $ (469,562) (4)% $ -- 0%
============== ======= ============== =======
</TABLE>
The net deferred tax assets consist of the tax effects of temporary
differences related to the following:
<TABLE>
<CAPTION>
August 31,
----------------------------
1995 1996
------------ -----------
<S> <C> <C>
Allowance for uncollectible accounts receivable ...... $ 160,894 $ 184,326
Equipment, furniture and fixtures ..................... (742,900) (4,539,736)
Intangible assets .................................... (35,814) 105,249
Accrued employee compensation ........................ 102,340 182,676
Net operating loss carryforwards ..................... 4,374,934 12,371,690
IRPC deferred tax liability ........................... (488,402) (488,402)
Other ................................................ (41,691) (16,434)
------------ ------------
Deferred tax asset before valuation allowance ...... 3,329,361 7,799,369
Valuation allowance ................................. (3,329,361) (7,799,369)
------------ ------------
Net deferred tax asset .............................. $ -- $ --
============ ============
</TABLE>
The following are the expiration dates and the approximate net operating
loss carryforwards at August 31, 1996:
Expiration Dates
Through:
2010 ....................... $ 1,346,252
2011 ....................... 11,521,202
2012 ....................... 23,519,870
F-13
<PAGE>
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.
9. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER, STOCK ISSUANCE AND OTHER
TRANSACTIONS WITH STOCKHOLDERS (See Note 13)
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 Class B stock (as defined) of OpTel
on March 31, 1995. Concurrently, VPC purchased 105,667 shares of OpTel's Class B
stock from Vanguard. As a result of these transactions, VPC owned 66.75% of
OpTel outstanding equity. 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
Class B stock, and $8,311,848 represented a convertible note payable that bore
interest at 15% and was convertible to 155,229 shares of Class B 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.
During fiscal 1996, the Company issued $79,900,000 in convertible notes to
VPC all of which bear interest at 15%, compounded annually, generally with
principal and interest due on demand. As of August 31, 1996, $73,466,776 was
advanced to OpTel under these notes.
The principal and interest on convertible notes may be converted, subject
to anti-dilution adjustments and other terms, into Class B 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 a price equal to the quotient
of $225 million divided by the number of shares of common stock outstanding at
the conversion date.
Amounts due from stockholder of $541,586 as of August 31, 1996, represent
amounts paid by the Company on behalf of VPC. Such amounts were repaid by VPC in
October 1996.
In August 1996, the Company granted Vanguard a non-transferable option to
purchase 48,937 shares of Class B stock at an exercise price of $53.55 per
share, subject to adjustment. The option is exercisable at any time after August
31, 1996 and expires on the earlier to occur of July 31, 1999 or 180 days after
the IPO Date.
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 stock (as defined) 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 have each agreed to provide consultant,
advisory and management services for $350,000 per annum (plus travel expenses)
per party. This arrangement terminates on the earlier to occur of the IPO Date
or the date on which any public or institutional financing obtained by the
Company restricts the payment of fees or charges to affiliates of the Company.
F-14
<PAGE>
10. STOCKHOLDERS' EQUITY
At August 31, 1996, the Class A Common Stock ("Class A stock") and Class B
Common Stock ("Class B 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, and
each holder of Class B stock is entitled to ten votes for each share of Class B
stock held. VPC and Vanguard (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.
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, 1996 and 1995, it would match 50% of its employees' elective
contribution (to a maximum Company contribution of 3% of the employees'
compensation). For the years ended August 31, 1996 and 1995, the Company's match
of its employees' elective contributions were $187,577 and $80,886,
respectively.
12. 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.
<TABLE>
<CAPTION>
August 31, 1995 August 31, 1996
----------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ............ $ 2,035,980 $ 2,035,980 $ 1,677,332 $ 1,677,332
Accounts receivable .................. 1,594,110 1,594,110 3,063,719 3,063,719
Liabilities:
Accounts payable ..................... 2,370,976 2,370,976 5,647,024 5,647,024
Customer deposits and deferred
revenue .............................. 1,258,120 1,258,120 2,167,253 2,167,253
Convertible notes payable to
stockholder ........................ 17,949,690 17,950,000 89,414,364 89,415,000
Notes payable and long-term
obligations ........................ 2,849,423 2,850,000 2,443,341 2,445,000
Deferred acquisition liabilities ...... 6,174,295 6,175,000 6,520,022 6,525,000
</TABLE>
F-15
<PAGE>
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, 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 estimates presented herein are based on pertinent information
available to management as of August 31, 1995 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.
13. SUBSEQUENT EVENTS
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 will receive
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 non-voting Class C Common Stock ("Class C stock").
14. ISSUANCE OF NOTES PAYABLE, COMMON STOCK AND INCENTIVE STOCK PLAN (Unaudited)
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 the investment thereof, 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.
On November 12, 1996, the Company adopted an incentive Stock Plan (the
"Plan"), pursuant to which options to acquire a maximum of 96,137 shares of
Class A Common may be granted to certain executives of the Company. Since
November 12, 1996 the Company granted options to purchase 66,655 shares of Class
A stock at an exercise price of $85.75 and 18,544 shares of Class A stock at an
exercise price of $74.42 per share. The options generally vest in equal
installments on each of the second, third, fourth and fifth anniversaries of the
grantees date of hire.
As a result of the formation of the plan in the fiscal year ended August
31, 1997 the Company will adopt Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," issued by the
Financial Accounting Standards Board, which 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. The Company will disclose 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.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of OpTel, Inc.:
We have audited the accompanying combined statements of operations and cash
flows of Richey Pacific Cablevision (the "Company") for the years ended December
31, 1993 and December 28, 1994. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined 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, the combined financial statements present fairly, in all
material respects, the results of operations and cash flows of Richey Pacific
Cablevision for the years ended December 31, 1993 and December 28, 1994, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
January 27, 1997
F-17
<PAGE>
RICHEY PACIFIC CABLEVISION
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND DECEMBER 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1994
-------------- ---------------
<S> <C> <C>
REVENUES ................................................... $ 3,913,967 $ 4,299,257
------------- ------------
OPERATING EXPENSES:
Cost of services .......................................... 1,120,101 1,648,389
Customer support, general and administrative (Note 3) ...... 2,396,781 3,215,081
Depreciation and amortization .............................. 1,345,007 1,743,497
------------- ------------
Total operating expenses .............................. 4,861,889 6,606,967
------------- ------------
LOSS FROM OPERATIONS ....................................... (947,922) (2,307,710)
INTEREST EXPENSE ............................................. (769,548) (1,218,719)
------------- -------------
NET LOSS ................................................... $ (1,717,470) $ (3,526,429)
============= =============
</TABLE>
See notes to combined financial statements.
F-18
<PAGE>
RICHEY PACIFIC CABLEVISION
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND DECEMBER 28, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1994
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss ...................................................... $ (1,717,470) $ (3,526,429)
Adjustments to reconcile net loss to cash flow provided by
operating activities:
Depreciation and amortization ................................. 1,345,007 1,743,497
Gain on sale of assets ....................................... (6,889) (33,559)
Limited partners' interest .................................... 16,399 42,709
Increase (decrease) in cash from changes in operating assets:
Accounts receivable .......................................... 14,880 (47,817)
Inventory ...................................................... 10,812 23,020
Advances, deposits, and other ................................. 18,385 33,105
Advances -- officers .......................................... (28,439) 65,210
Accounts payable and accrued liabilities ..................... 819,665 1,138,870
Advance payments and deposits ................................. (27,264) 1,359
------------- -------------
Net cash flows from operating activities .................. 445,086 (560,035)
------------- -------------
INVESTING ACTIVITIES:
Purchases of cable systems, property, plant and equipment ...... (1,349,954) (1,154,165)
Cable systems, property, plant and equipment sales ............ 714,594 137,633
Notes receivable ................................................ (14,414) --
------------- -------------
Net cash flows from investing activities .................. (649,774) (1,016,532)
------------- -------------
FINANCING ACTIVITIES:
Net borrowings under advances from related company ............ 49,826 (10,358)
Net changes to notes payable .................................... (16,325) 2,000,746
Additions to long-term debt .................................... 79,328 --
Principal payments on long-term debt ........................... (304,580) (282,640)
Additions to long-term debt -- related parties .................. 423,438 (63,657)
Other ......................................................... (16,396) (86,717)
------------- -------------
Net cash flows from financing activities .................. 215,291 1,557,374
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................... 10,603 (19,193)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 8,590 19,193
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................ $ 19,193 $ --
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Conversion of accrued interest to long-term debt ............... $ 126,500 $ --
Conversion of trade payables to long-term debt ............... 290,221 --
Notes payable obligation assumed in acquisition of cable
systems, property, plant and equipment ..................... 1,211,899 --
Additions to property by increase in limited partner obligation 150,962 512,672
Decrease in limited partnership interest by increase in lim-
ited partner obligation .................................... 85,449 --
Long-term debt assumed in acquisition of cable systems,
property, plant and equipment .............................. -- --
Conversion of long-term debt to common stock .................. -- 2,958,112
</TABLE>
See notes to combined financial statements.
F-19
<PAGE>
RICHEY PACIFIC CABLEVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND DECEMBER 28, 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The combined financial statements of RICHEY
PACIFIC CABLEVISION (the Company) combine the accounts of Richey Pacific
Cablevision, Inc., IRPC-Texas, Inc., IRPC Texas-Ventana Inc. and IRPC-Arizona,
Inc. all of which are subsidiaries of International Richey Pacific Cablevision,
Ltd. (the Parent). All significant intercompany accounts and transactions have
been eliminated, except for transactions between RPC and the Parent. On December
28, 1994 all of the common stock of these entities was purchased by OpTel, Inc.
Results of operations for the period December 29, 1994 through December 31, 1994
are not material for comparative purposes.
Operations -- The Company's principal business operations include
constructing, purchasing, and operating private cable television systems in
California, Arizona and Texas.
Revenue Recognition -- Subscriber revenue is recognized on the accrual
basis and is recorded when the cable service has been received by its customers.
Included in subscriber revenue for the year ended December 31, 1993 is $100,000
of nonrecurring consulting services provided by the Company.
Depreciation and amortization -- Depreciation and amortization on cable
systems, property, plant and equipment is calculated using the straight-line
method over the estimated useful lives of the assets which range from three to
ten years. Cost of maintenance and repairs is charged to operations as incurred;
significant renewals and betterments are capitalized.
Income Taxes -- The Company adopted the provisions of the Financial
Accounting Standard Board's Statement No. 109, "Accounting for Income Taxes"
effective January 1, 1993. The effect of adopting this statement did not have
any impact on the results of operations or the Company's financial position. No
benefit of tax loss carryforwards has been recognized as realization is
uncertain. Additionally, the acquisition of the Company by OpTel will restrict
the utilization of tax loss carryforwards.
Investments in Limited Partnerships -- Investments in limited partnerships
have been consolidated with one of the combined companies and, accordingly, the
results of operations of the partnerships have been included in the combined
financial statements. (See Note 2).
F-20
<PAGE>
2. INVESTMENTS
The Company, through Richey Pacific Cablevision, Inc. (RPCV), is a general
partner in limited partnership investments (the partnerships) and, as the
general partner, is to provide the management, technical and accounting support
for the partnerships. Compensation to be paid to RPCV for providing these
services includes receiving installation revenue, converter revenue, and
predetermined revenue per customer served, all as stated in the partnership
agreements. The operations and cash flows of the partnerships have been included
with those of the Company.
The partnership agreements prescribe that losses are shared in proportion
to the partnership capital balances. Income is shared as follows: for all, but
one of the partnerships, 50% to RPCV and 50% to the limited partners; for the
other partnership, 75% to RPCV and 25% to the limited partners. RPCV 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 RPCV 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. RPCV has agreed to provide the agent for the
limited partners with a carried interest in each partnership. This interest
takes two forms; an annual return equal to 5% of the funds invested by the
limited partners and a payment upon the sale of the systems equal to the
proceeds received net of the purchase cost of the limited partners' interest.
The Company has agreed to pay a broker dealer an annual fee equal to one
percent of the total capital raised for the partnerships.
3. RELATED PARTY TRANSACTIONS
Certain officers and shareholders of the Parent are owners of Richey
Construction Company which has advanced funds to the Company as needed for its
operations. Advances bear interest at 2% in excess of the prime rate, and are
unsecured. Additionally, Richey Construction Company provides accounting and
management services to the Company for which they were paid $48,000 per year.
4. COMMITMENTS AND CONTINGENCIES
At December 28, 1994, the Company had no material operating or capital
leases that extend beyond one year. The Company leases its office and warehouse
facilities in California on a month to month basis.
Rental expense under operating leases during the years ended December 31,
1993 and December 28, 1994, was approximately, $84,000 and $139,251,
respectively.
The Company is involved in certain claims and litigation. While the final
outcome with respect to these claims and litigation cannot be predicted with
certainty, it is the opinion of management, after consulting with its legal
counsel, that any ultimate liability will not have a material effect on the
combined financial statements of the Company.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of OpTel, Inc.:
We have audited the accompanying statements of revenues and expenses and
statements of cash flows of EagleVision (the "Company") for the years ended
December 31, 1993 and 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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, the financial statements present fairly, in all material
respects, the revenues and expenses and cash flows of EagleVision for the years
ended December 31, 1993 and 1994, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Dallas, Texas
January 27, 1997
F-22
<PAGE>
EAGLEVISION
STATEMENTS OF REVENUES AND EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1994
------------- --------------
<S> <C> <C>
REVENUES .......................................... $ 6,098,202 $ 6,616,392
------------- -------------
EXPENSES:
Cost of services ................................. 1,793,644 2,085,753
Customer support, general and administrative ...... 3,815,106 3,543,252
Depreciation and amortization ..................... 3,683,843 3,287,674
Loss on disposal of assets ........................ 1,072,591 417,652
------------- -------------
Total expenses ................................. 10,365,184 9,334,331
------------- -------------
EXCESS OF EXPENSES OVER REVENUES .................. $ (4,266,982) $ (2,717,939)
============= =============
</TABLE>
See notes to financial statements.
F-23
<PAGE>
EAGLEVISION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1994
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Excess of expenses over revenues ........................... $ (4,266,982) $ (2,717,939)
Adjustments to reconcile excess of expenses over revenues to
net cash flows provided by operations:
Depreciation and amortization .............................. 3,683,843 3,287,674
Loss on disposal of assets ................................. 1,072,591 417,652
Increase (decrease) in cash from changes in operating
assets:
Accounts receivable, net ................................. (20,128) (53,794)
Inventory ................................................ 194,518 (18,618)
Prepaid expenses ....................................... (14,688) 9,591
Accounts payable ....................................... (119,499) (152,153)
Accrued expenses and deferred revenues .................. 71,052 (66,398)
------------- -------------
Net cash flows provided by operating activities ......... 600,707 706,015
------------- -------------
INVESTING ACTIVITIES:
Purchases and construction of property and equipment ...... (1,649,078) (474,315)
Other investing activities ................................. (102,745) 30,979
------------- -------------
Net cash flows used for investing activities ............ (1,751,823) (443,336)
------------- -------------
FINANCING ACTIVITIES:
Net investment from Owner ................................. 1,229,719 (317,363)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................ 78,603 (54,684)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... -- 78,603
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 78,603 $ 23,919
============= =============
</TABLE>
See notes to financial statements.
F-24
<PAGE>
EAGLEVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Related Information -- The accompanying financial
statements include the accounts of EagleVision (the Company), a division of
Nationwide Communications Inc. (NCI). The Company is a cable television system
operator serving the Metropolitan Houston, Texas area through franchise cable
and satellite master antenna television (SMATV) systems. On January 11, 1995,
OpTel, Inc. acquired the assets of the Company from NCI.
Depreciation and amortization -- Depreciation is calculated using the
Modified Accelerated Cost Recovery System (MACRS), an accelerated depreciation
method. When assets are disposed or retired, the costs and related accumulated
depreciation are removed and any resulting gain or loss is reflected in
operations for the period. Cost of maintenance and repairs is charged to
operations as incurred; significant renewals and betterments are capitalized.
Life
-----------
Buildings and improvements ......... 31.5 years
Cable TV plant and equipment ......... 10 years
Headend equipment .................. 10 years
Office furniture and equipment ...... 5-10 years
Vehicles ........................... 5 years
Intangibles -- Intangible assets represent an allocation of the excess
purchase price over the fair value of certain operating assets and a franchise
agreement with the city of Houston acquired in connection with the purchase in
July 1990. These costs are amortized on a straight-line basis over approximately
eight years.
Operating Agreements -- The Company has obtained operating rights in
Houston and other markets through the purchase of these rights from others or by
entering into renewable operating agreements. Acquisitions of operating rights
are capitalized and amortized over the terms of the agreements which range from
3 to 18 years. When an MDU terminates an operating agreement, the cost and
related accumulated amortization are removed and any resulting gain or loss is
reflected in income for the period.
Revenue Recognition -- The Company recognizes subscriber revenue upon
delivery of programming. The Company bills customers in advance for monthly
services, which results in the deferral of revenue until those services are
provided.
Income Taxes -- The Company is included in a consolidated tax return filed
by NCI with its parent for federal tax purposes. The Company is not subject to
state and local income taxes. Since EagleVision is a division of NCI, NCI does
not allocate a tax provision or benefit to the Company. As such, the
accompanying financial statements do not reflect a benefit for taxes or any
current or deferred tax balances.
F-25
<PAGE>
2. RELATED PARTY TRANSACTIONS
NCI has provided services to the Company, including legal, accounting,
general management, data processing, administration of benefit and insurance
programs and treasury services. In connection with these services, NCI charged
the Company $38,052 and $58,299 in 1993 and 1994 respectively. These charges
have been made based on a reasonable method of allocation, however, they are not
necessarily indicative of the level of expenses which might have been incurred
by the Company on a stand-alone basis. No charges for capital used to finance
the business are allocated to the Company.
Included in total expenses in the accompanying statements of revenues and
expenses is $360,000 and $343,000 for 1993 and 1994, respectively, relating to
noncompete agreements held by NCI which were obtained in connection with the
acquisition of EagleVision.
3. EMPLOYEE BENEFITS
The Company is a participant, together with other affiliated companies,
(collectively, Nationwide Enterprise), in a defined benefit pension plan
covering all employees who have completed at least 1,000 hours of service within
a 12-month period and who have met certain age requirements. The Company also
participates in the Nationwide Enterprise 401(k) savings plan which covers
substantially all employees. The Company recognizes amounts allocated by NCI
based on the number of employees as its net pension and retirement cost. The
annual pension and retirement expense allocated to the Company for 1993 and 1994
were $91,788 and $104,645 respectively.
4. LEASE COMMITMENTS
Effective September 1994, the Company entered into new lease agreements for
the use of certain office and warehouse space. The leases will expire January
31, 1997. The Company also leases certain office and phone equipment. Total rent
expense for all leases of the Company were approximately $67,000 and $112,000
for 1993 and 1994 respectively.
5. LEGAL MATTERS
NCI and EagleVision are involved in various legal actions in the ordinary
course of their business. These actions generally involve such matters as
property ownership and royalty payments. NCI believes these proceedings are
incidental to its business and will not result in adverse judgements that would
materially impact operating revenues and expenses. The primary responsibility
for such legal actions related to EagleVision (during NCI's ownership) remains
NCI's.
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of OpTel, Inc.:
We have audited the accompanying statement of operations and cash flows of Triax
Associates V, L.P., (the "Company") for the year ended August 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the results of operations and cash flows of Triax Associates V, L.P.,
for the year August 31, 1995, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Dallas, Texas
January 27, 1997
F-27
<PAGE>
TRIAX ASSOCIATES V, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
REVENUES ................................................... $ 3,342,134
-----------
OPERATING EXPENSES:
Cost of services .......................................... 923,597
Customer support, general and administrative (Note 3) ...... 1,155,866
Depreciation and amortization .............................. 1,181,753
-----------
Total operating expenses .............................. 3,261,216
-----------
INCOME FROM OPERATIONS ....................................... 80,918
INTEREST EXPENSE ............................................. (620,527)
-----------
NET LOSS ................................................... $ (539,609)
===========
</TABLE>
See notes to financial statements.
F-28
<PAGE>
TRIAX ASSOCIATES V, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
OPERATING ACTIVITIES:
Net loss ...................................................... $ (539,609)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization .............................. 1,181,753
Increase (decrease) in cash from changes in operating assets:
Accounts receivable ....................................... (4,316)
Prepaid expenses .......................................... (13,342)
Accounts payable and other accrued expenses ............... 80,649
Subscriber prepayments and deposits ........................ 13,855
------------
Net cash flows from operating activities .................. 718,990
------------
INVESTING ACTIVITIES:
Acquisition of intangibles .................................... (977,190)
Purchase of property, plant and equipment ..................... (1,025,476)
------------
Net cash flows from investing activities ..................... (2,002,666)
------------
FINANCING ACTIVITIES:
Proceeds from debt .......................................... 1,200,400
Advances from affiliate ....................................... 48,038
------------
Net cash flows from financing activities .................. 1,248,438
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ..................... (35,238)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 76,650
------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 41,412
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest ........................ $ 659,338
============
</TABLE>
See notes to financial statements.
F-29
<PAGE>
TRIAX ASSOCIATES V, L.P.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. THE PARTNERSHIP
Triax Associates, V, L.P. (the "Partnership") is a Colorado limited
partnership formed for the purpose of owning, constructing and operating cable
television systems and satellite master antenna television ("SMATV") systems.
The Partnership allocates profits, losses, gains from capital events and cash
distributions among the partners in accordance with their "sharing fractions."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition -- Revenues are recognized in the period the related
services are provided to the subscribers.
Income Taxes -- No provision has been made for federal, state or local
income taxes because they are the responsibility of the individual partners. The
principal difference between tax and financial reporting net income (loss)
results primarily from the use of accelerated depreciation for tax purposes.
Depreciation and amortization -- Replacement, renewals and improvements are
capitalized and costs for repairs and maintenance are charged to operations when
incurred. Depreciation and amortization are calculated using the straight-line
method over the following estimated useful lives:
Life
Cable plant .................. 5-10 years
Equipment .................. 5 years
Leasehold improvements ...... 5 years
Vehicles ..................... 4 years
Intangible Assets -- Intangible assets are amortized using the
straight-line method over the following estimated useful lives:
Life
Operating rights ............ 15 years
Franchise costs ............ 6-11 years
Noncompete agreements ...... 5 years
3. RELATED PARTY TRANSACTIONS
Triax Communications Corporation ("TCC"), a limited partner, has advanced
funds to the Partnership for working capital needs.
TCC provides management services to the Partnership for a fee equal to 7%
of gross revenues. Charges for such services amounted to $233,949. Additionally,
TCC allocated to the Partnership certain indirect costs incurred by TCC on
behalf of the Partnership which amounted to $40,516.
The Partnership purchases programming through TCC at rates which would be
available to the Partnership if purchased directly from the program suppliers.
4. LEASES
The Partnership leases office facilities, headend sites and other equipment
under noncancelable operating lease agreements, some of which contain renewal
options. Total rental expenses, including month-to-month rental arrangements,
was $34,961.
5. ACQUISITIONS
On December 30, 1994, the Partnership acquired certain assets of
Diversified Cable, Ltd., totalling 15 SMATV systems for $1,414,123, including
closing costs. The acquisition was accounted for under the purchase method of
accounting.
F-30
<PAGE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer made hereby, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that there has
been no change in the information set forth herein or in the affairs of the
Company since the date as of which information is given in this Prospectus. This
Prospectus does not constitute an offer or a solicitation by anyone in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so or to any
person to whom it is unlawful to make such offer or solicitation.
------------------------------------------
TABLE OF CONTENTS
Page
-----
Prospectus Summary ..................... 3
Risk Factors ........................... 15
The Exchange Offer ........................ 27
Use of Proceeds ........................ 35
Capitalization ........................... 36
Selected Consolidated Financial and
Operating Data ........................ 37
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................. 40
Business ................................. 50
Management .............................. 79
Principal Stockholders .................. 86
Certain Transactions ..................... 90
Description of the Notes ............... 94
Book-Entry, Delivery and Form ............ 120
Exchange Offer; Registration Rights ...... 122
Certain Federal Income Tax Considerations 124
Plan of Distribution ..................... 124
Legal Matters ........................... 125
Experts ................................. 125
Index to Financial Statements ............ F-1
Until [90 days after effective date] all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
<PAGE>
OpTel, Inc.
$225,000,000 of 13%
Senior Notes Due 2005,
Series B
[LOGO]
Prospectus
Dated , 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Company's Certificate of Incorporation provides that the Company will
to the fullest extent permitted by the DGCL, indemnify all persons whom it may
indemnify pursuant thereto. The Company's By-laws contain a similar provision
requiring indemnification of the Company's directors and officers to the fullest
extent authorized by the DGCL. The DGCL permits a corporation to indemnify its
directors and officers (among others) against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by them in connection with any action, suit or proceeding brought (or
threatened to be brought) by third parties, if such directors or officers acted
in good faith and in a manner they reasonably believed to be in or not opposed
to the best interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made for expenses (including attorneys'
fees) actually and reasonably incurred by directors and officers in connection
with the defense or settlement of such action if they had acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged liable to the Company unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses. The DGCL further provides that, to the extent any
director or officer has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in this paragraph, or in defense of
any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith. The Company has indemnification insurance under which
directors and officers are insured against certain liability that may occur in
their capacity as such.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
(a) Exhibits
- -------------
<S> <C>
1.1 * Purchase Agreement, dated February 7, 1997, between the Issuer and Salomon Brothers Inc and
Merrill Lynch, Pierce, Fenner & Smith.
3.1 * Restated Certificate of Incorporation of the Issuer, together with all amendments thereto.
3.2 * Bylaws of the Issuer.
4.1 * Indenture, dated as of February 14, 1997, between the Issuer 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 Issuer 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 Issuer, Salomon Brothers Inc
and Merrill Lynch, Pierce, Fenner & Smith.
4.5 * Common Stock Registration Rights Agreement, dated as of February 14, 1997, between the Issuer,
VPC, GVL, Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith.
5.1 * Opinion of Kronish, Lieb, Weiner & Hellman LLP re: legality of securities offered.
10.1 * Stockholders' Agreement, dated as of December 22, 1994, between VPC, Vanguard, the General
Partner and the Issuer.
10.1.1 Term Sheet, dated as of May 13, 1997, regarding proposed stockholder arrangements.
10.2 * Registration Rights Agreement, dated as of December 22, 1994, between the Issuer and Vanguard.
10.3 * Settlement Agreement, dated as of August 1, 1996, between Vanguard, the General Partner, Pacific,
VPC, the Issuer and GVL.
10.4 * Amendment, dated as of February 17, 1997, between Vanguard, the General Partner, Pacific, VPC,
GVL and the Issuer.
10.5 * Form of Convertible Note (included as Exhibit B to the Amendment filed 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 filed 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 Issuer.
10.8 * First Amendment to Lease Agreement dated August 8, 1996 between Space Center Dallas, Inc. and
the Issuer.
10.9 * Restated Stock Incentive Plan.
10.10* Annual Bonus Plan.
10.11* Medium Term Performance Plan.
10.12* Employment Agreement between Louis Brunel and the Issuer dated November 15, 1996.
10.13* Employment Agreement between Rory Cole and the Issuer dated January 3, 1997.
10.14* Employment Agreement between Michael Katzenstein and the Issuer dated September 18, 1995.
10.15* Employment Agreement between Julian Riches and the Issuer dated January 31, 1995.
10.16* Employment Agreement between William O'Neil and the Issuer dated February 8, 1995.
10.17* Separation and Consulting Agreement, dated as of September 1, 1996, between the Issuer and
James A. Kofalt.
10.18* Warrant Agreement, dated as of September 1, 1996, between the Issuer and James A. Kofalt.
10.19* 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 THI.
10.20* Equipment License and Services Agreement, dated as of February 14, 1997, between TVMAX and
THI.
10.21* 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.
10.22* Option Agreement, dated as of February 14, 1997, between TVMAX and THI.
10.23* 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.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
(a) Exhibits
- -------------
<S> <C>
10.24* 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.
11.1 Statement re: Computation of Per Share Earnings.
12.1 * Statement re: computation of ratio of earnings to fixed charges
21.1 * List of subsidiaries of the Issuer.
23.1 * Consent of Kronish, Lieb, Weiner & Hellman LLP is included in the opinion filed as Exhibit 5.1
to this Registration Statement.
23.2 * Consent of Goldberg, Godles, Weiner & Wright.
23.3 Consent of Deloitte & Touche LLP.
24.1 * Power of Attorney is set forth on the signature page of this Registration Statement.
25.1 * Statement of Eligibility Under the Trust Indenture Act of 1939 on Form T-1.
27.1 * Financial Data Schedule.
99.1 Form of Letter of Transmittal.
</TABLE>
- ------------
*Previously filed.
(b) Financial Statement Schedule
The following Financial Statement Schedule is filed as part of the
Registration Statement.
Allowance for Doubtful Accounts
All other financial statement schedules have been omitted because the
required information is not present or not present in amounts to require
submission of the schedules, or because the information required is included in
the financial statements.
Item 22. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that paragraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Issuer pursuant to
Section 13 or Section 15(d) of the Exchange Act, that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-3
<PAGE>
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, on this 20th day
of May, 1997.
OPTEL, INC.
By: /s/ Louis Brunel
-------------------------------------
Louis Brunel
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- -------------------------------------- ----------------------------------------- -------------
<S> <C> <C>
Principal Executive Officer:
/s/ Louis Brunel
- --------------------- President and Chief Executive Officer May 20, 1997
Louis Brunel
Principal Financial and
Accounting Officers:
Chief Financial Officer May , 1997
*
- ---------------------
Bertrand Blanchette
Controller May , 1997
*
- ---------------------
Craig Milacek
Directors:
Chairman of the Board and Director May , 1997
*
- ---------------------
Claude Chagnon
Vice Chairman of the Board and Director May 20, 1997
/s/ Alain Michel
- ---------------------
Alain Michel
/s/ Louis Brunel Director May 20, 1997
- ---------------------
Louis Brunel
* Director May , 1997
- ---------------------
Christian Chagnon
* Director May , 1997
- ---------------------
Pierre Collins
* Director May , 1997
- ---------------------
Barry Porter
* Director May , 1997
- ---------------------
Gary Winnick
*By: /s/ Louis Brunel
-----------------
Louis Brunel,
as attorney-in-fact
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- --------- ------------------------------------------------------------------------------------------ -----
<S> <C> <C>
1.1 * Purchase Agreement, dated February 7, 1997, between the Issuer and Salomon
Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith.
3.1 * Restated Certificate of Incorporation of the Issuer, together with all amendments
thereto.
3.2 * Bylaws of the Issuer.
4.1 * Indenture, dated as of February 14, 1997, between the Issuer 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 Issuer 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 Issuer, Salomon
Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith.
4.5 * Common Stock Registration Rights Agreement, dated as of February 14, 1997,
between the Issuer, VPC, GVL, Salomon Brothers Inc and Merrill Lynch, Pierce,
Fenner & Smith.
5.1 * Opinion of Kronish, Lieb, Weiner & Hellman LLP re: legality of securities offered.
10.1 * Stockholders' Agreement, dated as of December 22, 1994, between VPC, Vanguard,
the General Partner and the Issuer.
10.1.1 Term Sheet, dated as of May 13, 1997, regarding proposed stockholder arrangements.
10.2 * Registration Rights Agreement, dated as of December 22, 1994, between the Issuer and
Vanguard.
10.3 * Settlement Agreement, dated as of August 1, 1996, between Vanguard, the General
Partner, Pacific, VPC, the Issuer and GVL.
10.4 * Amendment, dated as of February 17, 1997, between Vanguard, the General Partner,
Pacific, VPC, GVL and the Issuer.
10.5 * Form of Convertible Note (included as Exhibit B to the Amendment filed 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 filed 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
Issuer.
10.8 * First Amendment to Lease Agreement dated August 8, 1996 between Space Center
Dallas, Inc. and the Issuer.
10.9 * Restated Stock Incentive Plan.
10.10* Annual Bonus Plan.
10.11* Medium Term Performance Plan.
10.12* Employment Agreement between Louis Brunel and the Issuer dated November 15,
1996.
10.13* Employment Agreement between Rory Cole and the Issuer dated January 3, 1997.
10.14* Employment Agreement between Michael Katzenstein and the Issuer dated September
18, 1995.
10.15* Employment Agreement between Julian Riches and the Issuer dated January 31, 1995.
10.16* Employment Agreement between William O'Neil and the Issuer dated February 8,
1995.
10.17* Separation and Consulting Agreement, dated as of September 1, 1996, between the
Issuer and James A. Kofalt.
10.18* Warrant Agreement, dated as of September 1, 1996, between the Issuer and James A.
Kofalt.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- --------- -------------------------------------------------------------------------------------- -----
<S> <C> <C>
10.19* 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 THI.
10.20* Equipment License and Services Agreement, dated as of February 14, 1997, between
TVMAX and THI.
10.21* 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.
10.22* Option Agreement, dated as of February 14, 1997, between TVMAX and THI.
10.23* 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.
10.24* 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.
11.1 Statement re: Computation of Per Share Earnings.
12.1 * Statement re: computation of ratio of earnings to fixed charges
21.1 * List of subsidiaries of the Issuer.
23.1 * Consent of Kronish, Lieb, Weiner & Hellman LLP is included in the opinion filed as
Exhibit 5.1 to this Registration Statement.
23.2 * Consent of Goldberg, Godles, Weiner & Wright.
23.3 Consent of Deloitte & Touche LLP.
24.1 * Power of Attorney is set forth on the signature page of this Registration Statement.
25.1 * Statement of Eligibility Under the Trust Indenture Act of 1939 on Form T-1.
27.1 * Financial Data Schedule.
99.1 Form of Letter of Transmittal.
</TABLE>
- ------------
*Previously filed.
<PAGE>
CAPITAL COMMUNICATIONS CDPQ INC. ("CDPQ") AND
VPC CORPORATION ("VPC")
(CDPQ AND VPC COLLECTIVELY REFERRED TO AS THE "SHAREHOLDERS")
IN RELATION TO THEIR SHARE OWNERSHIP IN
OPTEL, INC. ("OPTEL")
- --------------------------------------------------------------------------------
TERM SHEET
- --------------------------------------------------------------------------------
A. Articles
--------
1. VPC and Le Groupe Videotron Ltee (*Le Groupe Videotron*) shall use their
reasonable best efforts to cause OpTel to modify its charter prior to CDPQ
acquiring any shares of OpTel from Vanguard and VPC undertakes to vote in
favor of such modifications:
(a) so as to provide holders of Class B Common Stock with pre-emptive
rights. Any shares to be issued by OpTel (except if made under a stock
option plan for directors, officers and employees of OpTel or under VPC
convertible notes) shall be first offered by OpTel to VPC and CDPQ in
proportion to the number of shares held by them, on a fully diluted
basis; and
(b) so that any restrictions relating to the voting rights attached to the
Class B Common Stock in the event of the acquisition and resale of such
shares be removed from the Charter;
2. In the event that in the course of a public offering of equity securities
of OpTel, strategic investment in OpTel, amalgamation or merger VPC
determines that it would be preferable that the shares held by it in OpTel
cease to carry multiple voting rights, CDPQ shall collaborate and
participate in any modification requested by VPC as long as CDPQ and VPC
are treated in the same manner.
3. In the event that in the course of a public offering of equity securities
of OpTel, strategic investment in OpTel, amalgamation or merger VPC
determines that it would be preferable that OpTel modify its charter in
order to cease providing the holders of Class B Common Stock with
pre-emptive rights, CDPQ shall collaborate and participate in any
modification requested by VPC as long as CDPQ and VPC are treated in the
same manner.
<PAGE>
4. CDPQ acknowledges that OpTel has given a mandate to a broker in order to
provide OpTel with a stategic investor, which shall not be an affiliate of
VPC, which may subscribe for OpTel's stock and, subject to (i) Section
B(10) hereof; (ii) the fact that the subscription price payable by such
strategic investor shall not be less then the price per share (US$82.18)
paid by CDPQ for the acquisition of OpTel's shares from Vanguard (the "CDPQ
Price"); and (iii) VPC's election not to exercise its pre-emptive rights
available by reason of such shares issuance by OpTel, CDPQ agrees that it
will not exercise its pre-emptive rights available by reason of such shares
issuance by OpTel.
5. CDPQ agrees that VPC may, at any time on or after September 1, 1997 but
before September 30, 1997, convert such portion of its convertible notes
including interest theron in OpTel necessary to provide VPC with 80% of the
voting rights in OpTel, at a price per share equal to the CDPQ Price in
order to provide VPC the option to consider OpTel on a tax consolidated
basis with its own operation. In the event VPC makes use of OpTel's tax
losses and credits and carry-overs and carry-backs of tax losses and
credits (collectively "tax Items") for any fiscal year subsequent to
August 31, 1997, VPC hereby undertakes to fully compensate OpTel, at the
end of each fiscal year (commencing August 31, 1998) at the net present
value (as provided in the example in Schedule C hereto) of the Tax Items
for any Tax Items OpTel would have benefited from had the conversion not
taken place, less interest amounts on the portion of the convertible notes
converted and which would have accrued on such notes until, the earlier of,
their maturity had the conversion not taken place or the conversion date of
all other outstanding convertible notes.
B. Shareholders' Agreement
-----------------------
The Shareholders' Agreement among VPC and CDPQ relating to OpTel shall be
designed primarily to protect the rights of the Shareholders and to provide
liquidity. To this effect, the Shareholders' Agreement will include provisions
relating to:
1. Reciprocal rights of first offer to be exercised within a period of 30
days; if such right of first offer is not exercised during said period of
thirty days the vendor shall have a period of 120 days to seek and accept
another offer and shall have the right to sell its shares to a third party
at the same price as offered to the other Shareholder (less 10% or at a
higher price) but subject to the same terms and conditions; failing such
disposition within the period for 120 days allotted the vendor shall not so
dispose of his shares without re-offering them to the other Shareholder; in
the event OpTel becomes public, and its shares are listed on a recognized
Stock Exchange (which shall include NASDAQ) (a "Stock Exchange") each of
VPC and CDPQ shall lose the benefit of this provision;
2. As long as CDPQ is a holder of at least 5% of the voting rights in OpTel,
CDPQ shall have the right to designate a number of directors on the Board
of Directors of OpTel or any subsidiary and any committee thereof which
shall be proportional to its voting interest in OpTel, calculated on a
fully diluted basis, with a minimum of one representative as long as it is
a holder of at least such above percentage. Each Shareholder of OpTel shall
agree to vote its shares in order to elect on the Board of Directors of
OpTel and any committee
<PAGE>
thereof the members designated by CDPQ and VPC as mentioned herein above
and cause OpTel to elect on the Board of Directors of any subsidiary and
any committee thereof the members designated by CDPQ and VPC. Such right to
nominate a Board representative under paragraph 2 shall not be in addition
to the right provided for in the Consolidated Agreement among Caisse de
depot et placement du Quebec, Andre Chagnon and Sojecci dated as of May 10,
1995 (the "Consolidated Agreement").
3. Acts and decisions concerning the conduct of the business and internal
affairs of OpTel relating to the matters mentioned in Schedule A hereto
shall not be undertaken or decided, as the case may be, unless the subject
to be dealt with was specifically mentioned and described in a notice
previously sent to CDPQ, and only to the extent that such matter is
approved by CDPQ in writing. To the exception of the US $10,000,000 and US
$40,000,000 limitations in Schedule A (subject to paragraph (c) thereof) no
provision of Shedule A shall be construed to impose a limitation upon OpTel
which is not already covered by the Indenture (to the exception of
paragraphs (a) and (b) in Schedule A). In the event OpTel becomes public,
and its shares are listed on a Stock Exchange, CDPQ shall lose the benefit
of said provision. The right contained in this paragraph, insofar and
solely as OpTel and its subsidiaries are concerned, amends and supersedes
Section 3 contained in the Consolidated Agreement.
4. (a) Prior to an Initial Public Offering of voting and equity shares of
OpTel whereby such shares would be listed upon a Stock Exchange (an
"IPO"), if VPC elects to sell all of its shares and its Covertible
Notes, which taken together or seperately represent a controlling
interest in OpTel, for cash or readily marketable securities (on the
condition that such securities are listed on a recognized Stock
Exchange and issued by a corporation with a market capitalization of at
least U.S. $1 billion and that such securities which would be issued to
CDPQ were it to join in the sale represent 5% or less of the float of
such cororation), VPC may require CDPQ to join in such sale in the same
proportion that the number of shares held by CDPQ bears to the total
number of OpTel shares then owned by VPC and CDPQ, calculated on a
fully-diluted basis, and otherwise at the same price per share and on
the same terms and conditions, provided that in order for this
provision to apply, CDPQ must receive an amount at least equal to the
aggregate price it paid to Vanguard for the OpTel shares it acquired
from Vanguard.
(b) If VPC elects to sell 10% or more of the OpTel shares owned by it
and/or its Convertible Notes (representing in the aggregate at least
10% of OpTel's shares), otherwise than in a public offering, CDPQ shall
have the right to join in such sale in the same proportion that the
number of shares held by CDPQ bears to the total number of shares then
owned by VPC and CDPQ, calculated on a fully-diluted basis, and
otherwise at the same price per share and on the same terms and
conditions.
(c) Without limiting the rights of CDPQ under Sections 4(a) and 4(b) above,
if VPC elects to sell 50% or more of the OpTel shares owned by it
and/or its Convertible Notes (representing in the aggregate at least
10% of OpTel's shares) otherwise than
<PAGE>
in a public offering, CDPQ shall have the right to join in such sale to
the extent of all of the shares then owned by it, calculated on a
fully-diluted basis, at the same price per share and on the same terms
and conditions.
(d) If prior to the IPO VPC shall cease to be an affiliate of Le Groupe
Videotron, then CDPQ shall have the option for a period of 15 days
after such change in control to sell all or any part of its OpTel
shares to the person then controlling VPC, at a price and on terms no
less favourable to CDPQ than those enjoyed by VPC in the transaction
that resulted in the change of control, adjusted as if the transaction
would have been made at the level of OpTel, (for greater certainty
including any control premiums) said adjustment to be determined
independently by two investment banks chosen by each of Le Groupe
Videotron and CDPQ respectively in a manner similar to the method
provided in Section 5 hereinafter.
5. VPC shall enter into an agreement (the "Agreement") (the obligations to be
set out therein to be guaranteed solidarily by Le Groupe Videotron) (which
may form part of the Shareholders' Agreement) which shall provide that if
upon the fifth anniversary of the transaction among Vanguard and CDPQ the
shares of OpTel are not registered under the Securities Act of 1933, as
amended, and that if no reputable underwriter has undertaken to underwrite
a registered offering of the shares of OpTel, CDPQ shall have the right to
sell all of its shares in OpTel to VPC at fair market value as determined
independently by two investment banks chosen by each of VPC and CDPQ,
respectively. Said Agreement will provide for an evaluation method whereby
should there be a discrepancy between the reports of the two investment
banks of 20% or less, the fair market value will be the average of the two
and should the discrepancy be more than 20%, the two investment banks shall
appoint a third, who shall be instructed to select within 30 days of its
engagement, one of the two fair market values previously determined by the
two originally seleced investment banks (without modification). The fair
market value selected by such third reputable investment bank shall be
final. The expenses of all reputable investments banks performing duties
hereunder shall be borne equally by VPC and CDPQ. VPC shall have the option
to pay for the transaction with cash or with Le Groupe Videotron freely
tradeable shares duly listed on the Toronto Stock Exchange and/or Montreal
Exchange (or any other Exchange acceptable to CDPQ) at a price per share
equal to the weighted average closing market price on such Exchange for the
last twenty (20) days in respect of which trading was done for a total
amount equal to the purchase price. CDPQ will receive the demand and
piggy-back registration rights more fully described in Schedule B hereto.
In the event OpTel becomes a public company, CDPQ may participate in such
public offering to the extent VPC is offered the opportunity to participate
in such public offering; in the event that VPC wishes to participate, both
of them shall participate on the same basis (share for share).
6. Arbitration of disputes which may arise in connection with the
Shareholders' Agreement, upon terms and conditions to be agreed upon among
the Shareholders.
<PAGE>
7. VPC and Le Groupe Videotron shall use their reasonable best efforts to
cause OpTel to meet the following ongoing reporting requirements up and
until OpTel proceeds with an IPO:
(a) OpTel will submit its audited consolidated financial statements, and/or
the individual audited, financial statements of each of its
subsidiaries (to the extent subsidiary financials are prepared and/or
audited in the normal course) within one hundred and twenty (120) days
following the end of each fiscal year.
(b) OpTel will submit its consolidated quarterly financial statements,
including a balance sheet and statement of changes in financial
position, and (to the extent they are regularly prepared) the
individual quarterly financial statement of each of its subsidiaries,
within forty-five (45) days following the end of each quarter.
(c) The Board of Directors of OpTel shall meet at least quarterly.
(d) VPC and Le Groupe Videotron shall use their reasonable best efforts to
cause OpTel to provide CDPQ with a copy of any document sent (i) to any
member of the Board of Directors, in their capacity as director, and
(ii) to any member of a Committee of the Board of Directors, in their
capacity as member of a committee.
8. VPC and Le Groupe Videotron covenant that they will use their reasonable
best efforts to cause OpTel not to enter into any transactions with
Affiliates that are "Affiliate Transactions" (as defined in the Indenture
dated as of February 14, 1997 between OpTel and U.S. Trust Company of
Texas, N.A., as Trustee and as Escrow Agent ("Indenture")) except in
accordance with and as permitted by the Indenture.
9. VPC covenants that it will confer any rights or privileges upon CDPQ as are
confirmed upon any new shareholder of OpTel if such rights or privileges
(strictly in relation to the rights prescribed in sections B(1), B(4)(b) to
B(4)(d) are more advantageous, (as determined by CDPQ at its sole
discretion, acting reasonably), than those granted to CDPQ under such
sections.
10. VPC shall represent and warrant that OpTel has no contractual restrictions
to carry on its affairs and business other than what would be considered
customary and in the ordinary course of business and under the Indenture
and that it may freely engage in the business of acquiring, developing and
operating cable television systems and telecommunications services in the
United States. CDPQ acknowledges that an affiliate of VPC holds an interest
in Wireless Holdings, Inc. and Videotron (Bay Area) Inc. and VPC holds an
interest in County Cable Corp.
11. Prior to CDPQ acquiring any shares of OpTel Vanguard will renounce to its
right to receive a management fee of US$ 350,000 annually; in relation to
the management fee of US$ 350,000 paid to Le Groupe Videotron and/or VPC,
the latters agree, effective upon the purchase by CDPQ of the Vanguard
shares, that their right to receive the management fee
<PAGE>
from OpTel shall terminate, Le Groupe Videotron and VPC shall provide a
list of the services rendered by each of them to OpTel and its subsidiaries
and the cost associated therewith which cost shall be fair and reasonable.
12. The Shareholders' Agreement will remain in full force until such time as
CDPQ is no longer a Shareholder of OpTel.
13. This Term Sheet is an agreement in principle. It is executed in couterparts
and such couterparts shall together constitute a single instrument. It is
the intention of the parties that the terms hereof will be incorporated in
formal documentation, with appropriate modification and detail, as promptly
and as practicable after the date hereof. This Term Sheet will lapse if not
replaced by a definite agreement within 60 days from the date hereof.
Signed as of this 13th day of May 1997.
CAPITAL COMMUNICATIONS CDPQ VPC CORPORATION
INC.
Per: _________________________ Per: _________________________
Per: _________________________
LE GROUPE VIDEOTRON LTEE
Per: _________________________
Per: _________________________
OPTEL INC. CAISSE DE DEPOT ET PLACEMENT
DU QUEBEC
Per: _________________________
Per: _________________________
Per: _________________________
OpTel has signed this Term Sheet only to affirm its concurrence with the
provisions of Section A(1) and Schedule B and Caisse de Depot et Placement du
Quebec only to affirm its concurrence with the provisions of Sections B(2) and
B(3).
<PAGE>
SCHEDULE A
----------
(a) Any modification, amendment or deletion to the articles (charter) or by-laws
of OpTel or any direct or indirect subsidiary.
(b) Any subdivision, consolidation, conversion, reclassification or modification
of any kind to the authorized or outstanding share capital of OpTel or any
direct or indirect subsidiary thereof.
(c) Except for the contemplated acquisition of Phonoscope and other acquisitions
which in the aggregate do not exceed US $25,000,000, the acquisition by
OpTel or any subsidiary thereof of shares, partnership interests, titles or
indebtedness or other securities of any partnership, company, corporation or
all or substantially all of the assets thereof or of any business for a
consideration in excess of U.S.$ 10,000,000 per transaction or in excess of
U.S.$ 40,000,000 in the aggregate per fiscal year.
(d) Merge or amalgamate OpTel or any subsidiary thereof with any other person,
company, corporation or partnership or otherwise associate itself or any
subsidiary (if said association results in an acquisition or transfer or
assets of causes important changes in the affaires of OpTel) with any other
person, partnership, company or corporation if the result of such
transaction is in excess of U.S.$ 10,000,000 or in excess of
U.S.$ 40,000,000 in the aggregate in the same fiscal fiscal year.
(e) Dispose of or transfer any shares it may hold in the share capital of any
other company or all or substantially all of the assets of OpTel or of any
subsidiary thereof or of a business thereof if for a consideration in excess
of U.S.$ 10,000,000 per transaction or in excess of U.S.$ 40,000,000 in the
aggregate per fiscal year.
(f) Subject to the Indenture not being reimbursed, the concurrence by OpTel or a
Restricted Subsidiary (as defined in the Indenture) of any indebtedness
which is not permitted to be incurred under the Indenture as in effect on
the date hereof.
(g) As soon as the Indenture is reimbursed, the grant by OpTel or any subsidiary
thereof of loans (excluding loans made to their employees as authorized
under the Indenture summarized in OpTel's Offering Memorandum dated February
7, 1997), guarantees, the guarantees, the guaranteeing of any debt or
obligation of a third party, or any borrowing except for Permitted
Indebtedness (as defined in the Indenture) if, in either case, after giving
pro forma effect to such occurrence (including the application of the net
proceeds therefrom), the ratio of (x) Total Consolidated Indebtedness (as of
the date of occurrence) to (y) Annualized Pro Forma Consolidated Operating
Cash Flow (based upon the two most recent fiscal quarters for which
consolidated financial statements of OpTel are available preceding the date
of such occurrence) would be more than (i) 8.0 to 1.0 if such occurrence is
prior to August 31, 2000 or (ii) 7.0 to 1.0 if such occurrence is on or
after August 31, 2000 and prior to August 31, 2002 or (iii) 6.0 to 1.0 if
such occurrence is on or after August 31, 2002.
<PAGE>
SCHEDULE B
----------
REGISTRATION RIGHTS AGREEMENT
-----------------------------
1. Demand Rights
-------------
1.1 effective 9 months after the IPO Date
1.2 applies to all Registrable Securities then owned by CDPQ
1.3 a first demand right at the expense of OpTel and one subsequent demand
right at the expense of CDPQ
1.4 OpTel will pay all Registration Expenses, subject to 1.3
1.5 selection of underwriters shall be by OpTel
1.6 if a demand registration is made, VPC has option within ten (10) days of
receipt of the said demand to buy shares from CDPQ at the average trading
price within the five (5) trading days following the receipt of the said
demand
2. Piggy-back Rights - have 3 times to exercise these rights provided
-----------------
registration becomes effective
2.1 Post-IPO Offerings
(a) OpTel must give CDPQ prompt written notice of OpTel's intention to
register securities
(b) exercise of right must be for at least 20% of Registrable Securities
then owed by CDPQ
(c) OpTel will pay all Registration Expenses
2.2 IPO
(a) if OpTel proposes an IPO, will give prompt written notice to CDPQ
("IPO Notice")
(b) CDPQ shall be entitled to include Registrable Securities, to the
extent, if any, that the investment banker for OpTel shall advise
OpTel in writing that, in its opinion, the offering contemplated by
OpTel would not be adversely affected
<PAGE>
(as to price and quantity) by the inclusion of Registrable Securities
(the quantity, if any, of Registrable Securities that may be included
per underwriter, the "IPO Permitted Registrable Securities"). IPO
Notice shall specify the quantity of IPO Permitted Registrable
Securities, if then known.
(c) exercise of right must be for at least 20% of Registrable Securities
then owned by CDPQ (or # of IPO Permitted Registrable Securities, if
less)
(d) OpTel will pay all Registration Expenses
2.3 Appointment in Incidental Registrations (piggy-back)
(a) if a reduction in amount to be sold; OpTel includes all of its
securities, and reduces Registrable Securities PRO RATA with ALL
other holders who were going to sell (other than VPC) based on total
amount of securities held by such persons.
(b) Notwithstanding the foregoing, CDPQ shall have priority over OpTel
with respect to the inclusion of Registrable Securities in the
registration for purposes of the exercise of any "greenshoe" or over
allotment option w/respect to the offering, 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.
Definition of "Registrable Securities" means the shares of Class A Stock issued
or issuable upon conversion of the shares of Class B Stock delivered to CDPQ
pursuant to the Purchase Agreement and any securities later acquired from OpTel
by CDPQ
REGISTRATION EXPENSES - includes reasonable expenses of counsel selected by CDPQ
to represent CDPQ's interest, but excludes underwriting discounts.
<PAGE>
SCHEDULE C
----------
<PAGE>
EXHIBIT 11.1 -- COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Eight Month Six Month Six Month
Period Ended Year Ended Period Ended Period Ended
August 31, August 31, February 29, February 28,
------------ ------------ ----------- ------------
1995 1996 1996 1997
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Primary:
Net loss $(10,160,639) $(18,429,784) $(7,242,166) $(16,292,351)
------------ ------------ ----------- ------------
Weighted average number of common
shares outstanding 1,474,554 2,219,770 2,149,332 2,323,207
------------ ------------ ----------- ------------
Net income per common share $ (6.89) $ (8.30) $ (3.37) $ (7.01)
------------ ------------ ----------- ------------
Fully Diluted:
Net loss $(10,160,639) $(18,429,784) $(7,242,166) $(16,292,351)
Interest expense related to convertible
notes, net of income tax expense $ 918,501 $ 5,342,208 $ 1,889,955 $ 6,907,852
------------ ------------ ----------- ------------
Adjusted net loss $ (9,242,138) $(13,087,576) $(5,352,211) $ (9,384,499)
------------ ------------ ----------- ------------
Weighted average number of common
shares outstanding, assuming
conversion of convertible notes at
beginning of relevant period 1,671,890 3,202,778 2,731,972 3,653,532
------------ ------------ ----------- ------------
Net loss per common share $ (5.53) $ (4.09) $ (1.96) $ (2.57)
------------ ------------ ----------- ------------
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to the Registration Statement No.
33-24881 of OpTel, Inc. on Form S-4 of our report dated November 7, 1996
(February 7, 1997 as to Note 13), on OpTel, Inc.'s consolidated financial
statements appearing in the Prospectus, which is part of this Registration
Statement, and of our reports dated January 27, 1997 relating to the audited
financial statements of the acquired companies appearing elsewhere in this
Registration Statement.
We also consent to the reference to us under the headings "Selected Consolidated
Financial and Operating Data," "Summary Consolidated Financial and Operating
Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
May 20, 1997
<PAGE>
LETTER OF TRANSMITTAL
for
13% Senior Notes Due 2005
of
OpTel, Inc.
Pursuant to the Exchange Offer in Respect of
All of their Outstanding 13% Senior Notes Due 2005
for
13% Senior Notes Due 2005, Series B
Pursuant to the Prospectus Dated , 1997
- -------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED, TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE BUSINESS DAY PRIOR TO THE EXPIRATION
DATE.
- -------------------------------------------------------------------------------
To: U.S. Trust Company of Texas, N.A., Exchange Agent
If by Mail: U.S. Trust Company of Texas, N.A.
P.O. Box 841
Cooper Station
New York, NY 10276-0841
If by Hand: U.S. Trust Company of Texas, N.A.
111 Broadway
Lower Level
New York, NY 10006-1906
If by Overnight Courier: U.S. Trust Company of Texas, N.A.
770 Broadway
13th Floor -- Corporate Trust Operations
New York, NY 10003-9598
Confirm by Telephone: 1-800-225-2398 Bondholder Inquiry
or
212-420-6668 Tony Nista
Delivery of this Letter of Transmittal to an address, or transmission,
other than as set forth above will not constitute a valid delivery. The
instructions contained herein should be read carefully before this Letter of
Transmittal is completed.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the Prospectus
(the "Prospectus"), dated , 1997, of OpTel, Inc. (the "Issuer"), which,
together with this Letter of Transmittal and the Instructions hereto (the
"Letter of Transmittal"), constitute the Issuer's offer (the "Exchange Offer")
to exchange $1,000 principal amount of its 13% Senior Notes Due 2005, Series B
(the "New Notes") that have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement of which
the Prospectus constitutes a part, for each $1,000 principal amount of its
outstanding 13% Senior Notes Due 2005 (the "Old Notes"), upon the terms and
subject to the conditions set forth in the Prospectus.
The Issuer has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer and to
the best of the Company's information and belief, each person participating in
the Exchange Offer is acquiring the New Notes in its ordinary course of business
and has no arrangement or understanding with any person to participate in the
distribution of the New Notes to be received in the Exchange Offer.
<PAGE>
This Letter of Transmittal is to be used by Holders if: (i) certificates
representing Old Notes are to be physically delivered to the Exchange Agent
herewith by Holders; (ii) tender of Old Notes is to be made by book-entry
transfer to the Exchange Agent's account at The Depository Trust Company ("DTC")
pursuant to the procedures set forth in the Prospectus under "The Exchange
Offer--Procedures for Tendering Old Notes" by any financial institution that is
a participant in DTC and whose name appears on a security position listing as
the owner of Old Notes (such participants, acting on behalf of Holders, are
referred to herein, together with such Holders, as "Acting Holders"); or (iii)
tender of Old Notes is to be made according to the guaranteed delivery
procedures set forth in the Prospectus under "The Exchange Offer-Procedures for
Tendering Old Notes." Delivery of documents to DTC does not constitute delivery
to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person: (i)
in whose name Old Notes are registered on the books of the Issuer or any other
person who has obtained a properly completed bond power from the registered
Holder or (ii) whose Old Notes are held of record by DTC who desires to deliver
such Old Notes by book entry transfer at DTC.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
All capitalized terms used herein and not defined herein shall have the
meaning ascribed to them in the Prospectus.
The instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Exchange Agent. See Instruction 8 herein.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES
MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, list the certificate numbers and
principal amounts on a separately executed schedule and affix the schedule to
this Letter of Transmittal. Tenders of Old Notes will be accepted only in
principal amounts equal to $1,000 or integral multiples thereof.
<PAGE>
- -------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES
- -------------------------------------------------------------------------------
Certificate Aggregate
Number(s)* Principal
(Attach signed Amount
Names(s) and Address(es) of Holder(s) list if Tendered (if less
(Please fill in, if blank) necessary) than all)**
- -------------------------------------|------------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
| -----------------------------------------
- -------------------------------------|------------------------------------------
TOTAL PRINCIPAL AMOUNT OF OLD NOTES TENDERED
- -------------------------------------------------------------------------------
* Need not be completed by Holders tendering by book-entry transfer.
** Need not be completed by Holders who wish to tender with respect to all Old
Notes listed. See
Instruction 2.
- -------------------------------------------------------------------------------
<PAGE>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE
AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:______________________________________________
DTC Book-Entry Account
No.:________________________________________________________________________
Transaction Code
No.:________________________________________________________________________
If Holders desire to tender Old Notes pursuant to the Exchange Offer and
(i) certificates representing such Old Notes are not lost but are not
immediately available, (ii) time will not permit this Letter of Transmittal,
certificates representing such Old Notes or other required documents to reach
the Exchange Agent prior to the Expiration Date or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date, such
Holders may effect a tender of such Old Notes in accordance with the guaranteed
delivery procedures set forth in the Prospectus under "The Exchange
Offer-Procedures for Tendering Old Notes."
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING:
Name(s) of Holder(s) of Old
Notes:_____________________________________________________________________
Window Ticket No. (if any):________________________________________________
Date of Execution of notice of Guaranteed
Delivery:__________________________________________________________________
Name of Eligible Institution that Guaranteed
Delivery:__________________________________________________________________
DTC Book-Entry Account No.:________________________________________________
If Delivered by Book-Entry Transfer,
Name of Tendering
Institution:_______________________________________________________________
Transaction Code No.:______________________________________________________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name:______________________________________________________________________
Address:___________________________________________________________________
___________________________________________________________________________
Ladies and Gentlemen:
Subject to the terms of the Exchange Offer, the undersigned hereby tenders
to the Issuer the principal amount of Old Notes indicated above. Subject to and
effective upon the acceptance for exchange of the principal amount of Old Notes
tendered in accordance with this Letter of Transmittal, the undersigned sells,
assigns and transfers to, or upon the order of, the Issuer all right, title and
interest in and to the Old Notes tendered hereby. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent its agent and
attorney-in-fact (with full knowledge that the Exchange Agent also acts as the
agent of the Issuer and as Trustee under the Indenture for the Old Notes and the
New Notes) with respect to the tendered Old Notes with full power of
substitution to (i) deliver certificates for such Old Notes to the Issuer, or
transfer ownership of such Old Notes on the account books maintained by DTC,
together, in either such case, with all accompanying evidences of transfer and
authenticity to, or upon the order of, the Issuer and (ii) present such Old
Notes for transfer on the books of the Issuer and receive all benefits and
otherwise exercise all rights of beneficial ownership of such Old Notes, all in
accordance with the terms of the Exchange Offer. The power of attorney granted
in this paragraph shall be deemed irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Issuer will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim, when the same are acquired by the Issuer. The
undersigned also acknowledges that this Exchange Offer is being made in reliance
upon an interpretation by the staff of the Securities and Exchange Commission
that the New Notes issued in exchange for the Old Notes pursuant to the Exchange
Offer may he offered for resale, resold and otherwise transferred by holders
thereof (other than any such holder that is an "affiliate" of the Issuer within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any Person to participate in
the
<PAGE>
distribution of such New Notes. The undersigned acknowledges that if he or she
is participating in the Exchange Offer for the purpose of distributing the New
Notes, the undersigned must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of the New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes, the undersigned
represents that such Old Notes were acquired as a result of market-making
activities or other trading activities and acknowledges that it will deliver a
prospectus in connection with any resale of such New Notes; however, by so
acknowledging and by delivering a prospectus, the undersigned will not he deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The undersigned represents that (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of such Holder's
business, (ii) such Holder has no arrangements with any person to participate in
the distribution of such New Notes, (iii) such Holder is not an "affiliate," as
defined under Rule 405 of the Securities Act, of the Issuer or, if such Holder
is an affiliate, that such Holder will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent applicable
and (iv) it is not a broker-dealer, or that, if it is a broker-dealer, the Old
Notes tendered for exchange are not part of an unsold allotment from the initial
offering of the Old Notes. Broker-dealers may not exchange Old Notes which are
part of an unsold original allotment in the Exchange Offer.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Issuer to he necessary or
desirable to complete the assignment and transfer of the Old Notes tendered
hereby.
For purposes of the Exchange Offer, the Issuer shall be deemed to have
accepted validly tendered Old Notes when, as and if the Issuer has given oral or
written notice thereof to the Exchange Agent. If any tendered Old Notes are not
accepted for exchange pursuant to the Exchange Offer for any reason,
certificates for any such unaccepted Old Notes will he returned (except as noted
below with respect to tenders through DTC), without expense, to the undersigned
at the address shown below or at a different address as may be indicated under
"Special Issuance Instructions" as promptly as practicable after the Expiration
Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation under this Letter of Transmittal shall he
binding upon the undersigned's heirs, personal representatives, successors and
assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer-Procedures for
Tendering Old Notes" in the Prospectus and in the instructions hereto will
constitute a binding agreement between the undersigned and the Issuer upon the
terms and subject to the conditions of the Exchange Offer.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the certificates representing the New Notes issued in exchange for the Old
Notes accepted for exchange and return any Old Notes not tendered or not
exchanged, in the name(s) of the undersigned (or in either such event, in the
case of Old Notes tendered by DTC, by credit to the account at DTC). Similarly,
unless otherwise indicated under "Special Delivery Instructions," please send
the certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and any certificates for Old Notes not tendered or not
exchanged (and accompanying documents, as appropriate) to the undersigned at the
address shown below the undersigned's signatures, unless, in either event,
tender is being made through DTC. In the event that both "Special Issuance
Instructions" and "Special Delivery Instructions" are completed, please issue
the certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and return any Old Notes not tendered or not exchanged in
the name(s) of, and send said certificates to, the person(s) so indicated. The
undersigned recognizes that the Issuer has no obligation pursuant to the
"Special Issuance Instructions" and "Special Delivery Instructions" to transfer
any Old Notes from the name of the registered holder(s) thereof if the Issuer
does not accept for exchange any of the Old Notes so tendered.
<PAGE>
PLEASE SIGN HERE
(To Be Completed by All Tendering Holders of Old Notes Regardless
of Whether Old Notes Are Being Physically Delivered Herewith)
This Letter of Transmittal must be signed by the Holder(s) of Old Notes
exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if
tendered by a participant in DTC, exactly as such participant's name appears on
a security position listing as the owner of Old Notes, or by person(s)
authorized to become registered Holder(s) by endorsements and documents
transmitted with this Letter of Transmittal. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer or other person
acting in a fiduciary or representative capacity, such person must set forth
his or her full title below under "Capacity" and submit evidence satisfactory
to the Issuer of such person's authority to so act. See Instruction 3 herein.
If the signature appearing below is not of the registered Holder(s) of the
Old Notes, then the registered Holder(s) must sign a valid proxy.
X ________________________________ Date:______________________________
X ________________________________ Date:______________________________
Signature(s) of Holder(s) or
Authorized Signatory
Names(s):_________________________ Address____________________________
_________________________ ____________________________
(Please Print) (Including Zip Code)
Capacity:_________________________ Area Code and Telephone No.:_______
Social Security No.:_________________________
SIGNATURE GUARANTEE (See Instruction 3 herein)
Certain Signatures Must Be Guaranteed by an Eligible Institution
______________________________________________________________________________
(Name of Eligible Institution Guaranteeing Signatures)
______________________________________________________________________________
(Address (including zip code) and Telephone Number
(including area code) of Firm)
______________________________________________________________________________
(Authorized Signature)
______________________________________________________________________________
(Printed Name)
______________________________________________________________________________
(Title)
Date:_____________________________
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS
(See Instructions 3 and 4 herein)
To be completed ONLY if certificates for Old Notes in a principal amount not
tendered are to be issued in the name of, or the New Notes issued pursuant to
the Exchange Offer are to be issued to the order of, someone other than the
person or persons whose signature(s) appear(s) within this Letter of Transmittal
or issued to an address different from that shown in the box entitled
"Description of Old Notes" within this Letter of Transmittal, or if Old Notes
tendered by book-entry transfer that are not accepted for purchase are to be
credited to an account maintained at DTC.
Name:__________________________________________________________________________
(Please Print)
Address:_______________________________________________________________________
(Please Print)
_______________________________________________________________________Zip Code
_______________________________________________________________________________
Taxpayer Identification or Social Security Number
SPECIAL DELIVERY INSTRUCTIONS
(See Instructions 3 and 4 herein)
To be completed ONLY if certificates for Old Notes in a principal amount not
tendered or not accepted for purchase or the new notes issued pursuant to the
Exchange Offer are to be sent to someone other than the person or persons whose
signature(s) appear(s) within this Letter of Transmittal or an address different
from that shown in the box entitled "Description of Old Notes" within this
Letter of Transmittal.
Name:__________________________________________________________________________
(Please Print)
Address:_______________________________________________________________________
(Please Print)
_______________________________________________________________________Zip Code
_______________________________________________________________________________
Taxpayer Identification or Social Security Number
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions
of the Exchange Offer
1. Delivery of this Letter of Transmittal and Old Notes. The certificates
for the tendered Old Notes (or a confirmation of a book-entry into the Exchange
Agent's account at DTC of all Old Notes delivered electronically), as well as a
properly completed and duly executed copy of this Letter of Transmittal or
facsimile hereof and any other documents required by this Letter of Transmittal
must be received by the Exchange Agent at its address set forth herein prior to
5:00 p.m., New York City time, on the Expiration Date. The method of delivery of
the tendered Old Notes, this Letter of Transmittal and all other required
documents to the Exchange Agent is at the election and risk of the Holder and,
except as otherwise provided below, the delivery will be deemed made only when
actually received by the Exchange Agent. Instead of delivery by mail, it is
recommended that the Holder use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. No Letter of
Transmittal or Old Notes should be sent to the Issuer.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, this Letter of
Transmittal or any other documents required hereby to the Exchange Agent prior
to the Expiration Date must tender their Old Notes and follow the guaranteed
delivery procedures set forth in the Prospectus. Pursuant to such procedures:
(i) such tender must be made by or through an Eligible Institution; (ii) prior
to the Expiration Date, the Exchange Agent must have received from the Eligible
Institution a properly completed and duly executed Notice of Guaranteed Delivery
(by facsimile transmission, mail or hand delivery) setting forth the name and
address of the Holder of the Old Notes, the certificate number or numbers of
such Old Notes and the principal amount of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five business days
after the Expiration Date, this Letter of Transmittal (or facsimile thereof)
together with the certificate(s) representing the Old Notes (or a confirmation
of electronic delivery of book-entry delivery into the Exchange Agent's account
at DTC) and any of the required documents will be deposited by the Eligible
Institution with the Exchange Agent; and (iii) such properly completed and
executed Letter of Transmittal (or facsimile hereof), as well as all other
documents required by this Letter of Transmittal and the certificate(s)
representing all tendered Old Notes in proper form for transfer (or a
confirmation of electronic mail delivery of book-entry delivery into the
Exchange Agent's account at DTC), must be received by the Exchange Agent within
five business days after the Expiration Date, all as provided in the Prospectus
under the caption "Guaranteed Delivery Procedures." Any Holder of Old Notes who
wishes to tender his Old Notes pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration
Date.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Issuer in its sole discretion, which determination will be final and
binding. The Issuer reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Issuer's acceptance of which would,
in the opinion of counsel for the Issuer, be unlawful. The Issuer also reserves
the right to waive any irregularities or conditions of tender as to particular
Old Notes. The Issuer's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in this Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Issuer shall determine. Neither the Issuer, the Exchange Agent nor
any other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost by the Exchange Agent to the
tendering Holders of Old Notes, unless otherwise provided in this Letter of
Transmittal, as soon as practicable following the Expiration Date.
2. Partial Tenders. Tenders of Old Notes will he accepted in all
denominations of $1,000 and integral multiples in excess thereof. If less than
the entire principal amount of any Old Notes is tendered, the tendering Holders
should fill in the principal amount tendered in the third column of the chart
entitled "Description of Old Notes." The entire principal amount of Old Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If the entire
<PAGE>
principal amount of all Old Notes is not tendered, Old Notes for the principal
amount of Old Notes not tendered and a certificate or certificates representing
New Notes issued in exchange of any Old Notes accepted will be sent to the
Holder at his or her registered address, unless a different address is provided
in the appropriate box on this Letter of Transmittal or unless tender is made
through DTC, promptly after the Old Notes are accepted for exchange.
3. Signatures on the Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this Letter of Transmittal (or facsimile hereof) is
signed by the registered Holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If this letter of Transmittal (or facsimile hereof) is signed by the
registered Holder(s) of Old Notes tendered and the certificate(s) for New Notes
issued in exchange therefor is to be issued (or any untendered principal amount
of Old Notes is to be reissued) to the registered Holder, such Holder need not
and should not endorse any tendered Old Note, nor provide a separate bond power.
In any other case, such Holder must either properly endorse the Old Notes
tendered or transmit a properly completed separate bond power with this Letter
of Transmittal, with the signatures on the endorsement or bond power guaranteed
by an Eligible Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered Holder(s) of any Old Notes listed, such Old Notes must
be endorsed or accompanied by appropriate bond powers signed as the name of the
registered Holder(s) appears on the Old Notes.
If this Letter of Transmittal (or facsimile hereof) or any Old Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and
unless waived by the Issuer, evidence satisfactory to the Issuer of their
authority so to act must be submitted with this Letter of Transmittal.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 3 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal (or facsimile hereof) must he
guaranteed by an Eligible Institution unless the Old Notes tendered pursuant
thereto are tendered (i) by a registered Holder (including any participant in
DTC whose name appears on a security position listing as the owner of Old Notes)
who has not completed the box set forth herein entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" or (ii) for
the account of an Eligible Institution.
4. Special Issuance and Delivery Instructions. Tendering Holders should
indicate, in the applicable spaces, the name and address to which New Notes or
substitute Old Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name and address of the
person signing this Letter of Transmittal (or in the case of tender of the Old
Notes through DTC, if different from DTC). In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated.
5. Transfer Taxes. The Issuer will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered Holder
of the Old Notes tendered hereby, or if tendered Old Notes are registered in the
name of any person other than the person signing this Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with this Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering Holder.
Except as provided in this Instruction 5, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
6. Waiver of Conditions. The Issuer reserves the absolute right to amend,
waive or modify specified conditions in the Exchange Offer in the case of any
Old Notes tendered.
7. Mutilated, Lost, Stolen or Destroyed Old Notes. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instruction.
<PAGE>
8. Requests for Assistance or Additional Copies. Questions and requests for
assistance and requests for additional copies of the Prospectus or this Letter
of Transmittal may be directed to the Exchange Agent at the address specified in
the Prospectus. Holders may also contact their broker, dealer, commercial bank,
trust company or other nominee for assistance concerning the Exchange Offer.
(DO NOT WRITE IN SPACE BELOW)
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Certificate Surrendered Old Notes Tendered Old Notes Accepted
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Delivery Prepared by_____________ Checked by ________________ Date________
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