<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OPTEL, INC.
(Exact name of registrant as specified in its charter)
---------------------
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<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.)
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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)
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Copies to:
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<S> <C> <C>
ERIC SIMONSON, ESQ. MICHAEL E. KATZENSTEIN, ESQ. JONATHAN A. SCHAFFZIN, ESQ.
KRONISH, LIEB, WEINER & HELLMAN LLP OPTEL, INC. CAHILL GORDON & REINDEL
1114 AVENUE OF THE AMERICAS 1111 W. MOCKINGBIRD LANE 80 PINE STREET
NEW YORK, NEW YORK 10036-7798 DALLAS, TEXAS 75247 NEW YORK, NEW YORK 10005
(212) 479-6000 (214) 634-3800 (212) 701-3000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES NUMBER OF SHARES OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED TO BE REGISTERED PER SHARE PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, par
value $.01 per share.... $100,000,000 $29,500
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act.
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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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
OPTEL, INC.
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF
REGULATION S-K, SHOWING THE LOCATION
IN THE PROSPECTUS OF THE ITEMS ON FORM S-1
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NAME AND CAPTION IN FORM S-1 CAPTION OR LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front Cover Page; Additional
Information; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Underwriting
6. Dilution................................... Dilution
7. Selling Stockholders....................... N/A
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Capital Stock to be
Registered................................. Outside Front Cover Page; Prospectus
Summary; Description of Capital Stock;
Certain Federal Income Tax Considerations
10. Interests of Named Experts and Counsel..... Legal; Experts
11. Information with Respect to the
Registrant................................. Prospectus Summary; Risk Factors; Dividend
Policy; Capitalization; Selected
Historical Consolidated Financial and
Operating Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Principal Stockholders;
Certain Relationships and Related
Transactions; Description of Capital
Stock; Description of Certain
Indebtedness; Certain Market Information;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Management
</TABLE>
<PAGE> 3
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 REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 5, 1998
PROSPECTUS
SHARES
OPTEL, INC. [LOGO]
CLASS A COMMON STOCK
------------------
All of the shares (the "Shares") of Class A Common Stock, par value
$.01 per share (the "Class A Common Stock"), offered hereby (the "Offering") are
being offered by OpTel, Inc. ("OpTel" or the "Company"). Prior to the Offering,
there has been no public market for the Class A Common Stock of the Company. It
is currently estimated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. OpTel
intends to apply for quotation of the Class A Common Stock on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") National
Market System (the "Nasdaq National Market") under the symbol " " upon
effectiveness of the Registration Statement.
Immediately following the Offering, the Company will have outstanding shares
of two classes of common stock, the Class A Common Stock and the Class B Common
Stock, par value $.01 per share (the "Multi-Vote Common" and, together with the
Class A Common Stock, the "Common Stock"). The rights of the holders of the
Class A Common Stock and the Multi-Vote Common are substantially identical,
except that (i) holders of the Class A Common Stock are entitled to one vote for
each issued and outstanding share and holders of the Multi-Vote Common are
entitled to 10 votes for each issued and outstanding share and (ii) the
Multi-Vote Common is fully convertible into Class A Common Stock at any time at
the option of the holder or automatically upon the occurrence of a Conversion
Event (as defined herein), on a one-for-one basis. Except as provided by law,
holders of both classes vote together as one class on all matters submitted to a
vote of stockholders including the election of directors. See "Description of
Capital Stock."
Immediately following the Offering, Le Groupe Videotron Ltee ("GVL"), owner
of the second largest cable television operator in Canada, will own
approximately % of the outstanding Multi-Vote Common, representing
approximately % of the total voting power of the outstanding Common Stock.
See "Risk Factors -- Control by GVL" and "Principal Stockholders."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
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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.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY(2)
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Per Share........................................... $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total(3)............................................ $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to an aggregate of additional shares of the Class A Common
Stock on the same terms and conditions as set forth above solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised
in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively.
------------------
The Shares are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered and accepted by them and
subject to certain conditions. The Underwriters reserve the right to withdraw,
cancel or modify the Offering and to reject orders in whole or in part. It is
expected that delivery of the Class A Common Stock will be made against payment
therefor on or about , 1998, at the offices of Smith Barney Inc., 333
West 34th Street, New York, New York 10001.
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
CIBC OPPENHEIMER
, 1998
<PAGE> 4
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES INCLUDING
ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY
ALSO ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET. SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information included elsewhere in this
Prospectus, including the Consolidated Financial Statements and the notes
thereto. As used in this Prospectus, the terms "Company" or "OpTel" mean OpTel,
Inc., a Delaware corporation, and its subsidiaries, except where the context
otherwise requires. Certain terms used herein are defined in the glossary
attached hereto as Appendix A. References to fiscal years throughout this
Prospectus are to the Company's fiscal years, which end on August 31 of each
calendar year. Unless otherwise indicated, the information in this Prospectus
(i) assumes an initial public offering price of $ per share, (ii) assumes
the Underwriters' over-allotment option will not be exercised, (iii) gives
effect to the conversion of the outstanding shares of OpTel's Class C Common
Stock, par value $.01 per share ("Non-Voting Common"), into shares of Class A
Common Stock upon consummation of the Offering, (iv) gives effect to the
conversion of the outstanding shares of OpTel's 9.75% Series A Preferred Stock,
par value $.01 per share ("Series A Preferred"), into shares of Multi-Vote
Common upon consummation of the Offering and (v) gives effect to the conversion
of the outstanding shares of OpTel's 8% Series B Preferred Stock, par value $.01
per share ("Series B Preferred"), into shares of Class A Common Stock promptly
following the consummation of the Offering. Prospective investors should
carefully consider the factors set forth in "Risk Factors." This Prospectus
contains "forward-looking" statements concerning the Company's operations,
economic performance and financial condition, which are subject to inherent
risks and uncertainties, including those identified under "Risk Factors."
THE COMPANY
OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone and cable television
services, to residents of multiple dwelling units ("MDUs") in the United States.
As a rapidly growing integrated communications provider ("ICP"), OpTel continues
to build upon its position as the largest provider of private cable television
services to MDUs in the United States. In each market that it serves, OpTel
seeks to become the principal competitor in the MDU marketplace to the incumbent
local exchange carrier ("ILEC") and the incumbent franchise cable television
operator by providing a package of voice, video and Internet access services at
competitive prices. OpTel believes its contractual relationships with MDU owners
and associations and its ability to deliver an integrated service offering to
MDU residents over its own networks provide it with a competitive advantage.
Industry sources estimate that annual revenues generated by the U.S.
communications industry in 1997 were approximately $223 billion (consisting of
approximately $192 billion in telecommunications revenues and $31 billion in
cable television revenues). The Company believes that a significant portion of
such revenue is attributable to residential users. OpTel recognizes the
opportunity to address the residential market by focusing on providing
integrated services to MDUs. MDUs comprise a wide variety of high density
residential complexes, including high- and low-rise apartment buildings,
condominiums, cooperatives, town houses and mobile home communities. According
to 1990 U.S. Census Bureau data, there are more than 13.2 million dwelling units
in MDUs with greater than 10 dwelling units in the United States. Within the MDU
market, the Company focuses on MDUs of 150 or more dwelling units ("Large
MDUs"). Based on industry sources, the Company believes that, within its
existing markets, as of March 25, 1998, there were approximately 3.0 million
dwelling units within these Large MDUs.
The Company is currently building telecommunications infrastructure in its
serviced markets and expects, by the end of calendar 1999, to be in a position
to offer facilities based telecommunications services in each of its major
markets. The Company presently offers services where it has a right of entry
agreement ("Right of Entry") with an MDU owner to provide its cable television
and/or telecommunications services. The Company classifies a unit as "passed" if
it is within an MDU for which the Company has a Right of Entry and the Company
has connected and activated the equipment necessary to provide services. As of
April 30, 1998, the Company had 369,090 units passed for cable television
services. At that date, OpTel had 202,716 cable television subscribers and 7,399
telecommunication lines in service.
3
<PAGE> 6
OpTel began operations in April 1993 with a strategy of consolidating the
then fragmented "private cable" television, or non-franchise cable television,
industry serving MDUs. Securing long-term Rights of Entry has been an integral
element of this strategy. The Company's Rights of Entry typically have original
terms of 10 to 15 years (five years for Rights of Entry with condominium
associations). The weighted average unexpired term of the Company's Rights of
Entry was approximately eight years as of April 30, 1998 (assuming the Company's
exercise of available renewal options). Rights of Entry generally provide
financial incentives to the property owners to promote and sell the Company's
cable television and telecommunications services to MDU residents. The Company
provides video programming to MDUs primarily under exclusive Rights of Entry.
The Company initially offered shared tenant telecommunications services ("STS")
to MDUs serviced under telephone Rights of Entry utilizing remote private branch
exchange ("PBX") switches. In accordance with its communications strategy, the
Company has begun the process of migrating its STS traffic to its own central
office switches and its own network facilities. The Company intends to grow its
business by negotiating additional Rights of Entry to serve MDUs currently
served by other providers and newly-constructed MDUs, by acquiring other
existing operators that serve MDUs, as appropriate, and by providing MDUs it
currently serves for cable television with additional services, such as
telephone and Internet access.
The Company currently provides cable television and telecommunications
services in several metropolitan areas including Houston, Dallas-Fort Worth, Los
Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta and Orlando-Tampa. The Company has commenced offering central
office switched local exchange services in Houston and Dallas-Fort Worth and is
licensed as a competitive local exchange carrier ("CLEC") in each of its other
major markets. The Company selected its current markets based upon their growth
characteristics, competitive conditions, MDU concentrations, favorable
demographics and regulatory environment.
Since April 1995, OpTel has been indirectly majority owned by Le Groupe
Videotron Ltee ("GVL"), which also owns the second largest cable television
operator in Canada (based on number of subscribers). GVL has invested
approximately $250 million in OpTel in the form of equity capital and
subordinated convertible notes (including accrued interest). See "-- Recent
Developments." These invested amounts have been critical to OpTel's growth. In
addition, key members of the Company's management team gained experience in the
competitive offering of telecommunications and cable television to residential
markets while serving as executives of a GVL affiliate in the United Kingdom.
OpTel management's extensive operating experience in both the telecommunications
and cable television industries, including the construction and design of
networks and sales and customer support, provides OpTel with significant
expertise in managing and developing an infrastructure to support voice, video
and Internet access operations.
OpTel was incorporated in Delaware in July 1994 as the successor to a
California limited partnership that was organized 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.
STRATEGY
OpTel's goal is to become the nation's largest ICP focusing on MDU markets.
OpTel's strategy for achieving this goal includes the following key components:
Provide an Integrated Service Offering. OpTel believes that by utilizing a
single advanced network infrastructure it can be among the first to market a
competitive integrated package of voice and video services in its target
markets. OpTel focuses exclusively on the integrated communications needs of the
MDU resident, which distinguishes OpTel from other competitors. OpTel believes
that MDU residents are attracted by bundled service offerings, competitive
pricing and integrated billing. The Company plans to supplement its voice and
video offerings with high speed Internet access in all of its serviced markets.
The Company also intends to introduce integrated billing of its bundled services
during fiscal 1999.
Deploy Cost Effective Networks. OpTel's networks are specifically designed
to provide services to MDUs. The Company uses a combination of point-to-point
microwave transmission equipment and fiber optic cable in order to offer a
single source for video, voice telecommunications and eventually high speed
Internet access services. A substantial amount of the capital required to
provide property-specific voice and video
4
<PAGE> 7
services to an individual MDU is invested only after the Company and the owner
of the MDU have entered into a Right of Entry for the MDU. The capital
expenditures required to serve an MDU are therefore, to a large extent,
"success-based" and will only be incurred shortly before properties are first
brought into service or as needed to bring non-network served MDUs onto the
Company's networks. In markets served by the Company's microwave networks, OpTel
expects that the incremental capital required for it to launch central office
switched telecommunications services and to connect customers will be lower than
that of its competitors. Unlike copper- and fiber-based systems that require
installation and maintenance of a significant amount of wire and cable, the
Company's microwave networks generally will not require the installation and
maintenance of physical wires between the MDU based equipment and the Company's
Network Hubs. As a result, OpTel expects to enjoy a lower network cost structure
than certain of its competitors.
Pursue Focused Marketing Strategy. Strategic relationships with MDU owners
are a key element of the Company's marketing strategy. The Company negotiates
long term Rights of Entry with MDU owners under which the Company obtains, among
other things, the exclusive right to provide cable television services to an MDU
or group of MDUs and an undertaking by the MDU owner to promote OpTel as the
preferred telecommunications alternative to the ILEC within the MDU. The Rights
of Entry generally provide MDU owners with financial incentives to work closely
with the Company to promote its products and services. The Company offers
prospective customers the opportunity to subscribe for Company services at the
same time they sign their unit leases. The Company believes this access, coupled
with customer preference for a single source of cable television and
telecommunications services, significantly enhances its customer marketing
efforts. In addition, the Company markets to MDU residents through (i) direct
mail and direct sales campaigns, (ii) special promotion and sign-up parties,
(iii) establishment of a physical presence at a MDU and (iv) distribution of
point-of-sale marketing materials.
Provide Superior Customer Service. The Company believes that superior
customer service is important to MDU residents. Therefore, the Company has
dedicated resources to providing services that attract and retain subscribers.
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 also has
dedicated local service teams that provide prompt installation and response to
customer service calls. Because the Company believes that the best way to
control the quality and consistency of technical and field services is to train
and supervise the service technicians, the Company relies primarily on its own
personnel to perform these functions. The Company also has established stringent
staff training procedures, including its Operational Excellence continuous
improvement program, and internal customer service standards.
Pursue Selective Acquisitions and Strategic Relationships. To expand its
markets and to achieve critical mass in its existing markets, the Company often
evaluates opportunities to make acquisitions. Since May 1996, the Company has
completed six acquisitions representing approximately 700 MDUs served and
103,000 subscribers. In addition, the Company has entered into strategic
relationships for the delivery of high speed Internet access services, and will
continue to evaluate other alliances including those permitting it to host
additional third-party traffic on its switches.
RECENT DEVELOPMENTS
The Company commenced operating a central office telephone switch in
Houston in September 1997 and has migrated most of its telecommunications
subscribers in the Houston market to this switch. The Company has recently
commenced operating a central office telephone switch in the Dallas-Fort Worth
market and intends to migrate the MDUs it currently serves through PBX switches
in that market to that central office switch over the coming months.
On April 13, 1998, OpTel closed the initial phase of the acquisition of the
private cable television and telecommunications service agreements and related
assets of Interactive Cable Systems, Inc. ("ICS") in Houston, Dallas-Fort Worth,
Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta, Orlando-Tampa, Indianapolis, Austin and greater Washington,
D.C. (the "ICS
5
<PAGE> 8
Operations"). As of May 31, 1998, OpTel had acquired approximately 66,000 cable
television and telecommunications units under contract (or approximately 72% of
the approximately 90,000 units under contract to be acquired). A corresponding
percentage of the aggregate $80.8 million purchase price remains in escrow
subject to release upon fulfillment of closing conditions. While the Company
expects the acquisition of the remaining units to be completed over the next few
months, the acquisition of these units is subject to certain conditions,
including the receipt of third party consents, and there can be no assurance
that the balance of the acquisition will be consummated. See "Risk
Factors -- Risks Associated with Acquisitions." The $80.8 million purchase price
is comprised of approximately $4.5 million in cash, approximately $16.1 million
in shares of Class A Common Stock, approximately $59.4 million in shares of
Series B Preferred plus assumed liabilities of $.8 million. Promptly following
the consummation of the Offering, the Series B Preferred will be converted into
shares of Class A Common Stock (based on an assumed initial public offering
price of $ per share).
Effective March 1, 1998, the Company's majority stockholder, VPC
Corporation ("VPC"), an indirect wholly-owned subsidiary of GVL, exchanged
$139.2 million of the Company's 15% Convertible Notes (the "GVL Notes")
(including accrued interest), constituting all of the outstanding GVL Notes, for
approximately 6,962 shares of Series A Preferred. Upon consummation of the
Offering, the Series A Preferred will be converted into shares of
Multi-Vote Common (based on an assumed initial public offering price of
$ per share).
6
<PAGE> 9
THE OFFERING
Class A Common Stock offered by
the Company...................... shares
Common Stock outstanding after
the Offering..................... shares of Class A Common
Stock(1)
________ shares of Multi-Vote Common(2)
shares of Common Stock(1)
Use of Proceeds.................. The Company intends to use the net proceeds
from the Offering for capital expenditures
related to the purchase and installation of
communications equipment and for general
corporate purposes, including working
capital related to its expansion into new
markets. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol...........................
Risk Factors..................... For a description of certain risks inherent
in an investment in the Class A Common
Stock, see "Risk Factors."
- ---------------
(1) Excludes (i) 15,657.87 shares of Class A Common Stock issuable upon exercise
of presently exercisable stock options granted to officers, employees and
consultants at a weighted average exercise price of $84.10 per share and
(ii) 35,127.22 shares of Class A Common Stock issuable upon exercise of
presently exercisable warrants at a weighted average exercise price of
$59.81 per share.
(2) The Multi-Vote Common is fully convertible into Class A Common Stock, on a
one-for-one basis, at any time at the option of the holder or upon the
occurrence of a Conversion Event. Upon consummation of the Offering, each of
(i) the transfer of beneficial ownership of the Multi-Vote Common to any
person or entity that is not a Permitted Holder (defined generally as
certain affiliates of GVL and Caisse de depot et placement du Quebec
("Caisse")) or (ii) any event or circumstance which results in such holder
of Multi-Vote Common ceasing to be a Permitted Holder will be a Conversion
Event. See "Description of the Capital Stock."
7
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data as of and for the eight month
period ended August 31, 1995 and the years ended August 31, 1996 and 1997 have
been derived from the consolidated financial statements of the Company included
elsewhere herein and audited by Deloitte & Touche LLP, independent auditors, as
set forth in their report thereon also included herein. The summary historical
consolidated financial and operating data presented below as of and for the six
month periods ended February 28, 1997 and 1998 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
end 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
unaudited pro forma consolidated operations data for the year ended August 31,
1997 and for the six months ended February 28, 1998 and the unaudited pro forma
balance sheet data as of February 28, 1998 give effect to the acquisition of
100% of the ICS Operations and the conversion of the GVL Notes into Series A
Preferred, subject to the assumptions stated in the notes set forth below, as
though such events occurred at the beginning of or on the date of the period
presented. The unaudited pro forma as adjusted balance sheet data as of February
28, 1998 give effect to each of the above pro forma adjustments as well as the
Offering subject to the assumptions stated in the notes set forth below as if
such events had occurred on such date. The unaudited pro forma consolidated
statements of operations data and the unaudited pro forma balance sheet data are
not necessarily indicative of what the actual results of operations or financial
position of the Company would have been had such events occurred at such dates,
nor do they purport to represent the Company's results of operations or
financial position for future periods. The following information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," the Consolidated Financial Statements of
the Company and the notes thereto and the Pro Forma Financial Information,
appearing elsewhere in this Prospectus.
<TABLE>
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HISTORICAL PRO FORMA
---------------------------------------------------------------- -------------------------
EIGHT MONTH YEAR ENDED SIX MONTHS
PERIOD ENDED AUGUST 31, SIX MONTHS ENDED YEAR ENDED ENDED
AUGUST 31, ------------------- FEBRUARY 28, FEBRUARY 28, AUGUST 31, FEBRUARY 28,
1995 1996 1997 1997 1998 1997(1) 1998(1)
------------ -------- -------- ------------ ------------ ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS
DATA
Revenues:
Cable television........ $ 8,783 $ 25,893 $ 36,915 $ 17,208 $ 25,247 $ 51,334 $ 32,853
Telecommunications...... 788 1,711 2,922 1,414 1,644 5,131 2,561
-------- -------- -------- -------- -------- -------- --------
Total
revenues...... 9,571 27,604 39,837 18,622 26,891 56,465 35,414
Operating expenses:
Cost of services........ 4,558 11,868 19,202 8,702 12,419 28,149 16,273
Customer support,
general and
administrative....... 12,055 19,636 28,926 12,267 15,855 35,529 18,836
Depreciation and
amortization......... 2,420 8,676 14,505 5,820 10,759 25,952 16,482
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses................ 19,033 40,180 62,633 26,789 39,033 89,631 51,591
-------- -------- -------- -------- -------- -------- --------
Loss from operations...... (9,462) (12,576) (22,796) (8,167) (12,142) (33,166) (16,177)
Interest expense,
net(2).................. (1,169) (5,854) (25,739) (8,125) (21,885) (10,677) (12,316)
-------- -------- -------- -------- -------- -------- --------
Loss before income
taxes................... (10,631) (18,430) (48,535) (16,292) (34,027) (43,843) (28,493)
Net loss(3)............... $(10,161) $(18,430) $(48,535) $(16,292) $(34,027) $(59,047) $(28,493)
-------- -------- -------- -------- -------- -------- --------
Dividends on preferred
stock................... -- -- -- -- -- (14,640) (8,645)
Loss attributable to
common equity........... $(10,161) $(18,430) $(48,535) $(16,292) $(34,027) $(58,483) $(37,138)
======== ======== ======== ======== ======== ======== ========
Basic and diluted loss per
share of common
equity(4)............... $ (6.89) $ (8.30) $ (19.98) $ (7.01) $ (13.20) $ (22.54) $ (13.54)
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------- PRO FORMA AS ADJUSTED
AUGUST 31, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1998 1998(1) 1998(1)(5)
---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents....................... $ 87,305 $ 18,388 $ 13,844 $ 13,844
Restricted investments.......................... 67,206 54,509 54,509 54,509
Short-term investments.......................... -- 111,154 111,154
Property, plant and equipment, net.............. 160,442 203,778 225,578 225,578
Intangible assets............................... 82,583 110,051 169,744 169,744
Total assets.................................... 403,416 505,171 583,701
Convertible notes due stockholder............... 129,604 139,244 -- --
Total indebtedness.............................. 358,177 492,667 354,216 354,216
Total liabilities............................... 383,051 518,833 382,554 383,098
Stockholders' equity............................ 20,365 (13,662) 201,147
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
EIGHT MONTH YEAR ENDED ENDED
PERIOD ENDED AUGUST 31, FEBRUARY 28,
AUGUST 31, -------------------- ---------------------
1995 1996 1997 1997 1998
------------ -------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Net cash flows used in operating
activities....................... $ (3,494) $ (453) $ (15,935) $ (3,048) $ (15,215)
Net cash flows used in investing
activities....................... (72,144) (72,037) (143,125) (107,229) (171,447)
Net cash flows provided by
financing activities............. 72,655 72,131 244,688 243,615 117,745
Capital expenditures(6)............ 22,170 62,121 71,506 24,925 37,900
EBITDA(7).......................... (7,042) (3,900) (8,291) (2,347) (1,383)
</TABLE>
<TABLE>
<CAPTION>
AS OF
---------------------------------------------
AUGUST 31,
------------------------------ FEBRUARY 28,
1995 1996 1997 1998
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
OPERATING DATA
CABLE TELEVISION
Units under contract(8)............................ 173,324 241,496 295,149 372,138
Units passed(9).................................... 170,336 225,433 254,032 320,286
Basic subscribers.................................. 75,944 114,163 132,556 172,643
Basic penetration(10).............................. 44.6% 50.6% 52.2% 53.9%
Premium units(11).................................. 39,753 60,641 95,150 144,832
Pay-to-basic ratio(11)(12)......................... 52.3% 53.1% 71.8% 83.9%
Average monthly revenue per basic subscriber(13)... $ 22.84 $ 22.70 $ 24.94 $ 27.57
TELECOMMUNICATIONS
Units under contract(8)............................ 10,322 20,945 39,831 61,082
Units passed(9).................................... 9,116 12,364 16,572 17,551
Lines(14).......................................... 2,650 4,126 6,185 6,375
Line penetration(15)............................... 29.1% 33.4% 37.3% 36.3%
Average monthly revenue per line(16)............... N/A $ 42.10 $ 47.23 $ 43.64
</TABLE>
- ---------------
(1) Gives effect to the acquisition of 100% of the ICS Operations and the
conversion of the GVL Notes into Series A Preferred. As of April 30, 1998,
the acquisition of approximately 72% of the ICS Operations had been
consummated. See "Risk Factors -- Risks Associated with Acquisitions."
(2) Interest expense, net is reflected net of interest income and interest
capitalized in property, plant and equipment. Includes interest expense on
the GVL Notes of approximately $919,000, $5,342,000, $15,204,000,
$6,907,000 and $9,640,000 for the eight month period ended August 31, 1995,
the years ended August 31, 1996 and 1997 and the six months ended February
28, 1997 and 1998, respectively.
9
<PAGE> 12
(3) The Company had no taxable income for the periods reported. The Company
reported an income tax benefit of approximately $469,000 for the eight
month period ended August 31, 1995.
(4) Loss per share has been restated to reflect the adoption of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share."
(5) Gives effect to the Offering. The conversion of Non-Voting Common into
Class A Common Stock and the Series A Preferred into Multi-Vote Common upon
consummation of the Offering and the Series B Preferred into Class A Common
Stock promptly following consummation of the Offering will have no impact
on stockholders' equity.
(6) Capital expenditures include expenditures on property, plant and equipment
together with intangible assets excluding expenditures for business
acquisitions.
(7) EBITDA represents earnings before interest expense (net of interest income
and amounts capitalized), 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. In addition, the measure of EBITDA presented herein
may not be comparable to other similarly titled measures by other
companies. The Company believes that EBITDA is a standard measure commonly
reported and widely used by analysts, investors and other interested
parties in the cable television and telecommunications industries.
Accordingly, this information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance
relative to other companies in its industry.
(8) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into Rights
of Entry for the provision of cable television and telecommunications
services, respectively, but which the Company has not yet passed and which
the Company expects to pass within the next five years. At this time
substantially all units under contract for telecommunications are also
under contract for cable television.
(9) 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.
(10) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(11) Beginning with the year ended August 31, 1997, to be consistent with most
other cable television providers, the Company revised the method of
reporting premium penetration to include all premium units in the
calculation. Historically the calculation excluded premium channels that
were provided to customers as part of an expanded basic line up or other
special arrangements. Prior years have not been restated.
(12) Pay-to-basic ratio is calculated by dividing the total number of premium
units by the total number of basic subscribers.
(13) Represents average monthly revenue per the average number of basic
subscribers for the fiscal periods ended as of the date shown.
(14) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line. The Company has revised its method of
reporting lines to reflect only one line in service where multiple
customers share a single line. The Company has restated the number of lines
previously reported to reflect this change.
(15) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.
(16) Represents average monthly revenue per the average number of lines 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.
10
<PAGE> 13
RISK FACTORS
Any investment in the Class A Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
factors in addition to other information set forth elsewhere in this Prospectus.
LIMITED OPERATIONS OF CERTAIN SERVICES; HISTORY OF NET LOSSES AND NEGATIVE CASH
FLOW
OpTel's business commenced in 1993. Historically, substantially all of
OpTel's revenues were derived from providing cable television services. The
Company's telephone and Internet access services only recently have been
initiated or their availability only recently expanded in new market areas.
OpTel expects to increase substantially the size of these operations in the near
future. Prospective investors, therefore, have limited historical financial
information about OpTel upon which to base an evaluation of OpTel's performance
in the markets and for the services that will be its principal focus in the
future. Given OpTel's limited experience operating telecommunications networks,
there can be no assurance that it will be able to compete successfully in the
telecommunications industry.
The development of OpTel's business and the expansion of its networks will
require substantial capital, operational and administrative expenditures, a
significant portion of which may be incurred before the realization of revenues.
These expenditures will result in negative cash flow until an adequate customer
base is established and revenues are realized. Although its revenues have
increased in each of the last three years, OpTel has incurred substantial
up-front operating expenses for marketing, customer operations, administration
and maintenance of facilities, general and administrative expenses and
depreciation and amortization in order to solicit and service customers in
advance of generating significant revenues. As a result of these factors, the
Company has generated operating losses of $5.6 million, $22.8 million, $12.6
million, and $9.5 million for the quarter ended February 28, 1998, fiscal 1997,
fiscal 1996 and the eight months ended August 31, 1995, respectively, as its
cable television and telecommunications customer base has grown. The Company
reported positive EBITDA of $0.1 million for the quarter ended February 28, 1998
as compared with negative EBITDA of $8.3 million, $3.9 million and $7.0 million
for fiscal 1997, fiscal 1996 and the eight months ended August 31, 1995,
respectively. There can be no assurance that OpTel will achieve or sustain
profitability or positive EBITDA in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL INDEBTEDNESS; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES;
ABILITY TO SERVICE DEBT
The Company's indebtedness is substantial in relation to its stockholders'
equity and cash flow. As of April 30, 1998, the Company had total consolidated
indebtedness of approximately $385 million (including approximately $125 million
under the $150 million senior secured credit facility (the "Senior Credit
Facility") which the Company obtained from a syndicate of financial institutions
in December 1997 and $219 million principal amount of 13% Senior Notes Due 2005
(the "Senior Notes")) and stockholders' equity of approximately $192 million.
The Company's earnings were insufficient to cover its fixed charges by
approximately $51 million for fiscal 1997 and $35 million for the six month
period ended February 28, 1998. See "Capitalization" and "Selected Historical
Consolidated Financial and Operating Data."
The Senior Credit Facility contains financial maintenance requirements and
both the Senior Credit Facility and the indenture governing the Senior Notes
(the "Indenture") impose certain restrictions on the operations and activities
of the Company. See "Description of Certain Indebtedness." The Company's ability
to meet its financial maintenance covenants and to make scheduled payments of
principal of, or to pay interest on, or to refinance, its indebtedness 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 may need to refinance
the principal amount of both the Senior Credit Facility and the Senior
11
<PAGE> 14
Notes at their respective maturities. 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 "-- Significant Capital Requirements
and Need for Additional Financing" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The degree to which OpTel is leveraged could have adverse consequences to
holders of the Common Stock, including the following: (i) a substantial portion
of OpTel's cash flow from operations will be dedicated to the payment of the
principal of and interest on its indebtedness thereby reducing funds available
for other purposes, (ii) OpTel's vulnerability to changes in general economic
conditions or increases in prevailing interest rates could be increased, (iii)
OpTel's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes could
be impaired, and (iv) OpTel may be more leveraged than certain of its
competitors, which may be a competitive disadvantage.
SIGNIFICANT CAPITAL REQUIREMENTS AND NEED FOR ADDITIONAL FINANCING
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, based on its current business plan, that the
net proceeds from the Offering, together with its cash on hand and availability
under the Senior Credit Facility, will provide the Company with sufficient
financial resources to fund its capital requirements through the third quarter
of fiscal 2000. However, the Company's future capital requirements will depend
upon a number of factors, including the Company's success in obtaining 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 public or private debt and/or equity
financing. There can be no assurance, however, that OpTel will be successful in
raising sufficient debt or equity when required or on terms that it will
consider acceptable. Moreover, the terms of OpTel's outstanding indebtedness
impose certain restrictions upon OpTel's ability to incur additional
indebtedness or issue additional stock. See "Description of Certain
Indebtedness." In addition, GVL has the power to prevent the Company from
obtaining additional debt or equity financing. See "-- Control by GVL." Failure
to generate or raise sufficient funds may require OpTel to delay or abandon some
of its future expansion or expenditures, which would have a material adverse
effect on its growth and its ability to compete in the cable television and
telecommunications industries. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
RISKS ASSOCIATED WITH ACQUISITIONS
OpTel expects to continue to make acquisitions of strategically important
businesses in the future when sufficiently attractive opportunities arise.
Acquisitions may divert the resources and management time of OpTel and will
require integration of the acquired operations with OpTel's existing networks
and services. There can be no assurance that any acquisition of assets,
operations or businesses, including the acquisition of the ICS Operations, will
be successfully integrated into OpTel's operations. The Company typically has
acquired businesses that were privately held by entrepreneurs, many of which
businesses were without the same regulatory compliance practices and internal
accounting controls and procedures as the Company. Accordingly, the Company
frequently is required to take remedial actions, which may include the
expenditure of funds and 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 will
not be adversely affected by these or other matters arising from past or future
acquisitions. Consistent with its consolidation strategy, OpTel is currently
evaluating and often engages in discussions regarding various acquisition
opportunities. These acquisitions may be funded by cash on hand and/or through
the issuance of OpTel's debt and/or equity securities. It is possible that one
or more of such possible future acquisitions, if completed, could adversely
12
<PAGE> 15
affect OpTel's cash flow, or increase OpTel's debt, or that such an acquisition
could be followed by a decline in the market value of OpTel's securities.
OpTel recently closed the initial phase of its acquisition of the ICS
Operations. A portion of the purchase price paid for the acquisition of the ICS
Operations was deposited in escrow subject to the closing of the balance of the
acquisition. The consummation of the balance of the acquisition is subject to
certain conditions, including the receipt of third party consents, and there can
be no assurance that the balance of the acquisition will be consummated. This
prospectus contains certain pro forma information which gives effect to the
acquisition of 100% of the ICS Operations. This pro forma information is not
indicative of the actual results or financial position that would have been
achieved had the acquisition in fact been consummated at the beginning of the
periods presented. As of April 30, 1998, the acquisition of approximately 72% of
the ICS Operations had been consummated. There can be no assurance that the
Company will consummate the acquisition of all or part of the balance of the ICS
Operations.
RISK ASSOCIATED WITH TELECOMMUNICATIONS STRATEGY
The Company is currently introducing central office switched
telecommunications services to MDUs served by its existing networks. The Company
believes that a successful introduction of these 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, obtain cooperation of the
ILECs, when needed, 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 central office switched telecommunications
services in each of its markets in a timely manner in accordance with its
strategic objectives and failure to do so could have a material adverse effect
on the Company. Specific risks associated with the Company's telecommunications
strategy include:
Switch Installation and Network Enhancement; Lack of Redundant Switches. An
essential element of the Company's telecommunications strategy is the provision
of switched local exchange service. The Company has recently commenced operating
central office switches in Houston and Dallas-Fort Worth and intends to
implement central office switches in substantially all of its major markets by
the end of calendar year 1999. In connection with the implementation of central
office switches in additional markets, the Company will be reconfiguring its
microwave networks in such markets to carry bi-directional voice traffic. The
Company intends to use certain components of its existing infrastructure to
deliver bi-directional transmission utilizing microwave 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 in each of its markets and
there can be no assurance regarding path or frequency availability. In addition,
there can be no assurance that the installation of the required switches and the
reconfiguration of the network will be completed on schedule. 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 initially to install only one switch in each market. As a
result, a switch failure which disables both the primary and redundant
capabilities of a Company switch may have a material adverse effect on the
Company's ability to provide telecommunications services in the affected market
which may continue for an indefinite period. The Company may seek 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. See
"Business -- Network Architecture."
Reliance On Third Parties. As part of its telecommunications configuration,
the Company may transport telephone traffic across municipal boundaries or local
access and transport areas ("LATAs") which may require the Company to have
multiple interconnection agreements. While the Company has entered into
interconnection agreements with ILECs serving portions of its markets, the
Company is currently negotiating agreements for the interconnection of its
networks with the network of other ILECs in certain of the
13
<PAGE> 16
metropolitan areas the Company serves. There can be no assurance that the
Company will be able to successfully negotiate interconnection agreements with
the ILEC or any other local exchange carrier ("LEC") in each market where the
Company plans to offer central office switched telecommunications services or
that it will be able to do so on favorable terms. In addition, the Company has
experienced delays and difficulties accessing inside wiring used or owned
exclusively by the ILEC even in circumstances where it has a Right of Entry. The
failure to negotiate the necessary interconnection agreements or gain access to
inside wiring used or owned exclusively by the ILEC 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 in most of its markets. STS providers generally use the ILEC's
facilities (although in many states CLECs can now supply STS operators with
facilities) to provide local telephone service as a reseller, 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 could be materially adversely affected. The
Company relies on the services of a third-party vendor to provide certain
carrier-to-carrier billing services. The failure by such vendor to accurately
bill interexchange carriers' ("IXCs") access charges could have a material
adverse effect on the Company.
Uncertainties Related to Reciprocal Compensation. The Telecommunications
Act of 1996, as amended (the "Telecom Act"), requires ILECs to provide
reciprocal compensation to other carriers for local traffic terminated on such
other carrier's network. Notwithstanding this requirement, a number of ILECs
have taken the position that traffic terminated to Internet service providers
("ISPs") is not local traffic. Competitive carriers generally have been
successful in challenging this position before the public utility commissions
("PUCs") in several states. However, this issue is under consideration and
subject to review at the Federal Communications Commission (the "FCC"), various
state PUCs and state and federal courts. There can be no assurance that traffic
terminated to an ISP will not ultimately be held to be exempt from the
reciprocal compensation contribution requirements.
Potential 911, E-911 and Intrusion Alarm Liability. The Company delivers
local exchange service, including access to emergency ("911") services, to MDU
residents through either its central office switches or PBX 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 switches, 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. In addition, the Company currently provides certain
intrusion alarm services 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.
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, (ii)
its ability to identify suitable MDUs and contract with their owners, (iii) the
continuing demographic attractiveness of the markets in
14
<PAGE> 17
which the Company has chosen to focus its business, (iv) 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 and (vii) the enforceability of the material terms of its Rights of
Entry, including exclusivity provisions. Although the Company does not believe
that any of its existing arrangements will be cancelled or will not be renewed
as needed in the near future, cancellation or non-renewal of certain of such
arrangements could materially adversely affect the Company's business in any
such affected area. In addition, the failure by the Company to enter into and
maintain any such arrangements for a particular network which is already under
development may affect the Company's ability to acquire or develop that network.
See "Business -- Competition" and "-- Regulation."
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, an undertaking by the MDU owner to promote OpTel as
the preferred telecommunications alternative to the ILEC. While the Company
believes that the exclusivity provisions in its cable television Rights of Entry
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 certain cities and municipalities in
states in which 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 state certified telecommunications service providers.
In addition, Virginia prohibits private cable television operators from entering
into revenue sharing or up front incentive payment arrangements with MDU owners.
The ICS Operations included several MDUs located in Virginia. Further, the FCC
has initiated a notice of proposed rule making seeking comment on whether the
FCC should adopt regulations restricting exclusive contracts. 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. 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 installing duplicate wiring were required
and result in competitive services being offered at MDUs where the Company
presently has exclusive rights of entry. See "-- Regulation."
In a number of instances individual 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 such indebtedness could result in
termination of such Right of Entry. Bankruptcy of an MDU owner could also result
in rejection of a Right of Entry as an "executory contract." Moreover, the terms
of a number of the Company's Rights of Entry require it to remain competitive
with other competitors in that market in general or competitive in terms of
price of offering, technology, number of programming channels and levels of
service. To meet these requirements, the Company could be required to upgrade
its networks and equipment, which would require capital expenditures. The
failure to remain competitive under any of these standards in a market could
result in a loss or cancellation of the related Right of Entry. Such losses or
cancellations could, in the aggregate, have a material adverse effect on the
Company's business. See "Business -- Strategic Relationships with MDU Owners."
DISTANCE AND WEATHER LIMITATIONS; LINE OF SIGHT; AVAILABILITY OF TRANSMISSION
SITES
Point-to-point microwave transmission requires a direct line of sight
between two dishes comprising a link and is subject to distance and rain
attenuation. The Company expects that its average coverage radius of Network
Hubs will be approximately five miles, depending on local conditions, and it is
expected that the Company's Network Hubs will utilize power control to increase
signal strength and mitigate the effects of rain attenuation. In areas of heavy
rainfall, transmission links are engineered for shorter distances and greater
power to maintain transmission quality. The reduction of path link distances to
maintain transmission quality may increase the cost of service coverage. While
these increased costs may not be significant in all cases, such costs may render
point-to-point microwave transmissions uneconomical in certain circumstances.
15
<PAGE> 18
Due to line of sight limitations, the Company currently plans to install
its dishes and antennas on the rooftops of buildings and on other tall
structures. The Company expects generally to be able to construct intermediate
links or use other means to resolve line of sight and distance issues. However,
these limitations may render point-to-point links uneconomical in certain
locations.
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 industries are 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, 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
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. 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. See
"-- Competition" and "Business -- Competition."
INFORMATION SYSTEMS AND AUTOMATION
The Company has ordered a new customer management information system which
is to be implemented during fiscal 1999 and which the Company expects to be an
important factor in its operations. If the customer management information
system is not implemented in a timely manner, or is not implemented at all or if
it fails or is unable to perform as expected, it could have a material adverse
effect on the Company. Furthermore, as the Company's business expands, problems
may be encountered with higher processing volumes or with additional automation
features, in which case the Company might experience system breakdowns, delays
and additional unbudgeted expense to remedy the defect or to replace the
defective system with an alternative system.
MANAGEMENT OF GROWTH AND DEPENDENCE ON QUALIFIED PERSONNEL
The Company is highly dependent upon the efforts of its senior management,
the loss of any of whom could impede the achievement of service delivery and
marketing objectives and could have a material adverse effect on the Company.
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. Any failure by the
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Company to effectively manage its growth and attract and retain qualified
personnel could have a material adverse effect on its business.
COMPETITION
OpTel competes with a wide range of service providers for each of the
services it provides. See "Business -- Competition." Substantially all markets
for voice and video services are highly competitive and the Company expects that
competition will intensify. In each of its markets, the Company faces
significant competition from larger companies with greater access to capital,
technology and other competitive resources. The Company's switched local
exchange services compete with ILECs, other STS providers, 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 IXCs and resellers. In addition, recent telecommunications
offerings, including PCS, and future offerings may increase competition in the
telecommunications industry. The Company's private cable television services
compete with incumbent franchise cable television operators as well as wireless
cable television operators, other private cable television operators, DBS
operators and stand-alone satellite service providers. Recent and future
legislative, regulatory and technological developments likely will result in
additional competition, as telecommunications companies enter the cable
television market and as franchise cable television operators and IXCs begin to
enter the local telephone market. See "Business -- 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 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. 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 also may 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 and do not prohibit tenants
from utilizing other services and technologies. For example, the Rights of Entry
do not prevent a resident from using cellular telephone service 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, regulatory 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.
As an emerging CLEC in each of its markets, OpTel faces significant
competition for the local exchange services it offers from ILECs which currently
dominate their local telecommunications markets. ILECs have longstanding
relationships with their customers, which relationships may create competitive
barriers. Furthermore, ILECs may have the potential to subsidize competitive
service from monopoly service revenues. OpTel believes that various legislative
initiatives, including the Telecom Act have removed most of the remaining
legislative barriers to local exchange competition. Nevertheless, in light of
the passage of the Telecom Act, regulators also are likely to provide ILECs with
increased pricing flexibility as competition increases. If ILECs are permitted
to lower their rates substantially or engage in excessive volume or term
discount pricing practices for their customers, the net income or cash flow of
ICPs and CLECS, including OpTel, could be materially adversely affected. In
addition, while OpTel currently competes with AT&T, Inc. ("AT&T"),
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MCI Telecommunications Corporation ("MCI") and others in the interexchange
services market, recent federal legislation permits the RBOCs to provide
interexchange services once certain criteria are met. Once the RBOCs begin to
provide such services, they will be in a position to offer single source
telecommunications service similar to that being offered by OpTel. On December
31, 1997, a Federal District Court in Texas found unconstitutional certain
provisions of the Telecom Act restricting the RBOCs from offering long distance
service in their operating regions until they could demonstrate that their
networks have been made available to competitive providers of local exchange
services in those regions. This decision has been stayed pending appeal. If this
decision is permitted to stand, it could result in RBOCs providing interexchange
service in their operating regions sooner than previously expected. In addition,
AT&T and MCI have entered, and other IXCs have announced their intent to enter,
the local exchange services market, which is facilitated by the Telecom Act's
resale and unbundled network element provisions. OpTel cannot predict the number
of competitors that will emerge as a result of existing or new federal and state
regulatory or legislative actions. Competition from the RBOCs with respect to
interexchange services or from AT&T, MCI or others with respect to local
exchange services could have a material adverse effect on OpTel's business. In
addition, a continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors for OpTel.
Many of OpTel's existing and potential competitors have financial, personnel and
other resources significantly greater than those of OpTel.
DEPENDENCE UPON PROGRAM MATERIAL
The Company has fixed-term contracts with various program suppliers. The
average term of such contracts is approximately five 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 adversely impacted, 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, changed or repealed, which could
limit the Company's ability to obtain programming or raise the cost of
programming. 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. 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 Telecom 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
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."
The Company believes that its exclusive Rights of Entry are now generally
enforceable under applicable law; however, current trends at the state and
federal level suggest that the future enforceability of these provisions may be
uncertain. The FCC is seeking comment on whether such exclusive contracts should
be
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limited to a maximum period of seven years and whether such an amount of time is
reasonably necessary to recover the capital costs of providing service to that
MDU. In another proceeding, the FCC is seeking comment on the legal, technical
and practical issues relating to whether the FCC should issue a rule 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. See "-- Risks Associated with Rights of Entry." There can be no assurance
that future state or federal 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 and Marketing," "-- Strategic
Relationships with MDU Owners" and "-- Regulation."
The Company uses a substantial number of point-to-point microwave paths,
using frequencies in the 18GHz band, in its network architecture. In addition,
the Company intends to obtain licenses for paths in other frequency bands,
principally in the 23GHz band, in the future. The 18GHz, 23GHz and other
frequency bands 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 licenses 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 or 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 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. 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. Any of the
foregoing developments could have a material adverse effect on the Company's
business. See "Business -- Network Architecture."
As an emerging CLEC, OpTel is subject to varying degrees of federal, state
and local regulation. OpTel is not currently subject to price cap or rate of
return regulation at the state or federal level. OpTel is, however, generally
subject to certification or registration and tariff or price list filing
requirements for intrastate services by state regulators. Although passage of
the Telecom Act should result in increased opportunities for companies that are
competing with the ILECs, no assurance can be given that changes in current or
future regulations adopted by the FCC or state regulators or other legislative
or judicial initiatives relating to the telecommunications industry would not
have a material adverse effect on OpTel. Moreover, while the Telecom Act reduces
regulation to which non-dominant LECs are subject, it also reduces the level of
regulation that applies to the ILECs and increases their ability to respond
quickly to competition from OpTel and others. In addition, the Telecom Act will
permit RBOCs, for the first time, to offer long distance service in the regions
where they provide local exchange service upon demonstrating to the FCC and
state regulatory agencies that they have complied with the FCC's interconnection
regulations designed to foster local exchange competition. While the FCC has not
approved the applications to provide in-region long distance service filed to
date, it may do so in the future. On December 31, 1997, a federal District Court
in Texas found unconstitutional the provisions of the Telecom Act restricting
RBOCs from providing long distance service in-region until they could
demonstrate that their networks have been made available to competitive
providers of local exchange services. The Court has stayed the decision and the
issue is under appeal but if the decision is upheld, RBOCs may be able to offer
in-region long distance service earlier than otherwise expected. RBOCs would
then be able to offer a combination of local and interexchange service to
customers in direct competition with OpTel's service offerings.
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In addition, the FCC has put in place access charge reform rules which may
over time result in a net decrease in the access charges paid by IXCs to LECs
for originating or terminating long distance traffic. To the extent ILECs are
afforded increased pricing flexibility or access charges are reduced, the
ability of the Company to compete with ILECs for certain services may be
adversely affected. On May 8, 1997, the FCC issued an order establishing a new
Universal Service support fund. The new Universal Service support fund rules
will be administered jointly by the FCC and state regulatory authorities, many
of which rules are still in the process of being formulated. The net revenue
effect on the Company of these rules is incalculable at this time.
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 in each of its markets. 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.
CONTROL OF LICENSES BY UNAFFILIATED COMPANY
The Telecom Act prohibits any corporation directly or indirectly controlled
by any other corporation of which more than 25 percent of the capital stock is
owned or voted by non-U.S. citizens from holding a common carrier radio station
license absent a finding by the FCC that the grant of such a license to such a
licensee would serve the public interest. In 1997, the United States agreed, in
the context of the World Trade Organization ("WTO") Basic Telecom Agreement, to
allow foreign suppliers from WTO member nations, including Canada, to provide a
broad range of basic telecommunications services in the United States. Those
commitments became effective in February 1998. In light of those commitments,
the FCC has determined that it will adopt an "open entry standard" for suppliers
of telecommunications services from WTO member nations, including Canada. In
conjunction with its new open entry policies, the FCC has adopted a presumption
favoring grant of applications to exceed the 25 percent limit on non-U.S.
ownership described above when the non-U.S. investment is from a WTO member
nation. GVL, the Company's principal stockholder, is a Canadian corporation.
Prior to the recent developments described above, the Company assigned
substantially all of its frequency licenses to Transmissions Holding, Inc.
("THI"), a Delaware corporation controlled by United States citizens, 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. The Company has an option to purchase the assets (or the stock) of THI,
exercisable at any time, subject to FCC approval. THI is not an affiliate of the
Company. While the Company is in the process of reevaluating whether it should
hold FCC authorizations directly and, specifically, whether it should exercise
its option to purchase the assets or stock of THI, the current 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 Relationships and
Related Transactions -- License Holding Company."
USE OF THE NAME OPTEL
On April 27, 1998, an action was commenced against the Company in the
United States District Court for the Northern District of California by Octel
Communications Corp. ("Octel"), charging the Company
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with trademark infringement, trade name infringement, trademark dilution, and
unfair competition (the "Civil Action") based on its use of the name "OpTel" and
seeking to enjoin the Company from using the name and trademark "OpTel." The
Civil Action follows a now-suspended administrative proceeding in the United
States Patent and Trademark Office ("PTO") relating to registration of the
"OpTel" mark by the Company. The PTO found the Company's application for
registration to be allowable; however, Octel commenced an opposition proceeding
claiming that the Company's mark is confusingly similar to the "Octel" mark used
by that party in a related field, and claiming that the Company's application
had procedural deficiencies. During the course of the PTO proceeding, the
Company acquired rights to the marks "Optel" and "Optel Communications" in the
telecommunications field which are believed to predate the rights of Octel to
its trademark, and the Company commenced two further proceedings against Octel
in the PTO seeking cancellation of two of the trademark registrations owned by
Octel. The various proceedings in the PTO between the Company and Octel were
consolidated and thereafter suspended on May 15, 1998, in view of the
commencement of the Civil Action. The answer and counterclaims must be filed by
the Company in mid-June. The Company believes it has meritorious counterclaims
in the Civil Action and intends to vigorously defend against Octel's claims.
Although the Company does not believe that its use of the name "OpTel" infringes
on the trademark rights or trade name rights of Octel or any other person, there
can be no assurance as to the outcome of the Civil Action or the proceedings in
the PTO (if reinstated) or that any such outcome would not materially adversely
affect the Company.
LATE FEES CLASS ACTION LITIGATION
On April 9, 1998, a purported class action complaint was filed in the
District Court of Harris County, Texas by Gavin Stewart Clarkson, individually
and on behalf of all cable subscribers in the U.S. that have paid late fees to
either the group of affiliated entities known as Phonoscope (collectively,
"Phonoscope") or the Company. The plaintiff, who formerly subscribed to cable
television services provided by Phonoscope, alleges that Phonoscope's charging
pre-established late fees for delinquent payments of cable subscription charges
constitutes an illegal collection of a penalty and that cable service providers
should only be entitled to their actual collection costs. The plaintiff seeks to
enjoin Phonoscope and OpTel from collecting, or attempting to collect, such late
fees. The case is in its very early stages and the Company has not yet been
served with process of the summons and complaint. No assurance can be given as
to its ultimate outcome or that any such outcome will not materially adversely
affect the Company. OpTel believes that it will have meritorious factual and
legal defenses, and intends to defend vigorously against these claims.
CONTROL BY GVL
After the consummation of the Offering, VPC, an indirect wholly-owned
subsidiary of GVL, will own shares of the Company's Multi-Vote Common,
representing % of the voting rights of the Company. Accordingly, VPC can
and, following consummation of the Offering, will continue to be able to elect a
majority of the Board of Directors of the Company (the "Board") and to control
the vote on matters submitted to the vote of the Company's stockholders.
In addition to its investment in the Company, GVL, through other
subsidiaries, currently holds interests in wireless cable systems or licenses to
operate wireless cable systems in a number of U.S. markets including San
Francisco, San Diego and Victorville, California and Tampa, Florida. These
subsidiaries employ multipoint multichannel distribution systems ("MMDS"),
satellite master antenna television ("SMATV") systems or hard wire franchise
cable television systems. As a result, affiliates of GVL may compete with the
Company in markets where their services overlap. In addition, an affiliate of
GVL has recently announced its intention to deliver high speed Internet access
in the San Francisco area. These services may compete with the Company's high
speed Internet offering.
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,
1998, GVL was able to incur approximately Cdn $670 million
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(approximately $462 million based on an exchange rate of $1.00 = Cdn $1.4489 as
reported by the Wall Street Journal on Tuesday, May 19, 1998) 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.
GVL, VPC, Capital Communications CDPQ Inc. ("CDPQ"), a subsidiary of
Caisse, a Quebec financial institution and minority shareholder of GVL, and the
Company are parties to a Stockholders' Agreement, dated as of August 15, 1997
(the "Stockholders' Agreement"), pursuant to which, among other things, CDPQ was
granted the right to elect certain directors of OpTel, preemptive rights to
acquire new securities issued by the Company subject to certain exceptions
(including a registered public offering) and tag along rights upon the sale by
VPC of its interest in OpTel. In addition, CDPQ agreed to certain restrictions
on the transfer of its shares of Multi-Vote Common. See "Principal
Stockholders -- Stockholders' Agreement."
A transfer by VPC of its interest in OpTel or a transfer by GVL of its
interest in VPC may result in a "Change of Control" under the Indenture, which
could require the Company to offer to purchase the Senior Notes. There can be no
assurance that the Company 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.
YEAR 2000 RISK
OpTel has implemented a Year 2000 program to ensure that its computer
systems and applications will function properly beyond 1999. OpTel believes that
it has allocated adequate resources for this purpose and expects its Year 2000
conversion program to be successfully completed on a timely basis. However,
successful completion of the Year 2000 conversion program is substantially
dependent upon successful implementation of the Company's new customer
management information system. The Company's financial accounting system has not
been upgraded to eliminate potential Year 2000 related malfunctions. The Company
has undertaken a selection process for a new financial accounting system and
plans to have the new system selected and implemented within the next twelve
months. There can be no assurance that the new customer management information
system and financial accounting system will be implemented on schedule or that
other components of the Year 2000 conversion program will be completed in a
timely manner. See "-- Information Systems and Automation." Other than expenses
relating to the acquisition of the customer management information system, OpTel
does not expect to incur significant expenditures to address this issue. The
ability of third parties with which OpTel transacts business to adequately
address their Year 2000 issues is outside of OpTel's control. There can be no
assurance that the failure of OpTel or such third parties to adequately address
their respective Year 2000 issues will not have a material adverse effect on
OpTel's business, financial condition, cash flows and results of operations.
LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock and there can be no assurance that an active trading market will
develop or be sustained. The initial public offering price for the Shares will
be determined through negotiations among the Company and the Underwriters and
may not be indicative of the market price of the Class A Common Stock after the
Offering. See "Underwriting." The market prices of securities of early stage
communications companies similar to the Company have historically been highly
volatile. Future announcements concerning the Company or its competitors,
including quarterly results, technological innovations, services offered,
government legislation or regulation and general market, economic and political
conditions, may have a significant effect on the market price of the Class A
Common Stock.
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DILUTION
There will be an immediate and substantial dilution of a purchaser's
investment in the Class A Common Stock in that the net tangible book value per
share of Class A Common Stock after the Offering will be substantially less than
the per share offering price of the Class A Common Stock. See "Dilution."
LACK OF DIVIDEND HISTORY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
OpTel has never declared or paid any cash dividends on its Common Stock and
does not expect to declare any such dividends in the foreseeable future. Payment
of any future dividends will depend upon earnings and capital requirements of
OpTel, OpTel's debt facilities and other factors the Board considers
appropriate. OpTel intends to retain earnings, if any, to finance the
development and expansion of its business, In addition, the terms of OpTel's
outstanding indebtedness, including the Senior Credit Facility and the
Indenture, and preferred stock restrict the payment of dividends on Common
Stock. See "Description of Capital Stock" and "Description of Certain
Indebtedness."
ANTI-TAKEOVER PROVISIONS
VPC's voting control of OpTel, certain other provisions of OpTel's
Certificate of Incorporation and Bylaws, the provisions of the Delaware General
Corporation Law (the "DGCL") and OpTel's outstanding indebtedness may make it
difficult in some respects to effect a change in control of OpTel and replace
incumbent management. The existence of these provisions may have a negative
impact on the price of the Common Stock, may discourage third-party bidders from
making a bid for OpTel or may reduce any premiums paid to stockholders for their
Class A Common Stock. In addition, the Board has the authority to fix the rights
and preferences of, and to issue shares of, OpTel's preferred stock, which may
have the effect of delaying or preventing a change in control of OpTel without
action by its stockholders. See "Description of Capital Stock -- Certain
Provisions of OpTel's Certificate of Incorporation and Bylaws and of Delaware
Law."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares, or the perception that such sales may occur, by
existing stockholders under Rule 144 of the Securities Act, or through the
exercise of outstanding registration rights or the issuance of shares of Common
Stock upon the exercise of options or warrants or conversion of convertible
securities, could materially adversely affect the market price of shares of
Class A Common Stock and could materially impair OpTel's future ability to raise
capital through an offering of equity securities. No predictions can be made as
to the effect, if any, that market sales of such shares or the availability of
such shares for future sale will have on the market price of shares of Class A
Common Stock prevailing from time to time. See "Description of Capital
Stock -- Shares Eligible for Future Sales" and "-- Registration Rights of
Certain Security Holders."
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "estimates," "projects," "anticipates,"
"expects," "intends," "believes" or the negative thereof or other variations
thereon or comparable terminology or by discussions of strategy that involve
risks and uncertainties. Management wishes to caution the reader that these
forward-looking statements are only estimates or predictions. No assurance can
be given that future results will be achieved. Actual events or results may
differ materially as a result of risks facing OpTel or actual events differing
from the assumptions underlying such statements. All forward-looking statements
made in connection with this Prospectus which are attributable to OpTel or
persons acting on its behalf are expressly qualified in their entirety by these
cautionary statements. The safe harbor for forward-looking statements provided
in the Private Securities Litigation Reform Act of 1995 does not apply to
initial public offerings.
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<PAGE> 26
USE OF PROCEEDS
The net proceeds to the Company from the Offering (based on an assumed
initial public offering price of $ per share) are estimated to be
approximately $ million ($ million if the over-allotment option granted
to the Underwriters is exercised in full) after deducting estimated underwriting
discounts and commissions and other offering expenses payable by the Company.
The Company intends to use the net proceeds from the Offering for capital
expenditures related to the purchase and installation of communications
equipment and for general corporate purposes, including working capital related
to its expansion into new markets. In addition, the Company may use a portion of
the net proceeds for acquisitions. Although the Company considers acquisitions
from time to time, no agreement or agreement in principal to effect any material
acquisition has been reached. Pending such uses, the net proceeds of the
Offering will be invested in short-term investment grade securities.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying dividends in the foreseeable future. Any future determination
to pay dividends will be at the discretion of the Board and will be dependent
upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board deems relevant. In addition,
the Company's ability to declare and pay dividends on the Common Stock is
restricted by the terms of OpTel's outstanding indebtedness, including the
Senior Credit Facility and the Indenture, and preferred stock. See "Risk
Factors -- Lack of Dividend History; Restrictions on Payment of Dividends."
24
<PAGE> 27
CAPITALIZATION
The following table sets forth, on an unaudited basis at February 28, 1998,
(i) the capitalization of the Company, (ii) the pro forma capitalization after
giving effect to the acquisition of the ICS Operations and the conversion of the
GVL Notes into Series A Preferred and (iii) the pro forma capitalization as
adjusted to give effect to the Offering and the conversion of all outstanding
shares of Non-Voting Common and Series B Preferred into shares of Class A Common
Stock and the conversion of all outstanding shares of Series A Preferred into
shares of Multi-Vote Common. This table should be read in connection with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements of the Company and the notes
thereto and the Pro Forma Financial Information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1998
-----------------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(1) ADJUSTED(1)(2)(3)
--------- --------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 18,388 $ 13,844 $ 13,844
Restricted Investments................................. 54,509 54,509 54,509
Short-term investments................................. 111,154 111,154
--------- --------- --------
Total................................................ $ 184,051 $ 179,507 $
========= ========= ========
Indebtedness:
13% Senior Notes Due 2005............................ $ 218,911 $ 218,911 $218,911
Convertible notes payable to stockholder............. 139,244 -- --
Notes payable and other long-term liabilities........ 128,856 129,649 129,649
Deferred acquisition liabilities..................... 5,656 5,656 5,656
--------- --------- --------
Subtotal........................................ 492,667 354,216 354,216
Stockholders' equity:
Class A common stock, $0.01 par value ("Class A
Common Stock"); 8,000,000 shares authorized; none
issued and outstanding; 164,272 issued and
outstanding pro forma; issued and outstanding
pro forma as adjusted............................. -- 2
Class B common stock, $0.01 par value ("Multi-Vote
Common"); 6,000,000 shares authorized; 2,353,498
issued and outstanding; 2,353,498 issued and
outstanding pro forma; issued and outstanding
pro forma as adjusted............................. 24 24
Class C common stock, $0.01 par value ("Non-Voting
Common"); 300,000 shares authorized; 225,000
issued and outstanding; 225,000 issued and
outstanding pro forma; none issued and outstanding
pro forma as adjusted............................. 2 2 --
Series A Preferred Stock, $0.01 par value, 10,000
shares authorized; none issued and outstanding;
6,962.2 shares issued and outstanding pro forma;
none issued and outstanding pro forma as
adjusted.......................................... -- 139,244 --
Series B Preferred Stock, $0.01 par value; 1,000
shares authorized; none issued and outstanding;
991.1 shares issued and outstanding pro forma;
none issued and outstanding pro forma as
adjusted.......................................... -- 59,466 --
Additional paid-in capital........................... 97,683 113,780
Accumulated deficit.................................. (111,371) (111,371)
--------- --------- --------
Subtotal........................................ (13,662) 201,147
--------- --------- --------
Total capitalization......................... $ 479,005 $ 555,363 $
========= ========= ========
</TABLE>
- ---------------
(1) Gives effect to the acquisition of 100% of the ICS Operations and the
conversion of the GVL Notes into Series A Preferred as if such events had
occurred on February 28, 1998. As of April 30, 1998, the acquisition of
approximately 72% of the ICS Operations had been consummated. See "Risk
Factors -- Risks Associated with Acquisitions."
(2) Gives effect to the Offering and to (i) the conversion of all outstanding
shares of Non-Voting Common into shares of Class A Common Stock upon
consummation of the Offering, (ii) the conversion of all outstanding shares
of Series B Preferred into shares of Class A Common Stock promptly
following consummation of the Offering and (iii) the conversion of all
outstanding shares of Series A Preferred into shares of Multi-Vote
Common upon consummation of the Offering.
(3) Gives effect to the Offering assuming an initial public offering price of
$ per share and after deducting the Underwriters' discounts and
commissions and estimated fees and expenses of $ .
25
<PAGE> 28
DILUTION
The net tangible book value per share of the Class A Common Stock is the
difference between the Company's tangible assets and its liabilities, divided by
the number of shares of Class A Common Stock, Multi-Vote Common and Non-Voting
Common outstanding. For investors in the Class A Common Stock, dilution is the
per share difference between the assumed $ per share initial offering
price of the Class A Common Stock offered hereby and the net tangible book value
of the Class A Common Stock immediately after completing the Offering. Dilution
in this case results from the fact that the per share offering price of the
Class A Common Stock is substantially in excess of the per share net tangible
book value of the Class A Common Stock prior to the Offering.
On February 28, 1998, the Company's net tangible book value was
approximately negative $123.7 million and the per share net tangible book value
based on 2,742,769.54 shares of Class A Common Stock, Multi-Vote Common and
Non-Voting Common outstanding was approximately negative $45.11 per share.
As of February 28, 1998, without taking into account any changes in the
Company's net tangible book value subsequent to that date other than to give
effect to the sale of the Class A Common Stock offered hereby based on an
assumed offering price of $ per share (after deducting the estimated
offering expenses, including underwriting discounts and commissions), the
conversion of the Non-Voting Common into shares of Class A Common Stock and
the conversion of the Series A Preferred and Series B Preferred into shares
of Multi-Vote Common and shares of Class A Common Stock, respectively
(based on an assumed offering price of $ per share), the pro forma net
tangible book value of each of the assumed outstanding shares of Class A Common
Stock, Multi-Vote Common and Non-Voting Common would have been $ per
share after the Offering. Therefore, investors in the Class A Common Stock would
have paid $ for a share of Class A Common Stock having a net tangible
book value of approximately $ per share after the Offering; that is,
their investment would have been diluted by approximately $ per share.
At the same time, existing stockholders would have realized an increase in net
tangible book value of $ per share after the Offering without further
cost or risk to themselves. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Class A
Common Stock.............................................. $
Net tangible book value per share of Class A Common Stock
before the Offering.................................... $(45.11)
Increase in net tangible book value per share of Class A
Common Stock attributable to investors in the
Offering(1)(2)......................................... $
Pro forma net tangible book value per share of Class A
Common Stock after the Offering(1)(2)..................... $
--------
Dilution to new investors(2)................................ $
========
</TABLE>
- ---------------
(1) After deduction of the estimated offering expenses payable by the Company
(including the underwriting discounts and commissions).
(2) Assumes that none of the Company's outstanding options or warrants are
exercised. See "Management -- Incentive Stock Plan," and "-- Stock Purchase
Plan" and "Description of Capital Stock."
26
<PAGE> 29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected historical consolidated financial data for the year
ended December 31, 1994, the eight month period ended August 31, 1995 and as of
and for the years ended August 31, 1996 and 1997 have been derived from the
consolidated financial statements of the Company included elsewhere herein and
audited by Deloitte & Touche LLP, independent auditors as set forth in their
report thereon also included herein. The selected financial data of the Company
as of and for the period ended December 31, 1993 and as of December 31, 1994 and
August 31, 1995 is derived from the Company's audited financial statements not
included herein. The selected financial data presented below as of and for the
six month periods ended February 28, 1997 and February 28, 1998 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 EIGHT MONTH
(DATE OF INCEPTION) YEAR ENDED PERIOD ENDED
TO DECEMBER 31, DECEMBER 31, AUGUST 31,
1993 1994 1995
------------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television.............. $ 12 $ 240 $ 8,783
Telecommunications............ -- 202 788
----- ------- --------
Total revenues................ 12 442 9,571
Operating expenses:
Cost of services.............. 6 470 4,558
Customer support, general and
administrative............. 304 7,733 12,055
Depreciation and
amortization............... 8 117 2,420
----- ------- --------
Total operating expenses........ 318 8,320 19,033
----- ------- --------
Loss from operations............ (306) (7,878) (9,462)
Interest expense, net(1)........ (1) (66) (1,169)
----- ------- --------
Loss before income taxes........ (307) (7,944) (10,631)
Net loss(2)..................... $(307) $(7,944) $(10,161)
===== ======= ========
Basic and diluted loss per share
of Common Stock(3)............ N/A N/A $ (6.89)
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
AUGUST 31, FEBRUARY 28,
----------------------- ---------------------------
1996 1997 1997 1998
---------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television.............. $ 25,893 $ 36,915 $ 17,208 $ 25,247
Telecommunications............ 1,711 2,922 1,414 1,644
-------- -------- -------- --------
Total revenues................ 27,604 39,837 18,622 26,891
Operating expenses:
Cost of services.............. 11,868 19,202 8,702 12,419
Customer support, general and
administrative............. 19,636 28,926 12,267 15,855
Depreciation and
amortization............... 8,676 14,505 5,820 10,759
-------- -------- -------- --------
Total operating expenses........ 40,180 62,633 26,789 39,033
-------- -------- -------- --------
Loss from operations............ (12,576) (22,796) (8,167) (12,142)
Interest expense, net(1)........ (5,854) (25,739) (8,125) (21,885)
-------- -------- -------- --------
Loss before income taxes........ (18,430) (48,535) (16,292) (34,027)
Net loss(2)..................... $(18,430) $(48,535) $(16,292) $(34,027)
======== ======== ======== ========
Basic and diluted loss per share
of Common Stock(3)............ $ (8.30) $ (19.98) $ (7.01) $ (13.20)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
-------------- ------------------------------ FEBRUARY 28,
1993 1994 1995 1996 1997 1998
---- ------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents......................... $ 41 $ 5,019 $ 2,036 $ 1,677 $ 87,305 $ 18,388
Restricted investments............................ -- -- -- -- 67,206 54,509
Short-term investment............................. -- -- -- -- -- 111,154
Property, plant and equipment, net................ 509 11,379 48,060 103,800 160,442 203,778
Intangible Assets................................. -- 16,189 55,443 65,876 82,583 110,051
Total Assets...................................... 588 33,820 108,072 175,978 403,416 505,171
Convertible notes due stockholder................. -- 15,000 17,950 89,414 129,604 139,244
Total liabilities................................. 206 31,007 39,527 116,700 383,051 518,833
Stockholders' equity.............................. 382 2,813 68,545 59,279 20,365 (13,662)
</TABLE>
27
<PAGE> 30
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 20, 1993 SIX MONTHS
(DATE OF EIGHT MONTH YEAR ENDED ENDED
INCEPTION) YEAR ENDED PERIOD ENDED AUGUST 31, FEBRUARY 28,
TO DECEMBER 31, DECEMBER 31, AUGUST 31, ----------------------- ---------------------------
1993 1994 1995 1996 1997 1997 1998
--------------- ------------ ------------ ---------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Net cash flows used in
operating activities.... $(183) $ (3,332) $ (3,494) $ (453) $ (15,935) $ (3,048) $ (15,215)
Net cash flows used in
investing activities.... (517) (10,576) (72,144) (72,037) (143,125) (107,229) (171,447)
Net cash flows provided by
financing activities.... 741 18,886 72,655 72,131 244,688 243,615 117,745
Capital expenditures(4)... 517 9,278 22,170 62,121 71,506 24,925 37,900
EBITDA(5)................. (298) (7,761) (7,042) (3,900) (8,291) (2,347) (1,383)
</TABLE>
<TABLE>
<CAPTION>
AS OF
----------------------------------------------
AUGUST 31,
------------------------------- FEBRUARY 28
1995 1996 1997 1998
------- ------- ------- -----------
<S> <C> <C> <C> <C>
OPERATING DATA
CABLE TELEVISION
Units under contract(6)..................................... 173,324 241,496 295,149 372,138
Units passed(7)............................................. 170,336 225,433 254,032 320,286
Basic subscribers........................................... 75,944 114,163 132,556 172,643
Basic penetration(8)........................................ 44.6% 50.6% 52.2% 53.9%
Premium units(9)............................................ 39,753 60,641 95,150 144,832
Pay-to-basic ratio(9)(10)................................... 52.3% 53.1% 71.8% 83.9%
Average monthly revenue per basic subscriber(11)............ $ 22.84 $ 22.70 $ 24.94 $ 27.57
TELECOMMUNICATIONS
Units under contract(6)..................................... 10,322 20,945 39,831 61,082
Units passed(7)............................................. 9,116 12,364 16,572 17,551
Lines(12)................................................... 2,650 4,126 6,185 6,375
Line penetration(13)........................................ 29.1% 33.4% 37.3% 36.3%
Average monthly revenue per line(14)........................ N/A $ 42.10 $ 47.23 $ 43.64
</TABLE>
- ---------------
(1) Interest expense, net is reflected net of interest income and interest
capitalized in property, plant and equipment. Includes interest expense on
the GVL Notes of approximately $919,000, $5,342,000, $15,204,000,
$6,907,000 and $9,640,000 for the eight month period ended August 31, 1995,
the years ended August 31, 1996 and 1997 and the six months ended February
28, 1997 and 1998, respectively.
(2) The Company had no taxable income for the periods reported. The Company
reported an income tax benefit of approximately $469,000 in the eight month
period ended August 31, 1995.
(3) Loss per share is not presented for the periods the Company was organized
as a partnership. Loss per share has been restated to reflect the adoption
of statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
(4) Capital expenditures include expenditures on property, plant and equipment
together with intangible assets excluding expenditures for business
acquisitions.
(5) EBITDA represents earnings before interest expense (net of interest income
and amounts capitalized), 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. In addition, the measure of EBITDA presented herein
may not be comparable to other similarly titled measures by other
companies. The Company believes that EBITDA is a standard measure commonly
reported and widely used by analysts, investors and other interested
parties in the cable television and telecommunications industries.
Accordingly, this information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance
relative to other companies in its industry.
(6) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into Rights
of Entry for the provision of cable television and telecommunications
services, respectively, but which the Company has not yet passed and which
the Company expects to pass within the next five years. At this time
substantially all units under contract for telecommunications are also
under contract for cable television.
(7) 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.
(8) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
28
<PAGE> 31
(9) Beginning with the year ended August 31, 1997, to be consistent with most
other cable television providers, the Company has revised the method of
reporting premium penetration to include all premium units in the
calculation. Historically the calculation excluded premium channels that
were provided to customers as part of an expanded basic line up or other
special arrangements. Prior years have not been restated.
(10) Pay-to-basic ratio is calculated by dividing the total number of premium
units by the total number of basic subscribers.
(11) Represents average monthly revenue per the average number of basic
subscribers for the fiscal periods ended as of the date shown.
(12) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line. The Company has revised its method of
reporting lines to reflect only one line in service where multiple
customers share a single line. The Company has restated the number of lines
previously reported to reflect this change.
(13) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.
(14) Represents average monthly revenue per the average number of lines for the
fiscal period ended as of the date shown. Information with respect to the
telecommunications business for the period ended August 31, 1995 is not
available.
29
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Prospectus. Except as otherwise indicated, the following analysis relates solely
to historical results and does not consider any potential impact that the
Offering or the proposed use of proceeds may have on the operations and
financial condition of the Company.
OVERVIEW
OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone and cable television
services, to residents of MDUs in the United States. The Company was organized
in April 1993 to build, acquire and operate private cable television and
telecommunications systems. The Company seeks to capitalize on opportunities
created by the Telecom Act to become the principal competitor in the MDU market
to the ILEC and the incumbent franchise cable television operator. The Company
has commenced offering central office switched telecommunications services in
Houston and Dallas-Fort Worth and expects to offer such services in
substantially all of its major markets by the end of calendar 1999.
Since inception, the Company has experienced substantial growth. This
growth has been achieved through a combination of acquisitions of other
operators, many of which operated SMATV systems, and the negotiation of new
Rights of Entry. As of April 30, 1998, the Company had 369,090 and 27,346 units
passed for cable television and telecommunications, respectively. As of such
date, OpTel had 202,716 cable television subscribers and 7,399 telecommunication
lines in service. In general, the conduct of the acquired operations prior to
acquisition was materially different from the conduct of operations following
acquisition. Among the changes made in many of the businesses after acquisition
were (i) commencing conversion of SMATV systems to 18GHz or fiber optic
networks, (ii) delivering customer service from a more advanced national call
center in Dallas, (iii) increasing the number of programming channels, (iv)
improving technical and field service and system reliability, (v) improving
regulatory and financial controls, and (vi) initiating telecommunications
services offerings.
OpTel believes that by utilizing a single advanced network infrastructure
it can be the first to market a competitive integrated package of voice and
video services in its serviced markets. As of March 31 and April 30, 1998,
respectively, the Company's networks delivered cable television services to
approximately 229,935 and 244,452 units representing approximately 72% and 61%
of the Company's units passed for cable television. The decrease in the
percentage of units passed served by the Company's networks is a direct result
of the acquisition of the ICS Operations on April 13, 1998. OpTel expects to
connect substantially all of the MDUs currently served by SMATV systems to 18GHz
or fiber optic networks by the end of calendar 2000. Once an MDU is brought onto
the Company's networks, gross profit per subscriber at the MDU generally
increases. In addition, networks provide OpTel with the infrastructure necessary
to deliver an integrated package of communications services to subscribers at
the MDU.
The Company's telecommunications revenue is comprised of monthly recurring
charges, usage charges and initial non-recurring charges. Monthly recurring
charges include fees paid by subscribers for line rental and additional
features. Usage charges consist of fees paid by end users for long distance,
fees paid by the ILEC for terminating intraLATA traffic to the Company's network
and access charges paid by carriers for long distance traffic originated and
terminated to and from local customers. Initial non-recurring charges include
fees paid by subscribers for installation.
The Company's cable television revenue is comprised of monthly recurring
charges paid by subscribers, monthly recurring charges paid by MDU-owners for
bulk services and fees paid by subscribers for premium services, and some
non-recurring charges. The Company offers its cable services under either retail
or bulk agreements. Under retail agreements, the Company contracts directly with
MDU residents. Under bulk agreements, the Company contracts directly with MDU
owners for basic cable to be provided to all units in a particular MDU, but
generally at lower prices than under retail agreements. This lower per unit rate
is generally offset by the 100% penetration achieved by bulk agreements. Premium
services are contracted for
30
<PAGE> 33
directly by subscribers under both types of agreements and include fees paid for
premium channels and pay-per-view. The Company anticipates that its overall
revenue per subscriber will increase as the number of bulk contracts declines as
a percentage of the Company's Rights of Entry. Additionally, the Company
believes that its revenue per subscriber will increase as it migrates its SMATV
properties onto the Company's networks. See "Business -- Network Architecture."
The cost of services for the Company's telecommunications services consists
of leased transport facilities, terminating access charges from ILECs, fees paid
to IXCs for long distance and revenue sharing. Leased transport facility costs
may include the rental of T-1s to connect the MDU's to the ILEC and may include
costs associated with connecting the Company's Network Hubs to each other and to
its central office switch. Terminating access charges are fees paid to the ILEC
for intraLATA calls which are originated by OpTel's subscribers and terminated
on the ILECs network. Fees paid to IXCs for long distance include costs
associated with terminating toll calls initiated by OpTel's subscribers. Revenue
sharing costs include a commission type payment to owners of MDUs for marketing
the Company's telephone product.
The cost of services for the Company's cable television services consists
of programming costs, franchise fees and revenue sharing. Programming costs
include those fees paid to obtain the rights to broadcast certain video
programming. Revenue sharing costs include a commission type payment to owners
of MDUs.
The Company's selling, general and administrative expenses include selling
and marketing costs, customer service, engineering, facilities and corporate and
regional administration.
Through February 28, 1998, the Company had invested approximately $339
million primarily in its cable television and telecommunications assets. The
Company's revenues have grown from $0.4 million for the year ended December 31,
1994 to $39.8 million for fiscal 1997. While pursuing its investment and
development strategy, the Company has incurred substantial up-front operating
expenses for marketing, customer operations, administration and maintenance of
facilities, general and administrative expenses and depreciation and
amortization in order to solicit and service customers in advance of generating
significant revenues. As a result of these factors, the Company has generated
operating losses of $5.6 million, $22.8 million, $12.6 million, and $9.5 million
for the quarter ended February 28, 1998, fiscal 1997, fiscal 1996 and the eight
months ended August 31, 1995, respectively, as its cable television and
telecommunications customer base has grown. The Company reported positive EBITDA
of $0.1 million for the quarter ended February 28, 1998 as compared with
negative EBITDA of $1.4 million, $8.3 million, $3.9 million and $7.0 million for
the six months ended February 28, 1998 and for fiscal 1997, fiscal 1996 and the
eight months ended August 31, 1995, respectively. The Company expects that the
incremental operating costs associated with the addition of new customers in its
existing markets will be principally limited to customer operations and
marketing expenses and, therefore, that its EBITDA will improve significantly.
There can be no assurance that the Company will generate operating profits or
continue to generate positive EBITDA in the future.
FACTORS AFFECTING FUTURE OPERATIONS
The principal operating factors affecting the Company's future results of
operations are expected to include (i) changes in the number of MDUs under
Rights of Entry, (ii) penetration rates for its services, (iii) the terms of its
arrangements with MDU owners, including revenue sharing and length of contract,
(iv) the prices that it charges its subscribers, (v) normal operating expenses,
which in the cable television business principally consist of programming
expenses and in the telecommunications business principally consist of fees paid
to long distance carriers, the cost of trunking services and other 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 commences offering central office switched
telecommunication services in additional markets and completes its conversion of
SMATV systems. The Company's results of operations may also be impacted by
future acquisitions.
The Company anticipates that it will continue to have higher churn than is
typical of an incumbent franchise cable television operator due to the frequent
turnover of MDU tenants. This churn generally does not result in a reduction in
overall penetration rates since the outgoing subscriber is generally quickly
replaced by a new tenant in the unit. This may result in average installation
revenue per subscriber that is higher than
31
<PAGE> 34
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. With respect to the Company's
telecommunications services, the Company believes that its best opportunity for
a sale arises when a subscriber first signs a lease and takes occupancy in an
MDU. Accordingly, the Company believes that during the early stages of the roll
out its central office switched telecommunications services in a market it
benefits from the high rate of MDU resident turnover.
RESULTS OF OPERATIONS
In 1995, the Company changed its fiscal year end to August 31 to match that
of its majority stockholder. In addition, all of the Company's acquisitions have
been accounted for by the purchase method of accounting. As a result of the
Company's growth through acquisitions and the change in fiscal year, the
Company's historical financial results are not directly comparable from period
to period, nor are they indicative of future results of operations in many
respects.
The following table sets forth, for the periods indicated, certain
operating and financial information relating to the Company.
<TABLE>
<CAPTION>
AS OF AS OF
AUGUST 31, FEBRUARY 28,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
CABLE
Units passed(1).............................. 170,336 225,433 254,032 239,801 320,286
Basic subscribers............................ 75,944 114,163 132,556 125,090 172,643
Basic penetration(2)......................... 44.6% 50.6% 52.2% 52.2% 53.9%
Average monthly revenue per basic
subscriber(3).............................. $ 22.84 $ 22.70 $ 24.94 $ 23.98 $ 27.57
TELECOMMUNICATIONS
Units passed(1).............................. 9,116 12,364 16,572 14,416 17,551
Lines(4)..................................... 2,650 4,126 6,185 5,059 6,375
Line penetration(5).......................... 29.1% 33.4% 37.3% 35.0% 36.3%
Average monthly revenue per line(6).......... N/A $ 42.10 $ 47.23 $ 51.29 $ 43.64
</TABLE>
<TABLE>
<CAPTION>
EIGHT MONTH YEAR ENDED SIX MONTH PERIOD
PERIOD ENDED AUGUST 31, ENDED FEBRUARY 28,
AUGUST 31, ----------------- -------------------
1995 1996 1997 1997 1998
------------ ------- ------- -------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
REVENUE
Cable television........................ $ 8,783 $25,893 $36,915 $17,208 $25,247
Telecommunications...................... 788 1,711 2,922 1,414 1,644
------- ------- ------- ------- -------
$ 9,571 $27,604 $39,837 $18,622 $26,891
Gross profit.............................. $ 5,013 $15,736 $20,635 $ 9,920 $14,472
Gross margin.............................. 52.4% 57.0% 51.8% 53.3% 53.8%
EBITDA(7)................................. $(7,042) $(3,900) $(8,291) $(2,347) $(1,383)
</TABLE>
- ---------------
(1) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications systems,
respectively.
(2) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(3) Represents average monthly revenue per the average number of basic
subscribers for the fiscal periods ended as of the date shown.
32
<PAGE> 35
(4) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line. The Company has revised its method of
reporting lines to reflect only one line in service where multiple customers
share a single line. The Company has restated the number of lines previously
reported to reflect this change.
(5) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.
(6) Represents average monthly revenue per the average number of lines for the
fiscal period ended as of the date shown. Information with respect to the
telecommunications business for the period ended August 31, 1995 is not
available.
(7) EBITDA represents income (loss) from operations before interest (net of
interest income and amounts capitalized), income taxes and depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
or an alternative to net loss, each as defined by generally accepted
accounting principles. In addition, the measure of EBITDA presented herein
may not be comparable to other similarly titled measures by other companies.
The Company believes that EBITDA is a standard measure commonly reported and
widely used by analysts, investors and other interested parties in the cable
television and telecommunications industries. Accordingly, this information
has been disclosed herein to permit a more complete comparative analysis of
the Company's operating performance relative to other companies in its
industry.
Six months ended February 28, 1998 compared with six months ended February 28,
1997
Total Revenues. Total revenues for the first six months of fiscal 1998
increased by $8.3 million or 45% to $26.9 million compared to revenues of $18.6
million for the first six months of fiscal 1997.
Cable Television. Cable television revenues in the first six months of
fiscal 1998 increased by $8.0 million, or 47%, to $25.2 million from $17.2
million for the comparable period of fiscal 1997, reflecting both a 38% increase
in the number of subscribers and a 12% increase in the average monthly revenue
per basic subscriber which rose from $23.98 for the first six months of fiscal
1997 to $27.57 for the first six months of fiscal 1998. This increase mainly
resulted from property upgrades, annual rate increases and increased premium
revenues as the Company's pay to basic ratio improved substantially from 68.5%
at February 28, 1997 to 83.9% at February 28, 1998. The Company also continued
to grow basic penetration which increased by 1.7% as compared to the first six
months of fiscal 1997.
Telecommunications. Telecommunications revenues for the first six months of
fiscal 1998 increased by 14% to $1.6 million from $1.4 million for the
comparable period of fiscal 1997. The Company's telecommunication lines
penetration over the comparable period rose 1.3% to 36.3% at February 28, 1998.
In Houston, the Company has substantially completed its conversion of properties
previously served by PBXs to the central office switch. In addition, the Company
has installed and tested its central office switch in Dallas-Fort Worth and
intends to migrate the MDUs it currently serves through PBXs in that market to
the central office switch over the coming months.
The reduction in average monthly revenue per line to $43.64 for the first
six months of fiscal 1998 from $51.29 for the first six months of fiscal 1997 is
largely due to an increase in the proportion of total telephone lines supplied
to student accommodation where usage is lower than average and to a decrease of
the Company's long distance rates. As the number of telephone lines is
increased, management expects the influence of the lower usage contracts to be
substantially reduced.
Cost of Services. Gross margins in the first six months of fiscal 1998
improved by 0.5% over gross margins for the first six months of fiscal 1997,
reflecting an increase in basic cable margins, an improvement of
telecommunications margins with respect to customers served by the Houston
central office switch and were partially offset by an increase in the
penetration of lower margin premium services.
Expenses. Expenses (customer support, general and administrative expenses)
were $15.9 million for the first six months of fiscal 1998 compared to $12.2
million for the first six months of fiscal 1997. The increase in customer
support, general and administrative expenses were in line with the company's
budget and was largely due to an increase in personnel associated with the
expansion of the Company's operations and recruitment for the roll out of the
Company's telecommunications services.
EBITDA. The Company's EBITDA for the first six months of fiscal 1998 was
negative $1.4 million compared to negative $2.3 million for the comparable
period of fiscal 1997.
33
<PAGE> 36
Interest Expense, Net. Interest expense (net of interest income and amounts
capitalized) was $21.9 million for the first six months of fiscal 1998, an
increase of $13.8 million over net interest expense of $8.1 million for the
first six months of fiscal 1997, reflecting the increase in the Company's debt
incurred principally to fund the build out of its network. See "-- Liquidity and
Capital Resources."
Fiscal year ended August 31, 1997 compared to fiscal year ended August 31, 1996
Total revenues. Total revenues for the fiscal year ended August 31, 1997
increased by $12.2 million or 44% to $39.8 million compared to revenues of $27.6
million for the fiscal year ended August 31, 1996.
Cable television. Compared to fiscal 1996, cable television revenues
increased by $11.0 million, or 42%, to $36.9 million from $25.9 million,
reflecting both a 16% increase in the number of subscribers and a 10% increase
in the average monthly revenue per basic subscriber which rose from $22.7 for
fiscal 1996 to $24.9 for fiscal 1997. The increase in revenue per subscriber
resulted from a combination of rate increases following property upgrades,
annual rate increases and increased premium revenues as the Company's pay to
basic ratio improved from 53% to 64% over the course of the year. The Company
continued to grow basic penetration which increased by 1.6% over the year.
Telecommunications. The Company's strategy is to roll out central office
switched local exchange services in each of the major markets in which it
operates. Until recently the Company served certain properties as an STS
provider, reselling telephone service using PBXs situated at the MDU properties.
The Company has not historically promoted such STS service because it was not in
line with its strategy to offer central office switched telecommunications
services to its subscribers. Despite not promoting telecommunications services
during the year, telecommunications contributed $2.9 million of revenue compared
to $1.7 million in the preceding year, mainly as a result of increased
penetration and a 34% increase in the number of units where telephone service is
offered from 12,364 at the end of fiscal 1996 to 16,572 at the end of fiscal
1997.
Cost of Services. Overall, gross margins decreased over the year from 57.0%
to 51.8%, largely due to costs associated with the increase in the number of
subscribers served by PBX telephone service, the increase in premium cable
penetration which has lower associated margins and, to a lesser extent, an
increase in the proportion of the Company's portfolio under revenue sharing
arrangements with property owners. The PBX costs represent the costs of
interconnecting individual properties with the ILEC's central office switch.
These costs will be substantially reduced once the Company is able to utilize
its own networks to pass telephone traffic to Company owned central office
switches. Consequently the Company expects gross profit margins to improve once
its central office switches are employed to serve telephone customers.
Expenses. Expenses (customer support, selling, general and administrative
expenses) were $28.9 million for fiscal 1997 compared to $19.6 million for
fiscal 1996. The increase in expenses was largely due to an increase in
personnel associated with the expansion of the Company's operations and
recruitment for the roll out of the Company's telecommunications services in
advance of the expected revenues. In addition the Company incurred a one time
reorganization charge of $1.4 million associated with the restructuring of
certain senior management positions during the year which was included in
operating expenses.
EBITDA. The Company's EBITDA decreased from negative $3.9 million to
negative $8.3 million over the year, largely due to the reduced gross margins
and the expansion of the Company's operations in anticipation of the roll out of
telecommunications services. The increase in negative EBITDA was largely within
expectations given that the Company increased its personnel in the middle of
fiscal 1997 in anticipation of two significant events that occurred after the
end of the fiscal year: the launch of the Houston central office switch and the
consummation of the acquisition of the residential cable television and
associated fiber optic network assets of Phonoscope.
Interest Expense, Net. Interest expense (net of interest income and amounts
capitalized) was negative $25.7 million for fiscal 1997, an increase of $19.9
million over net interest expense of negative $5.8 million for fiscal 1996,
reflecting the increase in the Company's debt incurred principally to fund the
build out of its network.
34
<PAGE> 37
Fiscal year ended August 31, 1996 compared with eight months ended August 31,
1995
Total revenues. Revenues were $27.6 million for fiscal 1996, an increase of
188% over revenues of $9.6 million for the eight months ended August 31, 1995.
Of the revenues generated in fiscal 1996, 93.8% and 6.2% represented revenues
from cable television and telecommunications, respectively, compared to 91.8%
and 8.2%, respectively, for the eight months ended August 31, 1995.
Cable television. Cable television revenues were $25.9 million for fiscal
1996, an increase of 194%, over cable television revenues of $8.8 million for
the eight months ended August 31, 1995. The growth was attributable in part to
an increase in the average number of cable television subscribers, which
accounted for approximately $15.6 million of the increase. Cable television
revenues also grew in part from an increase in the retail price of the Company's
cable television services which accounted for approximately $1.5 million of the
increase.
Telecommunications. Telecommunications revenues were $1.7 million for
fiscal 1996, an increase of 113% over the eight months ended August 31, 1995.
This growth was largely due to an increase in the average number of
telecommunications lines.
Cost of Services. Cost of services was $11.9 million for fiscal 1996, an
increase of 159%, from $4.6 million for the eight months ended August 31, 1995.
The increases in costs were primarily attributable to the growth in the number
of cable television subscribers and telecommunications lines. Gross margins
increased from 52.4% for the eight months ended August 31, 1995 to 57.0% for
fiscal 1996.
Expenses. Expenses (customer support, selling, general and administrative
expenses) increased to $19.6 million from $12.1 million, or 111%, over the eight
months ended August 31, 1995. The increase was largely due to an increase in
personnel associated with the expansion of the Company's operations and the
rapid growth in the size of the cable television and telecommunications networks
and the number of subscribers.
Included in the above amounts are costs of $2.3 million for fiscal 1996 and
$3.8 million for the eight months ended August 31, 1995, relating to
assimilating acquisitions made by the Company and including severance,
relocation and recruitment costs.
EBITDA. Negative EBITDA increased to $3.9 million for fiscal 1996. The
improvement in negative EBITDA represents an increase of $3.1 million over
negative EBITDA of $7.0 million for eight months ended August 31, 1995. Negative
EBITDA represented 14.1% of total revenues for fiscal 1996 compared to 73.6% of
total revenues for the eight months ended August 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated net losses since its inception, resulting in an
accumulated deficit of $111.4 million as of February 28, 1998. 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 building the
Company's cable television and telecommunications networks and related business
activities was $74.9 million for the first six months of fiscal 1998 (including
$36.5 million for the acquisition of Phonoscope) compared to $27.4 million for
the first six months of fiscal 1997.
From inception and until the issuance of the Senior Notes, the Company
relied primarily on investments from GVL, its principal stockholder, in the form
of equity and convertible notes to fund its operations. Effective March 1, 1998,
GVL converted all of the outstanding GVL Notes, including accrued interest, into
shares of Series A Preferred with an aggregate liquidation preference of
approximately $139.2 million. The Series A Preferred earns dividends at the
annual rate of 9.75%, payable in additional shares, and is convertible under
certain circumstances and at certain prices at the option of the holder into
shares of Multi-Vote Common. VPC has advised the Company that upon consummation
of the Offering it intends to convert the Series A Preferred into
shares of Multi-Vote Common. Based on an initial public offering price of
$ per share, the Series A Preferred will convert into shares
of Multi-Vote Common. None
35
<PAGE> 38
of the Company's stockholders or affiliates are under any contractual obligation
to provide additional financing to the Company.
In February 1997, the Company issued the Senior Notes along with 225,000
shares of Non-Voting Common for aggregate net proceeds of $220.2 million. Of
this amount, approximately $79.8 million was placed in an escrow account in
order to cover the first six semi-annual interest payments due on the Senior
Notes. At February 28, 1998, approximately $54.5 million remained in such escrow
account.
In December 1997, the Company obtained the Senior Credit Facility which
consists of a $125 million term loan bearing interest at LIBOR plus 3.5% and a
$25 million revolving credit commitment. The Senior Credit Facility is secured
by a first fixed and floating lien on substantially all of the assets of the
Company and its subsidiaries including liens on the shares of the Company's
subsidiaries. The proceeds of the term loan have been funded although
availability under the Senior Credit Facility will be subject to the Company
meeting certain performance criteria and the limitations on additional
indebtedness, limitations on certain payments, investments and distributions and
limitations on liens and certain asset sales. The Company is in compliance with,
or has obtained waivers for, all covenants of the Senior Credit Facility. The
Company entered into an interest rate swap agreement covering approximately $75
million of the Senior Credit Facility to comply with certain covenants of the
Senior Credit Facility.
The Company believes, based on its current business plan, that the net
proceeds from the Offering, together with its cash on hand and availability
under the Senior Credit Facility, will provide the Company with sufficient
financial resources to fund its capital requirements through the third quarter
of fiscal 2000. 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. The
Company plans to fund its future capital requirements through internally
generated funds with additional public or private debt and/or equity offerings.
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 -- Significant Capital Requirements and Need for Additional Financing."
In addition, GVL has the power to prevent the Company from obtaining
additional debt or equity financing. See "Risk Factors -- Control by GVL" and
"Principal Stockholders -- Stockholders' Agreement." GVL is party to an
indenture which limits the aggregate amount of indebtedness which can be
incurred by GVL and its subsidiaries, including the Company taken as a whole
(based upon a ratio of total consolidated indebtedness to consolidated operating
cash flow). As a result, GVL's strategies and the operating results of its
subsidiaries other than the Company may affect the ability of the Company to
incur additional indebtedness. There can be no assurance that GVL will not
restrain the Company's growth or limit the indebtedness incurred by the Company
so as to ensure GVL's compliance with the terms of its debt instruments.
The Company benefits from the fact that it does not require a substantial
capital investment in its cable television and telecommunications networks in
advance of connecting subscribers to its networks since a significant proportion
of the costs comprises the internal wiring and the erection of microwave
transmitting and receiving equipment specific to the MDU. These expenditures
are, to a large extent, "success-based" and will only be incurred when new
properties are brought into service or when existing properties serviced by
SMATV or PBX systems are connected to the networks. When a new Right of Entry is
signed, it takes approximately four months of construction work to activate
signal at the property. Once the property is activated, penetration rates
increase rapidly. The balance of the budgeted capital expenditures is for
infrastructure assets not related to individual MDUs. These assets include
central office switches, cable television head ends, computer hardware and
software and capitalized construction costs. The Company can to some degree
control the timing of the infrastructure capital expenditures by controlling the
timing of the telecommunications roll out and the scope of its expansion.
In order to accelerate the achievement of the Company's strategic goals,
the Company has from time to time held, and continues to hold, preliminary
discussions relating to possible acquisitions by the Company and possible
investments in the Company by strategic investors. There can be no assurance
that any agreement
36
<PAGE> 39
with any potential strategic investor or acquisition target will be reached nor
does management believe that any thereof is necessary to successfully implement
its strategic options.
YEAR 2000 COMPLIANCE
OpTel has implemented a Year 2000 program to ensure that its computer
systems and applications will function properly beyond 1999. OpTel believes that
it has allocated adequate resources for this purpose and expects its Year 2000
conversion program to be successfully completed on a timely basis. However,
successful completion of the Year 2000 conversion program is substantially
dependent upon successful implementation of the Company's new customer
management information system. The Company's financial accounting system has not
been upgraded to eliminate potential Year 2000 related malfunctions. The Company
has undertaken a selection process for a new financial accounting system and
plans to have the new system selected and implemented within the next twelve
months. Other than expenses relating to the acquisition of the customer
management information system and financial accounting system OpTel does not
expect to incur significant expenditures to address this issue. See "Risk
Factors -- Year 2000 Risk."
RECENTLY ISSUED ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," is effective for earnings per share calculations and disclosures for
periods ending after December 15, 1997, including interim periods, and requires
restatement of all prior period earnings per share data that is presented. SFAS
No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share," and provides reporting standards for calculating "Basic" and "Diluted"
earnings per share. The Company has adopted SFAS No. 128 and its earnings per
share computations have been restated for all prior periods.
The Financial Accounting Standards Board ("FASB") issued, in February 1997,
SFAS No. 129, "Disclosure of Information about Capital Structure," which
establishes standards for disclosing information about an entity's capital
structure and is effective for financial statements for periods ending after
December 15, 1997. The Company currently discloses substantially all of the
requirements of SFAS No. 129. Any additional information required will be
disclosed beginning August 31, 1998. There will be no impact on the Company's
results of operations or financial position.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. The Company
has evaluated the requirements of SFAS No. 130 and will begin disclosing the
appropriate information in the first quarter of fiscal 1999. There will be no
impact on the Company's results of operations or financial position.
The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way public companies disclose information about operating segments,
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company is currently evaluating the applicability of the requirements
of SFAS No. 131. Depending on the outcome of the Company's evaluation,
additional disclosure may be required beginning in fiscal 1999. There will be no
impact on the Company's results of operations or financial position.
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.
37
<PAGE> 40
BUSINESS
THE COMPANY
OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone and cable television
services, to residents of MDUs in the United States. As a rapidly growing ICP,
OpTel continues to build upon its position as the largest provider of private
cable television services to MDUs in the United States. In each market that it
serves, OpTel seeks to become the principal competitor in the MDU marketplace to
the ILEC and the incumbent franchise cable television operator by providing a
package of voice, video and Internet access services at competitive prices.
OpTel believes its contractual relationships with MDU owners and associations
and its ability to deliver an integrated service offering to MDU residents over
its own networks provide it with a competitive advantage.
Industry sources estimate that annual revenues generated by the U.S.
communications industry in 1997 were approximately $223 billion (consisting of
approximately $192 billion in telecommunications revenues and $31 billion in
cable television revenues). The Company believes that a significant portion of
such revenue is attributable to residential users. OpTel recognizes the
opportunity to address the residential market by focusing on providing
integrated services to MDUs. MDUs comprise a wide variety of high density
residential complexes, including high- and low-rise apartment buildings,
condominiums, cooperatives, town houses and mobile home communities. According
to 1990 U.S. Census Bureau data, there are more than 13.2 million dwelling units
in MDUs with greater than 10 dwelling units in the United States. Within the MDU
market, the Company focuses on Large MDUs. Based on industry sources, the
Company believes that, within its existing markets, as of March 25, 1998, there
are approximately 3.0 million dwelling units within these Large MDUs.
The Company is currently building telecommunications infrastructure in its
serviced markets and expects, by the end of calendar 1999, to be in a position
to offer facilities based telecommunications services in each of its major
markets. The Company presently offers services where it has a Right of Entry
with an MDU owner to provide its cable television and/or telecommunications
services. The Company classifies a unit as "passed" if it is within an MDU for
which the Company has a Right of Entry and the Company has connected and
activated the equipment necessary to provide services. As of April 30, 1998, the
Company had 369,090 units passed for cable television services. At that date,
OpTel had 202,716 cable television subscribers and 7,399 telecommunication lines
in service.
OpTel began operations in April 1993 with a strategy of consolidating the
then fragmented "private cable" television, or non-franchise cable television,
industry serving MDUs. Securing long-term Rights of Entry has been an integral
element of this strategy. The Company's Rights of Entry typically have original
terms of 10 to 15 years (five years for Rights of Entry with condominium
associations). The weighted average unexpired term of the Company's Rights of
Entry was approximately eight years as of April 30, 1998 (assuming the Company's
exercise of available renewal options). Rights of Entry generally provide
financial incentives to the property owners to promote and sell the Company's
cable television and telecommunications services to MDU residents. The Company
provides video programming to MDUs primarily under exclusive Rights of Entry.
The Company initially offered STS to MDUs serviced under telephone Rights of
Entry utilizing remote PBX switches. In accordance with its communications
strategy, the Company has begun the process of migrating its STS traffic to its
own central office switches and its own network facilities. The Company intends
to grow its business by negotiating additional Rights of Entry to serve MDUs
currently served by other providers and newly-constructed MDUs, by acquiring
other existing operators that serve MDUs, as appropriate, and by providing MDUs
it currently serves for cable television with additional services, such as
telephone and Internet access.
The Company currently provides cable television and telecommunications
services in several metropolitan areas including Houston, Dallas-Fort Worth, Los
Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta and Orlando-Tampa. The Company has commenced offering central
office switched local exchange services in Houston and Dallas-Fort Worth and is
licensed as a CLEC in each
38
<PAGE> 41
of its other major markets. The Company selected its current markets based upon
their growth characteristics, competitive conditions, MDU concentrations,
favorable demographics and regulatory environment.
Since April 1995, OpTel has been indirectly majority owned by GVL, which
also owns the second largest cable television operator in Canada (based on
number of subscribers). GVL has invested approximately $250 million in OpTel in
the form of equity capital and subordinated convertible notes (including accrued
interest). See "Prospectus Summary -- Recent Developments." These invested
amounts have been critical to OpTel's growth. In addition, key members of the
Company's management team gained experience in the competitive offering of
telecommunications and cable television to residential markets while serving as
executives of a GVL affiliate in the United Kingdom. OpTel management's
extensive operating experience in both the telecommunications and cable
television industries, including the construction and design of networks and
sales and customer support, provides OpTel with significant expertise in
managing and developing an infrastructure to support voice, video and Internet
access operations.
INDUSTRY OVERVIEW -- MARKET OPPORTUNITIES
Widespread Changes in Communications Industry
Both the telephone and cable television segments of the communications
industry are currently undergoing widespread changes brought about by, among
other things, (i) decisions of federal and state regulators which have opened
the monopoly local telephone and cable television markets to competition, (ii)
the ensuing transformation of the previously monopolistic communications market
controlled by heavily regulated incumbents into a consumer-driven competitive
service industry, and (iii) the need for higher speed, higher capacity networks
to meet the increasing consumer demand for expanded communications services
including broader video choices and high speed Internet services. The
convergence of these trends has created opportunities for new types of
communications companies capable of providing a wide range of voice, video and
data services.
Opening of Communications Markets
Divestiture of the Bell System. Until the passage of recent federal
legislative reform and other state and federal regulatory efforts to expand
competition into the local telephone market, the structure of the U.S.
telecommunications industry was shaped principally by the 1984 court-supervised
divestiture of local telephone services from AT&T (the "Divestiture") and other
judicial and regulatory initiatives which were designed primarily to implement
structural and technical industry changes through which competition could
develop in the long distance market. Under this structure, the RBOCs and certain
other LECs were permitted to retain their monopolies in the provision of local
exchange services, but were required to connect their local subscribers to the
long-distance services of AT&T and other IXCs. Under this regime, two distinct
industry segments developed; competitive IXCs, which offered subscribers long
distance telephone services between judicially defined LATAs, and monopoly LECs,
which offered subscribers local and toll services within judicially defined
LATAs, including connection (or "access") to IXCs for interLATA long-distance
services. As a result, the long-distance business became intensely competitive,
with low barriers to entry and many service providers competing in a
commodity-type market, while providers of local exchange services continued to
face relatively little competition.
Deregulation of Local Telephone Services. After the structural and
technical network changes were put in place following the Divestiture to give
IXCs other than AT&T "equal access" to the local exchange facilities of the
monopoly ILECs, and with long-distance competition beginning to provide
consumers with diverse services and lower rates, regulatory policy gradually
began to examine whether the competitive benefits which were being experienced
in the long-distance marketplace as a result of Divestiture should be expanded
to local exchange services. While a small number of states and the FCC had
already adopted rules and regulations which opened certain limited and discrete
segments of the local exchange market to competition from CAPs and CLECs
offering primarily dedicated high-speed private line and some local switching
services to large business users, the passage of the Telecom Act in February
1996 codified the pro-competitive policies on a national level and required both
the FCC and the state regulatory commissions to adopt dramatic and
39
<PAGE> 42
sweeping changes in their rules and regulations in furtherance of those
policies. The Telecom Act required regulators to remove market entry barriers
and to enable companies like OpTel to become full service providers of local
telephone service by, among other things, mandating that the ILECs provide
interconnection and competitively priced network facilities to competitors. In
addition, the Telecom Act permits RBOCs to offer long-distance interLATA
services in competition with IXCs once they have demonstrated that they have
implemented changes to permit economically efficient competition in their local
markets for both business and residential services. The Telecom Act also
repealed the LEC/cable television cross-ownership restriction, which prohibited
LECs from providing multichannel television directly to subscribers in their
telephone service areas. See "-- Regulation."
Deregulation of Cable Television. Unlike the local telephone market, the
cable television market is not subject to regulatory or statutory prohibitions
on competition. Nevertheless, competition to incumbent franchised cable
television operators has developed in only a handful of markets nationwide.
Because of the lack of any meaningful competition, in 1992 Congress passed
legislation providing for the regulation of certain cable rates. Subsequently,
as part of its general goal of supplanting regulation with competition, the
Telecom Act took further steps to provide alternative regulatory structures to
encourage entry into the multichannel video programming distribution market.
OpTel's Opportunity. The incumbent local telephone and cable television
providers to date have generally been slow to expand their services beyond their
traditional lines of business. In particular, the LECs generally have not
offered video programming services, nor have the incumbent cable operators
generally entered the telephone services market. In addition, most of the other
new competitive entrants, including most CLECs, have focused almost exclusively
on providing telephone service to medium to large commercial customers and have
tailored the coverage area of their networks and the configuration of their
business operations to provision services accordingly. Similarly, while a number
of companies have begun to market wireless alternatives to cable television
service, those companies have not generally begun to offer telephone services to
their customers.
Typically, the last mile connection between an ILEC and its customer is a
copper wire twisted pair and the last mile connection of a cable television
company is coaxial cable. The Company believes that in its markets, it is the
only competitor able to serve a single subscriber with both twisted pair and
coaxial cable last mile connections. Accordingly, OpTel believes that it is
well-positioned to take advantage of the new regulatory and market environment
and that it will be among the first to offer a single-source package of
integrated voice, video and Internet access services in its MDU markets. By
combining the enhanced telephone and Internet access services offered by CLECs
with high quality video programming, OpTel will act as a single source provider
of a wide range of voice, video and Internet access services to the MDU market.
OpTel's integrated service offerings are available either individually or in
bundled packages, providing the consumer with added choice and convenience.
STRATEGY
OpTel's goal is to become the nation's largest ICP focusing on MDU markets.
OpTel's strategy for achieving this goal includes the following key components:
Provide an Integrated Service Offering. OpTel believes that by utilizing a
single advanced network infrastructure it can be among the first to market a
competitive integrated package of voice and video services in its target
markets. OpTel focuses exclusively on the integrated communications needs of the
MDU resident, which distinguishes OpTel from other competitors. OpTel believes
that MDU residents are attracted by bundled service offerings, competitive
pricing and integrated billing. The Company plans to supplement its voice and
video offerings with high speed Internet access in all of its serviced markets.
The Company also intends to introduce integrated billing of its bundled services
during fiscal 1999.
Deploy Cost Effective Networks. OpTel's networks are specifically designed
to provide services to MDUs. The Company uses a combination of point-to-point
microwave transmission equipment and fiber optic cable in order to offer a
single source for video, voice telecommunications and eventually high speed
Internet access services. A substantial amount of the capital required to
provide property-specific voice and video services to
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<PAGE> 43
an individual MDU is invested only after the Company and the owner of the MDU
have entered into a Right of Entry for the MDU. The capital expenditures
required to serve an MDU are therefore, to a large extent, "success-based" and
will only be incurred shortly before properties are first brought into service
or as needed to bring non-network served MDUs onto the Company's networks. In
markets served by the Company's microwave networks, OpTel expects that the
incremental capital required for it to launch central office switched
telecommunications services and to connect customers will be lower than that of
its competitors. Unlike copper- and fiber-based systems that require
installation and maintenance of a significant amount of wire and cable, the
Company's microwave networks generally will not require the installation and
maintenance of physical wires between the MDU based equipment and the Company's
Network Hubs. As a result, OpTel expects to enjoy a lower network cost structure
than certain of its competitors.
Pursue Focused Marketing Strategy. Strategic relationships with MDU owners
are a key element of the Company's marketing strategy. The Company negotiates
long term Rights of Entry with MDU owners under which the Company obtains, among
other things, the exclusive right to provide cable television services to an MDU
or group of MDUs and an undertaking by the MDU owner to promote OpTel as the
preferred telecommunications alternative to the ILEC within the MDU. The Rights
of Entry generally provide MDU owners with financial incentives to work closely
with the Company to promote its products and services. The Company offers
prospective customers the opportunity to subscribe for Company services at the
same time they sign their unit leases. The Company believes this access, coupled
with customer preference for a single source of cable television and
telecommunications services, significantly enhances its customer marketing
efforts. In addition, the Company markets to MDU residents through (i) direct
mail and direct sales campaigns, (ii) special promotion and sign-up parties,
(iii) establishment of a physical presence at a MDU and (iv) distribution of
point-of-sale marketing materials.
Provide Superior Customer Service. The Company believes that superior
customer service is important to MDU residents. Therefore, the Company has
dedicated resources to providing services that attract and retain subscribers.
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 also has
dedicated local service teams that provide prompt installation and response to
customer service calls. Because the Company believes that the best way to
control the quality and consistency of technical and field services is to train
and supervise the service technicians, the Company relies primarily on its own
personnel to perform these functions. The Company also has established stringent
staff training procedures, including its Operational Excellence continuous
improvement program, and internal customer service standards.
Pursue Selective Acquisitions and Strategic Relationships. To expand its
markets and to achieve critical mass in its existing markets, the Company often
evaluates opportunities to make acquisitions. Since May 1996, the Company has
completed six acquisitions representing approximately 700 MDUs served and
103,000 subscribers. In addition, the Company has entered into strategic
relationships for the delivery of high speed Internet access services, and will
continue to evaluate other alliances including those permitting it to host
additional third-party traffic on its switches.
MARKETS
Historically, the Company's strategy has been to enter markets either
through the acquisition of private cable television operators serving the target
market or by entering into Rights of Entry with a major MDU owner in the market.
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 microwave 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. The Company's strategy for entering new
telecommunications markets is through the deployment of network infrastructure
and interconnecting such infrastructure to the Company's existing video
distribution network. See "-- Network Architecture."
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The following table sets forth the markets where OpTel currently operates
and, for each such market, certain additional information including the date the
Company launched, or intends to launch, its central office switched
telecommunications service offering. The timing and order of the launch of
central office switched telecommunications services in each of the Company's
markets may vary and will depend on a number of factors, and no assurance can be
given the Company will launch such services in each of its markets.
<TABLE>
<CAPTION>
NUMBER OF
UNITS
NUMBER OF IN MDUS CABLE
UNITS IN WITH OVER 150 UNITS PASSED TELEVISION TELECOMMUNICATIONS EXPECTED CLEC SERVICES
LOCATION MARKET(1) UNITS(2) FOR CABLE(3) SUBSCRIBERS LINES IN SERVICE LAUNCH DATE
-------- --------- ------------- ------------ ----------- ------------------ ----------------------
<S> <C> <C> <C> <C> <C> <C>
Houston.................... 362,960 315,401 136,722 67,715 2,251 In service
Dallas-Fort Worth.......... 485,623 405,122 43,644 21,395 2,291 In service
Los Angeles................ 730,405 294,644 17,777 10,966 75 Fiscal 1999
San Diego.................. 503,899 304,043 21,224 12,469 164 Fiscal 1999
Miami-Ft. Lauderdale....... 233,507 224,859 20,857 16,290 129 Fiscal 1999
Phoenix.................... 219,334 155,412 24,648 10,377 117 Fiscal 1999
Denver..................... 141,789 105,670 17,449 10,047 303 Fiscal 1999
San Francisco.............. 409,555 246,278 24,466 17,128 68 Fiscal 1999
Chicago.................... 416,985 342,214 29,708 17,974 113 Fiscal 1999
Atlanta.................... 284,805 233,242 9,456 5,146 75 Fiscal 2000
Orlando-Tampa.............. 239,955 204,928 11,396 7,318 245 Fiscal 2000
Other markets(4)........... 198,036 156,925 11,743 5,891 1,568
--------- --------- ------- ------- -----
Total(5)........... 4,226,853 2,988,738 369,090 202,716 7,399
========= ========= ======= ======= =====
</TABLE>
- ---------------
(1) Represents rental units in MDUs and is based on information published by
industry sources. The number of units do not include condominiums. According
to 1990 U.S. Census Bureau data there were 1.8 million dwelling units in
condominiums in the Company's markets.
(2) Represents rental units in MDUs with more than 150 dwelling units in the
United States and is based on information published by industry sources. The
number of dwelling units in MDUs with greater than 150 dwelling units do not
include condominiums.
(3) Units passed represents the number of units to which the Company has
connected its cable television systems. The Company has connected and
activated telecommunications infrastructure at only 27,346 of the units
passed for cable television services.
(4) Other markets include Austin, Corpus Christi and San Antonio, Texas; Daytona
Beach and Tallahassee, Florida; Las Vegas, Nevada; Indianapolis, Indiana;
and greater Washington, D.C. Other than with respect to Austin, Texas and
Indianapolis, Indiana, the Company has not yet decided whether to
concentrate in these markets and launch telecommunication services or to
dispose of assets in these markets.
(5) Excludes 29,051 units passed for cable, 15,828 cable television subscribers,
and 778 telecommunications lines in services related to the portion of the
acquisition of the ICS Operations not consummated as of April 30, 1998.
The Company installed its first central office switch in the Houston market
in October 1997 and currently offers switched access local exchange services to
most of its telecommunications customers in Houston. The Company installed,
activated and tested its central office switch in the Dallas-Fort Worth market
in April 1998 and is currently providing switched access local exchange services
to select customers in Dallas-Fort Worth. As of April 30, the Company had 44,359
units under contract for telecommunications in Houston and Dallas-Fort Worth.
The Company intends to progressively commence full scale marketing of local
exchange based telecommunications services in all of its major markets by the
end of calendar 1999. The Company is licensed as a CLEC in all of its major
markets and has completed or is negotiating interconnection agreements with the
principal ILECs in each of these markets.
SERVICES
OpTel provides a wide range of voice, video and Internet access services,
both individually and as integrated service offerings.
Voice. OpTel's telephone Rights of Entry generally provide that the MDU
owner will market exclusively OpTel's local telephone services to MDU residents.
In the markets where it has central office switches, OpTel competes with ILECs
and CLECs by offering local exchange telephone service, including standard dial
tone access and substantially all other feature groups provided by the ILEC.
OpTel offers a wide range of value-
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<PAGE> 45
added services, including call forwarding, call waiting, caller identification,
conference calling, speed dial, calling card, 800-numbers and voice mail. OpTel
generally prices its local telephone offering at a discount to the ILEC rates in
each of its serviced markets. OpTel also provides long distance services,
including outbound, inbound, calling card and operator services. OpTel contracts
or plans to contract for other ancillary services, including operator service,
directory listings and emergency 911 service and, in certain markets, transport,
from the local ILEC and other service providers.
The Company currently provides telephone service under two regulatory
frameworks. In Houston and Dallas-Fort Worth, the Company provides telephone
services as a CLEC through Company owned central office switches. In other
markets, OpTel provides telephone services as an STS provider. The Company
intends to convert substantially all of its STS telephone operations to CLEC
operations and to provide switched access local exchange services to
substantially all of its telephone customers by the end of calendar 1999.
Video. OpTel offers its subscribers a full range of popular cable
television programming at competitive prices. The Company's networks are capable
of delivering up to 72 uncompressed analog channels of programming. The Company
offers various programming packages to its cable television subscribers. The
Company's basic video programming package provides extensive channel selection
featuring all major cable and broadcast networks. The Company's premium video
programming package features uninterrupted, full-length motion pictures,
sporting events, concerts and other entertainment programming and includes HBO,
Cinemax, Showtime and The Movie Channel, as well as supplementary channels such
as HBO 2, HBO 3 and Cinemax 2. 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.
In addition, the programming selections available at an MDU can be tailored
to the demographics of each MDU and, unlike franchise cable television operators
which may be required to carry all local broadcast channels and public access
channels, the Company can utilize all of its available channels to provide
popular entertainment, news and information programming.
The Company's programming packages are generally competitively priced
compared to similar packages offered by the incumbent franchise cable television
operator.
To enhance its video programming offerings, the Company has made
arrangements with a DBS service provider for distribution of additional video
programming via DBS technology. The Company currently provides this programming
on a limited basis to MDUs in its San Francisco and Miami-Ft. Lauderdale markets
using a single, standard direct broadcast satellite receiving antenna at each
serviced MDU. The DBS signal is received in digital form, converted at the MDU
receiver site to analog form and over coaxial cable distributed to the
subscriber's unit. DBS transport permits the Company to provide basic
programming or to supplement the Company's other programming services.
High-Speed Internet Access. OpTel currently provides Internet access
service to residents of certain properties in the Houston market in
collaboration with a local ISP and a local CAP. OpTel is currently testing a
high-speed Internet access service in Dallas-Fort Worth in conjunction with
I(3)S, Inc. ("I(3)S"), an ISP. The Company and I(3)S have a strategic alliance
to provide high-speed Internet services in the Company's major markets.
Following successful completion of its testing, the Company intends to roll out
its high speed Internet access service in substantially all of its major
markets.
The Company expects to offer customers a choice of transmission speeds
ranging from approximately 64 kilobits ("KB") per second (normal dial-up
Internet speed is typically 28.8 KB per second) to 10 megabits ("MB") per
second. In MDUs where data transport is to be provided via the Company's
networks, the Company expects to be able to offer transmission speeds of up to
10 MB per second. In MDUs where the Company utilizes leased transport
facilities, the Company may choose to offer transmission speeds of up to 1.5 MB
per second, however, higher transmission speeds could be offered through the
lease of incremental bandwidth. Internet connections providing transmission
speeds over 0.5 MB per second are generally referred to as "high-speed." The
transmission speeds that the Company intends to offer will greatly exceed the 64
KB
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<PAGE> 46
per second speed available from many LECs through Integrated Services Digital
Network ("ISDN") technology.
OpTel initially will connect each property to the ISP's point of presence
using OpTel's microwave transport or its owned or leased fiber transport. At
each property, the data stream will be carried to the subscriber's unit via the
property's existing coaxial cable distribution wiring. The subscriber will
connect a personal computer to the high-speed Internet service using software
provided by the ISP and the subscriber's cable modem which will be connected to
a standard cable television outlet.
Wholesale Services to ISPs. The Company believes that with the recent
growth in demand for Internet services, numerous ISPs are unable to obtain
network capacity rapidly enough to meet customer demand and eliminate network
congestion problems. The Company plans to supplement its core end user product
offerings by providing a full array of local services to ISPs, including
telephone numbers and switched and dedicated access to the Internet.
NETWORK ARCHITECTURE
The Company's strategy is to deliver all of its service offerings through
integrated networks. OpTel's networks are designed specifically to provide
services to MDUs. The Company uses a combination of point-to-point microwave
transmission equipment and fiber optic cable in order to offer a single source
for video, voice telecommunications and eventually high speed Internet access
services. As of April 30, 1998, the Company had 46 microwave networks in service
in eleven metropolitan areas, and, in Houston, three fiber optic networks,
covering over 400 route miles. In order to integrate service offerings, the
Company actively adds properties it services within existing network coverage to
these networks and seeks to cost effectively develop new networks to cover MDU
clusters serviced by the Company in new or expanded markets.
To maximize network coverage of its microwave networks, the Company
establishes hubs designed to service MDU clusters (each a "Network Hub").
Network Hubs usually are located on rooftops or towers. The network is extended
from the Network Hubs to the serviced MDUs via point-to-point microwave. Each
Network Hub includes equipment to receive and transmit the Company's video
programming. The signal is transmitted to a receiving dish at the MDU which must
be within the line of site of the Network Hub or a repeater site. To ensure
transmission quality, the Company limits the radius of each microwave link to
between four and ten miles, depending on topographic and climatic conditions.
Within the MDUs it serves the Company distributes video programming via
conventional coaxial cable. The on-property network uses a combination of traps
(electronic filtering devices), addressable decoder-converter boxes and
interdiction. 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 a centralized location. 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 premium service penetration and greater
customer satisfaction.
OpTel's network design is digital capable. All voice traffic over OpTel's
networks is digitally compressed. The networks will facilitate digital
compression for video signal when economical and required by the marketplace. If
OpTel is required to carry digital broadcast programming (e.g., HDTV), then the
networks may be upgraded to transmit such programming without material
architectural change. See "-- Regulation."
The Company transports video programming to MDUs which are not yet on the
Company's networks by receiving video programming at a self-contained SMATV head
end located at the MDU. The Company intends to convert substantially all of its
SMATV systems to 18GHz, 12GHz (principally in Denver) or fiber optic networks by
the end of fiscal 2000.
To roll out its central office switched voice telecommunications offering
in areas covered by its microwave networks, the Company will link its Network
Hubs to both the central office switch and other Network Hubs to form a network
backbone. This network backbone will utilize either of 6GHz or 11GHz microwave
or fiber
44
<PAGE> 47
optic transmission capacity to form synchronous optical network ("SONET")
self-healing rings that provide high speed redundant connections for the
delivery of voice traffic. Where it uses fiber, the Company either will install
its own fiber optic facilities or on a limited basis will lease fiber from other
providers. Voice traffic will be delivered from a Network Hub to a serviced MDU
over 23GHz microwave links. The 23GHz microwave links will use the same
microwave transmission equipment that is used to relay video signal. Voice
traffic is delivered to the individual unit using a traditional copper wire
twisted pair. The Company has recently commenced offering network based central
office switched telecommunication services on its fiber optic networks in
Houston and in Dallas-Fort Worth over its microwave networks.
The Company has chosen the 5ESS-2000 digital switch manufactured by Lucent.
Unlike traditional long distance or local switches, the Lucent switch enables
the Company to provide local and long distance services from a single platform.
This uniform and advanced switch platform enables the Company to (i) deploy
features and functions quickly in all of its networks, (ii) expand switch
capacity in a cost effective manner and (iii) lower maintenance costs through
reduced training and spare part requirements. The Company expects to continue to
deploy Lucent switches to provide a consistent technology platform throughout
its network. The Company will use its networks to aggregate MDU long distance
and local traffic at its central office switch. As an initial entry strategy in
certain markets, the Company intends to lease telecommunication switch capacity
in certain markets from third-party providers in order to accelerate the roll
out of telephone services and to migrate telecommunications services to its own
switch over time. OpTel has entered into an agreement with a national CLEC,
pursuant to which OpTel may purchase local telephone service and local loop
elements. During any time period and in any market that the Company is
purchasing such services from the CLEC, the CLEC has the exclusive right to
provide OpTel with these services. OpTel is required to maintain each service
ordered for a 24-month minimum period.
In areas where the Company offers telecommunications services but where it
has not yet migrated to its networked central office switch architecture, a PBX
switch is installed at the MDU and traffic from the MDU is transported via
leased trunk lines to the LEC's central office. From the LEC's central office,
local calls are routed through the LEC's network. The Company intends to convert
all of its PBX serviced properties to its central office switched
telecommunications offering.
OpTel has contracted with a third-party to monitor its networked
telecommunications services. In 1998, OpTel will establish a Network Operations
Center to internalize the functions now provided by the third-party and to
enhance monitoring, control and maintenance of its networks. OpTel's Network
Operational Center is intended to be operational in August, 1998 at its Dallas
headquarters and will be staffed 24-hours-a-day, seven-days-a-week. The Network
Operations Center will monitor and manage OpTel's central office telephone
switches, PBX switches, video headend equipment and certain additional elements
of its telecommunications and cable television networks.
SALES AND MARKETING
A critical aspect of the Company's sales and marketing efforts is the
development of strategic contractual relationships with MDU owners. These
relationships encourage the owners to promote and sell the Company's cable
television and telecommunications services to MDU residents. The Company intends
to grow its business by negotiating additional Rights of Entry to serve MDUs
currently served by other providers and newly-constructed MDUs, by acquiring
other existing operators that serve MDUs, as appropriate, and by providing MDUs
it currently serves for cable television with additional services, such as
telephone and Internet access.
The Company tailors its sales and marketing efforts to two different
constituencies: (i) owners of MDUs and their agents and (ii) residents at MDUs
for which the Company has entered into Rights of Entry. Each constituency is
served by separate sales and marketing teams.
Sales and Marketing to MDU Owners
The Company maintains a full-time professional sales force dedicated to
securing Rights of Entry from owners of MDUs. Many of the Company's sales
representatives have previous experience in commercial real
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<PAGE> 48
estate sales and leasing. The Company has developed an incentive compensation
plan for sales personnel which the Company believes encourages sales personnel
to target MDUs with more favorable demographic characteristics.
Marketing to local MDU owners is conducted primarily by (i) using
established relationships with property developers, owners and management
companies, (ii) direct mail and direct sales campaigns to owners and apartment
managers, (iii) canvassing MDU owners with properties within the coverage of the
Company's existing and planned networks and (iv) attending and participating in
trade shows, conventions and seminars targeted to the MDU industry. In addition,
the Company markets to owners of large multiregional portfolios of MDUs via a
dedicated sales team. When marketing to MDUs, the Company emphasizes the
following competitive advantages:
New Revenue Source for MDU Owner. An MDU owner who enters into Rights of
Entry with the Company generally receives a percentage of the revenue generated
by the MDU. The revenue sharing percentages generally range between six and ten
percent of such revenue, are often scaled based on penetration and are fixed
over the term of the Right of Entry. The Company may from time to time pay
up-front "key-money" in lieu of or in combination with revenue participation.
While some franchise cable television operators and ILECs now offer revenue
sharing and access fee arrangements to some MDU owners, it is the Company's
experience that neither the ILECs nor the incumbent franchise cable television
operators are willing to offer broad-based, revenue-based incentive compensation
to MDU owners generally.
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 their 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. 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 believes that its services and
property enhancements can serve as an important marketing tool for owners to
attract prospective tenants because its services are generally provided at a
price competitive with those charged by the franchise cable operator and lower
than those charged by the ILEC 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. The Company also
maintains direct lines to facilitate rapid response to customer support calls
initiated by MDU owners and managers.
Marketing to MDU Residents
Once an MDU owner executes a Right 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 resident first signs
a lease and takes occupancy in an MDU. Accordingly, the Company believes that
during the first few years after it activates cable television or
telecommunications services at an MDU it benefits from the high rate of MDU
resident turnover. The Company has 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 and direct sales campaigns,
(ii) special promotions and sign-up parties, (iii) establishment of a physical
presence at a building 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.
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<PAGE> 49
Competitive Pricing. The Company believes it offers a competitive
telecommunications offering and cable television channel line-up (often
including pay-per-view and premium services) at prices that are generally
competitive with those charged by the ILEC and local franchise cable television
operator. Upon introduction of its integrated billing system, the Company plans
to offer pricing incentives to purchase more than one service from OpTel.
Superior Video Offering. 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 demographic characteristics 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.
Better Service and Quality. The Company is upgrading its networks and
support systems to ensure continued 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 is committed to providing excellent customer service. 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) computerized
tracking of all incoming calls to minimize waiting times, (iii) service calls
generally made the same day the subscriber indicates a service problem, (iv)
flexible, seven-day-a-week installation and service appointments, (v) follow-up
calls and on-site inspections to verify subscriber satisfaction, and (vi) 80% of
installations completed within three 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.
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 (which may be an ownership association) 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 Rights of Entry was approximately eight years as of April 30, 1998
(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 may include revenue sharing or 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 77% of the Company's
units under contract as of April 30, 1998) 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 include an undertaking by the MDU owner to promote
OpTel as the preferred telecommunications alternative to the ILEC within the
MDU. The Company believes that the development of 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. However, statutory limitations on exclusivity could
adversely affect the Company's ability to form new strategic relationships with
MDU owners and could increase the capital costs associated therewith. See "Risk
Factors -- Risks Associated with Rights of Entry."
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<PAGE> 50
COMPETITION
OpTel competes with a wide range of service providers for each of the
services it provides. Substantially all markets for voice, video and Internet
services are highly competitive and the Company expects that competition will
intensify. In each of its markets, the Company faces significant competition
from larger companies with greater access to capital, technology and other
competitive resources. The Company's switched local exchange services compete
with the ILEC, other STS providers, CLECs and CAPs and will compete with long
distance telephone companies and franchise cable television operators as they
begin to enter the local telephone business. The Company's long distance
services compete with established IXCs and resellers. In addition, recent
telecommunications offerings, including PCS, and future offerings may increase
competition in the telecommunications industry. The Company's private cable
television services compete with incumbent franchise cable television operators
as well as wireless cable television operators, other private cable television
operators, DBS operators and stand-alone satellite service providers. Recent and
future legislative, regulatory and technological developments likely will result
in additional competition in each of the markets in which the Company competes.
Moreover, 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. 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. 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. In
addition, technological developments may allow competitors of the Company to
bypass property owners altogether and market their services directly to tenants
of MDUs. See "Risk Factors -- Risks Associated with Rights of Entry" and
"-- Competition."
Certain of the Company's current and potential competitors are described
below.
ILECs. In each of its markets, OpTel faces, and expects to continue to
face, significant competition for the local exchange services it offers from the
ILECs, which currently dominate their local telephone markets. OpTel competes
with the ILECs in its markets on the basis of product offerings (including the
ability to offer integrated voice and video services), reliability, technology
and customer service, as well as price.
In addition, under the Telecom Act and ensuing federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
introduction of such competition, however, also establishes the predicate for
the incumbent RBOCs to provide in-region interexchange long distance services.
The RBOCs are currently allowed to offer "incidental" long distance service
in-region and to offer out-of-region long distance service. Once the RBOCs are
allowed to offer in-region long distance services, they will also be in a
position to offer single source local and long distance service similar to that
offered by OpTel and proposed by the three largest IXCs (AT&T, MCI and Sprint
Corporation). The Company expects that the increased competition made possible
by regulatory reform will result in certain pricing and margin pressures in the
telecommunications services businesses. See "Risk Factors -- Regulation" and
"-- Regulation."
OpTel has sought, and will continue to seek, to provide a full range of
local voice services in competition with ILECs in its service areas. The Company
expects to compete in this market by (i) establishing strategic relationships
with MDU owners so as to allow the Company to market effectively to MDU
residents, (ii) providing value added, enhanced services to MDU residents, (iii)
bundling its telecommunications and cable television services, (iv) providing a
high level of customer service and responsiveness, and (v) competitively pricing
its products.
The Telecom Act permits the ILECs and others to provide a wide variety of
video services directly to subscribers in competition with OpTel. Various LECs
currently provide video services within and outside their telephone service
areas through a variety of distribution methods, including both the deployment
of broadband wire facilities and the use of wireless transmission facilities.
The Company cannot predict the likelihood of success of video service ventures
by LECs or the impact on the Company of such competitive ventures.
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CLECs and Other Competitors. OpTel also faces, and expects to continue to
face, competition from other potential competitors in certain of its markets.
Other CLECs compete for local telephone services, although they have to date
focused primarily on the market for corporate customers. In addition, potential
competitors capable of offering private line and special access services also
include other smaller long distance carriers, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators and
private networks built by large end-users. However, OpTel believes that it will
be among the first to offer an integrated package of voice, video and Internet
access services to customers in MDUs.
Incumbent Franchise Cable Systems. The Company's major competition for
cable television Rights of Entry in each market comes from the incumbent
franchise cable television operator. In certain 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. The Company competes with franchise cable operators
by (i) focusing exclusively on MDUs, (ii) sharing profits with MDU owners, (iii)
providing an integrated product offering that to an increasing extent in the
future will include Internet services, (iv) offering customized programming, and
(v) charging lower cable and local telephone rates to subscribers.
Multipoint Multichannel Distribution Systems. MMDS systems are similar to
the Company's 18GHz and 12GHz networks in that they use microwave transmitting
and receiving equipment. MMDS differs from 18GHz and 12GHz in that (i) it
"broadcasts" its video programming directly to individual subscribers and
generally not to an MDU's receiver and (ii) its systems transmit in an
omni-directional manner, while 18GHz systems are point-to-point. As a result,
MMDS wireless cable can provide service to all households within a wireless
operator's "line-of-sight." The 2.5GHz spectrum utilized by MMDS wireless cable
was initially allocated by the FCC to applicants other than MMDS operators
within a given market, with 20 of the available channels generally allocated to
educational institutions. As a result, MMDS wireless operators have had
difficulty acquiring or leasing the critical mass of channels required to offer
a diverse programming lineup. Moreover, absent digital compression technology,
channel capacity is limited to 33 analog channels.
Local Multipoint Distribution Service. The FCC has issued rules
reallocating the 28GHz band to create a new local exchange and video programming
delivery service referred to as local multipoint distribution service ("LMDS").
LMDS licensees may hold up to 1000MHz of spectrum in each prescribed geographic
area. LMDS systems, like MMDS, will use point-to-multipoint microwave
distribution. Unlike MMDS, however, LMDS systems, using the proposed allocation
in the 28GHz band, will be able to provide channel capacity equal or greater to
that of most cable systems, including the Company's. In addition, LMDS systems
may include subscriber-to-hub transmission capabilities, which would allow them
to provide interactive and telecommunication services. In March 1998, the FCC
completed its auction of LMDS licenses. So far, however, there has been no
significant commercial deployment of LMDS systems in the Company's serviced
markets.
SMATV Systems. The largest number of private cable companies are operators
of SMATV systems. Like the Company, these SMATV operators offer a multichannel
television service pursuant to Rights of Entry with MDU owners. Where the
Company has introduced or will introduce 18GHz systems, the Company competes
with SMATV systems on the basis of (i) larger channel offerings (typically SMATV
offers 33 to 45 channels), (ii) the quality of its video programming delivery,
(iii) customer service, and (iv) the perceived high price of SMATV relative to
the programming package provided.
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, which can be lower than those charged by the Company before
consideration of the equipment costs. However, the Company believes that it can
effectively compete with DBS systems in the MDU marketplace for the following
reasons. First, DBS line-of-sight problems are significant (unless an entire MDU
is connected to the service) because a DBS antenna must be pointed in the
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proper direction to receive video programming from the satellite. In addition,
most MDU owners prohibit the placement of individual antennas on their property
by MDU residents. More importantly, DBS operators are generally 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.
Internet Services. The market for Internet access services is extremely
competitive and highly fragmented. No significant barriers to entry exist, and
competition in this market is expected to intensify as use of the Internet
grows. The Company competes (or in the future may compete) directly or
indirectly with (i) national and regional ISPs, (ii) national telecommunications
companies, (iii) LECs, (iv) cable operators, and (v) nonprofit or educational
ISPs. Some of these present or potential future competitors have or can be
expected to have substantially greater market presence and financial, technical,
marketing and other resources than the Company. Certain of the Company's online
competitors have introduced unlimited access to the Internet and their
proprietary content at flat rates, and certain of the LECs have also introduced
competitive flat-rate pricing for unlimited access (without a set-up fee for at
least some period of time). There can be no assurance that competition will not
lead to pricing pressures in the Internet business.
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environment are constantly occurring. In
addition, a continuing trend toward business combinations and alliances in the
communications industry may also create significant new competitors to OpTel.
The Company cannot predict whether competition from such developing and future
technologies or from such future competitors will have a material impact on its
operations. See "Risk Factors -- Competition."
REGULATION
The telecommunications and multichannel television 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 telecommunications and
multichannel television industries. 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 telecommunications and
multichannel television 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 did not comply with all
regulations applicable to them and it undertook to remediate such matters as
soon as practicable.
TELECOMMUNICATIONS ACT OF 1996
The Telecom Act, which amended the Communications Act of 1933 (as amended,
the "Communications Act"), has altered, and will continue to alter, federal,
state and local laws and regulations regarding telecommunications providers and
services. The law is intended, in part, to promote 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 Telecom
Act will help the Company compete with ILECs and with franchised cable
operators, it is not possible at this time to predict the effect of the Telecom
Act on the telecommunications and multichannel television industries in general
or the Company in particular. In large part, the impact of the Telecom Act will
depend upon the outcome of various FCC rulemaking proceedings to interpret and
implement the Telecom Act.
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TELECOMMUNICATIONS REGULATION
The telecommunications services provided by the Company are subject to
regulation by federal, state and local government agencies. As the Company
implements its telecommunications strategy, which includes replacing many of its
current PBX switches with networked central office switches, the Company will
increasingly become regulated as a CLEC. The FCC has jurisdiction over
interstate services, and state regulatory commissions exercise jurisdiction over
intrastate services. Additionally, local authorities may regulate limited
aspects of the Company's business, such as the use of public rights-of-way. The
following subsections summarize the local, state and federal regulations that
pertain to the Company's current and projected telecommunications services.
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 Telecom Act expands the FCC's authority to regulate local exchange
service and there can be no assurance that the FCC will not exercise this
authority aggressively.
State regulation of local exchange service traditionally has favored the
ILECs. The state laws have, with the exception of STS, generally prohibited
competition in the local exchange services market. The Telecom Act expressly
preempts such prohibitions. The Telecom Act declares that no state or local laws
or regulations may prohibit or have the effect of prohibiting the ability of any
entity to provide any interstate or intrastate telecommunications service.
States may, however, impose "competitively neutral" requirements regarding
universal service, public safety and welfare, service quality and consumer
protection. Local authorities may also require reasonable, competitively neutral
compensation for use of the public rights-of-way.
The Company anticipates that it will, in the future, increasingly compete
in telecommunications markets as a CLEC. For purposes of the Telecom Act, CLECs
and ILECs are subject to the same basic set of requirements. However, certain
additional obligations are imposed on ILECs, but not on CLECs. Although the
Company does not believe that the regulatory burdens applicable to CLECs will
have a material effect on its business, no assurance can be given at this time
regarding the extent or impact of such regulation.
The Telecom Act requires all carriers, both CLECs and ILECs, to
interconnect with the facilities of other carriers, resell their services,
provide number portability, provide dialing parity, afford access to their
poles, ducts, conduits and rights-of-way, and to establish reciprocal
compensation for the transport and termination of other LECs' telephone traffic.
All providers of telecommunications services are also subject to the Telecom
Act's requirements that they contribute to state and federal universal service
funds. ILECs are subject to certain additional requirements, such as a duty to
negotiate interconnection agreements in good faith, to unbundle elements of
their networks, to provide nondiscriminatory interconnection with their
networks, to comply with specific resale obligations, to provide notice of
changes to their networks and to allow collocation of other carriers' equipment
on their premises. The Company is not, however, considered an ILEC in any state.
The FCC and various state PUCs are in the process of defining the precise
contours of the requirements that will govern local exchange service in the
future. Although the Telecom 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 Telecom Act, and what additional
regulations they may adopt. Moreover, the United States Court of Appeals for the
Eighth Circuit overturned portions of the FCC's First Report and Order that had
set forth pricing methodologies for unbundling, resale and interconnection, and
that had also set forth certain technical requirements, such as obligations
relating to quality of service and combination of unbundled network elements.
The Supreme Court has granted certiorari and agreed to review the Eighth Circuit
decision. Further, a U.S. District Court has held unconstitutional certain
provisions of the Telecom Act that limit the ability of the RBOCs to provide
in-region long-distance telecommunications services. This decision has been
stayed pending appeal. Absent these
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restrictions, the RBOCs may have less incentive to cooperate with CLECs seeking
to enter local exchange markets. The Company cannot predict the outcome of this
litigation or the impact of any court decision on the Company's operations.
It is not possible for the Company to predict the outcome of these or any
other proceedings relating to the Telecom Act. Nonetheless, at this time it is
clear that an increasing number of service providers will be seeking to compete
as CLECs in the local exchange markets and that state and federal regulations
will, to some extent, allow for such market entry. Although 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.
Shared Tenant Services
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 PUCs
determined that resale of local exchange service is in the public interest and
have directed telecommunications companies within their jurisdictions to allow
for resale of local exchange service, opening the way for STS operations.
Moreover, the Telecom Act requires such resale pursuant to interconnection
agreements with the ILEC. In some states, PUCs have issued detailed regulations
governing the provision of STS and other resale services. In other jurisdictions
where no formal requirements have been adopted, most telecommunications
companies have nonetheless modified their tariffs to provide for resale of local
exchange services.
The precise terms and conditions under which such resale services may be
provided varies from state to state, and from LEC to LEC, and may include
significant restrictions and limitations. These include: (i) a requirement to be
certified by the state PUC, (ii) restrictions with respect to the location and
ownership of MDUs to which STS service may be provided and the crossing of
public rights-of-way by STS operator facilities, (iii) regulations allowing
telecommunications companies to apply different local service rate structures
(e.g., measured use vs. flat rate) to STS providers and other subscribers, in
some cases lessening or even eliminating efficiencies which might otherwise be
realized through the use of the LECs' trunking facilities, (iv) regulations
providing for LEC access or rights-of-way to directly service individual
customers within an MDU, and (v) in certain states, limits or prohibitions on
resale of intrastate long distance and local service at a profit.
None of the states in which the Company has significant operations has
adopted regulations governing the provision of STS services. The California PUC
has, however, adopted informal STS "guidelines." In addition, Florida requires
providers of STS services to be certified to resell local exchange services.
Other than the California "guidelines" and Florida's certification requirement,
the Company may provide STS services in each of its major markets, 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.
Information Service Provider Regulation
Information service providers, including Internet access providers, are
largely unregulated at this time (apart from federal, state, and local laws and
regulations applicable to business in general). However, there can be no
assurance that this business will not become subject to regulatory restraints.
For instance, although
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the FCC has rejected proposals to impose additional costs and regulations on
information service providers to the extent they use local exchange telephone
network facilities, it has suggested that certain telephone-to-telephone
services provided by information service providers using the Internet backbone
may be reclassified as "telecommunications services" and subject to regulation
as such. Any such change may affect demand for the Company's Internet related
services. In addition, the FCC has pending a proceeding in which it will
determine whether CLECs that serve as information service providers are entitled
to reciprocal compensation from other LECs for terminating Internet traffic that
originates on the other LEC's network. An FCC determination that information
service provider traffic should not be included within reciprocal compensation
calculations could have a negative effect on the Company's revenues.
There also have been efforts at the federal and state level to impose taxes
and other burdens on information service providers and to regulate content
provided via the Internet and other information services. These efforts have not
generally been upheld when challenged in court. Nonetheless, the Company expects
that proposals of this nature will continue to be debated in Congress and state
legislatures in the future. No assurance can be given that changes in current or
future regulations adopted by the FCC or state regulators or other legislative
or judicial initiatives relating to Internet services would not have a material
adverse effect on OpTel. In addition, although there is a trend in the law away
from ISP liability for content posted or published on the Internet, there can be
no assurance that the Company's involvement in the provision of ISP services
will not subject it to liability for acts performed by third parties using the
Internet.
Long Distance Resale Regulation
Non-dominant IXCs, 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. As a non-dominant carrier, the Company is permitted to
make tariff filings on a single day's notice and without cost support to justify
specific rates. The FCC generally does not exercise direct oversight over cost
justification and the level of charges for service of non-dominant carriers,
although it has the statutory power to do so. The FCC has jurisdiction to act
upon complaints brought by third parties, or on the FCC's own motion, against a
carrier for failure to comply with its statutory obligations.
Foreign Ownership Restrictions
Section 310(b) of the Communications Act limits the extent to which foreign
controlled companies may hold common carrier radio licenses. Under Section
310(b)(4) of the Communications Act, the FCC has discretion to permit common
carrier licensees to exceed some of these limits. To allow the Company to
provide common carrier telecommunications services using its networks, in the
event that the Company decides to provide such services, the Company has
assigned substantially all of its frequency licenses (the "Assigned 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.
In 1997, the United States agreed, as part of the WTO Basic Telecom
Agreement, to allow foreign suppliers from WTO member nations, including Canada,
to provide a broad range of basic telecommunications services in the United
States. In light of those commitments, which became effective in February of
1998, and consistent with its authority under Section 310(b)(4) of the
Communications Act, the FCC has adopted a presumption favoring grant of
applications to exceed the limits on non-U.S. ownership of common carrier
licensees when the non-U.S. investment is from a WTO member nation. Accordingly,
the Company is in the process of reevaluating whether it should hold FCC
authorizations directly and, specifically, whether it should exercise its option
to purchase the assets of THI.
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REGULATION OF CABLE TELEVISION
Certain of the Company's networks are, for regulatory purposes, deemed to
be "Cable Systems." To constitute a Cable System, a multichannel television
system must use hard-wire or fiber optic cable that makes a tangible physical
crossing or use of a public right-of-way. As a result, all Cable Systems are
required to obtain a local franchise and are subject to state and local
regulation as well as federal Cable System regulation, including rate regulation
in certain circumstances. The Company's 18GHz networks, its 12GHz networks to be
developed 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 system, a portion of its Fort Worth 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 governs the
regulation of Cable Systems. The regulations imposed on Cable Systems include
requirements to (i) obtain a local franchise (which may require the franchisee
to pay franchise fees to local governments of up to 5% of yearly gross
revenues), (ii) delete certain programs from cablecasts, (iii) comply with
certain customer service standards, (iv) retransmit certain broadcast television
programming, (v) in most circumstances, conform subscriber service and equipment
rates to applicable federal regulations, (vi) comply with FCC equal employment
opportunity ("EEO") rules and policies, (vii) make available channels for
leased-access programmers at rates that are to be calculated on a formula
established by the FCC and (viii) offer customer service to all buildings passed
by its network. In addition, rates for basic cable service on Cable Systems not
subject to "effective competition" are regulated by local franchising
authorities. Rates for upper tier or "cable programming services" on such
systems are regulated by the FCC. The Telecom Act eliminates cable programming
service tier rate regulation effective March 31, 1999, for all Cable System
operators. The Company's networks that are Cable Systems are subject to these
requirements, which impose regulatory costs and reduce the speed and flexibility
with which the Company and its Cable System competitors can respond to
competitive challenges from other video distribution technologies. The Company's
Cable Systems, however, are exempt from rate regulation because they are, the
Company believes, subject to "effective competition."
Prior to the enactment of the Telecom Act, Cable Systems were deemed to be
subject to "effective competition" if any of: (i) fewer than 30% of the
households in the franchise area subscribe to the service of the Cable System,
(ii) 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 (iii) the local franchising authority itself offers multichannel television
to at least 50% of the households in the franchise area. The Telecom Act
expanded the definition of "effective competition" to include situations in
which a LEC or its affiliate offers multichannel television directly to
subscribers by any means (other than direct-to-home satellite services) in the
franchise area. It is expected that this change will provide franchise cable
television operators with increased pricing flexibility to the extent that 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
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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 either to force local Cable Systems to
"carry" the television station free of charge (a "must carry" right) or to
prohibit Cable Systems and private cable television systems from carrying the
local television station (a "retransmission consent" right). Under the
must-carry rules, a Cable System, subject to certain restrictions, generally
must carry, upon request by the station and depending on the number of usable
activated channels on the system, all commercial television stations with
adequate signals that are licensed to the same market as the Cable System. Under
the retransmission consent rules, Cable Systems and private cable television
systems are precluded from carrying commercial broadcast stations that choose
not to exercise their must-carry rights, all "distant" commercial broadcast
stations (except for "superstations", i.e., commercial satellite-delivered
independent stations such as WTBS), commercial radio stations and certain low-
powered television stations, without obtaining those stations' explicit written
consent for the retransmission of their programming. Retransmission consent
agreements do not obviate a copyright license for the programming carried on the
broadcaster's signal. However, Cable Systems and private cable television
systems may obtain a compulsory copyright license for broadcast programming as
described above. To date, the "must carry/retransmission consent" regulations
have not had a significant impact on either the operations or profitability of
the Company. The Company has had little difficulty obtaining retransmission
consent agreements with local broadcasters. Nonetheless, there can be no
assurance that broadcasters, in some circumstances, will not withhold
retransmission consent, require excessive compensation for that consent or
impose onerous conditions thereon which could adversely affect the Company.
Furthermore, it is unclear at this time the extent to which Cable Systems will
be required to carry multiple signals of digital television broadcast stations
or high definition television ("HDTV") signals. The resolution of these
must-carry issues may have a significant impact on the programming carried on
the Company's systems.
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 Telecom 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 Telecom Act
repealed the LEC cable television cross-ownership restriction, which prohibited
LECs from providing multichannel television directly to subscribers in their
telephone service areas. This change may increase the level of competition in
the multichannel television market. LECs now have several options for entering
and competing in the multichannel television marketplace. LECs now may (i)
provide video programming to subscribers through radio communications under
Title III of the Communications Act, (ii) provide transmission of video
programming on a common carrier basis under Title II of the Communications Act
(i.e., provide a common carrier video platform), (iii) provide video programming
as a Cable System under Title VI of the Communications Act (franchise cable),
and (iv) provide video programming by means of an "open video system." Open
video systems are not required to comply with the full panoply of federal Cable
System regulation, but they are subject to certain additional programming
selection limitations. It is unclear at this time the extent to which any of
these market entry options will be used by LECs.
Rate Relief for Small Cable Operators. The Telecom 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."
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<PAGE> 58
The Uniform Rate Requirement. Prior to enactment of the Telecom Act, the
Communications Act generally provided that Cable Systems were required to have a
rate structure for the provision of cable service that was uniform throughout
its geographic area. The Telecom Act provides that this requirement is
applicable only where "effective competition" is absent. Further, the Telecom
Act exempts from the uniform rate requirement non-predatory bulk discounts
offered to MDUs. Consequently, the franchise cable television operators with
which the Company competes now have increased pricing flexibility with respect
to MDU bulk discounts.
Program Access. The program access provisions of the Communications Act
were intended to eliminate unfair competitive practices and facilitate
competition by providing competitive access to certain defined categories of
programming. Generally, these restrictions are applicable to Cable System
operators, satellite cable programming vendors in which a Cable System operator
has an attributable interest and satellite broadcast programming vendors. The
programming access provisions prohibit these entities from charging unfair,
unreasonable or discriminatory prices for programming. Further, the programming
access provisions prohibit most exclusive dealing arrangements pursuant to which
Cable Systems obtain the exclusive right to distribute the subject programming
within their franchise areas. Such exclusive distribution arrangements have been
found to inhibit the ability of new entrants to compete in the multichannel
television market. The prohibition on exclusive contracts, however, is scheduled
to expire on October 5, 2002 unless the FCC determines, during a proceeding that
is to be conducted in 2001, that the prohibition continues to be necessary to
promote competition in the multichannel television market. The Telecom 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.
Subscriber Access. The FCC has initiated a notice of proposed rulemaking
seeking comment on whether the FCC should adopt regulations restricting
exclusive contracts. The FCC has indicated that it seeks to ensure a level
competitive playing field in the emerging multichannel television market. One
possibility raised by the FCC is the establishment of a federal mandatory access
requirement or a limit on the duration of exclusive service agreements between
MDU owners and video programming providers. In another proceeding, the FCC is
contemplating an order preempting state, local and private restrictions on
over-the-air reception antennas placed on rental properties or properties not
within the exclusive control of the viewer. Although it is open to question
whether the FCC has statutory and constitutional authority to compel mandatory
access, restrict exclusive agreements or preempt private restrictions on
antennas located on property owned or controlled by others, there can be no
assurance that it will not attempt to do so. Either such action would tend to
undermine the exclusivity provisions of the Company's Rights of Entry with MDU
owners.
State and Local Cable System Regulation. Because Cable Systems use public
rights-of-way, they are subject to state and local regulation, typically imposed
through the franchising process. State and/or local officials often are involved
in the franchisee selection, system design and construction, safety, consumer
relations, billing, and community-related programming and services among other
matters. Cable Systems generally are operated pursuant to nonexclusive
franchises, permits, or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchise operator fails to comply with
material provisions of the franchise. Franchising authorities are immune from
monetary damage awards arising out of regulation of Cable Systems or decisions
made on franchise grants, renewals, transfers and amendments.
Cable franchises typically contain provisions governing fees to be paid to
the franchising authority, length of the franchise term, renewal, sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public rights-of-way and types
of cable services provided.
Although federal law contains certain procedural safeguards to protect
incumbent Cable Systems from arbitrary denials of franchise renewal, the renewal
of a cable franchise cannot be assured unless the franchisee has met certain
statutory standards. Moreover, even if a franchise is renewed, a franchising
authority may impose new requirements, such as the upgrading of facilities and
equipment or higher franchise fees. At least two states, Massachusetts and
Connecticut, have adopted legislation subjecting Cable Systems to regulation
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<PAGE> 59
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 the Company's non-franchised private cable systems that use
microwave distribution technologies are not subject to local franchise laws,
state and local property tax and environmental laws are applicable to the
Company's business. For example, the Company has to comply with local zoning
laws and applicable covenants, conditions and restrictions when installing its
antennae and other microwave equipment.
In addition, a number of states have enacted mandatory access laws.
Although such laws differ in some respects from state to state, state mandatory
access laws generally require that, in exchange for just compensation (typically
set by statute or regulation to be as low as $1.00), the owners of rental
apartments (and, in some instances, the owners of condominiums and manufactured
housing parks) must allow the local franchise cable television operator to have
access to the property to install its equipment and provide cable service to
residents of the MDU. Such state mandatory access laws effectively eliminate the
ability of the property owner to enter into an exclusive Right of Entry
agreement with a provider of cable or other video programming services. To the
best of the Company's knowledge, states that have enacted cable mandatory access
statutes in some form are: Connecticut, Delaware, Illinois, Kansas, Maine,
Minnesota, 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. Florida currently has a mandatory access statute for
condominiums, but the validity of that statute has been called into question
because an identical provision of Florida law that applied to rental properties
has been held to be unconstitutional. Virginia has an anti-compensation statute
that forbids an owner of an MDU from accepting compensation from whomever the
owner permits to provide cable or other video programming services to the
property. Such a statute limits the ability of a cable or other video
programming provider to enter into an exclusive Right of Entry agreement with an
owner of an MDU because an owner usually is induced to enter an exclusive
agreement through financial incentives. These statutes have been and are being
challenged on constitutional grounds in various states.
The Company does not have significant operations in any mandatory access
state other than Florida (with respect to condominiums) and Illinois. 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.
Microwave and Private Cable Regulation
The Company uses microwave distribution networks, which typically operate
in the 18GHz band, to interconnect individual private cable systems with each
other and with head-end facilities. 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 all microwave technologies are subject to legislative, judicial and
administrative changes. There can be no assurance that future legislative or
regulatory actions will not adversely affect the Company's ability to deliver
video or telecommunications programming using the radio frequency spectrum or
raise the cost of such delivery.
The Company's microwave networks must comply with the FCC's licensing
procedures and rules governing a licensee's operations. Application to use
microwave "paths" and frequencies is made to the FCC and is subject to certain
technical requirements and eligibility qualifications. After microwave paths are
licensed to an applicant, the facilities must normally 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.
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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
with the FCC 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 microwave frequencies are not
to the complete exclusion of other potential licensees. First, the Company's
rights only extend to the microwave paths identified in its application as
connecting the various points in its video distribution system. Other microwave
users are permitted to file applications and serve the same buildings as the
Company (in so far as the microwave 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 microwave bands used by the Company also are authorized
for use by other kinds of users, including non-video, point-to-point microwave,
mobile communications and satellite transmissions. Although sharing these
frequencies is technically feasible, it is possible that the Company will be
unable to obtain licenses for frequency 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. In addition, there have been proposals by certain satellite
operators to blanket license satellite downlink transmissions in the 18GHz band.
If adopted, such blanket licensing could impair the use of the 18GHz band by
private microwave operators such as the Company.
Radio frequency ("RF") emissions from microwave equipment may pose health
risks to humans. The FCC recently adopted new guidelines and methods for
evaluating the environmental effects of RF emissions from FCC-regulated
transmitters, including microwave equipment. The updated guidelines and methods
generally are more stringent than those previously in effect. The Company
expects that the microwave equipment to be provided by its vendors will comply
with applicable FCC guidelines.
Although private cable television operators are not subject to the full
range of regulation applicable to Cable Systems, they are subject to the
following federal regulations. First, private cable television operators are
entitled to the compulsory copyright license described above. Second, private
cable television operators benefit from the federal laws and regulations that
require certain programming providers to make cable programming available to all
multichannel video programming distributors on fair, reasonable and
nondiscriminatory terms. Third, as noted above, private cable television
operators are required to obtain retransmission consent from local broadcasters
in order to retransmit their signals. Finally, private cable television systems
are required to comply with the FCC's EEO rules and policies, although the
continuing validity of these rules and policies has been called into question by
a recent court of appeals decision overturning portions of the FCC's EEO rules
applicable to broadcast stations.
Because they are subject to minimal federal regulation, private cable
television operators have significantly more competitive flexibility than do the
franchised Cable Systems with which they compete. 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.
6GHz, 11GHz, 12GHz and 23GHz Microwave Regulation
The Company anticipates that in the future it will use 6GHz, 11GHz and
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 6GHz,
11GHz and 23GHz frequencies are substantially the same as those described above.
Although the Company expects that
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6GHz, 11GHz and 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.
Recently the FCC, at the request of national defense agencies, restricted
the use of 18GHz frequencies in the greater Denver and Washington, D.C. areas.
This change could severely limit the Company's ability to use 18GHz microwave
technologies in these two markets. The Company has, however, received assurances
from the FCC that it will be permitted, subject to certain waiver and/or
rulemaking procedures, to use 12GHz microwave as a medium to deliver
multi-channel video programming and telecommunications services in Denver. The
Company believes that 12GHz microwave paths are an acceptable substitute for
18GHz microwave paths and that the change will not materially adversely affect
the Company's network plans in Denver. The 12GHz frequencies are not, however,
generally available to private microwave licensees. Nonetheless, based on the
assurances received from the FCC, the Company has commenced frequency
coordinations for 12GHz paths on Denver and obtained waivers permitting it to
use 12GHz frequencies on selected paths in Denver. There can be no assurance
that 12GHz paths will be available for the Company's future needs in Denver or
the Washington, D.C. area.
To reduce the Company's reliance on 18GHz microwave and to take advantage
of superior propagation characteristics of lower frequency microwave
transmissions, the Company has initiated two proceedings at the FCC that would,
if resolved in a manner satisfactory to the Company, make additional microwave
bands available for use by the Company on a nationwide basis. First, the Company
has filed a petition for rulemaking that proposes FCC rule changes to allow the
Company and other private microwave licensees to use 12GHz frequencies
nationwide for the delivery of video programming materials. These bands, which
the Company has obtained limited waivers to use in the Denver market, normally
are not available for video distribution services by private microwave
licensees. Second, the Company has sought a nationwide waiver of a restriction
in the FCC's rules that prohibits non-common carrier microwave licensees from
transmitting video entertainment material in the 11GHz microwave bands. Although
the Company anticipates that one or both of these regulatory initiatives will be
successful, there can be no assurance that either of these bands will be made
generally available to the Company on a nationwide basis.
EMPLOYEES
As of April 30, 1998, the Company employed a total of 597 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. From time to time the Company also uses the services of
contract technicians for installation and maintenance services. The Company
relies principally on outside contractors for network construction. 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.
PROPERTIES
The Company's executive offices are located in Dallas, Texas and house its
national call center and its corporate, engineering, sales and marketing and
corporate administrative services groups. The original lease provides for
approximately 52,000 square feet of space and has a ten year term expiring
November 30, 2005. The Company has an option to extend the lease term for an
additional five year term at the then market rental rate. The Company recently
leased an additional 17,000 square feet in the same building, for a term of one
year, to provide for needed expansion. The Company pays approximately $71,000
per month for the space in its headquarters building. The Company has the right
to acquire additional space at its current location when such space becomes
available. In light of the Company's rapid growth, the Company is currently
evaluating relocating its executive offices to a new location within the
Dallas-Fort Worth area.
In October 1997, the Company purchased a building proximate to its
executive offices in Dallas, Texas. The Company has installed the central office
switch for the Dallas-Fort Worth market in the building and
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intends to relocate its Dallas regional operations to the same building by the
end of calendar 1998. The Company also leases facilities in each of the fourteen
cities in which it has established regional operations.
The Company owns substantially all of the telecommunications and cable
television equipment essential to its operations. The Company's major fixed
assets are telecommunications switches, cable television head ends, microwave
transmitters and receivers, SMATV receivers, PBX switches and coaxial fiber
optic cable. Such properties do not lend themselves to description by character
and location of principal units. Substantially all of this equipment (other than
fiber optic cable laid under public rights of way) resides on or under the MDUs
served by the Company or in leased facilities in various locations throughout
the metropolitan areas served by the Company.
LEGAL PROCEEDINGS
Except as set forth below, the Company is not a party to any legal
proceedings except for those arising in the ordinary course of business. The
Company does not believe that any legal proceeding to which it is a party will
have a material adverse impact on the Company's financial condition or results
of operations.
On April 27, 1998, the Civil Action was commenced against the Company in
the United States District Court for the Northern District of California by
Octel, charging the Company with trademark infringement, trade name
infringement, trademark dilution, and unfair competition based on its use of the
name "OpTel" and seeking to enjoin the Company from using the name "OpTel." The
Civil Action follows a now-suspended administrative proceeding in the PTO
relating to registration of the "OpTel" mark by the Company. The PTO found the
Company's application for registration to be allowable; however, Octel commenced
the PTO proceeding claiming that the Company's mark is confusingly similar to
the "Octel" mark used by that party in a related field, and claiming that the
Company's application had procedural deficiencies. During the course of the PTO
proceeding, the Company acquired rights to the marks "Optel" and "Optel
Communications" in the telecommunications field which are believed to predate
the rights of Octel to its trademark, and the Company commenced two further
proceedings against Octel in the PTO seeking cancellation of two of the
trademark registrations owned by Octel. The various proceedings in the PTO
between the Company and Octel were consolidated and thereafter suspended on May
15, 1998, in view of the commencement of the Civil Action. The Company believes
it has meritorious counterclaims in the Civil Action and intends to vigorously
defend against Octel's claims. The answer and counterclaims must be filed by the
Company in mid-June. Although the Company does not believe that its use of the
name "OpTel" infringes on the trademark or trade name rights of Octel or any
other person, there can be no assurance as to the outcome of the Civil Action or
that the Company will not be enjoined from the use of the name and trademark
"OpTel" or the proceedings in the PTO (if reinstated) or of any other action
that may be brought by any other party or that any such outcome would not
materially adversely affect the Company. See "Risk Factors -- Use of the Name
OpTel."
On April 9, 1998, a purported class action complaint was filed in the
District Court of Harris County, Texas by Gavin Stewart Clarkson, individually
and on behalf of all cable subscribers in the U.S. that have paid late fees to
either Phonoscope or the Company. The plaintiff, who formerly subscribed to
cable television services provided by Phonoscope, alleges that Phonoscope's
charging pre-established late fees for delinquent payments of cable subscription
charges constitutes an illegal collection of a penalty and that cable service
providers should only be entitled to their actual collection costs. The
plaintiff seeks to enjoin Phonoscope and OpTel from collecting, or attempting to
collect, such late fees. The case is in its very early stages and the Company
has not yet been served with process of the summons and complaint. No assurance
can be given as to its ultimate outcome or that any such outcome will not
materially adversely affect the Company. OpTel believes that it will have
meritorious factual and legal defenses, and intends to defend vigorously against
these claims.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of May 31, 1998:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
Claude Chagnon................ Chairman of the Board and Director 43
Louis Brunel.................. Director; President and Chief Executive Officer 56
Christian Chagnon............. Director 42
William O. Hunt............... Director 65
Lynn McDonald................. Director 38
Alain Michel.................. Vice Chairman of the Board and Director 49
Bertrand Blanchette........... Chief Financial Officer 40
John Czapko................... Vice President, Sales 56
Stephen Dube.................. Vice President, Operations 42
James Greene.................. Vice President, Telephone 52
Michael E. Katzenstein........ Vice President, Legal Affairs and General Counsel 38
Thomas Watson................. Vice President, Engineering and Information Services 41
Lynn Zera..................... Vice President, Human Resources 50
</TABLE>
Claude Chagnon has served as a Director since August 1996. Since October
1996, he has been the President and Chief Operating Officer of GVL. From January
1994 to October 1996, Mr. Chagnon was Vice Chairman of GVL. Prior to 1994, Mr.
Chagnon 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.
Louis Brunel has served as a Director since March 1995 and as President and
Chief Executive Officer since April 1996. Since 1988, Mr. Brunel has held
various positions at GVL and its subsidiaries, including, immediately prior to
joining OpTel, Vice-Chairman and Chief Executive Officer of Videotron Holdings
Plc ("VHP"), a recently divested United Kingdom based cable and telephone
subsidiary of GVL. While at VHP, Mr. Brunel was the chief architect of VHP's
cable television/telecommunications business. From 1988 to 1990, he served as
Vice President, Corporate Development of GVL. In addition, he served as
President of Videotron International Ltee from September 1994 through December
1996.
Christian Chagnon has served as a Director since March 1997 and has been
Senior Vice President, Strategic Planning and Technology of GVL since September
1994. Prior to August 1994, Mr. Chagnon was also President of Videotron Services
Informatiques Ltee. Mr. Chagnon also serves as a Director of GVL. Mr. Christian
Chagnon is the brother of Mr. Claude Chagnon.
William O. Hunt was appointed as a Director in June 1998. Since December
1992, Mr. Hunt has served as Chairman of the Board, Chief Executive Officer and
President of Intellicall, Inc., a manufacturer of network and customer premise
equipment. From June 1986 to July 1992, Mr. Hunt was Chairman and Chief
Executive Officer of Alliance Telecommunications Corporation, a wireless
telecommunications company. Mr. Hunt also serves on the boards of The Allen
Group Inc., American Homestar Corporation, DSC Communications Corporation and
Dr. Pepper Bottling Company of Texas.
Lynn McDonald was appointed as a Director in June 1998. Since 1996, Ms.
McDonald has been a Manager with CDPQ, a subsidiary of Caisse that actively
manages private placements in communications companies. Prior to joining CDPQ,
Ms. McDonald worked at the Fonds de Solidarite des Travailleurs du Quebec, a
leading venture capital fund. Previously, Ms. McDonald was a special situations
equity analyst at BBN James Capel, a Canadian stock brokerage firm. Ms. McDonald
is also a director of Fundy Communications Inc., Telexis Corporation, Les
Systemes Proxima Ltee and Regional Vision Inc.
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Alain Michel has served as a Director since April 1997. Since July 1992,
Mr. Michel has held various management positions at GVL, including, since July
1994, Senior Vice President and Chief Financial Officer. Mr. Michel is also a
director of NB Capital, Inc., a publicly traded Delaware real estate investment
trust, Microcell Telecommunications Inc., a Canadian public company which
provides telecommunications services and in which GVL holds a minority interest,
and Groupe Goyette Inc., a Canadian private company which provides
transportation and storage services.
Bertrand Blanchette was appointed Chief Financial Officer in September
1996. From September 1995 to December 1996, Mr. Blanchette served as Chief
Financial Officer of VHP. From June 1994 to December 1995, he was Vice
President, Control of GVL. From October 1986 to May 1994, Mr. Blanchette was
Vice President, Finance of Heroux, Inc., a Canadian public company which
manufactures airplane parts.
John Czapko was appointed Vice President, Sales in March 1997. From
September 1993 to February 1997, Mr. Czapko was Director of Indirect
Distribution of Metrocel Cellular Telephone Company ("Metrocel"). From June 1991
to September 1993, he was Director of Direct Distribution of Metrocel.
Stephen Dube was appointed Vice President, Operations in March 1998. Prior
to that date, Mr. Dube served as Vice President, Marketing and Corporate
Development for OpTel from May 1997 to March 1998 and as Vice President,
Acquisitions and Strategic Planning for OpTel from July 1995 to May 1997. 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.
James Greene was appointed Vice President, Telephone in April 1998. From
June 1997 to April 1998, Mr. Greene was an independent consultant and advised
the Company on the launch of its first central office switch in Houston, Texas
and the commencement of CLEC services. Mr. Greene consulted for OpTel on an
exclusive basis from November 1997 until his appointment as Vice President. From
1993 to November 1997, Mr. Greene was a consultant for several state and local
regulatory bodies and worked principally with the State of Oregon.
Michael E. Katzenstein was appointed Vice President, Legal Affairs and
General Counsel in November 1995. Prior to joining OpTel, Mr. Katzenstein was a
partner at Kronish, Lieb, Weiner and Hellman LLP. Mr. Katzenstein received his
J.D. from Boston University School of Law in 1985.
Thomas Watson was appointed Vice President, Information Services in
September 1996. In August 1997, he also assumed the role of Vice President,
Engineering. From January 1992 to September 1996, Mr. Watson held various
positions at GTE Telephone Operations, an ILEC, including Group Product Manager,
Group Manager Engineering and Senior Program Manager.
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.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
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 (collectively, the "Named Executive
Officers") for the fiscal years ended August 31, 1997, 1996 and the eight month
period ended August 31, 1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ ------------------------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION(14)
--------------------------- ------ -------- ------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Louis Brunel........................ 1997 $269,623 -- $ 66,062(7) 16,034.79 --
President and Chief 1996 $ 35,095(2) -- -- -- --
Executive Officer 1995 -- -- -- -- --
Michael E. Katzenstein.............. 1997 $175,000 $57,500 $ 65,196(8) 9,137.61 $2,820
Vice President, Legal Affairs 1996 $135,346(3) $40,000 $103,756(9) -- $3,334
and General Counsel 1995 -- -- -- -- --
Rory Cole(1)........................ 1997 $163,654 $43,750 -- 9,406.36(13) $3,629
Vice President and 1996 $175,000 $36,500 -- -- $4,750
Chief Operating Officer 1995 $102,980 -- $ 22,405(10) -- --
Bertrand Blanchette................. 1997 $129,702(4) $ 5,000 $ 33,961(11) 4,373.12 --
Vice President and 1996 -- -- -- -- --
Chief Financial Officer 1995 -- -- -- -- --
Stephen Dube........................ 1997 $119,139 $15,000 $ 63,514(12) 3,381.88 $2,844
Vice President, Operations 1996 $ 36,542(5) -- -- -- --
1995 -- -- -- -- --
Lynn Zera........................... 1997 $112,877 $21,040 -- 2,565.57 $2,809
Vice President, Human Resources 1996 $ 83,750(6) -- -- -- $2,513
1995 -- -- -- -- --
</TABLE>
- ---------------
(1) Mr. Cole resigned from the Company effective July 11, 1997.
(2) During fiscal 1996, Mr. Brunel was paid primarily by GVL. Beginning June 1,
1996, a portion of Mr. Brunel's salary was allocated to the Company.
Effective November 1, 1996, Mr. Brunel accepted the position of President
and Chief Executive Officer on a full-time basis.
(3) Mr. Katzenstein commenced employment with the Company in November 1995.
(4) Mr. 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 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.
(5) During fiscal 1996, Mr. Dube was paid primarily by GVL. Beginning June 1,
1996, a portion of Mr. Dube's salary was allocated to the Company.
Effective January 1, 1997, Mr. Dube became a full-time employee of the
Company.
(6) Ms. Zera commenced employment with the Company in November 1995.
(7) $39,790 represents relocation payments and $21,680 represents an automobile
allowance.
(8) $49,823 represents tax reimbursements resulting from relocation.
(9) $93,706 represents relocation payments.
(10) The entire amount represents an automobile allowance.
(11) $29,161 represents relocation payments.
(12) $54,288 represents relocation payments.
(13) The options granted to Mr. Cole were exchanged for the Cole Warrant (as
defined herein) in connection with the termination of Mr. Cole's
employment. See "Certain Relationships and Related Transactions -- Cole
Warrant."
(14) Represents 401(k) matching fund contributions by the Company.
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OPTION GRANTS IN FISCAL 1997
The following table sets forth options to purchase shares of the Class A
Common Stock granted to the Named Executive Officers during fiscal 1997. Prior
to fiscal 1997, no options were granted by the Company.
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM
OPTIONS EMPLOYEES IN EXERCISE ------------------------
NAME GRANTED FISCAL YEAR PRICE EXPIRATION DATE 5% 10%
---- ---------- ------------ -------- --------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Louis Brunel.................. 16,034.79 18.40% $85.75 November, 2006 $758,067 $1,867,155
Rory Cole(1).................. 9,406.36 10.80% $74.42 November, 2006 $551,273 $1,201,888
Michael E. Katzenstein........ 9,137.61 10.49% $74.42 November, 2006 $535,522 $1,167,549
Bertrand Blanchette........... 4,373.12 5.02% $85.75 November, 2006 $206,745 $ 509,224
Stephen Dube.................. 3,381.88 3.88% $85.75 November, 2006 $159,883 $ 393,800
Lynn Zera..................... 2,565.57 2.94% $85.75 November, 2006 $121,291 $ 298,745
</TABLE>
- ---------------
(1) In connection with the termination of Mr. Cole's employment, all of the
options granted to Mr. Cole were exchanged for the Cole Warrant. See
"Certain Relationships and Related Transactions -- Cole Warrant."
AGGREGATED OPTIONS EXERCISES IN FISCAL 1997 AND FISCAL YEAR END OPTION VALUES
The following table shows the values of options held by the Named Executive
Officers as of the end of fiscal 1997. No options were exercised by the Named
Executive Officers during fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
1997(#) 1997($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Louis Brunel.......................... -- 16,034.79 -- --
Rory Cole(2).......................... -- -- -- --
Michael E. Katzenstein................ -- 9,137.61 -- $103,529
Bertrand Blanchette................... -- 4,373.12 -- --
Stephen Dube.......................... -- 3,381.88 -- --
Lynn Zera............................. -- 2,565.57 -- --
</TABLE>
- ---------------
(1) The value of the options at fiscal year-end 1997 is based on an assumed fair
market value of $85.75 per share of Class A Common Stock.
(2) In connection with the termination of Mr. Cole's employment, all of the
options granted to Mr. Cole were exchanged for the Cole Warrant. See
"Certain Relationships and Related Transactions -- Cole Warrant." At fiscal
year-end 1997, the Cole Warrant was presently exercisable and, assuming a
cashless exercise, had a value of $106,574 based on an assumed fair market
value of $85.75 per share of Class A Common Stock.
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 $350,000, a
Company automobile and a housing allowance. In addition, Mr. Brunel is entitled
to participate in the Company's Incentive Stock Plan (as described below) and
Bonus Plan (as described below). If Mr. Brunel's employment is terminated by the
Company for other than cause, Mr. Brunel will receive a severance payment equal
to two years base salary.
Michael E. Katzenstein is employed as Vice President, Legal Affairs and
General Counsel of the Company pursuant to an employment agreement expiring in
November 2000. Under the employment agreement, Mr. Katzenstein currently
receives an annual base salary of $182,000 and a Company automobile. In
addition, Mr. Katzenstein is entitled to participate in the Company's Incentive
Stock Plan and Bonus Plan.
Bertrand Blanchette is employed as Vice President and Chief Financial
Officer of the Company pursuant to an at will employment agreement. Under the
employment agreement, Mr. Blanchette currently receives an
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<PAGE> 67
annual base salary of $158,000 and a Company automobile. In addition, Mr.
Blanchette is entitled to participate in the Company's Incentive Stock Plan and
Bonus Plan.
Stephen Dube is employed as Vice President, Operations of the Company
pursuant to an at will employment agreement. Under the employment agreement, Mr.
Dube currently receives an annual base salary of $180,000 and a Company
automobile. In addition, Mr. Dube is entitled to participate in the Company's
Incentive Stock Plan and Bonus Plan.
Lynn Zera is employed as Vice President, Human Resources of the Company
pursuant to an at will employment agreement. Under the employment agreement, Ms.
Zera currently receives an annual base salary of $124,000 and a Company
automobile. In addition, Ms. Zera is entitled to participate in the Company's
Incentive Stock Plan and Bonus Plan.
Upon termination by the Company of any of its most senior executives
without cause, the Company has in the past offered severance equal to one year's
base salary.
INCENTIVE STOCK PLAN
In fiscal 1997, the Company adopted an Incentive Stock Plan. In fiscal
1998, the Company adopted certain amendments to such plan which will become
effective, subject to stockholder approval, on the date the Offering is
consummated (as so amended, the "Plan"). Five percent of the Class A Common
Stock outstanding, on a fully diluted basis, on the date the Offering is
consummated, may be issued under the terms of the Plan. The number of shares
issuable under the Plan will be adjusted on each January 1 to 5% of the then
outstanding Class A Common Stock, on a fully diluted basis, if such adjustment
would increase the number of shares. As of April 30, 1998, options to purchase
88,004 shares of Class A Common Stock have been granted under the Plan, none of
which have been exercised, at a weighted average exercise price of $84.37 per
share of Class A Common Stock. The Plan authorizes the Board to issue incentive
stock options ("ISOs") as defined in Section 422(b) of the Internal Revenue Code
of 1986, as amended (the "Code"), stock options that do not conform to the
requirements of that Code section ("Non-ISOs"), stock appreciation rights
("SARs"), restricted stock, stock awards, dividend equivalent rights,
performance based awards and similar stock-based awards. The Plan shall
terminate on the tenth anniversary of the date the Offering is consummated.
Stock Options. The Board has discretionary authority to determine the types
of options to be granted, the persons to whom options shall be granted (provided
that options shall only be granted to directors, senior executives and other
employees designated by the Board), the number of shares to be subject to each
option granted (provided that no single participant in the Plan shall be
entitled to receive more than 100,000 shares of Class A Common Stock pursuant to
the Plan) 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 Stock on the date of the grant and (ii) the options shall
become exercisable in equal installments on each of the second, third, fourth
and fifth anniversaries of the effective date of grant; provided that if a
participant owns 10% of the voting power or equity interests of all classes of
the Company's stock, ISOs granted to such person (i) shall have an exercise
price not less than 110% of the fair market value of the Class A Common Stock on
the date of the grant and (ii) shall expire five years from 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 by personal check, bank
draft, money order, or money transfers, through the delivery of shares of the
Class A Common Stock, pursuant to a broker-assisted "cashless exercise" program
if established by the Company or by such other method as the Board may deem
appropriate.
Stock Appreciation Rights. The Board may award SARs, which may or may not
be granted together with options, under the plan. Generally, SARs permit the
holder thereof to receive an amount (in cash, Class A Common Stock or a
combination thereof) equal to the number of shares of Class A Common Stock with
respect to which SARs are exercised multiplied by the excess of the fair market
value of the Class A Common Stock on the exercise date over the exercise price.
In general, the exercise of any portion of the SARs or any related option will
cause a corresponding reduction in the number of shares of Class A Common Stock
remaining subject to such SARs and related option.
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<PAGE> 68
Restricted Stock. Awards of Class A Common Stock granted under the Plan may
be subject to forfeiture until such restrictions, terms and conditions as the
Board may determine lapse or are fulfilled, as the case may be. The Board will
determine how the price for the Class A Common Stock, if any, may be paid.
Generally, a participant obtaining a restricted stock award will have all the
rights of a stockholder while the Class A Common Stock is subject to
restrictions, including the right to vote the Class A Common Stock and to
receive dividends. Restricted Class A Common Stock will be issued in the name of
the participant and held in escrow until any applicable restrictions lapse or
terms and conditions are fulfilled, as the case may be. Until the restrictions
are eliminated, restricted Class A Common Stock may not be transferred.
Dividend Equivalent Award. The Board may grant an award that represents the
right to receive a dividend or its equivalent with respect to any new or
previously existing award, which will entitle the recipient to receive at the
time of settlement an amount equal to the actual dividends paid on the Class A
Common Stock delivered to the recipient, calculated from the date of award and
accounted for as if reinvested in Class A Common Stock on the dividend payment
dates. This type of award may be paid in the form of Class A Common Stock, cash
or a combination of both.
Performance-Based Awards. The Board may grant awards under the Plan upon
the satisfaction of specified performance goals. The performance period for a
performance based award shall be established prior to the time such award is
granted and may overlap with performance periods relating to other awards
granted under the Plan to the same recipient. Each award shall be contingent
upon future performance and achievement of objectives described either in terms
of Company-wide performance or in terms that are related to the performance of
the recipient or of the division, subsidiary, department or function within the
Company in which the recipient is employed. Such objectives shall be based on
increases in share prices, operating income, net income or cash flow thresholds,
sales results, return on common equity or any combination of the foregoing.
Following the end of each performance period, the holder of each award shall be
entitled to receive payment of an amount, not exceeding the maximum value of the
award, based on the achievement of the performance measures for such performance
period, as determined by the Board. Unless the award specifies otherwise,
including restrictions in order to satisfy the conditions under Section 162(m)
of the Code, the Board may adjust the payment of awards or the performance
objectives if events occur or circumstances arise which would cause a particular
payment or set of performance objectives to be inappropriate, as determined by
the Board.
Other Stock Based Awards. The Board may grant Class A Common Stock or other
Class A Common Stock based awards that are related to or similar to the awards
described above.
STOCK PURCHASE PLAN
In fiscal 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Stock Purchase Plan") which is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code. One percent of the Class A Common
Stock outstanding, on a fully diluted basis, on the date the Offering is
consummated, may be issued under the terms of the Stock Purchase Plan. The Stock
Purchase Plan provides for a series of six month "Option Periods." Subject to
certain limitations, employees may contribute between 1% and 10% of their
compensation to the Stock Purchase Plan during an Option Period and purchase
Class A Common Stock at the end thereof. At the start of each Option Period,
employees electing to participate in the Stock Purchase Plan are deemed to have
been granted an option to purchase a number of whole shares of Class A Common
Stock at an exercise price (the "Exercise Price") equal to eighty-five percent
(85%) of the lower of the fair market value of one share of the Class A Common
Stock on (i) the first day of the Option Period or (ii) the last day of the
Option Period (the "Exercise Date"). The number of shares underlying such option
is determined by dividing (i) the amount contributed by such employee to the
Stock Purchase Plan during the Option Period by (ii) the Exercise Price. On each
Exercise Date, each employee will automatically be deemed to have exercised his
or her option to purchase at the Exercise Price the largest number of whole
shares of Class A Common Stock which can be purchased with the amount
contributed by such employee to the Stock Purchase Plan less any amounts
previously applied to option exercises under the terms of the Stock Purchase
Plan; provided, however, no employee shall be permitted to purchase more than
4,000 shares of
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<PAGE> 69
Class A Common Stock during any Option Period and subject to reduction in order
to avoid issuance of more shares than are provided for under the terms of the
Stock Purchase Plan.
ANNUAL BONUS PLAN
The Company has adopted an Annual Bonus Plan (the "Bonus Plan") pursuant to
which the Board is authorized to grant cash bonuses to certain employees 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.
401(K) PLAN
The Company has implemented an employee savings and retirement plan (the
"401(k) Plan") covering certain of the Company's employees who have at least
three months of service with the Company and have attained the age of 21.
Pursuant to the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the lesser of 15% of such compensation or the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The Company has made, and may in the future
make, contributions to the 401(k) Plan on behalf of eligible employees.
Employees become 100% vested in these Company contributions after one year of
service. The 401(k) Plan is intended to qualify under Section 401 of the Code so
that contributions by employees or by the Company to the 401(k) Plan, and income
earned on the 401(k) Plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by the Company, if
any, will be deductible by the Company when made. The trustee under the 401(k)
Plan, at the direction of each participant, invests the 401(k) Plan employee
salary deferrals in selected investment options.
COMMITTEES OF THE BOARD OF DIRECTORS
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 Company's independent public accountants and the 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 Claude Chagnon, William O. Hunt, Lynn McDonald and Alain Michel. The chairman
of the Audit Committee is Mr. Hunt. The function of the Compensation Committee
is 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 Claude Chagnon, William O.
Hunt, Lynn McDonald and Alain Michel. The Chairman of the Compensation Committee
is Mr. Chagnon.
COMPENSATION OF DIRECTORS
After the consummation of the Offering, Directors of the Company who are
neither employees of the Company nor designees of the Company's significant
stockholders will receive an annual fee of $15,000, a fee of $1,000 per meeting
of the Board and an annual fee of $1,500 if they serve as the chairperson of a
committee of the Board. Each such Director will also receive options to purchase
shares of Class A Common Stock having an aggregate value of $150,000 upon
consummation of the Offering (or, if such Director is not serving in such
capacity upon consummation of the Offering, on the date of his or her election
to the Board) with an exercise price equal to the initial public offering price
(or the fair market value on the date of grant). The options will become
exercisable in equal installments on each of the second, third, fourth and fifth
anniversaries of the consummation of the Offering. Directors who are either
employees of the Company or designees of the Company's significant stockholders
will not be compensated for their services. However, all Directors will be
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.
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<PAGE> 70
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, Mr. Brunel served as a member of the Compensation
Committee. Effective May 19, 1998, Mr. Brunel resigned from the Compensation
Committee.
LIMITATION OF LIABILITY; INDEMNIFICATION; INSURANCE
The Company's Certificate of Incorporation provides that the Company shall,
to the fullest extent permitted by the DGCL, indemnify all persons which 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 Company 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 Company's
Certificate of Incorporation also contains a provision eliminating the personal
liability of the Company's directors for monetary damages for breach of any
fiduciary duty. By virtue of this provision, under the DGCL, a director of the
Company will not 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 Company 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 the DGCL and (iv) any transaction from which a director derives
an improper personal benefit. However, this provision of the Company'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 the DGCL 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 Company'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 Company and its stockholders.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling OpTel pursuant to
the foregoing provisions, OpTel has been informed that in the opinion of the
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 the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company 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 Company 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.
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 deductible) and expires
in October 1998. The Company expects that this insurance will be renewed in the
ordinary course.
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<PAGE> 71
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by (i) each Director of the Company, (ii) each
Named Executive Officer, (iii) each person known by the Company to beneficially
own 5% or more of the outstanding shares of any class of Common Stock and (iv)
all directors and executive officers of the Company as a group, in each case as
adjusted to reflect the sale of the Class A Common Stock in the Offering and the
conversion of all of the outstanding shares of Non-Voting Common and Series B
Preferred into Class A Common Stock and all of the outstanding shares of Series
A Preferred into Multi-Vote Common in connection with the Offering.
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT AND PERCENT OF TOTAL
TITLE OF NATURE OF PERCENT OF TOTAL SHARES VOTING
BENEFICIAL OWNER CLASS OWNERSHIP(1) CLASS(2)(3)(4) OUTSTANDING(2)(3)(4) POWER(2)(3)(4)
---------------- -------------------- ------------ -------------- -------------------- --------------
<S> <C> <C> <C> <C> <C>
Le Groupe Videotron Ltee.... Multi-Vote Common (5)
Caisse de depot et placement
du Quebec................. Multi-Vote Common (6)
Interactive Cable Systems,
Inc....................... Class A Common Stock (7)(8)
Nomura Holding America
Inc....................... Class A Common Stock (7)(8)
MCI Telecommunications
Corporation............... Class A Common Stock (7)(8)
James A. Kofalt............. Class A Common Stock 24,992.00(9)
Rory Cole................... Class A Common Stock 9,406.36(10)
Louis Brunel................ Class A Common Stock 6,559.83(11)
Michael E. Katzenstein...... Class A Common Stock 2,284.40(12)
Bertrand Blanchette......... Class A Common Stock --(13)
Stephen Dube................ Class A Common Stock 1,195.34(14)
Lynn Zera................... Class A Common Stock 1,282.78(15)
All directors and officers
as a group (13 persons)... Class A Common Stock 11,322.35(16)
</TABLE>
- ---------------
(1) Except as otherwise indicated in the other footnotes to this table, each
person named in the table has sole voting and dispositive power with
respect to the shares of Common Stock beneficially owned by such person.
(2) "*" indicates less than one percent.
(3) In accordance with the Commission's rules, each beneficial owner's holdings
have been calculated assuming the full exercise of warrants and options and
the conversion of all shares of convertible preferred stock held by such
holder which are currently exercisable or convertible or which will become
exercisable or convertible within 60 days after the date of this Prospectus
and no exercise of warrants and options or conversion of preferred stock
held by any other person.
(4) Assumes that the over-allotment option granted to the Underwriters has not
been exercised.
(5) Such shares are owned by VPC, an indirect wholly-owned subsidiary of GVL.
Andre Chagnon, the founder of GVL, indirectly controls approximately 72% of
GVL's outstanding voting rights. All such shares are fully convertible into
Class A Common Stock on a one-for-one basis upon the occurrence of a
Conversion Event. See "-- Stockholders' Agreement" and "-- GVL
Shareholders' Agreement" for the terms of certain agreements governing the
voting and disposition of the shares of Common Stock held by VPC and GVL.
GVL's address is 300 Avenue Viger East, Montreal, Quebec, H2X 3W4.
(6) Such shares are owned by CDPQ, a wholly-owned subsidiary of Caisse. All
such shares are fully convertible into Class A Common Stock on a
one-for-one basis upon the occurrence of a Conversion Event. See "--
Stockholders' Agreement" and "-- GVL Shareholders' Agreement" for the terms
of certain agreements covering the voting and disposition of the shares of
Common Stock held by Caisse and CDPQ. Caisse's address is 1981, Avenue
McGill College, Montreal, Quebec, H3A 3C7.
(7) See "-- ICS Stockholders' Agreement and ICS Registration Rights Agreement"
for the terms of certain agreements governing the disposition of such
shares of Common Stock. ICS's address is 1901 N. Glenville Drive, Suite
800, Richardson, Texas 75081. Nomura Holding America Inc.'s ("Nomura")
address is 2 World Financial Center, Building B, New York, New York 10281.
MCI's address is 1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
(8) Includes shares currently held in escrow pending the consummation of the
balance of the acquisition of the ICS Operations.
(9) Represents a presently exercisable warrant to purchase 24,992 shares of
Class A Common Stock. Mr. Kofalt's address is 50209 Manly, Chapel Hill,
North Carolina 27514.
(10) Represents a presently exercisable warrant to purchase 9,406.36 shares of
Class A Common Stock. Mr. Cole's address is 4339 Beverly Drive, Dallas,
Texas 75205.
(11) Includes at least 6,559.83 shares of Class A Common Stock underlying
presently exercisable options. Excludes 19,679.51 shares of Class A Common
Stock underlying options which are not exercisable until at least 60 days
after the date of this Prospectus.
(12) Includes 2,284.40 shares of Class A Common Stock underlying presently
exercisable options. Excludes 6,853.21 shares of Class A Common Stock
underlying options which are not exercisable until at least 60 days after
the date of this Prospectus.
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<PAGE> 72
(13) Excludes 4,373.12 shares of Class A Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.
(14) Includes 1,195.34 shares of Class A Common Stock underlying presently
exercisable options. Excludes 5,102.04 shares of Class A Common Stock
underlying options which are not exercisable until at least 60 days after
the date of this Prospectus.
(15) Includes 1,282.78 shares of Class A Common Stock underlying presently
exercisable options. Excludes 1,282.79 shares of Class A Common Stock
underlying options which are not exercisable until at least 60 days after
the date of this Prospectus.
(16) With respect to executive officers who are not Named Executive Officers,
excludes 9,912.52 shares of Class A Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.
As of May 31, 1998, all of the outstanding shares of the Multi-Vote Common
were held by VPC and CDPQ and all of the outstanding shares of Common Stock were
held by ICS. See "Risk Factors -- Control by GVL."
ICS STOCKHOLDERS' AGREEMENT AND ICS REGISTRATION RIGHTS AGREEMENT
In connection with the Company's acquisition of the ICS Operations, ICS,
Nomura, MCI (ICS, Nomura, and MCI, together, the "ICS Group"), VPC, GVL and the
Company entered into a Stockholders' Agreement (the "ICS Stockholders'
Agreement") dated as of April 9, 1998 and the Company, ICS, Nomura and MCI
entered into a Registration Rights Agreement (the "ICS Registration Rights
Agreement") dated as of April 9, 1998.
Under the ICS Stockholders' Agreement, (i) the transfer of the shares of
Class A Common Stock and Series B Preferred owned by the ICS Group
(collectively, the "ICS Shares") is restricted, subject to certain exceptions,
and (ii) the ICS Shares are subject to drag-along rights if VPC (or GVL through
the sale of its interests in VPC) elects to sell equity interests representing
50% or more of the voting power of the outstanding capital stock of the Company
or 50% or more of the equity interests held by VPC.
Pursuant to the ICS Registration Rights Agreement, following the
consummation of the Offering, the ICS Group has piggyback registration rights,
on three occasions, in registration statements filed by the Company for the sale
of its equity securities, subject to certain conditions, including customary
allocation and holdback provisions.
STOCKHOLDERS' AGREEMENT
In August 1997, CDPQ purchased the minority interest in the Company from
Vanguard Communications L.P. ("Vanguard"). Vanguard also transferred to CDPQ an
option (the "Vanguard Option") to purchase 48,937 shares of the Multi-Vote
Common at an exercise price of $53.55 per share, subject to adjustment, which
CDPQ promptly exercised.
In connection with the sale by Vanguard of its minority stock position in
the Company to CDPQ, the Company, VPC and CDPQ entered into the Stockholders'
Agreement and the Company and CDPQ entered into a related Registration Rights
Agreement (the "Registration Rights Agreement"), under which CDPQ has certain
rights and obligations relating to the Company and VPC. CDPQ is also a party to
the GVL Shareholders' Agreement described below. The following is a summary of
certain provisions of the Stockholders' Agreement and the Registration Rights
Agreement.
Designation of Directors. Under the Stockholders' Agreement, for as long as
CDPQ holds at least 5% of the Company's voting stock, CDPQ may designate a
number of Directors of the Company and each of its subsidiaries, and each
committee of the Board and each of its subsidiaries, which is proportionate (in
relation to the total number of Directors or committee members) to CDPQ's
percentage ownership of the Company's voting stock, but in no event less than
one Director and one committee member. This agreement supersedes the rights of
Caisse to designate a Director of the Company pursuant to the GVL Shareholders'
Agreement; however, such rights are subject to reinstatement in the event CDPQ
ceases to be a stockholder of the Company. Pursuant to the terms of the
Stockholders' Agreement, Lynn McDonald has been designated as a Director of the
Company.
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<PAGE> 73
Rights in Connection with Other Financings; Tag-Along Rights. Pursuant to
the Stockholders' Agreement, VPC is obligated to cause the Company to afford
CDPQ rights equivalent to those afforded other purchasers of the Company's
capital stock to the extent they are more advantageous than the rights held by
CDPQ. Subject to certain exceptions (including a public offering of the
Company's equity securities) and waiver by CDPQ at VPC's request in connection
with certain events, the Company is obligated to afford CDPQ preemptive rights
to purchase equity securities which the Company proposes to sell in proportion
to CDPQ's ownership of the total outstanding equity securities of the Company
prior to the sale. In addition, pursuant to the Stockholders' Agreement, CDPQ
has certain tag-along rights in connection with sales by VPC of outstanding
shares of the Company's voting stock.
Registration Rights. Pursuant to the Registration Rights Agreement, nine
months after the consummation of the Offering and, subject to certain
conditions, CDPQ has the right, on two occasions, to require the Company to
register under the Securities Act shares of common stock issued to CDPQ upon the
conversion of the Multi-Vote Common. In addition, CDPQ has piggyback
registration rights, on three occasions, to include common stock held by it in
registration statements filed by the Company for the sale of its equity
securities, subject to certain conditions, including customary allocation and
holdback provisions.
GVL SHAREHOLDERS' AGREEMENT
Caisse, CDPQ, Sojecci Ltee and Sojecci (1995) Ltee, the principal
shareholders of GVL, and Andre Chagnon (the founder of GVL) are parties to an
amended and restated shareholders agreement, dated as of May 10, 1995 (the "GVL
Shareholders' Agreement"), which provides, among other things, that for so long
as GVL controls the Company, Caisse will be allowed to select one of GVL's
nominees to the Board and to have one representative on the Audit Committee of
the Company. While this right has been superseded by the Stockholders'
Agreement, it is subject to reinstatement in the event CDPQ ceases to be a
stockholder of the Company or the Stockholders' Agreement ceases to be
enforceable. See "-- Stockholders' Agreement."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONVERTIBLE NOTES AND SERIES A PREFERRED
The Company has financed a large portion of its capital needs by borrowing
from its majority stockholder, VPC. The Company borrowed approximately $17.8
million, $73.4 million and $23.7 million from VPC in the form of the GVL Notes
during the eight month period ended August 31, 1995, fiscal 1996 and fiscal
1997, respectively. The GVL Notes bore interest at a rate of 15% per annum,
payable concurrently with the payment of principal. Interest was added to
principal on an annual basis. Effective March 1, 1998, VPC exchanged all of the
GVL Notes for 6,962.21365 shares of the Series A Preferred. VPC has advised the
Company that it intends to convert all of its shares of Series A Preferred into
Multi-Vote Common upon the consummation of the Offering.
COLE WARRANT
As part of a severance package, Rory O. Cole was granted a warrant (the
"Cole Warrant") to purchase up to 9,406.36 shares of Class A Common Stock at an
exercise price of $74.42 per share, subject to adjustment. The Cole Warrant was
granted by the Company in exchange for the cancellation of options granted to
Mr. Cole under the Plan to purchase an equivalent amount of shares. The Cole
Warrant is presently exercisable and expires on July 11, 2002.
VANGUARD-RELATED TRANSACTIONS
In August 1996, in connection with a negotiated settlement of certain
disputes between the Company and Vanguard, which then held a minority interest
in the Company, the Company granted Vanguard an option to purchase 48,937 shares
of Multi-Vote Common at an exercise price of $53.55 per share, subject to
adjustment. On August 15, 1997, Vanguard sold the option along with its minority
interest in the Company to CDPQ.
In September 1996, the Company entered into a consulting agreement with
James A. Kofalt, a former Chairman of the Board and active participant in the
management of the Company and a limited partner of Vanguard, pursuant to which
the Company agreed to compensate Mr. Kofalt with a one time payment of $70,000.
In connection therewith, the Company also granted Mr. Kofalt a warrant (the
"Kofalt Warrant") to purchase up to 24,992 shares of Class A Common Stock 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 addition, pursuant to
the terms of the Kofalt Warrant, Mr. Kofalt has piggyback registration rights in
registration statements filed by the Company for the sale of its equity
securities, subject to certain conditions, including customary allocation and
holdback provisions. See "Description of Capital Stock -- Registration Rights of
Certain Security Holders."
MANAGEMENT FEES
In connection with a negotiated settlement of certain disputes between the
Company and Vanguard, in August 1996, VPC and Vanguard agreed to provide, at the
specific request of the Board, such reasonable consultant, advisory and
management services as the Company might reasonably require. These arrangements
with Vanguard and VPC were terminated as of August 15, 1997, upon the sale of
Vanguard's minority interest in the Company to CDPQ. The Company is unable to
determine if the aggregate fees paid to VPC and Vanguard in connection with such
services were greater or less than the fees the Company would have been required
to pay if it had obtained such services from an unaffiliated third party. The
Company accrued a liability of $29,167 to each of VPC and Vanguard for general
consulting services during fiscal 1996. Vanguard was paid such amount during
fiscal 1997. In fiscal 1997, the Company accrued and paid Vanguard $350,000
(plus travel expenses) for such services and accrued $350,000 to VPC for similar
services. None of such amounts have been paid to VPC.
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LICENSE HOLDING COMPANY
The Company has assigned substantially all of its frequency licenses to THI
in exchange for a $1.0 million secured promissory note with interest at 8% 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.
Section 310(b) of 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
from holding a common carrier radio station license. In addition, under Section
310(b)(4) of the Communications Act, the FCC may, if it finds that it would
serve the public interest, deny or revoke a common carrier license if the
applicant or licensee is controlled directly or indirectly by any other
corporation of which more than one-fourth of the capital stock is owned or voted
by non-U.S. citizens. GVL, the Company's principal stockholder, is a Canadian
corporation. Consequently, THI was created to permit the Company to use the
Assigned Licenses, modified as necessary, to provide "common carrier"
telecommunications services in the event that the Company should desire to do so
in the future. Russell S. Berman, Henry Goldberg and Thomas Watson, each U.S.
citizens, each own one-third of the outstanding equity interests in THI. 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, Wiener & Wright which represents both the
Company and THI with respect to certain federal regulatory matters. Mr. Watson
is the Vice President of Engineering and Information Services of OpTel.
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 nonexclusive 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
obtain future licenses necessary to provide the Company with the transmission
capacity it requires. The THI Agreement provides for payments from the Company
to THI which are expected to approximate the monthly interest due on the License
Note plus an allowance for the anticipated expenses of THI. The Company may also
advance funds to THI to the extent necessary to enable THI to fulfill its
obligations under the THI Agreement. All amounts of such advances will be added
to the principal 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 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 of, plus the accrued interest on, the License Note on the
closing date, which may be paid by tendering to THI the License Note plus an
amount equal to the lesser of (i) the book value of the assets being purchased
or (ii) the initial capitalization of THI plus a 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 a 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.
In 1997, the United States agreed, in the context of the WTO Basic Telecom
Agreement, to allow foreign suppliers from WTO member nations, including Canada,
to provide a broad range of basic telecommunications services in the United
States. Those commitments became effective in February of 1998. In light of
those commitments, the FCC has determined that it will adopt an "open entry
standard" for suppliers of telecommunications services from WTO member nations.
In conjunction with its new open entry policies, the FCC has adopted a
presumption favoring grant of applications to exceed the 25 percent limit on
non-U.S. ownership contained in Section 310(b)(4) of the Communications Act when
the non-U.S. investment is from a WTO member nation. Accordingly, the Company is
in the process of reevaluating whether it should hold
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FCC authorizations directly and, specifically, whether it should exercise its
option to purchase the assets or stock of THI.
ACQUISITION OF CERTAIN ASSETS
Effective as of July 31, 1996, the Company purchased certain assets from
certain affiliates of VPC for an aggregate purchase price of approximately $3.9
million. The assets represented approximately 23,000 units passed. The
operations of the acquired assets are located in the San Francisco, California
and Tampa, Florida areas. The amounts paid represented the sellers' historical
costs. At the time of the purchase, the Board 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.
SERVICE AGREEMENTS
Pursuant to the terms of the Stockholders' Agreement, VPC and certain of
its affiliates provide certain strategic planning and treasury support services
to the Company and perform internal audits of the Company's operations.
Additional services may be provided as and when requested by the Company. The
Company is charged for such services based on an estimate of the actual cost of
the personnel engaged and materials used to provide such services (without an
allowance for profit). The Company estimates that its costs for such services in
fiscal 1998 will not exceed $310,000.
In addition, OpTel provides certain customer support and billing services
to certain affiliates of GVL which operate wireless cable systems using MMDS
technology. OpTel charges such affiliates based on the actual cost of the
personnel engaged and materials used to provide such services.
SHARED LITIGATION EXPENSES
GVL, the Company and certain other affiliates of GVL have been named as
defendants in a lawsuit by a former employee of the Company. GVL and the Company
have agreed to joint representation by a single law firm and to share the
associated expenses. The Company does not believe the litigation (or the
associated expenses) to be material.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Following the Offering, the authorized capital stock of the Company will
consist of shares of Class A Common Stock, shares of
Multi-Vote Common, 300,000 shares of Non-Voting Common and shares of
preferred stock. All of the outstanding shares of Non-Voting Common will be
converted into Class A Common Stock upon consummation of the Offering, all of
the outstanding shares of Series B Preferred will be converted into Class A
Common Stock promptly following the Offering and all shares of Series A
Preferred will be converted into Multi-Vote Common upon consummation of the
Offering. After giving effect thereto and assuming the exercise of all
outstanding options and warrants to acquire Class A Common Stock, there will be
shares of Class A Common Stock and shares of Multi-Vote
Common outstanding on a fully diluted basis. All of the outstanding shares of
all classes of Common Stock and all series of preferred stock are fully paid and
nonassessable.
COMMON STOCK
Each share of Multi-Vote Common is convertible, at the option of the holder
and automatically and irrevocably upon the occurrence of a Conversion Event,
into one share of Class A Common Stock. Upon consummation of the Offering, a
"Conversion Event" will be defined as the occurrence of (i) the direct or
indirect transfer by a holder of Multi-Vote Common of beneficial ownership of
the Multi-Vote Common to a person or entity other than a Permitted Holder or
(ii) any event or circumstance as a result of which a holder of Multi-Vote
Common ceases to be a Permitted Holder. A "Permitted Holder" will be defined as
any of GVL or Caisse or any of their respective controlled affiliates or (ii)
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 Common Stock held
by others, or (iii) any controlled affiliate of any member of the Chagnon Family
or (iv) 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 (v) any charitable foundation a majority of whose members,
trustees or directors, as the case may be, are persons referred to in (ii)
above. For purposes of this definition, "lineal descendant" shall include at any
time any person that is adopted, is treated as being adopted or is in the
process of being adopted by any member of the Chagnon Family at such time. The
rights of the holders of the Class A Common Stock and Multi-Vote Common are
identical in all respects except that holders of the Class A Common Stock are
entitled to one vote for each issued and outstanding share and the holders of
Multi-Vote Common are entitled to 10 votes for each issued and outstanding
share. Holders of Common Stock do not have cumulative rights, so that holders of
more than 50% of the voting rights attached to the Common Stock are able to
elect all of the Company's Directors. The holders of all of the outstanding
shares of Multi-Vote Common have entered into a voting agreement pursuant to
which they have agreed to vote their shares for certain nominees. See "Principal
Stockholders -- Stockholders' Agreement" and "Risk Factors -- Control by GVL."
Holders of the Class A Common Stock and Multi-Vote Common vote together as a
single class on all matters submitted to a vote of the stockholders, other than
certain matters which may adversely affect the rights of the individual class.
The holders of Common Stock will be entitled to receive dividends and other
distributions as may be declared thereon by the Board out of assets or funds of
the Company legally available therefor, subject to the rights of the holders of
any series of preferred stock and any other provision of the certificate of
incorporation. The certificate of incorporation of the Company provides that if
at any time a dividend or other distribution in cash or other property is paid
on Class A Common Stock or Multi-Vote Common, a like dividend or other
distribution in cash or other property will also be paid on Class A Common Stock
or Multi-Vote Common, as the case may be, in an equal amount per share. In this
connection, the certificate of incorporation specifically provides that if
shares of Multi-Vote Common are paid on Multi-Vote Common and shares of Class A
Common Stock are paid on Class A Common Stock, in an equal amount per share of
Multi-Vote Common and Class A Common Stock, such payment will be deemed to be a
like dividend or other distribution. In the case of any split, subdivision,
combination or reclassification of Multi-Vote Common or Class A Common
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Stock, the shares of Class A Common Stock or Multi-Vote Common, as the case may
be, will also be split, subdivided, combined or reclassified so that the number
of shares of Multi-Vote Common and Class A Common Stock outstanding immediately
following such split, subdivision, combination or reclassification will bear the
same relationship to each other as that which existed immediately prior thereto,
unless a different basis has been consented to by the holders of a majority of
the outstanding shares of each class adversely affected by such action.
In the event of any corporate merger, consolidation, purchase or
acquisition of property or stock, or other reorganization in which any
consideration is to be received by the holders of the Class A Common Stock or
the holders of Multi-Vote Common, the holders of the Class A Common Stock and
the holders of Multi-Vote Common will receive the same consideration on a per
share basis; except that, if such consideration shall consist in any part of
voting securities (or of options or warrants to purchase, or securities
convertible into or exchangeable for, voting securities), the holders of
Multi-Vote Common may receive, on a per share basis, voting securities with ten
times the number of votes per share as those voting securities to be received by
the holders of the Class A Common Stock (or options or warrants to purchase, or
securities convertible into or exchangeable for, voting securities with ten
times the number of votes per share as those voting securities issuable upon the
exercise of the options or warrants, or into which the convertible or
exchangeable securities may be converted or exchanged, to be received by the
holders of the Class A Common Stock).
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Common Stock will be entitled to receive the assets and funds
of the Company available for distribution after payments to creditors and to the
holders of any preferred stock of the Company that may at the time be
outstanding in proportion to the number of shares held by them, respectively,
without regard to class. There are no rights of redemption or sinking fund
provisions with respect to outstanding shares of any class of capital stock. The
Company, VPC and CDPQ have contractually agreed to certain preemptive rights
with respect to any future issuances of capital stock. Subject to certain
exceptions (including a public offering of the Company's equity securities), the
Company is obligated to afford CDPQ preemptive rights to purchase equity
securities which the Company proposes to sell in proportion to CDPQ's ownership
of the total outstanding equity securities of the Company prior to the sale. See
"Principal Stockholders -- Stockholders' Agreement."
This description is intended as a summary and is qualified in its entirety
by reference to the DGCL and the Company's Certificate of Incorporation and
Bylaws. Copies of the Company's Certificate of Incorporation and Bylaws have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
PREFERRED STOCK
The preferred stock may be issued at any time or from time to time in one
or more series with such designations, powers, preferences, rights,
qualifications, limitations and restrictions (including dividend, conversion and
voting rights) as may be fixed by the Board, without any further vote or action
by the stockholders. Although the Company has no present plans to issue any
additional shares of preferred stock, the ownership and control of the Company
by the holders of the Class A Common Stock would be diluted if the Company were
to issue preferred stock that had voting rights or that was convertible into
Class A Common Stock or Multi-Vote Common. In addition, the holders of preferred
stock issued by the Company would be entitled by law to vote on certain
transactions such as a merger or consolidation, and thus the issuance of
preferred stock could dilute the voting rights of the holders of the Class A
Common Stock on such issues. The issuance of preferred stock could also have the
effect of delaying, deferring or preventing a change of control of the Company.
The Company currently has outstanding two series of preferred stock. VPC
has informed the Company that it intends to exercise its right to convert all of
the outstanding shares of Series A Preferred into shares of Multi-Vote
Common upon consummation of the Offering. The Company will cause all of the
shares of Series B Preferred to be converted into shares of Class A
Common Stock promptly following the Offering. Thereafter, there will be no
outstanding shares of any series of preferred stock and the holders of the
Common Stock and Multi-Vote Common will have all the equity voting rights in the
Company.
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The Series A Preferred is convertible into Multi-Vote Common, at the option
of the holder, during the 180-day period following the receipt by the Company of
the proceeds from the Offering (the "Series A Conversion Period"). Shares of
Series A Preferred may be converted by the holder into Multi-Vote Common at the
"conversion price" which is defined as the price per share which is the highest
of (i) $82.18, (ii) the price per share at which the Common Stock is first sold
to the public in the Offering, and (iii) the quotient of $225 million divided by
the number of shares of Common Stock outstanding, on a fully diluted basis,
subject to certain adjustments and exceptions. VPC has advised the Company that
it intends to convert all of the Series A Preferred upon consummation of the
Offering. The number of shares of Multi-Vote Common issuable upon conversion of
each share of Series A Preferred will be determined by dividing the sum of (i)
the liquidation preference ($20,000 per share) plus all accrued and unpaid
dividends on such share by (ii) the conversion price. Based on an assumed
initial public offering price of $ per share, a total of approximately
shares of Multi-Vote Common will be issued upon conversion of all the
outstanding shares of Series A Preferred.
The Company will cause the conversion of all the outstanding shares of
Series B Preferred into Class A Common Stock promptly after the consummation of
the Offering by delivering a notice to each holder of Series B Preferred. Such
notice will automatically become effective upon receipt thereof. The number of
shares of Class A Common Stock issuable upon conversion of each share of Series
B Preferred will be determined by dividing the sum of (i) the liquidation
preference ($60,000 per share) plus all accrued and unpaid dividends on such
share by (ii) the initial public offering price. Based on an assumed initial
public offering price of $ per share, a total of shares of
the Class A Common Stock will be issued upon conversion of all of the
outstanding shares of Series B Preferred.
As of May 31, 1998, the Company had outstanding 991.1039 shares of the
Series B Preferred (having an aggregate liquidation preference $59,466,228).
Holders of the Series B Preferred are entitled to receive cumulative dividends
accruing at the annual rate of 8% of the aggregate liquidation preference
thereof. Dividends are payable quarterly, in arrears, by the issuance of
additional shares of Series B Preferred having an aggregate liquidation
preference equal to the amount of such dividends. Unless full cumulative
dividends on all outstanding shares of Series B Preferred have been paid, the
Company may not make dividend payments or distributions on any securities junior
to the Series B Preferred ("Series B Junior Securities") (other than dividend
payments or other distributions paid solely in shares of Series B Junior
Securities) or redeem or make sinking fund or similar contributions for the
redemption of any Series B Junior Securities.
This description is intended as a summary and is qualified in its entirety
by reference to the DGCL and the Series B Preferred Certificate of Designation.
OUTSTANDING OPTIONS AND WARRANTS
As of May 31, 1998, there were outstanding options to purchase 85,557.98
shares of the Class A Common Stock pursuant to the Plan with a weighted average
exercise price of $84.37 per share. See "Management -- Incentive Stock Plan." As
of the same date, there are outstanding warrants to purchase 35,127.22 shares of
the Class A Common Stock with a weighted average exercise price of $59.81 per
share.
REGISTRATION RIGHTS OF CERTAIN SECURITY HOLDERS
Pursuant to the Registration Rights Agreement, nine months after the
consummation of the Offering, CDPQ has the right, on two occasions, subject to
certain conditions, to require the Company to register under the Securities Act
shares of common stock issued to CDPQ upon the conversion of the Multi-Vote
Common. Pursuant to the Common Stock Registration Rights Agreement among the
Company, VPC, GVL, Salomon Brothers Inc, Merrill Lynch, Pierce Fenner & Smith
Incorporated and U.S. Trust Company of Texas, N.A., dated as of February 14,
1997, holders of the Non-Voting Common have the right after the 90th day
following the Offering, and subject to certain conditions, to require the
Company to effect one demand registration of the Class A Common Stock to be
issued upon conversion of the Non-Voting Common (the "Non-Voting Registration
Shares"). Such demand registration rights only may be exercised upon the written
request of holders of at least one-third of the Non-Voting Registration Shares.
In lieu of filing and causing to become
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effective a demand registration, the Company may satisfy its obligation with
respect to such demand registration by making and consummating an offer to
purchase all of the Non-Voting Registration Shares at a price at least equal to
the fair market value.
The Company is party to several agreements pursuant to which certain
holders of the Company's securities have the right, under certain circumstances,
to require the Company to include their shares of Common Stock (or shares of
Common Stock issuable upon exercise or conversion of certain outstanding
warrants or convertible securities) in registration statements filed by the
Company under the Securities Act. The rights cover an aggregate of
shares of Common Stock. In addition, certain stockholders may exercise the right
to include certain shares of Common Stock in the Registration Statement of which
this Prospectus forms a part.
TRANSFER AGENT
The Transfer Agent and Registrar for the Class A Common Stock is
.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have outstanding
shares of Class A Common Stock and shares of Multi-Vote Common. Of these
shares, the Shares (and any additional shares of Class A Common Stock sold
upon exercise of the Underwriters' over-allotment option) will be freely
tradeable without restriction or further registration under the Securities Act.
The remaining shares of Class A Common Stock held by the existing stockholders
(including any shares of Class A Common Stock which may be issued upon
conversion of the Multi-Vote Common) are "restricted securities" under the
Securities Act. The restricted shares were issued and sold by the Company in
private transactions in reliance upon exemptions from registration under the
Securities Act and may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act ("Rule 144"). In general, under Rule 144 as currently in effect, beginning
90 days after the conclusion of the Offering, a person (or persons whose shares
are aggregated) who has beneficially owned restricted shares for at least one
year, including persons who may be deemed "affiliates" of the Company, will be
entitled to sell in any three-month period a number of shares of Class A Common
Stock that does not exceed the greater of: (i) 1% of the then outstanding shares
of Class A Common Stock (approximately shares after giving effect to the
Offering) or (ii) the average weekly trading volume of the Class A Common Stock
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Commission. Sales pursuant to Rule 144 are also
subject to certain other requirements relating to manner of sale, notice and
availability of current public information about the Company. A person who has
beneficially owned restricted securities for at least two years and who is not,
and has not been at anytime during the three month period immediately preceding
the sale, an affiliate of the Company is entitled to sell restricted shares
pursuant to Rule 144(k) without regard to the limitations described above.
Because there has been no public market for shares of the Class A Common
Stock of the Company, the Company is unable to predict the effect that sales
made under Rule 144, pursuant to future registration statements or otherwise,
may have on the market price for the shares of Class A Common Stock.
Nevertheless, sales of a substantial amount of Class A Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect market prices.
FUTURE SALES OF STOCK TO EMPLOYEES
The Company plans to seek to attract and retain employees in part by
offering stock options and other purchase rights for a significant number of
shares of Class A Common Stock. These plans may have the effect of diluting the
percentage of ownership in the Company of the then existing stockholders. See
"Management -- Incentive Stock Plan" and "-- Stock Purchase Plan."
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CERTAIN PROVISIONS OF OPTEL'S CERTIFICATE OF INCORPORATION AND BYLAWS AND OF
DELAWARE LAW
General. The Certificate of Incorporation and the Bylaws of OpTel and the
DGCL contain certain provisions that could make more difficult the acquisition
of OpTel by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of OpTel first to negotiate with OpTel. Although such provisions
may have the effect of delaying, deferring or preventing a change in control of
OpTel, the Company believes that the benefits of increased protection of OpTel's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms. See
"Risk Factors -- Anti-Takeover Provisions." The description set forth below is
intended as a summary only and is qualified in its entirety by reference to the
Certificate of Incorporation and Bylaws of OpTel.
Multi-Vote Common and Blank Check Preferred Stock. Upon consummation of the
Offering, the Company will have outstanding shares of Multi-Vote
Common. In addition, the Company's Certificate of Incorporation authorizes the
issuance of up to 1,000,000 shares of preferred stock from time to time in one
or more designated series. The approximately 6,962 outstanding shares of Series
A Preferred and the approximately 991 outstanding shares of Series B Preferred
will revert to authorized but unissued status upon their conversion into
Multi-Vote Common and Class A Common Stock, respectively. See "-- Preferred
Stock." The Board, without approval of the stockholders, is authorized to
establish voting, dividend, redemption, conversion, liquidation and other
provisions of a particular series of preferred stock. The outstanding Multi-Vote
Common does, and the issuance of additional shares of Multi-Vote Common or
preferred stock could, among other things, adversely affect the voting power or
other rights of the holders of Class A Common Stock and, under certain
circumstances, make it more difficult for a third party to acquire, or
discourage a third party from acquiring, control of the Company. See "Risk
Factors -- Control by GVL" and "-- Anti-Takeover Provisions." The Board has no
present intention to authorize the issuance of any additional series of
preferred stock.
Stockholder Action and Special Meetings. Prior to the consummation of the
Offering, OpTel's certificate of incorporation and bylaws will be amended to
provide that (i) any action required or permitted to be taken by OpTel's
stockholders must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing and (ii) the
authorized number of directors may be changed only by resolution of the Board.
The Company's Bylaws will also provide that, subject to any rights of the
holders of any series of preferred stock, special meetings of stockholders may
be called only by the Chairman of the Board or the President of OpTel, by a
majority of the Board or by stockholders owning shares representing at least a
majority of the capital stock of OpTel issued and outstanding and entitled to
vote.
Anti-Takeover Statute. Section 203 of the DGCL ("Section 203") prohibits
certain persons ("Interested Stockholders") from engaging in a "business
combination" with a Delaware corporation for three years following the date such
persons become Interested Stockholders. Interested Stockholders generally
include (i) persons who are the beneficial owners of 15% or more of the
outstanding voting stock of the corporation and (ii) persons who are affiliates
or associates of the corporation and who held 15% or more of the corporation's
outstanding voting stock at any time within three years before the date on which
such person's status as an Interested Stockholder is determined. Subject to
certain exceptions, a "business combination" includes, among other things (i)
mergers or consolidations, (ii) the sale, lease, exchange, mortgage, pledge,
transfer or other disposition of assets having an aggregate market value equal
to 10% or more of either the aggregate market value of all assets of the
corporation determined on a consolidated basis or the aggregate market value of
all the outstanding stock of the corporation, (iii) transactions that result in
the issuance or transfer by the corporation of any stock of the corporation to
the Interested Stockholder, except pursuant to a transaction that effects a pro
rata distribution to all stockholders of the corporation, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder or (v) any receipt by the Interested
Stockholder of the benefit
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(except proportionately as a stockholder) of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 does not apply to a business combination if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (other than certain excluded shares) or (iii) concurrently
with or following a transaction in which the person became an Interested
Stockholder, the business combination is (a) approved by the board of directors
of the corporation and (b) authorized at an annual or special meeting of
stockholders (and not by written consent) by the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the Interested Stockholder.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax considerations generally applicable to holders acquiring the Class A
Common Stock on original issue but does not purport to be a complete analysis of
all potential consequences. The discussion is based upon the Code, Treasury
regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now
in effect, all of which are subject to change at any time by legislative,
judicial or administrative action. Any such changes may be applied retroactively
in a manner that could adversely affect a holder of the Class A Common Stock.
The discussion assumes that the holders of the Class A Common Stock will hold it
as a "capital asset" within the meaning of Section 1221 of the Code.
The tax treatment of a holder of the Class A Common Stock may vary
depending on such holder's particular situation or status. Certain holders
(including S corporations, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, taxpayers subject to alternative minimum
tax and persons holding the Class A Common Stock as part of a straddle, hedging
or conversion transaction) may be subject to special rules not discussed below.
The following discussion does not consider all aspects of United States federal
income taxation that may be relevant to the purchase, ownership and disposition
of the Class A Common Stock by a holder in light of such holder's personal
circumstances. In addition, the discussion does not consider the effect of any
applicable foreign, state or local tax laws. PERSONS CONSIDERING THE PURCHASE OF
CLASS A COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION.
For purposes of this discussion, a "U.S. Holder" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in the United States or under the laws of the United States
or of any political subdivision thereof, an estate whose income is includible in
gross income for United States federal income tax purposes regardless of its
source or a trust if a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust. A "Non-U.S. Holder" means a
holder that is not a U.S. Holder.
TAX CONSEQUENCES TO U.S. HOLDERS
Distributions on the Class A Common Stock
A cash distribution on the Class A Common Stock will be taxable to the U.S.
Holder as ordinary dividend income to the extent that the amount of the
distribution does not exceed the Company's current or accumulated earnings and
profits allocable to such distribution (as determined for United States federal
income tax purposes). To the extent that the amount of the distribution exceeds
the Company's current or accumulated earnings and profits allocable to such
distribution, the distribution will be treated as a return of capital, thus
reducing the holder's adjusted tax basis in the Class A Common Stock with
respect to which such distribution is made. The amount of any such excess
distribution that exceeds the U.S. Holder's adjusted tax basis in the Class A
Common Stock will be taxed as capital gain and will be long-term capital gain if
the U.S. Holder's holding period for the Class A Common Stock exceeds one year.
The most favorable tax rate on long-term capital gains of non-corporate U.S.
Holders (20%) will not be available unless the holding period exceeds 18 months.
There can be no assurance that the Company will have sufficient earnings and
profits to cause distributions on the Class A Common Stock to be treated as
dividends for United States federal income tax purposes. For purposes of the
remainder of this discussion, the term "dividend" refers to a distribution paid
out of current or accumulated earnings and profits, unless the context indicates
otherwise.
Dividends received by corporate U.S. Holders will generally be eligible for
the 70% dividends-received deduction under Section 243 of the Code. There are,
however, many exceptions and restrictions relating to the availability of the
dividends-received deduction, such as restrictions relating to (i) the holding
period of the stock on which the dividends are received, (ii) debt-financed
portfolio stock, (iii) dividends treated as "extraordinary dividends" for
purposes of Section 1059 of the Code and (iv) taxpayers that pay alternative
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minimum tax. Corporate U.S. Holders should consult their own tax advisors
regarding the extent, if any, to which such exceptions and restrictions may
apply to their particular factual situations. A corporate holder must satisfy a
separate 46-day (91-day, in the case of certain preferred stock dividends)
holding period requirement with respect to each dividend in order to be eligible
for the dividends-received deduction with respect to such dividend.
Sale or Other Taxable Disposition of Class A Common Stock
Upon a sale or other taxable disposition of the Class A Common Stock, the
difference between the sum of the amount of cash and the fair market value of
other property received and the holder's adjusted tax basis in the Class A
Common Stock will be capital gain or loss. This gain or loss will be long-term
capital gain or loss if the U.S. Holder's holding period for the Class A Common
Stock exceeds one year. The most favorable tax rate on long-term capital gains
of non-corporate U.S. Holders (20%) will not be available unless the holding
period exceeds 18 months.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Distributions on the Class A Common Stock
Dividends paid to a Non-U.S. Holder of Class A Common Stock that are not
effectively connected with the conduct of a trade or business within the United
States by the Non-U.S. Holder (or, if certain tax treaties apply, attributable
to a permanent establishment therein maintained by the Non-U.S. Holder) will be
subject to United States federal income tax, which generally will be withheld at
a rate of 30% of the gross amount of the dividends unless the rate is reduced by
an applicable income tax treaty. Under currently applicable Treasury
regulations, dividends paid to an address in a country other than the United
States are subject to withholding (unless the payor has knowledge to the
contrary).
Dividends paid to a Non-U.S. Holder of Class A Common Stock that are
effectively connected with a United States trade or business conducted by such
Non-U.S. Holder will be taxed at the graduated rates applicable to United States
citizens, resident aliens and domestic corporations (the "Regular Federal Income
Tax") and will not be subject to withholding if the Non-U.S. Holder gives an
appropriate statement to the Company or its paying agent in advance of the
dividend payment. In addition to the Regular Federal Income Tax, effectively
connected dividends (or dividends attributable to a permanent establishment)
received by a Non-U.S. Holder that is a corporation may also be subject to an
additional branch profits tax at a rate of 30% (unless the rate is reduced by an
applicable income tax treaty).
Sale or Other Taxable Disposition of Class A Common Stock
A Non-U.S. Holder generally will not be subject to United States federal
income tax or withholding on gain recognized upon a sale or other disposition of
Class A Common Stock unless: (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-U.S. Holder
(or, if certain tax treaties apply, attributable to a permanent establishment
therein maintained by the Non-U.S. Holder), in which case the branch profits tax
also may apply if the Non-U.S. Holder is a corporation; (ii) in the case of a
Non-U.S. Holder who is a non-resident alien individual and holds the Class A
Common Stock as a capital asset, such holder is present in the United States for
183 or more days in the taxable year and certain other conditions are met; or
(iii) the Class A Common Stock constitutes a United States real property
interest by reason of the Company's status as a "United States real property
holding corporation" ("USRPHC") for United States federal income tax purposes at
any time within the shorter of the five-year period preceding such disposition
or such Non-U.S. Holder's holding period for the Class A Common Stock. The
Company does not believe that it is or will become a USRPHC for federal income
tax purposes.
If a Non-U.S. Holder falls within clause (i) or (iii) in the preceding
paragraph, the holder will be taxed on the net gain derived from the sale under
the Regular Federal Income Tax and may be subject to withholding under certain
circumstances (and, in the case of a corporate Non-U.S. Holder, may also be
subject to the branch profits tax described above). If a Non-U.S. Holder falls
under clause (ii) in the
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preceding paragraph, the holder generally will be subject to United States
federal income tax at a rate of 30% on the gain derived from the sale.
Federal Estate Tax
An individual Non-U.S. Holder who owns, or is treated as owning, Class A
Common Stock at the time of his or her death or has made certain lifetime
transfers of an interest in Class A Common Stock will be required to include the
value of such Class A Common Stock in his or her gross estate for United States
federal estate tax purposes, and therefore may be subject to United States
federal tax and therefore may be subject to United States federal tax unless an
applicable estate tax treaty provides otherwise.
New Withholding Regulations
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules applicable to payments made to
Non-U.S. Holders (the "New Withholding Regulations"). In general, the New
Withholding Regulations do not significantly alter the substantive withholding
and information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The New Withholding
Regulations are generally effective for payments made after December 31, 1999,
subject to certain transition rules. NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW WITHHOLDING
REGULATIONS.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, distributions on (and, in the case of U.S. Holders, proceeds
from the sale of) Class A Common Stock will be reported annually to holders of
Class A Common Stock and to the IRS.
A U.S. Holder of Class A Common Stock may be subject to backup withholding
at the rate of 31% with respect to dividends paid on, or the proceeds of a sale
or exchange of, the Class A Common Stock, unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates its exemption or (b) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Holder of Class A Common Stock that does not provide the Company with the
holder's correct taxpayer identification number may be subject to penalties
imposed by the IRS. A Non-U.S. Holder of Class A Common Stock may also be
subject to certain information reporting or backup withholding if certain
requisite certification is not received or other exemptions do not apply. Any
amount paid as backup withholding with respect to a holder of Class A Common
Stock would be creditable against such holder's United States federal income tax
liability, provided that the required information is furnished to the IRS.
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE SENIOR NOTES
As of May 31, 1998, the Company had outstanding $225,000,000 principal
amount of 13% Senior Notes due 2005. The Senior Notes mature on February 15,
2005. Cash interest on the Senior Notes is payable semi-annually in arrears on
each February 15 and August 15 at a rate of 13% per annum. Upon issuance of the
Senior Notes, the Company deposited with an escrow agent an amount of cash and
government securities that, together with the proceeds from the investment
thereof, were estimated to be sufficient to pay when due the first six interest
payments on the Senior Notes, with the balance to be retained by the Company.
The Senior Notes are collateralized by a first priority security interest in
such escrow account. The Senior Notes may be redeemed at the Company's option at
any time after February 15, 2002 upon payment of the redemption price plus
accrued and unpaid interest, if any, to the date of redemption. In the event of
a change of control of the Company, holders of the Senior Notes have the right
to require the Company to purchase their Senior Notes, in whole or in part, at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase.
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The Indenture contains certain covenants that, among other things, limit
the ability of the Company and its subsidiaries to make certain restricted
payments, incur additional indebtedness, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell assets of
the Company or its subsidiaries, issue or sell equity interests of the Company's
subsidiaries or enter into certain mergers and consolidations. In addition,
under certain circumstances, the Company is required to offer to purchase Senior
Notes at a price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase, with the proceeds of certain
asset sales. The Indenture also provides for customary events of default. This
description is intended as a summary and is qualified in its entirety by
reference to the Indenture, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
THE SENIOR CREDIT FACILITY
On December 19, 1997, the Company obtained the Senior Credit Facility from
a group of financial institutions. The Senior Credit Facility consists of a $125
million term loan (which was drawn on December 19, 1997) bearing interest at
LIBOR plus 3.5% and a $25 million revolving credit commitment. As of the date
hereof, the Company has not drawn down any of the funds available to it under
the revolving credit commitment.
TVMAX Telecommunications, Inc. ("TVMAX"), a wholly-owned subsidiary of
OpTel, is the primary borrower under the Senior Credit Facility. OpTel and each
subsidiary of OpTel is a guarantor of the obligations of TVMAX under the Senior
Credit Facility. The Senior Credit Facility is secured by a lien on
substantially all of the assets of OpTel and its subsidiaries, including the
stock of each such subsidiary. The proceeds of the Senior Credit Facility may be
used by TVMAX to finance capital expenditures and permitted acquisitions, to
provide working capital and for other general corporate purposes.
Interest on the Senior Credit Facility is payable, in arrears, on the last
day of each two month LIBOR period. Principal will be payable starting February
2001, in 14 quarterly installments. TVMAX may make voluntary prepayments of
either the term loan or the revolving credit commitment. Prepayments of the term
loan on or prior to December 19, 1998 will incur a fee equal to 1% of the
prepaid principal. TVMAX also may be required to make prepayments under certain
circumstances, including the sale of all or part of any wholly-owned subsidiary
of OpTel or any of its subsidiaries or the sale of all or substantially all of
the assets of any division or line of business.
The Senior Credit Facility contains customary covenants, including certain
limitations on the Company's ability to incur indebtedness, create liens, make
investments, incur consolidated capital expenditures in excess of a certain
amount per year, incur contingent obligations, make certain payments such as
dividends, enter into certain fundamental organizational changes, dispose of
subsidiary stock, sell or discount receivables, transact business with
shareholders or affiliates and enter into a new line of business. The Company
also must meet certain financial covenants including minimum revenues and
maximum debt ratios. The Senior Credit Facility also provides for customary
events of default, including defaults arising if guaranties given by the Company
pursuant to the terms of the Senior Credit Facility are or become invalid or any
material license held by the Company is terminated or cancelled.
This description is intended as a summary and is qualified in its entirety
by reference to the agreements governing the Senior Credit Facility, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
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UNDERWRITING
Subject to the terms and conditions set forth in an agreement between the
Underwriters and the Company (the "Underwriting Agreement"), the Company has
agreed to sell to each of the Underwriters named below (the "Underwriters"), and
each of the Underwriters for whom Smith Barney Inc., Goldman, Sachs & Co., Bear,
Stearns & Co. Inc. and CIBC Oppenheimer Corp. are acting as representatives (the
"Representatives"), has severally agreed to purchase the number of shares of
Class A Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Smith Barney Inc............................................
Goldman, Sachs & Co.........................................
Bear, Stearns & Co. Inc.....................................
CIBC Oppenheimer Corp. .....................................
----------
Total.............................................
==========
</TABLE>
The Company has been advised by the Representatives that the several
Underwriters initially propose to offer such Shares to the public at the Price
to Public set forth on the cover page of this Prospectus and part of the Shares
to certain dealers at such price less a concession not in excess of $
per Share under the Price to Public. The Underwriters may allow and such dealers
may reallow a concession not in excess of $ per Share to certain other
dealers. After the Offering, the Price to Public and such concessions may be
changed.
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above Shares if any are purchased. The Shares are offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.
The Company granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to an aggregate
of additional shares of Class A Common Stock from the Company at the
Price to Public less the Underwriting Discounts and Commissions, each as set
forth on the cover page of this Prospectus. If the Underwriters exercise such
option in whole or in part, then each Underwriter will be committed, subject to
certain conditions, to purchase such additional shares proportionate to such
Underwriter's initial commitment.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities and expenses, including liabilities
under the Securities Act, or will contribute to payments that the Underwriters
may be required to make in respect thereof.
Subject to certain exceptions, the Company, its directors, officers and
certain stockholders, including VPC and CDPQ, have agreed not to offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, or announce
the offering of any shares of Class A Common Stock, including any such shares
beneficially owned or controlled by any such person, or any securities
convertible into, or exchangeable or exercisable for, shares of the Class A
Common Stock, for 180 days from the date of this Prospectus, without the prior
written consent of Smith Barney Inc.
The Underwriters will not confirm sales to any discretionary account
without the prior specific written approval of the customer.
At the Company's request, the Underwriters have reserved up to
Shares (the "Directed Shares") for sale at the Price to Public to persons who
are directors, officers or employees of, or otherwise associated with, the
Company and its affiliates and who have advised the Company of their desire to
purchase such Shares. The number of Shares available for sale to the general
public will be reduced to the extent of sales of Directed Shares to any of the
persons for whom they have been reserved. Any Shares not so purchased will be
offered by the Underwriters on the same basis as all other Shares offered
hereby.
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During and after the Offering, the Underwriters may purchase and sell the
Class A Common Stock in the open market. These transactions may include
overallotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members of other broker-dealers in respect of the Shares sold in the Offering
for their account may be reclaimed by the syndicate if such Shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Class A Common Stock which may be higher than the price that might otherwise
prevail in the open market. The Underwriters are not required to engage in these
activities and may end these activities at any time.
Prior to the Offering, there has been no public market for the Class A
Common Stock. The Price to Public was determined by negotiations between the
Company and the Representatives. Among the factors considered in determining the
Price to Public were prevailing market conditions, the market values of publicly
traded companies that the Underwriters believed to be somewhat comparable to the
Company, the demand for the Shares and for similar securities of publicly traded
companies that the Underwriters believed to be somewhat comparable to the
Company, the future prospects of the Company and its industry in general, sales,
earnings and certain other financial and operating information of the Company in
recent periods and other factors deemed relevant. There can be no assurance that
the prices at which the Shares will sell in the public market after the Offering
will not be lower than the Price to Public.
Salomon Brothers Inc, an affiliate of Smith Barney Inc., was an initial
purchaser in connection with the Company's offering, in February 1997, of units
consisting of $225,000,000 aggregate principal amount of the Senior Notes and
225,000 shares of the Non-Voting Common, for which it received customary fees.
From time to time, Smith Barney Inc. (or certain of its affiliates) has
provided, and may in the future provide, financial advisory services to the
Company for which it has received, and expects to continue to receive, customary
fees. Canadian Imperial Bank of Commerce, an affiliate of CIBC Oppenheimer
Corp., is acting as the administrative agent for the syndicate of lenders and as
a lender in connection with the Senior Credit Facility, for which it is
receiving customary fees. Goldman Sachs Credit Partners, L.P., an affiliate of
Goldman Sachs, & Co., arranged the Senior Credit Facility and is acting as a
lender, for which it received customary fees.
CERTAIN MARKET INFORMATION
Prior to the Offering, no class of equity securities of the Company has
been traded in any public market. There can be no assurance that a public
trading market will develop for the Class A Common Stock or, if one develops
after the completion of the Offering, that it will be sustained. See "Risk
Factors -- Lack of Prior Public Market; Possible Volatility of Stock Price."
The Company intends to apply for approval for quotation of the shares of
Class A Common Stock through the Nasdaq National Market under the symbol " "
upon the effectiveness of this Registration Statement of which this Prospectus
is a part.
LEGAL MATTERS
The validity of the Shares will be passed upon and certain other legal
matters in connection with the sale of securities offered hereby will be passed
upon for the Company by Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the
Americas, New York, New York 10036. Certain federal regulatory matters related
to the Offering or described herein will be passed upon for the Company by
Goldberg, Godles, Wiener & Wright, 1229 Nineteenth Street, N.W., Washington,
D.C. 20036, the Company's FCC counsel. Certain legal matters relating to the
sale of the Shares will be passed upon for the Underwriters by Cahill Gordon &
Reindel (a partnership including a professional corporation), 80 Pine Street,
New York, New York 10005. Russell S. Berman of Kronish, Lieb, Weiner & Hellman
LLP and Henry Goldberg of Goldberg, Godles, Wiener & Wright each hold one-third
of the outstanding equity interests in THI. See "Certain Relationships and
Related Transactions -- License Holding Company."
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EXPERTS
The Consolidated Financial Statements of the Company for the year ended
December 31, 1994, the eight month period ended August 31, 1995 and as of and
for the years ended August 31, 1996 and August 31, 1997, and the Financial
Statements of the Assets and Liabilities of ICS Communications, LLC acquired by
the Company as of and for the year ended December 31, 1997, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Shares offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement or the
exhibits and schedules thereto, certain portions having been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Shares offered hereby, reference
is made to the Registration Statement, including the exhibits and financial
statement schedules thereto, which may be inspected without charge at the public
reference facility maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located
at Seven World Trade Center, 13th Floor, New York, New York 10007 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. Such Web site is located at
http://www.sec.gov. Statements made in this Prospectus concerning the contents
of any document referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, a copy of any or all of the documents (other
than exhibits to such documents) which have been incorporated by reference in
the Registration Statement, upon the oral or written request of such person to
OpTel, Inc., 1111 W. Mockingbird Lane, Dallas, Texas 75247 (telephone (214)
634-3800), Attention: Andrew N. Jent.
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APPENDIX A
GLOSSARY
Access Charges -- The charges paid by an IXC to an ILEC or CLEC for the
origination or termination of the IXC's customer's long distance calls.
CAP (Competitive Access Provider) -- A service provider that competes with
local telephone companies for access traffic by providing to high-volume
customers private line access to IXCs. Although traditional CAPs did not provide
a complete package of local exchange services, some CAPs have begun to provide
local exchange services following the passage of the Telecom Act.
Central Office -- The switching center and/or central circuit termination
facility of a local telephone company.
CLEC (Competitive Local Exchange Carrier) -- A telephone service provider
(carrier) offering services similar to those offered by the former monopoly
local telephone company. A CLEC may also provide other types of
telecommunications services (e.g., long distance).
CLEC Certification -- Granted by a state public service commission or
public utility commission, this certification provides a telecommunications
services provider with the legal standing to offer local exchange telephone
services in direct competition with ILECs and other CLECs. Such certifications
are granted on a state-by-state basis.
Communications Act of 1934 -- Federal legislation that established rules
for broadcast and nonbroadcast communications, including both wireless and wire
line telephone service which continues, as amended, to be in effect today.
FCC (Federal Communications Commission) -- The principal U.S. Government
agency charged with the oversight of all public communications media.
HDTV (High Definition Television) -- Digital signals used in television
broadcasting which have been the subject of recent federal legislation.
Head End -- Equipment necessary to receive video programming via satellite
transmission and combine the signals into a channel lineup for distribution.
Hertz, Megahertz and Gigahertz -- The dimensional unit for measuring the
frequency with which an electromagnetic signal cycles through the zero-value
state between lowest and highest states. One Hertz (abbreviated Hz) equals one
cycle per second. MHz (MegaHertz) stands for millions of Hertz. GHz (GigaHertz)
stands for billions of Hertz.
ICP (Integrated Communications Provider) -- A communications carrier that
provides packaged or integrated services from among a broad range of categories,
including local exchange services, long distance services, data services, cable
television services and other communications services.
ILEC (Incumbent Local Exchange Carrier) -- The local exchange carrier that
was the monopoly carrier prior to the opening of local exchange services to
competition.
Interconnection (co-carrier) Agreement -- A contract between an ILEC and a
CLEC for the interconnection of the two networks for the purpose of mutual
exchange of traffic between the networks, allowing customers of one of the
networks to call users served by the other network. These agreements set out the
financial and operational aspects of such interconnection.
Interexchange Services -- Telecommunications services that are provided
between two exchange areas, generally meaning between two cities (i.e., long
distance).
InterLATA -- Telecommunications services originating inside a LATA and
terminating outside of that LATA.
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Internet -- A global collection of interconnected computer networks which
use a specific communications protocol.
ISDN (Integrated Services Digital Network) -- An information transfer
standard for transmitting digital voice and data over telephone lines at speeds
up to 128 KB per second.
ISP (Internet Service Provider) -- A service provider that provides access
to the Internet, normally for dial-access customers, by sharing communications
lines and equipment.
IXC (Interexchange Carrier) -- A provider of telecommunications services
that extend between exchanges or cities, also known as a long distance provider.
KB (Kilobits) per second -- A transmission rate. One kilobit equals 1,024
bits of information.
LATA (Local Access and Transport Area) -- A geographic area inside of which
a LEC can offer switched telecommunications services, including long distance
(known as local toll). The LATA boundaries were established at the divestiture
of the local exchange business of AT&T.
LEC (Local Exchange Carrier) -- Any telephone service provider offering
local exchange services. LECs include ILECs, RBOCs and CLECs.
LMDS (Local Multipoint Distribution Service) -- A wireless point to
multipoint communications service.
Local Exchange -- An area inside of which telephone calls are generally
completed without any toll or long distance charges. Local exchange areas are
defined by the state regulator of telephone services.
Local Exchange Services -- Telephone services that are provided within a
local exchange. These usually refer to local calling services (e.g., dial tone
services).
MB (Megabits) per second -- A transmission rate. One megabit equals 1,024
kilobits.
MDU (Multiple Dwelling Unit) -- High density residential complexes such as
high- and low-rise apartment buildings, condominiums, cooperatives, townhouses
and mobile home communities.
MMDS (Multichannel Multipoint Distribution Service) -- A wireless point to
multipoint distribution system using microwave transmitting and receiving
equipment that broadcasts to individual subscribers in an omni-directional
manner.
Modem -- A device for transmitting digital information over an analog
telephone line.
Network Hubs -- Locations where the Company has installed Head End
equipment and telecommunications transmitting and receiving equipment for
distribution to MDUs.
Network Operations Center -- A facility where the Company monitors and
manages the Company's networks.
PBX (Private Branch Exchange) -- A telephone switching system designed to
operate at the MDU. A PBX connects telephones to each other and to lines and
trunks that connect the PBX to the public network and/or private telephone
networks.
POP (Point of Presence) -- A location where a carrier, usually an IXC, has
located transmission and terminating equipment to connect its network to the
networks of other carriers or to customers.
RBOC (Regional Bell Operating Company) -- ILECs created by the divestiture
of the local exchange business of AT&T. These include BellSouth, Bell Atlantic,
Ameritech, US WEST, SBC Communications, Inc. and PacBell.
Reciprocal Compensation -- The compensation paid to and from one local
exchange carrier to another for termination of a local call on the other's
networks.
STS (Shared Tenant Services) -- The provision of telecommunications
services to multiple tenants by allowing these users to have shared access to
telephone lines and other telephone services.
A-2
<PAGE> 92
SMATV (Satellite Master Antenna Television) -- Non-networked systems which
transmit video programming via Head Ends located at individual MDUs.
SONET (Synchronous Optical Network) -- Self-healing rings that provide high
speed redundant connections for the delivery of voice traffic.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is the process of
interconnecting circuits to form a transmission path between users. A switch
also captures information for billing purposes.
Switch-based -- A communications provider that delivers its services to the
end-user via owned switches and leased (or owned) transport.
T-1 -- A high-speed digital circuit typically linking high volume customer
locations to long distance carriers or other customer locations. Typically
utilized for voice transmissions as well as the interconnection of local area
networks, T-1 service accommodates transmission speeds of up to 1.544 MB per
second, which is equivalent to 24 voice grade equivalent circuits.
Trunk -- A dedicated circuit which concentrates subscriber lines. A trunked
system combines multiple channels with unrestricted access in such a manner that
user demands for channels are automatically "queued" and then allocated to the
first available channel.
A-3
<PAGE> 93
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
OPTEL, INC. AND SUBSIDIARIES:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of August 31, 1996 and 1997
and February 28, 1998 (unaudited)......................... F-3
Consolidated Statements of Operations for the year ended
December 31, 1994, the period from January 1, 1995 to
August 31, 1995, the years ended August 31, 1996 and 1997,
and the six months ended February 28, 1997 and 1998
(unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 1994, the period from January 1, 1995
to August 31, 1995, the years ended August 31, 1996 and
1997, and the six months ended February 28, 1997 and 1998
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1994, the period from January 1, 1995 to
August 31, 1995, the years ended August 31, 1996 and 1997,
and the six months ended February 28, 1997 and 1998
(unaudited)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
Pro Forma Balance Sheet as of February 28, 1998............. F-23
Pro Forma Statements of Operations for the year ended August
31, 1997 and the six months ended February 28, 1998....... F-24
Notes to Pro Forma Financial Information.................... F-26
ACQUIRED COMPANY:
Assets and Liabilities Acquired of ICS Communications, LLC
by OpTel, Inc.:
Independent Auditors' Report.............................. F-27
Statements of Assets and Liabilities Acquired as of
December 31, 1997 and March 31, 1998 (unaudited)....... F-28
Statements of Revenues and Direct Expenses for the year
ended December 31, 1997 and the three months ended
March 31, 1998 (unaudited)............................. F-29
Notes to Financial Statements............................. F-30
</TABLE>
F-1
<PAGE> 94
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, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1994, the period from January 1, 1995 to August 31,
1995 and the years ended August 31, 1996 and 1997. 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, 1996 and 1997 and the results of their operations and their cash
flows for the year ended December 31, 1994, the period from January 1, 1995 to
August 31, 1995 and the years ended August 31, 1996 and 1997 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
October 14, 1997
Dallas, Texas
F-2
<PAGE> 95
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31, AUGUST 31, FEBRUARY 28,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 1,677 $ 87,305 $ 18,388
Restricted investments (Notes 6 and 12)................... -- 67,206 54,509
Short-term investments.................................... -- -- 111,154
Accounts receivable (Net of allowance for doubtful
accounts of $542, $1,125 and $1,301, respectively)...... 3,064 4,044 5,440
Prepaid expenses, deposits and other assets............... 1,562 1,836 1,851
Property and equipment, net (Note 4)...................... 103,800 160,442 203,778
Intangible assets, net (Note 5)........................... 65,876 82,583 110,051
-------- -------- ---------
TOTAL........................................... $175,979 $403,416 $ 505,171
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable.......................................... $ 5,649 $ 7,927 $ 6,042
Accrued expenses and other liabilities.................... 10,507 13,969 16,120
Deferred revenue and customer deposits.................... 2,167 2,978 4,004
Convertible notes payable to stockholder (Notes 6 and
9)...................................................... 89,414 129,604 139,244
Notes payable and long-term obligations (Note 6).......... 2,443 221,653 347,767
Deferred acquisition liabilities (Notes 3 and 6).......... 6,520 6,920 5,656
-------- -------- ---------
Total liabilities............................... 116,700 383,051 518,833
Commitments and contingencies (Notes 3 and 7)
Stockholders' equity (deficit) (Notes 9, 10 and 13)
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding.............. -- -- --
Class A common stock, $.01 par value; 8,000,000 shares
authorized; none issued and outstanding.............. -- -- --
Class B common stock, $.01 par value; 6,000,000 shares
authorized; 2,304,561, 2,353,498 and 2,353,498 issued
and outstanding, respectively........................ 23 24 24
Class C common stock, $.01 par value; 300,000 shares
authorized; 225,000 issued and outstanding........... -- 2 2
Additional paid-in capital................................ 88,065 97,683 97,683
Accumulated deficit....................................... (28,809) (77,344) (111,371)
-------- -------- ---------
Total stockholders' equity (deficit)............ 59,279 20,365 (13,662)
-------- -------- ---------
TOTAL........................................... $175,979 $403,416 $ 505,171
======== ======== =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 96
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
YEAR ENDED JANUARY 1, 1995 YEAR ENDED AUGUST 31, FEBRUARY 28,
DECEMBER 31, TO AUGUST 31, ----------------------- ---------------------------
1994 1995 1996 1997 1997 1998
------------ --------------- ---------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Cable television.................... $ 240 $ 8,783 $ 25,893 $ 36,915 $ 17,208 $ 25,247
Telecommunications.................. 202 788 1,711 2,922 1,414 1,644
------- -------- -------- -------- -------- --------
Total revenues.............. 442 9,571 27,604 39,837 18,622 26,891
OPERATING EXPENSES:
Cost of services.................... 470 4,558 11,868 19,202 8,702 12,419
Customer support, general and
administrative................... 7,733 12,055 19,636 28,926 12,267 15,855
Depreciation and amortization....... 117 2,420 8,676 14,505 5,820 10,759
------- -------- -------- -------- -------- --------
Total operating expenses.... 8,320 19,033 40,180 62,633 26,789 39,033
------- -------- -------- -------- -------- --------
LOSS FROM OPERATIONS.................. (7,878) (9,462) (12,576) (22,796) (8,167) (12,142)
OTHER INCOME (EXPENSE):
Interest expense on convertible
notes payable to stockholder
(Notes 4 and 9).................. -- (919) (5,342) (15,204) (6,907) (9,640)
Other interest expense.............. (76) (349) (657) (16,210) (1,694) (16,386)
Interest and other income........... 10 99 145 5,675 476 4,141
------- -------- -------- -------- -------- --------
LOSS BEFORE INCOME TAXES.............. (7,944) (10,631) (18,430) (48,535) (16,292) (34,027)
Income Tax Benefit (Note 8)........... -- 470 -- -- -- --
------- -------- -------- -------- -------- --------
NET LOSS.............................. $(7,944) $(10,161) $(18,430) $(48,535) $(16,292) $(34,027)
======= ======== ======== ======== ======== ========
BASIC AND DILUTED LOSS PER COMMON
SHARE (Notes 2 and 10).............. $ (6.89) $ (8.30) $ (19.98) $ (7.01) $ (13.20)
======== ======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Notes 2 and
10)................................. 1,475 2,220 2,430 2,323 2,578
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 97
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS B CLASS C
COMMON STOCK COMMON STOCK
------------------- ------------------- ADDITIONAL
PARTNERSHIP SHARES PAR SHARES PAR PAID-IN ACCUMULATED
CAPITAL OUTSTANDING VALUE OUTSTANDING VALUE CAPITAL DEFICIT
----------- ----------- ----- ----------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994................ $ 689 -- $-- -- $-- $ -- $ (307)
Contributions......................... 10,375... -- -- -- -- -- --
Net loss of partnership............... -- -- -- -- -- -- (7,725)
Reorganization from partnership....... (11,064) 717 7 -- -- 3,024 8,032
Net loss.............................. -- -- -- -- -- -- (219)
-------- ------ --- ---- --- ------- ---------
BALANCE, DECEMBER 31, 1994.............. -- 717 7 -- -- 3,024 (219)
Issuance of stock upon debt
conversion, net of transaction
costs.............................. -- 1,121 11 -- -- 59,194 --
Sale and issuance of stock............ -- 312 3 -- -- 16,684 --
Net loss.............................. -- -- -- -- -- -- (10,160)
-------- ------ --- ---- --- ------- ---------
BALANCE, AUGUST 31, 1995................ -- 2,150 21 -- -- 78,902 (10,379)
Issuance of stock upon debt
conversion......................... -- 171 2 -- -- 9,163 --
Contribution and cancellation of
shares............................. -- (16) -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- (18,430)
-------- ------ --- ---- --- ------- ---------
BALANCE, AUGUST 31, 1996................ -- 2,305 23 -- -- 88,065 (28,809)
Issuance of stock with senior notes
offering........................... -- -- -- 225 2 6,998 --
Stock options exercised............... -- 48 1 -- -- 2,620 --
Net loss.............................. -- -- -- -- -- -- (48,535)
-------- ------ --- ---- --- ------- ---------
BALANCE, AUGUST 31, 1997................ -- 2,353 24 225 2 97,683 (77,344)
Net loss (unaudited).................. -- -- -- -- -- -- (34,027)
-------- ------ --- ---- --- ------- ---------
BALANCE, FEBRUARY 28, 1998
(unaudited)........................... $ -- 2,353 $24 225 $ 2 $97,683 $(111,371)
======== ====== === ==== === ======= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 98
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD FROM YEAR ENDED ENDED
YEAR ENDED JANUARY 1, 1995 AUGUST 31, FEBRUARY 28,
DECEMBER 31, TO AUGUST 31, ------------------- ---------------------
1994 1995 1996 1997 1997 1998
------------ --------------- -------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss......................................... $(7,944) $(10,161) $(18,430) $(48,535) $ (16,292) $ (34,027)
Adjustments to reconcile net loss to net cash
flow used in operating activities:
Depreciation and amortization.................. 117 2,420 8,676 14,505 5,820 10,759
Deferred tax benefit........................... -- (488) -- -- -- --
Noncash interest expense....................... -- 1,147 5,661 15,107 7,104 10,291
Noncash interest earned on restricted
investments.................................. -- -- -- (2,303) -- (1,927)
Increase(decrease) in cash from changes in
operating assets and liabilities, net of
effect of business combinations:
Accounts receivable.......................... (58) (1,005) (1,370) (754) (566) (1,493)
Prepaid expenses, deposits and other
assets..................................... (1,008) 180 (126) (785) (554) 118
Deferred revenue and other liabilities....... 164 895 906 640 268 653
Accounts payable and accrued expenses........ 5,397 3,518 4,230 6,190 1,172 411
------- -------- -------- -------- --------- ---------
Net cash flows used in operating
activities............................... (3,332) (3,494) (453) (15,935) (3,048) (15,215)
------- -------- -------- -------- --------- ---------
INVESTING ACTIVITIES:
Purchases of businesses.......................... (1,298) (49,974) (9,916) (6,717) (2,500) (37,018)
Purchases of short term investments.............. -- (126,154)
Proceeds from sale of short term investments..... -- 15,000
Acquisition of intangible assets................. (3,211) (608) (7,904) (10,112) (4,830) (4,274)
Purchases and construction of property and
equipment...................................... (6,067) (21,562) (54,217) (61,393) (20,095) (33,626)
Purchases of restricted investments.............. -- -- -- (79,609) (79,804) --
Proceeds from maturity of restricted
investments.................................... -- -- -- 14,706 -- 14,625
------- -------- -------- -------- --------- ---------
Net cash flows used in investing
activities............................... (10,576) (72,144) (72,037) (143,125) (107,229) (171,447)
------- -------- -------- -------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from convertible notes payable.......... 15,000 62,823 73,438 33,700 23,700 --
Repayments on convertible notes payable.......... -- -- -- (10,000) -- --
Proceeds from senior notes payable............... -- -- -- 218,000 218,000 --
Financing costs of senior notes payable.......... -- -- -- (5,738) (4,776) --
Proceeds from bank financing, net of transaction
costs.......................................... -- -- -- -- -- 119,852
Proceeds from issuance of common stock........... -- 16,688 -- 9,620 7,000 --
Payment on notes payable and long term
obligations.................................... (6,489) (6,856) (1,307) (894) (309) (630)
Payment of deferred acquisition liabilities...... -- -- -- -- -- (1,477)
Contributions received from partners............. 10,375 -- -- -- -- --
------- -------- -------- -------- --------- ---------
Net cash flows provided by financing
activities............................... 18,886 72,655 72,131 244,688 243,615 117,745
------- -------- -------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 4,978 (2,983) (359) 85,628 133,338 (68,917)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... 41 5,019 2,036 1,677 1,677 87,305
------- -------- -------- -------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 5,019 $ 2,036 $ 1,677 $ 87,305 $ 135,015 $ 18,388
======= ======== ======== ======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(Notes 3 and 9)
Cash paid during the period for:
Interest....................................... $ 39 $ 120 $ 290 $ 15,059 $ 162 $ 15,997
======= ======== ======== ======== ========= =========
Taxes.......................................... $ -- $ 19 $ -- $ -- $ -- $ --
======= ======== ======== ======== ========= =========
Increase in capital lease obligations............ $ -- $ -- $ 879 $ 1,630 $ 480 $ 1,306
======= ======== ======== ======== ========= =========
Convertible debt issued for accrued interest..... $ -- $ -- $ 6,436 $ 16,490 $ -- $ 9,640
======= ======== ======== ======== ========= =========
Conversion of convertible debt and partnership
capital to common stock:
Partnership capital............................ $(3,031) $ -- $ -- $ -- $ -- $ --
======= ======== ======== ======== ========= =========
Convertible debt and accrued interest.......... $ -- $(60,792) $ (9,166) $ -- $ -- $ --
======= ======== ======== ======== ========= =========
Common stock................................... $ 7 $ 11 $ 2 $ -- $ -- $ --
======= ======== ======== ======== ========= =========
Additional paid-in capital, net of transaction
costs........................................ $ 3,024 $ 59,194 $ 9,163 $ -- $ -- $ --
======= ======== ======== ======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 99
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1. DESCRIPTION OF BUSINESS
OpTel, Inc., a Delaware corporation, and subsidiaries (the "Company" or
"OpTel") is the successor of the cable television and telecommunications
operations of Vanguard Communications, L.P. ("Vanguard"). Vanguard commenced
operations in April 1993. On December 20, 1994, Vanguard contributed its cable
television and telecommunications 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 services to customers in multiple dwelling
units ("MDUs"). The Company negotiates long-term, generally exclusive cable
television service agreements and nonexclusive telecommunications service
agreements with owners and managers of MDUs, generally for terms of up to 15
years. The company's primary markets are major metropolitan areas in Arizona,
California, Colorado, Florida, Illinois and Texas.
During the period from April 20, 1993 (date of inception) to March 31,
1995, the Company was wholly owned by Vanguard. On March 31, 1995, VPC
Corporation ("VPC") (a wholly owned subsidiary of Le Groupe Videotron Ltee
("Videotron") -- a Quebec corporation), acquired a 66.75% interest in the
Company. At August 31, 1997, VPC's interest in the Company was 74.62% (see Note
9).
In 1995, the Company elected to change its year-end to August 31 from
December 31 to conform to that of its new majority stockholder.
2. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information -- The accompanying unaudited interim
consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial information. In the opinion of management, all adjustments (consisting
only of normal recurring entries) considered necessary for a fair presentation
have been included. Operating results for the six month period ended February
28, 1997 and 1998, are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other interim period.
Principles of Consolidation -- The consolidated financial statements
include the accounts of OpTel and its wholly owned and majority-owned
subsidiaries and limited partnerships. All significant intercompany accounts and
transactions have been eliminated. Amounts due to minority limited partners are
included in notes payable and long-term obligations.
Cash and Cash Equivalents -- Cash and cash equivalents of the Company are
composed of demand deposits with banks and short-term investments with
maturities of three months or less when purchased.
Restricted Investments -- Restricted investments of the Company are
composed of U.S. Treasury securities restricted for payment of interest on the
Company's Senior Notes. These investments are classified as held to maturity and
are carried at amortized cost.
Property and Equipment -- Property and equipment are stated at cost, which
includes amounts for construction materials, direct labor and overhead, and
capitalized interest. When assets are disposed of, the costs and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Cost of maintenance and repairs is charged
to operations as incurred; significant renewals and
F-7
<PAGE> 100
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
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:
<TABLE>
<S> <C>
Headends............................................... 15 years
Telephone switches..................................... 10 years
Distribution systems and enhancements.................. 15 years
Computer software and equipment........................ 4 years
Other.................................................. 5 to 10 years
</TABLE>
Management routinely evaluates its recorded investments for impairment
based on projected undiscounted cash flows and other methods and believes the
investments to be recoverable.
Intangible Assets -- Costs associated with licensing fees, commissions and
other direct costs incurred in connection with the execution of rights-of-entry
agreements to provide cable television and telecommunications service to MDUs,
the excess of purchase price over the fair value of tangible assets acquired,
goodwill and other intangible assets, are amortized using the straight-line
method over the following estimated useful lives:
<TABLE>
<S> <C>
Goodwill....................................... 20 years
Licensing fees and rights-of entry costs....... Life of contract
Deferred financing costs....................... Terms of indebtedness
Other.......................................... 1 to 5 years
</TABLE>
Management routinely evaluates its recorded investments for impairment
based on projected undiscounted cash flows and other methods and believes the
investments to be recoverable.
Federal and State Income Taxes -- Prior to August 2, 1996 the Company and
its corporate subsidiaries filed a consolidated federal income tax return.
Beginning August 2, 1996, in connection with VPC acquiring additional stock from
Vanguard, the Company was included in VPC's consolidated federal income tax
return. Effective February 14, 1997, as the result of issuing Class C Common
(see Notes 6 and 9), the Company will again be required to file a separate
consolidated federal income tax return. During the period in which the Company
was consolidated with VPC, for purposes of financial reporting, the Company has
recorded federal and state income tax as if it were filing a separate return.
Deferred tax assets and liabilities are recorded based on the difference between
the tax basis of the assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary differences. Provision is
made or benefit recognized for deferred taxes relating to temporary differences
in the recognition of expense and income for financial reporting purposes. To
the extent a deferred tax asset does not meet the criterion of "more likely than
not" for realization, a valuation allowance is recorded.
Revenue Recognition and Deferred Revenue -- The Company recognizes revenue
upon delivery of cable television programming and telecommunications service to
subscribers. OpTel typically bills customers in advance for monthly cable
television services, which results in the deferral of revenue until those
services are provided.
Cost of Services -- System operating costs include programming,
telecommunications service costs, revenue sharing with owners of MDUs for which
OpTel provides cable television and/or telecommunications service, and franchise
fees.
F-8
<PAGE> 101
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
Net Loss Per Common Share -- The computation of basic and diluted loss per
common share is based on the weighted average number of common shares
outstanding during the period (see Note 10). No loss per share information is
presented for the period the Company was organized as a partnership. Common
stock equivalents are included in the computation if they are material. Diluted
earnings per share will continue to be calculated in a manner similar to the
historical fully diluted calculation. The diluted loss per common share is
considered to be the same as basic since the effect of the convertible notes
payable to stockholder and common stock equivalents outstanding for each period
presented would be antidilutive.
Acquisitions -- Acquisitions accounted for using the purchase method of
accounting include results of operations of the acquired businesses in the
accompanying consolidated financial statements from the dates of acquisition.
Identifiable tangible and intangible assets acquired and liabilities assumed are
recorded at their estimated fair value at the date of acquisition. The excess of
the purchase price over the net assets acquired is recorded as goodwill.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reporting amounts of certain assets,
liabilities, revenues and expenses. Actual results may differ from such
estimates. The Company is in the initial stages of entering new markets and
acquiring or constructing the infrastructure necessary to deliver cable
television and telecommunication services. The Company's network upgrades and
investment in central office switched telecommunications require significant
investment, a portion of which will not be recovered unless the Company's
customer base increases from current levels, as to which there can be no
assurance because of possible changes due to competition, regulatory changes,
technology changes, the ability to finance future expenditures or other
unforeseen factors. The carrying value of property, equipment, and intangible
assets will be subject to ongoing assessment.
New Accounting Pronouncements -- On September 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which did not have a significant impact on the Company's results of
operations or financial position.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share," which established new standards for
computing and presenting earnings per share and was effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Prior periods presented have been restated to reflect the adoption of
SFAS No. 128 which did not have a significant impact upon the Company's reported
earnings per share.
The FASB issued, in February 1997, SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosing information
about an entity's capital structure and is effective for financial statements
for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997.
The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way public companies disclose information about operating segments,
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997.
Reclassifications -- Certain reclassifications of prior year amounts have
been made to conform to the current year presentation.
F-9
<PAGE> 102
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
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 of liabilities, issuance of a note for $1,000,
payment of approximately $1,300 in cash and issuance of a warrant for the right
to purchase an ownership interest in Vanguard. The $1,000 secured note payable
was due to IRPC one year after closing and was subject to adjustment based on
the actual amount of assumed liabilities. In December 1997, the Company and IRPC
reached an agreement with respect to the actual amount of liabilities assumed.
Also in December 1997, IRPC exercised its right to put the warrant to OpTel. The
obligations for the secured note payable and the warrant were satisfied by the
Company by payment of approximately $1,477. The combined amounts due to IRPC
were included on the accompanying August 31, 1996 and 1997 consolidated balance
sheets in deferred acquisition liabilities. The Company, as a result of the
acquisition from IRPC, is a general partner in limited partnership investments
(the "Partnerships"). The operations of these Partnerships have been
consolidated with those of the Company. The Company has the option to purchase
the interest of each limited partner at defined amounts ranging from 110% to
140% of each limited partner's initial capital contribution for the first four
years of the partnership agreements and is required to purchase the interests at
the end of the fifth year at 150% of the initial capital contribution. From the
date of initial capital contribution until the date the Company purchases the
interest of a limited partner, each limited partner receives a guaranteed return
equal to 10% per annum of their initial capital contribution paid quarterly.
During the periods ended August 31, 1995, 1996 and 1997 OpTel paid $2,114, $392,
and $0, respectively, to repurchase certain partnership obligations (see Note
6). The operations of the acquired subsidiaries and the partnerships are located
in the San Diego, California, and Phoenix, Arizona areas.
On January 11, 1995, the Company purchased the assets of EagleVision, a
division of Nationwide Communications, Inc. ("NCI"). The purchase price
consisted of $15,200 in cash, the assumption of approximately $110 of
liabilities and a deferred payment due to NCI of not less than $6,000 and not
more than $10,000 based on the profitability of OpTel's assets in the Houston,
Texas market with certain adjustments. This deferred payment shall be payable at
NCI's option, either (a) following the sale of all or substantially all of the
EagleVision assets or the sale of a majority of the outstanding voting capital
of the OpTel subsidiary which acquired EagleVision assets to a third party who
is not an affiliate or (b) at the conclusion of the fifth or sixth year
following the acquisition. This deferred payment is carried on the accompanying
consolidated balance sheets in deferred acquisition liabilities at the net
present value of the estimated final payment with an accretion of interest
recorded to operations. As of the date of acquisition and as of August 31, 1997,
the estimated payment due was $6,000 with a net present value at August 31, 1996
and 1997 of $4,503 and $4,903, 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 in cash and the assumption of
approximately $350 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
in cash and the assumption of approximately $30 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 in cash
and the assumption of approximately $100 of liabilities. The operations of Triax
are located in the Chicago, Illinois area.
F-10
<PAGE> 103
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
On January 30, 1996, the Company purchased the assets of Telecom Master
L.P. and Telecom Satellite Systems Corporation ("Telecom") for approximately
$5,700 in cash and the assumption of $100 of liabilities. The operations of
Telecom are located in the Dallas, Texas area.
On August 2, 1996, the Company purchased certain assets of certain
subsidiaries of Wireless Holdings, Inc., and Videotron (Bay Area), Inc.,
companies that are 50% and 80% owned and controlled by Videotron, respectively,
for approximately $3,880. The amount paid represents the sellers' historical
cost which also approximates the acquired assets' estimated fair market value.
The operations of the acquired assets are located in the San Francisco,
California, and Tampa, Florida areas.
On November 12, 1996, the Company purchased the assets of Malvey Cable
Company ("Nor-Cal") for approximately $2,500 in cash. The operations of Nor-Cal
are located in the San Francisco, California area.
On March 14, 1997, the Company purchased the stock of Tara Communication
Systems, Inc. ("Tara") for $2,450 in cash and the assumption of approximately
$65 of liabilities. The operations of Tara are located in the Chicago, Illinois
area.
On August 1, 1997, the Company purchased certain assets of Northgate
Communications, Inc. ("Northgate") for approximately $1,700 in cash. The
operations of Northgate are located in the Los Angeles and San Diego, California
areas.
On October 27, 1997, the Company purchased the residential cable television
and associated fiber optic network assets of Phonoscope Ltd. and the stock of
several affiliated entities (collectively "Phonoscope"). The operations of
Phonoscope are in Houston, Texas. The purchase price consisted of $36.5 million
in cash and was recorded as a purchase acquisition. At February 28, 1998, the
allocation of the purchase price is recorded on a preliminary basis and is
subject to adjustment.
The pro forma effect of the 1996 and 1997 acquisitions would have an
insignificant impact on the consolidated results of operations of the Company
for the years ended August 31, 1996 and 1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31,
------------------- FEBRUARY 28,
1996 1997 1998
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Headends............................................. $ 32,119 $ 53,088 $ 58,669
Telephone switches................................... 4,976 9,347 11,679
Distribution systems and enhancements................ 36,372 68,538 109,216
Computer software and equipment...................... 4,957 9,512 11,573
Other................................................ 5,813 8,762 8,758
Construction in progress............................. 25,434 26,177 25,936
-------- -------- --------
109,671 175,424 225,831
Less accumulated depreciation........................ (5,871) (14,982) (22,053)
-------- -------- --------
$103,800 $160,442 $203,778
======== ======== ========
</TABLE>
Interest expense of $1,849 and $2,256 was capitalized during 1996 and 1997
respectively.
F-11
<PAGE> 104
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31,
------------------ FEBRUARY 28,
1996 1997 1998
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill.............................................. $47,344 $ 53,081 $ 69,982
Licensing fees and rights-of-entry costs.............. 22,174 30,833 40,643
Deferred financing costs.............................. -- 5,784 10,973
Other................................................. 1,650 3,243 2,419
------- -------- --------
71,168 92,941 124,017
Less accumulated amortization......................... (5,292) (10,358) (13,966)
------- -------- --------
$65,876 $ 82,583 $110,051
======= ======== ========
</TABLE>
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31,
----------------- FEBRUARY 28,
1996 1997 1998
------ -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
13% Senior Notes Due 2005, Series B, net of
unamortized discount of $0, $6,526 and $6,089....... $ -- $218,474 $218,911
Senior credit facility bearing interest at LIBOR plus
3.5% per annum, payable quarterly, collateralized by
substantially all of the assets of the Company...... -- -- 125,000
Installment notes payable bearing interest at rates
ranging from 7.75% to 13% per annum, substantially
all collateralized by certain transportation
equipment or private cable television systems....... 511 280 218
Limited partner obligations (see Note 3).............. 633 714 760
Obligations under capital leases, net of amounts
representing interest of $581 and $355 for 1997 and
1996, respectively.................................. 1,299 2,185 2,878
------ -------- --------
$2,443.. $221,653 $347,767
====== ======== ========
</TABLE>
On February 14, 1997, the Company issued $225.0 million of 13% Senior Notes
Due 2005 ("Senior Notes"). The Senior Notes require semiannual interest payments
due on August 15 and February 15 of each year until their maturity on February
15, 2005. The Senior Notes are redeemable at the option of the Company generally
at a premium at any time after February 15, 2002 and can be redeemed, in part,
also at a premium, earlier upon the occurrence of certain defined events. The
Senior Notes are unsecured.
In connection with the issuance of the Senior Notes, the Company issued
225,000 shares of Class C Common. The portion of the net proceeds allocated to
the Class C Common 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
Common, the Company will no longer be included in VPC's consolidated federal
income tax return.
F-12
<PAGE> 105
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
Concurrent with the issuance of the Senior Notes, the Company was required
to deposit in an escrow account $79.6 million in cash that, together with the
proceeds from such investment, will be sufficient to pay when due the first six
interest payments on the Senior Notes. Such amount is reflected as restricted
investments on the accompanying consolidated balance sheet.
In December 1997, the Company, through subsidiaries, secured a $150 million
senior secured credit facility (the "Senior Facility") from a syndicate of
financial institutions. The Senior Facility consists of a term loan in the
amount of $125.0 million (which was drawn on December 19, 1997) bearing interest
at LIBOR plus 3.5% and a $25.0 million revolving credit commitment. The Senior
Facility is secured by a first fixed and floating lien on substantially all of
the assets of the Company and its subsidiaries. The Senior Facility contains
financial maintenance requirements and certain limitations on the Company's
ability to incur indebtedness, maximum capital expenditures, and pay dividends.
The Company is in compliance with, or has obtained waivers for, all covenants of
the Senior Credit Facility. The Company entered into an interest rate swap
agreement covering approximately $75 million of the Senior Credit Facility to
comply with certain covenants of the Senior Credit Facility.
Aggregate maturities of the Company's indebtedness are as follows as of
August 31, 1997:
<TABLE>
<CAPTION>
NOTES PAYABLE CONVERTIBLE DEFERRED
AND NOTES PAYABLE ACQUISITION
LONG-TERM TO STOCKHOLDER LIABILITIES
OBLIGATIONS (NOTE 9) (NOTE 3) TOTAL
------------- -------------- ----------- --------
<S> <C> <C> <C> <C>
Fiscal year ending:
1998............................... $ 1,587 $ -- $2,017 $ 3,604
1999............................... 811 -- -- 811
2000............................... 530 -- 4,903 5,433
2001............................... 249 -- -- 249
2002............................... 2 -- -- 2
Thereafter........................... 218,474 129,604 -- 348,078
-------- -------- ------ --------
Totals..................... $221,653 $129,604 $6,920 $358,177
======== ======== ====== ========
</TABLE>
The Company leases office space and certain equipment under operating and
capital leases. The leases generally have initial terms of 3 to 20 years.
Equipment acquired under capital leases consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
---------------
1996 1997
------ ------
<S> <C> <C>
Amount of equipment under capital leases.................... $1,717 $3,069
Less accumulated amortization............................... (298) (470)
------ ------
$1,419 $2,599
====== ======
</TABLE>
F-13
<PAGE> 106
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
Minimum future obligations on operating leases at August 31, 1997, consist
of the following:
<TABLE>
<S> <C>
Fiscal year ending:
1998............................................. $ 2,474
1999............................................. 2,285
2000............................................. 1,880
2001............................................. 1,546
2002............................................. 1,218
Thereafter......................................... 3,646
-------
Total minimum lease payments............. $13,049
=======
</TABLE>
Rental expense under operating leases for the periods ending August 31,
1995, 1996 and 1997 was $616, $2,158 and $2,763, respectively. The company's
rental expense under operating leases includes facility rentals as well as
rental of roof top space for distribution purposes.
7. COMMITMENTS AND CONTINGENCIES
Employment and Consulting Agreements -- Employment agreements with certain
executive employees provide for separation payments ranging from 3 to 24 months
of the employee's annual salary if employment is terminated due to change of
control or without cause. However, stipulations for termination payment and
payment terms vary. The Company paid or accrued approximately $1,590, $297 and
$278 in severance during 1995, 1996 and 1997, respectively, related to such
employment agreements.
Legal -- The Company is a defendant in certain lawsuits incurred in the
ordinary course of business. It is the opinion of the Company's management that
the outcome of the suits now pending will not have a material, adverse effect on
the operations, cash flows or the consolidated financial position of the
Company.
8. INCOME TAXES
The cumulative losses of Vanguard incurred prior to the transfer of its
assets to the Company on December 20, 1994, have been reported in the individual
income tax returns of Vanguard's partners. Upon transfer, the Company recorded
deferred taxes for the difference between the tax and book basis of the assets,
which was not material. Upon acquisition of the stock of the IRPC subsidiaries,
a deferred tax liability of $488 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 $19
of federal and state income tax expense.
F-14
<PAGE> 107
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
Income tax expense (benefit) consists of the following for the period from
January 1, 1995 to August 31, 1995 and the years ended August 31, 1996 and 1997:
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ -- $ --
State................................................ 19 -- --
-------- ------- -------
Total current tax expense.................... 19 -- --
Deferred tax expense (benefit)......................... (3,452) (4,470) (13,213)
Change in deferred tax valuation allowance............. 2,963 4,470 13,213
-------- ------- -------
Total income tax expense (benefit)........... $ (470) $ -- $ --
======== ======= =======
</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 years ended August 31, 1996 and 1997, is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates.......... $ (3,614) (34)% $(6,266) (34)% $(16,502) (34)%
State income taxes, net of federal tax
benefit.............................. 12 0 (1) 0 8 0
Valuation allowance.................... 2,963 28 4,470 24 13,213 27
Expenses (deductible) not deductible
for tax purposes..................... 169 2 1,797 10 (842) (2)
Utilization of current loss by parent
company in consolidated return....... -- -- -- -- 4,123 9
-------- --- ------- --- -------- ---
Total income tax benefit..... $ (470) (4)% $ -- 0% $ -- 0%
======== === ======= === ======== ===
</TABLE>
The net deferred tax assets consist of the tax effects of temporary
differences related to the following:
<TABLE>
<CAPTION>
AUGUST 31,
---------------------------
1996 1997
------------ -----------
<S> <C> <C>
Allowance for uncollectible accounts receivable.......... $ 184 $ 381
Equipment, furniture and fixtures........................ (4,540) (10,694)
Intangible assets........................................ 105 421
Accrued employee compensation............................ 183 214
Net operating loss carryforwards......................... 12,372 31,121
IRPC deferred tax liability.............................. (488) (480)
Other.................................................... (16) 59
------------ -----------
Deferred tax asset before valuation allowance.......... 7,800 21,022
Valuation allowance.................................... (7,800) (21,022)
------------ -----------
Net deferred tax asset......................... $ -- $ --
============ ===========
</TABLE>
Realization of deferred tax assets is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. The Company is
unable to determine whether these accumulated losses will be utilized;
accordingly, a valuation allowance has been provided.
F-15
<PAGE> 108
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
The following are the expiration dates and the approximate net operating
loss carryforwards at August 31, 1997:
<TABLE>
<S> <C>
Expiration Dates Through:
2010.......................................... $ 1,346
2011.......................................... 11,521
2012.......................................... 26,161
2013.......................................... 52,504
</TABLE>
Certain of the Company's net operating losses were utilized by VPC while
the Company was included in VPC's consolidated tax return. Such losses will not
be available for future use by the Company, and, accordingly, the deferred tax
benefit and valuation allowance were reduced. In connection with the revised
shareholder agreement (see Note 9), subsequent to August 31, 1997, the Company
will be reimbursed for any tax benefit generated by the Company and utilized by
VPC.
9. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER, STOCK ISSUANCE AND OTHER
TRANSACTIONS WITH STOCKHOLDERS
From December 22, 1994 through March 31, 1995, the Company borrowed $60,000
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 for the
period from December 22, 1994 until conversion on March 31, 1995, was converted
to 1,120,985 shares of Class B Common of OpTel on March 31, 1995. Concurrently,
VPC purchased 105,667 shares of OpTel's Class B Common from Vanguard.
Additionally, the Company incurred $1,587 of costs related to this conversion of
debt which was charged to additional paid-in capital.
On July 26, 1995, VPC invested $25,000 in the Company, of which $16,688
represented VPC's purchase of an additional 311,652 shares of OpTel's Class B
Common, and $8,312 represented a convertible note payable that bore interest at
15% and was convertible to 155,229 shares of Class B Common 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 $8,312 note and accrued interest of $854
into 155,229 shares of Class B Common.
From August 1995 through August 1997, the Company issued a total of
$131,400 in convertible notes ("Convertible Notes") to VPC, all of which bear
interest at 15%, generally with principal and interest due on demand. Under the
terms of the Convertible Notes, any accrued interest on which there is no demand
for payment as of each August 31, automatically converts to additional principal
payable. As of August 31, 1997, $106,678 was advanced to OpTel under the
Convertible Notes and a total of $22,926 of interest on the Convertible Notes
has been converted to principal to date. As of February 29, 1998 an additional
$10,291 of interest on the Convertible Notes has been converted to principle.
The principal and interest on Convertible Notes were convertible into Class B
Common after the earlier to occur of an initial public offering or April 30,
1999 (See Note 16).
In August 1997, in connection with a revised shareholder agreement, Capital
Communication CDPQ, Inc. ("CDPQ"), a minority stockholder of Videotron, acquired
all of Vanguard's interest in OpTel, including an option to purchase 48,937
shares of Class B Common at an exercise price of $53.55 per share, subject to
F-16
<PAGE> 109
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
adjustment, that had been granted to Vanguard in August 1996. The option was
exercised by CDPQ on August 15, 1997, resulting in the Company receiving $2,620
in cash.
In September 1996, the Company entered into a consulting agreement with a
former director of the Company who is a limited partner of Vanguard. In
connection therewith, the Company granted him a warrant to purchase up to 24,992
shares of Class A Common at an exercise price of $53.55 per share, subject to
adjustment, that is presently exercisable and expires on August 31, 1999.
VPC and an affiliate of Vanguard had each agreed to provide consultant,
advisory and management services for $350 per annum (plus travel expenses) per
party. This arrangement terminated in August 1997 with the sale of Vanguard's
interest in the Company.
10. STOCKHOLDERS' EQUITY
The Class A Common, Class B Common and Class C Common of the Company are
identical in all respects and have equal powers, preferences, rights and
privileges except that each holder of Class A Common is entitled to one vote for
each share of Class A Common held, each holder of Class B Common is entitled to
ten votes for each share of Class B Common held, and each holder of Class C
Common does not possess any voting privileges. VPC and CDPQ are the only holders
of Class B Common and, upon any transfer other than to a permitted holder, the
Class B Common automatically converts to a like number of shares of Class A
Common.
On February 7, 1997 the Company approved a stock split effected in the form
of a stock dividend. Each share of outstanding Class B Common (the only class of
common stock then outstanding) received 17.3768 additional shares. The number of
authorized shares of Class A Common and Class B Common was increased to
8,000,000 and 6,000,000, respectively. The financial statements have been
restated to reflect the stock split as if it had occurred on December 20, 1994,
the date the Company reorganized as a corporation. Additionally, the Company
authorized the issuance of 300,000 shares of Class C Common.
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, 1995, 1996 and 1997, it would match 50% of its employees' elective
contribution (to a maximum Company contribution of 3% of the employees'
compensation). For the periods ended August 31, 1995, 1996 and 1997, the
Company's match of its employees' elective contributions was $81, $188 and $289,
respectively.
12. RESTRICTED INVESTMENTS
Concurrent with the issuance of the Senior Notes, the Company was required
to deposit in an escrow account $79.6 million in cash that was subsequently
invested in U.S. Treasury securities. The securities are classified as
held-to-maturity and, at August 31, 1997, have an amortized cost basis of
$67,206, and aggregate
F-17
<PAGE> 110
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
fair value of $67,233, and gross unrealized holding gains of $27. The
contractual maturity of the securities correspond to the semi-annual interest
payments required under the Senior Notes through February 15, 2000.
13. EMPLOYEE STOCK OPTIONS AND WARRANTS
During the year ended August 31, 1997 the Company adopted a stock option
and award plan for the benefit of officers and key employees. The plan is
administered by a committee of the Board of Directors. The plan authorizes the
Board to issue incentive stock options, as defined in Section 422A(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and stock options which
do not conform to the requirements of that Code section. The Board has
discretionary authority to determine the types of options to be granted, the
persons to whom options shall be granted, the number of shares to be subject to
each option granted and the terms of the stock option agreements. Unless
otherwise specifically provided in the option agreement, (i) the exercise price
of an option will not be less than the fair market value, as determined by the
Board, of the Class A Common on the date of grant and (ii) the options vest in
equal installments on each of the second, third, fourth and fifth anniversaries
of the date of grant. The options issued as of August 31, 1997, expire ten years
from the date of grant. In the event of a "change in control," all options shall
vest and become immediately exercisable. The Board has authorized 95,137 shares
of Class A Common to be issued under the plan. Stock option activity under the
plan and warrants issued (see Note 9) for the year ended August 31, 1997, was as
follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE PRICE PER SHARE
--------- --------------- ----------------
<S> <C> <C> <C>
Options and warrants outstanding at August
31, 1996................................. -- -- --
Granted.................................... 112,115 $53.55 to $85.75 $76.70
Exercised.................................. -- -- --
Forfeited.................................. 22,078 $53.55 to $85.75 $80.92
-------
Options and warrants outstanding at August
31, 1997................................. 90,037 $53.55 to $85.75 $75.66
-------
Options and warrants exercisable at August
31, 1997................................. 27,095 $53.55 to $85.75 $56.05
Options available for grant at August 31,
1997..................................... 30,092
</TABLE>
The weighted average remaining contractual life of the stock options
outstanding at August 31, 1997 is nine years.
At August 31, 1997, the Company has reserved a total of 65,045 shares of
Class A Common for issuance upon the exercise of stock options. The Company has
also granted stock warrants in connection with an agreement to provide
consulting services (see Note 9).
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for its stock option and award plan and the stock
warrants. During 1997, the exercise price of each option granted was greater
than or equal to the estimated fair value of the Company's stock on the date of
grant. Accordingly, no compensation expense has been recognized under this plan.
For the year ended August 31, 1997, the difference between actual net loss and
loss per share and net loss and loss per share on a proforma basis as if the
Company had utilized the accounting methodology prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," would have been $44 and $.02 per
share, respectively.
F-18
<PAGE> 111
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
The estimated weighted average grant date fair value of options and
warrants granted during 1997 was $1.10 per share. For purposes of determining
fair value of each option, the Company used the minimum value method using the
following assumptions:
<TABLE>
<S> <C>
Risk-free interest rate..................... 6.18% -- 6.88%
Expected life............................... 3 to 10 years
</TABLE>
14. FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirement of SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments." The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
AUGUST 31, 1996 AUGUST 31, 1997
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents................... $ 1,677 $ 1,677 $ 87,305 $ 87,305
Restricted investments...................... -- -- 67,206 67,233
Accounts receivable......................... 3,064 3,064 4,044 4,044
Liabilities:
Accounts payable............................ 5,647 5,647 7,927 7,927
Customer deposits and deferred revenue...... 2,167 2,167 2,978 2,978
Convertible notes payable to stockholder.... 89,414 89,415 129,604 129,605
Notes payable and long-term obligations..... 2,443 2,445 221,653 228,650
Deferred acquisition liabilities............ 6,520 6,525 6,920 6,920
</TABLE>
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and customer deposits and deferred revenue approximates fair
value. The fair values of convertible notes payable to stockholder, certain
notes payable and long-term obligations and deferred acquisition liabilities are
estimated based on present values using applicable market discount rates or
rates that approximate what the Company could obtain from the open market. The
fair value of restricted investments and the Senior Notes are based on quoted
market prices. The fair value estimates presented herein are based on pertinent
information available to management as of August 31, 1996 and 1997. 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.
F-19
<PAGE> 112
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues................................. $ 5,825 $ 6,463 $ 7,320 $ 7,996
Operating Expenses....................... $ 8,000 $ 9,395 $ 10,320 $ 12,465
Other Expense............................ $ 614 $ 1,522 $ 1,573 $ 2,145
Net Income (Loss)........................ $(2,789) $(4,453) $ (4,573) $ (6,615)
Basic and diluted loss per common
share.................................. $ (1.30) $ (2.07) $ (2.02) $ (2.86)
Weighted average number of shares
outstanding............................ 2,149 2,149 2,263 2,315
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues................................. $ 9,076 $ 9,546 $ 10,495 $ 10,720
Operating expenses....................... $12,693 $14,096 $ 17,003 $ 18,841
Other expense............................ $ 3,277 $ 4,849 $ 8,867 $ 8,746
Net income (loss)........................ $(6,894) $(9,398) $(15,376) $(16,867)
Basic and diluted loss per common
share.................................. $ (2.99) $ (4.01) $ (6.08) $ (6.65)
Weighted average number of shares
outstanding............................ 2,305 2,342 2,530 2,538
</TABLE>
16. SUBSEQUENT EVENTS (UNAUDITED)
As of March 1, 1998, the Company's majority stockholder converted its
Convertible Notes payable, including accrued interest, of $139.2 million into a
like amount of Series A Preferred. Such stock earns dividends at the annual rate
of 9.75%, payable in additional shares of Series A Preferred, and is convertible
under certain circumstances and at certain prices at the option of the holder of
the shares into shares of Class B Common.
On March 3, 1998, the Company entered into a definitive purchase agreement
to acquire certain cable television and telephone assets of Interactive Cable
Systems, Inc. ("ICS"). The total purchase price is, including service agreements
and customers, approximately $80.8 million and is comprised of approximately
$4.5 million of cash, Series B Preferred with a liquidation preference of $59.4
million, and 164,272 shares of Class A Common plus assumed liabilities of $.8
million. In April, 1998, the Company completed the acquisition of approximately
62% of the assets which are the subject of the aggregate acquisition. The
Company expects the balance of the acquisition to be completed over the next few
months as ICS meets certain conditions to the purchase of these remaining
assets. Approximately 38% of the total purchase price is contingent upon ICS
meeting these conditions. The assets being acquired are located in Houston,
Dallas-Fort Worth, San Diego, Phoenix, Chicago, Denver, San Francisco, Los
Angeles, Miami-Ft. Lauderdale, Tampa-Orlando, Atlanta, Indianapolis and greater
Washington, D.C.
On April 9, 1998, a purported class action complaint was filed in the
District Court of Harris County, Texas by Gavin Stewart Clarkson, individually
and on behalf of all cable subscribers in the U.S. that have paid late fees to
either Phonoscope or the Company. The plaintiff, who formerly subscribed to
cable television services provided by Phonoscope, alleges that Phonoscope's
charging pre-established late fees for delinquent
F-20
<PAGE> 113
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
payments of cable subscription charges constitutes an illegal collection of a
penalty and that cable service providers should only be entitled to their actual
collection costs. The plaintiff seeks to enjoin Phonoscope and OpTel from
collecting, or attempting to collect, such late fees. The case is in its very
early stages and the Company has not yet been served with process of the summons
and complaint. No assurance can be given as to its ultimate outcome or that any
such outcome will not materially adversely affect the Company. OpTel believes
that it will have meritorious factual and legal defenses, and intends to defend
vigorously against these claims.
On April 27, 1998, a civil action was commenced against the Company in the
United States District Court for the Northern District of California by Octel,
charging the Company with trademark infringement, trade name infringement,
trademark dilution, and unfair competition based on its use of the name "OpTel"
and seeking to enjoin the Company from using the name "OpTel." The Civil Action
follows a now-suspended administrative proceeding in the Patent and Trademark
Office ("PTO") relating to registration of the "OpTel" mark by the Company. The
PTO found the Company's application for registration to be allowable; however,
Octel commenced the PTO proceeding claiming that the Company's mark is
confusingly similar to the "Octel" mark used by that party in a related field,
and claiming that the Company's application had procedural deficiencies. During
the course of the PTO proceeding, the Company acquired rights to the marks
"Optel" and "Optel Communications" in the telecommunications field which are
believed to predate the rights of Octel to its trademark, and the Company
commenced two further proceedings against Octel in the PTO seeking cancellation
of two of the trademark registrations owned by Octel. The various proceedings in
the PTO between the Company and Octel were consolidated and thereafter suspended
on May 15, 1998, in view of the commencement of the civil action. The Company
believes it has meritorious counterclaims in the Civil Action and intends to
vigorously defend against Octel's claims. Although the Company does not believe
that its use of the name "OpTel" infringes on the trademark or trade name rights
of Octel or any other person, there can be no assurance as to the outcome of the
civil action or that the Company will not be enjoined from the use of the name
and trademark "OpTel" or the proceedings in the PTO (if reinstated) or that any
such outcome would not materially adversely affect the Company.
F-21
<PAGE> 114
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma information is based on the historical
financial statements of the Company and the historical financial statements of
the assets and liabilities of ICS Communications, L.L.C. (the "ICS Operations")
acquired by the OpTel, Inc. ("Company").
The pro forma statements of operations for the year ended August 31, 1997
and the six months ended February 28, 1998 have been prepared to illustrate the
effects of the acquisition as if it had occurred on the first day of the periods
presented. The pro forma balance sheet as of February 28, 1998 has been prepared
as if the acquisition had occurred on that date. The unaudited pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable. The pro forma financial information and
accompanying notes should be read in conjunction with the consolidated financial
statements and other financial information included elsewhere herein pertaining
to the Company and the ICS Operations, including "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The pro forma financial information is not necessarily indicative
of either future results of operations or the results that might have been
achieved if such transactions had been consummated on the indicated dates.
The acquisition of the ICS Operations was accounted for using the purchase
method of accounting. The aggregate purchase price is allocated to the tangible
and intangible assets and liabilities acquired based upon their respective fair
values. The allocation of the aggregate purchase price reflected in the pro
forma financial information is preliminary, the final allocation of the purchase
price is contingent upon the final valuation of the acquired assets and the
revision of other estimates; however, the allocation is not expected to differ
materially from the preliminary allocation.
F-22
<PAGE> 115
OPTEL, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
AS OF FEBRUARY 28, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL
----------------------
ICS PRO FORMA COMPANY
COMPANY OPERATIONS ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
(A) (B)
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 18,388 $ $(4,544)(D) $ 13,844
Restricted investments.......................... 54,509 54,509
Short-term investments.......................... 111,154 111,154
Accounts receivable............................. 5,440 1,332 6,772
Prepaid expenses, deposits and other assets..... 1,851 290 (41)(C) 2,100
Property and equipment, net..................... 203,778 21,084 716(C) 225,578
Intangible assets, net.......................... 110,051 8,167 51,526(C) 169,744
--------- ------- ------- ---------
TOTAL................................. $ 505,171 $30,873 $47,657 $ 583,701
========= ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................ $ 6,042 $ $ $ 6,042
Accrued expenses and other liabilities.......... 16,120 1,330(E) 17,450
Deferred revenue and customer deposits.......... 4,004 842 4,846
Convertible notes payable to Stockholder........ 139,244 139,244
Notes payable and long-term obligations......... 347,767 807 (14)(C) 348,560
Deferred acquisition liabilities................ 5,656 5,656
--------- ------- ------- ---------
Total liabilities..................... 518,833 1,649 1,316 521,798
Stockholders' equity(deficit)
Series B Preferred stock, 8.0%................ 59,466(F) 59,466
Class A Common................................ 2(G) 2
Class B Common................................ 24 24
Class C Common................................ 2 2
Additional paid-in-capital.................... 97,683 16,097(G) 113,780
Accumulated deficit........................... (111,371) (111,371)
--------- ------- ------- ---------
Total stockholders' equity
(deficit)........................... (13,662) 75,565 61,903
--------- ------- ------- ---------
TOTAL................................. $ 505,171 $ 1,649 $76,881 $ 583,701
========= ======= ======= =========
</TABLE>
See notes to unaudited pro forma financial information.
F-23
<PAGE> 116
OPTEL, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS -- YEAR ENDED AUGUST 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------- PRO FORMA COMPANY
COMPANY ICS OPERATIONS ADJUSTMENTS PRO FORMA
--------------- ----------------- ----------- ---------
(H) (I)
<S> <C> <C> <C> <C>
REVENUES:
Cable television.......................................... $ 36,915 $14,419 $ $ 51,334
Telecommunications........................................ 2,922 2,209 5,131
-------- ------- ------- --------
Total revenues..................................... 39,837 16,628 56,465
OPERATING EXPENSES:
Cost of services.......................................... 19,202 8,947 28,149
Customer support, general and administrative.............. 28,926 5,518 1,086(K) 35,530
Depreciation and amortization............................. 14,505 8,089 3,358(L) 25,952
-------- ------- ------- --------
Total operating expenses........................... 62,633 22,554 4,444 89,631
LOSS FROM OPERATIONS........................................ (22,796) (5,926) (4,444) (33,166)
Interest expense on -- Convertible Notes.................... (15,204) (15,204)
Other interest expense...................................... (16,210) (142) (16,352)
Interest and other income................................... 5,675 5,675
-------- ------- ------- --------
LOSS BEFORE INCOME TAXES.................................... (48,535) (6,068) (4,444) (59,047)
INCOME TAXES................................................
-------- ------- ------- --------
NET LOSS.................................................... $(48,535) $(6,068) $(4,444) $(59,047)
-------- ------- ------- --------
DIVIDENDS ON PREFERRED SHARES:
Series B Preferred Stock 8.0%............................. $ (4,757)(M)
-------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.................... $(48,535) $(63,804)
======== ========
BASIC AND DILUTED LOSS PER SHARE............................ $ (19.98) $ (24.60)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 2,430 2,594(G)
======== ========
</TABLE>
- ---------------
See notes to unaudited pro forma financial information.
F-24
<PAGE> 117
OPTEL, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------- PRO FORMA COMPANY
COMPANY ICS OPERATIONS ADJUSTMENTS PRO FORMA
----------------- ----------------- ----------- ---------
(H) (J)
<S> <C> <C> <C> <C>
REVENUES:
Cable television.......................................... $ 25,247 $ 7,606 $ $ 32,853
Telecommunications........................................ 1,644 917 2,561
-------- ------- ------- --------
Total revenues..................................... 26,891 8,523 35,414
OPERATING EXPENSES:
Cost of services.......................................... 12,419 3,854 16,273
Customer support, general and administrative.............. 15,855 2,426 555(K) 18,836
Depreciation and amortization............................. 10,759 4,044 1,679(L) 16,482
-------- ------- ------- --------
Total operating expenses........................... 39,033 10,324 2,234 51,591
LOSS FROM OPERATIONS........................................ (12,142) (1,801) (2,234) (16,177)
Interest expense on Convertible Notes....................... (9,640) (9,640)
Other interest expense...................................... (16,386) (71) (16,457)
Interest and other income................................... 4,141 4,141
-------- ------- ------- --------
LOSS BEFORE INCOME TAXES.................................... (34,027) (1,872) (2,234) (38,133)
INCOME TAXES................................................
-------- ------- ------- --------
NET LOSS.................................................... $(34,027) $(1,872) $(2,234) $(38,133)
-------- ------- ------- --------
DIVIDENDS ON PREFERRED SHARES:
Dividends -- Series B Preferred, 8.0%..................... $ (2,379)(M)
-------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.................... $(34,027) $(40,512)
BASIC AND DILUTED LOSS PER SHARE............................ $ (13.20) $ (14.77)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 2,578 2,742(G)
======== ========
</TABLE>
See notes to unaudited pro forma financial information.
F-25
<PAGE> 118
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(A) Represents the historical unaudited consolidated balance sheet of the
Company as of February 28, 1998.
(B) Represents the historical unaudited statement of assets and liabilities
acquired of ICS Communications, LLC ("ICS Operations") as of March 31, 1998
acquired by the Company.
(C) Reflects the adjustment to the assets purchased and liabilities assumed to
record them at their estimated fair value and the recording of goodwill for
the excess of the aggregate purchase price over the fair value of the
tangible and intangible assets acquired. The preliminary allocation of the
purchase price is as follows:
<TABLE>
<CAPTION>
ALLOCATION OF CARRYING PRO FORMA
PURCHASE PRICE VALUE ADJUSTMENTS
-------------- -------- -----------
<S> <C> <C> <C>
Accounts receivable, net................................. $ 1,332 $ 1,332 $
Prepaid expenses and other............................... 249 290 (41)
Property and equipment, net.............................. 21,800 21,084 716
Intangible assets, net................................... 59,693 8,167 51,526
Accrued acquisition costs................................ (1,330) -- (1,330)
Deferred revenue and customer deposits................... (842) (842) --
Notes payable and long-term obligations.................. (793) (807) 14
-------
Total.......................................... $80,109
=======
</TABLE>
(D) Represents the cash payment to purchase the ICS Operations.
(E) Represents the estimated costs of the acquisition including professional
fees.
(F) Represents the issuance of 991.1 shares (liquidation preference of $59,466)
of Series B Preferred to purchase the ICS Operations.
(G) Represents the issuance of 164,272 shares of Class A Common, $.01 par value
at an estimated price per share of $98 and total fair value of $16,099 to
purchase the ICS Operations.
(H) Represents the historical consolidated statement of operations of the
Company for the period indicated.
(I) Represents the unaudited statement of revenues and direct expenses of the
ICS Operations for the year ended November 30, 1997. Such presentation is
made to conform to the Company's quarter ended November 30, 1997 and were
derived from the financial records of ICS using the audited December 31,
1997, statement of revenues and direct expenses adjusted for the exclusion
of the December 1997 results and inclusion of the December 1996 results.
The amounts include amounts representing allocated regional overhead
attributable to the acquired operations. The statement of revenues and
direct expenses include only the results of operations for the assets
acquired and liabilities assumed and do not include any amounts
representing corporate overhead of ICS or interest incurred on liabilities
not assumed by the Company.
(J) Represents the unaudited statement of revenues and direct expenses of the
acquired ICS Operations for the six months ended February 28, 1998 and were
derived from the financial records of ICS. The statement of revenues and
direct expenses include only the results of operations for the assets
acquired and liabilities assumed and do not include any amounts
representing corporate overhead of ICS or interest incurred on liabilities
not assumed by the Company. The amounts do include amounts representing
allocated regional overhead attributable to the acquired operations.
(K) Represents incremental customer support, corporate and administrative
expenses not included in the historical financial statements of the
acquired ICS Operations. The amounts have been estimated based upon the
Company's average historical cost per subscriber for the appropriate period
applied to the expected number of subscribers added as part of the
acquisition.
(L) Represents an adjustment to depreciation expense for acquired property and
equipment and to record amortization expense for the acquired intangible
assets over 5 to 15 years.
(M) Represents adjustment to reflect cumulative dividend accrued during the
period presented, assuming issuance on the first day of the period
presented, for the $59,466 of the Company's Series B Preferred issued to
acquire the ICS Operations. The adjustment reflects the Series B Preferred
dividend accrual rate of 8.0%.
F-26
<PAGE> 119
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.
We have audited the accompanying statement of assets and liabilities of ICS
Communications, LLC acquired by OpTel, Inc. ("OpTel") as of December 31, 1997,
and the statement of revenues and direct expenses of such assets and liabilities
for the year then ended. These financial statements are the responsibility of
OpTel'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, such financial statements present fairly, in all material
respects, the assets and liabilities of ICS Communications, LLC acquired by
OpTel, Inc. at December 31, 1997 and the related revenues and direct expenses
for the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
May 15, 1998
Dallas, Texas
F-27
<PAGE> 120
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
STATEMENTS OF ASSETS AND LIABILITIES ACQUIRED
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ---------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable (Net of allowance for doubtful accounts
of $737,000 and $333,000)................................. $ 1,181,677 $ 1,332,000
Prepaid expenses, deposits and other assets................. 295,639 290,233
Property and equipment, net (Note 2)........................ 21,824,123 21,084,342
Intangible assets, net (Note 3)............................. 9,241,488 8,166,744
----------- -----------
Total assets...................................... 32,542,927 30,873,319
----------- -----------
LIABILITIES
Deferred revenues and customer deposits..................... 758,109 841,620
Capital lease obligations (Note 4).......................... 825,056 807,047
----------- -----------
Total liabilities................................. 1,583,165 1,648,667
----------- -----------
Net assets acquired............................... $30,959,762 $29,224,652
=========== ===========
</TABLE>
See notes to financial statements.
F-28
<PAGE> 121
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
STATEMENTS OF REVENUES AND DIRECT EXPENSES
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
<S> <C> <C>
REVENUES:
Cable television.......................................... $14,559,625 $4,028,128
Telecommunications........................................ 2,127,310 354,587
----------- ----------
Total revenues.................................... 16,686,935 4,382,715
OPERATING EXPENSES:
Cost of services.......................................... 8,747,441 1,909,037
Customer support, general and administrative.............. 5,371,633 1,215,493
Depreciation and amortization............................. 8,088,727 1,988,608
----------- ----------
Total operating expenses.......................... 22,207,802 5,113,138
----------- ----------
LOSS FROM OPERATIONS........................................ (5,520,867) (730,423)
INTEREST EXPENSE............................................ (141,504) (35,376)
----------- ----------
NET LOSS.................................................... $(5,662,371) $ (765,799)
=========== ==========
</TABLE>
See notes to financial statements.
F-29
<PAGE> 122
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements include the accounts of ICS
Communications, LLC (the "Company") only as they relate to the assets acquired
and liabilities assumed by OpTel, Inc. ("OpTel") on April 9, 1998. The statement
of revenues and direct expenses include only the results of operations for the
assets acquired and liabilities assumed and do not include any amounts
representing corporate overhead of the Company or interest incurred on
liabilities not assumed by OpTel. In preparation of the statement of revenues
and direct expenses, certain regional overhead costs were allocated to the
assets acquired. Such allocations were based upon subscriber counts, cable
passings or other criteria as considered appropriate.
The Company's operations are in a single business segment, the providing of
cable television and local and long distance telephone services to the high
density residential market, including apartment complexes, condominiums and
other multi-family residential properties (collectively "MDUs"). The Company
provides these services generally under exclusive, long-term contracts with
owners and managers of MDUs.
The assets acquired include long-term contracts to provide cable television
and telephone services to MDU properties, the property and equipment comprising
the cable television and telephone delivery systems for each of the contracts,
other prepaid assets specifically identified at the date of the purchase
(generally prepaid rent on delivery equipment) and customer receivables. In
connection with the purchase, certain liabilities were assumed, generally
capital lease obligations related to the property and equipment used in
telephone delivery systems.
The primary markets of the assets acquired are major metropolitan areas in
Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Texas, and
the greater Washington D.C. area.
Interim Financial Information -- The accompanying unaudited consolidated
financial statements of the Company have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial information. In
the opinion of management, all adjustments (consisting only of normal recurring
entries) considered necessary for a fair presentation have been included.
Operating results for the three month periods ended March 31, 1998, are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other interim period.
Property and Equipment -- Property and equipment, including equipment under
capital leases, is stated at cost, which includes amounts for construction
materials, direct labor and overhead and capitalized interest. Cost of
maintenance and repairs is charged to operations as incurred. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
various classes of property and equipment as follows:
<TABLE>
<S> <C>
Installed cable and headend equipment............ 5-10 years
Telephone switches and equipment................. 5-10 years
</TABLE>
Intangible Assets -- Intangible assets includes 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. Intangible assets are amortized using the
straight-line method over the lesser of the term of the right-of-entry agreement
or 5 years.
Revenue Recognition -- Cable subscriber fees for basic monthly services and
premium channels are billed in advance and recorded as revenue in the month the
service is provided. Telecommunication service billings include residential
service fees billed in advance plus amounts based on minutes of use billed in
arrears. Telecommunications service revenues are recognized in the month the
service is provided.
F-30
<PAGE> 123
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
Cost of Services -- System operating costs include programming,
telecommunications service costs, revenue sharing with owners of MDUs and
franchise fees.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates included in the accompanying financial statements include
the allowance for doubtful accounts, the recoverability of the carrying value of
property and equipment and intangible assets and the allocation of regional
overhead as it relates to the assets acquired. Actual results could differ from
those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997, including assets under capital
lease, consist of the following:
<TABLE>
<S> <C>
Installed cable and headend equipment.......... $ 30,051,718
Telephone switches and equipment............... 2,020,330
------------
Sub-total............................ 32,072,048
Less accumulated depreciation................ (10,247,925)
------------
Property and equipment, net.......... $ 21,824,123
============
</TABLE>
Telephone switches and equipment at December 31, 1997 include $1,238,273 in
net assets under capital lease.
3. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 consist of the following:
<TABLE>
<S> <C>
Rights-of-entry costs.......................... $ 21,979,856
Less accumulated amortization................ (12,738,368)
------------
Intangible assets, net............... $ 9,241,488
============
</TABLE>
4. CAPITAL LEASE OBLIGATIONS
During 1995 and 1996 the Company entered into capital leases for telephone
equipment with five year terms. The leases are payable in monthly installments
ranging from $1,267 to $2,121 bearing interest at rates ranging from 10.4% to
13.0%. Scheduled maturities on capital lease obligations are as follows:
<TABLE>
<S> <C>
Year ending:
1998........................................... $ 379,980
1999........................................... 379,980
2000........................................... 243,440
Thereafter..................................... --
----------
Total payments......................... 1,003,400
Less amounts representing interest............. (178,344)
----------
Capital lease obligation............... $ 825,056
==========
</TABLE>
F-31
<PAGE> 124
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
5. RELATED PARTY TRANSACTIONS
The Company's largest shareholder is MCI Telecommunications Corporation
("MCI"). In the ordinary course of the Company's local and long distance
telephone services, the Company purchases certain services from MCI under terms
and rates that management believes are no more favorable to the Company than
those arranged with other parties.
F-32
<PAGE> 125
======================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. 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 AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 3
Risk Factors............................ 11
Use of Proceeds......................... 24
Dividend Policy......................... 24
Capitalization.......................... 25
Dilution................................ 26
Selected Historical Consolidated
Financial and Operating Data.......... 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 30
Business................................ 38
Management.............................. 61
Principal Stockholders.................. 69
Certain Relationships and Related
Transactions.......................... 72
Description of Capital Stock............ 75
Certain Federal Income Tax
Considerations........................ 81
Description of Certain Indebtedness..... 83
Underwriting............................ 85
Certain Market Information.............. 86
Legal Matters........................... 86
Experts................................. 87
Additional Information.................. 87
Glossary................................ A-1
Index to Financial Statements........... F-1
</TABLE>
------------------
Until , 1998 (25 days after the date of this Prospectus), 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 obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
SHARES
OPTEL, INC.
CLASS A COMMON STOCK
[LOGO]
------------
PROSPECTUS
, 1998
------------
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
CIBC OPPENHEIMER
======================================================
<PAGE> 126
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following statement sets forth the expenses payable in connection with
this Registration Statement (estimated except for the registration fee and the
NASD filing fee), all of which will be borne by OpTel:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............... $ 29,500
NASD filing fee............................................. $ 10,500
National Market listing fee................................. $ 50,000
Legal fees and expenses..................................... $200,000
Accountant's fees and expenses.............................. $150,000
Printing costs.............................................. $150,000
Miscellaneous............................................... $160,000
--------
Total............................................. $750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that the Company shall,
to the fullest extent permitted by 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 Company 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 Company's
Certificate of Incorporation also contains a provision eliminating the personal
liability of the Company's directors for monetary damages for breach of any
fiduciary duty. By virtue of this provision, under the DGCL, a director of the
Company will not 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 Company 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 the DGCL, and (iv) any transaction from which a director derives
an improper personal benefit. However, this provision of the Company'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 the DGCL 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 Company'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 Company and its stockholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On April 13, 1998, in connection with the initial closing of the
acquisition of the ICS Operations and the payment of the purchase price thereof,
the Company issued 164,271.54 shares of Class A Common Stock and 991.1039 shares
of the Series B Preferred. Such issuances were made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act as transactions
by an issuer not involving a public offering. All of the securities were
acquired by the recipients thereof for investment and with no view toward the
sale or redistribution thereof. The sales were made without any public
solicitation; the stock certificates bear restrictive legends and appropriate
stop transfer instructions have been or will be given to the transfer agent.
II-1
<PAGE> 127
Effective March 1, 1998, VPC exchanged $139.2 million principal amount of
the GVL Notes, constituting all of the GVL Notes, for 6,962.21365 shares of the
Series A Preferred. The issuance of the shares of Series A Preferred in exchange
for the GVL Notes was made in reliance on the exemption from registration
provided by Section 3(a)(9) of the Securities Act for securities exchanged by an
issuer with its existing security holders exclusively. No commissions or other
remuneration was paid or given for soliciting such exchange.
In August 1997, in connection with CDPQ's purchase of Vanguard's minority
interest in the Company, CDPQ exercised the Vanguard Option and purchased 48,937
shares of the Multi-Vote Common at a price of $53.55 per share (aggregate
consideration of $2,620,392). The issuance of the shares of Multi-Vote Common
pursuant to CDPQ's exercise of the Vanguard Option was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. The securities were
acquired by the recipient thereof for investment and with no view toward the
sale or redistribution thereof. The securities were acquired without any public
solicitation; the securities bears a restrictive legend and appropriate stop
transfer instructions have been or will be given to the transfer agent.
On July 11, 1997, the Company issued to Mr. Cole a warrant to purchase up
to 9406.36 shares of Class A Common Stock at an exercise price of $74.42 per
share, subject to adjustment, in consideration for Mr. Cole's separation
agreement. The warrant is exercisable until July 11, 2002. On July 3, 1997, the
Company issued to Mr. Hecht a warrant to purchase up to 728.86 shares of Class A
Common Stock at an exercise price of $85.75 per share, subject to adjustment, in
consideration for Mr. Hecht's settlement agreement. The warrant is exercisable
until December 31, 2000. The issuance of these securities was made in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act as transactions by an issuer not involving a public offering. The securities
were acquired by the recipients thereof for investment and with no view toward
the sale or redistribution thereof. The securities were acquired without any
public solicitation; the securities bear restrictive legends and appropriate
stop transfer instructions have been or will be given to the transfer agent.
During February 1997, the Company issued $225,000,000 principal amount of
Senior Notes and 225,000 shares of the Non-Voting Common to qualified
institutional buyers who purchased the securities in a private placement
pursuant to Rule 144A and/or Regulation D. The gross proceeds of this private
placement were approximately $220 million. In each instance, the offers and
sales were made without any public solicitation; the note and stock certificates
bear restrictive legends; and appropriate stop transfer instructions have been
or will be given to the transfer agent. In connection with such offering,
Salomon Brothers Inc and Merrill Lynch, Pierce Fenner & Smith Incorporated
received customary commissions. All issuances of securities in this private
placement were made in reliance on the exemptions from registration provided by
Section 4(2) of the Securities Act, and Rule 144A and Regulation D promulgated
thereunder, as transactions by an issuer not involving a public offering.
During fiscal 1997 and fiscal 1998, the Company granted options to purchase
a total of 119,971.71 shares of Class A Common Stock to certain employees of the
Company as part of their compensation packages. Such issuances were made in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. All
of the securities were acquired by the recipients thereof for investment and
with no view toward the sale or redistribution thereof. The securities were
acquired without any public solicitation; the securities bear restrictive
legends; and appropriate stop transfer instructions have been or will be given
to the transfer agent.
On September 1, 1996, the Company issued to Mr. Kofalt a warrant to
purchase up to 24,992 shares of Class A Common Stock at an exercise price of
$53.55 per share in consideration for Mr. Kofalt's separation agreement. The
warrant is exercisable until August 31, 1999. The issuance of this security was
made in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering. The security was acquired by the recipient thereof for investment and
with no view toward the sale or redistribution thereof. The security was
acquired without any public solicitation; the security bears a restrictive
legend; and appropriate stop transfer instructions have been or will be given to
the transfer agent.
II-2
<PAGE> 128
In August 1996, in connection with a negotiated settlement of certain
disputes between the Company and Vanguard, which at such time held a minority
interest in the Company, the Company granted Vanguard an option to purchase
48,937 shares of Multi-Vote Common at an exercise price of $53.55 per share,
subject to adjustment. The issuance of this security was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. The security was
acquired by the recipient thereof for investment and with no view toward the
sale or redistribution thereof. The Vanguard Option was subsequently transferred
to, and exercised by, CDPQ.
The Company issued GVL Notes to VPC in the amount of $23.7 million , $73.4
million and $17.8 million during fiscal 1997, fiscal 1996 and the eight-month
period ended August 31, 1995, respectively. All of the GVL Notes were
subsequently exchanged for shares of Series A Preferred, as described above. The
issuance of the GVL Notes was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act as transactions not
involving a public offering. The GVL Notes were acquired by VPC for investment
and with no view toward the sale or distribution thereof.
ITEM 16. EXHIBITS AND FINANCIAL DATA SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Proposed Form of Underwriting Agreement.*
2.1 -- Purchase Agreement (the "ICS Purchase Agreement") among
OpTel, ICS and ICS Licenses, Inc. dated as of March 4,
1998.
2.2 -- Amendment Number One to the ICS Purchase Agreement dated
as of March 4, 1998.
2.3 -- Purchase Agreement (the "Phonoscope Purchase Agreement")
dated as of August 13, 1997 among OpTel, Phonoscope,
Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook
and Lee Cook Family Trust.(2)
2.4 -- Amendment Number One to the Phonoscope Purchase Agreement
dated as of August 13, 1997.
2.5 -- Amendment Number Two to the Phonoscope Purchase Agreement
dated as of August 13, 1997.
3.1 -- Amended and Restated Certificate of Incorporation of
OpTel, together with all amendments thereto.*
3.2 -- Amended and Restated Bylaws of OpTel.*
4.1 -- See the Amended and Restated Certificate of Incorporation
and the amendments thereto filed as Exhibit 3.1 and the
Amended and Restated Bylaws filed as Exhibit 3.2.
4.2 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series A Preferred.
4.3 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series B Preferred.
4.4 -- Registration Agreement, dated as of February 14, 1997,
between OpTel and Salomon Brothers Inc and Merrill Lynch,
Pierce, Fenner & Smith Incorporated.(1)
4.5 -- Common Stock Registration Rights Agreement, dated as of
February 14, 1997, among OpTel, VPC, GVL and Salomon
Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and U.S. Trust Company of Texas, N.A.(1)
4.6 -- Registration Rights Agreement, dated as of August 15,
1997, between OpTel and CDPQ.(2)
</TABLE>
II-3
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
4.7 -- Registration Rights Agreement dated as of April 9, 1998
between OpTel, ICS, Nomura and MCI.
4.8 -- Warrant Agreement dated as of September 1, 1996 between
OpTel and James A. Kofalt.(1)
4.9 -- Warrant Agreement, dated as of July 11, 1997, between
OpTel and Rory O. Cole.(2)
4.10 -- Indenture, dated as of February 14, 1997, between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee.(1)
4.11 -- Form of Senior Note (included in Exhibit 4.10).(1)
4.12 -- Escrow Agreement, dated as of February 14, 1997, between
OpTel and U.S. Trust Company of Texas, N.A., as Trustee
and as Escrow Agent.(1)
5.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP.*
8.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP re: Tax
matters (included in Exhibit 5.1)
10.1 -- Stockholders' Agreement, dated as of December 22, 1994,
between VPC, Vanguard, Vanguard Communications, Inc.
("General Partner") and OpTel.(1)
10.2 -- Registration Rights Agreement, dated as of December 22,
1994, between OpTel and Vanguard.(1)
10.3 -- Settlement Agreement, dated as of August 1, 1996, between
Vanguard, General Partner, Pacific Capital Group, Inc.
("Pacific"), VPC, OpTel and GVL.(1)
10.4 -- Amendment, dated as of February 17, 1997, between
Vanguard, General Partner, Pacific, VPC, OpTel and
GVL.(1)
10.5 -- Form of Convertible Note (included as Exhibit B to the
Amendment referenced as Exhibit 10.4 hereto) and a list
of the issue dates and principal amounts of all
outstanding Convertible Notes (included as Schedule 1 to
the Amendment referenced as Exhibit 10.4 hereto).(1)
10.6 -- Stockholders' Agreement dated as of August 15, 1997 by
and among VPC, CDPQ and OpTel.(3)
10.7 -- Stockholders' Agreement dated as of April 9, 1998 among
OpTel, Nomura, MCI, GVL and ICS.
10.8 -- Lease Agreement dated July 25, 1995 between Space Center
Dallas, Inc. and OpTel.(1)
10.9 -- First Amendment to Lease Agreement dated August 8, 1996
between Space Center Dallas, Inc. and OpTel.(1)
10.10 -- Restated Incentive Stock Plan of OpTel.*
10.11 -- Annual Bonus Plan of OpTel.(1)
10.12 -- 1998 Employee Stock Purchase Plan of OpTel.*
10.13 -- Employment Agreement between Louis Brunel and OpTel dated
November 15, 1996.(1)
10.14 -- Employment Agreement between Rory Cole and OpTel dated
January 3, 1997.(1)
10.15 -- Employment Agreement between Michael Katzenstein and
OpTel dated September 18, 1995.(1)
10.16 -- Separation and Consulting Agreement, dated as of
September 1, 1996, between OpTel and James A. Kofalt.(1)
10.17 -- Separation Agreement dated as of July 11, 1997, between
OpTel and Rory O. Cole.
</TABLE>
II-4
<PAGE> 130
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.18 -- Assignment Agreement, dated as of February 14, 1997,
among TVMAX, Sunshine Television Entertainment, Inc.,
Richey Pacific Cablevision, Inc., IRPC Arizona, Inc. and
THI.(1)
10.19 -- Equipment License and Services Agreement, dated as of
February 14, 1997, between TVMAX and THI.(1)
10.20 -- 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.(1)
10.21 -- Option Agreement, dated as of February 14, 1997, between
TVMAX and THI.(1)
10.22 -- City of Houston, Texas, Ordinance No. 89-338 dated March
29, 1989 granting to PrimeTime Cable Partners I, Ltd. the
right to operate for 15 years a Community Antenna
Television System, and subsequent ordinances consenting
to assignment of rights to EagleVision and to TVMAX
Communications (Texas), Inc.(1)
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.(1)
10.24 -- City of Houston, Texas, Ordinance No. 97-1088 dated
September 3, 1997, extending to TVMAX Communications
(Texas), Inc. a temporary permit to operate a
Telecommunications Network (originally granted pursuant
to the permit referenced in Exhibit 10.23 hereto).(2)
10.25 -- City of Houston, Texas, Ordinance No. 97-1567 dated
December 23, 1997, granting to TVMAX Communications
(Texas), Inc. a franchise to operate a Telecommunications
Network (superseding and replacing the temporary permits
referenced in Exhibits 10.23 and 10.24 hereto).
10.26 -- Amendment Number 001 to the Videotron/Lucent Agreement,
dated August 28, 1997, among Videotron Telecom Ltee and
Lucent Technologies Canada Inc. and TVMAX and Lucent
Technologies Inc.(2)
10.27 -- Credit Agreement dated as of December 19, 1997 (the
"Credit Agreement") among TVMAX, OpTel, Goldman Sachs
Credit Partners L.P., as arranger and syndication agent,
Canadian Imperial Bank of Commerce, individually and as
administrative agent, General Electric Capital
Corporation, individually and as documentation agent, and
the lenders party thereto from time to time
(collectively, the "Lenders").
10.28 -- First Amendment to the Credit Agreement dated as of April
29, 1998.
10.29 -- Guaranty dated as of December 19, 1997 between OpTel and
the Lenders.*
10.30 -- Pledge Agreement dated as of December 19, 1997 between
OpTel and the Lenders.*
10.31 -- Security Agreement dated as of December 19, 1997 between
OpTel and the Lenders.*
10.32 -- Interconnection Agreement under Sections 251 and 252 of
the Telecom Act by and between Southwestern Bell
Telephone Company and OpTel (Texas) Telecom, Inc.(2)
21.1 -- List of Subsidiaries of the Company.(3)
23.1 -- Consent of Kronish, Lieb, Weiner & Hellman LLP included
in Exhibit 5.1.
23.2 -- Consent of Deloitte & Touche LLP.
24.1 -- Power of Attorney is set forth on the signature page of
this Registration Statement.
</TABLE>
II-5
<PAGE> 131
- ---------------
(1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with
the Commission on April 10, 1997.
(2) Filed as an exhibit to the Company's 10-K filed with the Commission for
fiscal year ended August 31, 1997.
(3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for
fiscal year ended August 31, 1997.
* To be filed by Amendment to this Registration Statement.
(b) The financial statements and financial statement schedules filed as
part of this Registration Statement are as follows:
1. Financial Statements. See Index to Financial Statements on page F-1
of the Prospectus included in this Registration Statement.
2. Financial Statement Schedules.
All schedules have been omitted as they are not required under the related
instructions, are inapplicable, or because the information required is included
in the financial statements and related notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by OpTel pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus 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 initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of OpTel
pursuant to the foregoing provisions, or otherwise, OpTel has been advised that
in the opinion of the 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 OpTel of expenses incurred or paid by a director, officer or
controlling person of OpTel 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, OpTel 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-6
<PAGE> 132
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on this 5th day of June, 1998.
OPTEL, INC.
By: /s/ LOUIS BRUNEL
----------------------------------
Louis Brunel
President and Chief Executive
Officer
Each person whose signature appears below constitutes and appoints Louis
Brunel and Bertrand Blanchette or either of them (with full power in each to act
alone), his true and lawful attorneys-in-fact, with full power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith including, without limitation, any registration
statements for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act with the Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Principal Executive Officer:
/s/ LOUIS BRUNEL President and Chief Executive June 5, 1998
- ----------------------------------------------------- Officer
Louis Brunel
Principal Financial and Accounting Officers:
/s/ BERTRAND BLANCHETTE Chief Financial Officer June 5, 1998
- -----------------------------------------------------
Bertrand Blanchette
/s/ CRAIG MILACEK Controller June 5, 1998
- -----------------------------------------------------
Craig Milacek
Other Directors:
/s/ CLAUDE CHAGNON Chairman of the Board June 5, 1998
- -----------------------------------------------------
Claude Chagnon
/s/ ALAIN MICHEL Vice Chairman of the Board June 5, 1998
- -----------------------------------------------------
Alain Michel
/s/ LOUIS BRUNEL Director June 5, 1998
- -----------------------------------------------------
Louis Brunel
/s/ CHRISTIAN CHAGNON Director June 5, 1998
- -----------------------------------------------------
Christian Chagnon
/s/ WILLIAM O. HUNT Director June 5, 1998
- -----------------------------------------------------
William O. Hunt
/s/ LYNN MCDONALD Director June 5, 1998
- -----------------------------------------------------
Lynn McDonald
</TABLE>
II-7
<PAGE> 133
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 -- Proposed Form of Underwriting Agreement.*
2.1 -- Purchase Agreement (the "ICS Purchase Agreement") among
OpTel, ICS and ICS Licenses, Inc. dated as of March 4,
1998.
2.2 -- Amendment Number One to the ICS Purchase Agreement dated
as of March 4, 1998.
2.3 -- Purchase Agreement (the "Phonoscope Purchase Agreement")
dated as of August 13, 1997 among OpTel, Phonoscope,
Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook
and Lee Cook Family Trust.(2)
2.4 -- Amendment Number One to the Phonoscope Purchase Agreement
dated as of August 13, 1997.
2.5 -- Amendment Number Two to the Phonoscope Purchase Agreement
dated as of August 13, 1997.
3.1 -- Amended and Restated Certificate of Incorporation of
OpTel, together with all amendments thereto.*
3.2 -- Amended and Restated Bylaws of OpTel.*
4.1 -- See the Amended and Restated Certificate of Incorporation
and the amendments thereto filed as Exhibit 3.1 and the
Amended and Restated Bylaws filed as Exhibit 3.2.
4.2 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series A Preferred.
4.3 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series B Preferred.
4.4 -- Registration Agreement, dated as of February 14, 1997,
between OpTel and Salomon Brothers Inc and Merrill Lynch,
Pierce, Fenner & Smith Incorporated.(1)
4.5 -- Common Stock Registration Rights Agreement, dated as of
February 14, 1997, among OpTel, VPC, GVL and Salomon
Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and U.S. Trust Company of Texas, N.A.(1)
4.6 -- Registration Rights Agreement, dated as of August 15,
1997, between OpTel and CDPQ.(2)
4.7 -- Registration Rights Agreement dated as of April 9, 1998
between OpTel, ICS, Nomura and MCI.
4.8 -- Warrant Agreement dated as of September 1, 1996 between
OpTel and James A. Kofalt.(1)
4.9 -- Warrant Agreement, dated as of July 11, 1997, between
OpTel and Rory O. Cole.(2)
4.10 -- Indenture, dated as of February 14, 1997, between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee.(1)
4.11 -- Form of Senior Note (included in Exhibit 4.10).(1)
4.12 -- Escrow Agreement, dated as of February 14, 1997, between
OpTel and U.S. Trust Company of Texas, N.A., as Trustee
and as Escrow Agent.(1)
5.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP.*
8.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP re: Tax
matters (included in Exhibit 5.1)
</TABLE>
<PAGE> 134
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 -- Stockholders' Agreement, dated as of December 22, 1994,
between VPC, Vanguard, Vanguard Communications, Inc.
("General Partner") and OpTel.(1)
10.2 -- Registration Rights Agreement, dated as of December 22,
1994, between OpTel and Vanguard.(1)
10.3 -- Settlement Agreement, dated as of August 1, 1996, between
Vanguard, General Partner, Pacific Capital Group, Inc.
("Pacific"), VPC, OpTel and GVL.(1)
10.4 -- Amendment, dated as of February 17, 1997, between
Vanguard, General Partner, Pacific, VPC, OpTel and
GVL.(1)
10.5 -- Form of Convertible Note (included as Exhibit B to the
Amendment referenced as Exhibit 10.4 hereto) and a list
of the issue dates and principal amounts of all
outstanding Convertible Notes (included as Schedule 1 to
the Amendment referenced as Exhibit 10.4 hereto).(1)
10.6 -- Stockholders' Agreement dated as of August 15, 1997 by
and among VPC, CDPQ and OpTel.(3)
10.7 -- Stockholders' Agreement dated as of April 9, 1998 among
OpTel, Nomura, MCI, GVL and ICS.
10.8 -- Lease Agreement dated July 25, 1995 between Space Center
Dallas, Inc. and OpTel.(1)
10.9 -- First Amendment to Lease Agreement dated August 8, 1996
between Space Center Dallas, Inc. and OpTel.(1)
10.10 -- Restated Incentive Stock Plan of OpTel.*
10.11 -- Annual Bonus Plan of OpTel.(1)
10.12 -- 1998 Employee Stock Purchase Plan of OpTel.*
10.13 -- Employment Agreement between Louis Brunel and OpTel dated
November 15, 1996.(1)
10.14 -- Employment Agreement between Rory Cole and OpTel dated
January 3, 1997.(1)
10.15 -- Employment Agreement between Michael Katzenstein and
OpTel dated September 18, 1995.(1)
10.16 -- Separation and Consulting Agreement, dated as of
September 1, 1996, between OpTel and James A. Kofalt.(1)
10.17 -- Separation Agreement dated as of July 11, 1997, between
OpTel and Rory O. Cole.
10.18 -- Assignment Agreement, dated as of February 14, 1997,
among TVMAX, Sunshine Television Entertainment, Inc.,
Richey Pacific Cablevision, Inc., IRPC Arizona, Inc. and
THI.(1)
10.19 -- Equipment License and Services Agreement, dated as of
February 14, 1997, between TVMAX and THI.(1)
10.20 -- 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.(1)
10.21 -- Option Agreement, dated as of February 14, 1997, between
TVMAX and THI.(1)
10.22 -- City of Houston, Texas, Ordinance No. 89-338 dated March
29, 1989 granting to PrimeTime Cable Partners I, Ltd. the
right to operate for 15 years a Community Antenna
Television System, and subsequent ordinances consenting
to assignment of rights to EagleVision and to TVMAX
Communications (Texas), Inc.(1)
</TABLE>
<PAGE> 135
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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.(1)
10.24 -- City of Houston, Texas, Ordinance No. 97-1088 dated
September 3, 1997, extending to TVMAX Communications
(Texas), Inc. a temporary permit to operate a
Telecommunications Network (originally granted pursuant
to the permit referenced in Exhibit 10.23 hereto).(2)
10.25 -- City of Houston, Texas, Ordinance No. 97-1567 dated
December 23, 1997, granting to TVMAX Communications
(Texas), Inc. a franchise to operate a Telecommunications
Network (superseding and replacing the temporary permits
referenced in Exhibits 10.23 and 10.24 hereto).
10.26 -- Amendment Number 001 to the Videotron/Lucent Agreement,
dated August 28, 1997, among Videotron Telecom Ltee and
Lucent Technologies Canada Inc. and TVMAX and Lucent
Technologies Inc.(2)
10.27 -- Credit Agreement dated as of December 19, 1997 (the
"Credit Agreement") among TVMAX, OpTel, Goldman Sachs
Credit Partners L.P., as arranger and syndication agent,
Canadian Imperial Bank of Commerce, individually and as
administrative agent, General Electric Capital
Corporation, individually and as documentation agent, and
the lenders party thereto from time to time
(collectively, the "Lenders").
10.28 -- First Amendment to the Credit Agreement dated as of April
29, 1998.
10.29 -- Guaranty dated as of December 19, 1997 between OpTel and
the Lenders.*
10.30 -- Pledge Agreement dated as of December 19, 1997 between
OpTel and the Lenders.*
10.31 -- Security Agreement dated as of December 19, 1997 between
OpTel and the Lenders.*
10.32 -- Interconnection Agreement under Sections 251 and 252 of
the Telecom Act by and between Southwestern Bell
Telephone Company and OpTel (Texas) Telecom, Inc.(2)
21.1 -- List of Subsidiaries of the Company.(3)
23.1 -- Consent of Kronish, Lieb, Weiner & Hellman LLP included
in Exhibit 5.1.
23.2 -- Consent of Deloitte & Touche LLP.
24.1 -- Power of Attorney is set forth on the signature page of
this Registration Statement.
</TABLE>
- ---------------
(1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with
the Commission on April 10, 1997.
(2) Filed as an exhibit to the Company's 10-K filed with the Commission for
fiscal year ended August 31, 1997.
(3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for
fiscal year ended August 31, 1997.
* To be filed by Amendment to this Registration Statement.
<PAGE> 1
EXHIBIT 2.1
PURCHASE AGREEMENT
among
OPTEL, INC.,
INTERACTIVE CABLE SYSTEMS, INC.
and
ICS LICENSES, INC.
Dated as of March 4, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. SALE AND PURCHASE; PURCHASE PRICE; ADJUSTMENTS..................................................1
1.1 The Purchase...............................................................................1
1.2 The Purchase Price.........................................................................1
1.3 Adjustments to the Purchase Price..........................................................3
1.4 Resolution of Disputes....................................................................11
2. PAYMENT OF PURCHASE PRICE; ESCROW ARRANGEMENT;
TRANSITION SERVICES AND SUBCONTRACT ARRANGEMENT................................................12
2.1 Payment of Purchase Price.................................................................12
2.2 Ratio Formula.............................................................................13
2.3 Consent Escrow............................................................................13
2.4 Crossings Escrow..........................................................................15
2.5 Title to Shares...........................................................................15
2.6 Delivery of Series B Preferred Stock to ICS
Secured Lenders...........................................................................16
3. CLOSING; TERMINATION...........................................................................16
3.1 Date of Closing...........................................................................16
3.2 Closing...................................................................................16
3.3 Termination...............................................................................17
4. CONDITIONS OF CLOSING..........................................................................18
4.1 Conditions to Each Party..................................................................18
4.2 Buyer's Conditions to Closing.............................................................18
4.2.1 Consent from Senior Lender.....................................................18
4.2.2 Opinion of Counsel to Seller...................................................19
4.2.3 Representations and Warranties;
Covenants......................................................................19
4.2.4 Secretary's Certificates; Organization
Documents......................................................................19
4.2.5 Proceedings....................................................................19
4.2.6 No Adverse Legislation.........................................................20
4.2.7 Changes........................................................................20
4.2.8 Approval and Consents..........................................................20
4.2.9 Other Agreements...............................................................21
4.2.10 Absence of Liens...............................................................22
4.2.11 Non-Conforming Crossings.......................................................22
4.3 Seller's Conditions to Closing........................................................22
4.3.1 No Adverse Legislation.........................................................22
4.3.2 Representations and Warranties;
Covenants......................................................................22
4.3.3 Secretary's Certificate........................................................23
4.3.4 Other Agreements...............................................................23
4.3.5 Opinion of Counsel to Buyer....................................................23
5. EMPLOYEE MATTERS...............................................................................23
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
6. COVENANTS......................................................................................25
6.1 Maintain Existence and Obtain Approvals...............................................25
6.2 Assignment of Transmission Licenses and
Permits...............................................................................26
6.3 Access to Information.................................................................26
6.4 Disclosure and Classification of Defaults Under
Rights of Entry.......................................................................26
6.5 Promotional Campaigns.................................................................27
6.6 Certain Payments......................................................................27
6.7 Taxes.................................................................................27
6.8 Maintenance of Properties; Insurance; Books and
Records; Compliance with Law; Relationships...........................................27
6.9 Deliveries............................................................................28
6.10 Filings; Approvals....................................................................29
6.11 Conduct of the Business...............................................................29
6.12 Bulk Sales Compliance.................................................................29
6.13 Assignment of Certain Rights..........................................................30
6.14 Crossing Matters......................................................................30
6.15 Transfer Taxes........................................................................30
6.16 Best Efforts..........................................................................30
6.17 First Offer Rights....................................................................31
6.18 Personal Property.....................................................................31
6.19 Financial Statements..................................................................31
7. REPRESENTATIONS AND WARRANTIES OF SELLER.......................................................31
7.1 Authority; Organization and Qualification;
Capitalization........................................................................31
7.2 Actions Pending.......................................................................32
7.3 Outstanding Debt; Defaults............................................................33
7.4 Material Liabilities; Financial Statements............................................33
7.5 Purchased Assets......................................................................33
7.6 Taxes.................................................................................34
7.7 No Conflicts..........................................................................34
7.8 Material Agreements...................................................................35
7.9 Broker's or Finder's Commissions......................................................36
7.10 Applicable Environmental Regulations..................................................36
7.11 Compliance with Other Laws............................................................36
7.12 ERISA; Labor Agreements...............................................................36
7.13 Possession of Franchises, Licenses, etc...............................................36
7.14 Intellectual Property.................................................................37
7.15 Governmental Consents.................................................................37
7.16 Disclosure............................................................................38
7.17 Closing Statement.....................................................................38
7.18 Investment............................................................................38
7.19 Subscribers, Rights of Entry..........................................................40
7.20 Cable Systems.........................................................................40
7.21 FCC Licenses..........................................................................41
7.22 FCC Applications......................................................................41
7.23 FCC Compliance........................................................................42
7.24 Zoning, Aviation, etc. Compliance.....................................................42
7.25 Compliance with the Copyright Act.....................................................42
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
7.26 Must-Carry and Retransmission Consent.................................................42
7.27 Petitions for Special Relief..........................................................43
7.28 Conduct in Ordinary Course............................................................43
7.29 Solvency..............................................................................43
7.30 Effective Competition.................................................................43
7.31 Hard Wire Public Right-of-Way Crossings...............................................43
7.32 Security Services.....................................................................44
8. REPRESENTATIONS AND WARRANTIES OF BUYER........................................................44
8.1 Organization..........................................................................44
8.2 Authority.............................................................................44
8.3 Capital Stock and Other Matters.......................................................44
8.4 Validity of Shares....................................................................46
8.5 No Conflicts..........................................................................46
8.6 Actions Pending.......................................................................46
8.7 Solvency..............................................................................46
8.8 Periodic SEC Filings..................................................................46
8.9 Broker's or Finder's Commissions......................................................47
8.10 Assignee Representation and Warranties................................................47
9. DEFINITIONS....................................................................................47
10. MISCELLANEOUS..................................................................................57
10.1 Indemnification......................................................................57
10.2 Indemnification Procedures, Determination of
Damages, Limitations and Related Matters.............................................58
10.3 Amendments...........................................................................60
10.4 Survival of Representations and Warranties...........................................60
10.5 Successors and Assigns...............................................................60
10.6 Notices..............................................................................60
10.7 Descriptive Headings.................................................................61
10.8 Governing Law; Consent to Exclusive
Jurisdiction.........................................................................61
10.9 Binding Arbitration..................................................................62
10.10 Entire Agreement.....................................................................63
10.11 Severability.........................................................................63
10.12 Public Announcement..................................................................63
10.13 Expenses.............................................................................63
10.14 Confidentiality......................................................................64
10.15 Counterparts.........................................................................64
10.16 No Solicitation or Negotiation.......................................................64
10.17 Further Action.......................................................................65
</TABLE>
iii
<PAGE> 5
PURCHASE AGREEMENT, dated as of March 4, 1998 (the "Agreement"), among
OPTEL, INC., a Delaware corporation ("Buyer"), INTERACTIVE CABLE SYSTEMS, INC.,
a California corporation ("Seller") and ICS LICENSES, INC., a Delaware
corporation ("License Company").
R E C I T A L S:
Seller and License Company own, or hold for use in the Relevant
Markets, the Purchased Assets.
Seller and License Company desire to sell to Buyer, and Buyer desires
to purchase from Seller and License Company, the Purchased Assets, upon the
terms and subject to the conditions set forth herein.
In consideration of the recitals and the mutual agreements and
covenants hereinafter set forth, Buyer, Seller and License Company hereby agree
as follows:
1. SALE AND PURCHASE; PURCHASE PRICE; ADJUSTMENTS.
1.1 The Purchase. Upon the terms and subject to the conditions of this
Agreement, and in reliance upon the representations and warranties contained
herein, at the Closing, Seller and License Company shall sell, convey, transfer,
assign and deliver to Buyer and Buyer shall purchase from Seller and License
Company all of Seller's and License Company's right, title and interest in and
to the Purchased Assets free and clear of all Liens (other than Liens which are
associated with the Assumed Liabilities).
1.2 The Purchase Price. (a) The purchase price for the Purchased Assets
shall be (i) $4,000,000 in cash (the "Cash"), (ii) the aggregate of $60,000,000
face amount of Buyer's Series B 8% PIK Cumulative Preferred Stock, $.01 par
value ( the "Series B Preferred Stock") and (iii) 165,746 shares of Buyer's
Class A Common Stock, $.01 par value (the "Class A Common Stock") ((i), (ii) and
(iii), collectively comprise the "Purchase Price") plus assumption (as of the
Closing) of the Assumed Liabilities, as provided in Section 1.2(b), subject to
the adjustments set forth in Section 1.3 and shall be payable in the manner set
forth in Section 2.
(b) As of the Closing, Buyer shall assume and thereafter pay, perform
and discharge when due, only the Assumed Liabilities. The Assumed Liabilities
(other than the Pre-Closing Liabilities) specifically exclude all past due
amounts and all other payment obligations (including, without limitation, any
amounts payable as a result of a breach) however incurred, arising from any
action or omission prior to the Closing. Seller
<PAGE> 6
shall retain, and shall be responsible for paying, performing and discharging
when due, and Buyer shall not assume or have any responsibility for, any and all
Liabilities of Seller, including, without limitation, any Indemnified Taxes,
other than the Assumed Liabilities.
(c) Further, Buyer shall have the option to acquire, irrespective of
whether such assets are used in the Business, and, subject to (i) the assumption
of all associated Liabilities arising after the Closing, and (ii) Seller's
obtaining all required consents to their transfer: (A) that certain programming
agreement dated May 12, 1995 between Maxtel Cablevision and American Telecasting
of Denver, Inc., (B) vehicles located in any Relevant Market and the
corresponding leases, if any, (C) leases of (1) head-end sites, (2) microwave
transmission, repeater and receiver sites, (3) office space, (4) storage space
and (5) security deposits relating to the leases, (D) all contracts and
arrangements necessary for the provision of local and long distance telephone
service as currently provided to Billable Phone Subscribers, including, without
limitation, local loop (T- 1) transport circuits, local dialtone, E911, operator
services and telephone listings (collectively, the "Telephone Agreements"), (E)
existing agreements for the provision by third party providers of video signal
feed to certain of the Relevant Properties, including, but not limited to, those
properties identified on Schedule 1.2(C) and (F) existing broadcaster
retransmission consent agreements for those Relevant Markets indicated as "New
Markets" on Schedule 9.4. Twenty (20) Business Days prior to the Closing Date,
Seller shall provide Buyer with a true, correct and complete list of all of the
above described assets (including all Leased Premises Assets (defined below))
and associated Liabilities (including those Liabilities associated with Leased
Premises Assets). Buyer shall exercise the option on or before Fifteen (15)
Business Days prior to the Closing Date, provided, that with respect to
subsections (E) and (F) above, Buyer shall have the right to exercise such
option on the Closing Date. Upon exercise of this option, all such assets shall
be deemed Purchased Assets under this Agreement. Buyer's decision to include
assets under this Section 1.2(c) as part of the Purchased Assets shall not
result in any increase to the Purchase Price payable to Seller at the Closing
and shall not be subject to a Purchase Price Adjustment pursuant to Section
1.3(a) below.
If Buyer chooses to acquire any of the aforesaid assets that require
consent to their transfer, Seller shall use its best efforts to obtain such
consents prior to Closing. Additionally, upon Buyer's request, Seller, at its
own expense, shall use all commercially reasonable efforts to provide Buyer with
an estoppel letter from the lessor of any leased premises described in
subsection (C) above. Further, if Buyer chooses to acquire any of the leased
premises set forth in subsection (C) above, Buyer
2
<PAGE> 7
shall be required to purchase (without payment of additional consideration
therefore) all office equipment (i.e. copy machines, fax machines, telephones,
etc.) and office furniture located at such premises (the "Leased Premises
Assets") and shall assume all Liabilities associated with such Leased Premises
Assets.
Notwithstanding the aforesaid, Buyer shall not have the option to
acquire the principal administration office premises of Seller located in
Dallas, Texas and Tampa, Florida.
If Buyer does not elect to purchase an agreement for the provision of
video signal feed pursuant to subsection (E) or a broadcaster retransmission
consent agreement pursuant to subsection (F) above, Seller shall, upon request
by Buyer delivered at Closing, maintain such agreements for the benefit of Buyer
for a period of 90 days from the Closing Date and shall take all actions
necessary to permit Buyer to lawfully receive and retransmit signal pursuant
thereto during such time. Buyer shall reimburse Seller for all of Seller's out
of pocket costs of maintaining such agreements and the provision of signal feed
to Buyer thereunder for such period as set forth in the related agreement as in
effect on the date hereof.
(d) All amounts of the Purchase Price (subject to the adjustments and
escrow arrangements and delivery instructions set forth herein) shall be
distributed directly to Seller or to the ICS Secured Lenders pursuant to the
Earmark Agreement (as defined in Section 2.6). Seller and License Company each
hereby irrevocably waive any rights it may have against Buyer relating to the
distribution of the Purchase Price and shall indemnify, defend and hold harmless
Buyer from and against any Losses that Buyer may suffer arising from claims by
Seller or License Company (or any Person as assignee, transferee or otherwise
making a claim by, through or on behalf of Seller, License Company or any such
assignee or transferee) resulting from such distribution of the Purchase Price
to Seller or the ICS Secured Lenders pursuant to the Earmark Agreement.
1.3 Adjustments to the Purchase Price. The Purchase Price shall be
subject to the following adjustments:
(a) Adjustments Relating to Liabilities. Five (5) Business Days prior
to the Closing, Seller shall deliver to Buyer a statement signed by the chief
executive officer of Seller (the "Closing Statement") certifying such person's
best good faith estimate as of the Closing Date of the amounts of all (i)
Liabilities to repay customer deposits relating to Rights of Entry which are
part of the Purchased Assets, (ii) Liabilities of Seller which include financing
arrangements, capitalized leases, conditional sales arrangements, mortgages and
all other similar
3
<PAGE> 8
arrangements with respect to the Purchased Assets that will not be satisfied or
discharged at the Closing (excluding Leased Premises Assets, vehicle and
premises leases), (iii) Pre-Closing Liabilities which Buyer chooses to assume
pursuant to this Section 1.3(a) and (iv) the amounts of all recoverable
deposits, prepaid rent and prepaid royalties (which prepaid royalties are
recoupable against Revenue Share payable to property owners under related Rights
of Entry and which shall not exceed $100,000 in the aggregate) paid by Seller in
respect of a lease, license or other agreement forming part of the Purchased
Assets to the extent such lease, license or other agreement shall be assigned to
Buyer at Closing (the "Transferred Deposits"). The Liabilities under subsections
(i) and (ii) are the "Specified Assumed Liabilities". In addition to the
certification of the amounts of such Liabilities and Transferred Deposits, five
(5) Business Days prior to the Closing, Seller shall provide Buyer with a
description of all such Liabilities and Transferred Deposits. The estimate of
Specified Assumed Liabilities shall be based upon, and prepared in accordance
with, GAAP for all Liabilities that would be reflected on a balance sheet of the
Business prepared in accordance with GAAP, and for all other Liabilities, based
upon a good faith estimate of (i) the present value of all lease or other
similar payments to be made after Closing and (ii) the present value of the cost
to purchase the property at the expiry of the lease or other similar agreement,
in each case discounted at a monthly discount rate of 1.25%.
Notwithstanding the aforesaid, with respect to the Purchased Assets
relating to the Specified Assumed Liabilities, Seller shall use its reasonable
efforts to satisfy such Liabilities prior to Closing and transfer to Buyer
absolute ownership of such Purchased Assets free and clear of any such
Liability. If Seller is unable to satisfy any such Specified Assumed Liability
prior to Closing, Seller shall promptly disclose the same to Buyer and shall
obtain the required consent of the lessor (or other party) to transfer of the
lease (or other agreement) to Buyer prior to Closing at Seller's expense and the
liabilities in respect thereof shall be estimated in the manner set forth in the
aforesaid paragraph and such Liabilities shall become a part of the Specified
Assumed Liabilities for purposes of the adjustment pursuant to this Section
1.3(a).
Fifteen (15) Business Days prior to the Closing, Seller shall provide
Buyer with a description of any outstanding pre-Closing Liabilities with respect
to the Purchased Assets (the "Pre-Closing Liabilities"). Other than Liabilities
for which Seller shall commit to satisfy or discharge at the Closing, Buyer, in
its sole discretion, may elect to assume any or all of such Pre-Closing
Liabilities by notifying Seller in writing seven (7) Business Days prior to the
Closing. If Buyer does not elect
4
<PAGE> 9
to assume such Pre-Closing Liabilities, Seller must satisfy such Pre-Closing
Liabilities prior to the Closing.
The Purchase Price payable to the Seller on the Closing Date, shall be
decreased by an amount equal to the sum of all Specified Assumed Liabilities and
assumed Pre-Closing Liabilities as set forth on the Closing Statement and
increased by the sum of the Transferred Deposits.
(b) Other Adjustments.
(i) Subscriber Adjustments. The Closing Statement shall also
certify, as of the Closing Date for the Base Period (defined in
subsection 1.3(b)(ii) below) the number of Cable Subscribers and
Billable Phone Subscribers. If there are less than an aggregate of
42,069 Cable Subscribers and Billable Phone Subscribers on the Closing
Date, the "Subscriber Adjustment Amount" shall be a negative number
equal to the product of (A) $1,750 multiplied by (B) the difference
between the aggregate number of Cable Subscribers and Billable Phone
Subscribers and 42,069. If there are more than an aggregate of 42,069
Cable Subscribers and Billable Phone Subscribers at the Closing Date,
the "Subscriber Adjustment Amount" shall be a positive number equal to
the product of (A) $1,750 multiplied by (B) the difference between the
aggregate number of Cable Subscribers and Billable Phone Subscribers
and 42,069.
(ii) Average Revenue Per Subscriber, Revenue Share and Remaining
Contract Term Adjustment. The Closing Statement shall also certify, as
of the Closing Date for the Base Period (defined below): (A) Seller's
actual Average Monthly Cable Revenue Per Cable Subscriber and Average
Phone Revenue per Billable Phone Subscriber, respectively; (B) Seller's
actual cable Revenue Share and phone Revenue Share; and (C) the average
remaining terms to expiry of Seller's cable Rights of Entry and phone
Rights of Entry, respectively, in Relevant Properties, such averages in
each case weighted by the number of units in the applicable Relevant
Properties. Revenues shall be determined in conformity with GAAP and
shall not include taxes or retroactive, catch-up or extraordinary
revenues.
If the Net Revenue Stream Total (as defined below) exceeds
$67,077,000, the Revenue and Term Adjustment Amount is a positive
amount equal to the excess; if Amount X is less than $67,077,000, the
Revenue and Term Adjustment Amount is a negative amount equal to the
deficiency.
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The Net Revenue Stream Total means the aggregate of:
(A) the actuarial present value of a series of equal, consecutive
monthly payments, for a period of months equal to the
"unit-weighted average remaining term" (which for all purposes
shall not include any renewal or extension, optional or otherwise,
which has not been exercised prior to February 1, 1998) of cable
Rights of Entry, in the amount of (1) 40,387 multiplied by Seller's
actual Average Cable Revenue per Cable Subscriber, less (2) the
Seller's actual cable Revenue Share in each case for the Base
Period; and
(B) the actuarial present value of a series of equal, consecutive
monthly payments, for a period of months equal to the
"unit-weighted average remaining term" of phone Rights of Entry, in
the amount of (1) 1,682 multiplied by Seller's actual Average Phone
Revenue per Billable Phone Subscriber, less (2) the Seller's actual
phone Revenue Share in each case for the Base Period,
all as certified by Seller for the Base Period as hereinafter
described.
For the purposes of this Section 1.3(b)(ii), "actuarial present
value" shall:
(A) be computed using a monthly discount rate of 1.25% per month;
and
(B) for all periods shown in the Annuity Present Value Factor table
presented in Schedule 1.3(b)(ii), be computed in accordance with
such table by multiplying the amount of the monthly consecutive
payment determined for cable or phone, as the case may be, by the
factor that corresponds to the "unit-weighted average remaining
term" of cable or phone, as the case may be; and, for all periods
not shown in such table, shall be calculated by interpolation from
the two points closest to it as shown in the table.
"Base Period" means the calendar month ending immediately prior
to the Closing Date but no earlier than March 1998 for which a
monthly billing cycle has been completed.
(iii) 550 MHz Standard Adjustment. (A) For each of Phoenix,
Arizona; Los Angeles, Orange County, San Diego and San Francisco,
California; Denver, Colorado; Miami, Florida; Dallas and Houston,
Texas; and Chicago, Illinois, Seller shall classify the Relevant
Properties
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situated in each of those markets into four categories (each a
"Category"), with Category I comprised of all properties designated
by Seller on Schedule 7.19 as having 750 MHz bandwith (the
"Category I Properties"), Category II comprised of all properties
designated by Seller on Schedule 7.19 as having 550 MHz bandwith
(the "Category II Properties"), Category III comprised of all
properties designated by Seller on Schedule 7.19 as having 450 MHz
bandwith (the "Category III Properties") and Category IV comprised
of all properties designated by Seller on Schedule 7.19 as having
330 MHz bandwith (the "Category IV Properties").
(B) Buyer shall submit to Seller, in writing, a list of
Relevant Properties which comprise the greater of (x) 20% (based on
units) or (y) two of the Relevant Properties in each Category which
reasonably represent the properties with demographic ratings of A,
B, C and D assigned by Seller in each market, which Buyer will use
as a representative sample of the properties in such market in such
category (the "Sample Properties"). Within 5 days after receipt
thereof, Seller shall provide Buyer with copies of as-built maps
(and digital media, if available) for each of the Sample
Properties. In the event as-built maps are not available for a
Sample Property, Buyer (with Seller's cooperation) shall have the
option to produce such maps, at its own expense, or select similar
properties in such Category for which as-built maps are available.
A designated representative of Buyer shall walk out each of the
Sample Properties with a designated representative of Seller to
verify that the as-built maps are accurate and shall record any
deviations in construction or materials on the as-built maps.
(C) With respect to Categories I and II, based on the completed
as-built maps and manufacturers' equipment specifications and
recommended operating levels, Buyer shall compute signal levels,
signal-to-noise ratios and coherent distortions for each of the
Sample Properties in each of the Categories. If based on such
computations, a Sample Property fails to meet the "Minimum
Performance Specifications for Pass/Fail Testing of Properties
Identified by Seller as 550 MHz and 750 MHz" (the "Test
Specifications") set forth in part I of Schedule 1.3(b)(iii), such
property shall be deemed to be a failed property, unless within 5
days after receipt of written notice of such failure, Seller
provides Buyer with results of an on-site test, conducted at
Seller's expense, in the presence of a designated representative of
Buyer and in accordance
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with a test configuration, subject to Buyer's reasonable approval,
which demonstrate that the failed property meets the Test
Specifications. Failed properties shall be redesigned by Seller to
meet the "Minimum Performance Specifications for Re-Design of
Failing Properties including all Properties Identified by Seller as
450 MHz and 330 MHz" (the "Re-Design Specifications") set forth in
part II of Schedule 1.3(b)(iii) in accordance with a budget using
the labor and material costs in conjunction with the unit prices
set forth on Schedule 1.3(b)(iii). Seller's redesign is subject to
reasonable approval or submittal of an alternate redesign by Buyer.
Seller and Buyer in good faith shall agree upon an alternate
redesign, if necessary.
(D) The number of units in each Sample Property in Category I
and II, respectively, that fail to meet the Test Specifications
shall be totaled and divided by the total number of units in all
Sample Properties in such Category I or II, respectively. Such
quotient shall be referred to as the "Assumed Failed Ratio".
(E) The Assumed Failed Ratios for Category I and II,
respectively, shall be multiplied by the total number of units in
Category I or II, respectively. Such product shall be referred to
as the "Assumed Failed Units in Category I" or "Assumed Failed
Units in Category II", respectively.
(F) The labor and material costs for the redesign of all failed
properties in Category I and II, respectively, shall be totaled and
such total cost shall be divided by the number of Sample Property
units in such Category that fail to meet the Test Specifications to
determine the per unit adjustment price (the "Per Unit Adjustment
Price").
(G) The Per Unit Adjustment Price shall be multiplied by the
Assumed Failed Units in Category I and Assumed Failed Units in
Category II, respectively. Such product shall be referred to as the
"Total Adjustment Price for Category I" and "Total Adjustment Price
for Category II", respectively.
(H) For each of Category III and IV, the Assumed Failed Ratio
shall be deemed to be 100% and the number of Assumed Failed Units
for Category III and Assumed Failed Units for Category IV,
respectively shall be deemed to be 100% of the total number of
units in Category III and Category IV, respectively.
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(I) Using the completed as-built maps and manufacturers'
equipment specifications and recommended operating levels, Seller
shall redesign each Category III and Category IV Sample Property to
meet the ReDesign Specifications in accordance with a budget using
the labor and material costs in conjunction with the unit prices
set forth on Schedule 1.3(b)(iii). Seller's redesign is subject to
reasonable approval or submittal of an alternate redesign by Buyer.
Seller and Buyer in good faith shall agree upon an alternate
redesign, if necessary.
(J) The labor and material costs for all Sample Properties in
Category III and IV, respectively, shall be totaled and such total
cost shall be divided by the total number of Sample Property units
in Category III and Category IV, respectively, to determine the Per
Unit Adjustment Price.
(K) The Per Unit Adjustment Price shall be multiplied by the
total number of units in Category III and Category IV,
respectively. Such product shall be referred to as the "Total
Adjustment Price for Category III" and "Total Adjustment Price for
Category IV", respectively.
(L) In order to meet the Re-Design Specifications, all
redesigns of properties shall be based upon one or more of the
following ten changes, in order of priority (i.e., the lower number
remedy shall be chosen over a higher number remedy if such remedy
will provide an adequate redesign): (1) replacement of passives,
(2) addition of passives, (3) replacement of amplifiers, (4)
relocation of amplifiers, (5) addition of amplifiers, (6)
replacement of cables, (7) addition of cables, (8) replacement of
power supplies, (9) relocation of power supplies and (10) addition
of power supplies.
(M) The 550 MHz Adjustment Amount shall be a negative number
the magnitude of which shall be the amount, if any, by which the
lesser of:
(i) $75 multiplied by the number of units in all of the markets
listed in subsection (A) above;
(ii) the sum of (x) $40 multiplied by the number of Assumed
Failed Units in Category I and II, plus (y) $137.50 multiplied by
the number of units in Category
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III, plus (z) $200 multiplied by the number of units in Category
IV; or
(iii) the aggregate of the Total Adjustment Price for Category I,
Total Adjustment Price for Category II, Total Adjustment
Price for Category III and Total Adjustment Price for
Category IV;
exceeds $1,000,000; for greater certainty, if the lesser of (i), (ii) or (iii)
is less than $1,000,000, the 550 MHz Adjustment Amount shall be zero.
(N) Notwithstanding the aforesaid, Seller shall complete all
redesigns at Seller's sole expense and Buyer shall complete all
alternate redesigns at Buyer's sole expense.
(O) Buyer shall have the option at any time, in its sole
discretion, to waive the 550 MHz Adjustment in its entirety or to
terminate the requirement of a walkout or redesign for a property.
(P) Buyer and Seller shall each use their best efforts and act
in good faith to provide and agree to all items required under this
Section 1.3(b)(iii) to be provided or agreed to by such party.
(Q) To the extent Buyer and Seller are unable to agree to a
proposal under subsection (C) or (I) above, the parties agree to
use Buyer's proposal for purposes of the 550 MHz Adjustment at
Closing. Seller shall have the right after the Closing to dispute
such proposal and seek an adjustment under Section 1.4. All other
disputes between Buyer and Seller relating to issues under this
Section 1.3(b)(iii) shall be resolved by reference to independent
engineers. Buyer and Seller shall share equally all costs and
expenses of the independent engineers.
(c) If the aggregate net sum of the Subscriber
Adjustment Amount, the Revenue and Term Adjustment Amount and the 550 MHz
Adjustment Amount as set forth in Section 1.3(b) is a negative amount: (i) up to
$2,000,000, there shall be no adjustment to the Purchase Price, (ii) more than
$2,000,000, the Purchase Price payable to Seller on the Closing Date shall be
decreased by the difference between the total adjustment and $2,000,000,
provided, that the maximum decrease to the Purchase Price arising under Section
1.3(b) shall be $4,500,000 (the "Adjustment Cap"). If the aggregate net sum of
the Subscriber Adjustment Amount, the Revenue and Term Adjustment Amount and the
550 MHz Adjustment Amount as set forth in Section 1.3(b) is a
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positive number, adjustment pursuant to Section 1.3(b) shall not result in an
increase to the Purchase Price provided, however, that the amount (if any) by
which such positive number exceeds $2,000,000 shall constitute the Indemnity
Basket for purposes of Section 10.1(b).
Each $1,000 of purchase price-adjustment pursuant to Section 1.3 shall
be applied as follows (with amounts not in whole multiples of $1,000 applied in
the same proportion):
(i) by a reduction in the face amount of Series B Preferred
shares issued or to be issued in the amount of $786.96; and
(ii) by a reduction in the number of Class A Common shares issued
or to be issued of 2.17388 shares.
1.4 Resolution of Disputes. Except as otherwise provided in Section
1.3(b)(iii), the Closing Statement and all other scheduled information upon
which the foregoing adjustments are based, which are delivered by Seller shall
be final, binding and conclusive on the parties with respect to adjustments to
the Purchase Price under Section 1.3 unless Buyer submits to Seller a written
notice of any dispute (setting forth in reasonable detail the basis for such
dispute) within 90 days after the Closing. If Buyer delivers a timely notice of
dispute, Seller's Accountants and Buyer's Accountants shall confer to determine
the nature and scope of any disagreement among the parties and shall submit such
issues to the parties for resolution. If Buyer and Seller are unable to reach a
resolution within 30 days after the receipt by Seller of Buyer's written notice
of dispute, then the dispute shall be submitted to Arthur Andersen (or if Arthur
Andersen is unavailable, to another nationally recognized public accounting firm
mutually satisfactory to Buyer and Seller). Buyer and Seller shall provide full
cooperation to such accounting firm. Such accounting firm shall make a final and
binding determination as to the matter or matters in dispute. Buyer and Seller
shall cooperate with each other and with each other's authorized representatives
in order to resolve such dispute as soon as practicable. Within five (5) days
after the final resolution of all disputes relating to the Closing Statement,
Buyer and Seller shall readjust the Purchase Price in the same manner as
provided in Section 1.3. If the payments at Closing by Buyer were greater than
the Purchase Price that should have been paid as finally determined by this
Section 1.4, Seller shall immediately refund such excess amount (less any amount
that may have been paid to Buyer pursuant to Section 10.1 hereof or pursuant to
the Guaranty relating to such dispute) to Buyer, together with interest on such
amount from the Closing Date to the date of such payment at the rate of eight
percent per annum, in the manner set forth below. If the payments at Closing by
Buyer were less than the
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Purchase Price that should have been paid as finally determined by this Section
1.4, Buyer shall immediately pay such additional amount to Seller, together with
interest on such amount from the Closing Date to the date of such payment at the
rate of eight percent per annum, in the manner set forth below. Each $1,000 of
amounts to be refunded by Seller or paid as additional consideration by Buyer
pursuant to Section 1.4 shall be paid as follows (with amounts not in whole
multiples of $1,000 applied in the same proportion):
(i) by the issue or return for cancellation, as the case
may be, of Series B Preferred shares having face
amount and accrued and unpaid dividends in the amount
of $786.96 plus an accretion factor of 8% per annum
from the date of Closing; and
(ii) by the issue or return for cancellation, as the case
may be, of 2.17388 Class A Common shares.
Upon resolution of a dispute, Seller shall pay a percentage of the Accountant's
costs and expenses equal to the percentage of the disputed amount determined in
favor of Buyer and Buyer shall pay a percentage of the Accountant's costs and
expenses equal to the percentage of the disputed amount determined in favor of
Seller. All other costs and expenses of Buyer and Seller associated with
resolving a dispute under this Section 1.4 shall be borne by Buyer and Seller,
respectively.
Nothing in this Section 1.4 shall limit Seller's rights or
remedies under this Agreement or otherwise to dispute information on which the
adjustments in Section 1.3 are based.
2. PAYMENT OF PURCHASE PRICE; ESCROW ARRANGEMENT;
TRANSITION SERVICES AND SUBCONTRACT ARRANGEMENT.
2.1 Payment of Purchase Price. (a) At the Closing, Buyer shall
pay to Seller the Purchase Price (as adjusted to reflect the adjustments
specified in Section 1.3) (but subject to post-Closing adjustment in the event
of a dispute as provided in Section 1.4), less the Consent Escrow Amount and the
Crossings Escrow Amount.
(b) Payments pursuant to this Section 2.1 shall be made as
follows:
(i) Cash by a single wire transfer of immediately
available funds to an account designated by Seller at least five
(5) Business Days prior to the Closing Date;
(ii) subject to the adjustments in Section 1.3, the
escrow arrangements specified in Sections 2.3 and 2.4 and the
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delivery arrangement specified in Section 2.6, delivery to Seller of the Series
B Preferred Stock, in such denominations as Seller shall request in writing five
days prior to the Closing; and
(iii) subject to the adjustments in Section 1.3,
the escrow arrangements specified in Sections 2.3 and 2.4 and the delivery
arrangement specified in Section 2.6, delivery to Seller of the Class A Common
Stock, in such denominations as Seller shall request in writing five days prior
to the Closing.
2.2 Ratio Formula. Each $1,000 amount to be deposited in
and/or released from escrows created pursuant to Sections 2.3, 2.4 and 4.28
shall be comprised of (with amounts not in whole multiples of $1,000 applied in
the same proportion):
(i) $786.96 face amount of Series B Preferred shares,
together with dividends paid or accrued since issue,
and
(ii) 2.17388 Class A Common shares.
2.3 Consent Escrow. (a) At the Closing, Buyer and Seller shall
execute and deliver an escrow agreement substantially in the form of Exhibit A
hereto (the "Consent Escrow Agreement") under which a Person mutually
satisfactory to Buyer and Seller shall act as escrow agent (the "Consent Escrow
Agent"). Buyer shall deposit with the Consent Escrow Agent the amount required
by Section 4.2.8, in conformity with Section 2.2 (the "Consent Escrow Amount"),
which shall be withheld from the Purchase Price payable to Seller at the Closing
as provided in Section 2.1.
(b) Subject to the provisions of this Section 2.3 and the
Consent Escrow Agreement, the Consent Escrow Amount shall be paid to Seller from
time to time as Required Consents are obtained by Seller (and Rights of Entry
and related Purchased Assets are delivered to Buyer free and clear of all
Liens), equal to the Per Subscriber Amount (as defined in Section 9) multiplied
by the number of Cable Subscribers or Billable Phone Subscribers at the Closing
Date that relate to such Required Consents, provided, that 365 days after the
Closing Date, or at Seller's option, upon not less than 30 days prior written
notice to Buyer, 180 days after the Closing Date, all agreements to service
Cable Subscribers and Billable Phone Subscribers for which Required Consents
have not been received shall remain owned by Seller and all remaining amounts of
the Consent Escrow Amount shall be released to Buyer and Seller in the manner
described below. Notwithstanding the above, if after exerting all reasonable
efforts to secure a consent from an owner of any of the properties listed on
Schedule 2.3, Seller believes that it is futile to continue negotiations with
such owner(s) after the
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Closing and prior to such 180th or 365th day, Seller shall advise Buyer of its
efforts and the Right of Entry related to such property shall remain owned by
Seller and the appropriate amount relating to such Right of Entry as provided
below, shall promptly be released to Seller. For each Required Consent which is
not obtained, (i) Seller shall receive in conformity with Section 2.2, the
amount placed in escrow in respect of the contract for which such Required
Consent was not obtained (an "Underlying Contract") multiplied by (y) the
quotient of (A) the number of years (.5 or 1) the Consent Escrow arrangement is
in place (the "Consent Escrow Term"), and (B) the number of years to expiration
of the Underlying Contract, as of the Closing Date, rounded to the nearest year
(the "Contract Expiration Date"), provided that with respect to any of the
properties set forth on Schedule 2.3, the Consent Escrow Term shall be the
fraction of a year (rounded to the nearest one-tenth of a year) during which the
portion of the Consent Escrow Amount for such property was held in escrow and
(ii) Buyer shall receive the balance of the remaining Consent Escrow Amount.
For purposes of this Section 2.3, each of the following shall
be deemed to be the obtaining of a Required Consent during the Consent Escrow
Term: (i) Buyer's execution of a new Right of Entry in lieu of obtaining a
consent, (ii) with respect to a Right of Entry classified under Subsection (ii)
of Section 6.4, the curing or resolution of alleged or existing defaults under
such Right of Entry and the obtaining of a consent (with estoppel language
regarding such cured or resolved defaults) from any third party required by the
terms of such Right of Entry, (iii) with respect to any Right of Entry for which
a franchise or license must be obtained, the effective transfer of such
franchise or license to Buyer and the obtaining of consents, if any, from any
third party required by the terms of such Right of Entry, and (iv) the
expiration of a Right of Entry, or its conversion to a month-to-month basis
following expiry, in each case, and in accordance with its existing terms as of
the date hereof.
(d) At the Closing, Buyer and Seller shall enter
into an agreement in the form of Exhibit B hereto (the "Services and Cooperation
Agreement"), pursuant to which (i) Buyer (through one or more of its
Subsidiaries) and Seller shall perform certain transition services for each
other, (ii) Buyer will subcontract with Seller to service all Cable Subscribers
and Billable Phone Subscribers for which Required Consents have not been
received, from the Closing Date through the Consent Escrow Term or earlier, as
provided in Section 2.4(b) and (iii) Seller will agree to maintain the Telephone
Agreements for the telephone service provided under Rights of Entry acquired by
Buyer where such Telephone Agreements were not assigned to Buyer prior to the
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Closing Date, from the Closing Date until such time as Buyer has entered into
its own Telephone Agreements.
2.4 Crossings Escrow. (a) At the Closing, Buyer and Seller
shall execute and deliver an escrow agreement substantially in the form of
Exhibit C hereto (the "Crossings Escrow Agreement") under which a person
mutually satisfactory to Buyer and Seller shall act as escrow agent (the
"Crossing Escrow Agent") with respect to the escrow fund. Buyer shall deposit
with the Crossings Escrow Agent, in conformity with Section 2.2, $40,000 for
each Non-Conforming Crossing (the "Crossing Escrow Amount"), which shall be
withheld from the Purchase Price payable to Seller at the Closing as provided in
Section 2.1.
(b) Subject to the provisions of this Section 2.4 and the
Crossings Escrow Agreement, the Crossing Escrow Amount for each Non-Conforming
Crossing shall be delivered to Seller in its entirety, in conformity with
Section 2.2, for each NonConforming Crossing for which Seller has completed the
Remedy (as defined in Section 6.14) by the end of the six month period described
in Section 6.14. If the Remedy for a Non-Conforming Crossing is not completed
until after such six month period, upon completion of the Remedy, Seller shall
receive the Crossing Escrow Amount escrowed for such Non-Conforming Crossing
less all out-of-pocket costs incurred by Buyer to complete the Remedy. The
remainder of the funds relating to such Non-Conforming Crossing shall be
released to Buyer at such time.
2.5 Title to Shares. All shares of the Series B Preferred
Stock and Class A Common Stock deposited with the Consent Escrow Agent (the
"Consent Shares") and the Crossings Escrow Agent (the "Crossings Shares") shall
be registered in the name of, and deemed delivered to, Seller as of the Closing
Date, notwithstanding the fact that such Consent Shares and Crossings Shares are
held in escrow by the respective Escrow Agents pursuant to the Escrow
Agreements; provided, that Seller shall deliver on the Closing Date to the
respective Escrow Agents stock powers endorsed in blank representing the Consent
Shares and Crossings Shares. Notwithstanding anything to the contrary in this
Agreement or in the Crossings Escrow Agreement, but subject at all times to
Buyer's rights in and to the Crossings Escrow Amount pursuant to the terms of
this Agreement and the Crossings Escrow Agreement, the ICS Secured Lenders may
have a security interest, pursuant to the terms of the ICS Amended and Restated
Note Purchase Agreement (and the other related loan documents referred to
therein), in and to the Crossings Escrow Amount, to the extent of Seller's
ownership interest in such amount. Pursuant to the Bailee Letter, substantially
in the form of Exhibit D hereto (the "Bailee Letter"), the Crossings Escrow
Agent shall act as bailee of the Crossings Escrow Amount for the ICS Secured
Lenders and shall deliver all amounts from the
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Crossings Escrow Fund which are to be delivered to Seller, pursuant to the terms
of this Agreement and the Crossings Escrow Agreement, to the ICS Collateral
Agent.
2.6 Delivery of Series B Preferred Stock to ICS Secured
Lenders. Seller shall provide Buyer with a copy of an Earmark Agreement among
Seller, Buyer and the ICS Secured Lenders, substantially in the form of Exhibit
E hereto (the "Earmark Agreement"), pursuant to which (a) Buyer shall be
directed to deliver a specified portion of the Series B Preferred Stock (and to
the extent set forth therein, Class A Common Stock), which is not subject to an
escrow agreement or other encumbrance, to such ICS Secured Lenders in lieu of
Seller and (b) the ICS Secured Lenders shall each make the representations and
warranties which are set forth in Section 7.18 of this Agreement with respect to
any shares of Series B Preferred Stock (and to the extent applicable, any shares
of Class A Common Stock) received by such ICS Secured Lender. Buyer agrees to
deliver such portion of the shares of Series B Preferred Stock (and to the
extent applicable, shares of Class A Common Stock) (in all cases, after escrows
are provided for) to the ICS Secured Lenders at the address set forth in the
Earmark Agreement. Seller acknowledges that any delivery to the ICS Secured
Lenders pursuant to this Section 2.6 shall be deemed to be a delivery to Seller.
If Seller does not provide Buyer with the Earmark Agreement, Buyer shall deliver
to Seller all portions of the Purchase Price which are not subject to an escrow
arrangement.
3. CLOSING; TERMINATION.
3.1 Date of Closing. Upon the terms and subject to the
conditions of this Agreement, the sale and purchase of the Purchased Assets
contemplated by this Agreement shall take place at a closing (the "Closing") to
be held at the offices of Kronish, Lieb, Weiner & Hellman LLP (or at such other
place as the parties may agree in writing) at 10:00 A.M. New York time on March
31, 1998, or on a date mutually designated by Seller and Buyer, but in no event
later than five (5) Business Days after the date when each of the conditions
specified in Article 4 has been fulfilled (or waived by the party entitled to
waive that condition). (The date on which the Closing is held is referred to
herein as the "Closing Date".)
3.2 Closing. (a) At the Closing the following shall occur
simultaneously, and none shall be deemed to occur without the occurrence of all
of the others:
(i) Seller shall deliver to Buyer bills of
sale, assignments, endorsements, releases and such
other documents and instruments (collectively,
"Transfer Documentation") as may be necessary or
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appropriate to convey and vest in Buyer, good and
marketable title in and to the Purchased Assets that
are tangible assets, and all of Seller's
right, title and interest to the Purchased Assets
that are intangible assets, free and clear of all
Liens;
(ii) Buyer shall deliver to Seller an
assumption agreement and such other documents and
instruments as may be necessary or appropriate for
Buyer to assume the Assumed Liabilities;
(iii) Buyer shall deliver the Purchase Price
in the manner set forth in Section 2.
(b) From time to time, pursuant to the reasonable request of
Buyer delivered to Seller after the Closing Date, Seller, at Seller's expense
and without any further consideration, will execute and deliver to Buyer such
instruments and documents of conveyance and transfer, and do and cause to be
done such acts or things, as Buyer may reasonably request in order to more
effectively sell, convey, transfer and assign to Buyer, or to perfect or record
Buyer's interest in or title to, or to enable Buyer to use, any and all of the
Purchased Assets, or otherwise to carry out the purposes and intent of this
Agreement. From and after the Closing, each of Buyer and Seller shall have the
right and authority to endorse the other's name on any check or other instrument
received by it on account of any accounts receivable title to which such party
shall have after the Closing pursuant to this Agreement. Buyer shall deliver
promptly to Seller any and all payments of accounts receivable relating to
services performed by Seller prior to the Closing Date which are received by
Buyer after the Closing Date.
3.3 Termination. (a) This Agreement may be terminated at
any time prior to the Closing:
(i) by written agreement executed by Seller
and Buyer;
(ii) by Buyer or Seller if the Closing has
not occurred on or before October 31, 1998, provided
that the non-occurrence of the Closing is not
attributable to a breach of the terms hereof by the
party seeking termination; or
(iii) by Buyer, in its sole discretion, if
the aggregate adjustments to the Purchase Price as
provided in Section 1.3 (b) would have exceeded
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$4,500,000 without application of the Adjustment Cap.
(b) Upon any termination of this Agreement pursuant to Section
3.3(a), this Agreement shall become void and have no effect, without any
liability on the part of any party hereto or its directors, officers or
stockholders in respect of this Agreement, except (i) the provisions of Sections
3.3, 10.1, 10.2, 10.3, 10.5, 10.6, 10.8, 10.9, 10.11, 10.15 and Article 9, shall
survive such termination, and (ii) that nothing herein shall limit the right of
either Buyer or Seller to seek damages for breach of this Agreement.
4. CONDITIONS OF CLOSING.
4.1 Conditions to Each Party. The obligations of each party to
consummate the transactions contemplated by this Agreement at the Closing shall
be subject to the satisfaction, at or prior to the Closing, of the following
conditions:
(a) All notifications required pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), to carry out the transactions contemplated by this Agreement shall have
been made, and the applicable waiting period and any extensions thereof shall
have expired or been terminated, without the imposition of any material burden
or condition on any party hereto.
(b) No order of any Governmental Body (including a court
order) shall have been entered that enjoins, restrains or prohibits consummation
of the transactions contemplated by this Agreement, or puts in doubt the
validity of this Agreement or any document contemplated herein in any material
respect. No proceeding before any Governmental Body shall be pending or
threatened that (i) restrains, prohibits, prevents or materially changes, or
presents a substantial possibility of restraining, prohibiting, preventing or
materially changing, the terms of the transactions contemplated by this
Agreement or (ii) presents a substantial possibility of resulting in material
Losses to any party hereto in each case arising from the transactions
contemplated by this Agreement.
4.2 Buyer's Conditions to Closing. The obligation of Buyer to
consummate the transactions contemplated by this Agreement at the Closing shall
be subject to the satisfaction, at or prior to the Closing, of the following
conditions:
4.2.1 Consent from Senior Lender. Buyer shall have
received consent from the requisite number of lenders under that certain Credit
Agreement dated as of December 19, 1997, by and among TVMAX Telecommunications,
Inc., Optel, Inc., the
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lenders listed thereon, Goldman Sachs Credit Partners L.P., Canadian Imperial
Bank of Commerce and General Electric Capital Corporation, to consummate the
transactions contemplated by this Agreement.
4.2.2 Opinion of Counsel to Seller. Buyer shall have
received from Fulbright & Jaworski L.L.P. a legal opinion addressed to Buyer and
dated the Closing Date, the material provisions of which are set forth on
Exhibit F.
4.2.3 Representations and Warranties; Covenants. The
representations and warranties contained in Section 7 shall be true and correct
in all material respects when made and as of the Closing Date except to the
extent, and only to the extent, that any exceptions thereto are fully disclosed
to Buyer; Seller and License Company shall have duly performed and complied in
all material respects with all agreements and conditions required by this
Agreement to be performed or complied with by it prior to the Closing Date;
Seller and License Company shall have delivered to Buyer an Officer's
Certificate, dated the Closing Date to the foregoing effect. The Closing
Statement shall be true, correct and complete in all material respects.
4.2.4 Secretary's Certificates; Organization Documents.
(a) Buyer shall have received a certificate, dated the Closing Date, of the
Secretary of Seller and License Company, respectively to which are attached: (i)
a true and complete copy of the articles of incorporation of Seller and License
Company, respectively, as then amended and in force, (ii) a true and complete
copy of the bylaws of Seller and License Company, respectively, as then in
force, (iii) a certificate of good standing, dated within five (5) Business Days
of Closing, of the secretary of state of the state of incorporation for Seller
and License Company, respectively, and (iv) resolutions of the board of
directors of Seller and License Company, respectively, and all other corporate
proceedings of Seller and License Company authorizing the execution and delivery
of this Agreement by Seller and License Company, respectively, the agreements
and instruments contemplated herein, and the consummation of the transactions
contemplated hereby. Such Secretary's certificate shall also certify the names
and offices of the officers of Seller and License Company, respectively,
authorized to execute this Agreement and the other documents to be delivered
hereunder on behalf of Seller and License Company, respectively.
4.2.5 Proceedings. All required corporate and other
proceedings taken or required to be taken in connection with the transactions
contemplated hereby and all documents incident thereto shall be reasonably
satisfactory in form and substance to Buyer and its counsel, and Buyer and its
counsel shall have received all such counterpart originals or certified
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or other copies of such documents as each of them may reasonably request.
4.2.6 No Adverse Legislation. No legislation, order, rule,
ruling or regulation shall have been enacted, promulgated or made by or on
behalf of any Governmental Body nor shall any decision of any court of competent
jurisdiction within the United States have been rendered which, in Buyer's
reasonable judgment, could reasonably be expected to materially and adversely
affect (a) the validity or enforceability of this Agreement or any of the
transactions contemplated hereby or (b) the Purchased Assets or the Business or
Buyer's rights thereto or use thereof.
4.2.7 Changes. From the date hereof to and including the
Closing Date, there shall not have been any changes in or effects on the
Purchased Assets or Seller, which could, in the aggregate, without application
of the Adjustment Cap, result in an adjustment to the Purchase Price pursuant to
Section 1.3(b) which could exceed $4,500,000, nor shall there have been any
development or discovery of any material contingency or other Liability which
could reasonably be expected to have such effect or result in a Material Adverse
Effect on the Business, but only to the extent such changes or effects are not
included or considered in any adjustment to the Purchase Price pursuant to
Section 1.3.
4.2.8 Approval and Consents. (a) Each of Seller, License
Company and Buyer shall have duly received all authorizations, consents,
approvals, licenses, franchises, permits and certificates (including, without
limitation, all telecommunication licenses necessary to conduct the Business) by
or of all federal, state and local governmental authorities and of all third
Persons which (i) are reasonably necessary for the execution and delivery of
this Agreement or (ii) the failure of which to obtain, in the aggregate, would
be reasonably likely to interfere with Buyer's use and enjoyment of any of the
Purchased Assets or would otherwise adversely affect the Business or the
consummation of the transactions contemplated hereby (the "Required Consents"),
and all Required Consents shall be in full force and effect at the time of the
Closing and Buyer shall have received such certificates or other evidence as
Buyer may reasonably request to establish compliance with these conditions
provided that a consent shall not be deemed to be required for any property
which is not subject to a Right of Entry, is subject to a Right of Entry which
can be terminated by the property owner on 30 days' notice (or less) or which
Seller is currently servicing pursuant to a Right of Entry which has expired.
Notwithstanding the aforesaid, with respect to consents from property owners,
this condition shall be deemed satisfied if consents are received from property
owners representing 70% of
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the aggregate number of all Cable Subscribers and Billable Phone Subscribers
which are included in the Business, provided that (i) a portion of the Purchase
Price, in conformity with Section 2.2, in the amount of the Per Subscriber
Amount multiplied by the Cable Subscribers and Billable Phone Subscribers
affected by the Required Consents that have not been obtained, shall be paid
into the Consent Escrow, as provided in Section 2.3 and shall be released
pursuant to such Section and the Consent Escrow Agreement, and (ii) after the
Closing Seller shall use its best efforts to obtain such Required Consents as
promptly as practicable. Buyer shall cooperate with Seller and use its
commercially reasonable efforts to assist Seller in obtaining the remaining
Required Consents as set forth in Section 6.1 and shall not take any action
reasonably likely to cause property owners to refuse to grant such consents. For
purposes of the aforesaid and Section 6.1, in the case of a Right of Entry for
which a franchise or license is required, a Required Consent shall be deemed
received upon transfer of the franchise or license to Buyer and upon receipt of
all other Required Consents from third parties required by the terms of the
Right of Entry. Further, if a Right of Entry associated with a default disclosed
pursuant to Section 6.4 is classified under: (a) subsection (i) of Section 6.4,
such Right of Entry shall be treated in the same manner as those Rights of Entry
for which there is no alleged or existing default; (b) subsection (ii) of
Section 6.4, such Right of Entry shall be deemed to contain a Required Consent
and shall be subject to the terms of the Consent Escrow and a Required Consent
shall be deemed received upon the curing or resolution of alleged or existing
defaults under such Right of Entry and the obtaining of a Required Consent (with
estoppel language regarding such cured or resolved defaults) from third parties
required by the terms of the Right of Entry. Notwithstanding any other provision
of this Agreement, with respect to the Consent Escrow Amount for those Rights of
Entry which are classified under Subsection (ii) of Section 6.4, such amount
shall equal the Per-Subscriber Amount multiplied by the total number of Cable
Subscribers and Billable Phone Subscribers subject to Rights of Entry which are
classified under Subsection (ii) of Section 6.4, less an aggregate of 800 Cable
Subscribers and Billable Phone Subscribers.
(b) Buyer shall have received written consents from each
external accountant or auditor of Seller permitting access to the financial
statements and work papers, and the right to use such financial statements, work
papers and the information contained therein, in each case in the manner
described in Section 6.5(a).
4.2.9 Other Agreements. Each party other than Buyer shall
have duly executed and delivered each of the documents and instruments described
in Section 3.2(a) to be
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executed and delivered by it and each of the following agreements:
(a) the Consent Escrow Agreement;
(b) the Crossing Escrow Agreement;
(c) a Stockholders Agreement, substantially in the form of
Exhibit G hereto (the "Stockholders Agreement") governing
Seller's rights with respect to the Class A Common Stock
and Series B Preferred Stock received by Seller as part of
the Purchase Price;
(d) the Services and Cooperation Agreement;
(e) the Non-Competition Agreement;
(f) the mutual release, substantially in the form of
Exhibit H hereto (the "Mutual Release"); and
(g) a guaranty, substantially in the form of Exhibit I
hereto (the "Guaranty").
4.2.10 Absence of Liens. At the Closing, Seller shall
provide Buyer with evidence reasonably satisfactory to Buyer of the release of
all Liens relating to the Purchased Assets.
4.2.11 Non-Conforming Crossings. Seller shall have
delivered to Buyer Five (5) Business Days prior to the Closing a true and
correct list of all Non-Conforming Crossings.
4.3 Seller's Conditions to Closing. The obligation of Seller to
consummate the transactions contemplated by this Agreement at the Closing shall
be subject to the satisfaction, at or prior to the Closing, of the following
conditions:
4.3.1 No Adverse Legislation. No legislation, order, rule,
ruling or regulation shall have been enacted, promulgated or made by or on
behalf of any Governmental Body nor shall any decision of any court of competent
jurisdiction within the United States have been rendered, which in Seller's
reasonable judgment, could reasonably be expected to materially and adversely
affect the validity or enforceability of this Agreement or of any of the
transactions contemplated hereby.
4.3.2 Representations and Warranties; Covenants. The
representations and warranties contained in Section 8 shall be true and correct
in all material respects when
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made and as of the Closing Date; Buyer shall have duly performed and complied in
all material respects with all agreements and conditions required by this
Agreement to be performed or complied with by it prior to the Closing Date; and
Buyer shall have delivered to Seller an Officer's Certificate, dated the Closing
Date, to the foregoing effect.
4.3.3 Secretary's Certificate. Seller shall have received
a certificate, dated the Closing Date, of the Secretary of Buyer to which are
attached resolutions of the board of directors of Buyer authorizing the
execution and delivery of this Agreement, the agreements and documents
contemplated herein and the consummation of the transactions contemplated
hereby. Such Secretary's certificates shall also certify the names and
signatures of the officers of Buyer authorized to sign this Agreement and the
other documents to be delivered hereunder.
4.3.4 Other Agreements. Each party other than Seller shall
have duly executed and delivered each of the documents and instruments described
in Section 3.2 to be executed and delivered by it and each of the following
agreements:
(a) the Consent Escrow Agreement;
(b) the Crossings Escrow Agreement;
(c) the Stockholders Agreement;
(d) the Registration Rights Agreement, substantially in
the form of Exhibit J hereto (the "Registration Rights
Agreement" governing Seller's registration rights with
respect to the Class A Common Stock and Series B Preferred
Stock received by the Seller as part of the Purchase
Price;
(e) the Services and Cooperation Agreement;
(f) the Mutual Release.
4.3.5 Opinion of Counsel to Buyer. Seller shall have
received from Kronish, Lieb, Weiner & Hellman LLP, a legal opinion addressed to
Buyer and dated the Closing Date, the material provisions of which are set forth
on Exhibit K hereto.
5. EMPLOYEE MATTERS. (a) From and after the Closing, Buyer shall not be
obligated to hire or retain any employee engaged in the Business. Each of Seller
and Buyer acknowledge and agree that Buyer shall have no Liability or obligation
whatsoever to the employees engaged in the Business (including, without
limitation, any obligation to hire or retain any such employees for any period
of time following the Closing or any
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Liability or obligation relating to any period prior to the Closing whether
asserted at any time before, on or after the Closing Date) and Seller shall pay
and discharge any and all such Liabilities and obligations (including, without
limitation, any severance or similar liabilities arising from Buyer's failure to
hire any such employees at any time on or within six months after the Closing
and any liability of Buyer under the WARN Act arising from the transactions
contemplated by this Agreement) (collectively, "Employee Liabilities"). Seller
shall indemnify and hold Buyer harmless from any and all Losses not reflected as
Liabilities on the Closing Statement based upon, attributable to or resulting
from or arising out of any Employee Liability including, but not limited to
severance costs or accrued benefits, any costs associated with compliance with
COBRA and any liability under the WARN Act. Notwithstanding any other provision
of this Agreement, the obligation of Seller under this Section 5 shall survive
the Closing until the applicable statute of limitations shall have expired.
(b) At least ten (10) Business Days prior to the Closing Date,
Buyer shall deliver to Seller a written list (the "Employee List") of all those
employees (subject to Section 5(e), below) to whom Buyer shall offer temporary
employment agreements, after the Closing. Buyer may offer employment, either
temporary or permanent, to employees of the Business upon terms and conditions
solely within its absolute discretion. Offers of employment to employees engaged
in the Business may be made orally or in writing, at Buyer's sole discretion.
Buyer and Seller shall agree upon the text of the initial announcement to
employees of the Business with respect to this Agreement and employment
opportunities following the Closing, which announcement shall be made as
promptly as practicable after the date hereof. Seller shall make no other
communications with employees engaged in the Business relating to prospective
employment following the Closing. Buyer agrees to use its reasonable best
efforts to complete the Employee List as early as possible prior to ten (10)
Business Days before the Closing Date.
(c) Buyer shall have no obligation to credit any employees for
pre-Closing service for any purpose, including eligibility, vesting or
determining the amount of any benefit or payment due to any employee, except as
required by law.
(d) Seller shall retain responsibility for and continue to pay
all expenses and benefits for all employees of Seller engaged in the Business at
the Closing and their covered dependents with respect to claims incurred on or
prior to the Closing Date in accordance with existing policies and as required
by law, and shall comply with all requirements of COBRA following the Closing.
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6. COVENANTS.
6.1 Maintain Existence and Obtain Approvals. Until the
Closing, Seller and License Company shall do all things necessary to maintain
its respective corporate existence. Seller shall diligently and in good faith
use its best efforts to procure all Required Consents (as such term is referred
to in Section 4.2.8). Buyer shall cooperate and support Seller in its efforts to
obtain all Required Consents, including, without limitation, paying to Seller,
on and after the Closing Date, 50% of the costs paid, per Cable Subscriber and
Billable Phone Subscriber, to obtain each Required Consent up to $1,000,000 (50%
of $2,000,000) in the aggregate but only up to $100 (50% of $200) per Cable
Subscriber and Billable Phone Subscriber relating to any such Required Consent.
Notwithstanding the aforesaid (but still subject to the aggregate limit), to the
extent a Cable Subscriber and Billable Phone Subscriber is the same Person and
is being provided service under one Right of Entry for both phone and cable
services, Buyer shall only be required to pay up to $100 for such subscriber.
Costs paid per Cable Subscriber and Billable Phone Subscriber shall include,
cash incentive payments, the present value (using a monthly discount rate of
1.25%) of any increased amount of Revenue Share and capital costs of equipment.
Except as set forth below, Seller shall not enter into any agreements with
property owners which would require costs to be paid or incurred, including, but
not limited to undertaking to provide additional services by Buyer without
obtaining Buyer's prior written consent to such agreement. Subject to the
maximum dollar amounts stated above, Seller shall not be required to obtain the
written consent of Buyer prior to offering (i) cash incentives, (ii) an
improvement of the terms of Revenue Share or (iii) a commitment to provide up to
ten additional channels, and to the extent required, additional programming may
be selected from the list set forth on Schedule 6.1 (with no more than one
sports channel set forth on Schedule 6.1 per property), to Cable Subscribers, in
connection with obtaining a consent; provided, that Seller may offer to provide
programming which is not listed on Schedule 6.1 provided that the related Right
of Entry states that such programming is not included in the basic program tier
and will be subject to additional per subscription charges. Notwithstanding the
aforesaid, Seller may not offer any programming under subsection (iii) if it
would require the placement of any additional, or relocation of any existing,
satellite receiving dishes at the related property. Seller shall be required to
obtain Buyer's written consent prior to entering into an agreement to provide
more than ten additional channels or any particular programming other than that
permitted above to Cable Subscribers. Further, Seller shall consult and
cooperate with Buyer in reaching any agreements to obtain Required Consents.
Notwithstanding anything herein to the contrary, under no circumstances shall
Seller make any representation as to the
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costs of services to be provided on and after the Closing Date under any Right
of Entry other than as provided in such Rights of Entry on the date hereof. To
the extent there exist restrictions in a Right of Entry limiting, in any
respect, Buyer's ability to raise costs of service, Seller shall not be
permitted to offer additional channels or programming under such Right of Entry
pursuant to this Section 6.1 without Buyer's prior consent.
6.2 Assignment of Transmission Licenses and Permits. Seller
shall use its best efforts to procure all consents to assign transmission
licenses and permits from Seller and License Company to Buyer in all Relevant
Markets.
6.3 Access to Information. Seller shall provide to Buyer and
its authorized agents and representatives (including its auditors and legal
counsel) reasonable access to the books, records, properties and proceedings
relating to Seller (as the same may be related to the Purchased Assets and the
Business) other than such books and records that are subject to attorney-client
privilege. Seller shall deliver to Buyer copies of all FCC licenses, franchise
agreements, pole attachment agreements, access agreements, right-of-way
agreements, right of entry agreements, subscriber agreements, a list of all
programming, leases and other agreements of Seller (relating to the Purchased
Assets and the Business) as promptly as practicable. Seller shall promptly give
notice to Buyer of any occurrence or event, including the commencement of any
litigation, investigation or proceeding, which, in either case, if not cured or
if adversely determined could reasonably be expected to have a Material Adverse
Effect. Without limiting the aforesaid (a) if any party hereto receives a notice
of any order or proceeding described in Section 4.1(b), such party shall
deliver, as promptly as practicable, notice of such order or proceeding,
together with all pleadings and correspondence received in connection therewith,
to the other parties hereto and (b) if any party hereto becomes aware of any
matter described in Section 4.2.6, such party shall notify the other parties of
such matter as promptly as practicable.
6.4 Disclosure and Classification of Defaults Under Rights of
Entry. To the extent Seller deems it to be appropriate, after the execution of
this Agreement, Seller shall deliver estoppel letters to the property owners
associated with Rights of Entry for which there is an alleged or existing
default, with a request that such owners execute the estoppel letter and return
it to Seller at least six (6) Business Days prior to Closing. Additionally,
Seller shall make all other reasonable efforts between the date of this
Agreement and the Closing Date to resolve any alleged or existing defaults. Five
(5) Business Days prior to Closing, Seller shall deliver to Buyer a copy of all
estoppel letters and other resolutions received by
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Seller and shall disclose to Buyer all alleged and existing defaults under the
Rights of Entry in the Relevant Markets for which an estoppel letter or
resolution satisfactory to Buyer was not received, specifying the details of
each default and providing copies of all correspondence relating thereto.
At such time, Buyer in consultation with Seller, shall
determine whether such defaults are (i) frivolous or can be cured without any
significant post Closing expenditures or other commitments which are not set
forth in the Right of Entry or (ii) all other defaults.
In order to determine whether Rights of Entry should be
classified under subsections (i) or (ii), Buyer shall have the right to confer,
with participation by Seller, with the owners of the properties corresponding to
the Rights of Entry in a manner that Buyer, in its sole discretion, deems
appropriate.
Rights of Entry classified under the aforesaid Subsections (i)
and (ii) shall be treated in the manner set forth in Section 4.2.8.
6.5 Promotional Campaigns. Schedule 6.5 sets forth a calendar
and description of all of Seller's discount and promotional campaigns from
December 1997 through June 1998. From the date hereof until the Closing, Seller
shall not conduct any promotional and discount campaigns other than those set
forth on Schedule 6.5.
6.6 Certain Payments. Until the Closing, Seller shall pay or
discharge or cause to be paid or discharged, before the same shall become
delinquent, (i) all Taxes, fees, assessments and governmental charges levied or
imposed upon or collectible by Seller and (ii) all lawful claims for labor,
materials, supplies and any other claims which, if unpaid, might by law
reasonably be expected to become a Lien upon the Purchased Assets; provided,
that where any of the foregoing are being contested by Seller in good faith by
appropriate proceedings, such payments shall be paid by Seller upon a resolution
of such contest in favor of the opposing party.
6.7 Taxes. After the Closing, Seller will pay all Taxes
relating to the Business for periods on or prior to the Closing Date when such
Taxes are due and payable by Seller, except as any of the foregoing are being
contested in good faith by appropriate proceedings, in which case such Taxes
shall be paid by Seller upon a resolution of such contest in favor of the
opposing party.
6.8 Maintenance of Properties; Insurance; Books and Records;
Compliance with Law; Relationships. Until the Closing,
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(a) Seller shall (i) maintain and keep the Purchased Assets in
their condition and state of repair and working order that existed as of the
date hereof, ordinary course wear and tear excepted and (ii) do or cause to be
done all things reasonably necessary or appropriate to preserve and keep in full
force all rights, licenses, franchises, rights of entry, approvals,
authorizations, consents, permits and other authorizations necessary or
desirable to enable Seller to operate the Business as currently conducted;
(b) Seller shall maintain insurance with respect to the
Purchased Assets in accordance with past practices;
(c) Seller shall keep proper books of record and accounts, in
which full and correct entries shall be made of all (i) financial transactions
relating to the Purchased Assets and the Business, in accordance with GAAP
consistent with past practices;
(d) Seller shall (i) conduct the Business in the usual,
regular and ordinary manner consistent with past practices and (ii) comply in
all material respects, and conduct the Business in material compliance, with all
statutes, laws, ordinances, or rules and regulations and orders of Governmental
Bodies to which Seller or any of its assets and properties or the Business is
subject; and
(e) Subject to Section 5, Seller shall use commercially
reasonable efforts to (i) provide Buyer with the opportunity to discuss
employment with the employees of Seller who are engaged in the Business and (ii)
preserve Seller's current relationships with its customers and other Persons
with whom it has a significant business relationship.
6.9 Deliveries. (a) Until the Closing, Seller shall deliver to
Buyer promptly such periodic financial and/or operating data with respect to the
Business or Purchased Assets as Buyer may reasonably request, including, without
limitation, any audited financial statements that may have been prepared,
provided that nothing herein shall require Seller to prepare audited financial
statements relating to the Purchased Assets.
Without limiting the foregoing, both before and after the Closing, Seller shall
provide Buyer with access to all audited financial statements and workpapers of
its internal and external accountants and shall procure from all such external
accountants all consents necessary for such access and otherwise necessary for
Buyer to comply with any reporting requirements that Buyer, in its sole
discretion, determines that it may have under the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder or under
the terms of any indenture or other instrument of Buyer and its affiliates.
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(b) Buyer is hereby authorized to deliver a copy of any
financial statement or certificate delivered pursuant to this Section 6.9 to any
Governmental Body having jurisdiction over it or any financing source that
requests such information; provided, however, that Buyer shall take any and all
steps as may be reasonable to maintain the confidentiality of such information
and material in keeping with their obligations to maintain information in
confidence under the terms hereof and all prior agreements still in force and
effect.
(c) Seller shall also deliver to Buyer, promptly upon receipt
by it, any other reports or other copies of any reports from Seller's auditors,
copies of any correspondence to or from or filings with the FCC or any other
Governmental Body relating to the Business or the Purchased Assets covering all
periods within twelve (12) months prior to the Closing Date.
6.10 Filings; Approvals. (a) Seller, License Company and Buyer, as
promptly as practicable, each shall file or supply, or cause to be filed or
supplied, all applications, notifications and information required to be filed
or supplied by any of them, by any Governmental Body in connection with this
Agreement or the consummation of the transactions contemplated hereby, including
but not limited to any filings pursuant to the HSR Act. Seller and Buyer each,
as promptly as practicable, shall use all reasonable efforts to obtain or make,
or cause to be obtained or made, all Required Consents necessary to be obtained
or made by it, in order for each of them so to consummate such sale and transfer
and such transactions.
(b) Seller and Buyer shall coordinate and cooperate with each
other in exchanging such information and supplying such reasonable assistance as
may be reasonably requested by the other in connection with the filings and
other actions contemplated by this Section 6.10.
6.11 Conduct of the Business. Prior to the Closing, Seller (with
respect to the Business and the Purchased Assets) (a) shall conduct the Business
only in the usual, regular and ordinary manner consistent with past practices
and (b) shall not (i) take any action to diminish the aggregate value of the
Purchased Assets, (ii) disburse any of the Purchased Assets to any other Person
(iii) take any action to frustrate the transactions contemplated by this
Agreement, (iv) create, incur, assume, or suffer to exist any Liens of any kind
against or upon any of the Purchased Assets, or (v) without Buyer's written
consent, create any Subsidiaries.
6.12 Bulk Sales Compliance. Buyer hereby waives compliance by
Seller with the provisions of the bulk sales law of any state, and Seller shall
pay and discharge when due all claims
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of creditors that could be asserted against Buyer or its Affiliates by reason of
such non-compliance to the extent that liabilities to such creditors are not
specifically assumed by Buyer under this Agreement. Seller shall indemnify,
defend and hold harmless Buyer from and against any Losses arising from Seller's
failure to comply with any such bulk sales law. The foregoing indemnity shall
continue indefinitely and shall not be subject to any limitation set forth in
Section 10.1.
6.13 Assignment of Certain Rights. Without limiting any rights
Buyer may otherwise have pursuant to this Agreement or otherwise, at the
Closing, Seller shall provide Buyer with all the benefits of any confidentiality
agreements to which Seller may be a party or a beneficiary relating to the
Purchased Assets (to the extent not otherwise transferred to Buyer as part of
the Purchased Assets) by either assigning all of the rights to enforce such
agreements to Buyer (to the extent such rights are assignable) or undertaking to
enforce any such agreement, for the benefit of Buyer, upon Buyer's demand.
6.14 Crossing Matters. Until the 180th day after the Closing Date,
Seller shall use its best efforts and act as promptly as practicable to obtain a
franchise agreement on terms reasonably acceptable to Buyer for or otherwise
eliminate (a "Remedy") each Non-Conforming Crossing, provided that any Remedy
shall not adversely effect the ability of Buyer to service the Cable Subscribers
and Billable Phone Subscribers. Seller, in its sole discretion, may choose the
Remedies and shall use its own funds to pay the costs and expenses of such
Remedies. If there are still Non-Conforming Crossings in existence at the end of
such 180 day period, Buyer, in its sole discretion, shall either (a) direct
Seller to continue, in good faith, its efforts to complete the Remedy for some
or all of such Non-Conforming Crossings or (b) choose another Remedy, which, for
properties located in Houston, may be the connection of the property to Buyer's
fiber optic network and, for other properties, may include, without limitation,
obtaining a franchise, building out a microwave link or any other remedy, for
each remaining NonConforming Crossing, and in which case Buyer shall have sole
authority for obtaining such Remedy (with the cooperation and assistance of
Seller).
6.15 Transfer Taxes. Seller shall pay or cause to be paid all
Taxes and other expenses of transferring the Purchased Assets as contemplated
hereunder, including, without limitation, all sales, use, real estate transfer,
conveyance, gains, stamp, value added and other similar taxes (including any
interest, penalties and additions thereto).
6.16 Best Efforts. Upon the terms and subject to the conditions
hereof, each of the parties hereto shall use its
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reasonable best efforts to take or cause to be taken all actions and to do or
cause to be done all things necessary to satisfy, as promptly as practicable
after the date hereof, and in any case on or before October 31, 1998, the
conditions to the Closing and to consummate the transactions contemplated by
this Agreement and the other agreements contemplated herein. Without limitation,
(a) each party shall use its best efforts to prepare all filings under the HSR
Act as promptly as practicable after the date hereof and to respond promptly to
any requests from the Federal Trade Commission and the Department of Justice
relating thereto, and (b) Seller shall be primarily responsible for obtaining,
and shall use its best efforts to obtain, all other Required Consents. The Buyer
shall cooperate with Seller to obtain such consents as set forth in Section 6.1.
Periodically between the date hereof and the Closing Date, and in no event less
frequently than weekly, Seller shall provide Buyer with a status report (which
report may be oral) describing in reasonable detail its efforts to obtain
Required Consents and the results of such efforts.
6.17 First Offer Rights. Within one year after the Closing Date,
if Seller proposes to sell, assign or transfer (a) any Right of Entry associated
with a property listed on Schedule 2.3 which has been released to Seller in
accordance with Section 2.3, or (b) any other Right of Entry for which a
Required Consent was not received (other than for those properties included in
the Consent Escrow pursuant to Section 4.2.8), Seller shall first make a bona
fide good faith offer to sell such Rights of Entry to Buyer, such offer to be
negotiated exclusively between Buyer and Seller for up to 30 days.
6.18 Personal Property. Between the date hereof and the Closing
Date, to the extent any of the Purchased Assets located at a Relevant Property
or otherwise set forth on Schedule 7.5(d) is removed from such property or
ceases to be in good working order, Seller shall replace such assets with
substantially similar assets or repair such assets.
6.19 Financial Statements. Promptly after completion thereof, and
in no event more than 15 days after the date hereof, Seller shall deliver to
Buyer the final balance sheet of Seller as of October 31, 1997 and final
statements of income and cash flows of the Business for the ten (10) months
ended October 31, 1997.
7. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller hereby represents
and warrants to Buyer as follows:
7.1 Authority; Organization and Qualification; Capitalization. (a)
Each of License Company and Seller has all requisite corporate power and
authority and legal capacity to
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enter into this Agreement and each agreement contemplated hereby, to carry out
its obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of this
Agreement and each of the agreements contemplated hereby to which Seller and
License Company is a party have been duly authorized by all required action on
the part of Seller and/or License Company, as applicable. This Agreement has
been, and upon its execution each of the other agreements contemplated hereby
will be, duly executed and delivered by Seller and License Company and (assuming
due authorization, execution and delivery by Buyer) this Agreement constitutes,
and upon License Company's and Seller's execution of each of the other
agreements contemplated hereby will constitute, the legal, valid and binding
obligation of Seller and License Company enforceable against Seller and License
Company in accordance with its respective terms.
(b) Each of License Company and Seller is a corporation, duly
organized, validly existing and in good standing under the laws of the state of
its incorporation. Seller is duly authorized to do business in each of the
Relevant Markets. Each of License Company and Seller has the power to own its
properties and to carry on its business as currently being conducted and as
intended to be conducted. All corporate actions taken by Seller and License
Company have been duly authorized and Seller and License Company have not taken
any action that in any respect conflicts with, constitutes a default under or
results in a violation of any provision of its respective articles of
incorporation or bylaws. True and complete copies of the articles of
incorporation and bylaws of Seller and License Company, as in effect on the date
hereof, have been delivered by Seller to Buyer. Other than ICS Communications,
LLC, Activetel L.D., Inc., ICS Systems, Inc. (formerly M.A. Equity Holdings),
Maxtel Communications Corporation and License Company Seller has no Subsidiaries
and no investments or interests in any other Person. Each of ICS Communications,
LLC, ICS Systems, Inc. (formerly M.A. Equity Holdings) and Maxtel Communications
Corporation do not conduct the Business and do not hold assets which are used in
the Business. Activetel L.D., Inc. does not hold any of the Purchased Assets.
License Company has no Subsidiaries and no investments or interests in any other
Person.
7.2 Actions Pending. Except as set forth on Schedule 7.2, there is no
action, suit or proceeding, or to the best knowledge of Seller, investigation,
pending or, to the best knowledge of Seller, threatened, against or affecting
Seller, License Company and any of the Purchased Assets or the Business, by or
before any court, arbitrator or administrative tribunal or Governmental Body.
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7.3 Outstanding Debt; Defaults. Except as set forth on Schedule 7.3,
each of License Company and Seller (i) has no outstanding Indebtedness (other
than Indebtedness relating solely to the Retained Businesses that does not
impose or support any Lien or any other restriction on any of the Purchased
Assets), and (ii) is not in violation of or in default in any material respect
under or with respect to any lease, license, permit, contract or agreement
(including oral and informal arrangements) to which it is a party and effects
the Purchased Assets or the Business and each such lease, license, permit,
contract or agreement is in full force and effect. To the best knowledge of
Seller, no other party to any such lease, license, contract or agreement is in
default in any material respect. Seller has provided to Buyer a true and
complete copy of each such lease, license, permit, contract or agreement.
7.4 Material Liabilities; Financial Statements. (a) There are no
material Liabilities, accrued or contingent, of Seller or License Company
relating to the Business or Purchased Assets that are not disclosed in Schedule
7.4.
(b) Seller has furnished Buyer with a draft balance sheet of it as
of October 31, 1997 and draft statements of income and cash flows of the
Business for the ten (10) months ended October 31, 1997. The draft financial
statements and after completion and delivery to Buyer pursuant to Section 6.19,
the final balance sheet and statements of income and cash flows (in both cases,
including any related schedules and/or notes) are true and correct in all
material respects, have been prepared in accordance with GAAP consistently
applied throughout the periods involved and show all liabilities, direct and
contingent, of Seller required to be shown in accordance with such principles.
The draft balance sheet fairly presents the condition of Seller as at October
31, 1997, and the statements of income and cash flows fairly presents the
results of the operations of the Business and its cash flows for the periods
indicated.
7.5 Purchased Assets. (a) Seller owns, leases or has the legal right to
use all of the Purchased Assets, and, with respect to contract rights, Seller is
a party to and enjoys the right to the benefits of all contracts, agreements and
other arrangements used by Seller in the Business. License Company owns all of
the licenses used by Seller in the Business. Except as set forth on Schedule
7.5(a), each of Seller and License Company has good and marketable title to, or,
in the case of leased or subleased Purchased Assets, valid and subsisting
leasehold interests in, all its Purchased Assets, free and clear of all Liens.
Seller has valid and enforceable rights from all third parties and Governmental
entities to maintain the poles or similar attachments used or held for use in
the Business at their present locations. Additionally, Schedule 7.5(a) shall
identify
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all leased and subleased Purchased Assets specifying the terms
and conditions of all related leases.
(b) The Purchased Assets constitute all the properties, assets and
rights, other than cash and receivables, forming a part of, used, held or
intended to be used in, and all such properties, assets and rights as are
necessary in the conduct of, the Business. All of the Purchased Assets are being
sold "as is".
(c) Upon the consummation of the transactions contemplated by this
Agreement to be consummated at the Closing, Seller will deliver good, valid and
marketable title to, or lease, under valid and subsisting leases, the Purchased
Assets free and clear of any Liens and without incurring any penalty or other
adverse consequence, including, without limitation, any increase in rentals,
royalties, or license or other fees imposed as a result of, or arising from, the
consummation of the transactions contemplated by this Agreement, except as
provided in this Agreement or set forth on Schedule 7.5(c).
(d) Set forth on Schedule 7.5(d) is a true and complete list of
equipment, tools, supplies, furniture, fixtures, personalty, vehicles, rolling
stock and other tangible personal property (the "Personal Property") located in
the Relevant Markets or categories of such Personal Property, in the case of
items of lesser value. The Personal Property constitutes all of the equipment,
tools, supplies, furniture, fixtures, personalty, vehicles, rolling stock and
other tangible personal property as is necessary to conduct the Business in the
ordinary and customary course, consistent with past practices. Seller has caused
the Personal Property to be maintained in accordance with good business
practice.
(e) Seller owns no real property located in any of the Relevant
Markets.
7.6 Taxes. Except as set forth on Schedule 7.6, Seller has filed all
Federal, state and other income Tax returns or reports which are required to be
filed, all such Tax returns or reports are true, correct and complete in all
material respects and Seller has paid all Taxes as shown on said returns and on
all assessments received by it to the extent that such Taxes have become due and
are payable by Seller, except as any of the foregoing are being contested in
good faith by appropriate proceedings; and no Tax lien has been filed and, to
the best knowledge of Seller, no claim is being asserted with respect to any Tax
or other similar charge.
7.7 No Conflicts. Except as set forth on Schedule 7.7, neither the
execution or delivery of this Agreement or any
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agreement contemplated hereby, nor fulfillment of or compliance with the terms
and provisions hereof and thereof, nor the consummation of the transactions
contemplated hereby and thereby, will conflict with or result in a breach of the
terms, conditions or provisions of, or constitute a default under, or result in
any violation of, or result in the creation of any Lien upon any of the
Purchased Assets of Seller or License Company pursuant to, or require any
consent under (which has not been obtained or waived), or give to any third
Person any rights of termination, amendment, acceleration, suspension,
revocation or cancellation of, (i) the articles of incorporation or bylaws of
Seller or License Company, (ii) any award of any arbitrator or any order,
judgment, decree, statute, law, rule or regulation to which Seller or License
Company or any material amount of its respective properties, assets or business
is subject or (iii) any note, bond, mortgage or indenture, contract, agreement,
lease, sublease, license, permit, franchise or other instrument or arrangement
to which Seller or License Company is a party or by which any of its respective
assets or properties is bound or affected.
7.8 Material Agreements. Schedule 7.8 is a complete and correct list as
of the Closing Date of all agreements, contracts and commitments of the
following types related to the Business, written or oral, to which the Seller
and License Company is a party or by which either of them or any of their
respective assets is bound as the date hereof: (a) mortgages indentures,
security agreements, guarantees, pledges and other agreements and instruments
relating to the borrowing of money or extension of credit; (b) agreements and
arrangements with Affiliates; (c) sales, agency, manufacturer's representative
or distributorship agreements; (d) licenses of patent, trademark and other
rights relating to any Intellectual Property; (e) leases of equipment or
machinery requiring rental payments of more than $5,000 per year each and all
leases of real property; (f) joint venture agreements; and (g) other agreements,
contracts and commitments that in any case involve payments or receipts of more
than $5,000 in any fiscal year or $15,000 in total (collectively, "Material
Agreements"). Seller has delivered or made available to Buyer complete and
correct copies of all written Material Agreements together with all amendments
thereto, and accurate descriptions of all oral Material Agreements. Except as
set forth on Schedule 7.8, each Material Agreement is in full force and effect
and is binding upon Seller or License Company, as applicable, and with respect
to the other parties thereto, to the Seller's knowledge is binding upon such
other parties in each case in accordance with its terms. Except as set forth in
Schedule 7.8, there does not exist under any Material Agreement any material
default by the Seller or License Company, and with respect to the other parties
thereto, to the Seller's knowledge by any other party, under any Material
Agreement or event or
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condition which, after notice or lapse of time or both, would constitute such a
default.
7.9 Broker's or Finder's Commissions. Except for a brokerage fee that
may be payable to CMD Ventures, LLC which shall be paid by Seller, no broker's
or finder's fee or commission will be payable by Seller or License Company with
respect to the transactions contemplated by this Agreement.
7.10 Applicable Environmental Regulations. Except as would not,
individually or in the aggregate, have a Material Adverse Effect, Seller and
License Company are each in compliance with all applicable laws, rules,
regulations and other requirements of Governmental Bodies relating to health,
safety, hazardous materials, pollution or the environment ("Environmental Laws")
and with all such licenses, permits, authorizations, certificates, exemptions
and approvals required by such Environmental Laws. Except as would not,
individually or in the aggregate, have a Material Adverse Effect, Seller and
License Company have not performed or suffered any act or practice which could
reasonably be expected to give rise to, and have not otherwise incurred,
Liability to any Person under any Environmental Laws.
7.11 Compliance with Other Laws. Seller and License Company have each
conducted and shall continue to conduct the Business in compliance in all
material respects with all laws, rules and regulations and orders of
Governmental Bodies, and Seller and License Company is not in violation in any
material respect of any such law, rule, regulation or order of a Governmental
Body with the exception of any and all Schedules in Section 7 detailing
non-compliance.
7.12 ERISA; Labor Agreements. Except as set forth in Schedule 7.12,
Seller and License Company do not have, or in the past has it ever had, any
plan, agreement or arrangement, written or otherwise, subject to ERISA or any
Liability to the PBGC. Seller and License Company are not currently, or in the
past have ever been, a party to any collective bargaining agreement. Schedule
7.12 sets forth a complete list of all employees of Seller and License Company
engaged in activities relating to the Business and their rates of compensation.
7.13 Possession of Franchises, Licenses, etc. Seller and License Company
each possess all franchises, certificates, licenses, permits, approvals and
other authorizations from governmental political subdivisions or Governmental
Bodies, including the FCC, that are necessary for the ownership, maintenance and
operation of the Purchased Assets or for the conduct of the Business as it is
now operated. All such franchises, certificates, licenses, permits, approvals
and other
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authorizations are in full force and effect, and neither License Company nor
Seller is in violation of any thereof in any material respect. Neither Seller
nor License Company has received any notice from any Governmental Body (or from
any third party or other Person requesting such action) revoking, cancelling,
rescinding, modifying or refusing to renew, or threatening to take any such
action with respect to, any such franchise, certificate, license, permit,
approval or other authorization. Except as set forth on Schedule 7.13, all such
franchises, certificates, licenses, permits, approvals and authorizations held
by Seller and License Company relating to the Business or the Purchased Assets
are freely transferable to Buyer subject to prior Government Body and FCC
approvals, where applicable. Following consummation of the transaction
contemplated to be consummated at the Closing and receipt of any required
Government Body and FCC approvals, Buyer will receive the benefits (without any
diminution) of all such franchises, certificates, licenses, permits, approvals
and authorizations.
7.14 Intellectual Property. Except as set forth on Schedule 7.14, Seller
and License Company owns or possesses adequate, or has paid appropriate
compulsory copyright fees for, licenses or other valid rights to use all
patents, patent rights, trademarks, trademark rights, trade names, trade name
rights, copyrights, service marks, trade secrets, applications for trademarks
and for service marks, mask works, know-how and other proprietary rights and
information necessary for the conduct of the Business as currently conducted or
as contemplated to be conducted by Seller and License Company, and Seller and
License Company are each unaware of any assertion or claim, or any state of
facts that could give rise to a claim, challenging the validity of any of the
foregoing. The conduct of the Business as currently conducted and as
contemplated to be conducted does not and will not conflict in any material way
with any patent, patent right, license, trademark, trademark right, trade name,
trade name right, service mark, mask work or copyright of any third party. There
are no infringements of any proprietary rights owned by or licensed by or to
Seller or License Company. Except as set forth on Schedule 7.14, Seller and
License Company have not licensed or otherwise permitted the use by any third
party of any proprietary information.
7.15 Governmental Consents. Neither the nature of the Business or any of
the businesses, assets or properties used in the Business, nor the nature of the
Purchased Assets, nor any relationship between Seller and License Company and
any other Person, nor any circumstance in connection with the transactions
contemplated by this Agreement is such as to require on behalf of Seller or
License Company, any consent, approval or other action by or any notice to or
filing with any court or administrative body or Governmental Body in connection
with the execution,
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delivery and performance of this Agreement, except for filings under the HSR Act
and consents, approvals and other actions, notices and filings which have been
obtained, taken and completed, as applicable, including, but not limited to all
required prior approvals from the FCC and any other Government Body.
7.16 Disclosure. The information relating to the Purchased Assets and
the Business provided to Buyer by Seller and License Company is complete and
accurate in all material respects, does not contain a misstatement of a material
fact and does not omit to state any material fact necessary to make the
information provided not misleading. Without limiting the aforesaid, all
information provided by Seller which is used to calculate the adjustments set
forth in Section 1.3 and all information provided pursuant to Section 1.2, when
delivered by Seller will be true, correct and complete, including without
limitation, information regarding Liabilities and Assumed Liabilities, the 550
MHz Relevant Properties, the number of defaults existing under Rights of Entry,
the "unit weighted average remaining term" of all Rights of Entry, actual Phone
and Cable Revenue Share, the number of Cable Subscribers and Billable Phone
Subscribers, the Average Cable Revenue Per Cable Subscriber and Average Phone
Revenue Per Billable Phone Subscriber, respectively, and the number of fully
activated cable and telephone passings and associated Rights of Entry.
7.17 Closing Statement. The information set forth on the Closing
Statement and any and all information used to calculate the information set
forth on the Closing Statement (including, without limitation, amounts of all
Specified Assumed Liabilities) is true, correct and complete in all respects.
7.18 Investment. (a) Seller is an "Accredited Investor" as that term is
defined in Rule 501(a) promulgated under the Securities Act of 1933, as amended
(the "Act"). Seller has experience in analyzing and investing in companies like
Buyer and is capable of evaluating the merits and risks of an investment in
Buyer and has the capacity to protect its own interests. Seller is aware of
Buyer's business affairs and financial condition, and has acquired information
about Buyer sufficient to reach an informed and knowledgeable decision to
acquire the Series B Preferred Stock and Class A Common Stock. Seller
understands that investment in the Series B Preferred Stock and Class A Common
Stock is subject to a high degree of risk. Seller can bear the economic risk of
its investment, including the full loss of its investment, and by reason of its
business or financial experience or the business or financial experience of its
professional advisors has the capacity to evaluate the merits and risks of its
investment and protect its
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own interest in connection with the purchase of the Series B Preferred Stock and
Class A Common Stock.
(b) The shares of Series B Preferred Stock and Class A Common
Stock to be acquired by Seller pursuant to this Agreement are being acquired for
its own account and with no intention of distributing or reselling such shares
or any part thereof in any transaction that would be in violation of the
securities laws of the United States of America, or any state, without
prejudice, however, to the rights of the Seller at all times to sell or
otherwise dispose of all or any part of such shares under an effective
registration statement under the Act, or under an exemption from such
registration available under the Act, and subject, nevertheless, to the
disposition of the Seller's property being at all times within its control. If
Seller should in the future decide to dispose of any of the shares of Series B
Preferred Stock or Class A Common Stock, the Seller understands and agrees that
it may do so only in compliance with the Stockholder's Agreement and the Act and
applicable state securities laws, as then in effect. Without limiting the
generality of the preceding sentences of this Section 7.18(b), but subject to
the pledge in favor of the ICS Secured Lenders and delivery to the ICS Secured
Lenders in accordance with the Earmark Agreement, the Seller has not offered or
sold any portion of the securities to be acquired by it and Seller has no
present intention of reselling or otherwise disposing of any portion of the
securities. Other than as set forth in the previous sentence, Seller represents
that it does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participation to such person or to any
third person, with respect to any of the securities.
(c) Seller has independently, and based on such information as it
has deemed appropriate, made its own analysis and decision to enter into this
Agreement, and specifically, has made its own independent investigation and
evaluation of the Series B Preferred Stock and Class A Common Stock in
connection with the transactions contemplated hereunder. Seller further
acknowledges that (i) except as expressly provided in this Agreement, Buyer
makes no representation or warranty and assumes no responsibility with respect
to the accuracy of any statements, warranties or representations made in or in
connection with the Series B Preferred Stock or the Class A Common Stock or any
other information relating to the Series B Preferred Stock or Class A Common
Stock or any other matter including, without limitation, information received
from third parties or pursuant to Seller's due diligence investigations of Buyer
and without limitations Seller acknowledges that Buyer has made no
representation or warranty with respect to Buyer's internal analyses,
projections, business plans, or any document delivered or disclosed to it
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except as expressly set forth in this Agreement, and (ii) Seller has had access
to, or will have access on or prior to the Closing Date to, copies of all
documents and information (including the representations and warranties of Buyer
contained in this Agreement) as it has deemed appropriate to make its own
investment analysis and decision to enter into this Agreement.
7.19 Subscribers, Rights of Entry. Schedule 7.19 is a complete and
correct list of all Rights of Entry relating to the Business and the number of
Cable Subscribers and Billable Phone Subscribers served pursuant to each such
Right of Entry. True, accurate and complete copies of all Rights of Entry listed
in Schedule 7.19 have been delivered by Seller to Buyer. Except as set forth in
Schedule 7.19, all Rights of Entry, including all amendments thereto, (a) are in
writing and are legal, valid, binding and enforceable in accordance with their
terms, (b) if held by Seller, are freely transferable to Buyer and (c) the
validity and enforceability (including the rights of Buyer to such Rights of
Entry following the Closing) of the same will not be adversely affected by the
consummation of any of the transactions contemplated by this Agreement. Except
as set forth in Schedule 7.19, no material default of any Person exists under
any of the Rights of Entry, and the parties thereto other than Seller have no
offsets or defenses to the enforcement thereof. Additionally, Schedule 7.19
accurately sets forth the properties to which Seller provides service in the
conduct of the Business the ("Relevant Properties), the locations of such
properties, the number of units to such services at each of such locations, the
number of Cable Subscribers and Billable Phone Subscribers to such services at
each of such locations, the date of the Rights of Entry relating to each
property and the expiration of such Right of Entry. All Relevant Properties set
forth on Schedule 7.19 are located within the Relevant Markets. Additionally,
Schedule 7.19 sets forth a complete and correct list, for each Relevant
Property, of the source of signal feed used in the Business, specifying whether
such feed is SMATV on premises, 18ghz or another type of feed (and a description
thereof).
7.20 Cable Systems. Schedule 7.20 hereto lists all "cable systems," as
defined by the Act and FCC Rules, operated by Seller and License Company and
relating to the Business (collectively, "Cable Systems"), the name of the
franchise authority ("Franchisor"), if any, the date on which the franchise was
awarded and the date on which the franchise is scheduled to expire (if not
renewed). Except as set forth on Schedule 7.20 with respect to each such Cable
System and since March 31, 1995, Seller and License Company (i) has timely filed
all required registration statements with the FCC pursuant to FCC Rule 76.12,
(ii) has timely filed all required equal employment opportunity reports with the
FCC pursuant to FCC Rule 76.77, such reports are true and accurate, and the FCC
has certified compliance in
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response to each such report except for the 1997 report which was filed after
the due date and has not yet been certified by the FCC, (iii) is in compliance
with all FCC programming requirements, including the children's programming
provisions of FCC Rule 76.225, (iv) has timely filed all reports, including
those required by FCC Rule 76.403, and is in compliance with the record-keeping
and inspection requirements of FCC Rules 76.307 and 76.601, (v) has not received
any notice of non-compliance from any franchisor pursuant to FCC Rule 76.309 and
meets or exceeds the customer service provisions set forth in that rule, (vi)
complies with the requirements of FCC Rule 76.601 and is in compliance with the
applicable technical standards of FCC Rule 76.605, and (vii) is in compliance
with the aeronautical interference provisions of FCC Rules 76.610-76.615.
7.21 FCC Licenses. Schedule 7.21 correctly sets forth all of the FCC
licenses, permits, approvals and authorizations (collectively, "FCC Licenses")
used or planned to be used by Seller and License Company in connection with the
Business and correctly sets forth the entity holding such FCC License, the call
sign or file number and expiration date of each such FCC License. Neither Seller
nor License Company is required to hold any other FCC License to conduct the
Business. Each such FCC License has been duly and validly issued or assigned to
Seller or License Company by or with the consent of the FCC pursuant to
procedures which comply with all requirements of applicable law, is in full
force and effect, and is unimpaired, and Seller and License Company each have
the right to use all FCC Licenses in the ordinary course of business for the
operation of the Business. Seller and License Company are each in compliance in
all material respects with the FCC Licenses and FCC Rules, and there is no known
conflict with the valid rights of others which could adversely affect the FCC
Licenses, the Business or Seller or License Company. There is no complaint or
proceeding pending before the FCC, or to the best knowledge of Seller or License
Company threatened, or other event that has occurred, which could reasonably be
expected to result in the forfeiture, revocation, impairment, non-renewal or
adverse modification, of any such FCC License, or the imposition of a financial
or other penalty upon Seller or License Company. All facilities authorized
pursuant to the FCC Licenses were timely constructed in accordance with such FCC
License and all provisions of the Communications Act of 1934, as amended (the
"Act") and the rules promulgated and policies adopted under the Act
(collectively, "FCC Rules") and are operating in compliance therewith.
7.22 FCC Applications. Schedule 7.22 sets forth all applications
(collectively, "FCC Applications") that are pending before the FCC with respect
to the Business, the file number of each such application and the date on which
it was accepted for filing by the FCC. Each of the FCC Applications complies in
all
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material respects with FCC Rules and policies. There are no petitions, protests,
objections, or other proceedings, formal or informal, pending or threatened,
before the FCC requesting dismissal, denial, reconsideration or reinstatement
which, if granted, could result in the denial, dismissal, return, or non-grant
of any FCC Application, the issuance of a cease and desist order, or the
imposition of any administrative or judicial sanction.
7.23 FCC Compliance. Except as set forth in Schedule 7.20, Seller and
License Company have each timely filed with the FCC all reports and filings
(collectively, "Reports") relating to the Business which are required to be
filed by it under the Act and FCC Rules, including, without limitation, FCC
Rules relating to equal employment opportunity.
7.24 Zoning, Aviation, etc. Compliance. Except as set forth in Schedule
7.24, none of the facilities used in the Business violates the provisions of any
applicable federal, state, or local aviation regulation (including FCC and
Federal Aviation Administrative tower markings and lighting requirements),
building restriction, zoning ordinance or regulation, and each such facility is
zoned, if required, so as to permit the commercial uses intended by the owner or
occupier thereof, and there are no outstanding variances or special use permits
affecting any of such facilities or the uses thereof.
7.25 Compliance with the Copyright Act. Except as set forth on Schedule
7.14, Seller and License Company have each (i) (a) duly filed in a timely manner
all registration statements, statements of account and other filings relating to
the operation of the Business which are required to be filed under the Copyright
Act and under any local laws and rules, (b) conducted the Business in compliance
with the Copyright Act and the rules and regulations of the Copyright Office,
and (c) timely submitted any and all notices, statements of account, or other
instruments required under the Copyright Act and the Rules and Regulations of
the Copyright Office for a license to carry all broadcast stations previously or
currently carried on the Seller's systems; and (ii) timely remitted all required
payments and royalty fees for the carriage of such stations. Neither Seller nor
License Company is liable to any Person for copyright infringement under the
Copyright Act or trademark infringement under the applicable federal and state
statutes and regulations as a result of its business operations, its conduct of
the Business or otherwise.
7.26 Must-Carry and Retransmission Consent. Schedule 7.26 lists each
Broadcast Station (as defined below) which is carried on each Cable System
pursuant to the must-carry provisions of FCC Rules 76.51-76.62, and the channel
on which it is carried. Schedule 7.26 also separately lists each Broadcast
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Station carried pursuant to a retransmission consent agreement, and the channel
on which it is carried. Except as set forth on Schedule 7.26 there is no dispute
pending or threatened with respect to the carriage of any Broadcast Station.
Seller and License Company have each complied with all Broadcast Station
notification provisions of FCC Rule 76.58 and the must-carry record-keeping
provisions of FCC Rule 76.302 with respect to each Cable System, and with all
other FCC Rules regarding must-carry and retransmission consent. Each Broadcast
Station signal carried by the Cable Systems is carried either pursuant to the
must-carry obligations of the Cable Systems or pursuant to a valid and binding
agreement between Seller and the Broadcast Station (or License Company and the
Broadcast Station) authorizing the retransmission of the Broadcast Station
signal. For purposes of this Section 7.26, the term "Broadcast Station" means,
in connection with signals retransmitted, a local commercial television station,
as defined in FCC Rule 76.55(c), a qualified low power station, as defined in
FCC Rule 76.55(d), or a qualified noncommercial educational television
broadcasting station as defined in FCC Rule 76.55(a), but does not include a
"superstation" as defined by FCC Rule 76.64(c)(2).
7.27 Petitions for Special Relief. Neither License Company nor Seller
has received or have knowledge of any petition for special relief or document so
styled filed against or with respect to Seller or License Company concerning any
matters which under FCC Rules can be raised in a petition for special relief, in
each case relating to the Business.
7.28 Conduct in Ordinary Course. Since January 19, 1998, Seller and
License Company have each conducted the Business only in the usual, regular and
ordinary manner consistent with past practices and have not, except as in the
ordinary course, (i) taken any action to diminish the aggregate value of the
Purchased Assets, (ii) disbursed any of the Purchased Assets to any other
Person, (iii) taken any action to frustrate the transactions contemplated by
this Agreement, (iv) created, incurred, assumed or suffered to exist any Liens
of any kind against or upon any of the Purchased Assets or (v) created any
Subsidiaries.
7.29 Solvency. Upon and immediately following the Closing, Seller will
be Solvent.
7.30 Effective Competition. The Cable Systems are either exempt from
rate regulation or are subject to "effective competition" as defined in FCC Rule
76.905(b). No franchisor has certified to the FCC as a pre-condition to rate
regulation.
7.31 Hard Wire Public Right-of-Way Crossings. Schedule 7.31 sets forth a
complete and correct list of all hard
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wire public right-of-way crossings relating to the Purchased Assets or the
Business. Except as set forth on Schedule 7.31, Seller has valid, binding and
enforceable rights and franchises to maintain such crossings and all such rights
and franchises are freely transferable to Buyer.
7.32 Security Services. Schedule 7.32 is a true, complete and correct
list of all Relevant Properties for which Seller has agreements with respect to
the provision of security services, specifying the corresponding Right of Entry,
whether such security service is performed at Seller's option or is required by
the Right of Entry and all subcontract arrangements to provide the security
services. Seller has provided Buyer with copies of all contracts and
subcontracts relating to such security services.
8. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants to
Seller as follows:
8.1 Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
8.2 Authority. Buyer has all requisite power and authority to enter into
this Agreement and each agreement contemplated hereby to which it is to be a
party, to carry out its obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement and each of the agreements contemplated hereby to
which it is a party have been duly authorized by all required corporate action
on the part of Buyer. This Agreement has been, and upon its execution of each of
the agreements contemplated hereby will be, duly executed and delivered by
Buyer, and (assuming due authorization, execution and delivery by Seller) this
Agreement constitutes, and upon execution by Buyer, each of the agreements
contemplated hereby will constitute, legal, valid and binding obligations of
Buyer enforceable against Buyer in accordance with their respective terms.
8.3 Capital Stock and Other Matters. (a) Schedule 8.3 sets forth the
authorized capital stock of Buyer, the number of each class of shares issued and
outstanding, the number of each class of shares reserved for issuance pursuant
to convertible securities, options and other agreements, and the number of each
class of shares held by Buyer in its treasury on the date hereof. Schedule 8.3
assumes that the convertible notes, including accrued interest, issued by Buyer
and held by VPC Corporation ("GVL Notes") will be converted at a price equal to
or greater than $82.18 as may be adjusted in accordance with their terms. No
bonds, debentures, notes or other indebtedness of Buyer having
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the right to vote (or convertible into securities having the right to vote) on
any matters on which holders of shares of capital stock of Buyer may vote are
issued or outstanding on the date hereof. All of the issued and outstanding
shares of Buyer's capital stock are validly issued, fully paid and
nonassessable.
Seller acknowledges that from and after the date hereof, Buyer may,
without limit, issue securities or make changes in its capital structure as it
deems appropriate, including the conversion into Class B Common shares of the
GVL Notes or the Series A Preferred Shares at a price equal to or greater than
$82.18, as may be adjusted in accordance with its terms, and the grant of stock
options to employees, in the conduct of its business and without restrictions by
Seller. Seller further acknowledges that in the event of such a change in the
Buyer's capital structure there shall be no adjustment to the Purchase Price,
except in the case of (i) stock dividends on Common Stock or (ii) capital
reorganizations.
Additionally, Seller acknowledges that Buyer expects to issue, at a time
prior to or after the Closing Date, a series of preferred stock of Buyer (the
"Series A Preferred Stock") which shall be issued in redemption, conversion,
exchange or otherwise for the GVL Notes. Seller further acknowledges that the
Series A Preferred Stock shall have a priority in all respects to the Series B
Preferred Stock. Although the precise terms of the Series A Preferred Stock have
not yet been determined, the Series A Preferred Stock will only be entitled to
receive dividends payable in shares of such series at an annual rate equal to or
less than 15% of the liquidation preference thereof and will not be convertible
into common equity of Buyer at a price less than $82.18 per share.
(b) Except as set forth in the Stockholder Agreement dated as of August
15, 1997 (the "Existing Stockholder Agreement") among VPC Corporation, Capital
Communications CDPQ Inc. and Buyer, no class of capital stock is entitled to
preemptive rights. Except for the Existing Stockholder Agreement and the Warrant
Agreement dated as of July 3, 1997 granted by Buyer to Gordon Hecht, the Warrant
Agreement dated as of September 1, 1996 granted by Buyer to James A. Kofalt, the
Warrant Agreement dated as of July 11, 1997 granted by Buyer to Rory Cole and
the Restated Incentive Stock Plan of Buyer, there are no stockholder agreements,
voting trusts or other contracts or agreements to which Buyer is a party or by
which it is bound relating to the voting or transfer of any shares or units of
any class of shares of Buyer.
(c) A complete and correct copy of the Certificate of Designation
setting forth the terms and conditions of the Series B Preferred Stock is
attached hereto as Exhibit L.
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8.4 Validity of Shares. When the shares of Class A Common Stock
and Series B Preferred Stock, as the case may be, are issued and delivered,
against payment therefor, at the Closing as provided herein, each such share
shall be validly issued, fully paid and a nonassessable share of capital stock
of Buyer.
8.5 No Conflicts. Neither the execution or delivery of this
Agreement or any agreement contemplated hereby, nor fulfillment of or compliance
with the terms and provisions hereof and thereof, nor the consummation of the
transactions contemplated hereby and thereby, will conflict with or result in a
breach of the terms, conditions or provisions, of or constitute a default under,
or result in any violation of, or result in the creation of any Lien upon any of
the properties or assets of Buyer pursuant to, or require any consent under, or
give to any third Person any rights of termination, amendment, acceleration,
suspension, revocation or cancellation of, (i) the certificate of incorporation
or bylaws of Buyer, (ii) any award of any arbitrator or any order, judgment,
decree, statute, law, rule or regulation to which Buyer or is subject, or (iii)
any note, bond mortgage or indenture, contract, agreement lease, sublease,
license, permit, franchise or other instrument or arrangement to which Buyer is
a party or by which any of Buyer's assets or properties are bound or affected,
except for filings under the HSR Act.
8.6 Actions Pending. There is no action, suit, investigation or
proceeding pending or, to the best knowledge of Buyer, threatened, against or
affecting Buyer or any of its properties or rights, by or before any court,
arbitrator, administrative tribunal or governmental body that is reasonably
likely to materially impair Buyer's ability to consummate the transactions
contemplated by this Agreement.
8.7 Solvency. Buyer is, and immediately after the consummation of
the transactions contemplated hereby will be, Solvent.
8.8 Periodic SEC Filings. Buyer has delivered to Seller its (a)
Annual Report on Form 10-K for the year ended August 31, 1997 as filed with the
SEC; (b) its amendment to Form 10-K on Form 10K-A for the year ended December
31, 1997 as filed with the SEC on February 17, 1998; and (c) all other reports
or registration statements filed by Buyer with the SEC since December 31, 1996
(collectively, the "Buyer SEC Documents"). Except to the extent amended or
corrected by subsequent filings included in the Buyer SEC Documents, as of their
respective dates, the Buyer SEC Documents were prepared in accordance with the
requirements of the Securities Act of 1933, as amended, and the Exchange Act, as
the case may be, and the rules and
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regulations thereunder and did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. Except to the extent amended or corrected by
subsequent filings included in the Buyer SEC Documents, the financial statements
of Buyer and its Subsidiaries included in the Buyer SEC Documents comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles (except, in
the case of unaudited statements, as permitted by Form 10-Q of the SEC) applied
on a consistent basis (except as may be indicated in the notes thereto) and
fairly present the consolidated financial position of Buyer and its consolidated
Subsidiaries as of the dates thereof and the consolidated results of their
operations and cash flows and for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit adjustments).
8.9 Broker's or Finder's Commissions. No broker's or finder's fee
or commission will be payable by Buyer with respect to the transactions
contemplated by this Agreement.
8.10 Assignee Representation and Warranties. If Buyer exercises
its assignment rights pursuant to Section 10.5, then Buyer represents and
warrants as of the Closing Date that the representation, and warranties in
Sections 8.1, 8.2, 8.5, and 8.9 made with respect to Buyer shall be true and
correct as applicable to Assignee, mutatis, mutandis.
9. DEFINITIONS.
As used herein, the following terms shall have the following meanings:
550 MHz Relevant Properties: means all properties situated in the
markets listed in paragraph (A) of Section of 1.3(b)(iii).
550 MHz Standard: means the "550 MHz Performance Standard"
described in Schedule 1.3(b)(iii).
Act: means 47 U.S.C.ss. 522.
Affiliate: means with respect to any Person, another Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person.
Aggregate Cable Revenue: means for all Relevant Markets in the
aggregate, the monthly revenues billed in respect
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of all cable services provided by Seller, and for which (a) in the case of bulk
contracts the accounts are not more than 60 days past due and (b) in the case of
retail contracts, the accounts are not more than 90 days past due and, in each
case, for which the standard deposit and installation fees for such services (in
accordance with Seller's customary practices of the Business) have been billed.
Aggregate Phone Revenue: means for all Relevant Markets in the
aggregate, the monthly revenues billed in respect of all phone services provided
by Seller, and for which (a) in the case of bulk contracts the accounts are not
more than 60 days past due and (b) in the case of retail contracts, the accounts
are not more than 90 days past due and, in each case, for which the standard
deposit and installation fees for such services (in accordance with Seller's
customary practices of the Business) have been billed.
Aggregate Revenue: means for all Relevant Markets in the
aggregate, the monthly revenues billed in respect of all cable and phone
services provided by Seller, and for which (a) in the case of bulk contracts the
accounts are not more than 60 days past due and (b) in the case of retail
contracts, the accounts are not more than 90 days past due and, in each case,
for which the standard deposit and installation fees for such services (in
accordance with Seller's customary practices of the Business) have been billed.
Assignee: means one or more wholly owned Subsidiaries of Buyer,
and Transmission Holdings, Inc. with respect to any federal licenses assigned.
Assumed Liabilities: means the Specified Assumed Liabilities, the
assumed Pre-Closing Liabilities and Liabilities arising after the Closing Date
which are associated with assets described in Section 1.2(c) which are
transferred to Buyer on the Closing Date.
Average Cable Revenue Per Cable Subscriber: means the monthly
Aggregate Cable Revenue divided by the number of Cable Subscribers in the same
market(s) and period(s).
Average Phone Revenue Per Billable Phone Subscriber: means the
monthly Aggregate Phone Revenue divided by the number of Billable Phone
Subscribers in the same market(s) and period(s).
Billable Phone Subscribers: means, residential subscribers
receiving service on a for-charge basis at Seller's undiscounted rates in a
Relevant Property, whose account is not more 90 days past due for a retail
contract and excluding those
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properties for which (a) there is no PBX or service is not being offered or (b)
there is either no contract or a month-to-month contract where Seller has
received notice that its service to such properties is or will be terminated or
Seller has knowledge that another operator has been granted the right to service
such properties.
Broadcast Station: has the meaning specified in Section 7.24.
Business: means the cable television, telephone, residential
security and telecommunications business of Seller in the Relevant Markets.
Business Day: means any day which is not a Saturday or Sunday or
other day on which banks are required or authorized by law to close in the State
of New York.
Buyer: has the meaning specified in the introduction.
Buyer's Accountants: means the accounting firm of Deloitte &
Touche, LLP.
Buyer Indemnified Parties: has the meaning specified in Section
10.1(a).
Cable Subscriber: means, individual residential subscribers to the
basic cable service tier in retail properties and fully activated units in bulk
contract properties, which comprise the Relevant Properties, and which, as of
the Closing, are active subscribers to the cable services offered by Seller,
whose account is not more than 90 days past due for a retail contract and 60
days past due for a bulk contract and excluding those properties for which there
is either no contract or a month-to-month contract where Seller has received
notice that its service to such properties is or will be terminated or Seller
has knowledge that another operator has been granted the right to service such
properties.
Capitalized Lease Obligations: means all rental obligations which,
under GAAP in effect on the day incurred, are required to be capitalized on the
books of Seller, in each case to the extent of the amount thereof accounted for
as indebtedness (net of interest expense) in accordance with GAAP.
Claim: has the meaning specified in Section 10.2.
Closing: has the meaning specified in Section 3.1.
Closing Date: has the meaning specified in Section 3.1.
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Closing Statement: has the meaning specified in Section 1.3(a).
COBRA: means Consolidated Omnibus Budget Reconciliation Act of
1985, as amended.
Employee Liabilities: has the meaning specified in Section 5(a).
Employee List: has the meaning specified in Section 5(b).
Environmental Laws: has the meaning specified in Section 7.9.
ERISA: means the Employee Retirement Income Security Act of 1974,
as amended.
Escrow Agents: means the Consent Escrow Agent and the Crossings
Escrow Agent.
Escrow Agreements: means the Consent Escrow Agreement and the
Crossings Escrow Agreement.
Expenses: has the meaning specified in Section 10.1(a).
FCC: means the Federal Communications Commission or any successor
thereto.
FCC Applications: has the meaning specified in Section 7.22.
FCC Licenses: has the meaning specified in Section 7.21.
GAAP: means United States generally accepted accounting principles
consistently applied throughout the period or periods in question.
Governmental Body: means any government or any political
subdivision thereof, whether federal, state, local or foreign, any agency,
instrumentality or authority thereof (including, without limitation, the FCC),
and any court or arbitrator (public or private).
Indebtedness: means, with respect to any Person, (a) all
indebtedness of such Person, whether or not contingent, for borrowed money, (b)
all obligations of such Person evidenced by notes, bonds, debentures or other
similar instruments, (c) all obligations of such Person as lessee under leases
that have been
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or should be, in accordance with GAAP, recorded as capital leases, (d) all
obligations, contingent or otherwise, of such Person under acceptance, letter of
credit or similar facilities, (e) all Indebtedness of others referred to in
clauses (a) through (d) above guaranteed directly or indirectly in any manner by
such Person, or in effect guaranteed directly or indirectly by such Person
through any agreement or arrangement, and (f) all Indebtedness referred to in
clauses (a) through (d) above secured by any Lien on property owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness.
Indemnified Taxes: means any Taxes paid or payable by Buyer or any
person with whom Buyer pays Taxes on a consolidated, combined, or similar basis
with respect to any taxable year or period of Seller or predecessor entities of
Seller which ends on or before the Closing Date, including any tax liability of
Seller which arises as a result of the transactions contemplated by this
Agreement. Indemnified Taxes also includes any Taxes paid or payable by Buyer or
any person with whom Buyer pays Taxes on a consolidated, combined, or similar
basis with respect to any taxable year or period of Seller which begins before
and ends after the Closing Date, to the extent such Taxes are attributable to
the activities of Seller on or before the Closing Date, including any tax
liability of Seller which arises as a result of the transactions contemplated by
this Agreement but only to the extent such liability is not reflected as a
liability on the Closing Statement.
Internal Revenue Code: means the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
ICS Amended and Restated Note Purchase Agreement: means the
Amended and Restated Note Purchase Agreement, dated as of October 15, 1997,
among the Seller, Nomura Holding America Inc., MCI Telecommunications
Corporation and Nomura International Trust Company, as collateral agent, as
amended, supplemented or otherwise modified from time to time in accordance with
its terms.
ICS Secured Lenders: means the holders from time to time of (i)
the notes issued pursuant to the ICS Amended and Restated Note Purchase
Agreement and (ii) the Additional Notes (as such term is defined in the ICS
Amended and Restated Note Purchase Agreement).
Liabilities: means any and all debts, liabilities and obligations,
whether accrued or fixed, absolute or contingent, matured or unmatured or
determined or undetermined, including, without limitation, deposits owing to
customers in properties
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included in Purchased Assets and those arising under any law, rule or regulation
of any Governmental Body (including, without limitation, Indemnified Taxes),
those arising under any contract, agreement, arrangement, commitment or
undertaking or those to or in respect of employees or leased employees of
Seller.
Leased Premises Assets: shall have the meaning set forth in
Section 1.2(c).
Lien: means any mortgage, pledge, security interest, encumbrance,
lien or charge of any kind, including any agreement to give any of the
foregoing, any conditional sale or other title retention agreement, any lease in
the nature thereof, and the filing of or agreement to give any financing
statement under the Uniform Commercial Code of any jurisdiction (other than
filings for notice purposes only where the secured party named on the financing
statement can not look to the Purchased Assets as security for any obligations
of Seller to such party).
Losses: has the meaning specified in Section 10.1(a).
Material Adverse Effect: means any circumstance, change in, or
effect on, the Business or the Purchased Assets that, individually or in the
aggregate with any other circumstances, changes in, or effects on, the Business
or the Purchased Assets: (a) is, or could reasonably be expected to be,
materially adverse to the business, operations, assets or Liabilities
(including, without limitation, contingent Liabilities), employee relationships,
customer or supplier relationships, prospects, results of operations or the
condition (financial or otherwise) of the Business or the Purchased Assets or
(b) could reasonably be expected to materially adversely affect the ability of
Buyer to operate or conduct the Business in the manner in which it is currently
operated or conducted by Seller.
Non-Competition Agreement: means the agreement to be entered into
at the Closing by Buyer and Seller in the form attached as Exhibit M.
Non-Conforming Crossing: means a hard wire crossing of public
right of way using wiring owned or leased by Seller, for which, in Buyer's
reasonable judgment, a required franchise, permit or other required
authorization has not been obtained.
Notice: has the meaning specified in Section 10.6.
Officer's Certificate: means as to any Person, a certificate of
its president, vice president, chief financial officer, treasurer or controller
or, in the case of a partnership or limited liability company, an equivalent
officer of a general
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partner or manager or an individual general partner or manager, or in the case
of an individual, such Person himself.
PBGC: means the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor entity thereto.
Per Subscriber Amount: means an amount calculated at Closing equal
to (a) $80,243,108, as adjusted in accordance with Section 1.3(b), divided by
(b) the number of Cable Subscribers and Billable Phone Subscribers included in
the Purchased Assets.
Permitted Liens: means Purchase Money Security Interests,
landlord's liens, mechanics' liens, repairmen's liens and other similar liens,
if any, that do not materially detract from the value of the property subject
thereto or materially interfere with the manner in which it is currently being
used in the Business, or materially impair the operations of the Business, and
Taxes, general and special assessments not in default without penalty or
interest and Liens to secure Capitalized Lease Obligations to the extent they
exist on the date hereof.
Person: means an individual, partnership, joint venture,
corporation, limited liability company, trust or other entity or any
Governmental Body or subdivision, agency, commission or authority thereof.
Pre-Closing Liabilities: shall have the meaning set forth in
Section 1.3(a),
Purchase Money Debt: means debt of Seller incurred to finance an
acquisition of assets which is secured by a Purchase Money Security Interest.
Purchase Money Security Interest: means a purchase money security
interest within the meaning of Section 9-107 of the Uniform Commercial Code, as
in effect on the date hereof.
Purchase Price: has the meaning specified in Section 1.1.
Purchased Assets: means all the assets, business and operations,
other than cash and receivables, of Seller relating to the Business including,
without limitation:
(i) all cable passings including, without limitation, those
located at the properties listed in Schedule 7.19;
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(ii) all telephone passings including, without limitation, those
located at the properties listed in Schedule 7.19;
(iii) all franchises, licenses, permits, real property rights and
assessments held or pending;
(iv) all Rights of Entry including, without limitation, those
listed in Schedule 7.19;
(v) all other contracts, agreements and arrangements including,
but not limited to, leases relating to the Business;
(vi) all transmission licenses and permits;
(vii) all head-ends, satellite receiving dishes, signal
processing equipment, modulators, IRD's, amplifiers, active
and passive electronic devices, converter boxes, remotes,
wiring, microwave transmissions and repeater and receiver
equipment;
(viii) the 60 day customary usage inventory of spare parts and
supplies (the specific inventory to be agreed upon between
Buyer and Seller Five (5) Business Days prior to Closing);
(ix) technical and test equipment and other current assets
(other than cash and receivables), systems, computers,
office equipment, books and records;
(x) all of the equipment, tools, supplies, furniture, fixtures,
personalty, vehicles, rolling stock and other tangible
personal property set forth on Schedule 7.5(d) plus any
additional items of a similar nature which are acquired or
received by Seller between the date hereof and the Closing
Date;
(ix) all microwave paths and licenses in any Relevant Market.
Purchased Assets do not include: (w) stock and corporate governance books and
records, (x) assets which are physically located at and associated only with
properties which by agreement of the parties are excluded from this transaction,
(y) inventory of spare parts and supplies which are excluded from subsection
(viii) above, and (z) idle equipment which is not physically
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located at any Relevant Property, not required to service a Relevant Property
and not scheduled on Schedule 7.5(d).
Ratio Formula: has the meaning specified in Section 2.2.
Relevant Markets: means the metropolitan areas listed on Schedule
9.4.
Relevant Properties: means those properties listed on Schedule
7.19.
Reports: has the meaning specified in Section 7.20.
Required Consents: has the meaning specified in Section 4.2.8.
Retained Businesses: means any business of Seller unassociated
with a Relevant Market.
Revenue Share: means determined in accordance with GAAP on an
accrual basis, and on a monthly basis, the dollar amount accrued payable
pursuant to Rights of Entry to owners or managers of properties from gross
revenues collected pursuant to such Rights of Entry. For purposes of clarity,
Revenue Share shall be calculated without regard to the period in which Revenue
Share was actually paid or offset against prepaid royalties.
Rights of Entry: means valid, lawful, binding and enforceable
written agreements in favor of Seller to provide exclusive video programming
delivery service, telephone service and/or telecommunications service to Cable
Subscribers and/or Billable Phone Subscribers.
Seller: has the meaning specified in the introduction.
Seller Indemnified Parties: has the meaning specified in Section
10.1(c).
Seller's Accountants: means the accounting firm of Deloitte and
Touche, LLP.
Services and Cooperation Agreement: means the agreement to be
entered into at the Closing by Buyer and Seller in the form attached as Exhibit
B.
Solvent: means, with respect to any Person on a particular date,
that on such date (a) the fair value of the property of such Person is greater
than the total amount of Liabilities, including, without limitation, contingent
Liabilities, of such Person, (b) the present fair salable value
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of the assets of such Person is not less than the amount that will be required
to pay the probable Liability of such Person on its debts as they become
absolute and matured, (c) such Person does not intend to, and does not believe
that it will, incur debts or Liabilities beyond such Person's ability to pay as
such debts and Liabilities mature and (d) such Person is not engaged in business
or a transaction, and is not about to engage in business or a transaction, for
which such Person's property would constitute an unreasonably small capital.
Specified Assumed Liabilities: has the meaning set forth in
Section 1.3(a).
Subsidiary: means, as to any Person, a corporation or other Person
of which shares or similar securities having voting power to elect a majority of
the board of directors or other managers are at the time owned, directly or
indirectly, through one or more intermediaries, by such Person.
Tax or Taxes: means any and all taxes, fees, levies, duties,
tariffs, imposts, and other charges of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any government or taxing authority, including,
without limitation: taxes or other charges on or with respect to income,
capital, gains, capital gains, franchises, windfall or other profits, gross
receipts, property, sales, use, capital stock, payroll, employment, social
security, workers' compensation, unemployment compensation, or net worth and
alternative minimum taxes; taxes or other charges in the nature of excise,
withholding, ad valorem, stamp, transfer, value added, or gains taxes; license,
registration and documentation fees; and customs' duties, tariffs, and similar
charges.
Tax Authority: means any federal, state, local or foreign taxing
authority, court, or tax administrative body.
Tax Proceeding: means an examination, investigation, audit,
hearing, or other proceeding conducted by a Tax Authority regarding a Tax
Return. A Tax Proceeding also includes a proceeding in federal Tax Court and a
state or local administrative proceeding.
Tax Return: means any tax return or other tax reporting document
filed or required to be filed by or on behalf of Seller with a Tax Authority
which relates to Indemnified Taxes.
Upgrade: has the meaning specified in Section 1.3(b).
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WARN: Worker Adjustment and Retraining Notification Act of 1988,
as amended.
10. MISCELLANEOUS.
10.1 Indemnification. (a) Seller shall indemnify and hold Buyer
and its directors, officers, employees, affiliates, agents, successors and
assigns (collectively, the "Buyer Indemnified Parties") harmless from and
against any and all losses, liabilities, obligations, damages, claims,
deficiencies, costs and expenses ("Losses") based upon, attributable to,
resulting from or arising out of: (i) the Liabilities other than the Assumed
Liabilities (to the extent not misrepresented by Seller); (ii) any
misrepresentation or breach of representation or warranty made by Seller herein,
(iii) subject to paragraph (b) below facts or circumstances not fully disclosed
to Buyer prior to the Closing which facts or circumstances were used in
computing the Purchase Price adjustment set forth in Section 1.3(b); (iv)
liabilities relating to the period prior to the Closing through completion of a
Remedy which directly relate to the Non-Conforming Crossings (v) breach or
non-fulfillment of any agreement or covenant on the part of Seller under this
Agreement or any of the agreements contemplated hereby; (vi) all Indemnified
Taxes; (vii) any brokerage claims by CMD Ventures, LLC or any other broker with
respect to this transaction, (viii) Seller's obligations under the Services and
Cooperation Agreement; and (ix) any and all notices, actions, suits,
proceedings, demands, assessments, judgments, costs, penalties and expenses,
including attorneys' and other professionals' fees (including, without
limitation, reasonable attorneys' and other professionals' fees and expenses
incurred in any action or proceeding between the parties hereto or between any
party hereto (if such party is the prevailing party) and a third party, if such
matter is subject to the indemnification provisions of this Article 10) and
charges incurred in connection with the investigation, defending or preparing to
defend the foregoing (collectively, "Expenses").
(b) Notwithstanding anything in this Section 10.1 to the
contrary, if the aggregate net sum of the Subscriber Adjustment Amount, the
Revenue and Term Adjustment Amount, and the 550 MHz Adjustment Amount is a
positive number in excess of $2,000,000, a Buyer Indemnified Party shall only be
entitled to seek indemnity for Losses under subsections (ii) and (iii) of
Section 10.1(a), in excess of an amount (the "Basket") equal to the excess of
such sum over $2,000,000.
(c) Buyer shall indemnify and hold Seller and its directors,
officers, shareholders, employees, heirs, executors, administrators, affiliates,
agents, successors and assigns (collectively, the "Seller Indemnified Parties")
harmless from
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and against any and all Losses based upon, attributable to or resulting from (i)
any misrepresentation, breach of representation or warranty made by Buyer
herein, (ii) any breach or non-fulfillment of any covenant or agreement on the
part of Buyer under this Agreement or any of the agreements contemplated hereby,
(iii) any Assumed Liabilities and (iv) any and all Expenses incident to the
foregoing.
(d) Except as set forth below, an indemnifying party may be
liable for Losses arising under Section 10.1(a)(ii) or 10.1(c)(i) only if
written notice of a claim for indemnity in respect of such subject matter is
given to the indemnifying parties on or prior to the first anniversary of the
Closing Date (except that (i) such day shall be the day of expiration of the
applicable statute of limitations in respect of breaches of the representations
and warranties in Section 7.6, (ii) such day shall be three years after the
Closing Date in respect of breaches of the representations and warranties in
Sections 7.2, 7.3, 7.5, 7.9, 7.10 and 7.23, and (iii) other than the time limits
for accrual of a cause of action under applicable law, there shall be no time
limit on the ability of any party to bring a claim for any loss arising from
intentional misrepresentation or fraud).
10.2 Indemnification Procedures, Determination of Damages,
Limitations and Related Matters. (a) In the event that any legal proceedings,
including, without limitation, any Tax Proceeding, shall be instituted or that
any claim or demand ("Claim") shall be asserted by any Person in respect of
which indemnity may be sought under Section 10.1(a) or Section 10.1(c), the
indemnified party shall reasonably and promptly cause written notice of the
assertion of any Claim of which it has knowledge which is subject to such
indemnity to be forwarded to the indemnifying party; provided, however, that the
failure to notify the indemnifying party shall not affect the indemnifying
party's obligation hereunder except to the extent of actual prejudice. The
indemnifying party shall have the right, at its sole option and expense, to be
represented by counsel of its choice, which shall be satisfactory to the
indemnified party in the reasonable exercise of its discretion. In the event the
indemnifying party is Seller and it acknowledges in writing its obligation to
indemnify the Buyer Indemnified Parties against any Losses that may result from
such Claim, and if such Claim is for monetary damages only and the defense of
such Claim by Seller will not, in the judgment of Buyer, otherwise materially
adversely impact the Business or any Buyer Indemnified Party in any manner
whatsoever, then (and under no other circumstances) Seller shall have the right
to defend against, negotiate, settle or otherwise deal with any Claim which
relates to any Losses indemnified against hereunder; provided, however, that no
settlement shall be made without the prior written consent of Buyer, which shall
not
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unreasonably withhold or delay its consent. In the event the indemnifying party
is Buyer and Buyer acknowledges in writing its obligation to indemnify Seller
Indemnified Parties against any Losses that may result from such Claim, and if
such Claim is for monetary damages only and the defense of such Claim by Buyer
will not, in the judgment of Seller, otherwise materially adversely impact any
Seller Indemnified Party in any manner whatsoever, then (and under no other
circumstances) Buyer shall have the right to defend against, negotiate, settle
or otherwise deal with any Claim which relates to any Losses indemnified against
hereunder; provided, however, that no settlement shall be made without the prior
written consent of Seller, which shall not unreasonably withhold or delay its
consent. If the indemnifying party elects to defend against, negotiate, settle
or otherwise deal with any Claim which relates to any Losses subject to
indemnity hereunder, it shall within Fifteen (15) Business Days (or sooner, if
the nature of the Claim so requires) notify the indemnified party of its intent
to do so. If the indemnifying party shall not be entitled to, or elects not to,
defend against, negotiate, settle or otherwise deal with any Claim which relates
to any Losses subject to indemnity hereunder, fails to notify the indemnified
party of its election as herein provided or contests its obligation to provide
indemnity hereunder, the indemnified party may defend against, negotiate, settle
or otherwise deal with such Claim. If the indemnified party defends any Claim,
then the indemnifying party shall periodically reimburse the indemnified party
for the expenses of defending such Claim promptly following submission of
invoices therefor. The indemnified party may not settle any Claim without the
prior written consent of the indemnifying party, which shall not unreasonably
withhold or delay its consent. If the indemnifying party shall assume the
defense of any Claim, the indemnified party may participate, at its own expense,
in the defense of such Claim; provided, however, that the indemnified party
shall be entitled to participate in any such defense with separate counsel, at
the expense of the indemnifying party, if (i) requested by the indemnifying
party so to participate or (ii) in the reasonable opinion of counsel to the
indemnified party a conflict or potential conflict exists between the
indemnified party and the indemnifying party that would make such separate
representation advisable; and provided, further, that the indemnifying party
shall not be required to pay for more than one such counsel for all indemnified
parties in connection with any Claim. The parties agree to cooperate fully with
each other in connection with the defense, negotiation or settlement of any such
Claim.
(b) After any final judgment or award shall have been rendered by
a court, arbitration panel or administrative agency of competent jurisdiction
and the expiration of the time in which to appeal therefrom, or a settlement
shall have been
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consummated, or any indemnified party shall have paid or experienced Losses for
which an indemnified party shall be entitled to indemnification under Section
10.1(a) or Section 10.1(c) or the indemnified party and the indemnifying party
shall have arrived at a mutually binding agreement with respect to a Claim, the
indemnified party shall forward to the indemnifying party notice of any sums due
and owing by the indemnifying party pursuant hereto with respect to such matter
and the indemnifying party shall be required to pay all of the sums so due and
owing to the indemnified party as described below.
(c) The Buyer Indemnified Parties shall not be deemed to have
notice of any Claim by virtue of knowledge of facts relating thereto acquired on
or prior to the Closing Date by a Person employed by Seller prior to the
Closing.
(d) Except as described in clause (e) below, indemnity
payments for Losses due to an indemnified party under this Section 10.2 shall be
made by wire transfer of immediately available funds to an account designated by
the indemnified party, within Five (5) business days after the date of the
notice referred to in Section 10.2(b).
10.3 Amendments. This Agreement may not be amended except in a
writing signed by, or on behalf of, all parties hereto.
10.4 Survival of Representations and Warranties. All
representations and warranties contained herein or made in writing by or on
behalf of any party hereto in connection herewith shall survive the Closing as
provided for in Section 10.1.
10.5 Successors and Assigns. All covenants and agreements in this
Agreement contained by or on behalf of the parties hereto shall bind and inure
to the benefit of the respective successors and assigns of the parties, whether
so expressed or not. This Agreement shall not be assignable by any party hereto
without the prior consent of the other party, provided, however, that Buyer may
assign any part or all of its interest under this Agreement to Assignee or any
other wholly-owned Subsidiary or Subsidiaries, in which case, both Buyer and
Assignee or such other Subsidiary or Subsidiaries shall be jointly and severally
liable for all obligations so assigned.
10.6 Notices. (a) All notices, consents, instructions and other
communications required or permitted under this Agreement (collectively,
"Notice") shall be effective only if given in writing and shall be considered to
have been duly given when (i) delivered by hand, (ii) sent by telecopier (with
receipt confirmed), provided that a copy is mailed (on the same
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date) by certified or registered mail, return receipt requested, postage
prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal
Express or other reputable express delivery service (receipt requested), or by
first class certified or registered mail, return receipt requested, postage
prepaid. Notice shall be sent in each case to the appropriate addresses or
telecopier numbers set forth below (or to such other addresses and telecopier
numbers as a party may from time to time designate as to itself by notice
similarly given to the other parties in accordance herewith, which shall not be
deemed given until received by the addressee). Notice shall be given:
(1) to Buyer at:
Optel, Inc.
1111 West Mockingbird Lane
Suite 1000
Dallas, Texas
Attn: General Counsel
Telecopier: (214) 634-3889
copy to: Kronish, Lieb, Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036
Attn: Eric Simonson
Telecopier: (212) 479-6275
(2) to Seller at:
1901 N. Glenville Drive
Suite 800
Richardson, Texas 75081
Attn: Kevin Schottlaender, President and
Carl Koenig
Telecopier: (972) 669-6016 and (972) 669-6113
10.7 Descriptive Headings. The descriptive headings of the several
Sections and paragraphs of this Agreement are inserted for convenience only and
do not constitute a part of this Agreement.
10.8 GOVERNING LAW; CONSENT TO EXCLUSIVE JURISDICTION. THIS
AGREEMENT IS BEING DELIVERED IN THE STATE OF NEW YORK AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY,
THE LAW OF SUCH STATE APPLICABLE TO CONTRACTS ENTERED INTO AND TO BE PERFORMED
WHOLLY WITHIN SUCH STATE. SUBJECT TO SECTION 10.9, ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT MAY BE BROUGHT EXCLUSIVELY IN THE
COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE
SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS AGREEMENT,
BUYER AND SELLER HEREBY ACCEPT FOR THEMSELVES AND IN RESPECT OF THEIR
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PROPERTY, GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE
AFORESAID COURTS. EACH OF BUYER AND SELLER HEREBY WAIVES, AND AGREES NOT TO
ASSERT, AS A DEFENSE IN ANY ACTION, SUIT OR PROCEEDING FOR THE INTERPRETATION OR
ENFORCEMENT OF THIS AGREEMENT, THAT IT IS NOT SUBJECT THERETO OR THAT SUCH
ACTION, SUIT OR PROCEEDING MAY NOT BE BROUGHT OR IS NOT MAINTAINABLE IN SAID
COURTS OR THAT THIS AGREEMENT MAY NOT BE ENFORCED IN OR BY SAID COURTS OR THAT
ITS PROPERTY IS EXEMPT OR IMMUNE FROM EXECUTION, THAT THE SUIT, ACTION OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT,
ACTION OR PROCEEDING IS IMPROPER OR (PROVIDED THAT PROCESS SHALL BE SERVED IN
ANY MANNER REFERRED TO IN THE FOLLOWING SENTENCE) THAT SERVICE OF PROCESS UPON
SUCH PARTY IS INEFFECTIVE. EACH OF BUYER AND SELLER AGREES THAT SERVICE OF
PROCESS IN ANY SUCH ACTION, SUIT OR PROCEEDING MAY BE MADE UPON IT IN ANY MANNER
PERMITTED BY THE LAWS OF THE STATE OF NEW YORK OR THE FEDERAL LAWS OF THE UNITED
STATES OR AS FOLLOWS: (I) BY PERSONAL SERVICE OR (II) BY CERTIFIED OR REGISTERED
MAIL TO THE PARTY FOR WHICH INTENDED AT ITS ADDRESS FOR NOTICE PURSUANT TO
SECTION 10.6. SERVICE OF PROCESS UPON ANY PARTY IN ANY MANNER REFERRED TO IN THE
PRECEDING SENTENCE SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS
UPON SUCH PARTY.
10.9 BINDING ARBITRATION. ANY CONTROVERSY, CLAIM OR DISPUTE
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE BREACH, TERMINATION,
ENFORCEABILITY OR VALIDITY THEREOF, INCLUDING WITHOUT LIMITATION THE
DETERMINATION OF THE SCOPE OR APPLICABILITY OF THIS AGREEMENT TO ARBITRATE,
SHALL BE DETERMINED EXCLUSIVELY BY BINDING ARBITRATION IN NEW YORK, NEW YORK
BEFORE ONE ARBITRATOR. THE ARBITRATION SHALL BE GOVERNED BY THE AMERICAN
ARBITRATION ASSOCIATION UNDER ITS COMMERCIAL ARBITRATION RULES AND ITS
SUPPLEMENTARY PROCEDURES FOR LARGE, COMPLEX DISPUTES, PROVIDED THAT THE PERSON
ELIGIBLE TO BE SELECTED AS THE ARBITRATOR SHALL BE LIMITED TO AN ATTORNEY-AT-LAW
WHO (I) IS ON THE AAA'S LARGE, COMPLEX CASE PANEL OR A CENTER FOR PUBLIC
RESOURCES ("CPR") PANEL OF DISTINGUISHED NEUTRALS, OR WHO HAS PROFESSIONAL
CREDENTIALS SIMILAR TO THE ATTORNEYS LISTED ON SUCH AAA AND CPR PANELS, AND (II)
WHO HAS PRACTICED LAW FOR AT LEAST 15 YEARS AS AN ATTORNEY IN NEW YORK
SPECIALIZING IN EITHER GENERAL COMMERCIAL LITIGATION OR GENERAL CORPORATE AND
COMMERCIAL MATTERS.
NO PROVISION OF, NOR THE EXERCISE OF ANY RIGHTS UNDER, SECTION
10.9(a) SHALL LIMIT THE RIGHT OF ANY PARTY TO REQUEST AND OBTAIN FROM A COURT
HAVING JURISDICTION BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION,
PROVISIONAL OR ANCILLARY REMEDIES AND RELIEF INCLUDING, BUT NOT LIMITED TO,
INJUNCTIVE OR MANDATORY RELIEF OR THE APPOINTMENT OF A RECEIVER. THE INSTITUTION
AND MAINTENANCE OF AN ACTION OR JUDICIAL PROCEEDING FOR, OR PURSUIT OF,
PROVISIONAL OR ANCILLARY REMEDIES SHALL NOT CONSTITUTE A WAIVER OF THE RIGHT OF
BUYER, EVEN IF BUYER IS THE
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PLAINTIFF, TO SUBMIT THE DISPUTE TO ARBITRATION IF BUYER WOULD OTHERWISE HAVE
SUCH RIGHT.
IN ANY SUCH ARBITRATION PROCEEDING, THE ARBITRATOR SHALL NOT HAVE
THE POWER OR AUTHORITY TO AWARD PUNITIVE DAMAGES TO ANY PARTY. JUDGMENT UPON THE
AWARD RENDERED MAY BE ENTERED IN ANY COURT HAVING JURISDICTION (AND WITHOUT
REGARD TO SECTION 10.8).
EACH OF THE PARTIES SHALL, SUBJECT TO THE AWARD OF THE
ARBITRATORS, PAY AN EQUAL SHARE OF THE ARBITRATORS' FEES. THE ARBITRATORS SHALL
HAVE THE POWER TO AWARD RECOVERY OF ALL COSTS AND FEES (INCLUDING ATTORNEYS'
FEES, ADMINISTRATIVE FEES, ARBITRATORS' FEES, AND COURT COSTS) TO THE PREVAILING
PARTY.
10.10 Entire Agreement. Other than the Confidentiality Agreement
dated February 2, 1998 among Buyer, Seller, Nomura Holding America Inc., MCI
Telecommunications Corporation, Chanin & Company, Houlihan, Lokey, Howard &
Zukin, this Agreement and the other writings referred to herein or delivered
pursuant hereto contain the entire agreement among the parties with respect to
the subject matter hereof and supersedes all prior and contemporaneous
arrangements or understandings with respect thereto. Nothing in this Agreement
is intended to confer any rights or remedies under or by reason of this
Agreement on any Persons other than Seller and Buyer and their respective
successors and permitted assigns.
10.11 Severability. Any provision of this Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
10.12 Public Announcement. Neither Buyer on the one hand, nor
Seller on the other hand, nor any of their respective officers, directors or
advisors shall make any public announcement or report with respect to this
Agreement or its subject matter, without the prior written consent of Buyer and
Seller unless (and only to the extent) such announcement or report is necessary
to comply with legal requirements or to bring about the consummation of the
Closing.
10.13 Expenses. Except as expressly provided in this Agreement,
each party hereto agrees to pay its cash expenses, including the fees and
disbursements of its own advisors and counsel.
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10.14 Confidentiality. Seller agrees to, and shall cause its
agents, representatives, Affiliates and employees to: (i) treat and hold as
confidential (and not disclose or provide access to any Person to) all
information relating to trade secrets, processes, intellectual property
applications, product development, price, customer and supplier lists, pricing
and marketing plans, policies and strategies, details of client, customer,
subscriber and consultant contracts and agreements, operations methods, product
development techniques, business acquisition plans, new personnel acquisition
plans and all other confidential information with respect to the Business, (ii)
in the event that Seller or any such agent, representative, Affiliate or
employee becomes legally compelled to disclose any such information, provide
Buyer with prompt written notice of such requirement so that Buyer may seek a
protective order or other remedy or waive compliance with this Section 10.14,
(iii) in the event that such protective order or other remedy is not obtained,
or Buyer waives compliance with this Section 10.14, furnish only that portion of
such confidential information which is legally required to be provided and
exercise its best efforts to obtain assurances that confidential treatment will
be accorded such information, and (iv) promptly furnish (prior to, at, or as
soon as practicable following, the Closing) to Buyer any and all copies (in
whatever form or medium) of all such confidential information then in the
possession of Seller or any of its agents, representatives, Affiliates or
employees, and destroy any and all additional copies then in the possession of
Seller or any of its agents, representatives, Affiliates or employees of such
information and of any analyses, compilations, studies or other documents
prepared, in whole or in part, on the basis thereof; provided, however, that
this sentence shall not apply to any information that, at the time of
disclosure, is available publicly and was not disclosed in breach of this
Agreement by Seller or its agents, representatives, Affiliates or employees.
Seller agrees and acknowledges that remedies at law for any breach of its
obligations under this Section 10.14 are inadequate and that in addition thereto
Buyer shall be entitled to seek equitable relief, including injunction and
specific performance, in the event of any such breach.
10.15 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and it shall not be
necessary in making proof of this Agreement to produce or account for more than
one such counterpart.
10.16 No Solicitation or Negotiation. Seller immediately shall
cease and cause to be terminated all existing discussions, conversations,
negotiations and other communications with any Persons conducted heretofore with
respect to any proposal or offer to acquire or purchase all or any portion of
the Purchased Assets or to enter into any extraordinary business
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transaction involving or otherwise relating to the Business or the Purchased
Assets. Seller shall notify Buyer promptly if any such proposal or offer, or any
inquiry or other contact with any Person with respect thereto, is made and
shall, in any such notice to Buyer, indicate in reasonable detail the identity
of the Person making such proposal, offer, inquiry or contact and the terms and
conditions of such proposal, offer, inquiry or other contact. Seller agrees not
to, without the prior written consent of Buyer, release any Person from, or
waive any provisions of, any confidentiality or standstill agreement to which
Seller is a party.
10.17 Further Action. Each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all appropriate action, do or
cause to be done all things necessary, proper or advisable under applicable
laws, and execute and deliver such documents and other papers, as may be
required to carry out the provisions of this Agreement and consummate and make
effective the transactions contemplated by this Agreement.
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IN WITNESS WHEREOF, the parties have executed, or caused to be
executed, this Agreement as of the date first above written.
OPTEL, INC.
By: /s/ MICHAEL E. KATZENSTEIN
---------------------------------------
Name: Michael E. Katzenstein
Title: Vice President Legal Affairs,
General Counsel and Secretary
By: /s/ STEPHEN DUBE
--------------------------------------
Name: Stephen Dube
Title: Vice President, Operations
INTERACTIVE CABLE SYSTEMS, INC.
By: /s/ KEVIN SCHOTTLAENDER
--------------------------------------
Name: Kevin Schottlaender
Title: President
<PAGE> 71
ICS LICENSES, INC.
By:/s/ KEVIN SCHOTTLAENDER
--------------------------------------
Name: Kevin Schottlaender
Title: President
<PAGE> 1
EXHIBIT 2.2
AMENDMENT NUMBER ONE
to the
PURCHASE AGREEMENT
AMENDMENT NUMBER ONE (the "Amendment") to the Purchase Agreement, dated
as of March 4, 1998 (the "Agreement"), among OpTel, Inc., Interactive Cable
Systems, Inc. and ICS Licenses, Inc. Capitalized terms used without definition
herein shall have the meanings provided in the Agreement.
1. From and after the date hereof, Seller shall use its best efforts to
obtain all of the consents required to be obtained in order to transfer to Buyer
the Purchased Assets free and clear of all Liens (other than Liens associated
with the Assumed Liabilities), including but not limited to all consents
required to transfer all of the Required Consents relating to the Rights of
Entry. The parties hereto agree that Rights of Entry that provide, in substance,
that no consent is required in the context of a sale of all or substantially all
of the assets of Seller, shall be deemed for all purposes relating to the
Agreement and the transactions contemplated therein to require consent (without
prejudice to any position or claim that may be made against any Person not a
party hereto). In addition, Seller shall not be deemed to have obtained any
Required Consents obtained after the Closing Date unless the consent received is
substantially in the form of Exhibit A hereto.
2. With respect to Required Consents received by Seller on or prior to
the Closing Date that do not contain the estoppel language contained in Exhibit
A (representing approximately 5,500 Subscribers), the parties hereto agree that
such Required Consents shall be deemed to have been obtained by Seller for
purposes of satisfying conditions to Closing pursuant to Section 4.2.8 ,
provided,
(a) Seller shall indemnify, defend and hold harmless the Buyer
Indemnified Parties from and against any and all Losses arising from or relating
in any way to any actual or alleged pre-Closing defaults by Seller or any of its
affiliates under the Rights of Entry relating to the 5,500 Subscribers described
above (without limit as to time or amount, and in addition to all other remedies
available, the Buyer Indemnified Parties shall have recourse against the
Additional Escrow Amount, as defined below, to satisfy such claims, in the
manner provided below);
<PAGE> 2
(b) at the Closing, Buyer and Seller shall execute and deliver an
escrow agreement substantially in the form of Exhibit B hereto (the "Additional
Escrow Agreement") under which Kronish, Lieb, Weiner & Hellman LLP shall act as
escrow agent (the "Additional Escrow Agent"). At the Closing Buyer shall deposit
with the Additional Escrow Agent an amount of the Purchase Price equal to
$2,000,000 (in shares of Series B Preferred and Class A Common in the ratio
described in Section 2.2 of the Agreement) (the "Additional Escrow Amount"),
which shall be withheld from the Purchase Price payable to Seller at the
Closing.
(c) Subject to the terms of the Additional Escrow Agreement, the
Additional Escrow Amount shall be released to Seller as follows:
(i) On the 90th day following the Closing, an amount (the "First
Reduction Amount") equal to (1) the Basket (as the Basket is finally determined
pursuant to the Agreement as amended hereby) minus (2) the amount of any claims
paid or pending for indemnification under Section 10.1 of the Agreement as of
such date, and minus the amount of any claims paid or pending for
indemnification under this Section 2 of this Amendment, in each case made by the
Buyer Indemnified Parties, shall be released to Seller, provided that the First
Reduction Amount shall not exceed the Additional Escrow Amount then held by the
Additional Escrow Agent. The Basket thereupon shall be reduced by the First
Reduction Amount for all purposes under the Agreement (but in no event shall the
Basket be reduced below zero).
(ii) On the 180th day following the Closing, an amount (the "Second
Reduction Amount") equal to the remaining Additional Escrow Amount, if any,
minus the amount of any claims pending for indemnification under this Section 2
of the Amendment, shall be released to Seller. At such time the Basket shall be
increased by an amount equal to the amount released to Seller. Upon final
determination of the amount of claims for indemnification under this Section 2,
the balance of the Additional Escrow Amount remaining after payment of such
claims to the Buyer Indemnified Parties under this Section 2 (which shall be
paid to Buyer), shall be paid to Seller (and the Basket shall be further
increased by any additional amounts released to Seller upon such final
determination).
3. Exhibit C hereto is a list of all signal feed agreements that
Buyer shall assume at the Closing and all other signal feed agreements relating
to the Business (the "Other Signal Agreements"). On or prior to the 60th day
following the Closing Date, Buyer shall notify Seller as to which of the Other
Signal Feed Agreements it wishes to assume (in which case Buyer and Seller as
promptly as practicable shall execute such
<PAGE> 3
documents of assumption necessary for Buyer to assume such agreements). For up
to 90 days after such notice (subject to Buyer's right to terminate such license
at any time), Seller shall license to Buyer the right to use all Other Signal
Agreements not assumed by Buyer pursuant hereto, subject to Buyer assuming all
payment obligations, if any, with respect to such Other Signal Agreements, which
payments shall be made to Seller and Seller shall pay over such amounts to the
Person entitled to such payments under such Other Signal Agreements. Seller
shall use its reasonable best efforts to maintain its rights under the
underlying agreements during such period. If an underlying Other Signal
Agreement is terminated other than due to a failure by Seller to make payments
under such agreement, then this license shall terminate in respect of such
agreement. Buyer acknowledges that it has received copies of the Other Signal
Agreements from Seller.
4. The parties hereto agree that notwithstanding the terms of the
Agreement, the adjustments to the Purchase Price described in Section
1.3(b)(iii) of the Agreement shall be completed after the Closing Date. The
parties shall use their best efforts to complete all actions provided in such
Section 1.3(b)(iii) on or prior to the 30th day following the Closing Date, and
in any event the parties shall complete all such actions (and the related
adjustment to the Purchase Price and/or the Basket) on or prior to the 90th day
following the Closing Date.
5. The parties agree that with respect to all Required Consents
(other than those relating to Rights of Entry or to vehicle leases), from and
after the Closing Seller shall grant Buyer an irrevocable, perpetual,
royalty-free license, coupled with an interest, to use any of the Purchased
Assets for which consents to transfer have not been received until such time as
such consents are received, upon terms that provide Buyer with all economic
rights and benefits of actual ownership of such assets, and with no associated
pre-Closing liabilities (but Buyer shall assume all payment obligations, if any,
and the risk of loss with respect to the Purchased Assets in question, which
payments shall be made to Seller, and Seller shall pay over such amounts to the
Person entitled to such payment under the associated agreement requiring the
Required Consent). From and after the Closing, Seller shall indemnify, defend
and hold harmless the Buyer Indemnified Parties from and against any and all
Losses arising from, or relating to, Seller's failure to obtain such Required
Consents.
6. The parties agree that with respect to Required Consents
relating to vehicle leases, from and after the Closing Seller shall grant to
Buyer an irrevocable, perpetual, royalty free license, coupled with an interest,
to use the vehicles
<PAGE> 4
subject to such leases until such time as such Required Consents are received,
upon terms that provide Buyer with all the economic rights and benefits of
Seller with respect to such vehicles, and with no associated pre-Closing
liabilities (but Buyer shall assume all payment obligations under such leases in
the manner provided in paragraph 5, above and risk of loss). Seller shall use
its reasonable best efforts to maintain its rights under the underlying leases
during such period. If an underlying lease is terminated other than due to a
failure by Seller to make payments under such leases, then this license shall
terminate in respect of such agreement. From and after the Closing, Seller shall
indemnify, defend and hold harmless the Buyer Indemnified Parties from and
against any and all Losses arising from, or relating to, failure to obtain such
Required Consents.
7. Seller acknowledges that the Required Consents must include a
waiver of a property owner's first refusal rights for the following properties
(in accordance with the terms of the associated Reports of Entry): Manchester
(Franchise 80) and Watergate (Franchise 77).
8. Seller acknowledges that a Required Consent in the form attached
as Exhibit A is required for River Crest (Franchise 7R).
9. Seller shall use its best efforts to make such additional UCC
filings as Buyer may reasonably request to effectuate the release of Liens on
the Purchased Assets that, under the Agreement, were to have been released at
the Closing but were not in fact released. With respect to UCC-3 forms that do
not set forth the correct Seller address, such forms shall be prepared and filed
by Seller with the proper Seller addresses within 10 Business Days after the
Closing.
10. Seller shall promptly notify Buyer in writing after Seller has
obtained a Required Consent for a Right of Entry which is part of the Consent
Escrow. At the end of each two week period following Closing, with the first two
week period ending on April 17, 1998, Buyer and Seller shall use all reasonable
efforts to complete the release and transfer to Buyer of all Rights of Entry for
which Required Consents have been obtained, subject to satisfaction of the
requirements set forth in the following paragraph.
Prior to the release of a Right of Entry from the Consent Escrow,
each of the following documents with respect to such Right of Entry shall have
been executed and delivered to Buyer: (a) a Bill of Sale, (b) an Assumption
Agreement, (c) all documentation necessary to release all Liens against such
Right of Entry and related Purchased Assets, and (d) a certificate setting forth
the amount to be disbursed to Seller from the
<PAGE> 5
Consent Escrow Amount with a copy to the Consent Escrow Agent. Upon such
deliveries stock certificates and stock powers reflecting the new amounts of
Series B Preferred Stock and Class A Common Stock to remain with the Consent
Escrow Agent shall be delivered to the Consent Escrow Agent in exchange for
certificates then held and certificates reflecting the Consent Escrow Amount to
be released to Seller shall be delivered to Seller, all in accordance with the
terms of the Consent Escrow Agreement.
Seller and Buyer agree that with respect to each Right of Entry
transferred to Buyer in accordance herewith, Seller will provide reasonable
accommodations and information to Buyer, including, without limitation,
transition billing services, so that there is minimum disruption of billing and
customer service associated with each such Right of Entry.
11. Seller and Buyer agree that Purchased Assets include, for no
further consideration, the proceeds of any insurance received or receivable by
Seller with respect to any claim made after March 4, 1998 (whether or not the
claim accrued before or after March 4,1998) relating to Purchased Assets.
12. (a) With respect to the properties described in the grid below (the
"Upgrade Properties"), the parties acknowledge that Oxford Properties ("Oxford")
requires upgrade of channel capacity as described in the grid (the "Upgrades")
by the dates shown under Required Completion Date in the grid. Seller agrees
that it retains the absolute obligation to timely perform the Upgrades so as to
at all times protect Buyer's good standing with respect to Oxford properties
identified under that certain Consent dated April 9, 1998 among Seller, Buyer
and Oxford (the "Oxford Consent"). To secure and protect and as a source of
indemnification to Buyer in respect of such obligations of Seller, Buyer shall
have recourse against the Upgrade Escrow Amount (as defined below) all in the
manner provided below.
(b) Pursuant to the terms of the Oxford Consent, Seller shall, at its
sole expense, complete the following system upgrades by the required completion
dates set forth below:
<TABLE>
<CAPTION>
Property Increase Required Seller's Associated
- -------- -------- -------- -------- ----------
Channels Completion Required Subscribers
-------- ---------- -------- -----------
From To Date Completion
---- -- ---------- ----------
Date
----------
<S> <C> <C> <C> <C> <C>
Reflections 36 45 May 9, 1998 April 23, 1998 191
(Franchise
5J)
Verandah 36 45 July 9, 1998 July 2, 1998 161
Hunt Club
(Franchise
22)
Windrift 37 45 June 9, 1998 June 2, 1998 170
(Franchise
7H)
Stone Creek 26 45 May 9, 1998 May 2, 1998 124
(Franchise
28)
</TABLE>
<PAGE> 6
In completing such upgrades, Seller shall have an employee (and not
just a contractor) of Seller on-site on a continuous full-time basis during any
periods of construction work for the upgrades at Verandah Hunt Club and
Windrift. Additionally, Seller and its contractors shall promptly follow Buyer's
and Buyer's representatives' instructions at all times so as to minimize
customer disruption and property owner inconveniences. Seller shall complete the
upgrade in a good and workmanlike manner and shall use equipment, materials and
components reasonably acceptable to Buyer. Seller shall begin such upgrades
immediately upon Closing and thereafter diligently and continuously continue
construction until completion. Within 3 Business Days following Closing and
thereafter as they are prepared, Seller shall submit for Buyer's reasonable and
timely approval, plans, specifications and copies of all contracts entered into
with subcontractors. In the event that Seller fails promptly to commence
completion of the Upgrades, or fails to diligently pursue completion of the
Upgrades, or has not completed an Upgrade for a property to Buyer's and Oxford's
satisfaction by the applicable "Seller's Required Completion Date", Buyer may at
its option complete Upgrades with the right to claim all related costs and
expenses from the Upgrade Escrow Amount as described below and without relieving
Seller of its obligation to have the Upgrade timely completed, and without
limiting in any respect Buyer's right to claim against the Upgrade Escrow Amount
under Section 12(d)(ii) below.
In all cases, Seller shall at all times be solely responsible for its
own expenses and amounts owed to contractors and shall indemnify, defend and
hold harmless the Buyer Indemnified Parties from and against any and all Losses
arising from or relating in any way to Seller's completion of such upgrades
(without limit as to time or amount, and in addition to all other remedies
available). Further, Seller shall promptly cause all Liens, if any, on the
properties and Purchased Assets relating thereto to be released in their
entirety.
(c) At the Closing, Buyer and Seller shall execute and
<PAGE> 7
deliver an escrow agreement substantially in the form of Exhibit E hereto (the
"Upgrade Escrow Agreement") under which Kronish, Lieb, Weiner & Hellman LLP
shall act as escrow agent (the "Upgrade Escrow Agent"). At the Closing Buyer
shall deposit with the Upgrade Escrow Agent an amount of the Purchase Price
equal to Per Subscriber Amount multiplied by 646 (being the total of the
Associated Subscribers identified on the grid) (in shares of Series B Preferred
and Class A Common in the ratio described in Section 2.2 of the Agreement) (the
"Upgrade Escrow Amount"), which shall be withheld from the Purchase Price
payable to Seller at the Closing.
(d) Subject to the terms of the Upgrade Escrow Agreement, the Upgrade
Escrow Amount shall be released as follows:
(i) upon receipt by the Upgrade Escrow Agent at any time of a statement
executed by Buyer, to Buyer an amount of the Upgrade Escrow Amount equal to the
costs, expenses and Losses of Buyer in respect of the Upgrade, including any of
the same arising in connection with Buyer's completing such Upgrade, all as
identified on such statement;
(ii) upon receipt by the Upgrade Escrow Agent of a statement executed
by Buyer that Oxford is terminating the related service agreement with respect
to an Upgrade Property on the basis of a failure to timely complete an Upgrade,
an amount equal to the Per Subscriber Amount multiplied by the number of
Subscribers identified with respect to such Upgrade Property (with no obligation
of Buyer to defend against such termination);
(iii) upon receipt by the Upgrade Escrow Agent of a statement executed
by both Buyer and Seller that (A) Seller has timely completed an Upgrade of an
Upgrade Property to Buyer's reasonable satisfaction, (B) all subcontractors have
been paid (and have released or received waivers with respect to any and all
Liens relating to such property) and (C) Oxford has accepted in writing that
such Upgrade has been completed to its satisfaction, the Upgrade Escrow Agent
will release to Seller the portion of the Upgrade Escrow Amount that the
Subscribers at such property bears to the aggregate of the Subscribers shown on
the above chart, less any amounts theretofore claimed by or paid to Buyer in
connection with completing such Upgrade.
(iv) upon receipt by the Upgrade Escrow Agent of a certificate executed
by Buyer that all amounts due to Buyer have been paid and/or that the Upgrades
have been satisfactorily performed, the Upgrade Escrow Agent shall release the
balance of the Upgrade Escrow Amount to Seller.
(e) The parties agree that the prevailing party in any
<PAGE> 8
litigation or arbitration arising under or with respect to the Upgrade Escrow
Agreement shall have all of its attorneys costs and expenses paid by the
opposing party.
13. Except as amended hereby, the provisions of the Agreement shall
remain in full force and effect. This Amendment shall not constitute a waiver or
amendment of any other provision of the Agreement not referred to herein.
14. This Amendment may be executed in counterparts, and all such
counterparts taken together shall be deemed to constitute one and the same
instrument.
15. This Amendment shall be governed by, and construed in accordance
with, the laws of the State of New York.
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed on this day of April, 1998.
OPTEL, INC.
By: /s/ MICHAEL E. KATZENSTEIN
----------------------------------------------
Name: Michael E. Katzenstein
Title: Vice President Legal
Affairs, General Counsel
and Secretary
By: /s/ STEPHEN DUBE
----------------------------------------------
Name: Stephen Dube
Title: Vice President
Operations
INTERACTIVE CABLE SYSTEMS, INC.
By: /s/ KEVIN SCHOTTLAENDER
----------------------------------------------
Name: Kevin Schottlaender
Title: President
ICS LICENSES, INC.
By: /s/ KEVIN SCHOTTLAENDER
----------------------------------------------
Name: Kevin Schottlaender
Title: President
<PAGE> 1
EXHIBIT 2.4
AMENDMENT NUMBER ONE
TO THE
PURCHASE AGREEMENT
Amendment Number One (the "Amendment") to the Purchase Agreement,
dated as of August 13, 1997 (the "Agreement"), among OpTel, Inc., Phonoscope,
Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook and the Lee Cook Family
Trust. Capitalized terms used without definition herein shall have the meanings
provided in the Agreement.
1. Section 1.3(b) of the Agreement is hereby amended and restated
in its entirety as follows:
(b) MDU Adjustments. Schedule 1.3(b)(i) sets forth a list of the
standard labor and materials costs ("Standard Costs") to be used by
Buyer and the Sellers to estimate the cost of wiring and other upgrades
required to enable each MDU property (other than the properties listed
in Schedule 1.3(b)(ii)) to meet the "550 MHz Performance Standard"
described in Schedule 1.3(b)(i) (the "Upgrade") and Schedule
1.3(b)(iii) sets forth a list of all MDU locations relating to the
Business as of the date hereof. On or prior to September 22, 1997, the
Sellers shall deliver to Buyer a design (a "Redesign") and estimated
costs (based upon the Standard Costs) for the Upgrade of five of the 25
MDU locations indicated on Schedule 1.3(b)(iv). On or prior to
September 29, 1997, the Sellers shall deliver to Buyer a Redesign and
estimated costs (based upon the Standard Costs) for the Upgrade of ten
additional of the 25 MDU locations indicated on Schedule 1.3(b)(iv). On
or prior to October 6, 1997, the Sellers shall deliver to Buyer a
Redesign and estimated costs (based upon the Standard Costs) for the
Upgrade of the remaining MDU locations indicated on Schedule
1.3(b)(iv). The Redesigns (i) wherever possible shall incorporate all
existing coaxial cables leading from the Conveyed Network to the
network at the related MDU locations, (ii) shall assume in calculating
RF signal levels that the Conveyed Network amplifier feeding each
property will operate at rated output levels and that coaxial cable and
coupler losses are nominal, (iii) shall set forth clearly, by "before"
and "after" designs, all changes and shall indicate all cable routes
and footages, and (iv) shall incorporate the least expensive approach
consistent with the Approach Priorities (as defined below) necessary to
meet the 550 MHz Performance Standard at the drop connection of every
tap/splitter network. For purposes of this Section 1.3(b),
<PAGE> 2
the Approach Priorities shall be, in order of preference, (A) changing
existing passive devices, including taps and splitter networks, to
utilize all available ports, (B) relocating existing on-premises
amplifiers, (C) adding additional on-premises amplifiers and, if
necessary, power supplies, and (D) changing and/or adding new
underground coaxial cables to reduce signal loss. Buyer may review the
Redesigns and cost calculations and within five Business Days after
delivery by the Sellers may deliver to the Seller alternative Redesigns
and/or cost calculations ("Alternatives"). Unless Buyer so delivers
such Alternatives to the Sellers, the Redesigns (and associated cost
calculations) shall be deemed to have been accepted by Buyer. If Buyer
delivers Alternatives, the parties, within five Business Days, shall
commence negotiations in good faith to resolve any differences and to
agree upon a reasonable and appropriate Redesign and associated costs
prior to the Closing. In addition to the conditions set forth in
Article 4, the obligations of each party to consummate the transactions
contemplated by this Agreement at the Closing shall be subject to
agreement by the parties on the Redesigns (or Alternatives, as the case
may be). Notwithstanding the delivery of any Alternatives, Buyer may,
at any time, withdraw any Alternatives and accept the original
Redesigns proposed by the Sellers. The aggregate of the estimated costs
relating to the Redesigns (and/or Alternatives, if the parties agree
upon Alternatives) shall be the "Final Redesign Costs". 80% of the
Final Redesign Costs for the locations indicated on Schedule 1.3(b)(iv)
(the "Costed Locations") shall be divided by the number of units in the
Costed Locations to determine the "Per Unit Adjustment." The Purchase
Price shall be reduced by an amount equal to the Per Unit Adjustment
multiplied by the total number of all MDU locations relating to the
Business (other than the locations listed in Schedule 1.3(b)(ii)).
2. Schedule 1.3(b)(iv) is amended and restated in its entirety as
set forth in Attachment A hereto.
3. Section 2(b) of Exhibit G to the Agreement is hereby amended and
restated in its entirety as follows:
(b) As an accommodation to Phonoscope, the Buyer hereby provides to
Phonoscope, upon the terms and subject to the conditions set forth
herein, for a period from the Closing Date until the 180th day after
the Closing Date (such period, as it may be shortened as provided
below, the "Term"), access to OpTel's existing "head end" (the
"Temporary Head End") located at [insert address], without cost to
Phonoscope except that Phonoscope shall be solely responsible for all
operating costs, fees, maintenance
2
<PAGE> 3
costs, licensing or permit fees or any other expenses associated with
Phonoscope's use of the Temporary Head End. After October 13, 1997, and
prior, and as a condition precedent, to the Closing, Phonoscope shall
be entitled at reasonable times and upon reasonable advance notice to
the Buyer, to inspect and test the Temporary Head End to confirm its
conformity in all material respects with the specifications set forth
in Exhibit II hereto and that the Temporary Head End is in good
operating condition. Prior to October 13, 1997, the Buyer shall (i)
change the channel lineup of the Temporary Head End to match
Phonoscope's channel lineup (as set forth in a notice delivered by
Phonoscope to the Buyer no later than September 29, 1997) except that
pay-per-view services on Channel 1 and 99 will be excluded, (ii) obtain
and provide any necessary head end equipment to receive and provide
such programming, (iii) install two-way couplers into all off-air and
satellite feeds in order to provide signal services from both the
Buyer's new and existing head-ends and (iv) combine all the head end
signals and provide a single RF output for Phonoscope's use. Phonoscope
shall be solely responsible for all connections and attachments to the
Temporary Head End, including, but not limited to, all fiber
connections, optical electronics, passives, hardware, labor, splicing,
amplifiers, couplers, and equipment and connections necessary to
combine high-speed data services with the head end signals. In
addition, Phonoscope shall provide a "prevue guide" signal for
insertion at the Temporary Head End by either providing an RF feed over
the fiber from Phonoscope's head end site to the Temporary Head End or
providing satellite receiver and ancillary equipment necessary to
supply baseband signals into the RF modulators at the Temporary Head
End for this channel. The parties hereto shall cooperate to coordinate
an orderly cut over of signals to take place between October 20 and
October 24, 1997 during such evening or early morning hours as the
parties may agree. Wherever practicable, the parties will exchange
authorized VCRS and digicypher cards in order to effect the cutover.
Not later than October 19, 1997, each of Phonoscope and the Buyer shall
notify the other of which VCRS and digicypher cards will be exchanged
as part of the cutover. During the Term, the Buyer shall afford to
Phonoscope's employees set forth on a list of authorized employees
delivered to the Buyer prior to the Closing Date (and updated from time
to time by Phonoscope by delivery of a revised list) reasonable access
to the Temporary Head End in order to maintain and repair the Temporary
Head End and the equipment and fibers attached thereto, upon prior
notice, at such times as Phonoscope may reasonably request, provided,
that prior to the Closing Date the parties shall agree upon procedures
for assuring access at any and all
3
<PAGE> 4
times by Phonoscope to the Temporary Head End including during such
time as the Buyer's premises (at which the Temporary Head End is
located) is not staffed. Phonoscope shall obtain and maintain all
consents, permits, licenses (including programming licenses and
authorizations for VCRS and digicypher cards) and approvals necessary
for the operation of the Temporary Head End and shall operate the
Temporary Head End in accordance with all applicable laws and
regulations. If Phonoscope fails to comply in any material respect with
any term or condition set forth in this Section 2(b), the Buyer, after
delivery to Phonoscope of written notice of such non-compliance and
Phonoscope's failure to cure such non-compliance within five Business
Days after receipt of such notice, may terminate the Term and
Phonoscope's rights under this Section 2(b). In addition, Phonoscope
may terminate the Term upon 10 Business Days' written notice to the
Buyer. The Buyer and its affiliates shall have no obligation or
liability whatsoever to Phonoscope, its subscribers or any other Person
for any interruption of service or programming (or the content or
quality of any signal or programming) resulting from the use of the
Temporary Head End, provided such interruption is not the result of the
gross negligence of the Buyer. Aside from conformity to the
specifications set forth in Exhibit I, the Buyer makes no
representation and warranty as to the Temporary Head End. As promptly
as practical after the end of the Term, Phonoscope shall disconnect any
lines, cables, fibers and equipment ("Attached Equipment") from the
Temporary Head End and shall remove the Attached Equipment from the
vicinity of the Temporary Head End, and upon Phonoscope's failure to do
so and the Buyer's delivery to Phonoscope of written notice of
Phonoscope's failure to remove the Attached Equipment, within five
Business Days after receipt of such notice, the Buyer may do so (and
may retain or dispose of such Attached Equipment in any manner at its
sole discretion) without any liability to Phonoscope. In its removal of
the Attached Equipment, Phonoscope shall assure that the Temporary Head
End is left in its condition on the date hereof, ordinary wear and tear
excepted.
4. Section 2(c) of Exhibit G to the Agreement is hereby amended and
restated in its entirety as follows:
(c) The Buyer shall not be liable for any Losses suffered by
Phonoscope in connection with its use of the Buyer's Temporary Head
End, and each Seller, jointly and severally, shall indemnify, defend
and hold harmless the Buyer from and against all Losses incurred by the
Buyer in connection with the Buyer's permitting Phonoscope to use the
5
<PAGE> 5
Temporary Head End, except where such Losses result solely from an act
of gross negligence or willful misconduct by the Buyer.
5. Exhibit I to Exhibit G to the Agreement is hereby deleted.
6. This Amendment shall not constitute a waiver or amendment of any
other provision of the Agreement not referred to herein. Except as amended
hereby, the provisions of the Agreement are and shall remain in full force and
effect.
7. This Amendment may be executed in counterparts, and all such
counterparts taken together shall be deemed to constitute one and the same
instrument.
8. This Amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Texas.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed on this day of September, 1997.
OPTEL, INC.
By:
-----------------------------------------
Name:
Title:
PHONOSCOPE, LTD.
By:
-----------------------------------------
Name:
Title:
PHONOSCOPE MANAGEMENT L.C.
By:
-----------------------------------------
Name:
Title:
--------------------------------------------
Lee Cook
5
<PAGE> 6
LEE COOK FAMILY TRUST
By:
-----------------------------------------
Lee Cook
Sole Trustee
--------------------------------------------
Alton Cook
COMMUNICATIONS EQUITY ASSOCIATES
By:
-----------------------------------------
Name:
Title:
6
<PAGE> 1
EXHIBIT 2.5
AMENDMENT NUMBER TWO
TO THE
PURCHASE AGREEMENT
Amendment Number Two (the "Amendment") to the Purchase
Agreement, dated as of August 13, 1997, as amended by Amendment Number One to
the Purchase Agreement (as so amended, the "Agreement"), among OpTel, Inc.,
Phonoscope, Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook and the Lee
Cook Family Trust. Capitalized terms used without definition herein shall have
the meanings provided in the Agreement.
1. Section 6.16 of the Agreement is hereby amended by
deleting the last four sentences of that section.
2. Article 9 of the Agreement is hereby amended by the
addition of the following in clause (vi)(b) of the definition of Purchased
Assets:
(such fibers to include, but not be limited to, fibers used in
the Business located in sheathes and conduit owned by the
Sellers on the Closing Date running under, along or over
highways)
3. Section 1(b) of Exhibit G to the Agreement is hereby
amended by the insertion of the following after the term "Category III Segment"
in the first sentence thereof:
(including, but not limited to, fibers used in the Business
located in sheathes and conduit owned by the Sellers on the
Closing Date running under, along or over highways)
4. Section 2(b) of Exhibit G to the Agreement is hereby
amended by the addition of the following at the end of such section:
Notwithstanding anything in this Agreement to the contrary, until the
close of business on the date that the Temporary Head End meets the
specifications set forth on Exhibit II (the "Cut Over Time"), the
Buyer shall provide Phonoscope with signal feed from the head end
purchased from Phonoscope on the date hereof. Prior to the Cut Over
Time, the Buyer and Phonoscope shall cooperate in good faith to test
the Temporary Head End and to assure an orderly cut-over of signal to
the Temporary Head End on or prior to the Cut Over Time. Phonoscope
shall pay all programming fees associated with such signal feed and
shall pay and discharge all Losses and Expenses associated with
<PAGE> 2
Phonoscope's use of such signal feed. Phonoscope shall be
responsible, in all respects, for all transport and delivery of signal
from the head end.
5. Section 1.3(d) of the Agreement is hereby amended by
deleting the words "At the Closing" in the beginning of the second sentence
thereof and replacing them with "On or prior to the third Business Day
following the Closing".
6. Section 1.3(a) of the Agreement is hereby amended by
adding the following to the end of the third sentence thereof:
provided, however, that the parties hereto agree that the amount of
ARs and amounts collected or billed prior to the Closing in respect of
services to be performed after the Closing (the "DR's") on the Closing
Statement shall represent the Seller's best good faith estimate
thereof and that notwithstanding the acceptance thereof by Buyer for
use at the Closing, Buyer, pursuant to Section 1.4, may challenge such
amount. From and after the Closing, the Sellers shall deliver to
Buyer, as promptly as practicable after request therefor by Buyer, all
back-up information and documentation reasonably requested by Buyer
for Buyer to evaluate the amount of the ARs and DRs set forth on the
Closing Statement.
7. On or prior to 90 days after the Closing Date, the
Sellers, at their sole cost, expense and risk, shall cause the Greenspoint hub
to be moved from its location on the date hereof to the utility public right of
way that is as close as practicable to such location. The Sellers shall
coordinate with Buyer and use their best efforts to avoid or limit any
interruptions in Buyer's services and use of such hub during the movement of
such hub and shall assure that such hub, in its new location, will provide
services to Buyer at least to the same extent and quality (and at no greater
cost to Buyer) as the Greenspoint hub is providing on the date hereof.
Following the movement of the Greenspoint hub to its new location, the Sellers
shall take all action necessary to provide Buyer with access to such location
and hub at such times and in such manner as Buyer requests in order to operate
and maintain its business following the Closing.
8. From and after the Closing until the first anniversary
of the Closing Date, Buyer shall act as the billing and installation agent for
Phonoscope, acting under the Phonoscope name, for the provision of high speed
internet service to Phonoscope's internet customers existing on the date
hereof, in the manner provided on the date hereof (the "Phonoscope Internet
Business"). Phonoscope shall not (i) add any customers (other than as may be
required under the terms of any right of
2
<PAGE> 3
entry agreement assigned to Buyer on the date hereof) to the Phonoscope Internet
Business and (ii) actively market the Phonoscope Internet Business. Buyer shall
bill and collect all hook-up/installation and other access fees relating to the
Phonoscope Internet Business and remit all of such fees (less $25.00 of each
hook-up/installation fee) to Phonoscope. All modems shall be provided by
Phonoscope at its sole cost and expense. All services other than billing and
installation relating to the Phonoscope Internet Business shall be performed by
Phonoscope. Phonoscope shall maintain customer service for the Phonoscope
Internet Business to at least the same standards as provided on the date hereof
at its sole cost and expense. Without limiting anything in the Agreement,
Phonoscope shall indemnify, defend and hold harmless Buyer, its affiliates, and
their respective directors, officers, employees and advisors from and against
all Losses and Expenses arising from or relating to Buyer and its affiliates
relating to the Phonoscope Internet Business. At any time prior to the first
anniversary of the Closing Date, at Buyer's request, Phonoscope shall transfer
to Buyer, for no additional consideration, all of its right, title and interest
in and to the Phonoscope Internet Business.
9. Without limiting any rights or obligations under the
Agreement, from and after the Closing, the Sellers shall take all action
necessary with the cooperation and assistance of Buyer to cause, as promptly as
practicable after the Closing, (a) the termination of the existing cable
television franchises, without liability to Buyer or any of the Companies, held
by the Sellers or any of the Companies from each of the municipalities of Bunker
Hill Village, Taylor Lake Village, Hunter's Creek Village and Spring Valley, (b)
the grant by the municipalities of Bunker Hill Village and Hunter's Creek
Village of rights of passage for Buyer or its designee permitting the continued
placement of cable, fiber and other transmission facilities (and the
transmission of signal) through such municipalities to customers outside of such
municipalities on terms and conditions reasonably satisfactory to Buyer, and (c)
Buyer to receive all required and necessary consents of railroads for Buyer and
the Companies to continue the placement of cable (and the transmission of
signal) over the Conveyed Network. The Sellers shall hold Buyer and the
Companies harmless from and against all Losses incurred by any of them arising
from or relating to the failure to have caused the matters described in clauses
(a), (b) and (c) to have occurred at the Closing. Without limitation, Buyer's
waiver of any condition to the Closing under the Agreement shall not constitute
a waiver by Buyer of any other rights that it may have under the Agreement.
10. This Amendment shall not constitute a waiver or
amendment of any other provision of the Agreement not referred to herein.
Except as amended hereby, the provisions of the
3
<PAGE> 4
Agreement are and shall remain in full force and effect.
11. This Amendment may be executed in counterparts, and
all such counterparts taken together shall be deemed to constitute one and the
same instrument.
12. This Amendment shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Texas.
[Intentionally left blank.]
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed on this 27th day of October, 1997.
OPTEL, INC.
By:
---------------------------------
Name:
Title:
PHONOSCOPE, LTD.
By:
---------------------------------
Name:
Title:
PHONOSCOPE MANAGEMENT L.C.
By:
---------------------------------
Name:
Title:
------------------------------------
Lee Cook
LEE COOK FAMILY TRUST
By:
---------------------------------
Lee Cook
Sole Trustee
------------------------------------
Alton Cook
COMMUNICATIONS EQUITY ASSOCIATES
By:
---------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 4.2
CERTIFICATE OF DESIGNATION OF VOTING POWERS,
DESIGNATIONS, PREFERENCES, LIMITATIONS,
RESTRICTIONS
AND RELATIVE RIGHTS
OF
9.75% SERIES A PREFERRED STOCK
OF
OPTEL, INC.
-----------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-----------------------
OpTel, Inc., a Delaware corporation (the "Company"), certifies
that pursuant to the authority contained in Article Four of its Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and in accordance with the provisions of Section 151 of the General Corporation
Law of the State of Delaware ("DGCL"), the Board of Directors of the Company
(the "Board of Directors"), by Unanimous Written Consent made as of March 1,
1998, duly approved and adopted the following resolution:
RESOLVED, that pursuant to the authority vested in the Board
of Directors by the Certificate of Incorporation, the Board of Directors does
hereby designate, create, authorize and provide for the issue of a series of
non-voting preferred stock, to be known as the "Series A Preferred Stock", out
of the authorized shares of preferred stock, par value $.01 per share, of the
Corporation, the shares of such series to have a liquidation preference of
$20,000 per share (the "Liquidation Preference"), consisting of 10,000 shares
(which number may be increased or decreased by resolution of the Board of
Directors, provided that no decrease shall reduce the number of shares of
Series A Preferred Stock below 150% of the number of shares of Series A
Preferred Stock at such time outstanding) to be entitled to dividends payable
initially in additional shares of such series at the annual rate of 9.75% of
the liquidation preference, to be convertible at the option of the holders of
shares of such series into shares of Class B Common Stock of the Corporation
(the "Class B Common Stock") at the Conversion Price, and, specifically,
having voting powers, designations, preferences, limitations, restrictions, and
relative rights as follows:
1. Ranking. The Series A Preferred Stock shall rank, with
respect to dividend distributions and distributions upon the liquidation,
winding-up and dissolution of the Company, (a) senior to all classes of common
stock of the Company and to all shares of Series B Preferred Stock of the
Company and senior to all shares of each other class of capital stock or series
of preferred stock established after the Preferred Stock Issue Date by the
Board of Directors the terms of which do not expressly provide that it ranks
senior to or on a parity with the Series A Preferred Stock as to dividend
distributions and distributions upon the liquidation, winding-up and
dissolution of the Company (collectively with the common stock and Series B
Preferred Stock referred to as "Junior Securities"); (b) on a parity with any
additional shares of preferred stock issued by the Company and any other class
of capital stock or series
<PAGE> 2
of preferred stock issued by the Company established after the Series B
Preferred Stock Issue Date by the Board of Directors, the terms of which
expressly provide that such class or series will rank on a parity with the
Series A Preferred Stock as to dividend distributions and distributions upon the
liquidation, winding-up and dissolution of the Company (collectively referred to
as "Parity Securities"); and (c) junior to each class of capital stock or series
of preferred stock issued by the Company established after the Preferred Stock
Issue Date by the Board of Directors the terms of which expressly provide that
such class or series will rank senior to the Series A Preferred Stock as to
dividend distributions and distributions upon liquidation, winding-up and
dissolution of the Company (collectively referred to as "Senior Securities").
2. Dividends.
(a) The holders of shares of the Series A Preferred Stock shall be
entitled to receive, when, as and if dividends are declared by the Board of
Directors, cumulative preferential dividends (in the form described below) from
the Preferred Stock Issue Date accruing at the rate per annum of 9.75% of the
Liquidation Preference per share, payable annually in arrears on the last day
of August, commencing on August 31, 1998 (each a "Dividend Payment Date"). If
any such date is not a Business Day, such payment shall be made on the next
succeeding Business Day, to the holders of record as of the next preceding
August 15 (each, a "Record Date"). Dividends on Series A Preferred Stock
shall be payable initially only in additional shares of Series A Preferred
Stock (including fractional shares) having an aggregate Liquidation Preference
equal to the amount of such dividends; provided, however, that dividends
payable after the expiration of the Conversion Period shall be payable only in
cash. The issuance of such additional shares of Series A Preferred Stock shall
constitute "payment" of the related dividend for all purposes of this
Certificate of Designation. The accrual of dividends payable on the Series A
Preferred Stock will be computed on the basis of a 360- day year consisting of
twelve 30-day months, and dividends will be deemed to accrue on a daily basis.
(b) Dividends on the Series A Preferred Stock shall accumulate
whether or not the Company has earnings or profits, whether or not there are
funds legally available for the payment of such dividends and whether or not
dividends are declared. Dividends will accumulate to the extent they are not
paid on the Dividend Payment Date for the period to which they relate. The
Company shall take all actions required or permitted under the DGCL to permit
the payment of dividends on the Series A Preferred Stock.
(c) No dividend whatsoever shall be declared or paid upon any
outstanding share of the Series A Preferred Stock with respect to any dividend
period unless all dividends for all preceding dividend periods have been
declared and paid upon all outstanding shares of Series A Preferred Stock.
Unless full cumulative dividends on all outstanding shares of Series A
Preferred Stock for all past dividend periods shall have been declared and
paid, then: (i) no dividend (other than a dividend payable solely in shares of
any Junior Securities) shall be declared or paid upon, or any sum set apart for
the payment of dividends upon, any shares of Junior Securities; (ii) no other
distribution shall be declared or made upon, or any sum set apart for the
payment of dividends upon, any shares of Junior Securities, other than a
distribution consisting solely of Junior Securities; (iii) no shares of Junior
Securities shall be purchased, redeemed or otherwise acquired or retired for
value (excluding an exchange for shares of other Junior Securities) by the
Company or any of its Subsidiaries; and (iv) no monies shall be paid into or
set apart or made available for a sinking or other like fund for the purchase,
redemption or other acquisition or retirement for value of any shares of Junior
Securities by the Company or any of its Subsidiaries. Holders of the Series A
Preferred Stock will not be entitled to any dividends in excess of the full
cumulative dividends as herein described.
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<PAGE> 3
(d) To the extent permitted by law, additional cumulative
dividends shall accrue with respect to the outstanding shares of Series A
Preferred Stock so long as any dividends on the Series A Preferred Stock shall
remain accrued and unpaid after the respective Dividend Payment Dates therefor
(whether or not such accrued and unpaid dividends shall have been declared).
Such additional dividends shall accrue at the rate per annum of 9.75% of the
Liquidation Preference of all shares of Series A Preferred Stock issuable with
respect to such accrued but unpaid dividends from their respective Dividend
Payment Dates for so long as such accrued but unpaid dividends and additional
dividends accrued with respect thereto shall remain unpaid.
3. Conversion.
(a) During the Conversion Period, at the option of a holder of
Series A Preferred Stock, any outstanding shares of Series A Preferred Stock
may be converted by the holder into Class B Common Stock at the Conversion
Price. The number of shares of Class B Common Stock issuable for each share of
Series A Preferred Stock upon conversion shall be determined by dividing the
Liquidation Preference plus all accrued and unpaid dividends on such shares of
Series A Preferred Stock by the Conversion Price. Immediately following such
conversion, the rights of the holders of converted shares of Series A Preferred
Stock shall cease and the Persons entitled to receive the Class B Common Stock
upon the conversion of Series A Preferred Stock shall be treated for all
purposes as having become the owners of such Class B Common Stock.
(b) In order for a holder to exercise its rights to convert Series
A Preferred Stock a holder must (i) surrender the certificate or certificates
evidencing the shares of Series A Preferred Stock to be converted, duly
endorsed in a form reasonably satisfactory to the Company, at the office of the
Company or transfer agent for the Series A Preferred Stock, (ii) notify the
Company at such office that such holder elects to convert Series A Preferred
Stock and the number of shares to be converted, (iii) state in writing the name
or names in which the holder wishes the certificate or certificates for shares
of Class B Common Stock to be issued, and (iv) pay any transfer or similar tax
if required pursuant to Section 15. The date on which the holder satisfies all
such requirements shall be the "Conversion Date." As soon as practical, the
Company shall deliver a certificate or certificates for the number of shares of
Class B Common Stock issuable upon the conversion. The Person in whose name
the Class B Common Stock certificate is registered shall be treated as the
stockholder of record on and after the Conversion Date.
(c) The Company has reserved and shall continue to reserve out of
its authorized but unissued Class B Common Stock a sufficient number of shares
of Class B Common Stock to permit the conversion of the Series A Preferred
Stock in full. All shares of Class B Common Stock that may be issued upon
conversion of Series A Preferred Stock shall be fully paid and nonassessable.
The Company shall comply with all securities laws regulating the offer and
delivery of shares of Class B Common Stock upon conversion of Series A
Preferred Stock and shall list such shares on each national securities exchange
or automated quotation system on which the Class B Common Stock is listed.
(d) At any time after the consummation of an underwritten public
offering as described in Section 3, in the case of any consolidation or
reorganization of the Company or the merger of the Company with or into any
other entity or the sale or transfer of all or substantially all the assets of
the Company pursuant to which the Company's Class B Common Stock is converted
into other securities, cash or assets (any of the foregoing, a
"Consolidation"), upon consummation of such Consolidation, each holder of
Series A Preferred Stock shall be entitled to elect to have each share of
Series A Preferred Stock held by such holder to thereafter be convertible into
the kind and amount of securities, cash or other assets receivable upon the
consolidation, merger, sale or transfer by a holder of the number of shares of
Class B Common Stock into which such share of Series A Preferred Stock might
have been
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<PAGE> 4
converted immediately prior to such consolidation, merger, transfer or sale.
Appropriate adjustment (as determined by the Board of Directors) shall be made
in the application of the provisions herein set forth with respect to the rights
and interests thereafter of the holders of Series A Preferred Stock, to the end
that the provisions set forth herein (including provisions with respect to
changes in and other adjustment of the Conversion Price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the conversion of
Series A Preferred Stock.
4. Liquidation Rights. Upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company or reduction or decrease
in its capital stock resulting in a distribution of assets to the holders of
any class or series of the Company's capital stock, each holder of shares of
the Series A Preferred Stock will be entitled to payment out of the assets of
the Company available for distribution of an amount equal to the Liquidation
Preference per share of Series A Preferred Stock held by such holder, plus
accrued and unpaid dividends, to the date fixed for liquidation, dissolution,
winding-up or reduction or decrease in capital stock, before any distribution
is made on any Junior Securities, including, without limitation, Common Stock
of the Company. After payment in full of the Liquidation Preference and all
accrued dividends, to which holders of Series A Preferred Stock are entitled,
such holders will not be entitled to any further participation in any
distribution of assets of the Company. If, upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the amounts payable with
respect to the Series A Preferred Stock and all other Parity Securities are not
paid in full, the holders of the Series A Preferred Stock and the Parity
Securities will share equally and ratably in any distribution of assets of the
Company in proportion to the full liquidation preference and accumulated and
unpaid dividends, to which each is entitled. However, neither the voluntary
sale, conveyance, exchange or transfer (for cash, shares of stock, securities
or other consideration) of all or substantially all of the property or assets
of the Company nor the consolidation or merger of the Company with or into one
or more Persons will be deemed to be a voluntary or involuntary liquidation,
dissolution or winding-up of the Company or reduction or decrease in capital
stock, unless such sale, conveyance, exchange or transfer shall be in
connection with a liquidation, dissolution or winding-up of the business of the
Company.
5. Redemption by the Company.
(a) At all times after the expiration of the Conversion Period,
the Company shall have the option to redeem, in whole or in part, (subject to
the legal availability of funds therefor) all outstanding shares of Series A
Preferred Stock at a price (the "Redemption Price") in cash equal to the
Liquidation Preference thereof, plus accrued and unpaid dividends (including an
amount in cash equal to a prorated dividend for any partial dividend period) to
the date of redemption. The Company shall not be required to make sinking fund
payments with respect to the Series A Preferred Stock.
(b) In case of redemption of less than all of the shares of Series
A Preferred Stock at the time outstanding, the shares to be redeemed shall be
selected pro rata or by lot as determined by the Company in its sole
discretion.
(c) Notice of any redemption shall be sent by or on behalf of the
Company not less than 30 nor more than 60 days prior to the date specified for
redemption in such notice (the "Redemption Date"), by first class mail, postage
prepaid, to all holders of record of the Series A Preferred Stock at their last
addresses as they shall appear on the books of the Company; provided, however,
that no failure to give such notice or any defect therein or in the mailing
thereof shall affect the validity of the proceedings for the redemption of any
shares of Series A Preferred Stock except as to the holder to whom the Company
has failed to give notice or except as to the holder to whom notice was
defective. In addition to any information required by law or by the applicable
rules of any exchange upon which the Series A
4
<PAGE> 5
Preferred Stock may be listed or admitted to trading, such notice shall state:
(i) the Redemption Date; (ii) the Redemption Price; (iii) the number of shares
of Series A Preferred Stock to be redeemed and, if less than all shares held by
such holder are to be redeemed, the number of such shares to be redeemed; (iv)
the place or places where certificates for such shares are to be surrendered for
payment of the Redemption Price, including any procedures applicable to
redemptions to be accomplished through book-entry transfers; and (v) that
dividends on the shares to be redeemed will cease to accumulate on the
Redemption Date. Upon the mailing of any such notice of redemption, the Company
shall become obligated to redeem at the time of redemption specified thereon all
shares called for redemption.
(d) If notice has been mailed in accordance with Section 5(c)
above and provided that on or before the Redemption Date specified in such
notice, all funds necessary for such redemption shall have been set aside by
the Company, separate and apart from its other funds in trust for the pro rata
benefit of the holders of the shares so called for redemption, so as to be, and
to continue to be available therefor, then, from and after the Redemption Date,
dividends on the shares of the Series A Preferred Stock so called for
redemption shall cease to accumulate, and said shares shall no longer be deemed
to be outstanding and shall not have the status of shares of Series A Preferred
Stock, and all rights of the holders thereof as stockholders of the Company
(except the right to receive from the Company the Redemption Price) shall
cease. Upon surrender, in accordance with said notice, of the certificates for
any shares so redeemed (properly endorsed or assigned for transfer, if the
Company shall so require and the notice shall so state), such shares shall be
redeemed by the Company at the Redemption Price. In case fewer than all the
shares represented by any such certificate are redeemed, a new certificate or
certificates shall be issued representing the unredeemed shares without cost to
the holder thereof.
(e) Any funds deposited with a bank or trust company for the
purpose of redeeming Series A Preferred Stock shall be irrevocable except that:
(i) the Company shall be entitled to receive from such
bank or trust company the interest or other earnings, if any, earned
on any money so deposited in trust, and the holders of any shares
redeemed shall have no claim to such interest or other earnings; and
(ii) any balance of monies so deposited by the Company and
unclaimed by the holders of the Series A Preferred Stock entitled
thereto at the expiration of two years from the applicable Redemption
Date shall be repaid, together with any interest or other earnings
earned thereon, to the Company, and after any such repayment, the
holders of the shares entitled to the funds so repaid to the Company
shall look only to the Company for payment without interest or other
earnings.
(f) No Series A Preferred Stock may be redeemed except with funds
legally available for the purpose. The Company shall take all actions required
or permitted under the DGCL to permit any such redemption.
(g) Notwithstanding the foregoing provisions of this Section 5,
unless the full cumulative dividends on all outstanding shares of Series A
Preferred Stock shall have been paid or contemporaneously are declared and paid
for all past dividend periods, none of the shares of Series A Preferred Stock
shall be redeemed.
(h) All shares of Series A Preferred Stock redeemed pursuant to
this Section 5 shall be restored to the status of authorized and unissued
shares of preferred stock, without designation as to series or class,
and may thereafter be reissued as shares of any series or class of preferred
stock other than shares of Series A Preferred Stock.
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<PAGE> 6
6. Voting Rights.
The holders of record of shares of the Series A Preferred Stock shall
have no voting rights, except as required by law and as hereinafter provided in
this Section 6.
(a) The Company shall not, without the affirmative vote or consent of
the holders of at least a majority of the shares of Series A Preferred Stock
then outstanding (with shares held by the Company or any of its affiliates not
being considered to be outstanding for this purpose) voting or consenting as
the case may be, as one class:
(i) amend or otherwise alter this Certificate of Designation
(including the provisions of paragraph 6 hereof) in any manner that
adversely affects the specified rights, preferences, privileges or
voting rights of holders of Series A Preferred Stock;
(ii) waive compliance with any provision of this Certificate
of Designation; or
(iii) create or issue Senior Securities or Parity Securities.
(b) Without the consent of each holder affected, an amendment or
waiver of the Company's Certificate of Incorporation or of this Certificate of
Designation may not (with respect to any shares of Series A Preferred Stock
held by a non-consenting holder):
(i) alter the voting rights with respect to the Series A
Preferred Stock or reduce the number of shares of Series A Preferred
Stock whose holders must consent to an amendment, supplement or waiver;
(ii) reduce the Liquidation Preference of the Series A
Preferred Stock;
(iii) reduce the rate of or change the time for payment of
dividends on any share of Series A Preferred Stock;
(iv) waive the consequences of any failure to pay dividends on
the Series A Preferred Stock;
(v) make any share of Series A Preferred Stock payable in any
form other than that stated in this Certificate of Designation;
(vi) make any change in the provisions of this Certificate of
Designation relating to waivers of the rights of holders of Series A
Preferred Stock to receive the Liquidation Preference and dividends on
the Series A Preferred Stock; or
(vii) make any change in the foregoing amendment and waiver
provisions.
(c) The Company in its sole discretion may without the vote or
consent of any holders of the Series A Preferred Stock amend or supplement this
Certificate of Designation:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to provide for uncertificated Series A Preferred Stock in
addition to or in place of certificated Series A Preferred Stock; or
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<PAGE> 7
(iii) to make any change that would provide any additional
rights or benefits to the holders of the Series A Preferred Stock or
that does not adversely affect the legal rights under this Certificate
of Designation of any such holder.
Except as set forth above, (A) the creation, authorization or issuance of any
shares of Junior Securities, Parity Securities or Senior Securities or (B) the
increase or decrease in the amount of authorized capital stock of any class,
including any preferred stock, shall not require the consent of the holders of
the Series A Preferred Stock and shall not be deemed to affect adversely the
rights, preferences, privileges, special rights or voting rights of holders of
shares of Series A Preferred Stock.
7. Financial Reports. The Company shall furnish without cost to
VPC Corporation, as the agent for each holder of the outstanding Series A
Preferred Stock, all financial reports that the Company is required to deliver
pursuant to Section 13 or 15(d) of the Exchange Act. VPC Corporation shall
deliver copies of the financial reports to the respective holders.
8. Amendment. Subject to Section 6 hereof, this Certificate of
Designation shall not be amended, either directly or indirectly, or through
merger or consolidation with another entity, in any manner that would alter or
change the powers, preferences or special rights of the Series A Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of a majority or more of the outstanding Series A Preferred Stock,
voting separately as a class.
9. Exclusion of Other Rights. Except as may otherwise be
required by law, the shares of Series A Preferred Stock shall not have any
voting powers, preferences and relative, participating, optional or other
special rights, other than those specifically set forth in this Certificate of
Designation (as it may be amended from time to time) and in the Certificate of
Incorporation.
10. Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of any of the provisions hereof.
11. Severability of Provisions. If any voting powers, preferences
and relative, participating, optional and other special rights of the Series A
Preferred Stock and qualifications, limitations and restrictions thereof set
forth in this Certificate of Designation (as it may be amended from time to
time) is invalid, unlawful or incapable of being enforced by reason of any rule
of law or public policy, all other voting powers, preferences and relative,
participating, optional and other special rights of Series A Preferred Stock
and qualifications, limitations and restrictions thereof set forth in this
Certificate of Designation (as so amended) which can be given effect without
the invalid, unlawful or unenforceable voting powers, preferences and relative,
participating, optional and other special rights of Series A Preferred Stock
and qualifications, limitations and restrictions thereof shall, nevertheless,
remain in full force and effect, and no voting powers, preferences and
relative, participating, optional or other special rights of Series A
Preferred Stock and qualifications, limitations and restrictions thereof herein
set forth shall be deemed dependent upon any other such voting powers,
preferences and relative, participating, optional or other special rights of
Series A Preferred Stock and qualifications, limitations and restrictions
thereof unless so expressed herein.
12. Reissuance of Series A Preferred Stock. Shares of Series A
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed or exchanged or converted, shall (upon compliance
with any applicable provisions of the laws of Delaware) have the status of
authorized but unissued shares of preferred stock of the Company undesignated
as to series and may be designated or redesignated and issued or reissued, as
the case may be, as part of any series or class of preferred stock of the
Company other than shares of Series A Preferred Stock.
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<PAGE> 8
13. Mutilated or Missing Series A Preferred Stock Certificates.
If any of the Series A Preferred Stock certificates shall be mutilated, lost,
stolen or destroyed, the Company shall issue, in exchange and in substitution
for and upon cancellation of the mutilated Series A Preferred Stock
certificate, or in lieu of and substitution for the Series A Preferred Stock
certificate lost, stolen or destroyed, a new Series A Preferred Stock
certificate of like tenor and representing an equivalent amount of shares of
Series A Preferred Stock, but only upon receipt of evidence of such loss, theft
or destruction of such Series A Preferred Stock certificate and indemnity, if
requested, satisfactory to the Company and the transfer agent (if other than
the Company).
14. Notices. In case at any time or from time to time there shall
be a Consolidation or any event described in the first sentence of Section 4,
then the Corporation shall mail to each holder of shares of Series A Preferred
Stock at such holder's address as it appears on the transfer books of the
Corporation, as promptly as possible but in any event at least 10 days prior to
the applicable date hereinafter specified, a notice stating (a) the date on
which a record is to be taken for the purpose of such dividend, distribution or
rights or warrants or, if a record is not to be taken, the date as of which the
holder of the Class B Common Stock of record to be entitled to such dividend,
distribution or rights are to be determined, or (b) the date on which such
Consolidation is expected to become effective. Such notice also shall specify
the date as of which it is expected that holders of Class B Common Stock of
record shall be entitled to exchange their Class B Common Stock for shares of
stock or other securities or property or cash deliverable upon such
Consolidation.
15. Transfer Taxes. The issuance or delivery of certificates for
Class B Common Stock upon the conversion of shares of Series A Preferred Stock
shall be made without charge to the converting holder of shares of Series A
Preferred Stock for such certificates or for any tax in respect of the issuance
or delivery of such certificates or the securities represented thereby, and
such certificates shall be issued or delivered in the respective names of, or
(subject to compliance with the applicable provisions of federal and state
securities laws) in such names as may be directed by, the holders of the shares
of Series A Preferred Stock converted; provided, however, that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate in a
name other than that of the holder of the shares of Series A Preferred Stock
converted, and the Corporation shall not be required to issue or deliver such
certificate unless or until the Person or Persons requesting the issuance or
delivery thereof shall have paid to the Corporation the amount of such tax or
shall have established to the reasonable satisfaction of the Corporation that
such tax has been paid.
16. Certain Remedies. Any registered holder of Series A Preferred
Stock shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Certificate of Designations and to enforce specifically
the terms and provisions of this Certificate of Designations in any court of
the United States, or any state thereof having jurisdiction, this being in
addition to any remedy to which such holder may be entitled at law or in
equity.
17. Certain Definitions. As used in this Certificate of
Designation, the following terms shall have the following meanings (with terms
defined in the singular having comparable meanings when used in the plural and
vice versa), unless the context otherwise requires:
"Business Day" means any day except a Saturday, a Sunday, or any day
on which banking institutions in New York, New York are required or authorized
by law or other governmental action to be closed.
"Commission" means the Securities and Exchange Commission.
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<PAGE> 9
"Class A Common Stock" means the Class A Common Stock, par value $.01
per share, of the Company.
"Class B Common Stock" means the Class B Common Stock, par value $.01
per share, of the Company.
"Class C Common Stock" means the Class C Common Stock, par value $.01
per share, of the Company.
"Common Stock" means Class A Common Stock, Class B Common Stock,
Class C Common Stock or other common stock of the Company.
"Conversion Period" means (i) if the Conversion Period has not
previously commenced or the Series A Shares have not previously been converted,
the 180-day period commencing on the IPO Date or (ii), if such 180-day period
has not previously commenced and expired or the Series A Shares have not
previously been converted, the 90-day period commencing on April 30, 1999 (with
the effect that if the Conversion Period has previously commenced by reason of
the occurrence of the IPO Date but has not yet expired on April 30, 1999, the
Conversion Period shall continue for 90 days after April 30, 1999 and the total
Conversion Period may be more or less than 180 days but shall expire in any
event on August 29, 1999).
"Conversion Price" means, as of the date of commencement of the
Conversion Period, (i) if such date is on or after the IPO Date, the price per
share which is the highest of (x) $82.18, (y) the price per share at which
Common Stock is first sold to the public in a public offering pursuant to an
effective registration statement under the Securities Act, and (z) the quotient
of $225 million divided by the number of shares of Common Stock outstanding, on
a fully diluted basis (excluding shares sold in or after such public offering,
the 225,000 shares of Class C Common Stock outstanding on the Preferred Stock
Issue Date and shares issued or issuable upon conversion of such Class C shares
or conversion of any other securities convertible into Common Stock that may be
issued to VPC Corporation after the Preferred Stock Issue Date), or (ii) if
such date is prior to the IPO Date, the price per share which is the higher of
(x) $82.18 and (y) the quotient of $225 million divided by the number of shares
of Common Stock outstanding (excluding the 225,000 shares of Class C Common
Stock outstanding on the Preferred Stock Issue Date and shares issued or
issuable upon conversion of such Class C shares or conversion of any other
securities convertible into Common Stock that may be issued to VPC Corporation
after the Preferred Stock Issue Date).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"IPO Date" means the date on which the Company receives the net
proceeds of an underwritten initial public offering for its account of any of
its equity securities pursuant to an effective registration statement under the
Securities Act.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Preferred Stock Issue Date" means the date on which a share of Series
A Preferred Stock is first issued by the Company.
"Securities Act" means the Securities Act of 1933, as amended.
9
<PAGE> 10
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be duly executed by its President and a Vice President and
attested by its Secretary, as of March 1, 1998.
/s/ LOUIS BRUNEL
---------------------------------
Name: Louis Brunel
Title: President
/s/ STEPHEN DUBE
---------------------------------
Name: Stephen Dube
Title: Vice President
Attest:
/s/ MICHAEL E. KATZENSTEIN
- ------------------------------------
Name: Michael E. Katzenstein
Title: Secretary
10
<PAGE> 1
EXHIBIT 4.3
CERTIFICATE OF DESIGNATION OF VOTING POWERS,
DESIGNATIONS, PREFERENCES, LIMITATIONS,
RESTRICTIONS
AND RELATIVE RIGHTS
OF
8% SERIES B PREFERRED STOCK
OF
OPTEL, INC.
-----------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-----------------------
Optel, Inc., a Delaware corporation (the "Company") certifies
that pursuant to the authority contained in Article Four of its Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and in accordance with the provisions of Section 151 of the General Corporation
Law of the State of Delaware ("DGCL"), the Board of Directors of the Company
(the "Board of Directors") at a special meeting duly called and held on
February 26, 1998, duly approved and adopted the following resolution which
resolution remains in full force and effect on the date hereof:
RESOLVED, that pursuant to the authority vested in the Board
of Directors by the Certificate of Incorporation, the Board of Directors does
hereby designate, create, authorize and provide for the issue of a series of
nonvoting Series B Preferred Stock, to be known as the "Series B Preferred
Stock", out of the authorized shares of Series B Preferred Stock, par value
$.01 per share, of the Corporation, the shares of such series to have a
liquidation preference of $60,000 per share (the "Liquidation Preference"),
consisting of 1,000 shares (which number may be increased or decreased by
resolution of the Board of Directors, provided that no decrease shall reduce
the number of shares of Series B Preferred Stock below 150% of the number of
shares of Series B Preferred Stock at such time outstanding) to be entitled to
dividends payable in shares of such series at the annual rate of 8% (or, under
certain circumstances, 13%) of the Liquidation Preference, to be convertible at
the option of the Corporation or the holders of shares of such series into
shares of Class A Common Stock of the Corporation (the "Class A Common Stock")
at a conversion price equal to the price at which shares of Class A Common
Stock of the Corporation are first offered to the public in an initial
underwritten public offering by the Corporation, having such voting powers,
designations, preferences, limitations, restrictions, and relative rights as
follows:
1. Ranking. The Series B Preferred Stock shall rank, with
respect to dividend distributions and distributions upon the liquidation,
winding-up and dissolution of the Company, (a) senior to all classes of common
stock of the Company and to each other class of capital stock or series of
preferred stock established after the Series B Preferred Stock Issue Date by
the Board of Directors the terms of which do not expressly provide that it
ranks senior to or on a parity with the Series B Preferred Stock as to dividend
distributions and distributions upon the liquidation, winding-up and
dissolution of the
<PAGE> 2
Company (collectively referred to with the common stock of the Company as
"Junior Securities"); (b) on a parity with any additional shares of preferred
stock issued by the Company in the future and any other class of capital stock
or series of preferred stock issued by the Company established after the Series
B Preferred Stock Issue Date by the Board of Directors, the terms of which
expressly provide that such class or series will rank on a parity with the
Series B Preferred Stock as to dividend distributions and distributions upon
the liquidation, winding-up and dissolution of the Company (collectively
referred to as "Parity Securities"); and (c) junior to each class of capital
stock or series of preferred stock issued by the Company established after the
Series B Preferred Stock Issue Date by the Board of Directors the terms of
which expressly provide that such class or series will rank senior to the
Series B Preferred Stock as to dividend distributions and distributions upon
liquidation, winding-up and dissolution of the Company (collectively referred
to as "Senior Securities").
No dividend whatsoever shall be declared or paid upon any outstanding
share of the Series B Preferred Stock with respect to any dividend period
unless all dividends for all preceding dividend periods have been declared and
paid, or declared and a sufficient sum set apart for the payment of such
dividend, upon all outstanding shares of Senior Securities.
2. Dividends.
(a) The holders of shares of the Series B Preferred Stock shall be
entitled to receive, when, as and if dividends are declared by the Board of
Directors, cumulative preferential dividends (in the form described below) from
the Series B Preferred Stock Issue Date accruing at the rate per annum, subject
to the following sentence, of 8% of the Liquidation Preference per share (the
"Dividend Rate"), payable quarterly in arrears on each of the last days of
November, February, May and August, commencing on August 31, 1998 (each a
"Dividend Payment Date"). Notwithstanding the aforesaid, if a registration
statement under the Securities Act covering shares of Common Stock of the
Company has not been declared effective (an "Effective Registration") on or
prior to the 180th day after the later of (a) the fourth anniversary of the
Series B Preferred Stock Issue Date and (b) the date on which the holders of
the Series B Preferred Stock exercise registration rights under Section 2.1 of
the Registration Rights Agreement (the "Demand Date"), the Dividend Rate shall
be reset to an annual rate equal to 13% of the Liquidation Preference per share
from and after the fourth anniversary of the Series B Preferred Stock Issue
Date, payable in the same form and manner as the aforesaid, provided, that the
Dividend Rate shall be reset to 8% from and after the date of Effective
Registration. If any such date is not a Business Day, such payment shall be
made on the next succeeding Business Day, to the holders of record as of the
next preceding November 15, February 15, May 15 and August 15 (each, a "Record
Date"). Dividends shall be payable by the issuance of additional shares of
Series B Preferred Stock (including fractional shares) having an aggregate
Liquidation Preference equal to the amount of such dividends. The issuance of
such additional shares of Series B Preferred Stock shall constitute "payment"
of the related dividend for all purposes of this Certificate of Designation.
Dividends payable on the Series B Preferred Stock will be computed on the basis
of a 360-day year consisting of twelve 30-day months and will be deemed to
accrue on a daily basis.
(b) Dividends on the Series B Preferred Stock shall accumulate
whether or not the Company has earnings or profits, whether or not there are
funds legally available for the payment of such dividends and whether or not
dividends are declared. Dividends will accumulate to the extent they are not
paid on the Dividend Payment Date for the period to which they relate. The
Company shall take all actions required or permitted under the DGCL to permit
the payment of dividends on the Series B Preferred Stock.
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<PAGE> 3
(c) No dividend whatsoever shall be declared or paid upon any
outstanding share of the Series B Preferred Stock with respect to any dividend
period unless all dividends for all preceding dividend periods have been
declared and paid upon all outstanding shares of Series B Preferred Stock.
Unless full cumulative dividends on all outstanding shares of Series B
Preferred Stock for all past dividend periods shall have been declared and
paid, then: (i) no dividend (other than a dividend payable solely in shares of
any Junior Securities) shall be declared or paid upon, or any sum set apart for
the payment of dividends upon, any shares of Junior Securities; (ii) no other
distribution shall be declared or made upon, or any sum set apart for the
payment of dividends upon, any shares of Junior Securities, other than a
distribution consisting solely of Junior Securities; (iii) no shares of Junior
Securities shall be purchased, redeemed or otherwise acquired or retired for
value (excluding an exchange for shares of other Junior Securities) by the
Company or any of its Subsidiaries; and (iv) no monies shall be paid into or
set apart or made available for a sinking or other like fund for the purchase,
redemption or other acquisition or retirement for value of any shares of Junior
Securities by the Company or any of its Subsidiaries. Holders of the Series B
Preferred Stock will not be entitled to any dividends in excess of the full
cumulative dividends as herein described.
(d) To the extent permitted by law, all declared but unpaid
dividends shall accrue dividends (payable in the form provided in Section 2(a))
at the rate per annum of 8% (or under certain circumstances 13%) of the
aggregate unpaid amount from their respective Dividend Payment Date until paid
in full.
3. Conversion.
(a) Unless previously redeemed by the Company pursuant to Section
4, upon the consummation of an initial underwritten public offering pursuant to
an effective registration statement under the Securities Act covering the offer
and sale of Common Stock to the public (an "IPO"), at the option of either the
Company or a holder of Series B Preferred Stock, all (but not less than all)
outstanding shares of Series B Preferred Stock held by a holder of Series B
Preferred Stock may be converted into Class A Common Stock at the Conversion
Price, provided, that the Company shall only be permitted to convert all
outstanding shares of Series B Preferred Stock. The number of shares of Class
A Common Stock issuable for each share of Series B Preferred Stock upon
conversion shall be determined by dividing the Liquidation Preference plus all
accrued and unpaid dividends on such shares of Series B Preferred Stock by the
Conversion Price. Immediately following such conversion, the rights of the
holders of converted Series B Preferred Stock shall cease and the Persons
entitled to receive the Class A Common Stock upon the conversion of Series B
Preferred Stock shall be treated for all purposes as having become the owners
of such Class A Common Stock. Additionally, promptly following the occurrence
of such conversion, the Company shall give written notice thereof to each
record holder of converted Series B Preferred Stock, including instructions to
be followed to obtain a certificate for the shares of Class A Common Stock into
which such holder's Series B Preferred Stock was converted.
(b) In order for the Company to exercise its right to convert
Series B Preferred Stock the Company must send a notice to each holder of
Series B Preferred Stock stating that the Company is exercising its option to
convert all of the outstanding Series B Preferred Stock and requesting (i) the
surrender of all certificates evidencing the holder's shares of Series B
Preferred Stock, duly endorsed in a form satisfactory to the Company, at the
office of the Company or transfer agent for the Series B Preferred Stock and
(ii) the name or names into which the certificate or certificates for shares of
Class A Common Stock are to be issued. The date of delivery of such notice by
first class or registered mail to a holder's address listed on the Company's
stock ledger shall be the "Company Conversion Date" As soon as practical after
receipt of certificates evidencing a holder's shares of Series B Preferred
Stock, the Company shall deliver a certificate or certificates for the number
of shares of Class A Common Stock
3
<PAGE> 4
issuable upon the conversion. The Person in whose name the Class A Common
Stock certificate is registered shall be treated as the stockholder of record
on and after the Company Conversion Date.
(c) In order for a holder to exercise its rights to convert Series
B Preferred Stock a holder must (i) surrender the certificate or certificates
evidencing the shares of Series B Preferred Stock to be converted, duly
endorsed in a form reasonably satisfactory to the Company, at the office of the
Company or transfer agent for the Series B Preferred Stock, (ii) notify the
Company at such office that he elects to convert Series B Preferred Stock and
the number of shares to be converted, (iii) state in writing the name or names
in which he wishes the certificate or certificates for shares of Class A Common
Stock to be issued, and (iv) pay any transfer or similar tax if required
pursuant to Section 15. The date on which the holder satisfies all such
requirements shall be the "Conversion Date." As soon as practical, the Company
shall deliver a certificate or certificates for the number of shares of Class A
Common Stock issuable upon the conversion. The Person in whose name the Class
A Common Stock certificate is registered shall be treated as the stockholder of
record on and after the Conversion Date.
(d) If the Company elects to convert shares of Series B Preferred
Stock, the Company shall pay any documentary, stamp or similar issue or
transfer tax due on the issue of shares of Class A Common Stock upon the
conversion.
(e) The Company has reserved and shall continue to reserve out of
its authorized but unissued Class A Common Stock or its Class A Common Stock
held in treasury a sufficient number of shares of Class A Common Stock to
permit the conversion of the Series B Preferred Stock in full. All shares of
Class A Common Stock that may be issued upon conversion of Series B Preferred
Stock shall be duly authorized, fully paid and nonassessable. The Company
shall comply with all securities laws regulating the offer and delivery of
shares of Class A Common Stock upon conversion of Series B Preferred Stock and
shall list such shares on each national securities exchange or automated
quotation system on which the Class A Common Stock is listed.
(f) At any time after the consummation of an IPO, in the case of
any consolidation or reorganization of the Company or the merger of the Company
with or into any other entity or the sale or transfer of all or substantially
all the assets of the Company pursuant to which the Company's Class A Common
Stock is converted into other securities, cash or assets (any of the foregoing,
a "Consolidation"), upon consummation of such Consolidation, each holder of
Series B Preferred Stock shall be entitled to elect to have each share of
Series B Preferred Stock held by such holder to thereafter be convertible into
the kind and amount of securities, cash or other assets receivable upon the
consolidation, merger, sale or transfer by a holder of the number of shares of
Class A Common Stock into which such share of Series B Preferred Stock might
have been converted immediately prior to such consolidation, merger, transfer
or sale. Appropriate adjustment (as determined by the Board of Directors)
shall be made in the application of the provisions herein set forth with
respect to the rights and interests thereafter of the holders of Series B
Preferred Stock, to the end that the provisions set forth herein (including
provisions with respect to changes in and other adjustment of the Conversion
Price) shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other securities or property thereafter
deliverable upon the conversion of Series B Preferred Stock in respect of any
Consolidation.
4. Liquidation Rights. Upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company or reduction or decrease
in its capital stock resulting in a distribution of assets to the holders of
any class or series of the Company's capital stock, each holder of shares of
the Series B Preferred Stock will be entitled to payment out of the assets of
the Company available for distribution of an amount equal to the Liquidation
Preference per share of Series B Preferred Stock held
4
<PAGE> 5
by such holder, plus accrued and unpaid dividends, to the date fixed for
liquidation, dissolution, winding-up or reduction or decrease in capital stock,
before any distribution is made on any Junior Securities, including, without
limitation, Common Stock of the Company. After payment in full of the
Liquidation Preference and all accrued and unpaid dividends, to which holders
of Series B Preferred Stock are entitled, such holders will not be entitled to
any further participation in any distribution of assets of the Company. If,
upon any voluntary or involuntary liquidation, dissolution or winding-up of the
Company, the amounts payable with respect to the Series B Preferred Stock and
all other Parity Securities are not paid in full, the holders of the Series B
Preferred Stock and the Parity Securities will share equally and ratably in any
distribution of assets of the Company in proportion to the full Liquidation
Preference and accrued and unpaid dividends, to which each is entitled.
However, neither the voluntary sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of the property or assets of the Company nor the
consolidation or merger of the Company with or into one or more Persons will be
deemed to be a voluntary or involuntary liquidation, dissolution or winding-up
of the Company or reduction or decrease in capital stock, unless such sale,
conveyance, exchange or transfer shall be in connection with a liquidation,
dissolution or winding-up of the business of the Company.
5. Redemption by the Company.
(a) At all times, the Company shall have the option to redeem, in
whole or in part, (subject to the legal availability of funds therefor) all
outstanding shares of Series B Preferred Stock at a price (the "Redemption
Price") in cash equal to the Liquidation Preference thereof, plus accrued and
unpaid dividends (including an amount in cash equal to a prorated dividend for
any partial dividend period) to the date of redemption . The Company shall not
be required to make sinking fund payments with respect to the Series B
Preferred Stock. The Company shall take all actions required or permitted
under the DGCL to permit such redemption.
(b) In case of redemption of less than all of the shares of Series
B Preferred Stock at the time outstanding, the shares to be redeemed shall be
selected pro rata or by lot as determined by the Company in its sole
discretion.
(c) Notice of any redemption shall be sent by or on behalf of the
Company not less than 30 nor more than 60 days prior to the date specified for
redemption in such notice (the "Redemption Date"), by first class mail, postage
prepaid, to all holders of record of the Series B Preferred Stock at their last
addresses as they shall appear on the books of the Company; provided, however,
that no failure to give such notice or any defect therein or in the mailing
thereof shall affect the validity of the proceedings for the redemption of any
shares of Series B Preferred Stock except as to the holder to whom the Company
has failed to give notice or except as to the holder to whom notice was
defective. In addition to any information required by law or by the applicable
rules of any exchange upon which Series B Preferred Stock may be listed or
admitted to trading, such notice shall state: (i) the Redemption Date; (ii)
the Redemption Price; (iii) the number of shares of Series B Preferred Stock to
be redeemed and, if less than all shares held by such holder are to be
redeemed, the number of such shares to be redeemed; (iv) the place or places
where certificates for such shares are to be surrendered for payment of the
Redemption Price, including any procedures applicable to redemptions to be
accomplished through book-entry transfers; and (v) that dividends on the shares
to be redeemed will cease to accumulate on the Redemption Date. Upon the
mailing of any such notice of redemption, the Company shall become obligated to
redeem at the time of redemption specified thereon all shares called for
redemption.
(d) If notice has been mailed in accordance with Section 5(c)
above and provided that on or before the Redemption Date specified in such
notice, all funds necessary for such redemption shall have
5
<PAGE> 6
been set aside by the Company, separate and apart from its other funds in trust
for the pro rata benefit of the holders of the shares so called for redemption,
so as to be, and to continue to be available therefor, then, from and after the
Redemption Date, dividends on the shares of the Series B Preferred Stock so
called for redemption shall cease to accumulate, and said shares shall no
longer be deemed to be outstanding and shall not have the status of shares of
Series B Preferred Stock, and all rights of the holders thereof as stockholders
of the Company (except the right to receive from the Company the Redemption
Price) shall cease. Upon surrender, in accordance with said notice, of the
certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Company shall so require and the notice shall so state), such
shares shall be redeemed by the Company at the Redemption Price. In case fewer
than all the shares represented by any such certificate are redeemed, a new
certificate or certificates shall be issued representing the unredeemed shares
without cost to the holder thereof.
(e) Any funds deposited with a bank or trust company for the
purpose of redeeming Series B Preferred Stock shall be irrevocable except that:
(i) the Company shall be entitled to receive from such
bank or trust company the interest or other earnings, if any, earned
on any money so deposited in trust, and the holders of any shares
redeemed shall have no claim to such interest or other earnings; and
(ii) any balance of monies so deposited by the Company and
unclaimed by the holders of the Series B Preferred Stock entitled
thereto at the expiration of two years from the applicable Redemption
Date shall be repaid, together with any interest or other earnings
earned thereon, to the Company, and after any such repayment, the
holders of the shares entitled to the funds so repaid to the Company
shall look only to the Company for payment without interest or other
earnings.
(f) No Series B Preferred Stock may be redeemed except with funds
legally available for the purpose. The Company shall take all actions required
or permitted under the DGCL to permit any such redemption.
(g) Notwithstanding the foregoing provisions of this Section 5,
unless the full cumulative dividends on all outstanding shares of Series B
Preferred Stock shall have been paid or contemporaneously are declared and paid
for all past dividend periods, none of the shares of Series B Preferred Stock
shall be redeemed.
(h) All shares of Series B Preferred Stock redeemed pursuant to
this Section 5 shall be restored to the status of authorized and unissued
shares of Series B Preferred Stock, without designation as to series or class
and may thereafter be reissued as shares of any series or class of preferred
stock other than shares of Series B Preferred Stock.
6. Voting Rights.
The holders of record of shares of the Series B Preferred Stock shall
have no voting rights, except as required by law and as hereinafter provided in
this Section 6.
(a) The Company shall not, without the affirmative vote or consent of
the holders of at least a majority of the shares of Series B Preferred Stock
then outstanding (with shares held by the Company or any of its affiliates not
being considered to be outstanding for this purpose) voting or consenting as
the case may be, as one class:
6
<PAGE> 7
(i) amend or otherwise alter this Certificate of
Designation (including the provisions of paragraph 6 hereof) in any
manner that adversely affects the specified rights, preferences,
privileges or voting rights of holders of Series B Preferred Stock,
including, but not limited to, any change in the provisions of Section
3 hereof;
(ii) waive compliance with any provision of this
Certificate of Designation.
(b) Without the consent of each holder affected, an amendment or
waiver of the Company's Certificate of Incorporation or of this Certificate of
Designation may not (with respect to any shares of Series B Preferred Stock
held by a non-consenting holder):
(i) alter the voting rights with respect to the Series B
Preferred Stock or reduce the number of shares of Series B Preferred
Stock whose holders must consent to an amendment, supplement or waiver;
(ii) reduce the Liquidation Preference of the Series B
Preferred Stock;
(iii) reduce the rate of or change the time for payment of
dividends on any share of Series B Preferred Stock;
(iv) waive the consequences of any failure to pay
dividends on the Series B Preferred Stock;
(v) make any share of Series B Preferred Stock payable in
any form other than that stated in this Certificate of Designation;
(vi) make any change in the provisions of this Certificate
of Designation relating to waivers of the rights of holders of Series
B Preferred Stock to receive the Liquidation Preference and dividends
on the Series B Preferred Stock;
(vii) make any change in the foregoing amendment and waiver
provisions.
(c) The Company in its sole discretion may without the vote or
consent of any holders of the Series B Preferred Stock amend or supplement this
Certificate of Designation:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to provide for uncertificated Series B Preferred
Stock in addition to or in place of certificated Series B Preferred
Stock; or
(iii) to make any change that would provide any additional
rights or benefits to the holders of the Series B Preferred Stock or
that does not adversely affect the legal rights under this Certificate
of Designation of any such holder.
(d) If there has not been an Effective Registration on or prior to
the later of 180 days after (a) the fourth anniversary of the Series B
Preferred Stock Issue Date and (b) the Demand Date, then the holders of the
Series B Preferred Stock shall have the exclusive right, voting separately as a
class, to elect one director on the board of directors of the Company (the
"Preferred Director"). The right of the holders of the Series B Preferred
Stock to elect the Preferred Director shall continue until there is an
Effective Registration. At such time, the term of the Preferred Director shall
terminate. At any time
7
<PAGE> 8
when the holders of the Series B Preferred Stock shall have thus become
entitled to elect the Preferred Director, the Company shall take all action
necessary to ensure that the Preferred Director shall be elected to the board
of directors of the Company, including, without limitation (i) amending the
by-laws of the Company to increase the size of the board of directors, and (ii)
causing a special meeting of the stockholders to be called to elect the
Preferred Director. The special meeting of the stockholders that shall be
called for the purpose of electing the Preferred Director shall be held within
30 days after such right to elect the Preferred Director arises, upon notice
given in the manner provided in the by-laws of the Company or by law. At any
such special meeting or at any annual meeting at which the holders of the
Series B Preferred Stock shall be entitled to elect a Preferred Director, the
holders of a majority of the then outstanding Series B Preferred Stock present
in person or by proxy shall be sufficient to constitute a quorum for the
election of such director. The person elected by the holders of the Series B
Preferred Stock at any meeting in accordance with the terms of the preceding
sentence shall become a director on the date of such election.
Except as set forth above, (A) the creation, authorization or issuance of any
shares of Junior Securities, Parity Securities or Senior Securities or (B) the
increase or decrease in the amount of authorized capital stock of any class,
including any Series B Preferred Stock, shall not require the consent of the
holders of the Series B Preferred Stock and shall not be deemed to affect
adversely the rights, preferences, privileges, special rights or voting rights
of holders of shares of Series B Preferred Stock.
7. Financial Reports. The Company shall furnish without cost to
each record holder of the outstanding Series B Preferred Stock, all financial
reports that the Company is required to deliver pursuant to Section 13 or 15(d)
of the Exchange Act.
8. Amendment. Subject to Section 6 hereof, this Certificate of
Designation shall not be amended, either directly or indirectly, or through
merger or consolidation with another entity, in any manner that would alter or
change the powers, preferences or special rights of the Series B Preferred
Stock so as to affect them adversely without the affirmative vote of the
holders of a majority or more of the outstanding Series B Preferred Stock,
voting separately as a class.
9. Exclusion of Other Rights. Except as may otherwise be
required by law, the shares of Series B Preferred Stock shall not have any
voting powers, preferences and relative, participating, optional or other
special rights, other than those specifically set forth in this resolution (as
such resolution may be amended from time to time) and in the Certificate of
Incorporation.
10. Headings of Subdivisions. The headings of the various
subdivisions hereof are for convenience of reference only and shall not affect
the interpretation of any of the provisions hereof.
11. Severability of Provisions. If any voting powers, preferences
and relative, participating, optional and other special rights of the Series B
Preferred Stock and qualifications, limitations and restrictions thereof set
forth in this resolution (as such resolution may be amended from time to time)
is invalid, unlawful or incapable of being enforced by reason of any rule of
law or public policy, all other voting powers, preferences and relative,
participating, optional and other special rights of Series B Preferred Stock
and qualifications, limitations and restrictions thereof set forth in this
resolution (as so amended) which can be given effect without the invalid,
unlawful or unenforceable voting powers, preferences and relative,
participating, optional and other special rights of Series B Preferred Stock
and qualifications, limitations and restrictions thereof shall, nevertheless,
remain in full force and effect, and no voting powers, preferences and
relative, participating, optional or other special rights of Series B Preferred
Stock and qualifications, limitations and restrictions thereof herein set forth
shall be deemed dependent upon any other such voting powers, preferences and
relative, participating, optional or other
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<PAGE> 9
special rights of Series B Preferred Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.
12. Reissuance of Series B Preferred Stock. Shares of Series B
Preferred Stock that have been issued and reacquired in any manner, including
shares purchased or redeemed or exchanged or converted, shall (upon compliance
with any applicable provisions of the laws of Delaware) have the status of
authorized but unissued shares of Series B Preferred Stock of the Company
undesignated as to series and may be designated or redesignated and issued or
reissued, as the case may be, as part of any series or class of Series B
Preferred Stock of the Company other than shares of Series B Preferred Stock.
13. Mutilated or Missing Series B Preferred Stock Certificates.
If any of the Series B Preferred Stock certificates shall be mutilated, lost,
stolen or destroyed, the Company shall issue, in exchange and in substitution
for and upon cancellation of the mutilated Series B Preferred Stock
certificate, or in lieu of and substitution for the Series B Preferred Stock
certificate lost, stolen or destroyed, a new Series B Preferred Stock
certificate of like tenor and representing an equivalent amount of shares of
Series B Preferred Stock, but only upon receipt of evidence of such loss, theft
or destruction of such Series B Preferred Stock certificate and indemnity, if
requested, satisfactory to the Company and the transfer agent (if other than
the Company).
14. Notices. In case at any time or from time to time there shall
be a Consolidation or any event described in the first sentence of Section 4,
then the Company shall mail to each holder of shares of Series B Preferred
Stock at such holder's address as it appears on the transfer books of the
Company, as promptly as possible but in any event at least ten (10) days prior
to the applicable date hereinafter specified, a notice stating (a) the date on
which a record is to be taken for the purpose of such dividend, distribution or
rights or warrants or, if a record is not to be taken, the date as of which the
holder of the Class A Common Stock of record to be entitled to such dividend,
distribution or rights are to be determined, or (b) the date on which such
Consolidation is expected to become effective. Such notice also shall specify
the date as of which it is expected that holders of Class A Common Stock of
record shall be entitled to exchange their Class A Common Stock for shares of
stock or other securities or property or cash deliverable upon which
Consolidation.
15. Transfer Taxes. The issuance or delivery of certificates for
Class A Common Stock upon the conversion of shares of Series B Preferred Stock
shall be made without charge to the converting holder of shares of Series B
Preferred Stock for such certificates or for any tax in respect of the issuance
or delivery of such certificates or the securities represented thereby, and
such certificates shall be issued or delivered in the respective names of, or
(subject to compliance with the applicable provisions of federal and state
securities laws) in such names as may be directed by, the holders of the shares
of Series B Preferred Stock converted; provided, however, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate in a
name other than that of the holder of the shares of Series B Preferred Stock
converted, and the Company shall not be required to issue or deliver such
certificate unless or until the Person or Persons requesting the issuance or
delivery thereof shall have paid to the Company the amount of such tax or shall
have established to the reasonable satisfaction of the Company that such tax
has been paid.
16. Certain Remedies. Any registered holder of Series B Preferred
Stock shall be entitled to an injunction or injunctions to prevent breaches of
the provisions of this Certificate of Designation and to enforce specifically
the terms and provisions of this Certificate of Designation in any court of the
United States, or any state thereof having jurisdiction, this being in addition
to any remedy to which such holder may be entitled at law or in equity.
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17. Certain Definitions. As used in this Certificate of
Designation, the following terms shall have the following meanings (with terms
defined in the singular having comparable meanings when used in the plural and
vice versa), unless the context otherwise requires:
"Business Day" means any day except a Saturday, a Sunday, or any day
on which banking institutions in New York, New York are required or authorized
by law or other governmental action to be closed.
"Commission" means the Securities and Exchange Commission.
"Class A Common Stock" means the Class A Common Stock, par value $.01
per share, of the Company.
"Class B Common Stock" means the Class B Common Stock, par value $.01
per share, of the Company.
"Class C Common Stock" means the Class C Common Stock, par value $.01
per share, of the Company.
"Common Stock" means Class A Common Stock, Class B Common Stock,
Class C Common Stock or other common stock of the Company.
"Conversion Price" means the price at which a share of Class A Common
Stock is offered to the public pursuant to an initial underwritten public
offering as set forth in paragraph 3 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Person" means any individual, corporation, partnership, joint
venture, association, joint stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of April 9, 1998, between the Company, Interactive Cable
Systems, Inc., Nomura Holding America, Inc. and MCI Telecommunications
Corporation.
"Series B Preferred Stock Issue Date" means the date on which the
Series B Preferred Stock is originally issued by the Company under this
Certificate of Designation.
"Securities Act" means the Securities Act of 1933, as amended.
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IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be duly executed by its President and a Vice President and
attested by its Secretary, as of _______________________________, 1998.
--------------------------------------
Name: Louis Brunel
Title: President
--------------------------------------
Name: Stephen Dube
Title: Vice President
Attest:
- --------------------------------------
Name: Michael E. Katzenstein
Title: Secretary
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<PAGE> 1
EXHIBIT 4.7
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement") dated as of
April 9, 1998 between OPTEL, INC., a Delaware corporation (the "Company"),
INTERACTIVE CABLE SYSTEMS, INC., a California corporation ("ICS"), Nomura
Holding America, Inc. ("Nomura"), MCI Telecommunications Corporation ("MCI")
(ICS, Nomura and MCI, collectively, the "Holder" and together with any Permitted
Transferee, the "Holders").
RECITALS:
On the date hereof, pursuant to the terms of the
Purchase Agreement, dated as of March 4, 1998, as amended through the date
hereof (the "Purchase Agreement"), among ICS, ICS Licenses, Inc. and the
Company, the Company has purchased the Business (as defined in the Purchase
Agreement) from ICS and ICS Licenses, Inc. for consideration consisting of
cash, Series B Preferred Stock, par value $.01 per share, of the Company (the
"Preferred Stock") and Class A Common Stock, par value $.01 per share, of the
Company ("Common Stock"). The Common Stock held by ICS, Nomura and MCI on the
date hereof and the Common Stock into which the Preferred Stock held by such
Persons on the date hereof may be converted, and any Related Registrable
Securities (as defined herein) are collectively referred to herein as the
"Registrable Securities".
In that connection, the Company has agreed that the Holders
shall have certain rights to require registration of Registrable Securities
under the Securities Act of 1933, as amended (the "Securities Act"). These
rights are set forth in this Agreement.
The parties therefore agree as follows:
1. Effective Date. This Agreement shall become effective on
the date hereof.
2. Registration Under Securities Act, Etc.
2.1. Registration on Request.
2.1.1. Request. If the Company has not completed an
initial public offering of its Common Stock (an "IPO") on or prior to the
fourth anniversary of the date hereof, at any time after such fourth
anniversary and prior to an IPO, upon the written request of one or more of the
Holders who collectively hold not less than one-half of the Registrable
Securities that the Company effect the registration under the Securities Act of
all or part of the Registrable Securities, which request shall specify the
intended method of disposition thereof and the number of Registrable Securities
to be registered, the Company will use
<PAGE> 2
reasonable efforts in good faith to effect the registration under the
Securities Act, as promptly as is reasonably practicable (giving due regard to,
among other things, the other provisions of this Agreement which affect the
timing of such registration), of the Registrable Securities which the Company
has been so requested to register by the Holders to the extent requisite to
permit the disposition (in accordance with the intended methods thereof as
aforesaid) of the Registrable Securities so to be registered, provided that the
Company shall not be required to effect a registration pursuant to this Section
2.1 with respect to any Registrable Securities unless the request for
registration covers Registrable Securities representing at least 50% of all
Registrable Securities then held by the Holders. Whenever the Company shall
effect a registration pursuant to this Section 2.1 upon the request of a
Holder, it will give prompt written notice to each other Holder known to the
Company of its intention to do so and of such Holders' rights under this
Section 2.1.1. Upon the written request of any such Holder received by the
Company within 30 days after the date of any such notice to such Holder (which
request shall specify the Registrable Securities intended to be disposed of by
such Holder and the intended method of disposition thereof), the Company will
use its reasonable efforts to effect the registration under the Securities Act
of all Registrable Securities that the Company has been so requested to
register by all Holders, to the extent requisite to permit the disposition (in
accordance with the intended method or methods thereof as aforesaid) of the
Registrable Securities so to be registered.
2.1.2. Expenses. The Company will pay all
Registration Expenses in connection with any registration requested pursuant to
this Section 2.1. All Selling Expenses in connection with any registration of
Registrable Securities pursuant to this Section 2.1 shall be borne by the
seller or sellers of such Registrable Securities in such proportions upon which
such sellers may agree; provided, however, that if such sellers cannot
otherwise agree, they shall bear such expenses (other than their individual
counsel fees which shall be borne by them directly) in direct proportion to the
number of Registrable Securities that they are seeking to have registered.
2.1.3. Effective Registration Statement. A
registration shall not be deemed to have been effected pursuant to this Section
2.1 or pursuant to Section 2.2 (a) unless a registration statement with respect
thereto has become effective; provided, however, that a registration which does
not become effective after the Company has filed a registration statement with
respect thereto solely by reason of the refusal to proceed of any of the
Holders shall be deemed to have been effected by the Company unless the Holders
shall have elected to pay, and have in fact paid in full within 30 days after
the Company has received notice of any Holder's refusal to proceed which
results in a termination of the registered offering, all Registration Expenses
in connection with such registration, (b) if after it has become effective,
such registration statement is interfered with by any stop order, injunction or
other order or requirement of the Commission or other governmental agency or
court for any reason which results in a termination of the registered offering,
(c) if the conditions to closing specified in the purchase agreement or
underwriting agreement entered into in connection with such registration are
not satisfied or waived, other than by reason of some act or omission by any of
the Holders, or (d) if less than 10% of the Registrable
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<PAGE> 3
Securities with respect to which registration has been requested by any Holder
have been registered pursuant to such registration statement.
2.1.4. Priority in Requested Registrations. The
requested registration pursuant to this Section 2.1 shall not involve an
underwritten offering unless the Company shall first give its written approval
of each firm that acts as an underwriter in the offering, such approval not to
be unreasonably withheld. If the requested registration pursuant to this
Section 2.1 involves an underwritten offering, and the managing underwriter
shall advise the Company in writing that, in its opinion, the number or
quantity of shares or securities requested to be included in such registration
exceeds the number which can be sold in such offering within a price range
acceptable to the Holders (such writing to state the basis of such opinion and
the approximate number of shares or securities which may be included in such
offering without such effect), the Company will include in such registration,
to the extent of the number which the Company is so advised can be sold in such
offering, (a) first, Registrable Securities requested to be included in such
registration pursuant to Section 2.1.1 by the Holders (provided, however, that
if the Company is so advised that less than all such Registrable Securities can
be so sold in such offering, such Registrable Securities shall be included pro
rata in proportion to the respective holdings of such Registrable Securities by
the Holders, unless the Holders otherwise agree), and (b) second, such other
securities of the Company which the Company, in its discretion, may designate,
whether such securities are to be sold by the Company for its own account or
are to be sold by other security holders of the Company. Notwithstanding the
aforesaid or any other provision in this Agreement to the contrary, the right
of the Holders to have first priority in a requested registration pursuant to
Section 2.1.1 is subject to other security holders registration rights which
are in existence on the date hereof and may result in such other security
holders ranking pari passu with the Holders.
2.1.5. One Request. After a registration statement
has become effective under this Section 2.1, the Holders shall not be entitled
to make any further requests under this Section 2.1.
2.1.6. Delays in Registration. The Company may
delay the filing of a registration statement for up to 90 days if at the time
of a request under this Section 2.1:
(a) there is material undisclosed information
concerning the Company or any subsidiary of the Company which has not been
disclosed for business reasons; or
(b) the Company is about to commence an offering
of securities of the Company or any subsidiary of the Company and the
investment banker for the Company shall advise the Company in writing (with a
copy to the Holders) that, in its reasonable opinion, the offering contemplated
by the Company would be adversely affected by the sale of Registrable
Securities by the Holders;
provided, that if the Company exercises its rights under this Section 2.1.6,
the Holders, acting by delivery to the Company of a written request of Holders
holding a majority of the
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<PAGE> 4
Registrable Securities prior to effectiveness of such registration statement,
may revoke the request for registration under this Section 2.1.
2.1.7. Suspension of Registration. The Company may
suspend the effectiveness of any registration statement, including any
registration statement filed pursuant to Section 2.2, or, without suspending
such effectiveness, instruct the Holders that no sales of Registrable
Securities included in such registration statement may be made if, in the
Company's reasonable judgment, the Company would be required to disclose any
actions taken or proposed to be taken by the Company, which disclosure would
have a material adverse effect on the Company or on such actions (a "Suspension
Period") by providing the Holders with written notice of such Suspension Period
and the reasons therefor. The Company shall use its reasonable efforts to
provide such notice a reasonable number of days prior to the commencement of a
Suspension Period, provided that in any event the Company shall provide such
notice no later than the commencement of such Suspension Period. The
Suspension Period shall not exceed 90 days in any of the consecutive 365 day
periods, commencing on the date hereof, during which the Holders are entitled
to make a request pursuant to Section 2.1. In addition, the Company shall not
be required to keep any registration statement effective, or may without
suspending such effectiveness instruct the Holders included in such
registration statement not to sell such Registrable Securities, during any
period during which the Company is instructed, directed, ordered or otherwise
requested by any governmental agency or self-regulatory organization to stop or
suspend such trading or sales ("Supplemental Suspension Period") and such
Supplemental Suspension Period shall not be included in the calculation of the
Suspension Period referred to above. The Company shall give prompt written
notice to the Holders of the termination of any Suspension Period or
Supplemental Suspension Period.
2.2. Incidental Registration.
2.2.1. Right to Include Registrable Securities. If
the Company at any time after an IPO proposes to register the sale by the
Company for cash of any of its common stock of any class under the Securities
Act (other than pursuant to Section 2.1) by a registration on Form S-1, S-2 or
S-3 or any successor or similar form(s) (except registrations on such forms
solely for registration of shares in connection with an employee benefit plan
or a merger, consolidation or other comparable acquisition), it will at such
time give prompt written notice to the Holders of its intention to do so and of
the Holders' rights under this Section 2.2. Upon the written request to
register Registrable Securities in such registration by Holders owning not less
than 50% of the Registrable Securities then outstanding made within 20 days
after the date of any such notice (which request shall specify the intended
method of disposition thereof), the Company will deliver a copy of such notice
to all other Holders (which other Holders may elect to join in such request by
delivering to the Company a written request therefor within 10 days after such
delivery by the Company). The Company shall use its reasonable efforts to
effect in good faith the registration under the Securities Act of all
Registrable Securities owned by the Holders making or joining such request, to
the extent requisite to permit the disposition (in accordance with the intended
method or methods thereof
4
<PAGE> 5
as aforesaid) of the Registrable Securities so to be registered; provided,
however, that if, at any time after giving written notice of its intention to
register any securities and prior to the effective date of the registration
statement filed in connection with such registration, the Company shall
determine for any reason or for no reason not to register or to delay
registration of such securities, the Company may, at its election, give written
notice of such determination to the Holders and, thereupon (a) in the case of a
determination not to register, shall be relieved of its obligation to register
any Registrable Securities in connection with such registration (but not from
any obligation of the Company to pay the Registration Expenses in connection
therewith), and (b) in the case of a determination to delay registering, shall
be permitted to delay registering any Registrable Securities, for the same
period as the delay in registering such other securities. The Company will pay
all Registration Expenses in connection with registration of Registrable
Securities requested pursuant to this Section 2.2. All Selling Expenses in
connection with any registration of Registrable Securities pursuant to this
Section 2.2 shall be borne by the seller or sellers of such Registrable
Securities in such proportions upon which such sellers may agree; provided,
however, that if such sellers cannot otherwise agree, they shall bear such
expenses (other than their individual counsel fees which shall be borne by them
directly) in direct proportion to the number of Registrable Securities that
they are seeking to have registered. The Holders shall be entitled to
participate in three registrations under this Section 2.2, provided that (a) a
Holder shall forfeit the right to one registration for each registration
effected under this Section 2.2 in which such Holder does not request or join
in a request for such registration and (b) if pursuant to Section 2.2.2, such
Holders have been unable to dispose of all such Registrable Securities after
three such registrations, the Holders shall be entitled to participate in such
number of additional registrations pursuant to this Section 2.2 as may be
required to dispose of all remaining Registrable Securities owned by such
Holders, provided that no Holder shall be entitled to the benefit of clause (b)
if it shall not have requested or joined in a request for registration made
pursuant to this Section 2.2.
2.2.2. Priority in Incidental Registrations. If (a)
a registration pursuant to this Section 2.2 involves an underwritten offering
of the securities so being registered, to be distributed by or through one or
more underwriters of recognized standing, and (b) the managing underwriter of
such underwritten offering shall inform the Company in writing of its opinion
that the number of securities requested to be included in such registration
would materially adversely affect its ability to effect such offering (such
opinion to state the reasons therefor and the approximate number of securities
which may be included in such offering without such effect), then the Company
will include in such registration, to the extent of the number which the
Company is so advised can be sold in such offering, (i) first, all securities
proposed by the Company to be sold for the account of (x) a security holder
exercising a demand registration right, if any, and (y) James A. Kofalt, pari
passu, (ii) second, all securities proposed by the Company to be sold for its
own account or the account of any security holders (excluding VPC and its
affiliates) other than Registrable Securities, and (iii) third, all securities
proposed by the Company to be sold for the account of VPC and its affiliates
and such Registrable Securities requested to be included in such registration,
pari passu (provided, however, that if the Company is so advised that less than
all such Registrable
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<PAGE> 6
Securities can be so sold in such offering, such Registrable Securities shall
be included pro rata in proportion to the respective holdings of such
Registrable Securities by the Holders, unless the Holders otherwise agree).
Notwithstanding the aforesaid, if a registration pursuant to Section 2.2 does
not involve a demand registration by a security holder of the Company, then
securities proposed by the Company to be sold for the account of James A.
Kofalt shall rank pari passu with securities proposed by the Company to be sold
for its own account and the account of any security holders other than (x) VPC
and its affiliates and (y) the Registrable Securities.
2.3. Registration Procedures.
2.3.1. Procedures. If and whenever the Company is
required to use reasonable efforts in good faith to effect the registration of
any Registrable Securities under the Securities Act as provided in Sections 2.1
and 2.2, the Company will as promptly as practicable under the circumstances:
(a) prepare and file with the Commission the
requisite registration statement to effect such registration and thereafter use
reasonable efforts in good faith to cause such registration statement to become
effective, provided that the Company may discontinue any registration of
securities which are not Registrable Securities (and, under the circumstances
specified in Section 2.2.1, securities which are Registrable Securities) at any
time prior to the effective date of the registration statement relating
thereto;
(b) prepare and file with the Commission such
amendments and supplements to such registration statement and the prospectus
used in connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such registration
statement for 60 days or such earlier time as all of such securities have been
disposed of in accordance with the intended methods of disposition by the
Holders set forth in such registration statement, subject to any Suspension
Period or Supplemental Suspension Period which will suspend any remaining
portion of such 60-day period until termination of such Suspension Period or
Supplemental Suspension Period;
(c) promptly furnish to the Holders such number
of conformed copies of such registration statement and of each such amendment
and supplement thereto (in each case including all exhibits), such number of
copies of the prospectus contained in such registration statement (including
each preliminary prospectus and any summary prospectus) and any other
prospectus filed in accordance with Rule 424 under the Securities Act, in
conformity with the requirements of the Securities Act, and such other
documents, as the Holders may reasonably request;
(d) use reasonable efforts in good faith to
register or qualify all Registrable Securities and other securities covered by
such registration statement under such other securities or blue sky laws of
such jurisdictions as the Holders shall reasonably request,
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<PAGE> 7
to keep such registration or qualification in effect for so long as such
registration statement remains in effect, and take any other action which may
be reasonably necessary or advisable to enable the Holders to consummate the
disposition in such jurisdictions of its securities covered by such
registration statement, except that the Company shall not for any such purpose
be required to qualify generally to do business as a foreign corporation in any
jurisdiction wherein it would not but for the requirements of this Section
2.3.1(d) be obligated to be so qualified or to consent to general service of
process or to the imposition of taxes on, or measured by, all or any part of
the income of the Company, in any such jurisdiction;
(e) use reasonable efforts in good faith to cause
all Registrable Securities covered by such registration statement to be
registered with or approved by such other federal or state governmental
agencies or authorities as may be necessary to enable the Holders to consummate
the disposition of such Registrable Securities;
(f) immediately notify the Holders, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, upon discovery that, or upon the happening of any event as a
result of which, the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made, and at the request of the Holders promptly prepare and furnish
to the Holders a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
Holders of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
the light of the circumstances then existing;
(g) furnish to the Holders at least two business
days prior to the filing thereof a copy of any amendment or supplement to such
registration statement or prospectus and not file any thereof to which the
Holders shall have reasonably objected on the grounds that such amendment or
supplement does not comply in all material respects with the requirements of
the Securities Act or of the rules or regulations thereunder;
(h) otherwise use reasonable efforts in good
faith to comply with all applicable rules and regulations of the Commission,
and make available to its security holders, as soon as reasonably practicable,
an earnings statement covering the period of at least 12 months, but not more
than 18 months, beginning with the first full calendar month after the
effective date of such registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act;
(i) provide and cause to be maintained a transfer
agent and registrar for all Registrable Securities covered by such registration
statement from and after a date not later than the effective date of such
registration statement;
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<PAGE> 8
(j) use its best efforts to list all Registrable
Securities covered by such registration statement on the principal securities
exchange on which Registrable Securities of the type covered by such
registration statement are then listed;
(k) notify Holders as to the filing of the
registration statement and of all amendments or supplements thereto filed prior
to the effective date of said registration statement;
(l) notify Holders promptly after the Company
shall receive notice thereof of the time when said registration statement
became effective or when any amendment or supplement to any prospectus forming
a part of said registration statement has been filed;
(m) notify Holders promptly of any request by the
Commission for the amendment or supplementation of such registration statement
or prospectus or for additional information; and
(n) advise Holders promptly after the Company
shall receive notice or obtain knowledge thereof of the issuance of any stop
order by the Commission suspending the effectiveness of any such registration
statement or amendment thereto or the initiation or threatening of any
proceeding for that purpose, and promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal promptly if such stop
order should be issued.
2.3.2. Furnish Information. The Company may require
the Holders to furnish the Company, and the Holders shall so furnish, such
information regarding the Holders and the distribution of the Registrable
Securities as the Company may from time to time reasonably request in writing
and as shall be required by law or by the Commission in connection therewith.
2.3.3. Discontinuance. The Holders agree that upon
receipt by them of any notice from the Company of the happening of any event of
the kind described in Section 2.3.1(f) or of any Suspension Period or
Supplemental Suspension Period pursuant to Section 2.1.7, the Holders will
forthwith discontinue the Holders' disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until the Holders' receipt, as the case may be, of the copies of the
supplemented or amended prospectus contemplated by Section 2.3.1(f) or notice
of the termination of such Suspension Period or Supplemental Suspension Period.
If so directed by the Company, the Holders will deliver to the Company (at the
Company's expense) all copies, other than permanent file copies, then in the
Holders' possession of the prospectus relating to such Registrable Securities
current at the time of receipt of such notice of an event described in Section
2.3.1(f).
2.4. Underwritten Offerings.
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2.4.1. Underwriting Agreement. If requested by the
underwriters for any underwritten offering of Registrable Securities pursuant
to a registration requested under Section 2.1 or 2.2, the Company will enter
into an underwriting agreement with such underwriters for such offering, such
agreement to contain such representations and warranties by the Company and
such other terms as are customarily contained in underwriting agreements of
this type, including, without limitation, indemnities to the effect and to the
extent provided in Section 2.6. The Holders participating in such offering
shall be parties to such underwriting agreement. The Holders shall be required
to make such representations and warranties to and agreements with the Company
and the underwriters as are customarily contained in underwriting agreements of
this type, including, without limitation, representations, warranties and
agreements, including indemnities, regarding the Holders, the Registrable
Securities and the Holders' intended method or methods of distribution and any
other representation required by law.
2.4.2. Holdback Agreements. The Holders agree by
acquisition of the Registrable Securities, if so required by the managing
underwriter, not to effect any public sale or distribution of any Registrable
Securities during the seven days prior to the date on which any underwritten
registration pursuant to Section 2.1 or 2.2 becomes effective and the 180 days
thereafter, except as part of such underwritten registration or to the extent
that any of the Holders is prohibited by applicable law from agreeing to
withhold Registrable Securities from sale or is acting in its capacity as an
investment adviser.
2.5. Preparation; Reasonable Investigation. In connection
with the preparation and filing of each registration statement under the
Securities Act pursuant to this Agreement, the Company will give the Holders,
the underwriters, if any, and their respective counsel and accountants, the
opportunity to consult with the Company with respect to the preparation of such
registration statement, each prospectus included therein or filed with the
Commission, and each amendment thereof or supplement thereto, will give each of
them such access to its books and records, and such opportunities to discuss
the business of the Company with its officers and the independent public
accountants who have certified its financial statements as shall be necessary,
to conduct a reasonable investigation within the meaning of the Securities Act.
2.6. Indemnification.
2.6.1. Indemnification by the Company. In the event
of any registration of any securities of the Company under the Securities Act,
the Company will, and hereby does, indemnify and hold harmless in the case of
any registration statement filed pursuant to Section 2.1 or 2.2, each Holder
against any losses, claims, damages or liabilities to which such Holder may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such securities are registered under the
Securities Act, and preliminary prospectus, final prospectus
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or summary prospectus contained therein, or any amendment or supplement
thereto, or any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein in
the light of the circumstances under which they were made not misleading, and
the Company will reimburse each of the Holders for any legal or any other
expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, liability, action or proceeding; provided,
however, that the Company shall not be liable in any such case to the extent
that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in such
registration statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company through an instrument duly
executed by or on behalf of the Holders specifically stating that it is for use
in the preparation thereof; and provided further, however, that the Company
shall not be liable to any of the Holders, in any such case to the extent that
any such loss, claim, damage, liability (or action or proceeding in respect
thereof) or expense arises out of such Holder's failure to send or give a copy
of the final prospectus, as the same may be then supplemented or amended, to
the Person asserting an untrue statement or alleged untrue statement or
omission or alleged omission at or prior to the written confirmation of the
sale of Registrable Securities to such Person if such statement or omission was
corrected in such final prospectus and copies of such final prospectus were
delivered to the Holders prior to the written confirmation of the sale of
Registrable Securities to such Person asserting an untrue statement or alleged
untrue statement or omission or alleged omission. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf
of the Holders and shall survive the transfer of such securities by the
Holders.
2.6.2. Indemnification by the Holders. The Company
may require, as a condition to including any Registrable Securities in any
registration statement filed pursuant to Section 2.1 or 2.2, that the Company
shall have received an undertaking satisfactory to it from the Holders holding
such Registrable Securities, to indemnify and hold harmless (in the same manner
and to the same extent as set forth in Section 2.6.1) the Company, each
director of the Company, each officer of the Company and each other Person, if
any, who controls the Company within the meaning of the Securities Act or the
Exchange Act, with respect to any statement or alleged statement in or omission
or alleged omission from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, if such statement or alleged statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company through an instrument duly
executed by the Holders for use in the preparation of such registration
statement, preliminary prospectus, final prospectus, summary prospectus,
amendment or supplement. Such indemnity shall remain in full force and effect,
regardless of any investigation made by or on behalf of the Company or any such
director, officer or controlling person and shall survive the transfer of such
securities by the Holders.
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<PAGE> 11
2.6.3. Contribution. If for any reason the
foregoing indemnity is unavailable under either Section 2.6.1 or 2.6.2, then
the indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (a) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying party on the one hand and the indemnified
party on the other, or (b) if the allocation provided by subdivision (a) above
is not permitted by applicable law or provides a lesser sum to the indemnified
party than is appropriate to reflect not only the relative benefits received by
the indemnifying party on the one hand and the indemnified party on the other
but also the relative fault of the indemnifying party and the indemnified party
as well as any other relevant equitable considerations, then in such proportion
as is appropriate to reflect the relative fault of the indemnifying party and
the indemnified party as well as any other equitable considerations.
Notwithstanding the foregoing, neither party shall be required to contribute
any amount in excess of the amount the indemnifying party would have been
required to pay to an indemnified party if the indemnity under this Section 2.6
was available. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation.
2.6.4. Notices of Claims, etc. Promptly after
receipt by an indemnified party of notice of the commencement of any action or
proceeding involving a claim referred to in the preceding subdivisions of this
Section 2.6, such indemnified party will, if a claim in respect thereof is to
be made against an indemnifying party, give written notice to the latter of the
commencement of such action, provided that the failure of an indemnified party
to give notice as provided herein shall not relieve the indemnifying party of
its obligations under the preceding subdivisions of this Section 2.6, except to
the extent that the indemnifying party is actually prejudiced by such failure
to give notice. In case any such action is brought against an indemnified
party, unless in such indemnified party's reasonable judgment a conflict of
interest between such indemnified and indemnifying parties may exist in respect
of such claim, the indemnifying party shall be entitled to participate in and
to assume the defense thereof, jointly with any other indemnifying party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such indemnified party, and after notice from the indemnifying
party to such indemnified party of its election so to assume the defense
thereof, the indemnifying party shall not be liable to such indemnified party
for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect of such claim or litigation.
2.6.5. Other Indemnification. Indemnification or
contribution similar to that specified in the preceding subdivisions of this
Section 2.6 (with appropriate modifications) shall be given by the Company and
the Holders with respect to any required registration or other qualification of
securities under any federal or state law or regulation of any governmental
authority other than the Securities Act.
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<PAGE> 12
2.6.6. Indemnification Payments. The
indemnification or contribution required by this Section 2.6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or expense, loss, damage or
liability is incurred.
3. Definitions. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
Commission: The Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
Effective Period: As defined in Section 1 of this Agreement.
Exchange Act: The Securities Exchange Act of 1934, or any
similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. Reference to a
particular section of the Securities Exchange Act of 1934 shall include a
reference to the comparable section, if any, of any similar federal statute.
Person: A corporation, an association, a partnership, an
organization, a business, an individual, a governmental or political
subdivision thereof or a governmental agency.
Permitted Transferees: means any transferee permitted by the
Stockholders Agreement other than pursuant to Sections 2.2(a)(i) and 2.2(a)(ii)
of the Stockholders Agreement.
Registration Expenses: All expenses incurred by the Company
in complying with Section 2, including, without limitation, all registration
and filing fees, printing expenses, expenses of complying with securities or
blue sky laws (including fees and disbursements of counsel for the Company and
counsel for any underwriters of the offering, but excluding fees and
disbursements of counsel representing the Holders), all fees and disbursements
of counsel for the Company and any accountants' fees and expenses incident to
or required by any such registration.
Related Registrable Securities: means, with respect to any
shares of Common Stock or Preferred Stock held by the Holder on the date hereof
and the Common Stock into which the Preferred Stock held by the Holder on the
date hereof may be converted, any securities of the Company or any other Person
issued or issuable with respect to any such shares of Common Stock or Preferred
Stock, by way of a dividend or stock split or other distribution on shares of
Common Stock or Preferred Stock or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise.
12
<PAGE> 13
Request Date: The date on which the Holders deliver a request
for registration pursuant to Section 2.1.1.
Securities Act: The Securities Act of 1933, or any similar
federal statute, and the rules and regulations of the Commission thereunder,
all as the same shall be in effect at the time. References to a particular
section of the Securities Act of 1933 shall include a reference to the
comparable section, if any, of any such similar federal statute.
Selling Expenses: All underwriting fees and commissions and
any transfer or similar taxes to be incurred by any seller and all fees and
disbursements of counsel for any seller (other than counsel described in the
definition of "Registration Expenses").
Stockholder Agreement: means the Stockholder Agreement dated
as of __________ ___, 1998 among the Company, VPC Corporation, Le Groupe
Videotron Ltee and ICS, Nomura and MCI.
Supplemental Suspension Period: As defined in Section 2.1.7.
Suspension Period: As defined in Section 2.1.7.
Trading Day: Any day on which trading takes place on the
principal national securities exchange on which the Common Stock is then listed
or admitted to trading, or, if the Common Stock is not then listed or admitted
to trading on a national securities exchange, any day on which trading takes
place on the over-the-counter market and prices reflecting such trading are
published by NASDAQ.
VPC: means VPC Corporation, a Delaware corporation.
4. Amendments and Waivers. This Agreement may be amended and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company shall have obtained
the written consent to such amendment, action or omission to act, of the
Holders holding a majority of the Registrable Securities. The Holders shall be
bound by any consent authorized by this Section 4, whether or not such
Registrable Securities shall have been marked to indicate such consent.
5. Nominees for Beneficial Owners. If any Registrable
Securities are held by a nominee for the beneficial owner thereof, the
beneficial owner thereof may, at its election, be treated as the holder of such
Registrable Securities for purposes of any request or other action by any
holder or holders of Registrable Securities pursuant to this Agreement or any
determination of any number or percentage of shares of Registrable Securities
held by any holder or holders of Registrable Securities contemplated by this
Agreement provided that the Company receives notice of such election from the
beneficial owner and assurances reasonably satisfactory to the Company of such
owner's beneficial ownership of such
13
<PAGE> 14
Registrable Securities (which may, in the Company's discretion, consist of a
written acknowledgment of such beneficial ownership from the nominee).
6. Notices. All communications provided for hereunder shall
be in writing and sent by first-class mail and (a) if addressed to the Company,
at 1111 West Mockingbird Lane, Dallas, Texas 75247, Attention: General
Counsel,, with a copy to Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of
the Americas, New York, New York, 10036, Attention: Eric Simonson, or at such
other address, or to the attention of such other officer, as the Company shall
have furnished in writing to the Holders, or (b) if to any of the Holders, to
such address of such Holder as shall be shown on the record books of the
Company.
7. Assignment. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto and, with
respect to the Company, its respective successors and permitted assigns and,
with respect to the Holder, any holder of any Registrable Securities which
acquires Registrable Securities not in violation of the Stockholder Agreement.
This Agreement may not be assigned by the Company without prior written consent
of the holders of a majority in interest of the Registrable Securities
outstanding at the time such consent is requested.
8. Descriptive Headings. The descriptive headings of the
several sections and paragraphs of this Agreement are inserted or reference
only and shall not limit or otherwise affect the meaning hereof.
9. Governing Law. This Agreement shall be construed and
enforced in accordance with, and the rights of the parties shall be governed
by, the laws of the State of New York.
10. Counterparts. This Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed an
original, but all such counterparts shall together constitute one and the same
instrument.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have duly executed this
Agreement, all as of the date first written above.
OPTEL, INC.
By: /s/ MICHAEL E. KATZENSTEIN
------------------------------------
Name: Michael E. Katzenstein
Title: Vice President Legal
Affairs, General Counsel and
Secretary
By: /s/ STEPHEN DUBE
------------------------------------
Name: Stephen Dube
Title: Vice President Operations
INTERACTIVE CABLE SYSTEMS, INC.
By: /s/ KEVIN SCHOTTLAENDER
------------------------------------
Name: Kevin Schottlaender
Title: President
NOMURA HOLDING AMERICA, INC.
By: /s/ DENNIS DOLAN
------------------------------------
Name: Dennis Dolan
Title: Managing Director
MCI TELECOMMUNICATIONS CORPORATION
By: /s/ WILLIAM ARMISTEAD
------------------------------------
Name: William Armistead
Title: Vice President
<PAGE> 1
EXHIBIT 10.7
================================================================================
STOCKHOLDERS AGREEMENT
among
OPTEL, INC.
NOMURA HOLDING AMERICA INC.
MCI TELECOMMUNICATIONS CORPORATION
VPC CORPORATION
LE GROUPE VIDEOTRON LTEE
and
INTERACTIVE CABLE SYSTEMS, INC.
Dated as of April 9, 1998
================================================================================
<PAGE> 2
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT (the "Agreement"), dated as of
April 9, 1998, among Optel, Inc., a Delaware corporation (the "Corporation"),
VPC Corporation, a Delaware corporation ("VPC"), Le Groupe Videotron Ltee, a
Quebec corporation ("Videotron"), Nomura Holding America, Inc., a Delaware
corporation ("Nomura"), MCI Telecommunications Corporation, a Delaware
corporation ("MCI") and Interactive Cable Systems, Inc., a California
corporation ("ICS" and together with Nomura, MCI and any of their respective
transferees other than pursuant to a Transfer under Section 2.2(a)(i) and
2.2(a)(ii), the "Stockholders").
WHEREAS, ICS is the holder of the aggregate of $60 million
face amount of the issued and outstanding shares of Series B preferred stock,
par value $.01 per share ("Series B Preferred Stock"), of the Corporation and
165,746 of the issued and outstanding shares of Class A common stock, par value
$.01 per share ("Class A Common Stock"), of the Corporation;
WHEREAS, pursuant to the Purchase Agreement, dated as of March
4, 1998, between the Corporation and ICS, as amended through the date hereof
(the "Purchase Agreement"), ICS was issued the above mentioned shares of Series
B Preferred Stock and Class A Common Stock as partial payment for the Purchased
Assets (as such term is defined in the Purchase Agreement), subject to the
terms and conditions of the Purchase Agreement; and
WHEREAS, the ICS and the Corporation believe it to be in the
best interests of the Stockholders and the Corporation that they enter into
this Agreement providing for certain rights and restrictions with respect to
the shares of Series B Preferred Stock and Class A Common Stock owned by the
Stockholders or their transferees.
NOW, THEREFORE, in consideration of the mutual covenants and
obligations set forth in this Agreement, the parties hereto agree as follows:
1. Definitions.
"Affiliate" means, as applied to any Person, any other Person
that directly, or indirectly through one or more intermediaries, controls or is
controlled by, or is under common control with such Person.
"Class A Common Stock" has the meaning set forth in the
preamble to this Agreement.
"Class B Common Stock" means the Class B Common Stock, par
value $.01 per share, of the Corporation.
<PAGE> 3
"Class C Common Stock" means the Class C Common Stock, par
value $.01 per share, of the Corporation.
"Common Stock" means Class A Common Stock, Class B Common
Stock, Class C Common Stock or other common stock of the Corporation.
"Competitor" means any Person that is a franchise cable or
private cable operator or an incumbent local exchange carrier, or any Affiliate
of such Person.
"Escrow Agents" means the Consent Escrow Agent and the
Crossings Escrow Agent (as such terms are defined in the Purchase Agreement).
"Escrow Agreements" means the Consent Escrow Agreement and the
Crossings Escrow Agreement (as such terms are defined in the Purchase
Agreement).
"ICS Amended and Restated Note Purchase Agreement" means the
Amended and Restated Note Purchase Agreement, dated as of October 15, 1997,
among ICS, Nomura, MCI and Nomura International Trust Company, as collateral
agent, as amended, supplemented or otherwise modified from time to time in
accordance with its terms.
"ICS Secured Lenders" means the holders from time to time of
(i) the notes issued pursuant to ICS Amended and Restated Note Purchase
Agreement and (ii) the Additional Notes (as such term is defined in the ICS
Amended and Restated Note Purchase Agreement).
"IPO Date" means the first date on which the Corporation
receives the net proceeds of a Public Offering.
"Person" means any individual, partnership, company,
corporation, limited liability company, trust, estate, unincorporated
association, syndicate, joint venture or unincorporated organization, any
government or any department, agency or political subdivision thereof, or any
other entity.
"Public Offering" means any sale of shares of capital stock of
the Corporation (including Common Stock and Preferred Stock) to the public
pursuant to an offering registered under the Securities Act.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
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<PAGE> 4
"Series B Preferred Stock" has the meaning set forth in the
preamble to this Agreement.
"Stockholder Shares" means (i) any Series B Preferred Stock
held at any time, directly or indirectly, by a Stockholder, (ii) any Class A
Common Stock held at any time, directly or indirectly, by a Stockholder,
including without limitation, any Class A Common Stock issued or issuable upon
conversion of the Series B Preferred Stock, and (iii) any equity securities
issued or issuable directly or indirectly with respect to the securities
referred to in clause (i) or (ii) above by way of any stock split, reverse
stock split, stock dividend or other subdivision or combination.
"Transfer" means any direct or indirect, sale, assignment,
mortgage, transfer, pledge, hypothecation or other disposal of or encumbrance
of any Stockholder Shares including, without limitation, transfers to other
Stockholders, dispositions by gift, distributions in liquidation by a
corporation or partnership, transfers through the granting of participation
rights or otherwise and transfers or other dispositions by operation of law.
"Videotron" has the meaning set forth in the preamble to this
Agreement.
"VPC" has the meaning set forth in the preamble to this
Agreement.
"VPC Shares" means any Common Stock held, directly or
indirectly, by VPC, including without limitation any Common Stock issued or
issuable upon conversion of the Corporation's 15% convertible notes held by
VPC, whether or not the notes held by VPC are at the time convertible in
accordance with their terms, and (ii) any equity securities issued or issuable
directly or indirectly with respect to the securities referred to in clause (i)
above by way of any stock split, reverse stock split, stock dividend or other
subdivision or combination.
2. Restrictions on Transfer of Stockholder Shares.
2.1 Transfer in Violation of this Agreement. Any
Transfer or attempted Transfer of any Stockholder Shares in violation of any
provision of this Agreement shall be null and void, and the Corporation shall
not record such Transfer on its books or treat any purported transferee of such
Stockholder Shares as the owner of such shares for any purpose.
2.2 Transfer of Stockholder Shares. (a) Subject to
Sections 2, 3, 4, and 5, the Stockholder Shares are transferable only pursuant
to (i) a Public Offering, (ii) transactions under Rule 144 or Rule 144A (or any
similar rule or rules then in
3
<PAGE> 5
effect) of the SEC if such rule is available and (iii) any other legally
available means of Transfer. Notwithstanding the aforesaid, under no
circumstances may any Stockholder Transfer any Stockholder Shares to any
Competitor.
(b) No Transfer (other than pursuant to any bona fidepledge by
ICS of any of the Stockholder Shares to secure the obligations of ICS to the
ICS Secured Lenders) of any Stockholder Shares to a third party or a Permitted
Transferee (other than the Escrow Agents) shall be permitted unless such third
party or Permitted Transferee, as the case may be, shall agree in writing to be
bound by the terms and conditions of this Agreement pursuant to an instrument
of assumption reasonably satisfactory in form and substance to the Corporation
and such third party or Permitted Transferee, as the case may be, makes the
representations and warranties set forth in Exhibit B to this Agreement;
provided, however, that the provisions of this Section 2.2(b) shall not apply
to any Transfer made pursuant to Rule 144 or Rule 144A (or any similar rule or
rules then in effect) under the Securities Act.
(c) The provisions of Sections 3, 4, and 5 hereof shall not
apply to the following Transfers (each of which shall be deemed to constitute a
"Permitted Transfer," and each transferee of a Permitted Transfer shall be
referred to herein as a "Permitted Transferee"): (i) Transfers by any
Stockholder to any of the ICS Secured Lenders, (ii) Transfers by ICS to any
Escrow Agent pursuant to the Escrow Agreements, (iii) any bona fide pledge by
ICS of any Stockholder Shares to secure the obligations of ICS to the ICS
Secured Lenders and (iv) any Transfer by a Stockholder to no more than five (5)
Affiliates thereof.
(d) Notwithstanding anything to the contrary contained in this
Agreement regarding the Transfer of Stockholder Shares, shares of Series B
Preferred Stock and Class A Common Stock held in the Consent Escrow and
Crossings Escrow pursuant to the Escrow Agreements shall be held and released
to the Corporation or Stockholder in accordance with the terms of the
respective Escrow Agreements and shall not be transferable by any Stockholder
unless and until released to any Stockholder (or its designee) pursuant to the
terms of such agreements, whereupon such shares shall become Stockholder Shares
and shall become subject to all the terms and conditions of this Agreement.
(e) In connection with the proposed Transfer of any
Stockholder Shares described in clause (ii) or (iii) of Section 2.2, the holder
thereof shall deliver written notice to the Corporation describing in
reasonable detail the proposed Transfer, together with an opinion of counsel
reasonably acceptable to the Corporation to the effect that such proposed
4
<PAGE> 6
Transfer of Stockholder Shares may be effected without registration of such
Stockholder Shares under the Securities Act.
(f) Upon the request of any holder of Stockholder Shares, the
Corporation shall remove the legend set forth in Section 7 from the
certificates for such holder's Stockholder Shares; provided, that such
Stockholder Shares are, in the opinion of counsel reasonably satisfactory to
the Corporation, eligible for sale pursuant to Rule 144(k)(or any similar rule
or rules then in effect) of the SEC.
(g) For as long as the Corporation is required by law or
pursuant to an indenture relating to securities of the Corporation, the
Corporation shall timely make all reports and filings with the Securities and
Exchange Commission so that Rule 144 ("Rule 144") of the Rules and Regulations
promulgated under the Securities Act of 1933, as amended shall be available for
the Stockholders (subject to the terms, conditions and requirements of Rule
144).
3. Optional Participation in Sale of VPC Shares ("Tag
Along Rights"). (a) Prior to the IPO date and excluding any and all Transfers
of VPC Shares by VPC to its wholly owned subsidiaries or wholly-owned
subsidiaries of Videotron or pursuant to Rule 144 of the Securities Act, (i) if
VPC elects to Transfer VPC Shares representing more than 50% of the VPC Shares
then held by it (representing in the aggregate at least 10% of the Common Stock
on a fully diluted basis assuming all holders of then outstanding warrants,
options, and convertible securities of the Corporation which are in the money
had converted such convertible securities or exercised such warrants or options
immediately prior to such Transfer) or (ii) if VPC elects to Transfer VPC
Shares which when added to the number of VPC Shares previously Transferred
would cause the aggregate number of VPC Shares Transferred to exceed 50% of the
largest number of VPC Shares held by VPC between August 15, 1997 and the date
of such Transfer or Transfers, as appropriately adjusted for any stock split,
reverse stock split, stock dividend or other division or combination of Common
Stock since August 15, 1997, the Stockholders shall be permitted, subject to
the provisions of this Section 3, to participate in such Transfer at the same
price and on the same terms and conditions applicable to VPC.
(b) VPC shall deliver to each Stockholder a written notice (a
"Transfer Notice") of a proposed Transfer subject to this Section 3 no later
than 15 days prior to the proposed closing thereof. The Transfer Notice shall
make reference to the Stockholder's rights hereunder and shall describe in
reasonable detail: (i) the number of VPC Shares proposed to be Transferred by
VPC (without regard to any reduction in the number of VPC Shares to be
Transferred as a result of the rights of any
5
<PAGE> 7
stockholder of the Corporation to participate in such sale) (the "VPC Sales
Shares"), (ii) the person or group of persons to whom such VPC Shares are
proposed to be Transferred, (iii) the material terms and conditions of the
Transfer, including the amount and form of consideration to be paid therefor,
(iv) the proposed date, time and location of the closing of the Transfer, (v)
the number of Stockholder Shares the Stockholder may sell in such a Transfer,
and (vi) the date by and manner in which the Stockholder must respond in order
to exercise its right to participate pursuant to and in accordance with this
Section 3.
(c) Each Stockholder may exercise its right to participate in
a Transfer pursuant to this Section 3 by delivering to VPC a written notice (a
"Participation Notice") stating its election to do so and specifying the number
of Stockholder Shares held by it to be sold no later than 10 days after the
Transfer Notice was given. Failure to provide a Participation Notice within
such 10-day period shall be deemed to constitute an election by such
Stockholder not to exercise its rights pursuant to this Section 3. VPC shall
have 180 days following the expiration of such 10-day period in which to
Transfer not more than the number of VPC Shares described in the Transfer
Notice on terms not more favorable to VPC than those set forth in the Transfer
Notice. If, at the end of the 180-day period following the expiration of such
10-day period, VPC has not consummated the Transfer of the VPC Shares, VPC may
not Transfer the VPC Shares pursuant to this Section 3 without again fully
complying with the provisions of this Section 3.
(d) Each Stockholder shall have the right to Transfer in a
Transfer subject to this Section 3 up to the same proportion of the Stockholder
Shares then owned by it as the number of such Stockholder Shares (assuming
conversion into Common Stock of any Stockholder Shares that are shares of
Series B Preferred Stock at the conversion price then in effect, or if prior to
the IPO date, assuming a conversion price of $98 per share of Common Stock)
bears to the total number of such Stockholders Shares and VPC Shares.
4. First Offer Rights. At least 30 days prior to any
Transfer of Stockholder Shares by any Stockholder, the Stockholder proposing to
make such Transfer (the "Offering Stockholder") shall deliver a written notice
(the "Transfer Notice") to the Corporation and VPC, specifying in reasonable
detail the number of Stockholder Shares to be transferred, the proposed
purchase price (which shall be payable solely in cash)(the "Proposed Purchase
Price") and the other terms and conditions of the Transfer. The Corporation
may elect to purchase all (but not less than all) of the Stockholder Shares to
be Transferred, upon the same terms and conditions as those set forth in the
Transfer Notice, by delivering a written notice of
6
<PAGE> 8
such election to the Offering Stockholder within 20 days after the Transfer
Notice has been received by the Corporation. If the Corporation has not
elected within such 20 day period (the "Offer Period") to purchase all of the
Stockholder Shares to be Transferred, then VPC may elect to purchase all (but
not less than all) of the Stockholder Shares on the same terms and conditions
as the Corporation. If VPC has not elected within 10 days after the Offer
Period (the "Extended Offer Period") to purchase all of the Stockholder Shares
to be Transferred, the Offering Stockholder may, during the 180-day period
immediately following the expiration of the Extended Offer Period (the "Third
Party Offer Period"), Transfer the Stockholder Shares specified in the Transfer
Notice at an aggregate price which is not less than the Proposed Purchase Price
and on other terms which are not, in the aggregate, more favorable to the
transferee(s) than specified in the Transfer Notice. Stockholder Shares not
Transferred within the Third Party Offer Periods permitted by the foregoing
provisions may not be Transferred thereafter except upon further compliance
with the provisions of this Section 4 as if a Transfer Notice had never been
given with respect thereto.
5. Drag Along Rights. If VPC elects to sell VPC Shares
representing (or Videotron elects to sell shares of the capital stock of VPC
indirectly representing) 50% or more of the voting power of the outstanding
capital stock of the Corporation or 50% or more of the VPC Shares, then VPC (or
Videotron, as the case may be) shall have the right to require each Stockholder
to join in such sale by selling all (but not less than all) of its Stockholder
Shares on the same terms and at the same price as the sale to be effected by
VPC (or Videotron, as the case may be). Such right of VPC (or Videotron, as
the case may be) may be exercised by the delivery by VPC (or Videotron, as the
case may be) to Stockholder, at least fifteen (15) days prior to the
consummation of the proposed sale, of notice of the proposed sale setting forth
a description of the terms of such sale in reasonable detail and stating that
VPC (or Videotron, as the case may be) requires the Stockholder Shares be
included in such sale. In connection with such a sale, each Stockholder will,
if requested by the purchasers, execute, deliver and perform agreements with
the purchasers relating to such sale containing terms and conditions that are
the same in all material respects as those contained in the comparable
agreements to be executed, delivered and performed by VPC (or Videotron, as the
case may be).
6. Inapplicability After IPO. The provisions of Sections
2 (other than 2.2(g)) and 4 of this Agreement shall terminate and be of no
effect following the IPO Date.
7. Stock Certificate Legend. Each certificate
representing Stockholder Shares now or hereafter registered in
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<PAGE> 9
the name of any Stockholder shall be endorsed with a legend substantially as
follows:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO THE
RESTRICTIONS CONTAINED IN A STOCKHOLDER AGREEMENT DATED AS OF
April 9, 1998, AMONG THE CORPORATION, VPC, VIDEOTRON AND ICS
(THE "STOCKHOLDER AGREEMENT"), A COPY OF WHICH IS ON FILE IN
THE OFFICES OF THE CORPORATION AND WILL BE FURNISHED TO THE
HOLDER OF THIS CERTIFICATE UPON WRITTEN REQUEST AND WITHOUT
CHARGE. OWNERSHIP AND TRANSFER OF SUCH SHARES ARE SUBJECT TO
THE TERMS OF THE STOCKHOLDER AGREEMENT. THE HOLDER OF THIS
CERTIFICATE, BY ACCEPTANCE HEREOF, AGREES TO BE BOUND BY ALL
THE TERMS OF THE STOCKHOLDER AGREEMENT, AS THE SAME IS IN
EFFECT FROM TIME TO TIME. NO SALE, ASSIGNMENT, ENCUMBRANCE,
PLEDGE, TRANSFER OR OTHER HYPOTHECATION OR DISPOSITION OF SUCH
SHARES MAY BE MADE EXCEPT IN COMPLIANCE WITH THE STOCKHOLDER
AGREEMENT."
All Stockholders shall be bound by the requirements of such
legends to the extent that such legends are applicable.
8. Ownership of Shareholder Stock. Each Stockholder on
the date hereof represents and warrants that it owns the number of Stockholder
Shares set forth opposite its name on the Stockholder Schedule attached hereto
as Exhibit A.
9. Authorization. Each of the Stockholders and the
Corporation represents and warrants that it has the full right, power and
authority to execute this Agreement and to perform fully its obligations
hereunder, that it has duly executed and delivered this Agreement, and that
this Agreement constitutes its legal, valid and binding obligation, enforceable
against it in accordance with its terms.
10. Conflicts. Each of the Stockholders and the
Corporation represents and warrants that this Agreement does not conflict with
or result in a breach of any term or provision of, or constitute a default
under, any agreement or instrument to which it is a party or by which it is
bound, or any law, rule or regulation or order, judgment or decree of any court
or governmental authority applicable to it, or its certificate of incorporation
or by- laws or any other constituent documents.
8
<PAGE> 10
11. Consents. Each of the Stockholders and the
Corporation represents and warrants that except as expressly contemplated by
this Agreement, no consent, approval or authorization of, or registration,
declaration or filing with, any governmental authority is required to be
obtained or made by it in connection with the execution, delivery or
performance of this Agreement.
12. Amendments, Modifications and Waivers. No amendment,
modification or discharge of this Agreement, and no waiver hereunder, shall be
valid or binding unless set forth in writing and duly executed by the party
against whom enforcement of the amendment, modification, discharge or waiver is
sought. Any such waiver shall constitute a waiver only with respect to the
specific matter described in such writing and shall in no way impair the rights
of the party granting such waiver in any other respect or at any other time.
Neither the waiver by any of the parties hereto of a breach of or a default
under any of the provisions of this Agreement, nor the failure by any of the
parties, on one or more occasions, to enforce any of the provisions of this
Agreement or to exercise any right or privilege hereunder, shall be construed
as a waiver of any other breach or default of a similar nature, or as a waiver
of any of such provisions, rights or privileges hereunder.
13. Assignment. The provisions of this Agreement shall
be binding upon and inure to the benefit of the parties hereto and their
respective heirs, legal representatives, successors and assigns.
14. Termination. Any party to, or person who is subject
to, this Agreement who ceases to own any Stockholder Shares or any interest
therein in accordance with the terms of this Agreement shall cease to be a
party to, or person who is subject to, this Agreement and thereafter shall have
no rights or obligations hereunder; provided that any Stockholder who transfers
Stockholder Shares in breach of this Agreement shall not be relieved of
liability for any such breach.
15. Recapitalization, Exchanges, etc., Affecting the
Stockholder Shares. The provisions of this Agreement shall apply to the full
extent set forth herein with respect to (a) the Stockholder Shares and (b) any
and all shares of capital stock of the Corporation or any successor or assign
of the Corporation (whether by merger, consolidation, sale of assets or
otherwise) which may be issued in respect of, in exchange for, or in
substitution for the Stockholder Shares, by reason of any stock dividend,
split, reverse split, combination, recapitalization, reclassification, merger,
consolidation or otherwise. Except as otherwise provided herein, this
Agreement is not intended to
9
<PAGE> 11
confer upon any person, except for the parties hereto, any rights or remedies
hereunder.
16. Further Assurances. Each party hereto or person
subject hereto shall do and perform or cause to be done and performed all such
further acts and things and shall execute and deliver all such other
agreements, certificates, instruments and documents as any other party hereto
or person subject hereto may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.
17. Governing Law. This Agreement and the rights and
obligations of the parties hereunder and the persons subject hereto shall be
governed by, and construed and interpreted in accordance with, the law of the
State of New York, without giving effect to the choice of law principles
thereof.
18. Invalidity of Provision. The invalidity or
unenforceability of any provision of this Agreement in any jurisdiction shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of this Agreement,
including that provision, in any other jurisdiction.
19. Notices. All notices, requests, demands and other
communications made in connection with this Agreement shall be in writing and
shall be (a) mailed by first-class, registered or certified mail, return
receipt requested, postage prepaid, (b) transmitted by hand delivery or
overnight courier, or (c) transmitted by telecopy and, in each case, addressed
as follows:
(i) if to the Corporation:
1111 West Mockingbird Lane
Ste. 1000
Dallas, Texas 75247
Telecopy: (214) 634-3889
Attention: General Counsel
(ii) if to VPC or Videotron:
300 Avenue Viger Est
Montreal (Quebec)
H2X 3W4
Telecopy: 514) 985-8515
Attention: Senior Vice President, Legal
Affairs and Secretary
(iii) if to ICS:
10
<PAGE> 12
1901 N. Glenville Drive
Suite 800
Richardson, Texas 75081
Attn: Kevin Schottlaender, President and
Carl Koenig
Telecopier: (972) 669-6016 and
(972) 669-6113
(v) if to Nomura:
2 World Financial Center
Building B
New York, New York 10281-1198
Attn: Dennis Dolan
(vi) if to MCI:
1801 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
Attn: William Armistead
or, in each case, at such other address as may be specified in writing to the
other parties hereto. Any notice so addressed shall be deemed to be given (x)
three business days after being mailed by first-class, registered or certified
mail, return receipt requested, postage prepaid, (y) one business day after
being transmitted by telecopy, and (z) upon delivery, if transmitted by hand
delivery or overnight courier.
20. Headings; Execution in Counterparts. The headings
and captions contained herein are for convenience and shall not control or
affect the meaning or construction of any provision hereof. This Agreement may
be executed in any number of counterparts, each of which shall be deemed to be
an original and all of which together shall constitute one and the same
instrument.
21. Entire Agreement. This Agreement and the
Registration Rights Agreement dated as of April 9, 1998 between the
Corporation, ICS, Nomura and MCI embody the entire agreement and understanding
of the parties hereto in respect of the subject matter contained herein. This
Agreement supersedes all prior agreements and understandings between the
parties with respect to such subject matter.
22. Injunctive Relief. The Stockholder Shares cannot
readily be purchased or sold in the open market, and for that reason, among
others, the Corporation and the Stockholders will be irreparably damaged in the
event this Agreement is not specifically enforced. Each of the parties
therefore agrees that in the event of a breach of any provision of this
Agreement the
11
<PAGE> 13
aggrieved party may elect to institute and prosecute proceedings in any court
of competent jurisdiction to enforce specific performance or to enjoin the
continuing breach of this Agreement. Such remedies shall, however, be
cumulative and not exclusive, and shall be in addition to any other remedy
which the Corporation or the Stockholders may have. Each Stockholder hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts in New York for the purposes of any suit, action or other proceeding
arising out of or based upon this Agreement or the subject matter hereof. Each
Stockholder hereby consents to service of process by mail made in accordance
with Section 19.
23. Copies of Agreement. A copy of this Agreement shall
be filed with the Secretary of the Corporation and kept with the records of the
Corporation and will be furnished to a Stockholder upon written request and
without charge.
[Intentionally Left Blank]
12
<PAGE> 14
IN WITNESS WHEREOF, this Agreement has been signed by each of
the parties hereto on the date opposite such party's signature hereto, and
shall be effective as of the date first above written.
Dated: OPTEL INC.
----------------------
By:
----------------------------------
Name: Michael E. Katzenstein
Title: Vice President Legal
Affairs, General Counsel and
Secretary
By:
----------------------------------
Name: Stephen Dube
Title: Vice President Operations
Dated: VPC CORPORATION
-----------------------
By:
----------------------------------
Name:
Title:
By:
----------------------------------
Name:
Title:
Dated: LE GROUPE VIDEOTRON LTEE
-----------------------
By:
----------------------------------
Name:
Title:
By:
----------------------------------
Name:
Title:
<PAGE> 15
Dated: NOMURA HOLDING AMERICA, INC.
-----------------------
By:
----------------------------------
Name: Dennis Dolan
Title: Managing Director
Dated: MCI TELECOMMUNICATIONS CORPORATION
-----------------------
By:
----------------------------------
Name: William Armistead
Title: Vice President
<PAGE> 16
Dated: INTERACTIVE CABLE SYSTEMS, INC.
-----------------------
By:
----------------------------------
Kevin Schottlaender
President
<PAGE> 17
Exhibit A
Stockholder Schedule
<TABLE>
<CAPTION>
Number of Shares Number of Shares of Class A
Name Common Stock of Series B Preferred Stock
---- ---------------- ---------------------------
<S> <C> <C>
Interactive Cable Systems, Inc. 164,271.54 491.1038
Nomura Holding America Inc. 351.6901
MCI Telecommunications 148.3099
Corporation
</TABLE>
16
<PAGE> 18
Exhibit B
Permitted Transferee represents and warrants to the
Corporation, VPC and Videotron, as of April 9, 1998, as follows:
(a) Permitted Transferee is an "Accredited Investor" as that
term is defined in Rule 501(a) promulgated under the Securities Act of 1933, as
amended (the "Act"). Permitted Transferee has experience in analyzing and
investing in companies like The Corporation and is capable of evaluating the
merits and risks of an investment in The Corporation and has the capacity to
protect its own interests. Permitted Transferee is aware of The Corporation's
business affairs and financial condition, and has acquired information about
The Corporation sufficient to reach an informed and knowledgeable decision to
acquire the Series B Preferred Stock and Class A Common Stock. Permitted
Transferee understands that investment in the Series B Preferred Stock and
Class A Common Stock is subject to a high degree of risk. Permitted Transferee
can bear the economic risk of its investment, including the full loss of its
investment, and by reason of its business or financial experience or the
business or financial experience of its professional advisors has the capacity
to evaluate the merits and risks of its investment and protect its own interest
in connection with the purchase of the Series B Preferred Stock and Class A
Common Stock.
(b) The shares of Series B Preferred Stock and Class A
Common Stock to be acquired by the Permitted Transferee pursuant to this
Agreement are being acquired for its own account and with no intention of
distributing or reselling such shares or any part thereof in any transaction
that would be in violation of the securities laws of the United States of
America, or any state, without prejudice, however, to the rights of the
Permitted Transferee at all times to sell or otherwise dispose of all or any
part of such shares under an effective registration statement under the Act, or
under an exemption from such registration available under the Act, and subject,
nevertheless, to the disposition of the Permitted Transferee's property being
at all times within its control. If the Permitted Transferee should in the
future decide to dispose of any of the shares of Series B Preferred Stock or
Class A Common Stock, the Permitted Transferee understands and agrees that it
may do so only in compliance with the Stockholder's Agreement and the Act and
applicable state securities laws, as then in effect. Without limiting the
generality of the preceding sentences of this paragraph (b), the Permitted
Transferee has not offered or sold any portion of the securities to be acquired
by it and the Permitted Transferee has no present intention of reselling or
otherwise disposing of any portion of the securities. The Permitted Transferee
represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant
17
<PAGE> 19
participation to such person or to any third person, with respect to any of the
securities.
(c) Permitted Transferee has independently, and based on
such information as it has deemed appropriate, made its own analysis and
decision to enter into this Agreement, and specifically, has made its own
independent investigation and evaluation of the Series B Preferred Stock and
Class A Common Stock in connection with the transactions contemplated
hereunder. Permitted Transferee further acknowledges that (i) except as
expressly provided in this Agreement, The Corporation makes no representation
or warranty and assumes no responsibility with respect to the accuracy of any
statements, warranties or representations made in or in connection with the
Series B Preferred Stock or the Class A Common Stock or any other information
relating to the Series B Preferred Stock or Class A Common Stock or any other
matter including, without limitation, information received from third parties
or pursuant to Permitted Transferee's due diligence investigations of The
Corporation and without limitations Permitted Transferee acknowledges that The
Corporation has made no representation or warranty with respect to The
Corporation's internal analyses, projections, business plans, or any document
delivered or disclosed to it except as expressly set forth in this Agreement,
and (b) Permitted Transferee has had access to, or will have access on or prior
to the Closing Date to, copies of all documents and information (including the
representations and warranties of The Corporation contained in this Agreement)
as it has deemed appropriate to make its own investment analysis and decision
to enter into this Agreement.
Permitted Transferee
By:
-------------------------------
Name:
Title:
18
<PAGE> 20
MCI Telecommunications Corporation ("MCI"), represents and
warrants to the Corporation, VPC and Videotron, as of April 9, 1998, as
follows:
(a) MCI is an "Accredited Investor" as that term is defined in
Rule 501(a) promulgated under the Securities Act of 1933, as amended (the
"Act"). MCI has experience in analyzing and investing in companies like The
Corporation and is capable of evaluating the merits and risks of an investment
in The Corporation and has the capacity to protect its own interests. MCI is
aware of The Corporation's business affairs and financial condition, and has
acquired information about The Corporation sufficient to reach an informed and
knowledgeable decision to acquire the Series B Preferred Stock and Class A
Common Stock. MCI understands that investment in the Series B Preferred Stock
and Class A Common Stock is subject to a high degree of risk. MCI can bear the
economic risk of its investment, including the full loss of its investment, and
by reason of its business or financial experience or the business or financial
experience of its professional advisors has the capacity to evaluate the merits
and risks of its investment and protect its own interest in connection with the
purchase of the Series B Preferred Stock and Class A Common Stock.
(b) The shares of Series B Preferred Stock and Class A
Common Stock to be acquired by MCI pursuant to this Agreement are being
acquired for its own account and with no intention of distributing or reselling
such shares or any part thereof in any transaction that would be in violation
of the securities laws of the United States of America, or any state, without
prejudice, however, to the rights of MCI at all times to sell or otherwise
dispose of all or any part of such shares under an effective registration
statement under the Act, or under an exemption from such registration available
under the Act, and subject, nevertheless, to the disposition of MCI's property
being at all times within its control. If MCI should in the future decide to
dispose of any of the shares of Series B Preferred Stock or Class A Common
Stock, MCI understands and agrees that it may do so only in compliance with the
Stockholder's Agreement and the Act and applicable state securities laws, as
then in effect. Without limiting the generality of the preceding sentences of
this paragraph (b), MCI has not offered or sold any portion of the securities
to be acquired by it and MCI has no present intention of reselling or otherwise
disposing of any portion of the securities. MCI represents that it does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participation to such person or to any third person,
with respect to any of the securities.
<PAGE> 21
(c) MCI has independently, and based on such information
as it has deemed appropriate, made its own analysis and decision to enter into
this Agreement, and specifically, has made its own independent investigation
and evaluation of the Series B Preferred Stock and Class A Common Stock in
connection with the transactions contemplated hereunder. MCI further
acknowledges that (i) except as expressly provided in this Agreement, The
Corporation makes no representation or warranty and assumes no responsibility
with respect to the accuracy of any statements, warranties or representations
made in or in connection with the Series B Preferred Stock or the Class A
Common Stock or any other information relating to the Series B Preferred Stock
or Class A Common Stock or any other matter including, without limitation,
information received from third parties or pursuant to MCI's due diligence
investigations of The Corporation and without limitations MCI acknowledges that
The Corporation has made no representation or warranty with respect to The
Corporation's internal analyses, projections, business plans, or any document
delivered or disclosed to it except as expressly set forth in this Agreement,
and (b) MCI has had access to, or will have access on or prior to the Closing
Date to, copies of all documents and information (including the representations
and warranties of The Corporation contained in this Agreement) as it has deemed
appropriate to make its own investment analysis and decision to enter into this
Agreement.
MCI TELECOMMUNICATIONS CORPORATION
By:
-------------------------------------
Name: William Armistead
Title: Vice President
<PAGE> 22
Nomura Holding America, Inc. ("Nomura"), represents and
warrants to the Corporation, VPC and Videotron, as of April 9, 1998, as
follows:
(a) Nomura is an "Accredited Investor" as that term is defined
in Rule 501(a) promulgated under the Securities Act of 1933, as amended (the
"Act"). Nomura has experience in analyzing and investing in companies like The
Corporation and is capable of evaluating the merits and risks of an investment
in The Corporation and has the capacity to protect its own interests. Nomura
is aware of The Corporation's business affairs and financial condition, and has
acquired information about The Corporation sufficient to reach an informed and
knowledgeable decision to acquire the Series B Preferred Stock and Class A
Common Stock. Nomura understands that investment in the Series B Preferred
Stock and Class A Common Stock is subject to a high degree of risk. Nomura can
bear the economic risk of its investment, including the full loss of its
investment, and by reason of its business or financial experience or the
business or financial experience of its professional advisors has the capacity
to evaluate the merits and risks of its investment and protect its own interest
in connection with the purchase of the Series B Preferred Stock and Class A
Common Stock.
(b) The shares of Series B Preferred Stock and Class A
Common Stock to be acquired by Nomura pursuant to this Agreement are being
acquired for its own account and with no intention of distributing or reselling
such shares or any part thereof in any transaction that would be in violation
of the securities laws of the United States of America, or any state, without
prejudice, however, to the rights of Nomura at all times to sell or otherwise
dispose of all or any part of such shares under an effective registration
statement under the Act, or under an exemption from such registration available
under the Act, and subject, nevertheless, to the disposition of Nomura's
property being at all times within its control. If Nomura should in the future
decide to dispose of any of the shares of Series B Preferred Stock or Class A
Common Stock, Nomura understands and agrees that it may do so only in
compliance with the Stockholder's Agreement and the Act and applicable state
securities laws, as then in effect. Without limiting the generality of the
preceding sentences of this paragraph (b), Nomura has not offered or sold any
portion of the securities to be acquired by it and Nomura has no present
intention of reselling or otherwise disposing of any portion of the securities.
Nomura represents that it does not have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant participation to such
person or to any third person, with respect to any of the securities.
<PAGE> 23
(c) Nomura has independently, and based on such
information as it has deemed appropriate, made its own analysis and decision to
enter into this Agreement, and specifically, has made its own independent
investigation and evaluation of the Series B Preferred Stock and Class A Common
Stock in connection with the transactions contemplated hereunder. Nomura
further acknowledges that (i) except as expressly provided in this Agreement,
The Corporation makes no representation or warranty and assumes no
responsibility with respect to the accuracy of any statements, warranties or
representations made in or in connection with the Series B Preferred Stock or
the Class A Common Stock or any other information relating to the Series B
Preferred Stock or Class A Common Stock or any other matter including, without
limitation, information received from third parties or pursuant to Nomura's due
diligence investigations of The Corporation and without limitations Nomura
acknowledges that The Corporation has made no representation or warranty with
respect to The Corporation's internal analyses, projections, business plans, or
any document delivered or disclosed to it except as expressly set forth in this
Agreement, and (b) Nomura has had access to, or will have access on or prior to
the Closing Date to, copies of all documents and information (including the
representations and warranties of The Corporation contained in this Agreement)
as it has deemed appropriate to make its own investment analysis and decision
to enter into this Agreement.
NOMURA HOLDING AMERICA, INC.
By:
-------------------------------------
Name: Dennis Dolan
Title: Managing Director
<PAGE> 1
EXHIBIT 10.17
SEPARATION AGREEMENT
THIS AGREEMENT (the "Agreement") made and entered into
effective as of July 11, 1997, by and between OpTel, Inc., a Delaware
corporation with its principal office at 1111 W. Mockingbird Lane, Dallas,
Texas 75247 (the "Company"), and Rory O. Cole, an individual residing in
Dallas, Texas ("Employee");
W I T N E S S E T H
WHEREAS, Employee has served as Chief Operating Officer of the
Company; and
WHEREAS, Employee has resigned from the office of Chief
Operating Officer and from any employment with the Company effective as of the
date of this Agreement; and
WHEREAS, the Company agrees to provide certain consideration
to Employee in exchange for a waiver and release of claims by Employee; and
WHEREAS, in consideration of such arrangements, the parties
hereto are willing to enter into this Agreement upon the terms and conditions
herein set forth.
NOW THEREFORE, in consideration of the mutual promises and
agreements set forth herein, the parties hereto agree as follows:
1. Resignation by Employee: Effective as of July 11,
1997 (the "Effective Date"), Employee hereby resigns as Chief Operating Officer
of the Company. Employee further resigns, as of the Effective Date, from any
other position or office relating to the affairs of the Company.
2. Contractual Payment Upon Separation: The Company and
Employee agree that Employee is entitled to a lump-sum payment of $185,000
following his separation from employment under Employee's existing contractual
agreement with the Company. Employee further acknowledges that this is the sole
consideration to which he is entitled upon separation from employment under any
existing contractual agreement other than this Agreement.
3. Consideration for Execution of Agreement and Waiver
and Release: In consideration for Employee's execution of this Agreement and
the Waiver and Release attached hereto as Attachment A, Employee shall be
entitled to the consideration set forth in this Paragraph 3. This consideration
is provided subject to the binding execution by Employee of the attached Waiver
and Release, which must be executed by Employee on the date of execution of
this Agreement.
a. Lump Sum. The Company shall pay Employee a
one-time lump-sum payment of $34,194. Such amount shall be paid as
soon as practicable following the execution of the Waiver and Release
(the "Waiver Effective Date").
-1-
<PAGE> 2
b. Warrant Award. The Company shall issue to
Employee, pursuant to the arrant Agreement attached hereto, a warrant
(the "Warrant") to acquire 9,406.36 shares of Class A common stock of
the Company at an exercise price of $74.42 per share, which shall
become effective as of the Waiver Effective Date. The Warrant shall
not be treated as an incentive stock option, but shall be treated as a
nonqualified stock option under Section 83 of the Internal Revenue
Code of 1986, as amended. The Warrant shall be exercisable as of the
Waiver Effective Date, and shall terminate and expire on July 11,
2002, unless earlier terminated pursuant to its terms. The Warrant
shall be subject to all other terms and conditions set forth in the
Warrant Agreement. In exchange for the Warrant, the Option Agreement
dated November 12, 1996, shall terminate and be of no force and effect
from and after the Waiver Effective Date and the issuance of the
Warrant is conditioned upon no prior exercise of Employee's rights
under the Option Agreement.
c. Company Automobile. In addition to the payment due
under Paragraph 1.a. above, the Company shall pay Employee a lump-sum
payment of $22,007.91 as soon as practicable after the Waiver
Effective Date. This payment is equal to the book value of the Jeep
95 Grand Cherokee (the "Vehicle") currently provided to Employee by
the Company under a lease agreement with PHH Vehicle Management
Services. The Company agrees to assign to Employee its right to
acquire the Vehicle under the lease agreement; provided, however, that
Employee must exercise this right within seven days after the Waiver
Effective Date. From and after the Effective Date, Employee shall be
liable for all expenses relating to the Vehicle, including insurance,
maintenance, fuel, and lease payments.
d. Out-placement. The Company agrees to make available
to Employee out-placement services consisting of typical executive
out-placement support services including individual counseling,
instruction on resume writing, interviewing, networking, secretarial
support and the use of office facilities on the out-placement firm's
premises. The Company agrees to provide such out-placement services to
Employee through Reedie & Company until the earlier of (i) December
31, 1998, or (ii) such time as Employee accepts other employment or
engages in other business activities.
e. Bonus. In the event a bonus, is declared and paid to
senior management generally under the Company's Annual Bonus Plan with
respect to the fiscal year of the Company ending August 31, 1997, the
Company agrees to pay Employee a pro rated bonus amount determined by
multiplying the bonus amount that would have been available to him
were he still employed as the Chief Executive Officer of the Company
by the ratio of the number of days in the fiscal year through the
Effective Date 365 days. Any such bonus amount payable to Employee
shall be payable as soon practicable after the amount of the bonus has
been determined and paid to officers of the Company. The Company will
notify Employee of his right
-2-
<PAGE> 3
to a bonus payment and will provide Employee with appropriate back-up
calculations.
f. Tax Service. The Company agrees to reimburse
Employee for expenses incurred by Employee in the preparation of his
1996 and 1997 tax returns, up to a maximum amount of $1,500 for each
year's return. The Company agrees to reimburse this amount promptly
upon receipt of documentation of the amount of expense incurred by
Employee for this purpose.
g. Life Insurance. The Company agrees to use its best
efforts to enable Employee to convert his existing group life
insurance coverage to a personal life insurance policy. Such
conversion option shall be subject to the terms and conditions imposed
by the insurer. Employee is responsible for all premiums due after the
Effective Date.
h. U.K. Pension. The Company agrees to provide
reasonable assistance through MDH Benefits to effectuate Employee's
intention to transfer Employee's U.K Pension to Employee. The charges
of MDH Benefits for these services will be paid by the Company. The
Company makes no representation to Employee regarding the feasibility
of such a transfer, and Employee acknowledges that the Company shall
have no liability to Employee in the event such a transfer cannot be
effected with the reasonable assistance of the Company through MDH
Benefits.
i. Computer. The Company agrees to transfer to Employee
ownership of the IBM Thinkpad used by Employee immediately prior to
his termination of employment.
j. Company Telephone Line. The Company agrees to
reimburse the Employee for the cost incurred by Employee to convert
the existing business telephone line at Employee's residence to a
personal line or to remove the business telephone line from his
residence. The Company agrees to reimburse this amount promptly upon
receipt of documentation of the amount of expense incurred by Employee
for this purpose.
4. Transition Assistance. Employee agrees that for a
period of eighteen months after the date of this Agreement, Employee will
furnish such information and proper assistance as may be reasonably necessary
to assist the Company in the transition of Employee's responsibilities as an
officer of the Company and to assist the Company in connection with any
litigation in which the Company is or may become involved. The Company agrees
that Employee shall not be required to devote an unreasonable amount of time to
such assistance, and Employee shall not be required to perform such services as
such time as would cause interference with his other employment. The Company
will reimburse Employee for all reasonable out-of-pocket expenses incurred by
him in connection with his performance of such services under this Agreement in
accordance with the Company's standard policies, practices and procedures. In
addition, in the event the Company
-3-
<PAGE> 4
requires Employee to devote more than one hour in any business day to such
assistance, the Company agrees to pay Employee a consulting fee of $185 per
hour for Employee's time in excess of one hour. Employee shall submit to the
Company claims for reimbursement and fees and documentation of expenses within
sixty days of the date on which such expenses are incurred or services
performed. Notwithstanding the foregoing, however, from and after the Effective
Date Employee will not be to eligible to participate in any employee benefit
plans, programs or arrangements maintained by the Company will indemnify and
hold Employee harmless for any losses or expenses, including reasonable
attorney's fees, incurred as a result of assistance provided under this
Paragraph 4.
5. Confidentiality: Noncompetition: Nonsolicitation:
A. Confidentiality: Employee recognizes and
acknowledges that in the course of his duties with the Company and as a result
of the position of trust he has held with the Company he has obtained private
or confidential information and proprietary data relating to the Company and
its affiliates. Employee agrees that for a period of five years from the
Effective Date, he will not, either directly or indirectly, disclose or use
confidential information acquired during his relationship with the Company
except in connection with his assistance under this Agreement or with the prior
written consent of the Chairman of the Board of Directors or unless compelled
to do so by process of law. Furthermore, Employee agrees that, if compelled by
process of law to violate the provisions of this Paragraph 5, Employee will
provide prior written notice to the Company in accordance with the notice
provisions of Paragraph 12 of this Agreement so as to permit the Company to
seek a protective order or other protective measure; and Employee agrees to
provide such notice as soon as reasonably practicable and with all due
diligence recognizing that disclosure of confidential information could be
harmful to the Company. Finally, Employee agrees that the provisions of this
Agreement shall constitute "confidential information" as described in this
Paragraph 5.
B. Noncompetition: Unless and to the extent that the
Company gives Employee a written waiver, Employee agrees that during the
"Non-compete Period" (as defined in Paragraph 5.F. below) he will not (whether
acting alone or in concert with others, including actions as a member of a
partnership or a joint venture or an investor in or a holder of securities of
or an employee of, any corporation or other entity, or otherwise), (i) perform
any services that relate in any way to the conduct of the "Business" (as
defined in Paragraph 5.E. below) in the "Restricted Area" (as set forth on
Exhibit __) on behalf of any person, firm or corporation which is principally
and predominantly engaged in the Business, (ii) perform services in, or with
respect to, the Restricted Area that principally and predominantly are part of
or make up the Business, for any person, firm or corporation, or (iii) have any
interest in any person, firm, or corporation (except the Company) that is
principally and predominantly engaged in the Business and which has operations
in the Restricted Area. For purposes of this Paragraph 5.B., the determination
of whether services principally and predominantly relate to the Business shall
be made on the basis of the function performed, rather than on the basis of the
amount of time allocated to the function or any other measure. A person, firm
or corporation shall be determined to be principally and predominantly engaged
in the Business if a majority of the revenues or net income of the person, firm
or corporation are attributable to the Business. Solely by way of illustrating
the foregoing provisions of this Paragraph 5.B., Employee shall be free to
serve as the general manager of a traditional franchise
-4-
<PAGE> 5
cable enterprise in the Restricted Area, even if the operations of the
enterprise include the Business, as long as the services of Employee are not
principally and predominantly related to the Business. Also, by way of
illustration, Employee shall be free to conduct or invest in any enterprise
that operates the Business exclusively outside of the Restricted Area. Employee
shall be free, without restriction, to provide consulting, evaluation, or other
services to any entity that is considering becoming engaged in the Business,
whether or not the entity is considering engaging in the Business within the
Restricted Area, but Employee shall no longer provide services to such entity
after the entity becomes actively engaged in the Business if such services
would violate the foregoing provisions of this Paragraph 5.B. Notwithstanding
the provisions of clause (iii) of the first sentence of this Paragraph 5.B.,
however, Employee is not prohibited from holding as a passive investment up to
5% of the outstanding securities of any class of a company whose securities are
publicly traded, so long as Employee does not serve as a member of the board of
directors or an executive officer of or otherwise provide advice or services to
such company. Any request for a written waiver of any part of this covenant
shall be submitted in writing to the Company in accordance with the provisions
of Paragraph 12. The Company agrees to consider any such request within 10
business days of its receipt. The failure affirmatively to consent to any such
request shall be deemed disapproval of the request. The Company agrees to act
reasonably in considering any such request.
C. Nonsolicitation: Employee agrees that he shall not,
directly or indirectly, during the period commencing on the Effective Date and
ending on July 11, 1998, (a) take any action to solicit or divert any business
or customers away from the Company or its affiliates, (b) induce customers,
suppliers, agents or other persons under contract or otherwise associated or
doing business with the Company or its affiliates to terminate, reduce or alter
any such association or business with or from the Company or its affiliates
and/or (c) induce any person in the employment of the Company or its affiliates
or any Employee to the Company or its affiliates to terminate such employment
or consulting arrangement or accept employment or enter into any consulting
arrangement with anyone other than the Company or its affiliates.
D. Enforcement: Employee hereby agrees that a violation
of the provisions of Paragraph 5 or 6 would cause irreparable injury to the
Company and its affiliates, for which they would have no adequate remedy at
law. Any controversy or claim arising out of or relating to the provisions of
this Paragraph 5 or 6, or any alleged breach of Paragraph 5 or 6, shall be
settled by binding arbitration in accordance with Paragraph 10B.
Notwithstanding the foregoing, however, the Company specifically retains the
right before, during or after the pendency of any arbitration to seek
injunctive relief from a court having jurisdiction for any actual or threatened
breach of Paragraph 5 or 6 without necessity if complying with any requirement
as to the posting of a bond or other security (it being understood that
Employee hereby waives any such requirement). Any such injunctive relief shall
be in addition to any other remedies to which the Company may be entitled at
law or in equity or otherwise, and the institution and maintenance of an action
or judicial proceeding for, or pursuit of, such injunctive relief shall not
constitute a waiver of the right of the Company to submit the dispute to
arbitration.
If any provision of Paragraph 5 or 6 is found by either a
court of competent jurisdiction or the arbitrators to be unreasonably broad,
oppressive or unenforceable, such court or arbitrators (i) shall narrow the
scope of the Agreement in order to ensure that the application thereof
-5-
<PAGE> 6
is not unreasonably broad, oppressive or unenforceable, and (ii) to the fullest
extent permitted by law, shall enforce such Agreement as though reformed,
E. Business: For purposes of this Paragraph 5, the term
"Business" means the acquisition, development and operation of systems
employing 18 Ghz spectrum and/or any other media (including, without
limitation, SMATV and coaxial or fiber-optic cable) for or in connection with
the delivery of cable television, telephone services, paging services, Internet
and data services, cellular or other wireless communication services, security
services and utility management services to (i) residents of MDUs, and (ii)
Institutions. "Institutions" means hotels, motels and prisons and educational
and hospital facilities, each having 100 or more first outlets. "MDUs" means,
collectively multiple dwelling units (comprising high-rise and low-rise
apartment, condominium and cooperative complexes, town-house developments,
mobile home parks and congregate care and other similar facilities), each
containing 100 more dwelling units.
F. Non-compete Period: For purposes of this Paragraph 5,
the term "Noncompete Period" means the period commencing on the Effective Date
of this Agreement and, ending on the earlier of (i) the third anniversary of
the Effective Date or (ii) the date the Warrant is no longer outstanding and
exercisable, as a result of its exercise or cancellation, or (iii) the date a
"Change in Control" of the Company occurs as such term is defined in Paragraph
6(c) of the Option Agreement dated November 12, 1996.
6. Nondisparagement: As a material inducement to the
parties to enter into this Agreement, each of the parties to this Agreement
agrees not to (i) publicly criticize or disparage the other party (or any
affiliate with respect to the Company), or privately criticize or disparage the
other party (or any affiliate with respect to the Company) in a manner intended
or reasonably calculated to result in public embarrassment to, or injury to the
reputation of, the other party (or any affiliate with respect to the Company)
in any community in which the other party or affiliate is engaged in business;
or (ii) otherwise engage in any misconduct which is injurious to the business
or reputation of the other party (or any affiliate with respect to the
Company); provided, however, that neither party will be in breach of the
covenant contained above solely by reason of testimony which is compelled by
process of law. Employee agrees not to directly or indirectly take any action
inconsistent with the Waiver and Release or commit damage to the property of
the Company or any affiliate. The parties further agree not to make any public
or private oral or written statement to any person, or take any action or
position inconsistent with, the agreed statement of facts set forth on Exhibit
A. As used in Paragraphs 5 and 6 of this Agreement, the term "affiliate" means
the Company; Le Groupe Videotron Ltee ("Videotron"); any direct or indirect
subsidiary of the Company, any direct or in direct subsidiary of Videotron; any
other entity in which the Company, Videotron or any of their direct or indirect
subsidiaries owns more than 50% of the outstanding equity interests; any
officer director or employee of the Company or of any of the foregoing
entities; and any former officer, director or employee of the Company or of any
of the foregoing entities.
7. Covenants Regarding Transmission Holdings, Inc.
Employee agrees that, upon execution of this Amendment, he hereby resigns as an
officer and director and from any other position or office held with respect to
Transmission Holdings, Inc. ("THI"). Employee further agrees that, upon receipt
of written notice from the Company, which will be given within ten business
days
-6-
<PAGE> 7
after execution of this Agreement, he will sell the shares of common stock of
TIE (the "THI Shares") which he owns as of the Effective Date to the Company or
any person or entity designated by the Company for a payment in cash of $100
per share. Employee agrees that the provisions of this Paragraph 7 shall be
binding upon any transferee of THI Shares, including a transferee by reason of
death. Employee agrees that immediately upon the execution of this Agreement,
he will furnish to the Company his certificate or certificates for the THI
Shares in order to permit the Company to inscribe a legend on such certificate
or certificates evidencing the provisions of this Paragraph 7. Employee further
agrees at the provisions of Paragraphs 5 and 6 of this Agreement shall apply to
THI and all covenants by Employee therein in favor of the Company shall apply
to THI and THI shall be deemed to be a third-party beneficiary of this
Agreement.
8. Return of Company Property: Employee acknowledges
and agrees that all business and financial information, customer lists and
financial information on customers and other information relating to the
business, products, services, customers, methods or tactics of the Company are
the exclusive property of the Company. Employee confirms that prior to the
execution of this Agreement Employee has returned to the Company all such
information in the Employee's possession, whether in writing or on computer
discs or other media without retaining any copies, extracts or other
reproductions thereof.
9. Effect of Prior Agreements: This Agreement contains
the entire understanding between the parties hereto relating to the subject
matter hereof and supersedes any other prior agreement between the Company and
Employee.
10. General Provisions:
A. Nonassignability. Except as may expressly be provided
herein, neither this Agreement nor any right or interest hereunder shall be
subject, in any manner, to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance or charge, whether voluntary or involuntary, by
operation of law or otherwise, any attempt at such shall be void; and further
provided, that any such benefit shall not in any way be subject to the debts,
contract, liabilities, engagements or torts of Employee nor shall it be subject
to attachment or legal process for or against Employee.
B. Submission to Arbitration. Subject to the right of
the Company to seek injunctive relief under the provisions of Paragraph 5D
above (relating to the obligations of Employee under Paragraphs 5 and 6) and to
the right of the Executive to seek injunctive relief for a violation by the
Company of Paragraph 6, any controversy or claim arising out of or relating to
this contract or its alleged breach shall be settled by binding arbitration in
Dallas, Texas before three arbitrators in accordance with the Commercial
Arbitration Rules of the American Arbitration Association ("AAA"), and any
judgment it on the award rendered by the arbitrators may be entered by any
court having jurisdiction thereof The arbitrators shall be selected by mutual
agreement of the parties, if possible; provided, however, that persons eligible
to be selected as arbitrators shall be limited to attorneys-at-law who (a) are
on the AAA's Large, Complex Case Panel or a Center for Public Resources ("CPR")
Panel of Distinguished Neutrals, or who have professional credentials similar
to the attorneys listed on such AAA and CPR Panels, and (b) who practiced law
for at least 15 years
-7-
<PAGE> 8
as an attorney in Texas specializing in either general commercial litigation or
general corporate and commercial matters. If the parties fail to reach
agreement upon appointment of an arbitrator within thirty days following
receipt by one party of the other party's notice of desire to arbitrate, the
arbitrator shall be selected from a panel or panels of persons submitted by the
AAA who qualify as described above. The selection process shall be that which
is set forth in the AAA Commercial Arbitration Rules then prevailing, except
that, if the parties fail to select an arbitrator from one or more panels, AAA
shall not have the power to make an appointment but shall continue to submit
additional panels until an arbitrator has been selected.
In any such arbitration proceeding, the arbitrators shall not
have the power or authority to award punitive damages to any party. Judgment
upon the award rendered may be entered in any court having jurisdiction. Each
of Employee and the Company shall, subject to the award of the arbitrators, pay
an equal share of the arbitrators' fees. The arbitrators shall have the power
to award recovery of all costs and fees (including attorneys' fees,
administrative fees, arbitrators' fees, and court costs) to the prevailing
party.
C. Taxes. Employee acknowledges that he has sought the
advice of his own tax advisor regarding the tax treatment of income under this
Agreement. The Company shall withhold from the amounts payable to Employee
under Paragraphs 2 and 3 of this Agreement all federal, state and local taxes
that shall be required pursuant to any law or governmental regulation or
ruling.
D. Source of Payments. All payments provided in this
Agreement shall be paid in cash from the general funds of the Company, and no
special or separate funds shall be established and no other segregation of
assets shall be made to assure payments. Employee shall have no right, title,
or interest whatever in or to any investments which the Company may make to aid
the Company in meeting its obligations hereunder. Nothing contained in this
Agreement, and no action taken pursuant to this provision, shall create or be
construed to create a trust of any kind, or a fiduciary relationship, between
the Company and Employee or any other person. To the extent that any person
acquires a right to receive payments from the Company hereunder, such right
shall be no greater than the right of an unsecured creditor of the Company.
E. Survival. This Agreement shall survive a merger,
consolidation, reorganization, sale of assets or any other business combination
of the Company.
F. Headings. The paragraph headings set forth herein are
for convenience of reference only and shall not affect the meaning or
interpretation of this Agreement whatsoever.
11. Modification and Waiver:
A. Amendment of Agreement. This Agreement may not be
modified or amended except by an instrument in writing signed by the parties
hereto.
B. Waiver. No term or condition of this Agreement shall
be deemed to have been waived, nor shall there be an estoppel against the
enforcement of any provision of this Agreement, except by written instrument of
the party charged with such waiver or estoppel.
-8-
<PAGE> 9
12. Notices: All notices or communications hereunder
shall be in writing, addressed as follows:
To the Company:
OpTel, Inc.
1111 W. Mockingbird Lane
Dallas, Texas 75247
Attn: President
Copy: General Counsel
To Employee:
Rory O. Cole
4339 Beverly Drive
Dallas, Texas 75205
All such notices shall be conclusively deemed to be received and shall be
effective, (i) if sent by hand delivery, upon receipt, (ii) if sent by telecopy
or facsimile transmission, upon confirmation of receipt by the sender of such
transmission or (iii) if sent by registered or certified mail, on the fifth day
after the day on which such notice is mailed.
13. Governing Law: This Agreement has been executed and
delivered in the State of Texas, and its validity interpretation, performance,
and enforcement shall be governed by the laws of said State.
14. No Modification of Indemnification Rights. Nothing in
this Agreement shall modify or affect Employee's rights available to
indemnification from the Company or THI under Delaware corporate law or the
Bylaws or Certificate of Incorporation of the Company or THI or under the
relevant director's and officer's liability policy of the Company.
-9-
<PAGE> 10
IN WITNESS WHEREOF, the Company has caused this Agreement to
be executed and its seal to be affixed hereunto by its officers thereunto duty
authorized, and Employee has signed this Agreement, all as of the day first
above written.
OpTel, Inc.
By:
-------------------------
----------------------------
Rory O. Cole ("Employee")
-10-
<PAGE> 11
EXHIBIT A
Rory O. Cole has elected to resign from the office of Chief
Operating Officer of OpTel, Inc., in order to pursue other opportunities. All
inquiries should be directed to the Vice President of Human Resources or the
Chief Executive Officer of OpTel, Inc.
A-1
<PAGE> 12
EXHIBIT B
COUNTIES
<TABLE>
<CAPTION>
SAN LOS SAN BRYAN/
FLORIDA ILLINOIS DALLAS AUSTIN HOUSTON FRANCISCO ANGELES DIEGO PHOENIX DENVER LAS VEGAS COLLEGE STATION
- ------- -------- ------ ------ ------- --------- ------- ----- ------- ------ --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Hernando Cook Dallas Travis Harris Alameda Los San Maricopa Boulder Henderson Brazos
Angeles Diego
- ------------------------------------------------------------------------------------------------------------------------------------
Pinellas DuPage Denton Williams Galveston Contra San Pinal Arapahoe Clark
Costa Bernadino
- ------------------------------------------------------------------------------------------------------------------------------------
Dade Will Tarrant San Mateo Graze Adams
- ------------------------------------------------------------------------------------------------------------------------------------
Broward McHenry Collin San Riverside Jefferson
Francisco
- ------------------------------------------------------------------------------------------------------------------------------------
Palm Beach Lake Santa Denver
County Clara
- ------------------------------------------------------------------------------------------------------------------------------------
Hillsborough El Paso
- ------------------------------------------------------------------------------------------------------------------------------------
Pasco Frisco
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A-2
<PAGE> 1
EXHIBIT 10.25
CITY OF HOUSTON, TEXAS, ORDINANCE NO. 97-1567
AN ORDINANCE GRANTING A FRANCHISE TO TVMAX COMMUNICATIONS (TEXAS),
INC., A DELAWARE CORPORATION, TO ENCROACH UPON AND USE THE PUBLIC WAY OF THE
CITY OF HOUSTON, TEXAS, FOR THE PURPOSE OF LAYING, CONSTRUCTING, LEASING,
MAINTAINING, REPAIRING, REPLACING, REMOVING, USING, AND OPERATING THEREIN, A
TELECOMMUNICATIONS NETWORK FOR PROVIDING AUTHORIZED TELECOMMUNICATIONS
SERVICES; PROVIDING FOR RELATED TERMS AND CONDITIONS; TERMINATING TEMPORARY
PERMIT GRANTED UNDER CITY OF HOUSTON ORDINANCE NO. 97-285 ON THE EFFECTIVE DATE
OF THIS ORDINANCE; AND MAKING CERTAIN FINDINGS RELATED THERETO.
WHEREAS, TVMAX Communications (Texas), Inc. is in the business of
laying, constructing, leasing, maintaining, repairing, replacing, removing,
using and operating a telecommunications network and has requested a franchise
to allow such activities within the City of Houston (the "City") for the
purpose of providing telecommunication services to its customers and
subscribers; and
WHEREAS, it is hereby found and determined by the City Council that
it is in the best interest of the City that a franchise be granted to TVMAX
Communications (Texas), Inc., granting it the right to use the streets and
public rights of way of the City to provide telecommunication services to its
customers and subscribers, subject to the terms and conditions provided herein;
NOW, THEREFORE,
BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF HOUSTON, TEXAS:
ARTICLE I.
DEFINITIONS AND INTERPRETATIONS
SECTION 1.01. SHORT TITLE AND TABLE OF CONTENTS.
a. This ordinance shall be known and may be cited as the TVMAX
Communications (Texas), Inc. Telecommunication Franchise Ordinance.
b. Table of Contents.
<TABLE>
<S> <C>
ARTICLE I. DEFINITIONS AND INTERPRETATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.01. Short title and table of contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.02. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE II. GRANT OF FRANCHISE AND TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.01. Rights granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Section 2.02. Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.03. Specific limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 2.04. Use of the Network by other Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.05. Use of the Public Way by other Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 2.06. Termination of Temporary Permit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 2.07. Non-discrimination between telecommunication franchisees . . . . . . . . . . . . . . . . . . . 8
ARTICLE III. FEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.01. Franchise fee, generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 3.02. Timing of payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.03. Report to director; audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.04. Payment under protest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.05. Late payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Section 3.06. New Construction Permit Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE IV. RECORDS AND FILING REQUIREMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.01. Record keeping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.02. Confidential information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 4.03. Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE V. REGULATION OF CONSTRUCTION, USE OF THE PUBLIC WAY . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.01. Interference with public use prohibited . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.02. Permitting and plan approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 5.03. Work standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.04. Work in the Public Ways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.05. Restoration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Section 5.06. Relocation or removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.07. Timely completion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.08. Subsequent rules and regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Section 5.09. Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.10. Abandonment of obsolete facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Section 5.11. Acquisition of property adjacent to Public Way . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.12. Abandonment of Public Way . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.13. Bonding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 5.14. Installation of City fiber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE VI. INDEMNIFICATION AND INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 6.01. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 6.02. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE VII. DEFAULT AND TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 7.01. Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 7.02. Cure period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
-2-
<PAGE> 3
<TABLE>
<S> <C>
Section 7.03. Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ARTICLE VIII. TRANSFER OF FRANCHISE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.01. Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.02. Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Section 8.03. Scope of Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 8.04. Assignments not Requiring Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 8.05. Release . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE IX. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 9.01. Discrimination prohibited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 9.02. Drug-free workplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 9.03. Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 9.04. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 9.05. Controlling laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 9.06. Cumulative effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.07. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.08. Entire agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.09. Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.10. Acceptance and approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.11. Non-waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 9.12. Written amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 9.13. Publication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 9.14. Duties upon termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 9.15. Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 9.16. Acceptance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 9.17. Representations and warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
a. Organization, standing and power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
b. Compliance with law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
c. Full disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
d. Truthful statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
e. Survival of representations and warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 9.18. Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
EXHIBIT A
EXHIBIT B
EXHIBIT C
SECTION 1.02. DEFINITIONS. For the purpose of this Franchise, the
following terms, phrases, words, and their derivations shall have the meaning
given herein unless more specifically
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defined within other sections of this Franchise. When not inconsistent with the
context, words used in the present tense include the future tense, words in the
single number include the plural number. The word "shall" is always mandatory,
and not merely directory.
Anniversary Date means the successive annual recurrence of the Effective
Date.
Cable Services shall have the meaning defined for such term in the Cable
Communications Policy Act of 1984, as amended.
City means the City of Houston, Texas, a home-rule municipal corporation
principally located in Harris County, Texas, acting by and through its
governing body, the City Council.
City Engineer means the City Engineer for the City or a designee thereof.
Confidential Information is defined in SECTION 4.02(a).
Construction Permit Fee is defined in SECTION 3.06.
CPI-U means the Consumer Price Index for All Urban Consumers, U.S. city
average, All Items, as published in the Monthly Labor Review by the Bureau of
Labor Statistics of the Department of Labor of the United States of America
applicable to the third month immediately preceding the Anniversary Date; or if
the CPI is discontinued, the most nearly comparable statistics of the U.S.
Department of Labor (or if such statistics are no longer published by the U.S.
Department of Labor, the most nearly comparable statistics published by a
recognized financial authority selected by the Director.)
Day, whether or not capitalized, means a calendar day, unless
specifically provided otherwise.
Director means the Director of the City's Department of Finance and
Administration, or such person as such director may designate.
Effective Date is defined in SECTION 9.18.
Franchise means this ordinance, and includes the rights, obligations and
privileges granted to the Franchisee herein.
Franchisee means TVMAX Communications (Texas), Inc., a Delaware
corporation.
Franchise Fee means the fees provided for payment by the Franchisee as
provided in this Franchise.
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Gross Receipts means all Local Telecommunications Revenue (excluding (i)
Franchise Fees itemized on customer billings, (ii) sales taxes, excise taxes or
any similar direct taxes upon the customer or subscriber collected by the
Franchisee, (iii) receipts from the sale or trade-in value of any property used
in the provision of Services, (iv) refunds from suppliers, (v) refunds,
rebates, credits or discounts to customers or subscribers) received by the
Franchisee or by any affiliate, subsidiary, agent or assign, or other entity
controlled by the Franchisee using the Public Way that does not have a current
valid franchise with City, in connection with the provision of Services within
the City of Houston, including payments received for the operation of the
Network Facilities or maintaining, leasing, exchanging or using all or any
portion of the Network Facilities or for the provision of Services.
Local Office is defined in SECTION 4.01(c).
Local Telecommunications Revenue means the aggregate of all receipts,
direct or indirect, for Services provided by the Franchisee to its customers or
subscribers whose service address is physically located within the city limits
of the City. Local Telecommunications Revenue shall not include any amounts
charged to customers or subscribers that are paid to any telecommunications
system operator or owner not affiliated with the Franchisee for the provision
of Services on the Network Facilities if such amounts are payable by another
telecommunications provider required to have a franchise from the City.
Minimum Annual Fee is defined in SECTION 3.01(b).
Network Facilities means conduits, ducts, manholes, vaults, tanks,
towers, wave guides, optic fiber, microwave, dishes, and any associated
converters, electrical lines, communications lines, transmission lines, cables,
wires, amplifiers, switches, utility equipment, or other such object, device or
facilities, including attachments and encasements containing such facilities,
whether underground or overhead, which are designed, installed and constructed
within the Public Way for the purpose of producing, receiving, amplifying,
switching, transmitting or distributing audio, video, or other form of
electronic signals to or from customers, subscribers or locations within city
limits of the City in providing Services. Network Facilities does not include
such facilities to the extent that they are used to provide Cable Services.
New Construction Permit Fee is defined in SECTION 5.02(a).
Person includes an individual, association, corporation, firm, joint
venture, partnership, limited liability company, or other business entity or
legal representative.
Public Way means a Street or Water Way or any other right, title or
interest in or to real property, which is owned or claimed by City for use of
the public.
Report is defined in SECTION 3.03.
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Services means telecommunication services provided by the Franchisee
through its Network Facilities, excluding Cable Services provided pursuant to
separate franchise, but including without limitation (a) interconnecting
telecommunication companies for the purpose of voice, data or non-cable video
transmission; (b) providing switched or non-switched private line point-to-point
service to end-users for voice, data and non-cable video transmission; (3)
switching, transmitting or distributing signals on behalf of other
telecommunication companies; or (4) any other telecommunication services
authorized by State or Federal law.
Street means the entire area within the boundary lines of every public
street, avenue, road, parkway, drive, alley, highway, boulevard, bridge, tunnel
or other City roadway whether improved or unimproved, and any part thereof
including without limitation the pavement, shoulders, gutters, curbs, sidewalks,
parking areas and all other areas within street lines.
Water Way means the entire area within the boundary lines of every
stream, lake, river, bayou, ditch or other body or course of water that is owned
or maintained by the City.
ARTICLE II.
GRANT OF FRANCHISE AND TERM
SECTION 2.01. RIGHTS GRANTED. There is hereby granted to the
Franchisee, subject to the reasonable and timely compliance by the Franchisee
with the provisions contained herein, the non-exclusive right to encroach upon
and use the Public Way for the purpose of laying, constructing, leasing,
maintaining, repairing, replacing, removing, operating or using the Network
Facilities, in whole or in part, across, along, over, above, or under any Public
Way specifically for the purpose of providing the Services.
SECTION 2.02. TERM. The rights and franchise granted hereunder shall be
for a term beginning on the Effective Date and ending on December 31, 2009;
provided that, either the Franchisee or the Director may require an alternate
franchise to be substituted for this Franchise by giving the other written
notice thereof on or before September 1, 1999. If the City and the Franchisee do
not reach an agreement regarding the terms of the alternate franchise within 60
days of the date of such notice, subject to the terms of SECTION 2.07, the
alternate franchise shall be substituted on substantially the same terms and
conditions as the City offers to similar telecommunications companies making
similar use of the Public Way as of such date. Any non-renewal of this Franchise
shall be in accordance with all applicable requirements of State and Federal law
and regulation.
SECTION 2.03. SPECIFIC LIMITATIONS. This Franchise does not grant the
Franchisee the right to provide, directly or indirectly, any services not
specifically authorized by the terms of this Franchise. This Franchise does not
authorize the provision of Cable Services, and the Franchisee may provide Cable
Services through the Network Facilities only if authorized specifically by a
separate franchise either already in existence as of the Effective Date or later
granted at the discretion of City Council.
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SECTION 2.04. USE OF THE NETWORK BY OTHER PERSONS.
a. The Franchisee acknowledges and agrees that this Franchise
authorizes specific use of Public Ways only by the Franchisee and it agrees
that, except as specifically authorized herein or otherwise specifically
authorized by the City, it will not allow the use, by lease or otherwise, of the
Network Facilities by any other Person (other than an affiliate, subsidiary, or
other entity controlled by the Franchisee if such other Person's gross receipts
are included in the Gross Receipts for purposes of the Franchise Fee) to provide
the Services or for any other purpose. Use of the Network Facilities by any
Person for any purpose not specifically authorized hereunder shall be considered
to be use thereof by the Franchisee and is prohibited.
b. The Franchisee agrees to notify its customers or subscribers making
sales of telecommunications services through the use of the Network Facilities
of their possible need for a certificate from the Texas Public Utility
Commission, an FCC license, other state or federal authorization, or City
franchise, in the form provided in EXHIBIT A, attached hereto. Such notice shall
be given to existing customers or subscribers within 60 days of the Effective
Date and to new customers or subscribers within 30 days of the acquisition of
such customer or subscriber.
c. The Franchisee may lease the Network Facilities, or otherwise make
the Network Facilities available, in whole or in part, to its customers in the
ordinary conduct of the provision of Services, if (i) the Franchisee retains
responsibility for servicing and repairing the Network Facilities, and (ii) the
Franchisee has complied with the notice provisions of SUBSECTION (b). This
Franchise shall not be construed to provide any other party with the authority
to carry out its business by use of the Public Way, and any other party making
use of the Network Facilities must have a valid franchise granted by City, if
one is required. The Director shall determine whether a franchise is required in
accordance with applicable law, and such determination shall be made as if the
third party were the owner of the Network Facilities used by the third party,
rather than the Franchisee.
SECTION 2.05. USE OF THE PUBLIC WAY BY OTHER PERSONS.
a. Nothing in this Franchise shall ever be held or construed to confer
upon the Franchisee exclusive rights or privileges of any nature whatsoever. The
City may permit other Persons to, and the Franchisee acknowledges that, the City
or such other Persons may, lay, construct, operate, lease repair, maintain or
make use of, any sewer, gas, water and other pipes or pipelines, cables,
conduits, electrical lines, communications lines, transmission lines, utility
equipment or any other object, improvement, facility or device across, along,
over, above or under any Public Way. The City may also permit soil boring into
and the installation of monitoring wells in or under any Public Way occupied by
the Franchisee, and authorize any other lawful use of the Public Way.
b. In permitting such work to be done, City shall not be liable to
Franchisee for any damages arising out of the performance of any such work by
such third parties, provided that
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nothing herein shall relieve any Person other than the City or those operating
on its behalf, from liability for damage to the Network Facilities.
c. If the City requires the Franchisee to remove, alter, change, adapt
or conform its Network Facilities to enable any Person except the City to use
the Public Way, the Franchisee shall be obligated to make such changes to its
Network Facilities only if the Person obtains a cash bond prior to such work to
reimburse Franchisee for any loss and expense that will be caused by or which
will arise out of such changes to the Network Facilities. The City shall not be
liable for any reimbursement, loss, or expense caused by or arising out of such
changes to the Network Facilities.
SECTION 2.06. TERMINATION OF THE TEMPORARY PERMIT. If the term of the
Temporary Permit granted to the Franchisee pursuant to City of Houston Ordinance
No. 97-285 as amended, has not expired according to its terms on the Effective
Date, then such Temporary Permit is hereby terminated and superseded hereby.
SECTION 2.07. NON-DISCRIMINATION BETWEEN TELECOMMUNICATION FRANCHISEES.
In addition to any non-discrimination provisions under applicable law, which
this Franchise is not intended to limit, if the City grants a franchise to
another substantially similar telecommunications service provider to make
similar use of the Public Way, and such franchise is on terms and conditions
more favorable or less burdensome to such franchisee in like or similar
circumstances, then upon written request of the Franchisee, the City will offer
the other franchise to the Franchisee in its entirety in substitute for this
Franchise; provided that the term of the new franchise shall not be extended
beyond the termination date of this Franchise.
ARTICLE III.
FEES
SECTION 3.01. FRANCHISE FEE, GENERALLY.
a. In consideration for the rights and privileges herein granted, the
Franchisee shall pay to the City those fees set forth herein in the manner and
within the time limitations specifically provided. Time is of the essence with
regard to payments required hereby.
b. The Franchisee shall pay to City a basic Franchise Fee equal to the
greater of four percent of Gross Revenues, or the Minimum Annual Fee. The
Minimum Annual Fee shall never be less than $22,000 annually, adjusted by the
CPI-U, for each year this Franchise is in effect (the "Minimum Annual Fee"). The
Minimum Annual Fee will be adjusted on each Anniversary Date by the percentage
change in the CPI-U for the current year over the Base CPI-U. The most recently
published CPI-U at the Effective Date shall be the Base CPI-U. The CPI-U in
effect on each Anniversary Date shall be divided by the Base CPI-U and the
resulting factor shall be
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multiplied by the above-stated amount to determine the current year Minimum
Annual Fee. On each Anniversary Date, the Minimum Annual Fee shall be computed
as provided herein.
SECTION 3.02. TIMING OF PAYMENT. Following the Effective Date, the
Franchise Fee shall be paid with respect to each calendar quarter, or portion
thereof, within 45 days immediately following the end of the quarter. The fourth
quarter payment for each year this Franchise remains in effect shall be
increased by an amount equal to the difference between the Minimum Annual Fee
and the sum of Franchise Fees paid for that year, if the Minimum Annual Payment
is greater than the sum of the paid Franchise Fees.
SECTION 3.03. REPORT TO DIRECTOR; AUDIT.
a. On the same date that Franchise Fee payments are to be paid, the
Franchisee shall file with the Director a report showing all revenue, detailed
by category, from the operations of the Network Facilities for the preceding
calendar quarter. The Franchisee shall submit such report in the form of the
City of Houston Franchise Fee Remittance Form, set forth in EXHIBIT B, attached
hereto (the "Report").
b. The City may, at its discretion, upon no less than 30 days prior
written notice, require that the Franchisee's records related to this Franchise
be audited by the Director to ascertain the correctness of any Report. If the
audit determines that payment of Franchise Fees was not made in accordance with
the terms of this Franchise and that such payment represents an underpayment of
at least 10 percent of Franchise Fees due, the Franchisee shall reimburse the
City for all reasonable audit costs, and pay all Franchise Fees determined to be
due and payable to the City hereunder. Such costs and fees shall be paid within
30 days after determination of amount due is made.
SECTION 3.04. PAYMENT UNDER PROTEST. Any payment due under the terms of
this Franchise may be paid under protest. If made under protest, any payment
shall not be considered a waiver of the Franchisee's rights to dispute the
validity of the payment; provided that the Franchisee's right to reclaim a
payment under protest is limited to two years from remittance, unless such
period is extended by the Director.
SECTION 3.05. LATE PAYMENT. If any quarterly payment is not received by
the City on before five days immediately following the due date, the Franchisee
shall pay interest at the annual rate of 10 percent, compounded daily. The
Franchisee agrees to pay all costs of collection for any amounts due hereunder,
including reasonable attorney fees.
SECTION 3.06. NEW CONSTRUCTION PERMIT FEE. When submitting application
for a New Construction Permit as provided in Article V, the Franchisee shall pay
the permit fees provided herein. Such permit fees are in addition to the
Franchise Fees and are non-refundable. Each application for a New Construction
Permit shall be accompanied by a drawing and specification review fee of $1,005,
or such reasonable fee as may be in effect at the time of the permit
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application ("New Construction Permit Fee"). The New Construction Permit Fee is
only required for work in the Public Way other than routine maintenance or
emergency repairs, as described in SECTION 5.02.
ARTICLE IV.
RECORDS
SECTION 4.01. RECORD KEEPING. In addition to other records or filings
required hereunder or by law, the Franchisee shall:
a. Maintain a list, for review by the Director or City Engineer upon
request, of all entities that use any portion of the Network Facilities.
b. File copies, upon the Director's request, of all requested reports
made to federal and state authorities pertaining to the regulation of any
activity of the Franchisee in the Public Way.
c. Retain all records pertaining to any use of the Public Way for a
period of not less than five years at a location in Texas that is acceptable to
the Director (the "Local Office") and make the same available to the Director
for inspection, or copying from the Local Office during regular business hours
upon 24 hours written notice.
d. Maintain and provide a current map, upon request by the Director or
City Engineer, certified by a registered professional engineer to be true and
correct, showing the locations of the Network Facilities in the Public Ways.
e. Maintain records, accounts, and financial and operating reports in a
manner that will allow the City to determine the actual Gross Receipts. The
Director may require the keeping of additional records or accounts reasonably
necessary to determine the Franchisee's compliance with the terms of this
Franchise.
SECTION 4.02. CONFIDENTIAL INFORMATION.
a. The Director will not reproduce any customer lists, confidential
contracts or confidential financial information clearly designated by the
Franchisee to be confidential or proprietary ("Confidential Information") not
specifically required for documentation of audit issues. Except as provided by
law, the City shall not disclose any Confidential Information to any Person. The
Franchisee agrees that it will permit the Director to remove Confidential
Information from its Local Office for a period of 10 working days for the
purpose of review to determine Franchise compliance. Upon expiration of 10
working days or the completion of the Director's Franchise compliance review,
whichever is first to occur, the Director shall return all Confidential
Information removed from the Local Office; provided that the Director may retain
copies of
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documents deemed by the Director to be reasonably necessary for purposes of
determining compliance with this Franchise.
b. The Director shall not disclose any Confidential Information
reproduced for documentation of audit issues unless the City has received a
request to review or copy Confidential Information under the Texas Open Records
Act or related law (the "Act"). Upon receipt of such request, the City shall
(i) timely submit a request to the Attorney General of the State of Texas (or
other appropriate official if the Attorney General is not the proper official)
for an opinion as to whether the requested Confidential Information must be
disclosed under the Act, and (ii) notify the Franchisee that a request to
review or copy Confidential Information has been submitted to the City.
Confidential Information deemed subject to disclosure under the Act shall be
disclosed.
SECTION 4.03. ENFORCEMENT. The City Attorney, or the City Attorney's
designee, shall have the right to enforce all legal rights and obligations
under this Franchise without further authorization. The Franchisee agrees to
provide the City access to all documents and records that the Director, the
Controller or the City Attorney deem reasonably necessary to assist in
determining the Franchisee's compliance with this Franchise; provided that any
documents that would be privileged under the Texas Rules of Civil Procedure
shall not be required to be provided to the City.
ARTICLE V.
REGULATION OF CONSTRUCTION AND USE OF THE PUBLIC WAY
SECTION 5.01. INTERFERENCE WITH PUBLIC USE PROHIBITED. The Franchisee
shall lay, construct, operate, lease, maintain, repair and replace the Network
Facilities so as not to unreasonably interfere with use of the Public Way.
Insofar as possible, the Franchisee shall use existing Network Facilities in
the provision of the Services. The Franchisee shall provide any information
reasonably related to location or operation of the Network or Services
determined to be necessary by the City Engineer or the Director. The Franchisee
shall maintain the Network Facilities in good order and condition, subject to
ordinary wear and tear.
SECTION 5.02. PERMITTING AND PLAN APPROVAL.
a. NEW CONSTRUCTION PERMIT. Before commencing any work in the Public
Way other than routine maintenance or emergency work (as described in
Subsections b and c below) the Franchisee shall apply for and obtain a New
Construction Permit. The application shall include the application fee
described in SECTION 3.06, a written work description, including scale
drawings, showing the Network Facilities' location (or proposed location) and
estimated depth of the Network Facilities (existing and proposed) in the
immediate area of the proposed new construction. Such drawings and
specifications shall be prepared, executed and sealed by a registered
professional engineer. Such drawings and specifications will be reviewed by the
City Engineer and any comments will be provided to the Franchisee as soon as
practicable. The
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Franchisee agrees to make any changes to the drawings and specifications
requested by the City Engineer.
b. ROUTINE MAINTENANCE. Before the Franchisee performs any routine
maintenance or repairs on any Network Facilities, the Franchisee shall give at
least 30 days written notice to the City Engineer as to the time and location
of the proposed maintenance or repair. Unless waived by the City Engineer in
writing, daily work schedules shall be provided to the City by 8:30 a.m. each
day any such routine maintenance or repair is performed. Written approval from
the City Engineer of all routine maintenance or repair of the Network
Facilities must be obtained prior to beginning work. Such approval by City
Engineer shall constitute full authority for the issuance of required permits.
c. EMERGENCY REPAIRS. When an emergency occurs that could not
reasonably have been foreseen and requires immediate work on the Network
Facilities located in the Public Way, repairs may be performed by the
Franchisee and notice shall be given to City Engineer within 24 hours following
the commencement of such emergency repairs. Such notice shall state the nature
of the emergency repairs and the length of time estimated necessary to complete
the emergency repairs. The Franchisee shall apply for the required permits as
soon as reasonably practicable, and any work performed that is not consistent
with then-applicable City standards shall be corrected upon notice thereof from
the City.
d. PAYMENT OF FEES REQUIRED. Subject to the provisions of SECTION
3.04, the City is not required to grant any permit or approval to the
Franchisee unless and until all fees due and payable pursuant to this Franchise
have been paid in full, including any permit fees.
e. OTHER LICENSES AND FEES. The Franchisee shall obtain and pay the
cost of all licenses, permits, and certificates required by any statute,
ordinance, rule or regulation of any local, state or federal regulatory body
having jurisdiction over the conduct of its operations hereunder. The
Franchisee shall give notice to the Director of any revocation or failure to
obtain any such license, permit or certificate affecting its performance
hereunder within 15 days of such revocation or of the day upon which the
Franchisee received actual or constructive notice of its failure to obtain such
license, permit or certificate.
SECTION 5.03. WORK STANDARDS. All work in the Public Way shall be
performed in accordance with the City's Standard Specifications for Street and
Storm Drainage & Street Paving Construction, as such may be amended from time
to time, and shall be subject to the regulation, control and direction of the
City Engineer. All work done in connection with the laying, construction,
operation, maintenance, repair and replacement of the Network and Network
Facilities shall be in compliance with all applicable laws, ordinances, rules
and regulations of City, the applicable county, the State of Texas, and the
United States.
SECTION 5.04. WORK IN THE PUBLIC WAYS.
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a. The Franchisee's work affecting the Public Ways shall be performed
in a manner calculated to cause the least inconvenience to the City and the
public as may be reasonable possible under the circumstances. When the
Franchisee performs or causes to be performed any work in any Public Way, or so
closely adjacent thereto as to create hazards for the public or themselves, the
Franchisee shall provide construction and maintenance signs and sufficient
barricades and flagmen at work sites to protect the public, equipment and
workmen. The application of such traffic control devices shall be consistent
with the standards and provisions of the latest addition to the Texas Manual on
Uniform Traffic Control Devices. Appropriate warning lights shall be used at
all construction and maintenance zones where one or more traffic lanes are
being obstructed during nighttime conditions.
b. If the Franchisee's work requires the closure of any part of any
Street, such closure shall be performed in a manner approved in writing by the
City Engineer. The Franchisee shall not wholly close any Public Way, but shall
at all times maintain a route of travel along and within any roadway that is
within a Public Way; provided that, in cases of emergency, the City Engineer
may authorize a temporary closing of any Public Way or sidewalk to allow the
Franchisee to complete any emergency repairs if in the opinion of the City
Engineer, such closing is necessary to protect the safety of the public.
SECTION 5.05. RESTORATION.
a. At its sole cost and expense, the Franchisee shall repair, clean
up and restore the Public Way disturbed or affected during the maintenance,
construction, repair, replacement or removal of the Network Facilities and
shall warrant the repair and restoration of such Public Way and other surfaces
for a period of two years from the date of completion of same. The City
Engineer may require a bond as may be required under then-current City
regulations; in the absence thereof, the Franchisee shall to provide a surface
correction bond in an amount estimated by the City Engineer to be the cost of
repair of the Public Way. The terms and conditions of the bond will be
substantially similar to those required by the City of other Persons performing
similar work in the Public Ways. Such repairs, clean up and restoration shall
be carried out pursuant to standards promulgated by the City Engineer, and
shall return the Public Way and other disturbed surfaces to substantially the
same condition as before the Franchisee's work began.
b. Any excavation in any portion of the Public Way shall be replaced
with materials of the same kind as those removed unless the City Engineer
approves of some other type of fill or material. Without limitation of the
above, if after refilling an excavation the earth within the excavated area
settles so as to leave a depression, and the depression is related to the
Franchisee's work, the Franchisee shall make further necessary fills or other
repair work from time to time to correct the problem as ordered by the City
Engineer. The determination that the Public Way and other surfaces have been
returned to substantially the same condition shall be within the reasonable
exercise of the City Engineer's discretion.
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SECTION 5.06. RELOCATION OR REMOVAL. The Franchisee may be required
to lower, relocate or remove any Network Facility in any Public Way without
cost to the City if reasonably necessary as determined by the City Engineer to
abate a condition actually or potentially dangerous to the public health or
safety, or as may be reasonably necessary to accommodate any public works
project in the Public Way including, but not limited to, water, sanitary sewer,
storm drains, street lights and traffic signal conduits, or any other
facilities in or under the Public Way. In the alternative, where the City
Engineer determines it to be feasible, the Franchisee may be allowed to pay any
additional costs incurred for the design or construction of such public works
project in a manner that will avoid the relocation or removal of the Network
Facilities. In determining the feasibility, the City Engineer shall be guided
by the principles of economic waste.
SECTION 5.07. TIMELY COMPLETION. If the Franchisee fails to either
(i) commence or thereafter to diligently prosecute any repair, refilling,
lowering, relocation, or other work required by the City, or (ii) diligently
complete any work that disturbs the Public Ways, the City may cause the work to
be done or completed at the expense of the Franchisee and may recover all such
expense from the Franchisee together with all costs and reasonable attorney
fees.
SECTION 5.08. SUBSEQUENT RULES AND REGULATIONS. The City Council or
the City Engineer may make such other reasonable rules and regulations for the
placement and manner of the Network Facilities as they may deem appropriate for
the protection of the public and the Public Way and to avoid unreasonable
interference with other uses or contemplated uses of the Public Way. Without
limitation of the above, the City Council or the City Engineer may amend the
rules or regulations to require that all Network Facilities constructed after
the effective date of such amended rules be placed underground.
SECTION 5.09. INSPECTIONS. The City Engineer may perform inspections
of any Network Facility located in the Public Way from time to time as the City
Engineer may deem appropriate. The Franchisee may have a representative present
during such inspection.
SECTION 5.10. ABANDONMENT OF OBSOLETE FACILITIES.
a. When the Franchisee opens a trench, accesses a conduit, bores, or
is working on other locations it shall determine if the Network Facilities
located therein, if any, are obsolete, and shall remove such obsolete Network
Facilities from such locations, subject to the City Engineer's approval
pursuant to Subsection (d), which shall include consideration of structural
integrity of the Public Way, or a potentially adverse effect on existing
utilities.
b. When the Franchisee opens a trench, accesses a conduit or bores,
it shall notify all other franchisees with facilities in the area of such work,
so that all the other franchisees may remove their obsolete facilities, if any,
from such location, at their sole cost. The Franchisee may request a list of
such other franchisees from the City Engineer, and may rely thereon for
purposes of this Section. The Franchisee shall cooperate with the other
franchisees in their efforts to
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remove obsolete facilities. Nothing in this section shall require the
Franchisee to delay its work in order to accommodate other franchisees.
c. When the Franchisee receives notification from another franchisee
that it plans to open a trench, access a conduit or bore and the Franchisee
determines that the Network Facilities contained therein, if any, are obsolete,
the Franchisee may remove obsolete Network Facilities from such locations
pursuant to Subsection (e) without causing a delay to the other franchisee,
subject to the City Engineer's written approval, which shall include
consideration of structural integrity of the Public Way.
d. Whenever the Franchisee intends to abandon any Network Facilities
within the Public Way, the Franchisee shall submit to the City Engineer for the
City Engineer's approval a completed application describing the Network
Facilities to be abandoned and the date on which the Franchisee intends to
abandon such Network Facilities. The Franchisee may remove the Network
Facilities or request that the City permit them to remain in place. If the
Network Facilities remain in place, they shall be subject to all terms and
conditions of this Franchise as though they were in use by the Franchisee.
e. The City may require the Franchisee to perform a combination of
modification and removal of any Network Facilities determined by the Franchisee
to be obsolete under this section. The Franchisee shall complete such
modification or removal in accordance with a schedule approved in writing by
the City Engineer. Any obsolete Network Facilities shall be removed within a
reasonable time, not to exceed one year without the written consent of the City
Engineer. Until such time as the Franchisee removes, modifies or replaces any
obsolete Network Facilities as directed by the City Engineer, the Franchisee
shall be responsible for all necessary repairs, relocations of such Network
Facilities, and maintenance of the Public Way occupied by such Network
Facilities in the same manner and degree as if the Network Facilities were in
active use.
SECTION 5.11. ACQUISITION OF PROPERTY ADJACENT TO PUBLIC WAY.
a. Before the Franchisee acquires any interest in real property for
the installation or relocation of Network Facilities along or adjacent to any
Public Way, the Franchisee shall give the City Engineer written notice of such
planned acquisition no later than 30 days before the date of such acquisition.
The City Engineer will review the proposed acquisition to see that same does
not conflict or interfere with any proposed street or thoroughfare expansion.
b. If the City Engineer determines that the proposed acquisition will
unreasonably conflict or interfere with any proposed street or thoroughfare
expansion, the City Engineer will notify Franchisee of the potential conflict
or interference within 30 days after receipt of notice from the Franchisee, and
the Franchisee shall be required to accommodate the requirements of the City
Engineer with regard to the use of the property.
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c. If the Franchisee fails to notify the City within the prescribed 30
day period, the City may require the Franchisee to relocate its Network
Facilities at no cost to the City to avoid unreasonable interference with such
proposed street or thoroughfare expansion.
SECTION 5.12. ABANDONMENT OF PUBLIC WAY. If the City conveys, closes,
abandons, or releases its interest in any Public Way containing Network
Facilities installed or operated pursuant to this Franchise, any such
conveyance, closure, abandonment or release shall be subject to the rights of
the Franchisee under this Franchise.
SECTION 5.13. BONDING. The Franchisee shall comply with all applicable
requirements relating to the provision of bonds or other security to the City in
connection with its work in the Public Ways.
SECTION 5.14. INSTALLATION OF CITY FIBER. In the case of new
construction of the Network, the Franchisee, at its sole cost and expense, shall
upon written request of the City at the time of the issuance of the New
Construction Permit, provide to City for internal governmental purposes four
dark fiber strands throughout the portion of the Network Facilities being
constructed, as required by the City Engineer and suitable for City's needs. In
addition, where such new construction is located directly adjacent to municipal
buildings used by City for governmental purposes, the Franchisee shall provide
lateral lines connecting such locations to the Network as required by the City
Engineer at 110 percent of the Franchisee's direct cost, to be reimbursed by the
City. The City shall be responsible for providing the Franchisee with access to
such locations. The City Engineer shall notify the Franchisee of such locations
prior to the commencement of construction of the applicable portions of the
Network Facilities. The City reserves the right to obtain bids from vendors,
other than the Franchisee, for construction work not requiring access to the
Network Facilities.
ARTICLE VI.
INDEMNIFICATION AND INSURANCE
SECTION 6.01. INDEMNIFICATION. THE FRANCHISEE COVENANTS AND WARRANTS
THAT IT WILL PROTECT, DEFEND, AND HOLD HARMLESS THE CITY, ITS EMPLOYEES,
OFFICERS, AND LEGAL REPRESENTATIVES (COLLECTIVELY, THE "CITY") FROM ANY AND ALL
THIRD PARTY CLAIMS, DEMANDS, AND LIABILITY, INCLUDING DEFENSE COSTS, RELATING IN
ANY WAY TO DAMAGES, CLAIMS, OR FINES ARISING BY REASON OF OR IN CONNECTION WITH
FRANCHISEE'S ACTUAL OR ALLEGED NEGLIGENCE OR OTHER ACTIONABLE PERFORMANCE OR
OMISSION OF THE FRANCHISEE IN CONNECTION WITH OR DURING THE PERFORMANCE OF ITS
DUTIES UNDER THIS FRANCHISE. THE FRANCHISEE FURTHER EXPRESSLY COVENANTS AND
AGREES TO PROTECT, DEFEND, INDEMNIFY, AND HOLD HARMLESS CITY FROM ALL CLAIMS,
ALLEGATIONS, FINES, DEMANDS, AND DAMAGES RELATING IN ANY WAY TO
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THE ACTUAL OR ALLEGED JOINT AND/OR CONCURRENT NEGLIGENCE OF THE CITY AND THE
FRANCHISEE, WHETHER THE FRANCHISEE IS IMMUNE FROM LIABILITY OR NOT.
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, THE LIABILITY OF THE
FRANCHISEE UNDER THIS INDEMNITY PROVISION SHALL NOT EXCEED $1,000,000 PER
OCCURRENCE.
IF THE FRANCHISE GRANTED BY THIS ORDINANCE IS TERMINATED OR IS NOT
RENEWED, AND THE FRANCHISEE DOES NOT REMOVE ITS NETWORK FACILITIES FROM THE
PUBLIC WAY, THE FRANCHISEE SHALL CONTINUE TO INDEMNIFY AND HOLD HARMLESS THE
CITY PURSUANT TO THIS ARTICLE AS LONG AS ITS FACILITIES ARE LOCATED IN THE
PUBLIC WAY, AND FOR SAID PURPOSE, THIS SECTION SHALL SURVIVE THE FRANCHISE.
SECTION 6.02. INSURANCE. The Franchisee shall maintain the following
insurance coverage and the respective policies thereof shall cover all risks
related to the Franchisee's use and occupancy of the Public Way and all other
risks associated with this Franchise:
a. Description of Insurance Coverage and Limits
<TABLE>
<CAPTION>
Coverage Limit of Liability
- -------------------------- ---------------------------
<S> <C>
Workers' Compensation Statutory for Workers' Compensation.
Employer's Liability
Bodily Injury by Accident $1,000,000 (each accident)
Bodily Injury by Disease $1,000,000 (policy limit)
Bodily Injury by Disease $1,000,000 (each employee)
Commercial General Liability: Combined single limits of $1,000,000
Including Broad Form per occurrence and $1,000,000 aggregate
Coverage, Contractual
Liability, Bodily
and Personal Injury,
and Completed
Operations
Products and Completed Operations $1,000,000 aggregate
Automobile Liability Insurance $1,000,000 combined single limit
(for automobiles used by the per occurrence
Franchisee in the course of
its performance under this
Franchise, including Employer's
Non-Ownership and Hired Auto
Coverage)
Excess Coverage $1,000,000 per occurrence/
</TABLE>
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<PAGE> 18
<TABLE>
<S> <C>
combined aggregate in excess of
limits specified for Employer's Liability,
Commercial General Liability and
Automobile Liability
</TABLE>
Aggregate limits are per 12-month policy period, unless otherwise indicated.
b. Other insurance-related requirements
1. The City shall be named an additional insured, by
endorsement, on all applicable insurance policies.
2. Applicable insurance policies shall each be endorsed with
a waiver of subrogation in favor of the City.
3. Insurers shall have a rating of B+ or better and a
financial size of Class VI or better according to the
current year's Best's rating. Each issuer must be
responsible and reputable, must have financial capability
consistent with the risks covered, and shall be subject to
approval by the Director in the Director's discretion as
to conformance with these requirements.
4. Deductible limits on insurance policies and/or self
insured retention exceeding $50,000 require approval of
the City.
5. Certificates of insurance shall state that the City shall
be notified a minimum of 30 days prior to the insurer's
action in the event of cancellation, non-renewal or
material change in coverage regarding any insurance policy
required in this Franchise.
6. Full limits of insurance required in Subsection (a) shall
be available for claims arising out of this Franchise.
7. Certificates of insurance shall be provided by the
Franchisee to the City upon the Franchisee's execution of
this Franchise. Any failure on the part of the City to
request such documentation shall not be construed as a
waiver of insurance requirements specified herein.
8. The City shall be entitled, upon request and without
incurring expense, to review the insurance policies (or
certified copies thereof) including endorsements thereto
which relate to the insurance requirements specified
herein and, at its discretion, to require proof of payment
for policy premiums.
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9. The City reserves the right to revise insurance
requirements specified herein and require the Franchisee
to comply therewith within 60 days of the City's official
notice of the revision. Such notice shall be in writing
and shall state the particular revisions required, and the
reasons therefor.
10. The City shall not be responsible for paying the cost of
insurance coverage required herein.
11. Notice of any actual or potential claim and/or litigation
that would affect insurance coverage required herein shall
be provided to the City in a timely manner. In the
alternative, a policy may by endorsement, establish a
policy aggregate for this Franchise which meets the
aggregate requirements specified herein.
12. Each insurance policy required herein shall be primary
insurance to any other insurance available to the City
with respect to any claims arising hereunder.
13. The Franchisee shall agree to either require its
contractors to maintain the same insurance coverage and
limits thereof as specified herein or such coverage on the
Franchisee's contractors shall be provided by the
Franchisee.
The Franchisee shall continuously and without interruption, maintain in force
the required insurance coverage and limits set forth above. Failure to do so
will be a default under this Franchise, allowing the City, at its option, to
terminate this Franchise in accordance with the provisions of Article VII.
ARTICLE VII.
DEFAULT AND TERMINATION
SECTION 7.01. DEFAULTS. The occurrence of any of the following shall be
an event of default under this Franchise:
i. failure of the Franchisee to comply with any material
term, condition or provision of this Franchise;
ii. any intentional false statement or misrepresentation as to
a material fact in the Franchisee's application for this
Franchise;
iii. the Franchisee's loss of or failure to obtain all
licenses, permits, and certification lawfully required by
any statute, ordinance, rule or regulation
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of any regulatory body having jurisdiction over the
Franchisee's operations under this Franchise and pay all
fees associated therewith; or
iv. acts or omissions of the Franchisee constituting evasion
of payment of Franchise Fees, including evasion by means
of not reporting actual Gross Receipts, bartering or any
other means.
SECTION 7.02 CURE PERIOD. If the Franchisee continues to violate or
fails to comply with the material terms and provisions of this Franchise for a
period of 30 days after the Franchisee has been notified in writing by the City
to cure such specific alleged violation or failure to comply, then the City may
follow the procedures set forth herein to declare that the Franchisee has
terminated all rights and privileges consented to in this Franchise; provided
that if the Franchisee is alleged to be in violation of any material provisions
of this Franchise other than the payment of any fee due hereunder and if the
Franchisee commences efforts to cure such alleged violation(s) within 30 days
after receipt of written notice and shall thereafter prosecute such curative
efforts with reasonable diligence until such curative efforts are completed,
then such alleged violation(s) shall cease to exist and no further action will
be taken at that time.
SECTION 7.03. TERMINATION. Termination of this Franchise shall be by
City ordinance. The City shall provide written notice of such ordinance to
terminate to the Franchisee at least 60 days prior to such ordinance being
included on City Council's agenda. Such notice shall set forth the causes and
reasons for termination. The Franchisee shall be provided the opportunity to
appear before the City Council prior to the City Council's consideration of such
termination of the Franchise and such opportunity to speak shall be no less than
60 days following receipt of notice of termination. Such notice shall set forth
the time, date, and place of such time when the Franchisee may appear before the
City Council. Upon any termination of this Franchise, all amounts due by the
Franchisee to City shall immediately become due and payable.
ARTICLE VIII.
TRANSFER OF FRANCHISE
SECTION 8.01. PROHIBITION. The rights, privileges and franchise granted
hereunder may not be assigned, in whole or in part, without the prior consent of
the City expressed by resolution or ordinance, and then only under such
conditions as may therein be prescribed, except as otherwise provided in SECTION
8.04. No assignment in law or otherwise shall be effective until the assignee
has filed with the Director an instrument, duly executed, reciting the fact of
such assignment, accepting the terms hereof, and agreeing to comply with all of
the provisions hereof. A mortgage or other pledge of assets in a bona fide
lending transaction shall not be considered an assignment of this Franchise for
the purposes of this Article.
SECTION 8.02. PROCESS. Upon receipt of a request for consent to an
assignment, the Director shall diligently investigate the request in a timely
manner and place the request on the
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City Council agenda at the earliest practicable time. The City Council shall
proceed to act on the request within a reasonable period of time.
SECTION 8.03. SCOPE OF REVIEW. In reviewing a request for assignment, the
City may inquire into the legal, technical and financial qualifications of the
prospective assignee, and the Franchisee shall assist the City in so inquiring.
The City may condition said assignment upon such terms and conditions as it
deems reasonably necessary, provided its approval and any such terms and
conditions so attached shall be related to the legal, technical, and financial
qualifications of the prospective assignee as well as the Franchisee's
compliance with the terms hereof.
SECTION 8.04. ASSIGNMENTS NOT REQUIRING APPROVAL. Notwithstanding anything
to the contrary contained in this article, the prior approval of the City shall
not be required for any assignment to (i) any entity controlling, controlled by,
or under common control with the Franchisee, as long as such entity has
expertise in the operation of the Network Facilities; (ii) any entity with which
the Franchisee or an affiliate of the Franchisee shares joint ownership of the
Network Facilities; or (iii) any entity that is a holder of a then-current
comprehensive telecommunication (as distinguished from a Cable Services)
franchise. The Franchisee shall give written notice of such assignment and
provide documentation demonstrating the assignee's financial resources to the
Director.
SECTION 8.05. RELEASE. Upon receiving the City's consent to an assignment,
or, in the event of an assignment qualifying under SECTION 8.04, upon giving
notice under SECTION 8.04, the Franchisee shall be relieved of all conditions,
obligations, and liabilities arising or which might arise hereunder that are
assumed by the assignee.
ARTICLE IX.
MISCELLANEOUS
SECTION 9.01. DISCRIMINATION PROHIBITED.
a. The Franchisee shall not give unreasonable preference or advantage as to
rates or services to anyone within a service classification; nor shall
Franchisee discriminate against anyone in the furnishing of Services under this
Franchise, or the charges therefor, on account of race, color, religion, sex or
national origin.
b. The Franchisee shall comply with all laws, standards, orders and
regulations regarding equal employment which are applicable to the Franchisee.
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SECTION 9.02. DRUG-FREE WORKPLACE.
a. It is the policy of the City to achieve a drug-free work force and to
provide a workplace that is free from the use of alcohol and illegal drugs. It
is also the policy of the City that the manufacture, distribution, dispensation,
possession, sale or use of alcohol or illegal drugs by contractors while on City
premises is prohibited. By accepting this Franchise, the Franchisee agrees that
it shall require any contractor working for or on behalf of the Franchisee in
the Public Way to comply with all applicable federal and state laws and
regulations, as well as the requirements and procedures set forth in the Mayor's
Policy on Drug Detection and Deterrence, City Council Motion No. 92-1971 and the
Mayor's Drug Detection and Deterrence Procedures for Contractors, Executive
Order No. 1-31, both of which are on file in the Office of the City Secretary.
b. In addition, the Franchisee shall require that any subcontractor working
for or on behalf of Franchisee's contractor(s) in the Public Way shall also be
required to comply with the provisions of this section. The City may require
that the Franchisee produce evidence that Franchisee's contractors, as well as
any subcontractors, are in compliance with this provision of the Franchise.
SECTION 9.03. NOTICE.
a. All notices required or permitted hereunder shall be in writing and
shall be deemed delivered when actually received or, if earlier, on the third
day following deposit in a United States Postal Service post office or
receptacle with proper postage affixed (certified mail, return receipt
requested) addressed to the respective other party at the address prescribed
below or at such other address as the receiving party may have theretofore
prescribed by notice to the sending party.
b. Any notice or communication required or permitted in the administration
of this Franchise may be sent by personal delivery, United States mail or
courier and shall be sent as follows:
Notice to the City Engineer will be to:
City Engineer
Director, Department of Public Works and Engineering
City of Houston
1801 Main
Houston, Texas 77002
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Notice to the City or the Director will be to:
Director, Department of Finance and Administration
City of Houston
900 Bagby, 2nd Floor
Houston, Texas 77002
Notice to the Franchisee will be to:
TVMAX Communications (Texas), Inc.
1111 West Mockingbird Lane, Suite 1130
Dallas, Texas 75247
Attention: Mr. Mike Katzenstein, Vice President and General Counsel
TVMAX Communications (Texas), Inc.
10300 West Office Drive, Suite 200
Houston, Texas 77042
Attention: General Manager
and
Mr. Robert J. Collins
Andrews & Kurth, L.L.P.
4200 Texas Commerce Tower
Houston, Texas 77002
or to such other address as the Director, the City Engineer or the Franchisee
may designate in writing from time to time. Any notice sent by facsimile
transmission must, subsequent to such facsimile transmission, also be given by
any other means provided for hereunder.
SECTION 9.04. FORCE MAJEURE. Other than the Franchisee's failure to pay
amounts due and payable under this Franchise, the Franchisee shall not be in
default or be subject to sanction under any provision of this Franchise when its
performance is prevented by Force Majeure. Force Majeure means an event caused
by strike or other labor problem; embargo; epidemic; act of God; fire; flood;
adverse weather conditions, or other major environmental disturbance; act of
military authority; war or civil disorder. Provided, however, that such causes
are beyond the reasonable control and without the willful act, fault, failure or
negligence of the Franchisee. Performance is not excused under this section
following the end of the applicable event of Force Majeure.
SECTION 9.05. CONTROLLING LAWS. This ordinance and the franchise granted
herein are subject to the applicable provisions of the Constitution and laws of
the United States and of the State of Texas, the Charter of the City of Houston,
and the provisions of general applicability of
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the Code of Ordinances, City of Houston. All obligations of the parties
hereunder are performable in Harris County, Texas. In the event that any legal
proceeding is brought to enforce the terms of this Franchise, the same shall be
brought in Harris County, Texas.
SECTION 9.06 CUMULATIVE EFFECT. This Franchise shall be cumulative of all
provisions of the Code of Ordinances, City of Houston, as amended, except in
those instances where the provisions of this Franchise are in direct conflict
with the provisions of such Code, in which instances the provisions of this
Franchise shall supersede the conflicting provisions of such Code as they apply
to the City.
SECTION 9.07. SEVERABILITY. It is hereby declared to be the intention of
the City Council that the phrases, clauses, sentences, paragraphs and sections
of this Franchise are severable, and, if any phrase, clause, sentence, paragraph
or section of this Franchise shall be declared void, ineffective or
unconstitutional by the valid judgment or final decree of a court of competent
jurisdiction, such voidness, ineffectiveness or unconstitutionality shall not
affect any of the remaining phrases, clauses, sentences, paragraphs and sections
of this Franchise since the same would have been enacted by the City Council
without the incorporation herein of any such void, ineffective or
unconstitutional phrase, clause, sentence, paragraph or section.
SECTION 9.08. ENTIRE AGREEMENT. This Franchise merges the prior
negotiations and understandings of the parties hereto and embodies the entire
agreement of the parties, and there are not other agreements, assurances,
conditions, covenants (expressed or implied) or other terms with respect to the
Network Facilities whether written or verbal, antecedent or contemporaneous with
the execution hereof.
SECTION 9.09. CAPTIONS. Captions contained in this Franchise are for
reference purposes only, and therefore will be given no effect in construing
this Franchise and are not restrictive of the subject matter of any section of
this Franchise. Any reference to gender shall include the masculine, feminine
and neutral.
SECTION 9.10. ACCEPTANCE AND APPROVAL; CONSENTS. An approval by the
Director, the City Engineer, or any other instrumentality of City, of any part
of the Franchisee's Performance shall not be construed to waive compliance with
this Franchise or to establish a standard of performance other than required by
this Franchise or by law. Where this Franchise contains a provision that either
party approve or consent to any action of the other party, such approval or
consent shall not be unreasonably withheld or delayed.
SECTION 9.11. NON-WAIVER. Failure of either party hereto to insist on the
strict performance of any of the terms and conditions hereof or to exercise any
rights or remedies accruing hereunder upon default or failure of performance
shall not be considered a waiver of the right to insist on, and to enforce by
any appropriate remedy, strict compliance with any other obligation hereunder or
to exercise any right or remedy occurring as a result of any future default or
failure of performance, except as specifically conceded herein.
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SECTION 9.12. WRITTEN AMENDMENT. Unless otherwise provided herein, this
Franchise may be amended only by an ordinance duly adopted by the City Council.
SECTION 9.13. PUBLICATION. The City Secretary is hereby directed to publish
this Franchise in its entirety once a week for four consecutive weeks within a
period of 30 days after its passage in the official newspaper of the City, as
required by Article II, Section 17 of the Charter of the City of Houston, Texas.
The Franchisee shall pay all costs of publication of this Franchise.
SECTION 9.14. DUTIES UPON TERMINATION.
a. Unless this Franchise is renewed or superseded by another franchise
covering the same facilities and subject matter, the Franchisee shall notify the
City Engineer in writing, within 90 days after the termination of this
Franchise, of any of the Network Facilities that are not used or useful for
providing service under the Franchisee's existing cable franchise, or a
succeeding cable television franchise from the City, and that it wishes to
remove from the Public Way or convey in place. If the Franchisee does not timely
provide such notice, such Network Facilities shall, at the City's election, be
and become property of the City, without the payment of other or further
compensation to the Franchisee, or the City may, at its option, elect to have
all such property, if any, of the Franchisee in or under the Public Way removed
by the Franchisee at the Franchisee's sole cost and expense.
b. If the property is to be removed, the Franchisee shall have a reasonable
time to remove the Network Facilities and the Franchisee shall cause the Public
Way to be restored to the same condition, or in as good a state of repair or
condition, as same was in prior to removal of the Network Facilities. The
removal and restoration work shall proceed diligently to completion. All work
incident to the removal of the Network Facilities or restoration of Public Way
shall be done at the sole cost and expense of the Franchisee, and shall be done
under the supervision and satisfaction of the City Engineer. Notwithstanding
anything to the contrary contained herein, following the completion of such
removal, the Franchisee shall not remove additional property at any time for any
reason without the prior written approval of the Director, such approval to be
at the sole discretion of the Director.
c. If the property is to be conveyed in place, the Franchisee shall have a
reasonable time, not to exceed one year without the consent of the Director, to
provide the Director with a certified copy of the instrument conveying or
transferring the property to a third party; provided that the third party is
then currently franchised by the City to own and operate the conveyed property.
In the event the Franchisee does not timely provide the Director with such
instrument, the property shall be subject to the provisions of the second
sentence of SUBSECTION (a).
d. In the event of termination of this Franchise, the City Engineer may
order the removal of any Network Facilities from the Public Way at any time upon
a finding that the applicable
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Network Facilities interfere with the operation of the streets or utilities,
notwithstanding any time periods described in this section.
SECTION 9.15. VALUATION. This Franchise is granted subject to the lawful
provisions of Article II, Section 17, of the City Charter, which provisions are
made a part hereof and incorporated herein by reference. The terms of SECTION
9.14 constitute compliance with the valuation provisions of the Charter and
with regard to the disposition of the Network Facilities upon termination of
this Franchise.
SECTION 9.16. ACCEPTANCE. The Franchisee shall, within 30 days from the
Effective Date, file with the City Secretary a written statement executed in
its name by an officer of the Franchisee duly appointed and authorized to make
such statement, in the form provided in EXHIBIT C.
SECTION 9.17. REPRESENTATIONS AND WARRANTIES. In addition to the
representations, warranties, and covenants of the Franchisee to the City set
forth elsewhere herein, the Franchisee represents and warrants to the City and
covenants and agrees (which representations, warranties, covenants and
agreements shall not be affected or waived by any inspection or examination made
by or on behalf of the City) that, as of the closing and throughout the term of
this Franchise.
a. ORGANIZATION, STANDING AND POWER. The Franchisee is a corporation duly
organized, validly existing and in good standing under the laws of the state of
its incorporation and is duly authorized to do business in the State of Texas
and in the City. The Franchisee has all requisite power and authority to own or
lease its properties and assets, to conduct its businesses as currently
conducted and to execute, deliver and perform this Franchise and all other
agreements entered into or delivered in connection with or as contemplated
hereby.
b. COMPLIANCE WITH LAW. The Franchisee is, to the best of its knowledge and
belief, in compliance with all laws, ordinances, decrees and governmental rules
and regulations applicable to the System and has obtained all government
licenses, permits, and authorizations necessary for the operation and
maintenance of the Network Facilities.
c. FULL DISCLOSURE. Without limiting the specific language of any other
representation and warranty herein, all information furnished by the Franchisee
to the City in connection with this Franchise, or otherwise related to the
Network Facilities by authorized officers of the Franchisee, to the best of the
Franchisee's knowledge and belief is accurate and complete in all material
respects on the date of passage of this Franchise, and includes all material
facts required to be stated therein and does not contain any untrue statement of
a material fact or omit any material fact necessary to make the statements
therein not misleading. There is no fact known to the Franchisee, to the best of
its knowledge, which materially and adversely affects or in the future could
reasonably be expected to materially and adversely affect the business,
operations, properties, assets or financial condition of the Network, or any
part thereof, which has not been set forth in this Franchise or the other
documents, certificates, and instruments delivered to the
-26-
<PAGE> 27
City by or on behalf of the Franchisee specifically for use in connection with
the transactions contemplated by this Franchise.
d. TRUTHFUL STATEMENTS. The Franchisee warrants, to the best of its
knowledge and belief, that information provided and statements made in its
application for this Franchise were true and correct when made and are true and
correct upon execution hereof.
e. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained in this Franchise shall survive the term of the Franchise.
SECTION 9.18. EFFECTIVE DATE. This Franchise, having been published as
required in Article II, Section 17 of the Charter of the City of Houston shall
become effective 30 days following its final passage and approval by City
Council.
PASSED FIRST READING THIS 10TH DAY OF DECEMBER, 1997.
PASSED SECOND READING THIS 17TH DAY OF DECEMBER, 1997.
PASSED THIRD READING THIS 23RD DAY OF DECEMBER, 1997.
APPROVED THIS 23RD DAY OF DECEMBER, 1997.
----------------------------------
Mayor of the City of Houston
(Prepared by Legal Department [ILLEGIBLE])
(TA 12-1-97)
(Requested by Richard Lewis, Director, Department of Finance & Administration)
(LD File No. 349621601)
-27-
<PAGE> 28
Section 2.04(b) EXHIBIT A
LETTER TO BE SENT TO CUSTOMERS WHO MAY REQUIRE FRANCHISE AGREEMENTS*
Dear_____________:
Pursuant to the franchise agreement between ________________ and the City
of Houston (the "City"), City Ordinance No. ______________, this letter is to
notify you that you may require authorization from the City of Houston to
provide services via _____________ facilities located within City streets and
rights-of-way.
Information regarding applicability, procedures, and requirements for such
authorization may be obtained by calling the City of Houston Division of
Regulatory Development Services at (713) 247-1532.
[Company]
--------------------------
cc: City of Houston
Note to Exhibit A:
* Pursuant to SECTION 2.04(b) of Ordinance No. _____, this letter is to
be sent to entities whose use of the Network should reasonably require
certification, authorization, or licensing by the FCC, Texas Public
Utility Commission, or such other federal or state regulatory
authority.
<PAGE> 29
Section 3.03
EXHIBIT B
CITY OF HOUSTON
TELECOMMUNICATION FRANCHISE FEE PAYMENT FORM
Period Ending:
---------------------------
Franchisee:
------------------------------
No. of Customers By Class
Business (private)
-------------------
Business (public)
-------------------
Residential
-------------------
Sales and Revenues in City of Houston
Local Service Revenue
(5,000 to 5,069) 40 CFR Part 32 -------------------
Network Access Services Revenue
(5080 - 5084) -------------------
Long Distance Revenue
(5010 - 5169) -------------------
Miscellaneous Revenues
(5230 -5270) -------------------
Uncollectible
-------------------
TOTAL
-------------------
Franchise Fee @ 5% of Gross Revenue
-------------------
* Attached supporting quarterly revenue reports.
<PAGE> 30
Section 9.16
EXHIBIT C
STATEMENT OF ACCEPTANCE
________________________, for itself, its successors and assigns, hereby accepts
and agrees to be bound by all terms, conditions and provisions of the franchise
granted pursuant to Ordinance No. __________, attached hereto and incorporated
herein for all intents and purposes.
[COMPANY NAME]
-------------------------------
BY:
----------------------------
Name:
-----------------------
Title:
----------------------
Date:
-----------------------
Note to Exhibit C:
Attach copy of executed Ordinance containing such franchise.
<PAGE> 31
PASSED 1ST READING
12/10/97
<TABLE>
<CAPTION>
AYE NO
================================================
<S> <C> <C>
ABSENT MAYOR LANIER
- ------------------------------------------------
oooo oooo COUNCIL MEMBERS
- ------------------------------------------------
X HUEY
- ------------------------------------------------
X YARBROUGH
- ------------------------------------------------
X WONG
- ------------------------------------------------
X BONEY
- ------------------------------------------------
X TODD
- ------------------------------------------------
X DRISCOLL
- ------------------------------------------------
ABSENT KELLEY
- ------------------------------------------------
ABSENT FRAGA
- ------------------------------------------------
ABSENT CASTILLO
- ------------------------------------------------
MAYOR PRO TEM PRESIDING
X SAENZ
- ------------------------------------------------
X ROACH
- ------------------------------------------------
X SANCHEZ
- ------------------------------------------------
X BELL
- ------------------------------------------------
ABSENT ROBINSON
- ------------------------------------------------
CAPTION ADOPTED
</TABLE>
PASSED 2ND READING
12/17/97
<TABLE>
<CAPTION>
AYE NO
================================================
<S> <C> <C>
X MAYOR LANIER
- ------------------------------------------------
oooo oooo COUNCIL MEMBERS
- ------------------------------------------------
ABSENT HUEY
- ------------------------------------------------
X YARBROUGH
- ------------------------------------------------
X WONG
- ------------------------------------------------
X BONEY
- ------------------------------------------------
X TODD
- ------------------------------------------------
X DRISCOLL
- ------------------------------------------------
X KELLEY
- ------------------------------------------------
ABSENT FRAGA
- ------------------------------------------------
X CASTILLO
- ------------------------------------------------
X SAENZ
- ------------------------------------------------
X ROACH
- ------------------------------------------------
X SANCHEZ
- ------------------------------------------------
X BELL
- ------------------------------------------------
X ROBINSON
- ------------------------------------------------
CAPTION ADOPTED
</TABLE>
PASSED 3RD AND FINAL READING
12/23/97
<TABLE>
<CAPTION>
AYE NO
================================================
<S> <C> <C>
X MAYOR LANIER
- ------------------------------------------------
oooo oooo COUNCIL MEMBERS
- ------------------------------------------------
X HUEY
- ------------------------------------------------
X YARBROUGH
- ------------------------------------------------
X WONG
- ------------------------------------------------
X BONEY
- ------------------------------------------------
X TODD
- ------------------------------------------------
X DRISCOLL
- ------------------------------------------------
X KELLEY
- ------------------------------------------------
X FRAGA
- ------------------------------------------------
ABSENT CASTILLO
- ------------------------------------------------
X SAENZ
- ------------------------------------------------
X ROACH
- ------------------------------------------------
X SANCHEZ
- ------------------------------------------------
X BELL
- ------------------------------------------------
ABSENT ROBINSON
- ------------------------------------------------
CAPTION ADOPTED
</TABLE>
<PAGE> 32
I, ANNA RUSSELL, City Secretary of the City of Houston, Texas, do hereby
certify that the within and foregoing is a true and correct copy of Ordinance
No. 97-1567, passed and adopted by the City Council of said City on the 23rd day
of December, 1997, as the same appears in the records in my office.
WITNESS my hand and the Seal of said City this 31st day of December,
A.D. 1997.
/s/ ANNA RUSSELL
---------------------------------------
City Secretary of the City of Houston
Anna Russell
<PAGE> 1
EXHIBIT 10.27
================================================================================
CREDIT AGREEMENT
DATED AS OF DECEMBER 19, 1997
AMONG
TVMAX TELECOMMUNICATIONS, INC.,
AS BORROWER,
OPTEL, INC.,
THE LENDERS LISTED HEREIN,
AS LENDERS,
GOLDMAN SACHS CREDIT PARTNERS L.P.,
AS ARRANGER AND SYNDICATION AGENT,
CANADIAN IMPERIAL BANK OF COMMERCE,
AS ADMINISTRATIVE AGENT
AND
GENERAL ELECTRIC CAPITAL CORPORATION,
AS DOCUMENTATION AGENT
================================================================================
<PAGE> 2
TVMAX TELECOMMUNICATIONS, INC.
CREDIT AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1.
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Accounting Terms; Utilization of GAAP for Purposes of Calculations Under Agreement . . . . . . . . . 33
1.3 Other Definitional Provisions and Rules of Construction . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 2.
AMOUNTS AND TERMS OF COMMITMENTS AND LOANS . . . . . . . . . . . . . . . . . 34
2.1 Commitments; Making of Loans; the Register; Notes . . . . . . . . . . . . . . . . . . . . . . . . . 34
2.2 Interest on the Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
2.3 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.4 Repayments, Prepayments and Reductions in Revolving Loan Commitments; General Provisions
Regarding Payments; Application of Proceeds of Collateral and Payments Under Guaranties. . . . . . . 43
2.5 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
2.6 Special Provisions Governing Eurodollar Rate Loans. . . . . . . . . . . . . . . . . . . . . . . . . 52
2.7 Increased Costs; Taxes; Capital Adequacy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.8 Obligation of Lenders and Issuing Lender to Mitigate. . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 3.
LETTERS OF CREDIT . . . . . . . . . . . . . . . . . . . . . . . 60
3.1 Issuance of Letters of Credit and Lenders' Purchase of Participations Therein. . . . . . . . . . . . 60
3.2 Letter of Credit Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
3.3 Drawings and Reimbursement of Amounts Paid Under Letters of Credit. . . . . . . . . . . . . . . . . 62
3.4 Obligations Absolute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.5 Indemnification; Nature of Issuing Lender's Duties . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.6 Increased Costs and Taxes Relating to Letters of Credit . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 4.
CONDITIONS TO LOANS AND LETTERS OF CREDIT . . . . . . . . . . . . . . . . . 68
4.1 Conditions to AXELs and Revolving Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.2 Conditions to All Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
4.3 Conditions to Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
</TABLE>
(i)
<PAGE> 3
<TABLE>
<CAPTION>
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----
<S> <C> <C>
SECTION 5.
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . 73
5.1 Organization, Powers, Qualification, Good Standing, Business and Subsidiaries. . . . . . . . . . . . 73
5.2 Authorization of Borrowing, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
5.3 Financial Condition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
5.4 No Material Adverse Change; No Restricted Payments. . . . . . . . . . . . . . . . . . . . . . . . . 76
5.5 Title to Properties; Liens; Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
5.6 Litigation; Adverse Facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
5.7 Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
5.8 Performance of Agreements; Materially Adverse Agreements; Material Contracts. . . . . . . . . . . . 78
5.9 Governmental Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
5.10 Securities Activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
5.11 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
5.12 Certain Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
5.13 Environmental Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
5.14 Employee Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
5.15 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
5.16 Matters Relating to Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
5.17 Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
SECTION 6.
AFFIRMATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . 82
6.1 Financial Statements and Other Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
6.2 Corporate Existence, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
6.3 Payment of Taxes and Claims; Tax Consolidation. . . . . . . . . . . . . . . . . . . . . . . . . . . 88
6.4 Maintenance of Properties; Insurance; Application of Net Insurance/Condemnation Proceeds. . . . . . 88
6.5 Inspection Rights; Lender Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
6.6 Compliance with Laws, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
6.7 Execution of Subsidiary Guaranty and Personal Property Collateral Documents by Certain Subsid-
iaries and Future Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
6.8 Conforming Leasehold Interests; Matters Relating to Additional Real Property Collateral . . . . . . 92
6.9 Interest Rate Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
6.10 License Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
6.11 Assignment Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94
SECTION 7.
NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 95
7.1 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
7.2 Liens and Related Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
7.3 Investments; Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
7.4 Contingent Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
7.5 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
7.6 Financial Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
7.7 Restriction on Fundamental Changes; Asset Sales and Acquisitions. . . . . . . . . . . . . . . . . . 106
7.8 Consolidated Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
7.9 Restriction on Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
7.10 Sale or Discount of Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
7.11 Transactions with Shareholders and Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
7.12 Disposal of Subsidiary Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
7.13 Conduct of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
7.14 Amendments or Waivers of Related Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
7.15 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
7.16 AXEL Excess Proceeds Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
SECTION 8.
EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . 111
8.1 Failure to Make Payments When Due. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
8.2 Default in Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
8.3 Breach of Certain Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
8.4 Breach of Warranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
8.5 Other Defaults Under Loan Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
8.6 Involuntary Bankruptcy; Appointment of Receiver, etc. . . . . . . . . . . . . . . . . . . . . . . . 112
8.7 Voluntary Bankruptcy; Appointment of Receiver, etc. . . . . . . . . . . . . . . . . . . . . . . . . 113
8.8 Judgments and Attachments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
8.9 Dissolution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
8.10 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
8.11 Change in Control. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
8.12 Invalidity of Guaranties; Failure of Security; Repudiation of Obligations . . . . . . . . . . . . . 114
8.13 Subordinated Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
8.14 Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
SECTION 9.
AGENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 116
9.1 Appointment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
9.2 Powers and Duties; General Immunity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
9.3 Representations and Warranties; No Responsibility For Appraisal of Creditworthiness. . . . . . . . . 119
9.4 Right to Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
9.5 Successor Administrative Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
9.6 Collateral Documents and Guaranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
</TABLE>
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<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 10.
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . 121
10.1 Assignments and Participations in Loans and Letters of Credit. . . . . . . . . . . . . . . . . . . . 121
10.2 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
10.3 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
10.4 Set-Off; Security Interest in Deposit Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . 126
10.5 Ratable Sharing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
10.6 Amendments and Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
10.7 Independence of Covenants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
10.8 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
10.9 Survival of Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . . . . . . . 129
10.10 Failure or Indulgence Not Waiver; Remedies Cumulative. . . . . . . . . . . . . . . . . . . . . . . . 129
10.11 Marshalling; Payments Set Aside. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
10.12 Severability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
10.13 Obligations Several; Independent Nature of Lenders' Rights . . . . . . . . . . . . . . . . . . . . . 130
10.14 Headings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
10.15 Applicable Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
10.16 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
10.17 Consent to Jurisdiction and Service of Process . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
10.18 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
10.19 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
10.20 Maximum Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
10.21 Counterparts; Effectiveness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Signature pages S-1
</TABLE>
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EXHIBITS
<TABLE>
<S> <C>
I FORM OF NOTICE OF BORROWING
II FORM OF NOTICE OF CONVERSION/CONTINUATION
III FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT
IV FORM OF AXEL NOTE
V FORM OF REVOLVING NOTE
VI FORM OF CONVERTED TERM NOTE
VII FORM OF COMPLIANCE CERTIFICATE
VIII FORM OF OPINION OF COUNSEL TO LOAN PARTIES
IX FORM OF OPINION OF O'MELVENY & MYERS LLP
X FORM OF ASSIGNMENT AGREEMENT
XI FORM OF CERTIFICATE RE NON-BANK STATUS
XII FORM OF COLLATERAL ACCOUNT AGREEMENT
XIII FORM OF COMPANY PLEDGE AGREEMENT
XIV FORM OF COMPANY SECURITY AGREEMENT
XV FORM OF SUBSIDIARY GUARANTY
XVI FORM OF SUBSIDIARY PLEDGE AGREEMENT
XVII FORM OF SUBSIDIARY SECURITY AGREEMENT
XVIII FORM OF HOLDINGS GUARANTY
XIX FORM OF HOLDINGS PLEDGE AGREEMENT
XX FORM OF INTERCOMPANY NOTE
XXI FORM OF LICENSE CO. GUARANTY
XXII FORM OF LICENSE CO. SECURITY AGREEMENT
XXIII FORM OF VPC AND CDPQ AGREEMENT
XXIV FORM OF LICENSE CO. STOCKHOLDERS PLEDGE AGREEMENT
XXV FORM OF HOLDINGS SECURITY AGREEMENT
XXVI FORM OF LENDER SUBORDINATION AGREEMENT
</TABLE>
(v)
<PAGE> 7
SCHEDULES
<TABLE>
<S> <C>
2.1 LENDERS' COMMITMENTS AND PRO RATA SHARES
5.1A SUBSIDIARIES OF HOLDINGS
5.1E LICENSES
5.5 REAL PROPERTY
5.6 LITIGATION
5.8 MATERIAL CONTRACTS
5.11 CERTAIN EMPLOYEE BENEFIT PLANS
5.14 EMPLOYEE MATTERS
7.1 CERTAIN EXISTING INDEBTEDNESS
7.2 CERTAIN EXISTING LIENS
7.3 CERTAIN EXISTING INVESTMENTS
7.4 CERTAIN EXISTING CONTINGENT OBLIGATIONS
</TABLE>
(vi)
<PAGE> 8
TVMAX TELECOMMUNICATIONS, INC.
CREDIT AGREEMENT
This CREDIT AGREEMENT is dated as of December 19, 1997 and entered
into by and among TVMAX TELECOMMUNICATIONS, INC., a Delaware corporation
("COMPANY"), OPTEL, INC., a Delaware corporation ("HOLDINGS"), GOLDMAN SACHS
CREDIT PARTNERS L.P., as arranger (in such capacity, "ARRANGER") and
syndication agent (in such capacity, "SYNDICATION AGENT"), THE FINANCIAL
INSTITUTIONS LISTED ON THE SIGNATURE PAGES HEREOF (each individually referred
to herein as a "LENDER" and collectively as "LENDERS"), CANADIAN IMPERIAL BANK
OF COMMERCE ("CIBC"), as administrative agent for Lenders (in such capacity,
"ADMINISTRATIVE AGENT"), and GENERAL ELECTRIC CAPITAL CORPORATION, as
Documentation Agent (in such capacity, "DOCUMENTATION AGENT").
R E C I T A L S
WHEREAS, Company and Holdings (this and other capitalized terms used
in these recitals without definition being used as defined in subsection 1.1)
desire that Lenders extend certain credit facilities to Company for working
capital purposes (including the payment of interest expense and "key money"
amounts for new or renewed cable and telephone service contracts) of Company
and any other Subsidiaries of Company which are Guarantors and permitted
acquisitions;
WHEREAS, Company desires to secure all of the Obligations hereunder
and under the other Loan Documents by granting to Administrative Agent, on
behalf of Lenders, a first priority Lien on substantially all of its real,
personal and mixed property, including a pledge of all of the capital stock of
each of its Subsidiaries; and
WHEREAS, Holdings and all of the Subsidiaries of Holdings (other than
Company) have agreed to guarantee the Obligations hereunder and under the other
Loan Documents and to secure their Guaranties by granting to Administrative
Agent, on behalf of Lenders, a first priority Lien on substantially all of
their respective real, personal and mixed property, including a pledge of all
of the capital stock of each of their respective Subsidiaries; and
WHEREAS, VPC and CDPQ have agreed with Lenders that they will not
pledge to any other party the Holdings Common Stock owned by them and VPC has
agreed not to pledge the Existing Holdings Convertible Notes owned by it:
NOW, THEREFORE, in consideration of the premises and the agreements,
provisions and covenants herein contained, Company, Holdings, Lenders and
Agents agree as follows:
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<PAGE> 9
SECTION 1.
DEFINITIONS
1.1 CERTAIN DEFINED TERMS.
The following terms used in this Agreement shall have the following
meanings:
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (i)
assumed by Holdings or any of its Subsidiaries in connection with an
asset acquisition from such Person or (ii) existing at the time such
Person becomes a Subsidiary of Holdings or any of its Subsidiaries;
provided that in each case (a) such Indebtedness was existing at the
time of such asset acquisition or acquisition of such Person and not
incurred in contemplation of such acquisition and (b) such
Indebtedness is non-recourse except to the Person or assets acquired.
"ADDITIONAL SUBORDINATED INDEBTEDNESS" means (i) additional
convertible subordinated notes issued to Videotron which are
substantially in the form of Addendum B to the Lender Subordination
Agreement and (ii) other subordinated Indebtedness issued by Holdings
to Videotron or a Strategic Equity Investor with terms substantially
identical to the convertible subordinated promissory notes attached as
Addendum B to the Lender Subordination Agreement in terms of
maturities, no cash payments prior to maturity, covenants, events of
default, and subordination provisions.
"ADJUSTED BULK CABLE CUSTOMERS" means, for any period, (i) the
total number of cable customers under Bulk Cable Contracts divided by
(ii) three.
"ADJUSTED CABLE SUBSCRIBERS" means, for any period, the sum of
(i) Adjusted Bulk Cable Customers and (ii) Retail Cable Customers.
"ADJUSTED EURODOLLAR RATE" means, for any Interest Rate
Determination Date with respect to an Interest Period for a Eurodollar
Rate Loan, the rate per annum obtained by dividing (i) the offered
quotation (rounded upward to the nearest 1/16 of one percent) to first
class banks in the interbank Eurodollar market by CIBC for U.S. dollar
deposits of amounts in same day funds comparable to the principal
amount of the Eurodollar Rate Loan of CIBC for which the Adjusted
Eurodollar Rate is then being determined (which principal amount shall
be deemed to be $1,000,000 in the event CIBC is not making, converting
to or continuing such a Eurodollar Rate Loan) with maturities
comparable to such Interest Period as of approximately 10:00 a.m. (New
York time) on such Interest Rate Determination Date by (ii) a
percentage equal to 100% minus the stated maximum rate of all reserve
requirements (including any marginal, emergency, supplemental, special
or other reserves) applicable on such Interest Rate Determination Date
to any member bank of the Federal Reserve System in respect of
"Eurocurrency liabilities" as defined in Regulation D (or any
successor category of liabilities under Regulation D).
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<PAGE> 10
"ADMINISTRATIVE AGENT" has the meaning assigned to that term
in the introduction to this Agreement and also means and includes any
successor Administrative Agent appointed pursuant to subsection 9.5.
"AFFECTED LENDER" has the meaning assigned to that term in
subsection 2.6C.
"AFFILIATE", as applied to any Person, means any other Person
directly or indirectly controlling, controlled by, or under common
control with, that Person. For the purposes of this definition,
"control" (including, with correlative meanings, the terms
"controlling", "controlled by" and "under common control with"), as
applied to any Person, means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and
policies of that Person, whether through the ownership of voting
securities or by contract or otherwise.
"AGENT" means, individually, each of Arranger, Syndication
Agent, Administrative Agent and Documentation Agent and "AGENTS" means
Arranger, Syndication Agent, Administrative Agent and Documentation
Agent, collectively.
"AGREEMENT" means this Credit Agreement dated as of December
19, 1997, as it may be amended, supplemented or otherwise modified
from time to time.
"APPLICABLE MARGIN" means, with respect to the applicable Loan
bearing interest at a rate determined by reference to the Base Rate,
2.50% per annum, or if determined by reference to the Adjusted
Eurodollar Rate, 3.50% per annum, less, in either case, the Pricing
Reduction in effect on any date of determination, if applicable.
"ARRANGER" has the meaning assigned to that term in the
introduction to this Agreement.
"ASSET SALE" means the sale by Holdings or any of its
Subsidiaries to any Person other than wholly- owned Subsidiaries of
Holdings of (i) any of the stock of any of Holdings's Subsidiaries,
(ii) substantially all of the assets of any division or line of
business of Holdings or any of its Subsidiaries, or (iii) any other
assets (whether tangible or intangible) of Holdings or any of its
Subsidiaries outside of the ordinary course of business; other than
sales of stock or assets pursuant to clauses (i), (ii) or (iii) to the
extent that the aggregate value of such stock or assets sold in any
single transaction or related series of transac- tions is equal to
$500,000 or less.
"ASSIGNMENT AGREEMENT" means an Assignment Agreement in
substantially the form of Exhibit X annexed hereto.
"AVERAGE LIFE OF REMAINING CONTRACTS" means the (i) sum of (a)
the remaining years to expiration of each Bulk Cable Contract and
Retail Cable Contract giving effect to any renewal option which is
exercisable solely in the discretion of Holdings and its Subsidiaries
multiplied by (b) the number of units under contract under the
applicable
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<PAGE> 11
contract divided by (ii) the total number of units under contract;
provided, however, any cable contracts acquired in an acquisition
requiring Requisite Lender consent may be included or excluded from
such calculation at the option of Company, as set forth in the Request
for Acquisition Approval submitted by Company with respect to such
acquisition.
"AXEL" means a Loan made by a Lender to Company as an
amortization extended loan pursuant to subsection 2.1A(i), and "AXELS"
means any such Loan or Loans, collectively.
"AXEL COMMITMENT" means the commitment of a Lender to make an
AXEL to Company pursuant to subsection 2.1A(i), and "AXEL COMMITMENTS"
means such commitments of all Lenders in the aggregate.
"AXEL EXCESS PROCEEDS COLLATERAL ACCOUNT" is an account
maintained with Administrative Agent subject to the Collateral Account
Agreement into which proceeds of the AXELs made on the Closing Date
are deposited pursuant to subsection 7.16 which proceeds may be
invested in Cash Equivalents in accordance with the terms of the
Collateral Account Agreement; provided such account may be with
another financial institution reasonably acceptable to Administrative
Agent and subject to appropriate security documentation reasonably
acceptable to Administrative Agent.
"AXEL EXPOSURE" means, with respect to any Lender as of any
date of determination (i) prior to the funding of the AXELs, that
Lender's AXEL Commitment and (ii) after the funding of the AXELs, the
outstanding principal amount of the AXEL of that Lender.
"AXEL NOTES" means any promissory notes of Company issued
pursuant to subsection 2.1E(i)(a) or the last sentence of subsection
10.1B(i) in connection with assignments of the AXEL Commitments or
AXELs of any Lenders, in each case substantially in the form of
Exhibit IV annexed hereto, as they may be amended, supplemented or
otherwise modified from time to time.
"BANKRUPTCY CODE" means Title 11 of the United States Code
entitled "Bankruptcy", as now and hereafter in effect, or any
successor statute.
"BASE RATE" means, at any time, the higher of (i) the Prime
Rate or (ii) the rate which is 1/2 of 1% in excess of the Federal
Funds Effective Rate.
"BASE RATE LOANS" means Loans bearing interest at rates
determined by reference to the Base Rate as provided in subsection
2.2A.
"BULK CABLE CONTRACTS" means contracts between Company or any
other Subsidiaries of Holdings and an owner or manager or home owners'
association, cooperative or similar organization of a multiple dwelling
unit to provide cable services
4
<PAGE> 12
to all or substantially all of the residents of such unit which
services are paid for by the owner of the multiple dwelling unit.
"BUSINESS DAY" means (i) for all purposes other than as
covered by clause (ii) below, any day excluding Saturday, Sunday and
any day which is a legal holiday under the laws of the State of New
York or is a day on which banking institutions located in such state
are authorized or required by law or other governmental action to
close, and (ii) with respect to all notices, determinations, fundings
and payments in connection with the Adjusted Eurodollar Rate or any
Eurodollar Rate Loans, any day that is a Business Day described in
clause (i) above and that is also a day for trading by and between
banks in Dollar deposits in the interbank Eurodollar market.
"BUY-OUT PROCEEDS" means proceeds received by Holdings or any
of its Subsidiaries upon the exercise by any counterparty to a Bulk
Cable Contract or Retail Cable Contract of any right under such
contract to buy out the remaining term of such contract from Holdings
or its Subsidiaries.
"CABLE TELEVISION SYSTEM" means each cable television system
owned and operated by Company or any other Subsidiaries of Holdings.
"CAPITAL LEASE", as applied to any Person, means any lease of
any property (whether real, personal or mixed) by that Person as
lessee that, in conformity with GAAP, is accounted for as a capital
lease on the balance sheet of that Person.
"CASH" means money, currency or a credit balance in a Deposit
Account.
"CASH BALANCES" means, as of any date of determination, the
aggregate Dollar amount of Cash and Cash Equivalents held by Holdings
and its Subsidiaries (excluding any amounts held in the AXEL Excess
Proceeds Account or Holdings Senior Note Escrow Account).
"CASH EQUIVALENTS" means, as at any date of determination, (i)
marketable securities (a) issued or directly and unconditionally
guaranteed as to interest and principal by the United States
Government or (b) issued by any agency of the United States the
obligations of which are backed by the full faith and credit of the
United States, in each case maturing within one year after such date;
(ii) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or
any public instrumentality thereof, in each case maturing within one
year after such date and having, at the time of the acquisition
thereof, the highest rating obtainable from either Standard & Poor's
Ratings Group ("S&P") or Moody's Investors Service, Inc. ("MOODY'S");
(iii) commercial paper maturing no more than one year from the date of
creation thereof and having, at the time of the acquisition thereof, a
rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one
year after such date and issued or accepted by any Lender or by any
commercial bank organized under the laws of the United States of
5
<PAGE> 13
America or any state thereof or the District of Columbia that (a) is at
least "adequately capitalized" (as defined in the regulations of its
primary Federal banking regulator) and (b) has Tier 1 capital (as
defined in such regulations) of not less than $100,000,000; and (v)
shares of any money market mutual fund that (a) has at least 95% of its
assets invested continuously in the types of investments referred to in
clauses (i) and (ii) above, (b) has net assets of not less than
$500,000,000, and (c) has the highest rating obtainable from either S&P
or Moody's.
"CDPQ" means Capital Communications CDPQ Inc., a Quebec
corporation.
"CERTIFICATE RE NON-BANK STATUS" means a certificate
substantially in the form of Exhibit XI annexed hereto delivered by a
Lender to Administrative Agent pursuant to subsection 2.7B(iii).
"CLOSING DATE" means the date on or before December 19, 1997,
on which the AXELs are made.
"COLLATERAL" means, collectively, all of the real, personal
and mixed property (including capital stock) in which Liens are
purported to be granted pursuant to the Collateral Documents as
security for the Obligations.
"COLLATERAL ACCOUNT AGREEMENT" means the Collateral Account
Agreement executed and delivered by Company and Administrative Agent
on the Closing Date, substantially in the form of Exhibit XII annexed
hereto, as such Collateral Account Agreement may hereafter be amended,
supplemented or otherwise modified from time to time.
"COLLATERAL DOCUMENTS" means the Holdings Pledge Agreement,
the Company Pledge Agreement, Holdings Security Agreement, the Company
Security Agreement, the Collateral Account Agreement, the Subsidiary
Pledge Agreement, the Subsidiary Security Agreement, the License Co.
Security Agreement, the License Co. Stockholders Pledge Agreement, any
Mortgages and all other instruments or documents delivered by any Loan
Party pursuant to this Agreement or any of the other Loan Documents in
order to grant to Administrative Agent, on behalf of Lenders, a Lien
on any real, personal or mixed property of that Loan Party as security
for the Obligations.
"COMMITMENTS" means the commitments of Lenders to make Loans
as set forth in subsection 2.1A.
"COMMUNICATIONS ACT" means the Communications Act of 1934, as
amended (including, without limitation, the Telecommunications Act of
1996), or any successor statute or statutes thereto, and all
Regulations thereunder, in each case as from time to time in effect.
6
<PAGE> 14
"COMMUNICATIONS REGULATORY AUTHORITY" means the FCC, any State
PUC and any future federal, state or local communications regulatory
commission, agency, department, board or authority.
"COMPANY" has the meaning assigned to that term in the
introduction to this Agreement.
"COMPANY PLEDGE AGREEMENT" means the Company Pledge Agreement
executed and delivered by Company on the Closing Date, substantially
in the form of Exhibit XIII annexed hereto, as such Company Pledge
Agreement may thereafter be amended, supplemented or otherwise
modified from time to time.
"COMPANY SECURITY AGREEMENT" means the Company Security
Agreement executed and delivered by Company on the Closing Date,
substantially in the form of Exhibit XIV annexed hereto, as such
Company Security Agreement may thereafter be amended, supplemented or
otherwise modified from time to time.
"COMPLIANCE CERTIFICATE" means a certificate substantially in
the form of Exhibit VII annexed hereto delivered to Administrative
Agent and Lenders by Company pursuant to subsection 6.1(iv).
"CONFIDENTIAL INFORMATION MEMORANDUM" means that certain
Confidential Information Memorandum relating to the Loans dated
November 1997.
"CONSOLIDATED ADJUSTED EBITDA" means, for any period, the sum
of the amounts for such period of (i) Consolidated Net Income, (ii)
Consolidated Interest Expense, (iii) provisions for taxes based on
income, (iv) total depreciation expense, (v) total amortization
expense, and (vi) other non-cash items reducing Consolidated Net
Income less other non-cash items increasing Consolidated Net Income,
all of the foregoing as determined on a consolidated basis for
Holdings and its Subsidiaries in conformity with GAAP.
"CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the
sum of (i) capitalized interest, (ii) costs associated with the
purchase of Licenses, (iii) the aggregate of all expenditures (whether
paid in Cash or other consideration or accrued as a liability which is
capitalized on the consolidated balance sheet of Holdings and its
Subsidiaries) by Holdings and its Subsidiaries during such period
that, in conformity with all GAAP, are included in "additions to
property, plant or equipment" or otherwise capitalized (other than
Permitted Acquisitions and the acquisition of the Phonoscope
businesses), and (iv) costs incurred in connection with entering into
contracts to provide cable or telephone services including any amounts
paid to property owners in connection with entering into such
contracts for Holdings and its Subsidiaries on a consolidated basis.
7
<PAGE> 15
"CONSOLIDATED CASH AVAILABLE FOR FIXED CHARGES" means as of
any date of determination, the sum of (i) Consolidated Adjusted EBITDA
for the six-month period prior to the date of determination plus (ii)
the unused portion of the Revolving Loan Commitments as of the date of
determination plus (iii) Cash Balances of Holdings and its Subsidiaries
in excess of $10,000,000 as of the date of determination and plus (iv)
the net proceeds of the issuance of equity and Subordinated
Indebtedness definitively planned to be issued by Holdings in the
six-month period following the date of determination as set forth in
reasonable detail in a Compliance Certificate delivered pursuant to
subsection 6.1(iv).
"CONSOLIDATED CASH INTEREST EXPENSE" means, as of any date of
determination, Consolidated Interest Expense excluding, however, (i)
any interest expense not payable in Cash (including amortization of
discount, amortization of debt issuance costs and capitalized
interest), and (ii) interest on the Existing Holdings Senior Notes
payable from amounts on deposit in the Holdings Senior Note Escrow
Account.
"CONSOLIDATED CURRENT ASSETS" means, as at any date of
determination, the total assets of Holdings and its Subsidiaries on a
consolidated basis which may properly be classified as current assets
in conformity with GAAP, excluding Cash and Cash Equivalents.
"CONSOLIDATED CURRENT LIABILITIES" means, as at any date of
determination, the total liabilities of Holdings and its Subsidiaries
on a consolidated basis which may properly be classified as current
liabilities in conformity with GAAP.
"CONSOLIDATED EXCESS CASH FLOW" means, for any period, an
amount (if positive) equal to (i) the sum, without duplication, of the
amounts for such period of (a) Consolidated Adjusted EBITDA and (b)
the Consolidated Working Capital Adjustment minus (ii) the sum,
without duplication, of the amounts for such period of (a) voluntary
and scheduled repayments of Consolidated Total Debt (excluding
repayments of Revolving Loans except to the extent the Revolving Loan
Commitments are permanently reduced in connection with such
repayments), (b) Consolidated Capital Expenditures, (c) Consolidated
Cash Interest Expense, and (d) the provision for current taxes based
on income of Holdings and its Subsidiaries and payable in cash with
respect to such period.
"CONSOLIDATED FIXED CHARGES" means as of any date of
determination, the sum (without duplication) of the amounts of (i)
Consolidated Cash Interest Expense projected by Company for the
six-month period following the date of determination, (ii) taxes based
on income projected by Company to be paid in Cash during the six-
month period following the date of determination, (iii) scheduled
repayments of Consolidated Total Debt re- quired to be made during the
six-month period following the date of determination (excluding
repayments of Revolving Loans except to the extent the Revolving Loan
Commitments are permanently reduced in connection with such
repayments), and (iv) Consolidated Capital Expenditures projected by
Company to be made during the six- month period following the date of
determination.
8
<PAGE> 16
"CONSOLIDATED INTEREST EXPENSE" means, for any period, total
interest expense (including that portion attributable to Capital Leases
in accordance with GAAP and capitalized interest) of Holdings and its
Subsidiaries on a consolidated basis with respect to all outstanding
Indebtedness of Holdings and its Subsidiaries, including all
commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing and net costs under
Interest Rate Agreements, but excluding, however, any amounts referred
to in subsection 2.3 payable to Agents and Lenders on or before the
Closing Date.
"CONSOLIDATED NET CABLE REVENUE" means, for any period, total
cable revenue plus revenues from ancillary services (net of related
costs and excluding any revenue from services included in the
calculation of Consolidated Net Telephony Revenue) minus programming
costs of Holdings and its Subsidiaries on a consolidated basis for
such period.
"CONSOLIDATED NET INCOME" means, for any period, the net
income (or loss) of Holdings and its Subsidiaries on a consolidated
basis for such period taken as a single accounting period determined
in conformity with GAAP; provided that there shall be excluded (i) the
income (or loss) of any Person (other than a Subsidiary of Holdings)
in which any other Person (other than Holdings or any of its
Subsidiaries) has a joint interest, except to the extent of the amount
of dividends or other distributions actually paid to Holdings or any
of its Subsidiaries by such Person during such period, (ii) the income
(or loss) of any Person accrued prior to the date it becomes a
Subsidiary of Holdings or is merged into or consolidated with Holdings
or any of its Subsidiaries or that Person's assets are acquired by
Holdings or any of its Subsidiaries, (iii) the income of any
Subsidiary of Holdings to the extent that the declaration or payment
of dividends or similar distributions by that Subsidiary of that
income is not at the time permitted by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that
Subsidiary, other than any such restrictions under this Agreement,
(iv) any after-tax gains or losses attributable to Asset Sales or
returned surplus assets of any Pension Plan, and (v) (to the extent
not included in clauses (i) through (iv) above) any net extraordinary
gains or net non-cash extraordinary loss- es.
"CONSOLIDATED NET TELEPHONY REVENUE" means, for any period,
total consolidated revenue from internet and telecommunications
products and services of Holdings and its Subsidiaries for such period
minus payments made to other providers of telephony services for use
of their networks incurred by Holdings and its Subsidiaries during
such period.
"CONSOLIDATED RENTAL PAYMENTS" means, for any period, the
aggregate amount of all rents paid or payable by Holdings and its
Subsidiaries on a consolidated basis during that period under all
Operating Leases to which Holdings or any of its Subsidiaries is a
party as lessee.
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<PAGE> 17
"CONSOLIDATED TOTAL DEBT" means, as at any date of
determination, the aggregate stated amount of all Indebtedness of
Holdings and its Subsidiaries, determined on a consolidated basis in
accordance with GAAP.
"CONSOLIDATED TOTAL REVENUE" means, as at any date of
determination, the aggregate stated income statement amount of revenue
of Holdings and its Subsidiaries for the applicable period, determined
on a consolidated basis in accordance with GAAP.
"CONSOLIDATED WORKING CAPITAL" means, as at any date of
determination, the excess of Consolidated Current Assets over
Consolidated Current Liabilities.
"CONSOLIDATED WORKING CAPITAL ADJUSTMENT" means, for any
period on a consolidated basis, the amount (which may be a negative
number) by which Consolidated Working Capital as of the beginning of
such period exceeds (or is less than) Consolidated Working Capital as
of the end of such period.
"CONTINGENT OBLIGATION", as applied to any Person, means any
direct or indirect liability, contingent or otherwise, of that Person
(i) with respect to any Indebtedness, lease, dividend or other
obligation of another if the primary purpose or intent thereof by the
Person incurring the Contingent Obligation is to provide assurance to
the obligee of such obligation of another that such obligation of
another will be paid or discharged, or that any agreements relating
thereto will be complied with, or that the holders of such obligation
will be protected (in whole or in part) against loss in respect
thereof, (ii) with respect to any letter of credit issued for the
account of that Person or as to which that Person is otherwise liable
for reimbursement of drawings, or (iii) under Hedge Agreements.
Contingent Obligations shall include (a) the direct or indirect
guaranty, endorsement (otherwise than for collection or deposit in the
ordinary course of business), co-making, discounting with recourse or
sale with recourse by such Person of the obligation of another, (b)
the obligation to make take-or-pay or similar payments if required
regardless of non-performance by any other party or parties to an
agreement, and (c) any liability of such Person for the obligation of
another through any agreement (contingent or otherwise) (1) to
purchase, repurchase or otherwise acquire such obligation or any
security therefor, or to provide funds for the payment or discharge of
such obligation (whether in the form of loans, advances, stock
purchases, capital contributions or otherwise) or (2) to maintain the
solvency or any balance sheet item, level of income or financial
condition of another if, in the case of any agreement described under
subclauses (1) or (2) of this sentence, the primary purpose or intent
thereof is as described in the preceding sentence. The amount of any
Contingent Obligation shall be equal to the amount of the obligation
so guaranteed or otherwise supported or, if less, the amount to which
such Contingent Obligation is specifically limited.
"CONTRACTUAL OBLIGATION", as applied to any Person, means any
provision of any Security issued by that Person or of any material
indenture, mortgage, deed of trust, contract, undertaking, agreement
or other instrument to which that Person is a party or by which it or
any of its properties is bound or to which it or any of its properties
is subject.
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<PAGE> 18
"CONVERTED TERM LOAN" means a Loan made by a Lender to Company
pursuant to subsection 2.1A(iii) and "Converted Term Loans" means any
such Loan or Loans, collectively.
"CONVERTED TERM LOAN EXPOSURE" means with respect to any
Lender as of any date of determination (i) prior to the Revolving Loan
Conversion Date, $0 and (ii) after the Revolving Loan Conversion Date,
the outstanding principal amount of the Converted Term Loan of that
Lender.
"CURRENCY AGREEMENT" means any foreign exchange contract,
currency swap agreement, futures contract, option contract, synthetic
cap or other similar agreement or arrangement to which Holdings or any
of its Subsidiaries is a party.
"DEFAULTED CONTRACTS" means contracts between Holdings or its
Subsidiaries and property owners to provide cable or telephone
services which have been cancelled or terminated by such property
owner or under which such property owner has defaulted in making the
payments under such contract.
"DEPOSIT ACCOUNT" means a demand, time, savings, passbook or
like account with a bank, savings and loan association, credit union
or like organization, other than an account evidenced by a negotiable
certificate of deposit.
"DOCUMENTATION AGENT" has the meaning assigned to that term in
the introduction to this Agreement and also means and includes any
successor Documentation Agent.
"DOLLARS" and the sign "$" mean the lawful money of the United
States of America.
"ELIGIBLE ASSIGNEE" means (i) (a) a commercial bank organized
under the laws of the United States or any state thereof; (b) a
savings and loan association or savings bank organized under the laws
of the United States or any state thereof; (c) a commercial bank
organized under the laws of any other country or a political
subdivision thereof; provided that (1) such bank is acting through a
branch or agency located in the United States or (2) such bank is
organized under the laws of a country that is a member of the
Organization for Economic Cooperation and Development or a political
subdivision of such country; and (d) any other entity which is an
"accredited investor" (as defined in Regulation D under the Securities
Act) which extends credit or buys loans as one of its businesses
including insurance companies, mutual funds and lease financing
companies; and (ii) any Lender, any Affiliate of any Lender and, with
respect to any Lender that is an investment fund that invests in
commercial loans, any other related fund (a "RELATED FUND") that
invests in commercial loans and that is managed or advised by the same
investment advisor as such Lender of by an Affiliate of such
investment advisor; provided that no Affiliate of Holdings or any
Person who is a competitor of Holdings and its Subsidiaries shall be
an Eligible Assignee.
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"EMPLOYEE BENEFIT PLAN" means any "employee benefit plan" as
defined in Section 3(3) of ERISA which is or was maintained or
contributed to by Holdings, any of its Subsidiaries or any of their
respective ERISA Affiliates.
"ENVIRONMENTAL CLAIM" means any investigation, notice, notice
of violation, claim, action, suit, proceeding, demand, abatement order
or other order or directive (conditional or otherwise), by any
governmental authority or any other Person, arising (i) pursuant to or
in connection with any actual or alleged violation of any
Environmental Law, (ii) in connection with any Hazardous Materials or
any actual or alleged Hazardous Materials Activity, or (iii) in
connection with any actual or alleged damage, injury, threat or harm
to health, safety, natural resources or the environment.
"ENVIRONMENTAL LAWS" means any and all current or future
statutes, ordinances, orders, rules, regulations, guidance documents,
judgments, Governmental Authorizations, or any other requirements of
governmental authorities relating to (i) environmental matters,
including those relating to any Hazardous Materials Activity, (ii) the
generation, use, storage, transportation or disposal of Hazardous
Materials, or (iii) occupational safety and health, industrial
hygiene, land use or the protection of human, plant or animal health
or welfare, in any manner applicable to Holdings or any of its
Subsidiaries or any Facility, including the Comprehensive
Environmental Response, Compensation, and Liability Act (42 U.S.C.
Section 9601 et seq.), the Hazardous Materials Transportation Act (49
U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery
Act (42 U.S.C. Section 6901 et seq.), the Federal Water Pollution
Control Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42
U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15
U.S.C. Section 2601 et seq.), the Federal Insecticide, Fungicide and
Rodenticide Act (7 U.S.C. Section 136 et seq.), the Occupational
Safety and Health Act (29 U.S.C. Section 651 et seq.), the Oil
Pollution Act (33 U.S.C. Section 2701 et seq.) and the Emergency
Planning and Community Right-to-Know Act (42 U.S.C. Section 11001 et
seq.), each as amended or supplemented, any analogous present or
future state or local statutes or laws, and any regulations
promulgated pursuant to any of the foregoing.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor thereto.
"ERISA AFFILIATE" means, as applied to any Person, (i) any
corporation which is a member of a controlled group of corporations
within the meaning of Section 414(b) of the Internal Revenue Code of
which that Person is a member; (ii) any trade or business (whether or
not incorporated) which is a member of a group of trades or businesses
under common control within the meaning of Section 414(c) of the
Internal Revenue Code of which that Person is a member; and (iii) any
member of an affiliated service group within the meaning of Section
414(m) or (o) of the Internal Revenue Code of which that Person, any
corporation described in clause (i) above or any trade or business
described in clause (ii) above is a member. Any former ERISA
Affiliate of Holdings or any of its Subsidiaries shall continue to be
considered an ERISA Affiliate of Holdings or such Subsidiary within
the meaning of this definition with respect to the
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<PAGE> 20
period such entity was an ERISA Affiliate of Holdings or such
Subsidiary and with respect to liabilities arising after such period
for which Holdings or such Subsidiary could be liable under the
Internal Revenue Code or ERISA.
"ERISA EVENT" means (i) a "reportable event" within the
meaning of Section 4043 of ERISA and the regulations issued thereunder
with respect to any Pension Plan (excluding those for which the
provision for 30-day notice to the PBGC has been waived by
regulation); (ii) the failure to meet the minimum funding standard of
Section 412 of the Internal Revenue Code with respect to any Pension
Plan (whether or not waived in accordance with Section 412(d) of the
Internal Revenue Code) or the failure to make by its due date a
required installment under Section 412(m) of the Internal Revenue Code
with respect to any Pension Plan or the failure to make any required
contribution to a Multiemployer Plan; (iii) the provision by the
administrator of any Pension Plan pursuant to Section 4041(a)(2) of
ERISA of a notice of intent to terminate such plan in a distress
termination described in Section 4041(c) of ERISA; (iv) the withdrawal
by Holdings, any of its Subsidiaries or any of their respective ERISA
Affiliates from any Pension Plan with two or more contributing
sponsors or the termination of any such Pension Plan resulting in
liability pursuant to Section 4063 or 4064 of ERISA; (v) the
institution by the PBGC of proceedings to terminate any Pension Plan,
or the occurrence of any event or condition which might constitute
grounds under ERISA for the termination of, or the appointment of a
trustee to administer, any Pension Plan; (vi) the imposition of
liability on Holdings, any of its Subsidiaries or any of their
respective ERISA Affiliates pursuant to Section 4062(e) or 4069 of
ERISA or by reason of the application of Section 4212(c) of ERISA;
(vii) the withdrawal of Holdings, any of its Subsidiaries or any of
their respective ERISA Affiliates in a complete or partial withdrawal
(within the meaning of Sections 4203 and 4205 of ERISA) from any
Multiemployer Plan if there is any potential liability therefor, or
the receipt by Holdings, any of its Subsidiaries or any of their
respective ERISA Affiliates of notice from any Multiemployer Plan that
it is in reorganization or insolvency pursuant to Section 4241 or 4245
of ERISA, or that it intends to terminate or has terminated under
Section 4041A or 4042 of ERISA; (viii) the occurrence of an act or
omission which could give rise to the imposition on Holdings, any of
its Subsidiaries or any of their respective ERISA Affiliates of fines,
penalties, taxes or related charges under Chapter 43 of the Internal
Revenue Code or under Section 409, Section 502(c), (i) or (l), or
Section 4071 of ERISA in respect of any Employee Benefit Plan; (ix)
the assertion of a material claim (other than routine claims for
benefits) against any Employee Benefit Plan other than a Multiemployer
Plan or the assets thereof, or against Holdings, any of its
Subsidiaries or any of their respective ERISA Affiliates in connection
with any Employee Benefit Plan; (x) receipt from the Internal Revenue
Service of notice of the failure of any Pension Plan (or any other
Employee Benefit Plan intended to be qualified under Section 401(a) of
the Internal Revenue Code) to qualify under Section 401(a) of the
Internal Revenue Code, or the failure of any trust forming part of any
Pension Plan to qualify for exemption from taxation under Section
501(a) of the Internal Revenue Code; or (xi) the imposition of a Lien
pursuant to Section 401(a)(29) or 412(n) of the Internal Revenue Code
or pursuant to ERISA with respect to any Pension Plan.
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<PAGE> 21
"EURODOLLAR RATE LOANS" means Loans bearing interest at rates
determined by reference to the Adjusted Eurodollar Rate as provided in
subsection 2.2A.
"EVENT OF DEFAULT" means each of the events set forth in
Section 8.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor statute.
"EXISTING HOLDINGS CONVERTIBLE NOTE AGREEMENT" means the
agreement, dated February 7, 1997, among Vanguard Communications,
L.P., Vanguard Communications, Inc., Pacific Capital Group, Inc., VPC
Corporation, Company, and Videotron, governing the terms of the
Existing Holdings Convertible Notes as such agreement may be amended
from time to time to the extent permitted under subsection 7.14.
"EXISTING HOLDINGS CONVERTIBLE NOTES" means Holdings' 15%
convertible subordinated notes in an aggregate initial outstanding
principal amount of $131,400,000.
"EXISTING HOLDINGS SENIOR NOTE INDENTURE" means the indenture
pursuant to which the Existing Holdings Senior Notes were issued,
dated February 14, 1997, as such indenture may be amended from time to
time to the extent permitted under subsection 7.16.
"EXISTING HOLDINGS SENIOR NOTES" means Holdings' 13% Senior
Notes due 2005 and 13% Senior Notes Due 2005, Series B in initial
aggregate principal amount of $225,000,000.
"EXISTING RESTRICTED INDEBTEDNESS" means, collectively, the
Existing Holdings Convertible Notes and the Existing Holdings Senior
Notes.
"FACILITIES" means any and all real property (including all
buildings, fixtures or other improvements located thereon) now,
hereafter or heretofore owned, leased, operated or used by Holdings or
any of its Subsidiaries or any of their respective predecessors or
Affiliates.
"FCC" means the Federal Communications Commission and any
successor or substitute governmental commission, agency, department,
board or authority performing functions similar to those performed by
the Federal Communications Commission on the date hereof.
"FCC REGULATIONS" means all rules, regulations, written
policies, orders and decisions of the FCC under the Communications
Act.
"FEDERAL FUNDS EFFECTIVE RATE" means, for any period, a
fluctuating interest rate equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System
14
<PAGE> 22
arranged by Federal funds brokers, as published for such day (or, if
such day is not a Business Day, for the next preceding Business Day) by
the Federal Reserve Bank of New York, or, if such rate is not so
published for any day which is a Business Day, the average of the
quotations for such day on such transactions received by Administrative
Agent from three Federal funds brokers of recognized standing selected
by Administrative Agent.
"FINANCIAL PLAN" has the meaning assigned to that term in
subsection 6.1(xiii).
"FIRST PRIORITY" means, with respect to any Lien purported to
be created in any Collateral pursuant to any Collateral Document, that
(i) such Lien has priority over any other Lien on such Collateral and
(ii) such Lien is the only Lien (other than Permitted Encumbrances and
Liens permitted pursuant to subsection 7.2) to which such Collateral
is subject.
"FISCAL QUARTER" means a fiscal quarter of any Fiscal Year.
"FISCAL YEAR" means the fiscal year of Holdings and its
Subsidiaries ending on August 31 of each calendar year or such other
date as may be consented to by Requisite Lenders, such consent not to
be unreasonably withheld or delayed.
"FRANCHISE" means any franchise or other authorization to
operate a Cable Television System granted by any federal, state or
local governmental authority or agency.
"FLOOD HAZARD PROPERTY" means a Mortgaged Property located in
an area designated by the Federal Emergency Management Agency as
having special flood or mud slide hazards.
"FUNDING AND PAYMENT OFFICE" means (i) the office of
Administrative Agent located at 425 Lexington Avenue, New York, New
York 10017 or (ii) such other office of Administrative Agent and as
may from time to time hereafter be designated as such in a written
notice delivered by Administrative Agent to Company and each Lender.
"FUNDING DATE" means the Closing Date with respect to the
AXELs and the date of the funding of any Revolving Loan, with respect
to Revolving Loans.
"GAAP" means, subject to the limitations on the application
thereof set forth in subsection 1.2, generally accepted accounting
principles set forth in opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other
entity as may be approved by a significant segment of the accounting
profession, in each case as the same are applicable to the
circumstances as of the date of determination.
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<PAGE> 23
"GOVERNMENTAL AUTHORIZATION" means any permit, license,
authorization, plan, directive, consent order or consent decree of or
from any federal, state or local governmental authority, agency or
court.
"GSCP" has the meaning assigned to that term in the
introduction to this Agreement.
"GUARANTIES" means, collectively, the Holdings Guaranty, the
Subsidiary Guaranty and the License Co. Guaranty.
"GUARANTORS" means, collectively, Holdings, the Subsidiary
Guarantors and License Co.
"HAZARDOUS MATERIALS" means (i) any chemical, material or
substance at any time defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials",
"extremely hazardous waste", "acutely hazardous waste", "radioactive
waste", "biohazardous waste", "pollutant", "toxic pollutant",
"contaminant", "restricted hazardous waste", "infectious waste",
"toxic substances", or any other term or expression intended to
define, list or classify substances by reason of properties harmful to
health, safety or the indoor or outdoor environment (including harmful
properties such as ignitability, corrosivity, reactivity,
carcinogenicity, toxicity, reproductive toxicity, "TCLP toxicity" or
"EP toxicity" or words of similar import under any applicable
Environmental Laws); (ii) any oil, petroleum, petroleum fraction or
petroleum derived substance; (iii) any drilling fluids, produced
waters and other wastes associated with the exploration, development
or production of crude oil, natural gas or geothermal resources; (iv)
any flammable substances or explosives; (v) any radioactive materials;
(vi) any asbestos-containing materials; (vii) urea formaldehyde foam
insulation; (viii) electrical equipment which contains any oil or
dielectric fluid containing polychlorinated biphenyls; (ix)
pesticides; and (x) any other chemical, material or substance,
exposure to which is prohibited, limited or regulated by any
governmental authority or which may or could pose a hazard to the
health and safety of the owners, occupants or any Persons in the
vicinity of any Facility or to the indoor or outdoor environment.
"HAZARDOUS MATERIALS ACTIVITY" means any past, current,
proposed or threatened activity, event or occurrence involving any
Hazardous Materials, including the use, manufacture, possession,
storage, holding, presence, existence, location, Release, threatened
Release, discharge, placement, generation, transportation, processing,
construction, treatment, abatement, removal, remediation, disposal,
disposition or handling of any Hazardous Materials, and any corrective
action or response action with respect to any of the foregoing.
"HEDGE AGREEMENT" means an Interest Rate Agreement or a
Currency Agreement designed to hedge against fluctuations in interest
rates or currency values, respectively.
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<PAGE> 24
"HOLDINGS" means OpTel, Inc., a Delaware corporation.
"HOLDINGS COMMON STOCK" means the common stock of Holdings,
par value $0.01 per share.
"HOLDINGS GUARANTY" means the Holdings Guaranty executed and
delivered by Holdings on the Closing Date, substantially in the form
of Exhibit XVIII annexed hereto, as such Holdings Guaranty may
thereafter be amended, supplemented or otherwise modified from time to
time.
"HOLDINGS PLEDGE AGREEMENT" means the Holdings Pledge
Agreement executed and delivered by Holdings on the Closing Date,
substantially in the form of Exhibit XIX annexed hereto, as such
Holdings Pledge Agreement may thereafter be amended, supplemented or
otherwise modified from time to time.
"HOLDINGS SECURITY AGREEMENT" means the Holdings Security
Agreement executed and delivered by Holdings on the Closing Date,
substantially in the form of Exhibit XXV annexed hereto, as such
Holdings Security Agree- ment may thereafter be amended, supplemented
or otherwise modified from time to time.
"HOLDINGS SENIOR NOTE ESCROW ACCOUNT" means the "ESCROW
ACCOUNT" as defined in the Existing Holdings Senior Note Indenture.
"INDEBTEDNESS", as applied to any Person, means (i) all
indebtedness for borrowed money, (ii) that portion of obligations with
respect to Capital Leases that is properly classified as a liability
on a balance sheet in conformity with GAAP, (iii) notes payable and
drafts accepted representing extensions of credit whether or not
representing obligations for borrowed money, (iv) any obligation owed
for all or any part of the deferred purchase price of property or
services (excluding any such obligations incurred under ERISA), which
purchase price is (a) due more than six months from the date of
incurrence of the obligation in respect thereof or (b) evidenced by a
note or similar written instrument, and (v) all indebtedness secured
by any Lien on any property or asset owned or held by that Person
regardless of whether the indebtedness secured thereby shall have been
assumed by that Person or is nonrecourse to the credit of that Person.
Obligations under Interest Rate Agreements and Currency Agreements
constitute (1) in the case of Hedge Agreements, Contingent
Obligations, and (2) in all other cases, Investments, and in neither
case constitute Indebtedness.
"INDEMNITEE" has the meaning assigned to that term in
subsection 10.3.
"INTELLECTUAL PROPERTY" means all patents, trademarks,
tradenames, copyrights, technology, know-how and processes used in or
necessary for the conduct of the business of Holdings and its
Subsidiaries as currently conducted that are material to the condition
(financial or otherwise), business or operations of Holdings and its
Subsidiaries, taken as a whole.
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<PAGE> 25
"INTERCOMPANY NOTE" means a promissory note executed by a Loan
Party or any of its Subsidiaries or a Permitted Joint Venture
evidencing intercompany Indebtedness substantially in the form of
Exhibit XX annexed hereto.
"INTERCONNECTION AGREEMENT" means an agreement entered into
with an incumbent provider of local exchange telephone service in
accord with Sections 251 and 252 of the Communications Act.
"INTEREST PAYMENT DATE" means (i) with respect to any Base
Rate Loan, each February 28, May 31, August 31 and November 30 of each
year, commencing on the first such date to occur after the Closing
Date, and (ii) with respect to any Eurodollar Rate Loan, the last day
of each Interest Period applicable to such Loan; provided that in the
case of each Interest Period of longer than three months "Interest
Payment Date" shall also include each date that is three months, or an
integral multiple thereof, after the commencement of such Interest
Period.
"INTEREST PERIOD" has the meaning assigned to that term in
subsection 2.2B.
"INTEREST RATE AGREEMENT" means any interest rate swap
agreement, interest rate cap agreement, interest rate collar agreement
or other similar agreement or arrangement to which Holdings or any of
its Subsidiaries is a party.
"INTEREST RATE DETERMINATION DATE" means, with respect to any
Interest Period, the second Business Day prior to the first day of
such Interest Period.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of
1986, as amended to the date hereof and from time to time hereafter,
and any successor statute.
"INVESTMENT" means (i) any direct or indirect purchase or
other acquisition by Holdings or any of its Subsidiaries of, or of a
beneficial interest in, any Securities of any other Person (including
any Subsidiary of Holdings) (ii) any direct or indirect loan, advance
(other than advances to employees for moving, entertainment and travel
expenses, drawing accounts and similar expenditures in the ordinary
course of business) or capital contribution by Holdings or any of its
Subsidiaries to any other Person, including all indebtedness and
accounts receivable from that other Person that are not current assets
or did not arise from sales to that other Person in the ordinary
course of business, or (iii) Interest Rate Agreements or Currency
Agreements not constituting Hedge Agreements. The amount of any
Investment shall be the original cost of such Investment plus the cost
of all additions thereto, without any adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment.
"ISSUING LENDER" means CIBC, or any Person serving as
successor Administrative Agent hereunder, in its capacity as Issuing
Lender.
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<PAGE> 26
"JOINT VENTURE" means a joint venture, partnership or other
similar arrangement, whether in corporate, partnership or other legal
form; provided that in no event shall any corporate Subsidiary of any
Person be considered to be a Joint Venture to which such Person is a
party.
"LANDLORD CONSENT AND ESTOPPEL" means, with respect to any
Leasehold Property, a Landlord Consent and Estoppel in form and
substance approved by Administrative Agent executed by the lessor in
favor of the Administrative Agent.
"LEASEHOLD PROPERTY" means any leasehold interest of any Loan
Party as lessee under any lease of real property.
"LENDER" and "LENDERS" means the persons identified as
"Lenders" and listed on the signature pages of this Agreement,
together with their successors and permitted assigns pursuant to
subsection 10.1; provided that the term "Lenders", when used in the
context of a particular Commitment, shall mean Lenders having that
Commitment.
"LENDER SUBORDINATION AGREEMENT" means the Lender
Subordination Agreement executed and delivered by OpTel, VPC and
Videotron on the Closing Date in substantially the form of Exhibit
XXVI annexed hereto, as such agreement may be amended, supplemented or
otherwise modified from time to time.
"LETTER OF CREDIT" or "LETTERS OF CREDIT" means Standby
Letters of Credit issued or to be issued by Issuing Lenders for the
account of Company pursuant to subsection 3.1.
"LETTER OF CREDIT COLLATERAL ACCOUNT" has the meaning assigned
to that term in the Collateral Account Agreement.
"LETTER OF CREDIT USAGE" means, as at any date of
determination, the sum of (i) the maximum aggregate amount which is or
at any time thereafter may become available for drawing under all
Letters of Credit then outstanding plus (ii) the aggregate amount of
all drawings under Letters of Credit honored by Issuing Lenders and
not theretofore reimbursed by Company (including any such
reimbursement out of the proceeds of Revolving Loans pursuant to
subsection 3.3B).
"LICENSE CO." means Transmission Holdings, Inc., a Delaware
corporation
"LICENSE CO. DOCUMENTS" means collectively, (i) the Assignment
Agreement, dated as of February 14, 1997, among Company, Sunshine
Television Entertainment, Inc., Richie Pacific Cablevision, Inc. and
IRPC Arizona, Inc., as assignors, and License Co., as assignee, (ii)
the Equipment License and Services Agreement, dated as of February 14,
1997, between Company and License Co., (iii) the Promissory Note,
dated February 14, 1997, executed by License Co. in favor of Company,
(iv) the Option Agreement, dated as of February 14, 1997, between
Company and License Co., (v) each
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<PAGE> 27
of the Shareholder Option Agreements dated February 14, 1997, between
Company and Russell S. Berman and Henry Goldberg, respectively and the
Shareholder Option Agreement, dated as of September 17, 1997, between
Company and Thomas Watson, (vi) the Subscription and Shareholders
Agreement, dated as of February 14, 1997, among Henry Goldberg, Russell
B. Berman, and Thomas Watson and License Co. and (vii) any other
agreement identical to the foregoing in all material respects and
entered into for the same purposes that the Company or Holdings or any
of its Subsidiaries may enter into in the future, as each of the
foregoing documents referred to in clauses (i) through (vii) may be
amended, modified or supplemented in accordance with subsection 7.16.
"LICENSE CO. GUARANTY" means the License Co. Guaranty executed
and delivered by License Co. on the Closing Date substantially in the
form of Exhibit XXI annexed hereto, as such License Co. Guaranty may
here- after be amended, supplemented or otherwise modified from time
to time.
"LICENSE CO. SECURITY AGREEMENT" means the License Co.
Security Agreement executed and delivered by License Co. on the
Closing Date, substantially in the form of Exhibit XXII annexed
hereto, as such License Co. Security Agreement may be amended,
supplemented or otherwise modified from time to time.
"LICENSE CO. STOCKHOLDERS PLEDGE AGREEMENT" means the License
Co. Stockholder Pledge Agreement executed and delivered by the
stockholders of License Co. on the Closing Date, substantially in the
form of Exhibit XIV annexed hereto, as such License Co. Stockholders
Pledge Agreement may be amended, supplemented or otherwise modified
from time to time.
"LICENSE SUBSIDIARY" means License Co. or a Subsidiary of
Holdings in each case (i) the sole purpose of which is to hold
Licenses, (ii) which shall guarantee all of the Obligations, (iii) the
stock of which shall be pledged to Administrative Agent for the
benefit of Lenders to secure the Obligations, (iv) which shall not
engage in any business other than holding the Licenses and performing
its obligations related thereto, and in the case of License Co.,
performing its obligations under the License Co. Documents, (v) which
shall not incur any material liabilities, and (vi) which shall not
create, grant or permit to exist any Lien or other encumbrance on any
of its assets (other than pursuant to the Collateral Documents) or
transfer or dispose of any of the Licenses.
"LICENSES" means all licenses, authorizations, certifications,
waivers and permits required from any Communications Regulatory
Authority acting under the Communications Act or State Law.
"LIEN" means any lien, mortgage, pledge, assignment, security
interest, charge or encumbrance of any kind (including any conditional
sale or other title retention agreement, any lease in the nature
thereof, and any agreement to give any security interest) and any
option, trust or other preferential arrangement having the practical
effect of any of the foregoing.
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<PAGE> 28
"LIMITED INVESTMENT JOINT VENTURES" means one or more
Permitted Joint Ventures in which the aggregate amount of Investments
made by Holdings and its Subsidiaries does not exceed $10,000,000.
"LOAN" or "LOANS" means one or more of the AXELs, Converted
Term Loans or Revolving Loans or any combination thereof.
"LOAN DOCUMENTS" means this Agreement, the Notes, the Letters
of Credit (and any applications for, or reimbursement agreements or
other documents or certificates executed by Company in favor of an
Issuing Lender relating to, the Letters of Credit), the Holdings
Guaranty, the Subsidiary Guaranty, the License Co. Guaranty, the
Videotron and CDPQ Agreement, the Lender Subordination Agreement, and
the Collateral Documents.
"LOAN PARTY" means each of Company, Holdings, License Co. and
Holdings' Subsidiaries from time to time executing a Loan Document,
and "LOAN PARTIES" means all such Persons, collectively.
"MARGIN STOCK" has the meaning assigned to that term in
Regulation U of the Board of Governors of the Federal Reserve System
as in effect from time to time.
"MATERIAL ADVERSE EFFECT" means (i) a material adverse effect
upon the business, operations, properties, assets, condition
(financial or otherwise) or prospects of Holdings and its
Subsidiaries, taken as a whole (which shall include, without
limitation, any termination or reduction or other occurrence or event
(other than pursuant to a transaction permitted under this Agreement
or consented to by Requisite Lenders) which results in a reduction in
the total number of Adjusted Cable Subscribers by 10% or more) or (ii)
the impairment of the ability of any Loan Party to perform, or of
Administrative Agent or Lenders to enforce, the Obligations.
"MATERIAL CONTRACT" means any contract or other arrangement to
which Holdings or any of its Subsidiaries is a party (other than the
Loan Documents) for which breach, nonperformance, cancellation or
failure to renew could have a Material Adverse Effect.
"MATERIAL FEE PROPERTY" means any fee interest in real
property determined by Administrative Agent to be of material value as
Collateral or of material importance to the operations of Holdings and
its Subsidiaries.
"MATERIAL LEASEHOLD PROPERTY" means any Leasehold Property
determined by Administrative Agent to be of material value as
Collateral or of material importance to the operations of Holdings and
its Subsidiaries.
"MORTGAGE" means (i) a security instrument (whether designated
as a deed of trust or a mortgage or by any similar title) executed and
delivered by any Loan Party,
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<PAGE> 29
in form and substance approved by Administrative Agent in its sole
discretion, in each case with such changes thereto as may be
recommended by Administrative Agent's local counsel based on local laws
or customary local mortgage or deed of trust practices, or (ii) at
Administrative Agent's option, an amendment to an existing Mortgage, in
form satisfactory to Administrative Agent, adding such Mortgaged
Property to the Real Property Assets encumbered by such existing
Mortgage, in either case as such security instrument or amendment may
be amended, supplemented or otherwise modified from time to time.
"MORTGAGES" means all such instruments.
"MORTGAGED PROPERTY" means a Mortgaged Property (as defined in
subsection 6.9).
"MULTIEMPLOYER PLAN" means any Employee Benefit Plan which is
a "multiemployer plan" as defined in Section 3(37) of ERISA.
"NET ASSET SALE PROCEEDS" means, with respect to any Asset
Sale, Cash payments (including any Cash received by way of deferred
payment pursuant to, or by monetization of, a note receivable or
otherwise, but only as and when so received) received from such Asset
Sale, net of any bona fide direct costs incurred in connection with
such Asset Sale, including (i) provisions for income taxes reasonably
estimated to become payable within two years of the date of such Asset
Sale as a result of any gain recognized in connection with such Asset
Sale and (ii) payment of the outstanding principal amount of, premium
or penalty, if any, and interest on any Indebtedness (other than the
Loans) that is secured by a Lien on the stock or assets in question
and that is required to be repaid under the terms thereof as a result
of such Asset Sale.
"NET INSURANCE/CONDEMNATION PROCEEDS" means any Cash payments
or proceeds received by Holdings or any of its Subsidiaries (i) under
any business interruption or casualty insurance policy in respect of a
covered loss thereunder or (ii) as a result of the taking of any
assets of Holdings or any of its Subsidiaries by any Person pursuant
to the power of eminent domain, condemnation or otherwise, or pursuant
to a sale of any such assets to a purchaser with such power under
threat of such a taking, in each case net of any actual and reasonable
documented costs incurred by Holdings or any of its Subsidiaries in
connection with the adjustment or settlement of any claims of Holdings
or such Subsidiary in respect thereof.
"NOTES" means one or more of the Term Loan Notes or Revolving
Notes or any combination thereof.
"NOTICE OF BORROWING" means a notice substantially in the form
of Exhibit I annexed hereto delivered by Company to Administrative
Agent pursuant to subsection 2.1B with respect to a proposed
borrowing.
"NOTICE OF CONVERSION/CONTINUATION" means a notice
substantially in the form of Exhibit II annexed hereto delivered by
Company to Administrative Agent pursuant to
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subsection 2.2D with respect to a proposed conversion or continuation
of the applicable basis for determining the interest rate with respect
to the Loans specified therein.
"NOTICE OF ISSUANCE OF LETTER OF CREDIT" means a notice
substantially in the form of Exhibit III annexed hereto delivered by
Company to Administrative Agent pursuant to subsection 3.1B(i) with
respect to the proposed issuance of a Letter of Credit.
"OBLIGATIONS" means all obligations of every nature of each
Loan Party from time to time owed to Agents, Lenders or their
respective Affiliates or any of them under the Loan Documents, whether
for principal, interest, reimbursement of amounts drawn under Letters
of Credit, fees, expenses, indemnification or otherwise.
"OFFICERS' CERTIFICATE" means, as applied to any corporation,
a certificate executed on behalf of such corporation by its president
or one of its vice presidents and by its chief financial officer or
its treasurer or assistant treasurer; provided that every Officers'
Certificate with respect to the compliance with a condition precedent
to the making of any Loans hereunder shall include (i) a statement
that the officer or officers making or giving such Officers'
Certificate have read such condition and any definitions or other
provisions contained in this Agreement relating thereto, (ii) a
statement that, in the opinion of the signers, they have made or have
caused to be made such examination or investigation as is necessary to
enable them to express an informed opinion as to whether or not such
condition has been complied with, and (iii) a statement as to whether,
in the opinion of the signers, such condition has been complied with.
"OPERATING LEASE" means, as applied to any Person, any lease
(including leases that may be terminated by the lessee at any time) of
any property (whether real, personal or mixed) that is not a Capital
Lease other than any such lease under which that Person is the lessor.
"PBGC" means the Pension Benefit Guaranty Corporation or any
successor thereto.
"PENSION PLAN" means any Employee Benefit Plan, other than a
Multiemployer Plan, which is subject to Section 412 of the Internal
Revenue Code or Section 302 of ERISA.
"PERMITTED ACQUISITION" has the meaning assigned to that term
in subsection 7.7(vi).
"PERMITTED ENCUMBRANCES" means the following types of Liens
(excluding any such Lien imposed pursuant to Section 401(a)(29) or
412(n) of the Internal Revenue Code or by ERISA, any such Lien
relating to or imposed in connection with any Environmental Claim, and
any such Lien expressly prohibited by any applicable terms of any of
the Collateral Documents):
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(i) Liens for taxes, assessments or governmental
charges or claims the payment of which is not, at the time,
required by subsection 6.3;
(ii) statutory Liens of landlords, statutory Liens
of banks and rights of set-off, statutory Liens of carriers,
warehousemen, mechanics, repairmen, workmen and materialmen,
and other Liens imposed by law, in each case incurred in the
ordinary course of business (a) for amounts not yet overdue or
(b) for amounts that are overdue and that (in the case of any
such amounts overdue for a period in excess of 5 days) are
being contested in good faith by appropriate proceedings, so
long as (1) such reserves or other appropriate provisions, if
any, as shall be required by GAAP shall have been made for any
such contested amounts, and (2) in the case of a Lien with
respect to any portion of the Collateral, such contest
proceedings conclusively operate to stay the sale of any
portion of the Collateral on account of such Lien;
(iii) Liens incurred or deposits made in the
ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social
security, or to secure the performance of tenders, statutory
obligations, surety and appeal bonds, bids, leases, government
contracts, trade contracts, performance and return-of-money
bonds and other similar obligations (exclusive of obligations
for the payment of borrowed money), so long as no foreclosure,
sale or similar proceedings have been commenced with respect
to any portion of the Collateral on account thereof;
(iv) any attachment or judgment Lien not
constituting an Event of Default under subsection 8.8;
(v) leases or subleases granted to third parties
in accordance with any applicable terms of the Collateral
Documents and not interfering in any material respect with the
ordinary conduct of the business of Holdings or any of its
Subsidiaries or resulting in a material diminution in the
value of any Collateral as security for the Obligations;
(vi) easements, rights-of-way, restrictions,
encroachments, and other minor defects or irregularities in
title, in each case which do not and will not interfere in any
material respect with the ordinary conduct of the business of
Holdings or any of its Subsidiaries or result in a material
diminution in the value of any Collateral as security for the
Obligations;
(vii) any (a) interest or title of a lessor or
sublessor under any lease permitted by subsection 7.9, (b)
restriction or encumbrance that the interest or title of such
lessor or sublessor may be subject to, or (c) subordination of
the interest of the lessee or sublessee under such lease to
any restriction or encumbrance referred to in the preceding
clause (b), so long as the holder of such restriction or
encumbrance agrees to recognize the rights of such lessee or
sublessee under such lease;
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(viii) Liens arising from filing UCC financing
statements relating solely to leases permitted by this
Agreement;
(ix) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of goods;
(x) any zoning or similar law or right reserved
to or vested in any governmental office or agency to control
or regulate the use of any real property; and
(xi) Liens securing obligations (other than
obligations representing Indebtedness for borrowed money)
under operating, reciprocal easement or similar agreements
entered into in the ordinary course of business of Holdings
and its Subsidiaries.
"PERMITTED JOINT VENTURE" means a Joint Venture to which
Holdings or a Subsidiary of Holdings is a party; provided that (i)
Holdings or such Subsidiary of Holdings controls the management of
such Joint Venture, (ii) such Joint Venture, in the case of any Joint
Venture other than Limited Investment Joint Ventures, has no
Indebtedness other than Indebtedness to a Subsidiary of Holdings which
is evidenced by an Intercompany Note which is pledged to secure the
Obligations hereunder pursuant to the Company Pledge Agreement or
Subsidiary Pledge Agreement, as applicable, (iii) such Joint Venture,
in the case of a Limited Investment Joint Venture, has no Indebtedness
other than (a) Indebtedness to a Subsidiary of Holdings which is
evidenced by an Intercompany Note which is pledged to secure the
Obligations hereunder pursuant to the Company Pledge Agreement or
Subsidiary Pledge Agreement, as applicable and (b) Purchase Money
Indebtedness, and (iv) all of the ownership interests in such Joint
Venture held by Holdings or such Subsidiary of Holdings are pledged to
secure the Obligations hereunder pursuant to the Holdings Pledge
Agreement, Company Pledge Agreement or Subsidiary Pledge Agreement, as
applicable.
"PERMITTED PREFERRED STOCK" means preferred stock issued by
Holdings to Videotron or a Strategic Investor which either (i) has no
cash payments being required earlier than the maturity of the
promissory notes attached as Addendum B to the Lender Subordination
Agreement and does not contain any terms, covenants or conditions
which are more restrictive or burdensome to Holdings and its
Subsidiaries than the terms contained in the promissory notes attached
as Addendum B to the Lender Subordination Agreement or (ii) has been
approved by Requisite Lenders, such approval not to be unreasonably
withheld or delayed.
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"PERSON" means and includes natural persons, corporations,
limited partnerships, general partnerships, limited liability
companies, limited liability partnerships, joint stock companies,
Joint Ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other organizations,
whether or not legal entities, and governments (whether federal, state
or local, domestic or foreign, and including political subdivisions
thereof) and agencies or other administrative or regulatory bodies
thereof.
"PLEDGED COLLATERAL" means, collectively, the "Pledged
Collateral" as defined in the Holdings Pledge Agreement, the Company
Pledge Agreement and the Subsidiary Pledge Agreements.
"POTENTIAL EVENT OF DEFAULT" means a condition or event that,
after notice or lapse of time or both, would constitute an Event of
Default.
"PRICING REDUCTION" means, if at any time after the end of the
eighteenth month after the Closing Date, as of the end of any Fiscal
Quarter, the ratio of (i) the aggregate amount of Loans outstanding
under this Agreement to (ii) Consolidated Adjusted EBITDA for such
Fiscal Quarter multiplied by four is less than or equal to 7:1, a
pricing reduction equal to 0.25%. The Pricing Reduction shall be
determined by reference to the Consolidated Adjusted EBITDA set forth
in the most recent Compliance Certificate delivered by Company
pursuant to clause (iv) of subsection 6.1 (accompanied by financial
statements delivered by Company to Administrative Agent and Lenders
pursuant to clauses (ii) or (iii) of subsection 6.1). Any changes in
the Pricing Reduction shall become effective on the day following
delivery of the relevant Compliance Certificate to Administrative
Agent and Lenders and shall remain in effect through the next
scheduled date for delivery of a Compliance Certificate.
Notwithstanding anything herein to the contrary, (i) from the Closing
Date to and including the date eighteen months after the Closing Date,
the Pricing Reduction shall be zero and (ii) at any time an Event of
Default shall have occurred and be continuing, the Pricing Reduction
shall be zero.
"PRIME RATE" means the rate that CIBC announces from time to
time as its prime lending rate, as in effect from time to time. The
Prime Rate is a reference rate and does not necessarily represent the
lowest or best rate actually charged to any customer. CIBC or any
other Lender may make commercial loans or other loans at rates of
interest at, above or below the Prime Rate.
"PRO RATA SHARE" means (i) with respect to all payments,
computations and other matters relating to the AXEL Commitment or the
AXEL of any Lender, the percentage obtained by dividing (a) the AXEL
Exposure of that Lender by (b) the aggregate AXEL Exposure of all
Lenders, (ii) with respect to all payments, computations and other
matters relating to the Revolving Loan Commitment or the Revolving
Loans of any Lender or any Letters of Credit issued or participations
therein purchased by any Lender, the percentage obtained by dividing
(a) the Revolving Loan Exposure of that Lender by (b) the aggregate
Revolving Loan Exposure of all Lenders, (iii) with respect to all
payments, computations and other matters relating to the Converted
Term Loan of
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<PAGE> 34
any Lender, the percentage obtained by dividing (a) the Converted Term
Loan Exposure of that Lender by (b) the aggregate Converted Term Loan
Exposure of all Lenders, and (iv) for all other purposes with respect
to each Lender, the percentage obtained by dividing (a) the sum of the
AXEL Exposure of that Lender plus the Converted Term Loan Exposure of
that Lender plus the Revolving Loan Exposure of that Lender by (b) the
sum of the aggregate AXEL Exposure of all Lenders plus the aggregate
Converted Term Loan Exposure of all Lenders plus the aggregate
Revolving Loan Exposure of all Lenders, in any such case as the
applicable percentage may be adjusted by assignments permitted pursuant
to subsection 10.1. The initial Pro Rata Share of each Lender for
purposes of each of clauses (i), (ii), (iii) and (iv) of the preceding
sentence is set forth opposite the name of that Lender in Schedule 2.1
annexed hereto.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness, the proceeds
of which are used within 90 days of the incurrence thereof to purchase
assets in the ordinary course of business; provided that (i) the assets
purchased with the proceeds of such Indebtedness are equipment or other
assets relating to the business of Holdings and its Subsidiaries, (ii)
at least 75% of the purchase price of such assets is provided by the
proceeds of such Indebtedness, and (iii) such Indebtedness is secured
only by the equipment or other assets purchased with the proceeds
thereof.
"RECORDED LEASEHOLD INTEREST" means a Leasehold Property with
respect to which a Record Document (as hereinafter defined) has been
recorded in all places necessary or desirable, in Administrative
Agent's reasonable judgment, to give constructive notice of such
Leasehold Property to third-party purchasers and encumbrancers of the
affected real property. For purposes of this definition, the term
"RECORD DOCUMENT" means, with respect to any Leasehold Property, (a)
the lease evidencing such Leasehold Property or a memorandum thereof,
executed and acknowledged by the owner of the affected real property,
as lessor, or (b) if such Leasehold Property was acquired or subleased
from the holder of a Recorded Leasehold Interest, the applicable
assignment or sublease document, executed and acknowledged by such
holder, in each case in form sufficient to give such constructive
notice upon recordation and otherwise in form reasonably satisfactory
to Administrative Agent.
"REAL PROPERTY ASSET" means, at any time of determination, any
interest then owned by any Loan Party in any real property.
"REGISTER" has the meaning assigned to that term in subsection
2.1D.
"REGULATION D" means Regulation D of the Board of Governors of
the Federal Reserve System, as in effect from time to time.
"REGULATIONS" means all FCC Regulations, all State Regulations
and all rules, regulations, written policies, orders and decisions of
any local governmental authority.
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"REIMBURSEMENT DATE" has the meaning assigned to that term in
subsection 3.3B.
"RELATED AGREEMENTS" means the Existing Holdings Senior Note
Indenture, the Existing Senior Notes, the Existing Holdings
Convertible Note Agreement, the Existing Holdings Convertible Notes,
that certain Stockholders Agreement, dated as of August 15, 1997,
among VPC Corporation, Capital Communications CDPQ Inc. and Company,
and the License Co. Documents.
"RELEASE" means any release, spill, emission, leaking,
pumping, pouring, injection, escaping, deposit, disposal, discharge,
dispersal, dumping, leaching or migration of Hazardous Materials into
the indoor or outdoor environment (including the abandonment or
disposal of any barrels, containers or other closed receptacles
containing any Hazardous Materials), including the movement of any
Hazardous Materials through the air, soil, surface water or
groundwater.
"REMAINING TIME TO MATURITY OF THE LOANS" means, as of any
date of determination, the remaining time between such date of
determination and May 31, 2004.
"REQUEST FOR ACQUISITION APPROVAL" means an Officers'
Certificate delivered to Administrative Agent requesting that
Requisite Lenders consent to an acquisition, which Officers'
Certificate shall describe the proposed acquisition in reasonable
detail, including without limitation, (i) the Person or assets to be
acquired, (ii) the aggregate consideration to be paid for such
acquisition, (iii) the amount and terms of any Acquired Indebtedness
to be acquired or assumed in such acquisition, (iv) a description of
the nature and amount of any earn-out payments to be paid in
connection with such acquisition, (v) whether Company elects to have
the Retail Cable Contracts acquired in such acquisition included or
excluded from the calculation of Retail Cable Subscriber Penetration
and (vi) whether Company elects to have the Bulk Cable Contracts and
Retail Cable Contracts acquired in such acquisition included or
excluded in the calculation of Average Life of Remaining Contracts.
The elections made by Company pursuant to clauses (v) and (vi) of this
definition shall be one time elections and shall be irrevocable.
Lenders shall not unreasonably withhold or delay approval of any
Request for Acquisition Approval.
"REQUISITE LENDERS" means Lenders having or holding more than
50% of the sum of the aggregate AXEL Exposure of all Lenders plus the
aggregate Revolving Loan Exposure of all Lenders plus the aggregate
Converted Term Loan Exposure of all Lenders.
"RESTRICTED PAYMENT" means (i) any dividend or other
distribution, direct or indirect, on account of any shares of any
class of stock of Company or Holdings now or hereafter outstanding,
except a dividend payable solely in shares of that class of stock to
the holders of that class, (ii) any redemption, retirement, sinking
fund or similar payment, purchase or other acquisition for value,
direct or indirect, of any shares of any
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class of stock of Company or Holdings now or hereafter outstanding,
(iii) any payment made to retire, or to obtain the surrender of, any
outstanding warrants, options or other rights to acquire shares of any
class of stock of Company or Holdings now or hereafter outstanding, and
(iv) any payment or prepayment of principal of, premium, if any, or
interest on, or redemption, purchase, retirement, defeasance (including
in-substance or legal defeasance), sinking fund or similar payment with
respect to, Subordinated Indebtedness.
"RETAIL CABLE CONTRACTS" means retail cable contracts between
Holdings or its Subsidiaries with an owner or manager or home owners'
association, cooperative or similar organization of a multiple
dwelling unit pursuant to which each resident within the multiple
dwelling unit must individually enroll with Holdings or its
Subsidiaries in order to obtain cable services and must pay for such
services directly to Holdings or its Subsidiaries on a monthly basis.
"RETAIL CABLE CUSTOMERS" means, for any period, the total
number of cable customers under Retail Cable Contracts.
"RETAIL CABLE SUBSCRIBER PENETRATION" means, for any period,
the total number of cable subscribers under Retail Cable Contracts of
Holdings and its Subsidiaries divided by the number of residential
units for which Holdings and its Subsidiaries are capable of providing
cable service under such Retail Cable Contracts; provided, however,
any Retail Cable Contracts acquired in an acquisition requiring
Requisite Lender consent may be included or excluded from such
calculation, at the option of Company as set forth in the Request for
Acquisition Approval submitted by Company with respect such
acquisition.
"REVOLVING LOAN COMMITMENT" means the commitment of a Lender
to make Revolving Loans to Company pursuant to subsection 2.1A(ii),
and "REVOLVING LOAN COMMITMENTS" means such commitments of all Lenders
in the aggregate.
"REVOLVING LOAN CONVERSION DATE" means November 30, 2000.
"REVOLVING LOAN EXPOSURE" means, with respect to any Lender as
of any date of determination (i) prior to the termination of the
Revolving Loan Commitments, that Lender's Revolving Loan Commitment
and (ii) after the termination of the Revolving Loan Commitments, the
sum of (a) the aggregate outstanding principal amount of the Revolving
Loans of that Lender plus (b) in the event that Lender is an Issuing
Lender, the aggregate Letter of Credit Usage in respect of all Letters
of Credit issued by that Lender (in each case net of any
participations purchased by other Lenders in such Letters of Credit or
any unreimbursed drawings thereunder) plus(c) the aggregate amount of
all participations purchased by that Lender in any outstanding Letters
of Credit or any unreimbursed drawings under any Letters of Credit.
"REVOLVING LOANS" means the Loans made by Lenders to Company
pursuant to subsection 2.1A(ii).
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"REVOLVING NOTES" means any promissory notes issued by Company
pursuant to subsection 2.1E(i)(b) or the last sentence of subsection
10.1B(i) in connection with assignments of the Revolving Loan
Commitments and Revolving Loans of any Lenders, in each case
substantially in the form of Exhibit V annexed hereto, as they may be
amended, supplemented or otherwise modified from time to time.
"SECURITIES" means any stock, shares, partnership interests,
voting trust certificates, certificates of interest or participation
in any profit-sharing agreement or arrangement, options, warrants,
bonds, debentures, notes, or other evidences of indebtedness, secured
or unsecured, convertible, subordinated or otherwise, or in general
any instruments commonly known as "securities" or any certificates of
interest, shares or participations in temporary or interim
certificates for the purchase or acquisition of, or any right to
subscribe to, purchase or acquire, any of the foregoing.
"SECURITIES ACT" means the Securities Act of 1933, as amended
from time to time, and any successor statute.
"SOLVENT" means, with respect to any Person, that as of the
date of determination both (i) (a) the then fair saleable value of the
property (including intangible assets) of such Person is (1) greater
than the total amount of liabilities (including the amount of
contingent liabilities) of such Person and (2) not less than the
amount that will be required to pay the probable liabilities on such
Person's then existing debts as they become absolute and matured
considering all financing alternatives and potential asset sales
reasonably available to such Person; (b) such Person's capital is not
unreasonably small in relation to its business or any contemplated or
undertaken transaction; and (c) such Person does not intend to incur,
or believe (nor should it reasonably believe) that it will incur,
debts beyond its ability to pay such debts as they become due; and
(ii) such Person is "solvent" within the meaning given that term and
similar terms under applicable laws relating to fraudulent transfers
and conveyances. For purposes of this definition, the amount of any
contingent liability at any time shall be computed as the amount that,
in light of all of the facts and circumstances existing at such time,
represents the amount that can reasonably be expected to become an
actual or matured liability.
"STANDBY LETTER OF CREDIT" means any standby letter of credit
or similar instrument issued for the purpose of supporting (i)
Indebtedness of Company or any of its Subsidiaries in respect of
industrial revenue or development bonds or financings, (ii) workers'
compensation liabilities of Company or any of its Subsidiaries, (iii)
the obligations of third party insurers of Company or any of its
Subsidiaries arising by virtue of the laws of any jurisdiction
requiring third party insurers, (iv) obligations with respect to
Capital Leases or Operating Leases of Company or any of its
Subsidiaries, and (v) performance, payment, deposit or surety
obligations of Company or any of its Subsidiaries, in any case if
required by law or governmental rule or regulation or in accordance
with custom and practice in the industry; provided that Standby
Letters of Credit may not be issued for the purpose of supporting (a)
trade payables or (b) any
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Indebtedness constituting "antecedent debt" (as that term is used in
Section 547 of the Bankruptcy Code).
"STATE LAW" means any state law pertaining to or regulating
intrastate and local telecommunications services, or any successor
statute or statutes thereto, and all State Regulations pursuant to
such State Law, in each case as from time to time in effect.
"STATE PUC" means any state public utility commission or any
other state commission, agency, department, board or authority with
responsibility for regulating intrastate and local telecommunications
services.
"STATE REGULATIONS" means all rules, regulations, written
policies, orders and decisions of any State PUC.
"STRATEGIC EQUITY INVESTOR" means any Person (other than
Videotron) which (i) is (a) CDPQ or (b) is engaged principally in the
cable/telecommunications business or is a public utility and 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 and (ii)
invests, and after such investment continues to maintain an investment
of, not less than $20,000,000 in the common equity of Holdings.
"SUBORDINATED INDEBTEDNESS" means (i) the Indebtedness of
Holdings evidenced by the Existing Holdings Convertible Notes, (ii)
Additional Subordinated Indebtedness and (iii) any other Indebtedness
of Holdings (a) as to which no Subsidiary of Holdings provides credit
support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness) or is directly or
indirectly liable (as a guarantor or otherwise) or (b) which is
subordinated in right of payment to the Obligations pursuant to
documentation containing maturities, amortization schedules,
covenants, defaults, remedies, subordination provisions and other
material terms in form and substance satisfactory to Administrative
Agent and Requisite Lenders.
"SUBSIDIARY" means, (i) with respect to any Person, any
corporation, partnership, limited liability company, association,
joint venture or other business entity of which more than 50% of the
total voting power of shares of stock or other ownership interests
entitled (without regard to the occurrence of any contingency) to vote
in the election of the Person or Persons (whether directors, managers,
trustees or other Persons performing similar functions) having the
power to direct or cause the direction of the management and policies
thereof is at the time owned or controlled, directly or indirectly, by
that Person or one or more of the other Subsidiaries of that Person or
a combination thereof and (ii) for purposes of this Agreement any
Permitted Joint Venture irrespective of whether it meets the
requirements of clause (i) of this definition. Notwithstanding the
fact that License Co. is not an Affiliate of Holdings and its
Subsidiaries, License Co. shall be deemed a Subsidiary of Holdings
for purposes of this Agreement.
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"SUBSIDIARY GUARANTOR" means any Subsidiary of Holdings that
executes and delivers a counterpart of the Subsidiary Guaranty on the
Closing Date or from time to time thereafter pursuant to subsection
6.8.
"SUBSIDIARY GUARANTY" means the Subsidiary Guaranty executed
and delivered by each existing Subsidiary Guarantor on the Closing
Date and to be executed and delivered by additional Subsidiaries of
Holdings from time to time thereafter in accordance with subsection
6.8, substantially in the form of Exhibit XV annexed hereto, as such
Subsidiary Guaranty may hereafter be amended, supplemented or
otherwise modified from time to time.
"SUBSIDIARY PLEDGE AGREEMENT" means the Subsidiary Pledge
Agreement executed and delivered by each existing Subsidiary Guarantor
on the Closing Date and to be executed and delivered by any additional
Subsidiary Guarantor from time to time thereafter in accordance with
subsection 6.8, substantially in the form of Exhibit XVI annexed
hereto, as such Subsidiary Pledge Agreement may be amended,
supplemented or otherwise modified from time to time.
"SUBSIDIARY SECURITY AGREEMENT" means the Subsidiary Security
Agreement executed and delivered by each existing Subsidiary Guarantor
on the Closing Date and to be executed and delivered by any additional
Subsidiary Guarantor from time to time thereafter in accordance with
subsection 6.8, substantially in the form of Exhibit XVII annexed
hereto, as such Subsidiary Security Agreement may be amended,
supplemented or otherwise modified from time to time.
"SUPPLEMENTAL COLLATERAL AGENT" has the meaning assigned to
that term in subsection 9.1B.
"SWAP" means an Asset Sale by Holdings or its Subsidiaries in
which the consideration received in exchange for the assets sold is
other equipment or productive assets to be used in the conduct of the
business of Holdings and its Subsidiaries or the stock of a Person
which following the consummation of such acquisition shall be an
operating Subsidiary of Holdings.
"SYNDICATION AGENT" has the meaning assigned to that term in
the introduction to this Agreement.
"TAX" or "TAXES" means any present or future tax, levy,
impost, duty, charge, fee, deduction or withholding of any nature and
whatever called, by whomsoever, on whomsoever and wherever imposed,
levied, collected, withheld or assessed; provided that "TAX ON THE
OVERALL NET INCOME" of a Person shall be construed as a reference to a
tax imposed by the jurisdiction in which that Person is organized or
in which that Person's principal office (and/or, in the case of a
Lender, its lending office) is located or in which that Person
(and/or, in the case of a Lender, its lending office) is deemed to be
doing business on all or part of the net income, profits or gains
(whether
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worldwide, or only insofar as such income, profits or gains are
considered to arise in or to relate to a particular jurisdiction, or
otherwise) of that Person (and/or, in the case of a Lender, its lending
office).
"TERM LOAN" or "TERM LOANS" means one or more of the AXELs or
Converted Term Loans or any combination thereof.
"TERM LOAN NOTES" means any promissory notes of Company issued
pursuant to subsection 2.1E(i)(a) or 2.1E(i)(c) or the last sentence
of subsection 10.1B(i) in connection with assignments of the AXEL
Commitments or Converted Term Loans of any Lenders, in each case
substantially in the form of Exhibit IV or Exhibit VI, as applicable,
annexed hereto, as they may be amended, supplemented or otherwise
modified from time to time.
"TITLE COMPANY" means a title insurance company reasonably
satisfactory to Administrative Agent.
"TOTAL UTILIZATION OF REVOLVING LOAN COMMITMENTS" means, as at
any date of determination, the sum of (i) the aggregate principal
amount of all outstanding Revolving Loans (other than Revolving Loans
made for the purpose of reimbursing the applicable Issuing Lender for
any amount drawn under any Letter of Credit but not yet so applied)
plus (ii) the Letter of Credit Usage.
"UCC" means the Uniform Commercial Code (or any similar or
equivalent legislation) as in effect in any applicable jurisdiction.
"VIDEOTRON" means le Groupe Videotron Ltee., a Quebec
corporation.
"VPC" means VPC Corporation, a Delaware corporation.
"VPC AND CDPQ AGREEMENT" means the agreement executed and
delivered by VPC, Videotron and Caisse de Depot on the Closing Date in
substantially the form of Exhibit XXIII annexed hereto, as such
agreement may be amended, supplemented or otherwise modified from time
to time.
1.2 ACCOUNTING TERMS; UTILIZATION OF GAAP FOR PURPOSES OF CALCULATIONS
UNDER AGREEMENT.
Except as otherwise expressly provided in this Agreement, all
accounting terms not otherwise defined herein shall have the meanings assigned
to them in conformity with GAAP. Financial statements and other information
required to be delivered by Company to Lenders pursuant to clauses (i), (ii),
(iii) and (xiii) of subsection 6.1 shall be prepared in accordance with GAAP as
in effect at the time of such preparation (and delivered together with the
reconciliation statements provided for in subsection 6.1(v)). Calculations in
connection with the definitions,
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<PAGE> 41
covenants and other provisions of this Agreement shall utilize accounting
principles and policies in conformity with those used to prepare the financial
statements referred to in subsection 5.3. Notwithstanding the fact that License
Co. is not consolidated with Holdings and its Subsidiaries under GAAP since it
is not an Affiliate, during any Fiscal Quarter in which Holdings and its
Subsidiaries have made Cash payments to License Co. or License Co. has made Cash
payments to Holdings and its Subsidiaries (excluding any amounts paid by
offsetting amounts due from one party to the other), License Co. shall be deemed
a consolidated Subsidiary of Holdings for purposes of this Agreement and shall
be included in calculating numbers to be calculated on a consolidated basis.
1.3 OTHER DEFINITIONAL PROVISIONS AND RULES OF CONSTRUCTION.
Any of the terms defined herein may, unless the context otherwise
requires, be used in the singular or the plural, depending on the reference.
References to "Sections" and "subsections" shall be to Sections and
subsections, respectively, of this Agreement unless otherwise specifically
provided. The use herein of the word "include" or "including", when following
any general statement, term or matter, shall not be construed to limit such
statement, term or matter to the specific items or matters set forth
immediately following such word or to similar items or matters, whether or not
nonlimiting language (such as "without limitation" or "but not limited to" or
words of similar import) is used with reference thereto, but rather shall be
deemed to refer to all other items or matters that fall within the broadest
possible scope of such general statement, term or matter.
SECTION 2.
AMOUNTS AND TERMS OF COMMITMENTS AND LOANS
2.1 COMMITMENTS; MAKING OF LOANS; THE REGISTER; NOTES.
A. COMMITMENTS. Subject to the terms and conditions of this
Agreement and in reliance upon the representations and warranties of Company
herein set forth, each Lender hereby severally agrees to make the Loans
described in subsections 2.1A(i), 2.1A(ii) and 2.1A(iii).
(i) AXELs. Each Lender severally agrees to lend to
Company on the Closing Date an amount not exceeding its Pro Rata Share
of the aggregate amount of the AXEL Commitments to be used for the
purposes identified in subsection 2.5A. The amount of each Lender's
AXEL Commitment is set forth opposite its name on Schedule 2.1 annexed
hereto and the aggregate amount of the AXEL Commitments is
$125,000,000; provided that the AXEL Commitments of Lenders shall be
adjusted to give effect to any assignments of the AXEL Commitments
pursuant to subsection 10.1B. Each Lender's AXEL Commitment shall
expire immediately and without further action at 11:59 P.M. (New York
City time) on December 22, 1997 if the AXELs are not made on or before
that date. Company may make only one borrowing under the AXEL
Commitments.
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<PAGE> 42
Amounts borrowed under this subsection 2.1A(i) and subsequently repaid
or prepaid may not be reborrowed.
(ii) Revolving Loans. Each Lender severally agrees,
subject to the limitations set forth below with respect to the maximum
amount of Revolving Loans permitted to be outstanding from time to
time, to lend to Company from time to time during the period from the
Closing Date to but excluding the Revolving Loan Conversion Date an
aggregate amount not exceeding its Pro Rata Share of the aggregate
amount of the Revolving Loan Commitments to be used for the purposes
identified in subsection 2.5A. The original amount of each Lender's
Revolving Loan Commitment is set forth opposite its name on Schedule
2.1 annexed hereto and the aggregate original amount of the Revolving
Loan Commitments is $25,000,000; provided that the Revolving Loan
Commitments of Lenders shall be adjusted to give effect to any
assignments of the Revolving Loan Commitments pursuant to subsection
10.1B; and provided, further that the amount of the Revolving Loan
Commitments shall be reduced from time to time by the amount of any
reductions thereto made pursuant to subsections 2.4B(ii) and
2.4B(iii). Each Lender's Revolving Loan Commitment shall convert on
the Revolving Loan Conversion Date and all Revolving Loans shall be
converted to a Converted Term Loan; provided that each Lender's
Revolving Loan Com- mitment shall expire immediately and without
further action at 11:59 P.M. (New York City time) on December 22, 1997
if the AXELs are not made on or before that date. Amounts borrowed
under this subsection 2.1A(ii) may be repaid and reborrowed to but
excluding the Revolving Loan Conversion Date.
Anything contained in this Agreement to the contrary
notwithstanding, the Revolving Loans and the Revolving Loan
Commitments shall be subject to the limitation that in no event shall
the Total Utilization of Revolving Loan Commitments at any time exceed
the Revolving Loan Commitments then in effect.
(iii) Revolving Loan Conversion. On the Revolving Loan
Conversion Date, without further action by Company, Administrative
Agent or Lenders, all outstanding Revolving Loans shall be converted
to Converted Term Loans and all such Converted Term Loans shall be
allocated among Lenders in accordance with their respective Pro Rata
Shares.
(iv) Issuance of Notes Upon Revolving Loan Conversion. On
or as soon as practicable after the Revolving Loan Conversion Date,
(a) each Lender shall deliver any Revolving Notes issued to it
hereunder, marked to show their exchange, to Company, and (b) Company
shall execute and deliver to each Lender (or to Administrative Agent
for such Lender) a Term Note substantially in the form of Exhibit VI
annexed hereto to evidence that Lender's Converted Term Loans, in the
principal amount of that Lender's Converted Term Loan.
B. BORROWING MECHANICS. AXELs or Revolving Loans made on any
Funding Date (other than Revolving Loans made pursuant to subsection 3.3B for
the purpose of reimbursing
35
<PAGE> 43
any Issuing Lender for the amount of a drawing under a Letter of Credit issued
by it) shall be in an aggregate minimum amount of $1,000,000 and integral
multiples of $500,000 in excess of that amount; provided that AXELs or Revolving
Loans made on any Funding Date as Eurodollar Rate Loans with a particular
Interest Period shall be in an aggregate minimum amount of $5,000,000 and
integral multiples of $1,000,000 in excess of that amount. On the Closing Date,
with respect to AXELs and whenever Company desires that Lenders make Revolving
Loans it shall deliver to Administrative Agent a Notice of Borrowing no later
than 11:00 A.M. (New York City time) at least three Business Days in advance of
the proposed Funding Date (in the case of a Eurodollar Rate Loan) or at least
one Business Day in advance of the proposed Funding Date (in the case of a Base
Rate Loan). The Notice of Borrowing shall specify (i) the proposed Funding Date
(which shall be a Business Day), (ii) the amount and type of Loans requested,
(iii) whether such Loans shall be Base Rate Loans or Eurodollar Rate Loans, and
(iv) in the case of any Loans requested to be made as Eurodollar Rate Loans, the
initial Interest Period requested therefor. AXELs and Revolving Loans may be
continued as or converted into Base Rate Loans and Eurodollar Rate Loans in the
manner provided in subsection 2.2D. In lieu of delivering the above-described
Notice of Borrowing, Company may give Administrative Agent telephonic notice by
the required time of any proposed borrowing under this subsection 2.1B; provided
that such notice shall be promptly confirmed in writing by delivery of a Notice
of Borrowing to Administrative Agent on or before the applicable Funding Date.
Neither Administrative Agent nor any Lender shall incur any liability
to Company in acting upon any telephonic notice referred to above that
Administrative Agent believes in good faith to have been given by a duly
authorized officer or other person authorized to borrow on behalf of Company or
for otherwise acting in good faith under this subsection 2.1B, and upon funding
of Loans by Lenders in accordance with this Agreement pursuant to any such
telephonic notice Company shall have effected Loans hereunder.
Company shall notify Administrative Agent prior to the funding of any
Loans in the event that any of the matters to which Company is required to
certify in the applicable Notice of Borrowing is no longer true and correct as
of the applicable Funding Date, and the acceptance by Company of the proceeds
of any Loans shall constitute a re- certification by Company, as of the
applicable Funding Date, as to the matters to which Company is required to
certify in the applicable Notice of Borrowing.
Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a
Notice of Borrowing for a Eurodollar Rate Loan (or telephonic notice in lieu
thereof) shall be irrevocable on and after the related Interest Rate
Determination Date, and Company shall be bound to make a borrowing in
accordance therewith.
C. DISBURSEMENT OF FUNDS. All AXELs and Revolving Loans under
this Agreement shall be made by Lenders simultaneously and proportionately to
their respective Pro Rata Shares, it being understood that no Lender shall be
responsible for any default by any other Lender in that other Lender's
obligation to make a Loan requested hereunder nor shall the Commitment of any
Lender to make the particular type of Loan requested be increased or decreased
as a
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<PAGE> 44
result of a default by any other Lender in that other Lender's obligation
to make a Loan requested hereunder. Promptly after receipt by Administrative
Agent of a Notice of Borrowing pursuant to subsection 2.1B (or telephonic
notice in lieu thereof), Administrative Agent shall notify each Lender of the
proposed borrowing. Each Lender shall make the amount of its Loan available to
Administrative Agent not later than 12:00 Noon (New York City time) on the
applicable Funding Date in same day funds in Dollars, at the Funding and
Payment Office. Except as provided in subsection 3.3B with respect to
Revolving Loans used to reimburse any Issuing Lender for the amount of a
drawing under a Letter of Credit issued by it, upon satisfaction or waiver of
the conditions precedent specified in subsections 4.1 (in the case of Loans
made on the Closing Date) and 4.2 (in the case of all Loans), Administrative
Agent shall make the proceeds of such Loans available to Company on the
applicable Funding Date by causing an amount of same day funds in Dollars equal
to the proceeds of all such Loans received by Administrative Agent from Lenders
to be credited to the account of Company at the Funding and Payment Office.
Unless Administrative Agent shall have been notified by any Lender
prior to the Funding Date for any Loans that such Lender does not intend to
make available to Administrative Agent the amount of such Lender's Loan
requested on such Funding Date, Administrative Agent may assume that such
Lender has made such amount available to Administrative Agent on such Funding
Date and Administrative Agent may, in its sole discretion, but shall not be
obligated to, make available to Company a corresponding amount on such Funding
Date. If such corresponding amount is not in fact made available to
Administrative Agent by such Lender, Administrative Agent shall be entitled to
recover such corresponding amount on demand from such Lender together with
interest thereon, for each day from such Funding Date until the date such
amount is paid to Administrative Agent, at the customary rate set by
Administrative Agent for the correction of errors among banks for three Business
Days and thereafter at the Base Rate. If such Lender does not pay such
corresponding amount forthwith upon Administrative Agent's demand therefor,
Administrative Agent shall promptly notify Company and Company shall immediately
pay such corresponding amount to Administrative Agent together with interest
thereon, for each day from such Funding Date until the date such amount is paid
to Administrative Agent, at the rate payable under this Agreement for Base Rate
Loans. Nothing in this subsection 2.1C shall be deemed to relieve any Lender
from its obligation to fulfill its Commitments hereunder or to prejudice any
rights that Company may have against any Lender as a result of any default by
such Lender hereunder.
D. THE REGISTER.
(i) Administrative Agent shall maintain, at its address
referred to in subsection 10.8, a register for the recordation of the
names and addresses of Lenders and the Commitments and Loans of each
Lender from time to time (the "REGISTER"). The Register shall be
available for inspection by Company or any Lender at any reasonable
time and from time to time upon reasonable prior notice.
(ii) Administrative Agent shall record in the Register the
AXEL Commitment and Revolving Loan Commitment and the AXEL, Revolving
Loans and Converted Term Loans from time to time of each Lender, and
each repayment or prepayment in respect of the principal amount of the
AXEL, Revolving Loans or Converted Term
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<PAGE> 45
Loans of each Lender. Any such recordation shall be conclusive and
binding on Company and each Lender, absent manifest error; provided
that failure to make any such recordation, or any error in such
recordation, shall not affect any Lender's Commitments or Company's
Obligations in respect of any applicable Loans.
(iii) Each Lender shall record on its internal records
(including any Notes held by such Lender) the amount of the AXEL, each
Revolving Loan and the Converted Term Loan made by it and each payment
in respect thereof. Any such recordation shall be conclusive and
binding on Company, absent manifest error; provided that failure to
make any such recordation, or any error in such recordation, shall not
affect any Lender's Commitments or Company's Obligations in respect of
any applicable Loans; and provided, further that in the event of any
inconsistency between the Register and any Lender's records, the
recordations in the Register shall govern.
(iv) Company, Administrative Agent and Lenders shall deem
and treat the Persons listed as Lenders in the Register as the holders
and owners of the corresponding Commitments and Loans listed therein
for all purposes hereof, and no assignment or transfer of any such
Commitment or Loan shall be effective, in each case unless and until
an Assignment Agreement effecting the assignment or transfer thereof
shall have been accepted by Administrative Agent and recorded in the
Register as provided in subsection 10.1B(ii). Prior to such
recordation, all amounts owed with respect to the applicable Commitment
or Loan shall be owed to the Lender listed in the Register as the owner
thereof, and any request, authority or consent of any Person who, at
the time of making such request or giving such authority or consent, is
listed in the Register as a Lender shall be conclusive and binding on
any subsequent holder, assignee or transferee of the corresponding
Commitments or Loans.
(v) Company hereby designates CIBC to serve as Company's
agent solely for purposes of maintaining the Register as provided in
this subsection 2.1D, and Company hereby agrees that, to the extent
CIBC serves in such capacity, CIBC and its officers, directors,
employees, agents and affiliates shall constitute Indemnitees for all
purposes under subsection 10.3.
E. NOTES. Upon request of any Lender, Company shall execute and
deliver (i) to each Lender (or to Administrative Agent for that Lender) (a) an
AXEL Note substantially in the form of Exhibit IV annexed hereto to evidence
that Lender's AXEL, in the principal amount of that Lender's AXEL and with
other appropriate insertions, (b) a Revolving Note substantially in the form of
Exhibit V annexed hereto to evidence that Lender's Revolving Loans, in the
principal amount of that Lender's Revolving Loan Commitment and with other
appropriate insertions, and (c) a Converted Term Loan Note substantially in the
form of Exhibit VI annexed hereto to evidence that Lender's Converted Term
Loan, in the principal amount of that Lender's Converted Term Loan.
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<PAGE> 46
2.2 INTEREST ON THE LOANS.
A. RATE OF INTEREST. Subject to the provisions of subsections
2.6 and 2.7, each AXEL, each Revolving Loan and each Converted Term Loan shall
bear interest on the unpaid principal amount thereof from the date made through
maturity (whether by acceleration or otherwise) at a rate determined by
reference to the Base Rate or the Adjusted Eurodollar Rate. The applicable
basis for determining the rate of interest with respect to any Term Loan or any
Revolving Loan shall be selected by Company initially at the time a Notice of
Borrowing is given with respect to such Loan pursuant to subsection 2.1B. The
basis for determining the interest rate with respect to any Term Loan or any
Revolving Loan may be changed from time to time pursuant to subsection 2.2D.
If on any day a Term Loan or Revolving Loan is outstanding with respect to
which notice has not been delivered to Administrative Agent in accordance with
the terms of this Agreement specifying the applicable basis for determining the
rate of interest, then for that day that Loan shall bear interest determined by
reference to the Base Rate.
Subject to the provisions of subsections 2.2E and 2.7, the
Term Loans, and the Revolving Loans shall bear interest through
maturity as follows:
(a) if a Base Rate Loan, then at the sum of the
Base Rate in effect from time to time plus the Applicable
Margin; or
(b) if a Eurodollar Rate Loan, then at the sum of
the Adjusted Eurodollar Rate in effect from time to time plus
the Applicable Margin during the applicable Interest Period.
B. INTEREST PERIODS. In connection with each Eurodollar Rate
Loan, Company may, pursuant to the applicable Notice of Borrowing or Notice of
Conversion/Continuation, as the case may be, select an interest period (each an
"INTEREST PERIOD") to be applicable to such Loan, which Interest Period shall
be, at Company's option, either a one-, two-, three- or six-month period;
provided that:
(i) the initial Interest Period for any Eurodollar Rate
Loan shall commence on the Funding Date in respect of such Loan, in
the case of a Loan initially made as a Eurodollar Rate Loan, or on the
date specified in the applicable Notice of Conversion/Continuation, in
the case of a Loan converted to a Eurodollar Rate Loan;
(ii) in the case of immediately successive Interest
Periods applicable to a Eurodollar Rate Loan continued as such
pursuant to a Notice of Conversion/Continuation, each successive
Interest Period shall commence on the day on which the next preceding
Interest Period expires;
(iii) if an Interest Period would otherwise expire on a day
that is not a Business Day, such Interest Period shall expire on the
next succeeding Business Day; provided that, if any Interest Period
would otherwise expire on a day that is not a Business Day
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<PAGE> 47
but is a day of the month after which no further Business Day occurs in
such month, such Interest Period shall expire on the next preceding
Business Day;
(iv) any Interest Period that begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall, subject to clause (v) of this subsection 2.2B, end on
the last Business Day of a calendar month;
(v) no Interest Period with respect to any portion of the
Term Loans shall extend beyond May 31, 2004, and no Interest Period
with respect to any portion of the Revolving Loans shall extend beyond
the Revolving Loan Commitment Conversion Date unless no scheduled
payment of principal on the such Revolving Loans after they have been
converted to Converted Term Loans is due during such Interest Period;
(vi) no Interest Period with respect to any portion of the
Term Loans shall extend beyond a date on which Company is required to
make a scheduled payment of principal of the Term Loans unless the sum
of (a) the aggregate principal amount of Term Loans that are Base Rate
Loans plus (b) the aggregate principal amount of Term Loans that are
Eurodollar Rate Loans with Interest Periods expiring on or before such
date equals or exceeds the principal amount required to be paid on the
Term Loans on such date;
(vii) there shall be no more than 10 Interest Periods
outstanding at any time; and
(viii) in the event Company fails to specify an Interest
Period for any Eurodollar Rate Loan in the applicable Notice of
Borrowing or Notice of Conversion/Continuation, Company shall be
deemed to have selected an Interest Period of one month.
C. INTEREST PAYMENTS. Subject to the provisions of subsection
2.2E, interest on each Loan shall be payable in arrears on and to each Interest
Payment Date applicable to that Loan, upon any prepayment of that Loan (to the
extent accrued on the amount being prepaid) and at maturity (including final
maturity).
D. CONVERSION OR CONTINUATION. Subject to the provisions of
subsection 2.6, Company shall have the option (i) to convert at any time all or
any part of its outstanding Term Loans or Revolving Loans equal to $1,000,000
and integral multiples of $500,000 in excess of that amount from Loans bearing
interest at a rate determined by reference to one basis to Loans bearing
interest at a rate determined by reference to an alternative basis or (ii) upon
the expiration of any Interest Period applicable to a Eurodollar Rate Loan, to
continue all or any portion of such Loan equal to $5,000,000 and integral
multiples of $1,000,000 in excess of that amount as a Eurodollar Rate Loan;
provided, however, that a Eurodollar Rate Loan may only be converted into a
Base Rate Loan on the expiration date of an Interest Period applicable thereto.
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<PAGE> 48
Company shall deliver a Notice of Conversion/Continuation to
Administrative Agent no later than 11:00 A.M. (New York City time) at least one
Business Day in advance of the proposed conversion date (in the case of a
conversion to a Base Rate Loan) and at least three Business Days in advance of
the proposed conversion/continuation date (in the case of a conversion to, or a
continuation of, a Eurodollar Rate Loan). A Notice of Conversion/Continuation
shall specify (i) the proposed conversion/continuation date (which shall be a
Business Day), (ii) the amount and type of the Loan to be converted/continued,
(iii) the nature of the proposed conversion/continuation, (iv) in the case of a
conversion to, or a continuation of, a Eurodollar Rate Loan, the requested
Interest Period, and (v) in the case of a conversion to, or a continuation of,
a Eurodollar Rate Loan, that no Potential Event of Default or Event of Default
has occurred and is continuing. In lieu of delivering the above-described
Notice of Conversion/Continuation, Company may give Administrative Agent
telephonic notice by the required time of any proposed conversion/continuation
under this subsection 2.2D; provided that such notice shall be promptly
confirmed in writing by delivery of a Notice of Conversion/ Continuation to
Administrative Agent on or before the proposed conversion/continuation date.
Upon receipt of written or telephonic notice of any proposed
conversion/continuation under this subsection 2.2D, Administrative Agent shall
promptly transmit such notice by telefacsimile or telephone to each Lender.
Neither Administrative Agent nor any Lender shall incur any liability
to Company in acting upon any telephonic notice referred to above that
Administrative Agent believes in good faith to have been given by a duly
authorized officer or other person authorized to act on behalf of Company or
for otherwise acting in good faith under this subsection 2.2D, and upon
conversion or continuation of the applicable basis for determining the interest
rate with respect to any Loans in accordance with this Agreement pursuant to
any such telephonic notice Company shall have effect- ed a conversion or
continuation, as the case may be, hereunder.
Except as otherwise provided in subsections 2.6B, 2.6C and 2.6G, a
Notice of Conversion/Continuation for conversion to, or continuation of, a
Eurodollar Rate Loan (or telephonic notice in lieu thereof) shall be
irrevocable on and after the related Interest Rate Determination Date, and
Company shall be bound to effect a conversion or continuation in accordance
therewith.
E. DEFAULT RATE. Upon the occurrence and during the continuation
of any Event of Default, the outstanding principal amount of all Loans and, to
the extent permitted by applicable law, any interest payments thereon not paid
when due and any fees and other amounts then due and payable hereunder, shall
thereafter bear interest (including post- petition interest in any proceeding
under the Bankruptcy Code or other applicable bankruptcy laws) payable upon
demand at a rate that is 2% per annum in excess of the interest rate otherwise
payable under this Agreement with respect to the applicable Loans (or, in the
case of any such fees and other amounts, at a rate which is 2% per annum in
excess of the interest rate otherwise payable under this Agreement for Base
Rate Loans); provided that, in the case of Eurodollar Rate Loans, upon the
expiration of the Interest Period in effect at the time any such increase in
interest rate is effective such Eurodollar Rate Loans shall thereupon become
Base Rate Loans and shall thereafter bear interest payable upon demand at a
rate which is 2% per annum in excess of the
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<PAGE> 49
interest rate otherwise payable under this Agreement for Base Rate Loans.
Payment or acceptance of the increased rates of interest provided for in this
subsection 2.2E is not a permitted alternative to timely payment and shall not
constitute a waiver of any Event of Default or otherwise prejudice or limit any
rights or remedies of Administrative Agent or any Lender. Notwithstanding
anything in this subsection 2.2E to the contrary, the 2% default rate specified
in this subsection 2.2E shall not apply to any outstanding Loans the proceeds of
which are deposited in the AXEL Excess Process Account (but not the Letter of
Credit Collateral Account) unless an Event of Default under subsection 8.1 shall
have occurred and be continuing.
F. COMPUTATION OF INTEREST. Interest on the Loans shall be
computed on the basis of a 360-day year, in each case for the actual number of
days elapsed in the period during which it accrues. In computing interest on
any Loan, the date of the making of such Loan or the first day of an Interest
Period applicable to such Loan or, with respect to a Base Rate Loan being
converted from a Eurodollar Rate Loan, the date of conversion of such
Eurodollar Rate Loan to such Base Rate Loan, as the case may be, shall be
included, and the date of payment of such Loan or the expiration date of an
Interest Period applicable to such Loan or, with respect to a Base Rate Loan
being converted to a Eurodollar Rate Loan, the date of conversion of such Base
Rate Loan to such Eurodollar Rate Loan, as the case may be, shall be excluded;
provided that if a Loan is repaid on the same day on which it is made, one
day's interest shall be paid on that Loan.
2.3 FEES.
A. COMMITMENT FEES. Company agrees to pay to Administrative
Agent, for distribution to each Lender in proportion to that Lender's Pro Rata
Share, commitment fees for the period from and including the Closing Date to
and excluding the Revolving Loan Commitment Conversion Date equal to the
average of the daily excess of the Revolving Loan Commitments over the sum of
(i) the aggregate principal amount of outstanding Revolving Loans plus (ii) the
Letter of Credit Usage multiplied by 0.50 of 1% per annum, such commitment fees
to be calculated on the basis of a 360-day year and the actual number of days
elapsed and to be payable quarterly in arrears on February 28, May 31, August 31
and November 30 of each year, commencing on the first such date to occur after
the Closing Date, and on the Revolving Loan Commitment Termination Date.
B. OTHER FEES. Company agrees to pay to Arranger and
Administrative Agent such other fees in the amounts and at the times separately
agreed upon between Company, Arranger and Administrative Agent.
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<PAGE> 50
2.4 REPAYMENTS, PREPAYMENTS AND REDUCTIONS IN REVOLVING LOAN COMMITMENTS;
GENERAL PROVISIONS REGARDING PAYMENTS; APPLICATION OF PROCEEDS OF
COLLATERAL AND PAYMENTS UNDER GUARANTIES.
A. SCHEDULED PAYMENTS OF TERM LOANS.
(i) Scheduled Payments of AXELs. Company shall make
principal payments on the AXELs in installments on the dates and in
the amounts set forth below:
<TABLE>
<CAPTION>
================================================================================
SCHEDULED REPAYMENT
DATE OF AXELS
- --------------------------------------------------------------------------------
<S> <C>
February 28, 2001 2.5% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
May 31, 2001 2.5% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
August 31, 2001 2.5% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
November 30, 2001 2.5% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
February 28, 2002 3.75% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
May 31, 2002 3.75% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
August 31, 2002 3.75% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
November 30, 2002 3.75% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
February 28, 2003 5% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
May 31, 2003 5% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
August 31, 2003 5% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
November 30, 2003 5% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
February 29, 2004 6.25% of principal outstanding on the
Closing Date
- --------------------------------------------------------------------------------
May 31, 2004 48.75% of principal outstanding on th
Closing Date
================================================================================
</TABLE>
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<PAGE> 51
; provided that the scheduled installments of principal of the AXELs
set forth above shall be reduced in connection with any voluntary or
mandatory prepayments of the AXELs in accordance with subsection
2.4B(iv); and provided, further that the AXELs and all other amounts
owed hereunder with respect to the AXELs shall be paid in full no
later than May 31, 2004, and the final installment payable by Company
in respect of the AXELs on such date shall be in an amount, if such
amount is different from that specified above, sufficient to repay all
amounts owing by Company under this Agreement with respect to the
AXELs.
(ii) Scheduled Payments of Converted Term Loans. Company
shall make principal payments on the Converted Term Loans in
installments on the dates and in the amounts set forth below:
<TABLE>
<CAPTION>
================================================================================
SCHEDULED REPAYMENT
DATE OF CONVERTED TERM LOANS
- --------------------------------------------------------------------------------
<S> <C>
February 28, 2001 2.5% of principal outstanding on the
Revolving Loan Conversion Date
- --------------------------------------------------------------------------------
May 31, 2001 2.5% of principal outstanding on the
Revolving Loan Conversion Date
- --------------------------------------------------------------------------------
August 31, 2001 2.5% of principal outstanding on the
Revolving Loan Conversion Date
- --------------------------------------------------------------------------------
November 30, 2001 2.5% of principal outstanding on the
Revolving Loan Conversion Date
- --------------------------------------------------------------------------------
February 28, 2002 3.75% of principal outstanding on the
Revolving Loan Conversion Date
- --------------------------------------------------------------------------------
May 31, 2002 3.75% of principal outstanding on the
Revolving Loan Conversion Date
- --------------------------------------------------------------------------------
August 31, 2002 3.75% of principal outstanding on the
Revolving Loan Conversion Date
- --------------------------------------------------------------------------------
November 30, 2002 3.75% of principal outstanding on the
Revolving Loan Conversion Date
================================================================================
</TABLE>
44
<PAGE> 52
<TABLE>
<CAPTION>
================================================================================
SCHEDULED REPAYMENT
DATE OF CONVERTED TERM LOANS
- --------------------------------------------------------------------------------
<S> <C>
February 28, 2003 5% of principal outstanding on the Re-
volving Loan Conversion Date
- --------------------------------------------------------------------------------
May 31, 2003 5% of principal outstanding on the Re-
volving Loan Conversion Date
- --------------------------------------------------------------------------------
August 31, 2003 5% of principal outstanding on the Re-
volving Loan Conversion Date
- --------------------------------------------------------------------------------
November 30, 2003 5% of principal outstanding on the Re-
volving Loan Conversion Date
- --------------------------------------------------------------------------------
February 29, 2004 6.25% of principal outstanding on the
Revolving Loan Conversion Date
- --------------------------------------------------------------------------------
May 31, 2004 48.75% of principal outstanding on the
Revolving Loan Conversion Date
================================================================================
</TABLE>
; provided that the scheduled installments of principal of the
Converted Term Loans set forth above shall be reduced in connection
with any voluntary or mandatory prepayments of the Converted Term
Loans in accordance with subsection 2.4B(iv); and provided, further
that the Converted Term Loans and all other amounts owed hereunder
with respect to the Converted Term Loans shall be paid in full no
later than May 31, 2004, and the final installment payable by Company
in respect of the Converted Term Loans on such date shall be in an
amount, if such amount is different from that specified above,
sufficient to repay all amounts owing by Company under this Agreement
with respect to the Converted Term Loans.
B. PREPAYMENTS, LOANS AND REDUCTIONS IN REVOLVING LOAN
COMMITMENTS.
(i) Voluntary Prepayments.
(a) Notice of Prepayment. Company may, upon not
less than three Business Days' prior written or telephonic
notice given to Administrative Agent by 12:00 Noon (New York
City time) on the date required and, if given by telephone,
promptly confirmed in writing to Administrative Agent (which
original written or telephonic notice Administrative Agent
will promptly transmit by telefacsimile or telephone to each
Lender), at any time and from time to time
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<PAGE> 53
prepay any AXELs, Converted Term Loans or Revolving Loans on
any Business Day in whole or in part in an aggregate minimum
amount of $1,000,000 (or such lesser amount as shall
constitute the aggregate amount of Loans outstanding) and
integral multiples of $500,000 in excess of that amount;
provided, however, that with respect to any Eurodollar Rate
Loan prepaid prior to the expiration of the Interest Period
applicable thereto, Company shall pay all amounts payable
pursuant to subsection 2.6D. Notice of prepayment having been
given as aforesaid, the principal amount of the Loans
specified in such notice shall become due and payable on the
prepayment date specified therein. Any such voluntary
prepayment shall be applied as specified in subsection
2.4B(iv).
(b) Prepayment Fees. If any portion of the AXELs
is prepaid (except to the extent that such portion is prepaid
from a foreclosure on any funds in the AXEL Excess Proceeds
Account) (1) pursuant to subsection 2.4B or (2) pursuant to an
acceleration under Section 8, in each case on or prior to the
first anniversary of the Closing Date, Company shall pay to
Administrative Agent, for distribution to Lenders having AXELs
so prepaid in accordance with their Pro Rata Shares, a fee
equal to 1% of the principal amount of AXELs so prepaid.
(ii) Voluntary Reductions of Revolving Loan Commitments.
Company may, upon not less than three Business Days' prior written or
telephonic notice confirmed in writing to Administrative Agent (which
original written or telephonic notice Administrative Agent will
promptly transmit by telefacsimile or telephone to each Lender), at
any time and from time to time terminate in whole or permanently
reduce in part, without premium or penalty, the Revolving Loan
Commitments in an amount up to the amount by which the Revolving Loan
Commitments exceed the Total Utilization of Revolving Loan Commitments
at the time of such proposed termination or reduction; provided that
any such partial reduction of the Revolving Loan Commitments shall be
in an aggregate minimum amount of $1,000,000 and integral multiples of
$500,000 in excess of that amount. Company's notice to Administrative
Agent shall designate the date (which shall be a Business Day) of such
termination or reduction and the amount of any partial reduction, and
such termination or reduction of the Revolving Loan Commitments shall
be effective on the date specified in Company's notice and shall
reduce the Revolving Loan Commitment of each Lender proportionately to
its Pro Rata Share. Any such voluntary reduction of the Revolving
Loan Commitments shall be applied as specified in subsection 2.4B(iv).
(iii) Mandatory Prepayments of Loans and Mandatory
Reductions of Revolving Loan Commitments. The Loans shall be prepaid
and/or the Revolving Loan Commitments shall be permanently reduced in
the amounts and under the circumstances set forth below, all such
prepayments and/or reductions to be applied as set forth below or as
more specifically provided in subsection 2.4B(iv):
(a) Prepayments and Reductions From Net Asset
Sale Proceeds. No later than the first Business Day following
the date of receipt by Holdings or any
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<PAGE> 54
of its Subsidiaries of any Net Asset Sale Proceeds in respect
of any Asset Sale, Company shall prepay the Loans and/or the
Revolving Loan Commitments shall be permanently reduced in an
aggregate amount equal to such Net Asset Sale Proceeds.
Notwithstanding the foregoing, as long as no Event of Default
or Potential Event of Default shall have occurred and be
continuing, Company shall not be required to make any
mandatory prepayment pursuant to this subsection 2.4B(iii)(a)
to the extent the Net Asset Sale Proceeds are reinvested in
equipment or other productive assets (including stock of a
corporation that owns equipment or other productive assets to
the extent the acquisition of such stock is otherwise
permitted under this Agreement) used by Company and its
Subsidiaries in the conduct of its business within 180 days
from the date of receipt thereof; provided, however, that the
total Net Asset Sale Pro- ceeds which may be so reinvested
shall not exceed $20,000,000 in the aggregate. If upon any
Asset Sale, Company elects to reinvest the Net Asset Sale
Proceeds as permitted under this subsection 2.4B(iii)(a), (1)
no later than the first Business Day following the
consummation of such Asset Sale, Company shall deliver an
Officers' Certificate to Administrative Agent demonstrating
the derivation of the Net Asset Sale Proceeds of such Asset
Sale from the gross sales prices thereof and certifying the
portion of such proceeds which Company elects to reinvest in
equipment or other productive assets (including stock of a
corporation that owns equipment or other productive assets to
the extent the acquisition of such stock is otherwise
permitted under this Agreement) and certifying that no Event
of Default or Potential Event of Default shall have occurred
and be continuing and (2) upon the expiration of 180 days
after the date of receipt of the Net Asset Sale Proceeds
certified as being scheduled for reinvestment, Company shall
deliver to Administrative Agent an Officers' Certificate
indicating the amount of Net Asset Sale Proceeds reinvested as
of such date, the assets in which such Net Asset Sale Proceeds
have been reinvested, and the amount of any remaining Net
Asset Sale Proceeds which shall be applied to prepay the Loans
and/or reduce the Commitments as set forth in this Subsection
2.4B(iii)(a).
(b) Prepayments and Reductions from Net
Insurance/Condemnation Proceeds. No later than the first
Business Day following the date of receipt by Administrative
Agent or by Holdings or any of its Subsidiaries of any Net
Insurance/Condemnation Proceeds that are required to be
applied to prepay the Loans and/or reduce the Revolving Loan
Commitments pursuant to the provisions of subsection 6.4C,
Company shall prepay the Loans and/or the Revolving Loan
Commitments shall be permanently reduced in an aggregate
amount equal to the amount of such Net Insurance/Condemnation
Proceeds.
(c) Prepayments and Reductions Due to Reversion
of Surplus Assets of Pension Plans. On the date of return to
Holdings or any of its Subsidiaries of any surplus assets of
any pension plan of Holdings or any of its Subsidiaries,
Company shall prepay the Loans and/or the Revolving Loan
Commitments shall be permanently reduced in an aggregate
amount (such amount being the
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<PAGE> 55
"NET PENSION PROCEEDS") equal to 100% of such returned surplus
assets, net of transaction costs and expenses incurred in
obtaining such return, including incremental taxes payable as
a result thereof, in excess of $500,000 of aggregate Net
Pension Proceeds during the term of this Agreement.
(d) Prepayments and Reductions from Consolidated
Excess Cash Flow. In the event that there shall be
Consolidated Excess Cash Flow for any Fiscal Year (commencing
with Fiscal Year 2000), Company shall, no later than 100 days
after the end of such Fiscal Year, prepay the Loans and/or the
Revolving Loan Commitments shall be permanently reduced in an
aggregate amount equal to 75% of such Consolidated Excess Cash
Flow.
(e) Prepayments and Reductions from Buy-Out
Proceeds. If at any time Holdings and its Subsidiaries
receives Buy-Out Proceeds in a single transaction or series of
transactions in an aggregate amount in excess of $3,000,000
("EXCESS BUY-OUT PROCEEDS"), Company shall deliver to
Administrative Agent and Lenders, an Officers' Certificate
setting forth in reasonable detail the amount of Excess
Buy-Out Proceeds received and the purposes for which Holdings
and its Subsidiaries intend to use such Excess Buy-Out
Proceeds, and Requisite Lenders may require Company within
45-days thereafter, to prepay the Loans and/or permanently
reduce the Revolving Loan Commitments in an aggregate amount
equal to Excess Buy-Out Proceeds within two Business Days'
after receipt by Company of notice of such election from
Administrative Agent. If Requisite Lenders shall not have
elected to require a prepayment pursuant to this subsection
2.4B(iii)(e) within 45 days of receipt of the Officers'
Certificate specifying the amount of the Excess Buy-Out
Proceeds, Holdings and its Subsidiaries may use the Excess
Buy-Out Proceeds for the purposes specified in such Officers'
Certificate.
(f) Calculations of Net Proceeds Amounts;
Additional Prepayments and Reductions Based on Subsequent
Calculations. Concurrently with any prepayment of the Loans
and/or reduction of the Revolving Loan Commitments pursuant to
subsections 2.4B(iii)(a)-(e), Company shall deliver to Admin-
istrative Agent an Officers' Certificate demonstrating the
calculation of the amount (the "NET PROCEEDS AMOUNT") of the
applicable Net Asset Sale Proceeds or Net
Insurance/Condemnation Proceeds or the applicable Net Pension
Proceeds (as such term is defined in subsections 2.4B(iii)(c))
or the applicable Consolidated Excess Cash Flow or Excess
Buy-Out Proceeds, as the case may be, that gave rise to such
prepayment and/or reduction. In the event that Company shall
subsequently determine that the actual Net Proceeds Amount was
greater than the amount set forth in such Officers'
Certificate, Company shall promptly make an additional
prepayment of the Loans (and/or, if applicable, the Revolving
Loan Commitments shall be permanently reduced) in an amount
equal to the amount of such excess, and Company shall
concurrently therewith deliver to
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<PAGE> 56
Administrative Agent an Officers' Certificate demonstrating
the derivation of the additional Net Proceeds Amount resulting
in such excess.
(iv) Application of Prepayments of Loans and Unscheduled
Reductions of Revolving Loan Commitments.
(a) Application of Voluntary Prepayments by Type
of Loans and Order of Maturity. Any voluntary prepayments
pursuant to subsection 2.4B(i) shall be applied as specified
by Company in the applicable notice of prepayment; provided
that in the event Company fails to specify the Loans to which
any such prepayment shall be applied, such prepayment shall be
applied first to repay outstanding Revolving Loans to the full
extent thereof, and second to repay outstanding Term Loans to
the full extent thereof. Any voluntary prepayments of the
Term Loans pursuant to subsection 2.4B(i) shall be applied to
prepay the AXELs and the Converted Term Loans on a pro rata
basis (in accordance with the respective outstanding principal
amounts thereof) and to reduce on a pro rata basis the
scheduled installments of principal of the AXELs and Converted
Term Loans set forth in subsections 2.4A(i) and 2.4A(ii) that
is unpaid at the time of such payment.
(b) Application of Mandatory Prepayments by Type
of Loans. Any amount (the "APPLIED AMOUNT") required to be
applied as a mandatory prepayment of the Loans and/or a
reduction of the Revolving Loan Commitments pursuant to
subsections 2.4B(iii)(a)-(e) shall be applied first to prepay
the Term Loans to the full extent thereof, second, to the
extent of any remaining portion of the Applied Amount, to
prepay the Revolving Loans to the full extent thereof and to
further permanently reduce the Revolving Loan Commitments by
the amount of such prepayment, and third, to the extent of any
remaining portion of the Applied Amount, to further
permanently reduce the Revolving Loan Commitments to the full
extent thereof.
(c) Application of Mandatory Prepayments of AXELs
to AXELs and Converted Term Loans and the Scheduled
Installments of Principal Thereof. Any mandatory prepayments
of the Term Loans pursuant to subsection 2.4B(iii) shall be
applied to prepay the AXELs and the Converted Term Loans on a
pro rata basis (in accordance with the respective outstanding
principal amounts thereof) and shall be applied to reduce the
scheduled installments of principal of the AXELs or the
Converted Term Loans, as the case may be, set forth in
subsection 2.4A(i) or 2.4A(ii), respectively, in inverse order
of maturity.
(d) Application of Prepayments to Base Rate Loans
and Eurodollar Rate Loans. Considering AXELs, Converted Term
Loans and Revolving Loans being prepaid separately, any
prepayment thereof shall be applied first to Base Rate Loans
to the full extent thereof before application to Eurodollar
Rate Loans,
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<PAGE> 57
in each case in a manner which minimizes the amount of any
payments required to be made by Company pursuant to subsection
2.6D.
C. GENERAL PROVISIONS REGARDING PAYMENTS.
(i) Manner and Time of Payment. All payments by Company
of principal, interest, fees and other Obligations hereunder and under
the Notes shall be made in Dollars in same day funds, without defense,
setoff or counterclaim, free of any restriction or condition, and
delivered to Administrative Agent not later than 12:00 (Noon) (New
York City time) on the date due at the Funding and Payment Office for
the account of Lenders; funds received by Administrative Agent after
that time on such due date shall be deemed to have been paid by
Company on the next succeeding Business Day. Company hereby
authorizes Administrative Agent to charge its accounts with
Administrative Agent in order to cause timely payment to be made to
Administrative Agent of all principal, interest, fees and expenses due
hereunder (subject to sufficient funds being available in its accounts
for that purpose).
(ii) Application of Payments to Principal and Interest.
Except as provided in subsection 2.2C, all payments in respect of the
principal amount of any Loan shall include payment of accrued interest
on the principal amount being repaid or prepaid, and all such payments
(and, in any event, any payments in respect of any Loan on a date when
interest is due and payable with respect to such Loan) shall be
applied to the payment of interest before application to principal.
(iii) Apportionment of Payments. Aggregate principal and
interest payments in respect of Term Loans and Revolving Loans shall
be apportioned among all outstanding Loans to which such payments
relate, in each case proportionately to Lenders' respective Pro Rata
Shares. Administrative Agent shall promptly distribute to each
Lender, at its primary address set forth below its name on the
appropriate signature page hereof or at such other address as such
Lender may request, its Pro Rata Share of all such payments received
by Administrative Agent and the commitment fees of such Lender when
received by Administrative Agent pursuant to subsection 2.3.
Notwithstanding the foregoing provisions of this subsection 2.4C(iii),
if, pursuant to the provisions of subsection 2.6C, any Notice of
Conversion/Continuation is withdrawn as to any Affected Lender or if
any Affected Lender makes Base Rate Loans in lieu of its Pro Rata
Share of any Eurodollar Rate Loans, Administrative Agent shall give
effect thereto in apportioning payments received thereafter.
(iv) Payments on Business Days. Whenever any payment to
be made hereunder shall be stated to be due on a day that is not a
Business Day, such payment shall be made on the next succeeding
Business Day and such extension of time shall be included in the
computation of the payment of interest hereunder or of the commitment
fees hereunder, as the case may be.
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<PAGE> 58
(v) Notation of Payment. Each Lender agrees that before
disposing of any Note held by it, or any part thereof (other than by
granting participations therein), that Lender will make a notation
thereon of all Loans evidenced by that Note and all principal payments
previously made thereon and of the date to which interest thereon has
been paid; provided that the failure to make (or any error in the
making of) a notation of any Loan made under such Note shall not limit
or otherwise affect the obligations of Company hereunder or under such
Note with respect to any Loan or any payments of principal or interest
on such Note.
D. APPLICATION OF PROCEEDS OF COLLATERAL AND PAYMENTS UNDER
GUARANTIES.
(i) Application of Proceeds of Collateral. Except as
provided in subsection 2.4B(iii)(a) with respect to prepayments from
Net Asset Sale Proceeds, all proceeds received by Administrative Agent
in respect of any sale of, collection from, or other realization upon
all or any part of the Collateral under any Collateral Document may,
in the discretion of Administrative Agent, be held by Administrative
Agent as Collateral for, and/or (then or at any time thereafter)
applied in full or in part by Administrative Agent against, the
applicable Secured Obligations (as defined in such Collateral
Document) in the following order of priority:
(a) To the payment of all costs and expenses of
such sale, collection or other realization, including
reasonable compensation to Administrative Agent and its agents
and counsel, and all other expenses, liabilities and advances
made or incurred by Administrative Agent in connection
therewith, and all amounts for which Administrative Agent is
entitled to indemnification under such Collateral Document and
all advances made by Administrative Agent thereunder for the
account of the applicable Loan Party, and to the payment of
all costs and expenses paid or incurred by Administrative
Agent in connection with the exercise of any right or remedy
under such Collateral Document, all in accordance with the
terms of this Agreement and such Collateral Document;
(b) thereafter, to the extent of any excess such
proceeds, to the payment of all other such Secured Obligations
for the ratable benefit of the holders thereof; and
(c) thereafter, to the extent of any excess such
proceeds, to the payment to or upon the order of such Loan
Party or to whosoever may be lawfully entitled to receive the
same or as a court of competent jurisdiction may direct.
(ii) Application of Payments Under Guaranties. All
payments received by Administrative Agent under either Guaranty shall
be applied promptly from time to time by Administrative Agent in the
following order of priority:
51
<PAGE> 59
(a) To the payment of the costs and expenses of
any collection or other realization under such Guaranty,
including reasonable compensation to Administrative Agent and
its agents and counsel, and all expenses, liabilities and
advances made or incurred by Administrative Agent in
connection therewith, all in accordance with the terms of this
Agreement and such Guaranty;
(b) thereafter, to the extent of any excess such
payments, to the payment of all other Guarantied Obligations
(as defined in such Guaranty) for the ratable benefit of the
holders thereof; and
(c) thereafter, to the extent of any excess such
payments, to the payment to Holdings or the applicable
Subsidiary Guarantor or to whosoever may be lawfully entitled
to receive the same or as a court of competent jurisdiction
may direct.
2.5 USE OF PROCEEDS.
A. LOANS. The proceeds of the Loans shall be applied by Company
to finance capital expenditures and Permitted Acquisitions, to provide working
capital and for other general corporate purposes. The proceeds of the AXELs
made on the Closing Date shall be deposited in the AXEL Excess Proceeds Account
pending use in the business of Holdings and its Subsidiaries as set forth in
the preceding sentence and may be withdrawn from the AXEL Excess Proceeds
Account in accordance with subsection 7.16. The proceeds withdrawn from the
AXEL Excess Proceeds Account may also be used to repay outstanding AXELs.
B. MARGIN REGULATIONS. No portion of the proceeds of any
borrowing under this Agreement shall be used by Company or any of its
Subsidiaries in any manner that might cause the borrowing or the application of
such proceeds to violate Regulation G, Regulation U, Regulation T or Regulation
X of the Board of Governors of the Federal Reserve System or any other
regulation of such Board or to violate the Exchange Act, in each case as in
effect on the date or dates of such borrowing and such use of proceeds.
2.6 SPECIAL PROVISIONS GOVERNING EURODOLLAR RATE LOANS.
Notwithstanding any other provision of this Agreement to the contrary,
the following provisions shall govern with respect to Eurodollar Rate Loans as
to the matters covered:
A. DETERMINATION OF APPLICABLE INTEREST RATE. As soon as
practicable after 11:00 A.M. (New York City time) on each Interest Rate
Determination Date, Administrative Agent shall determine (which determination
shall, absent manifest error, be final, conclusive and binding upon all
parties) the interest rate that shall apply to the Eurodollar Rate Loans for
which an interest rate is then being determined for the applicable Interest
Period and shall promptly give notice thereof (in writing or by telephone
confirmed in writing) to Company and each Lender.
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<PAGE> 60
B. INABILITY TO DETERMINE APPLICABLE INTEREST RATE. In the event
that Administrative Agent shall have determined (which determination shall be
final and conclusive and binding upon all parties hereto), on any Interest Rate
Determination Date with respect to any Eurodollar Rate Loans, that by reason of
circumstances affecting the interbank Eurodollar market adequate and fair means
do not exist for ascertaining the interest rate applicable to such Loans on the
basis provided for in the definition of Adjusted Eurodollar Rate,
Administrative Agent shall on such date give notice (by telefacsimile or by
telephone confirmed in writing) to Company and each Lender of such
determination, whereupon (i) no Loans may be made as, or converted to,
Eurodollar Rate Loans until such time as Administrative Agent notifies Company
and Lenders that the circumstances giving rise to such notice no longer exist
and (ii) any Notice of Borrowing or Notice of Conversion/Continuation given by
Company with respect to the Loans in respect of which such determination was
made shall be deemed to be rescinded by Company.
C. ILLEGALITY OR IMPRACTICABILITY OF EURODOLLAR RATE LOANS. In
the event that on any date any Lender shall have determined (which
determination shall be final and conclusive and binding upon all parties hereto
but shall be made only after consultation with Company and Administrative
Agent) that the making, maintaining or continuation of its Eurodollar Rate
Loans (i) has become unlawful as a result of compliance by such Lender in good
faith with any law, treaty, governmental rule, regulation, guideline or order
(or would conflict with any such treaty, governmental rule, regulation,
guideline or order not having the force of law even though the failure to
comply therewith would not be unlawful) or (ii) has become impracticable, or
would cause such Lender material hardship, as a result of contingencies
occurring after the date of this Agreement which materially and adversely
affect the interbank Eurodollar market or the position of such Lender in that
market, then, and in any such event, such Lender shall be an "AFFECTED LENDER"
and it shall on that day give notice (by telefacsimile or by telephone
confirmed in writing) to Company and Administrative Agent of such determination
(which notice Administrative Agent shall promptly transmit to each other
Lender). Thereafter (a) the obligation of the Affected Lender to make Loans
as, or to convert Loans to, Eurodollar Rate Loans shall be suspended until such
notice shall be withdrawn by the Affected Lender, (b) to the extent such
determination by the Affected Lender relates to a Eurodollar Rate Loan then
being requested by Company pursuant to a Notice of Borrowing or a Notice of
Conversion/Continuation, the Affected Lender shall make such Loan as (or
convert such Loan to, as the case may be) a Base Rate Loan, (c) the Affected
Lender's obligation to maintain its outstanding Eurodollar Rate Loans (the
"AFFECTED LOANS") shall be terminated at the earlier to occur of the expiration
of the Interest Period then in effect with respect to the Affected Loans or
when required by law, and (d) the Affected Loans shall automatically convert
into Base Rate Loans on the date of such termination. Notwithstanding the
foregoing, to the extent a determination by an Affected Lender as described
above relates to a Eurodollar Rate Loan then being requested by Company
pursuant to a Notice of Borrowing or a Notice of Conversion/Continuation,
Company shall have the option, subject to the provisions of subsection 2.6D, to
rescind such Notice of Borrowing or Notice of Conversion/Continuation as to all
Lenders by giving notice (by telefacsimile or by telephone confirmed in
writing) to Administrative Agent of such rescission on the date on which the
Affected Lender gives notice of its determination as described above (which
notice of rescission Administrative Agent shall promptly transmit to each other
Lender). Except as provided in the immediately preceding sentence, nothing in
this
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<PAGE> 61
subsection 2.6C shall affect the obligation of any Lender other than an
Affected Lender to make or maintain Loans as, or to convert Loans to,
Eurodollar Rate Loans in accordance with the terms of this Agreement.
D. COMPENSATION FOR BREAKAGE OR NON-COMMENCEMENT OF INTEREST
PERIODS. Company shall compensate each Lender, upon written request by that
Lender (which request shall set forth the basis for requesting such amounts),
for all reasonable losses, expenses and liabilities (including any interest
paid by that Lender to lenders of funds borrowed by it to make or carry its
Eurodollar Rate Loans and any loss, expense or liability sustained by that
Lender in connection with the liquidation or re-employment of such funds) which
that Lender may sustain: (i) if for any reason (other than a default by that
Lender) a borrowing of any Eurodollar Rate Loan does not occur on a date
specified therefor in a Notice of Borrowing or a telephonic request for
borrowing, or a conversion to or continuation of any Eurodollar Rate Loan does
not occur on a date specified therefor in a Notice of Conversion/Continuation
or a telephonic request for conversion or continuation, (ii) if any prepayment
(including any prepayment pursuant to subsection 2.4B(i)) or other principal
payment or any conversion of any of its Eurodollar Rate Loans occurs on a date
prior to the last day of an Interest Period applicable to that Loan, (iii) if
any prepayment of any of its Eurodollar Rate Loans is not made on any date
specified in a notice of prepayment given by Company, or (iv) as a consequence
of any other default by Company in the repayment of its Eurodollar Rate Loans
when required by the terms of this Agreement.
E. BOOKING OF EURODOLLAR RATE LOANS. Any Lender may make, carry
or transfer Eurodollar Rate Loans at, to, or for the account of any of its
branch offices or the office of an Affiliate of that Lender.
F. ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE LOANS.
Calculation of all amounts payable to a Lender under this subsection 2.6 and
under subsection 2.7A shall be made as though that Lender had actually funded
each of its relevant Eurodollar Rate Loans through the purchase of a Eurodollar
deposit bearing interest at the rate obtained pursuant to clause (i) of the
definition of Adjusted Eurodollar Rate in an amount equal to the amount of such
Eurodollar Rate Loan and having a maturity comparable to the relevant Interest
Period and through the transfer of such Eurodollar deposit from an offshore
office of that Lender to a domestic office of that Lender in the United States
of America; provided, however, that each Lender may fund each of its Eurodollar
Rate Loans in any manner it sees fit and the foregoing assumptions shall be
utilized only for the purposes of calculating amounts payable under this
subsection 2.6 and under subsection 2.7A.
G. EURODOLLAR RATE LOANS AFTER DEFAULT. After the occurrence of
and during the continuation of a Potential Event of Default or an Event of
Default, (i) Company may not elect to have a Loan be made or maintained as, or
converted to, a Eurodollar Rate Loan after the expiration of any Interest
Period then in effect for that Loan and (ii) subject to the provisions of
subsection 2.6D, any Notice of Borrowing or Notice of Conversion/Continuation
given by Company with respect to a requested borrowing or
conversion/continuation that has not yet occurred shall be deemed to be
rescinded by Company.
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2.7 INCREASED COSTS; TAXES; CAPITAL ADEQUACY.
A. COMPENSATION FOR INCREASED COSTS AND TAXES. Subject to the
provisions of subsection 2.7B (which shall be controlling with respect to the
matters covered thereby), in the event that any Lender shall determine (which
determination shall, absent manifest error, be final and conclusive and binding
upon all parties hereto) that any law, treaty or governmental rule, regulation
or order, or any change therein or in the interpretation, administration or
application thereof (including the introduction of any new law, treaty or
governmental rule, regulation or order), or any determination of a court or
governmental authority, in each case that becomes effective after the date
hereof, or compliance by such Lender with any guideline, request or directive
issued or made after the date hereof by any central bank or other governmental
or quasi-governmental authority (whether or not having the force of law):
(i) subjects such Lender (or its applicable lending
office) to any additional Tax (other than any Tax on the overall net
income of such Lender) with respect to this Agreement or any of its
obligations hereunder or any payments to such Lender (or its
applicable lending office) of principal, interest, fees or any other
amount payable hereunder;
(ii) imposes, modifies or holds applicable any reserve
(including any marginal, emergency, supplemental, special or other
reserve), special deposit, compulsory loan, FDIC insurance or similar
requirement against assets held by, or deposits or other liabilities
in or for the account of, or advances or loans by, or other credit
extended by, or any other acquisition of funds by, any office of such
Lender (other than any such reserve or other requirements with respect
to Eurodollar Rate Loans that are reflected in the definition of
Adjusted Eurodollar Rate); or
(iii) imposes any other condition (other than with respect
to a Tax matter) on or affecting such Lender (or its applicable
lending office) or its obligations hereunder or the interbank
Eurodollar market;
and the result of any of the foregoing is to increase the cost to such Lender
of agreeing to make, making or maintaining Loans hereunder or to reduce any
amount received or receivable by such Lender (or its applicable lending office)
with respect thereto; then, in any such case, Company shall promptly pay to
such Lender, upon receipt of the statement referred to in the next sentence,
such additional amount or amounts (in the form of an increased rate of, or a
different method of calculating, interest or otherwise as such Lender in its
sole discretion shall determine) as may be necessary to compensate such Lender
for any such increased cost or reduction in amounts received or receivable
hereunder. Such Lender shall deliver to Company (with a copy to Administrative
Agent) a written statement, setting forth in reasonable detail the basis for
calculating the additional amounts owed to such Lender under this subsection
2.7A, which statement shall be conclusive and binding upon all parties hereto
absent manifest error.
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B. WITHHOLDING OF TAXES.
(i) Payments to Be Free and Clear. All sums payable by
Company under this Agreement and the other Loan Documents shall
(except to the extent required by law) be paid free and clear of, and
without any deduction or withholding on account of, any Tax (other
than a Tax on the overall net income of any Lender) imposed, levied,
collected, withheld or assessed by or within the United States of
America or any political subdivision in or of the United States of
America or any other jurisdiction from or to which a payment is made
by or on behalf of Company or by any federation or organization of
which the United States of America or any such jurisdiction is a
member at the time of payment.
(ii) Grossing-up of Payments. If Company or any other
Person is required by law to make any deduction or withholding on
account of any such Tax from any sum paid or payable by Company to
Administrative Agent or any Lender under any of the Loan Documents:
(a) Company or such other Person shall notify
Administrative Agent of any such requirement or any change in
any such requirement as soon as Company or such other Person
becomes aware of it;
(b) Company shall pay any such Tax before the
date on which penalties attach thereto, such payment to be
made (if the liability to pay is imposed on Company) for its
own account or (if that liability is imposed on Administrative
Agent or such Lender, as the case may be) on behalf of and in
the name of Administrative Agent or such Lender;
(c) the sum payable by Company in respect of
which the relevant deduction, withholding or payment is
required shall be increased to the extent necessary to ensure
that, after the making of that deduction, withholding or
payment, Administrative Agent or such Lender, as the case may
be, receives on the due date a net sum equal to what it would
have received had no such deduction, withholding or payment
been required or made; and
(d) within 30 days after paying any sum from
which it is required by law to make any deduction or
withholding, and within 30 days after the due date of payment
of any Tax which it is required by clause (b) above to pay,
Company shall deliver to Administrative Agent evidence
satisfactory to the other affected parties of such deduction,
withholding or payment and of the remittance thereof to the
relevant taxing or other authority;
provided that no such additional amount shall be required to be paid
to any Lender under clause (c) above except to the extent that any
change after the date hereof (in the case of each Lender listed on the
signature pages hereof) or after the date of the Assignment Agreement
pursuant to which such Lender became a Lender (in the case of each
other
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Lender) in any such requirement for a deduction, withholding or
payment as is mentioned therein shall result in an increase in the
rate of such deduction, withholding or payment from that in effect at
the date of this Agreement or at the date of such Assignment
Agreement, as the case may be, in respect of payments to such Lender.
(iii) Evidence of Exemption from U.S. Withholding Tax.
(a) Each Lender that is organized under the laws
of any jurisdiction other than the United States or any state
or other political subdivision thereof (for purposes of this
subsection 2.7B(iii), a "NON-US LENDER") shall deliver to
Administrative Agent for transmission to Company, on or prior
to the Closing Date (in the case of each Lender listed on the
signature pages hereof) or on or prior to the date of the
Assignment Agreement pursuant to which it becomes a Lender (in
the case of each other Lender), and at such other times as may
be necessary in the determination of Company or Administrative
Agent (each in the reasonable exercise of its discretion), (1)
two original copies of Internal Revenue Service Form 1001 or
4224 (or any successor forms), properly completed and duly
executed by such Lender, together with any other certificate
or statement of exemption required under the Internal Revenue
Code or the regulations issued thereunder to establish that
such Lender is not subject to deduction or withholding of
United States federal income tax with respect to any payments
to such Lender of principal, interest, fees or other amounts
payable under any of the Loan Documents or (2) if such Lender
is not a "bank" or other Person described in Section 881(c)(3)
of the Internal Revenue Code and cannot deliver either
Internal Revenue Service Form 1001 or 4224 pursuant to clause
(1) above, a Certificate re Non-Bank Status together with two
original copies of Internal Revenue Service Form W-8 (or any
successor form), properly completed and duly executed by such
Lender, together with any other certificate or statement of
exemption required under the Internal Revenue Code or the
regulations issued thereunder to establish that such Lender is
not subject to deduction or withholding of United States
federal income tax with respect to any payments to such Lender
of interest payable under any of the Loan Documents.
(b) Each Lender required to deliver any forms,
certificates or other evidence with respect to United States
federal income tax withholding matters pursuant to subsection
2.7B(iii)(a) hereby agrees, from time to time after the
initial delivery by such Lender of such forms, certificates or
other evidence, whenever a lapse in time or change in
circumstances renders such forms, certificates or other
evidence obsolete or inaccurate in any material respect, that
such Lender shall promptly (1) deliver to Administrative Agent
for transmission to Company two new original copies of
Internal Revenue Service Form 1001 or 4224, or a Certificate
re Non-Bank Status and two original copies of Internal Revenue
Service Form W-8, as the case may be, properly completed and
duly executed by such Lender, together with any other
certificate or statement of exemption required in order to
confirm or establish that such Lender is not
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subject to deduction or withholding of United States federal
income tax with respect to payments to such Lender under the
Loan Documents or (2) notify Administrative Agent and Company
of its inability to deliver any such forms, certificates or
other evidence.
(c) Company shall not be required to pay any
additional amount to any Non-US Lender under subsection
2.7B(i) and clause (c) of subsection 2.7B(ii) if such Lender
shall have failed to satisfy the requirements of clause (a) or
(b)(1) of this subsection 2.7B(iii); provided that if such
Lender shall have satisfied the requirements of subsection
2.7B(iii)(a) on the Closing Date (in the case of each Lender
listed on the signature pages hereof) or on the date of the
Assignment Agreement pursuant to which it became a Lender (in
the case of each other Lender), nothing in this subsection
2.7B(iii)(c) shall relieve Company of its obligation to pay
any additional amounts pursuant to clause (c) of subsection
2.7B(ii) in the event that, as a result of any change in any
applicable law, treaty or governmental rule, regulation or
order, or any change in the interpretation, administration or
application thereof, such Lender is no longer properly
entitled to deliver forms, certificates or other evidence at a
subsequent date establishing the fact that such Lender is not
subject to withholding as described in subsection
2.7B(iii)(a).
C. CAPITAL ADEQUACY ADJUSTMENT. If any Lender shall have
determined that the adoption, effectiveness, phase-in or applicability after
the date hereof of any law, rule or regulation (or any provision thereof)
regarding capital adequacy, or any change therein or in the interpretation or
administration thereof by any governmental authority, central bank, the
National Association of Insurance Commissioners, or comparable agency charged
with the interpretation or administration thereof, or compliance by any Lender
(or its applicable lending office) with any guideline, request or directive
regarding capital adequacy (whether or not having the force of law) of any such
governmental authority, central bank, the National Association of Insurance
Commissioners or comparable agency, has or would have the effect of reducing
the rate of return on the capital of such Lender or any corporation controlling
such Lender as a consequence of, or with reference to, such Lender's Loans or
Commitments or Letters of Credit or participations therein or other obligations
hereunder with respect to the Loans or the Letters of Credit to a level below
that which such Lender or such controlling corporation could have achieved but
for such adoption, effectiveness, phase-in, applicability, change or compliance
(taking into consideration the policies of such Lender or such controlling
corporation with regard to capital adequacy), then from time to time, within
five Business Days after receipt by Company from such Lender of the statement
referred to in the next sentence, Company shall pay to such Lender such
additional amount or amounts as will compensate such Lender or such controlling
corporation on an after-tax basis for such reduction. Such Lender shall deliver
to Company (with a copy to Administrative Agent) a written statement, setting
forth in reasonable detail the basis of the calculation of such additional
amounts, which statement shall be conclusive and binding upon all parties
hereto absent manifest error.
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D. SUBSTITUTE LENDERS. In the event Company is required under
the provisions of this subsection 2.7 or subsection 3.6 to make payments in a
material amount to any Lender or in the event any Lender fails to lend to
Company in accordance with this Agreement, Company may, so long as no Event of
Default or Potential Event of Default shall have occurred and be continuing,
elect to terminate such Lender as a party to this Agreement; provided that,
concurrently with such termination, (i) Company shall pay that Lender all
principal, interest and fees and other amounts (including without limitation,
amounts, if any, owed under this subsection 2.7 or subsection 3.6) owed to such
Lender through such date of termination, (ii) another financial institution
satisfactory to Administrative Agent (or if Administrative Agent is also the
Lender to be terminated, the successor Administrative Agent) shall agree, as of
such date, to become a Lender for all purposes under this Agreement (whether by
assignment or amendment) and to assume all obligations of the Lender to be
terminated as of such date, and (iii) all documents and supporting materials
necessary, in the judgment of Administrative Agent (or if Administrative Agent
is also the Lender to be terminated, the successor Administrative Agent), to
evidence the substitution of such Lender shall have been received and approved
by Adminis- trative Agent as of such date.
2.8 OBLIGATION OF LENDERS AND ISSUING LENDER TO MITIGATE.
Each Lender and Issuing Lender agrees that, as promptly as practicable
after the officer of such Lender or Issuing Lender responsible for
administering the Loans or Letters of Credit of such Lender or Issuing Lender,
as the case may be, becomes aware of the occurrence of an event or the
existence of a condition that would cause such Lender to become an Affected
Lender or that would entitle such Lender or Issuing Lender to receive payments
under subsection 2.7 or subsection 3.6, it will, to the extent not inconsistent
with the internal policies of such Lender or Issuing Lender and any applicable
legal or regulatory restrictions, use reasonable efforts (i) to make, issue,
fund or maintain the Commitments of such Lender or the affected Loans or
Letters of Credit of such Lender or Issuing Lender through another lending or
letter of credit office of such Lender or Issuing Lender, or (ii) take such
other measures as such Lender or Issuing Lender may deem reasonable, if as a
result thereof the circumstances which would cause such Lender to be an
Affected Lender would cease to exist or the additional amounts which would
otherwise be required to be paid to such Lender or Issuing Lender pursuant to
subsection 2.7 or subsection 3.6 would be materially reduced and if, as
determined by such Lender or Issuing Lender in its sole discretion, the making,
issuing, funding or maintaining of such Commitments or Loans or Letters of
Credit through such other lending or letter of credit office or in accordance
with such other measures, as the case may be, would not otherwise materially
adversely affect such Commitments or Loans or Letters of Credit or the
interests of such Lender or Issuing Lender; provided that such Lender or
Issuing Lender will not be obligated to utilize such other lending or letter of
credit office pursuant to this subsection 2.8 unless Company agrees to pay all
incremental expenses incurred by such Lender or Issuing Lender as a result of
utilizing such other lending or letter of credit office as described in clause
(i) above. A certificate as to the amount of any such expenses payable by
Company pursuant to this subsection 2.8 (setting forth in reasonable detail the
basis for requesting such amount) submitted by such Lender or Issuing Lender to
Company (with a copy to Administrative Agent) shall be conclusive absent
manifest error.
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SECTION 3.
LETTERS OF CREDIT
3.1 ISSUANCE OF LETTERS OF CREDIT AND LENDERS' PURCHASE OF PARTICIPATIONS
THEREIN.
A. LETTERS OF CREDIT. In addition to Company requesting that
Lenders make Revolving Loans pursuant to subsection 2.1A(ii), Company may
request, in accordance with the provisions of this subsection 3.1, from time to
time during the period from the Closing Date to but excluding the Revolving
Loan Commitment Conversion Date, that Issuing Lender issue Letters of Credit
for the account of Company for the purposes specified in the definition of
Standby Letters of Credit. Subject to the terms and conditions of this
Agreement and in reliance upon the representations and warranties of Company
herein set forth, Issuing Lender shall issue such Letters of Credit in
accordance with the provisions of this subsection 3.1; provided that Company
shall not request that Issuing Lender issue and Issuing Lender shall not issue:
(i) any Letter of Credit if, after giving effect to such
issuance, the Total Utilization of Revolving Loan Commitments would
exceed the Revolving Loan Commitments then in effect;
(ii) any Letter of Credit if, after giving effect to such
issuance, the Letter of Credit Usage would exceed $10,000,000;
(iii) any Standby Letter of Credit having an expiration
date later than the earlier of (a) the Revolving Loan Conversion Date
and (b) the date which is one year from the date of issuance of such
Standby Letter of Credit; provided that the immediately preceding
clause (b) shall not prevent Issuing Lender from agreeing that a
Standby Letter of Credit will automatically be extended for one or
more successive periods not to exceed one year each unless Issuing
Lender elects not to extend for any such additional period; and
provided, further that Issuing Lender shall elect not to extend such
Standby Letter of Credit if it has received a notice from
Administrative Agent or Company or any Lender that an Event of Default
has occurred and is continuing (and such Event of Default has not been
waived in accordance with subsection 10.6) at the time Issuing Lender
must elect whether or not to allow such extension; or
(iv) any Letter of Credit denominated in a currency other
than Dollars.
B. MECHANICS OF ISSUANCE.
(i) Notice of Issuance. Whenever Company desires the
issuance of a Letter of Credit, it shall deliver to Issuing Lender a
Notice of Issuance of Letter of Credit substantially in the form of
Exhibit III annexed hereto no later than 12:00 Noon (New York City
time) at least three Business Days, or such shorter period as may be
agreed to by Issuing Lender in any particular instance, in advance of
the proposed date of issuance. The Notice of Issuance of Letter of
Credit shall specify (a) the proposed date
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of issuance (which shall be a Business Day), (b) the face amount of
the Letter of Credit, (c) the expiration date of the Letter of Credit,
(d) the name and address of the beneficiary, and (e) either the
verbatim text of the proposed Letter of Credit or the proposed terms
and conditions thereof, including a precise description of any
documents to be presented by the beneficiary which, if presented by
the beneficiary prior to the expiration date of the Letter of Credit,
would require Issuing Lender to make payment under the Letter of
Credit; provided that Issuing Lender, in its reasonable discretion,
may require changes in the text of the proposed Letter of Credit or
any such documents; and provided, further that no Letter of Credit
shall require payment against a conforming draft to be made thereunder
on the same business day (under the laws of the jurisdiction in which
the office of Issuing Lender to which such draft is required to be
presented is located) that such draft is presented if such
presentation is made after 10:00 A.M. (in the time zone of such office
of Issuing Lender) on such business day.
Company shall notify Issuing Lender (and Administrative Agent,
if Administrative Agent is not Issuing Lender) prior to the issuance
of any Letter of Credit in the event that any of the matters to which
Company is required to certify in the applicable Notice of Issuance of
Letter of Credit is no longer true and correct as of the proposed date
of issuance of such Letter of Credit, and upon the issuance of any
Letter of Credit Company shall be deemed to have re-certified, as of
the date of such issuance, as to the matters to which Company is
required to certify in the applicable Notice of Issuance of Letter of
Credit.
(ii) Issuance of Letter of Credit. Upon satisfaction or
waiver (in accordance with subsection 10.6) of the conditions set
forth in subsection 4.3, Issuing Lender shall issue the requested
Letter of Credit in accordance with Issuing Lender's standard
operating procedures.
(iii) Notification to Lenders. Upon the issuance of any
Letter of Credit Issuing Lender shall promptly notify Administrative
Agent (if Administrative Agent is not Issuing Lender) and each other
Lender of such issuance, which notice shall be accompanied by a copy
of such Letter of Credit. Promptly after receipt of such notice (or,
if Administrative Agent is Issuing Lender, together with such notice),
Administrative Agent shall notify each Lender of the amount of such
Lender's respective participation in such Letter of Credit, determined
in accordance with subsection 3.1C.
(iv) Reports to Lenders. After the end of each calendar
quarter ending after the Closing Date, so long as any Letter of Credit
shall have been outstanding during such calendar quarter, Issuing
Lender shall, upon request of any Lender, deliver to such Lender as
soon as practicable following such request a report setting forth for
such calendar quarter the daily aggregate amount available to be drawn
under the Letters of Credit issued by such Issuing Lender that were
outstanding during such calendar quarter.
C. LENDERS' PURCHASE OF PARTICIPATIONS IN LETTERS OF CREDIT.
Immediately upon the issuance of each Letter of Credit, each Lender having a
Revolving Loan Commitment shall
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be deemed to, and hereby agrees to, have irrevocably purchased from Issuing
Lender a participation in such Letter of Credit and any drawings honored
thereunder in an amount equal to such Lender's Pro Rata Share (with respect to
the Revolving Loan Commitments) of the maximum amount which is or at any time
may become available to be drawn thereunder.
3.2 LETTER OF CREDIT FEES.
Company agrees to pay the following amounts with respect to Letters of
Credit issued hereunder:
(i) with respect to each Letter of Credit, (a) a fronting
fee, payable directly to Issuing Lender for its own account, equal to
0.25% per annum of the daily amount available to be drawn under such
Standby Letter of Credit and (b) a letter of credit fee, payable to
Administrative Agent for the account of Lenders, equal to the product
of (x) the Applicable Margin with respect to Revolving Loans that are
Eurodollar Rate Loans and (y) the daily amount available to be drawn
under such Standby Letter of Credit, each such fronting fee or letter
of credit fee to be payable in arrears on and to (but excluding) each
February 28, May 31, August 31 and November 30 of each year and
computed on the basis of a 360-day year for the actual number of days
elapsed; and
(ii) with respect to the issuance, amendment or transfer
of each Letter of Credit and each payment of a drawing made thereunder
(without duplication of the fees payable under clause (i) above),
documentary and processing charges payable directly to Issuing Lender
for its own account in accordance with Issuing Lender's standard
schedule for such charges in effect at the time of such issuance,
amendment, transfer or payment, as the case may be.
For purposes of calculating any fees payable under clause (i) of this
subsection 3.2, the daily amount available to be drawn under any Letter of
Credit shall be determined as of the close of business on any date of
determination Promptly upon receipt by Administrative Agent of any amount
described in clause (i)(b) of this subsection 3.2, Administrative Agent shall
distribute to each Lender its Pro Rata Share of such amount.
3.3 DRAWINGS AND REIMBURSEMENT OF AMOUNTS PAID UNDER LETTERS OF CREDIT.
A. RESPONSIBILITY OF ISSUING LENDER WITH RESPECT TO DRAWINGS. In
determining whether to honor any drawing under any Letter of Credit by the
beneficiary thereof, Issuing Lender shall be responsible only to examine the
documents delivered under such Letter of Credit with reasonable care so as to
ascertain whether they appear on their face to be in accordance with the terms
and conditions of such Letter of Credit.
B. REIMBURSEMENT BY COMPANY OF AMOUNTS PAID UNDER LETTERS OF
CREDIT. In the event Issuing Lender has determined to honor a drawing under a
Letter of Credit issued by it, Issuing Lender shall immediately notify Company
and Administrative Agent, and Company shall reimburse Issuing Lender on or
before the Business Day immediately following the date
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on which such drawing is honored (the "REIMBURSEMENT DATE") in an amount in
Dollars and in same day funds equal to the amount of such honored drawing;
provided that, anything contained in this Agreement to the contrary
notwithstanding, (i) unless Company shall have notified Administrative Agent
and Issuing Lender prior to 11:00 A.M. (New York City time) on the date such
drawing is honored that Company intends to reimburse Issuing Lender for the
amount of such honored drawing with funds other than the proceeds of Revolving
Loans, Company shall be deemed to have given a timely Notice of Borrowing to
Administrative Agent requesting Lenders to make Revolving Loans that are Base
Rate Loans on the Reimbursement Date in an amount in Dollars equal to the
amount of such honored drawing and (ii) subject to satisfaction or waiver of
the conditions specified in subsection 4.2B, Lenders shall, on the
Reimbursement Date, make Revolving Loans that are Base Rate Loans in the amount
of such honored drawing, the proceeds of which shall be applied directly by
Administrative Agent to reimburse Issuing Lender for the amount of such honored
drawing; and provided, further that if for any reason proceeds of Revolving
Loans are not received by Issuing Lender on the Reimbursement Date in an amount
equal to the amount of such honored drawing, Company shall reimburse Issuing
Lender, on demand, in an amount in same day funds equal to the excess of the
amount of such honored drawing over the aggregate amount of such Revolving
Loans, if any, which are so received. Nothing in this subsection 3.3B shall be
deemed to relieve any Lender from its obligation to make Revolving Loans on the
terms and conditions set forth in this Agreement, and Company shall retain any
and all rights it may have against any Lender resulting from the failure of
such Lender to make such Revolving Loans under this subsection 3.3B.
C. PAYMENT BY LENDERS OF UNREIMBURSED AMOUNTS PAID UNDER LETTERS
OF CREDIT.
(i) Payment by Lenders. In the event that Company shall
fail for any reason to reimburse Issuing Lender as provided in
subsection 3.3B in an amount equal to the amount of any drawing
honored by Issuing Lender under a Letter of Credit issued by it,
Issuing Lender shall promptly notify each other Lender of the
unreimbursed amount of such honored drawing and of such other Lender's
respective participation therein based on such Lender's Pro Rata Share
of the Revolving Loan Commitments. Each Lender shall make available
to Issuing Lender an amount equal to its respective participation, in
Dollars and in same day funds, at the office of such Issuing Lender
specified in such notice, not later than 12:00 Noon (New York City
time) on the first business day (under the laws of the jurisdiction in
which such office of Issuing Lender is located) after the date
notified by Issuing Lender. In the event that any Lender fails to
make available to Issuing Lender on such business day the amount of
such Lender's participation in such Letter of Credit as provided in
this subsection 3.3C, Issuing Lender shall be entitled to recover such
amount on demand from such Lender together with interest thereon at
the rate customarily used by Issuing Lender for the correction of
errors among banks for three Business Days and thereafter at the Base
Rate. Nothing in this subsection 3.3C shall be deemed to prejudice
the right of any Lender to recover from Issuing Lender any amounts
made available by such Lender to Issuing Lender pursuant to this
subsection 3.3C in the event that it is determined by the final
judgment of a court of competent jurisdiction that the payment with
respect to a Letter of Credit by Issuing Lender in
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respect of which payment was made by such Lender constituted gross
negligence or willful misconduct on the part of Issuing Lender.
(ii) Distribution to Lenders of Reimbursements Received
From Company. In the event Issuing Lender shall have been reimbursed
by other Lenders pursuant to subsection 3.3C(i) for all or any portion
of any drawing honored by Issuing Lender under a Letter of Credit
issued by it, Issuing Lender shall distribute to each other Lender
which has paid all amounts payable by it under subsection 3.3C(i) with
respect to such honored drawing such other Lender's Pro Rata Share of
all payments subsequently received by Issuing Lender from Company in
reimbursement of such honored drawing when such payments are received.
Any such distribution shall be made to a Lender at its primary address
set forth below its name on the appropriate signature page hereof or
at such other address as such Lender may request.
D. INTEREST ON AMOUNTS PAID UNDER LETTERS OF CREDIT.
(i) Payment of Interest by Company. Company agrees to
pay to Issuing Lender, with respect to drawings honored under any
Letters of Credit issued by it, interest on the amount paid by Issuing
Lender in respect of each such honored drawing from the date such
drawing is honored to but excluding the date such amount is reimbursed
by Company (including any such reimbursement out of the proceeds of
Revolving Loans pursuant to subsection 3.3B) at a rate equal to (a)
for the period from the date such drawing is honored to but excluding
the Reimbursement Date, the Base Rate plus the Applicable Margin with
respect to Revolving Loans that are Base Rate Loans and (b)
thereafter, a rate which is 2% per annum in excess of the rate of
interest otherwise payable under this Agreement with respect to
Revolving Loans that are Base Rate Loans. Interest payable pursuant
to this subsection 3.3D(i) shall be computed on the basis of a 360-day
year for the actual number of days elapsed in the period during which
it accrues and shall be payable on demand or, if no demand is made, on
the date on which the related drawing under a Letter of Credit is
reimbursed in full.
(ii) Distribution of Interest Payments by Issuing Lender.
Promptly upon receipt by Issuing Lender of any payment of interest
pursuant to subsection 3.3D(i) with respect to a drawing honored under
a Letter of Credit issued by it, (a) Issuing Lender shall distribute
to each other Lender, out of the interest received by Issuing Lender
in respect of the period from the date such drawing is honored to but
excluding the date on which Issuing Lender is reimbursed for the
amount of such drawing (including any such reimbursement out of the
proceeds of Revolving Loans pursuant to subsection 3.3B), the amount
that such other Lender would have been entitled to receive in respect
of the letter of credit fee that would have been payable in respect of
such Letter of Credit for such period pursuant to subsection 3.2 if no
drawing had been honored under such Letter of Credit, and (b) in the
event Issuing Lender shall have been reimbursed by other Lenders
pursuant to subsection 3.3C(i) for all or any portion of such honored
drawing, Issuing Lender shall distribute to each other Lender which
has paid all amounts payable by it under subsection 3.3C(i) with
respect to such honored drawing such other Lender's Pro
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Rata Share of any interest received by Issuing Lender in respect of
that portion of such honored drawing so reimbursed by other Lenders
for the period from the date on which Issuing Lender was so reimbursed
by other Lenders to but excluding the date on which such portion of
such honored drawing is reimbursed by Company. Any such distribution
shall be made to a Lender at its primary address set forth below its
name on the appropriate signature page hereof or at such other address
as such Lender may request.
3.4 OBLIGATIONS ABSOLUTE.
The obligation of Company to reimburse Issuing Lender for drawings
honored under the Letters of Credit issued by it and to repay any Revolving
Loans made by Lenders pursuant to subsection 3.3B and the obligations of
Lenders under subsection 3.3C(i) shall be unconditional and irrevocable and
shall be paid strictly in accordance with the terms of this Agreement under all
circumstances including any of the following circumstances:
(i) any lack of validity or enforceability of any Letter
of Credit;
(ii) the existence of any claim, set-off, defense or other
right which Company or any Lender may have at any time against a
beneficiary or any transferee of any Letter of Credit (or any Persons
for whom any such transferee may be acting), Issuing Lender or other
Lender or any other Person or, in the case of a Lender, against
Company, whether in connection with this Agreement, the transactions
contemplated herein or any unrelated transaction (including any
underlying transaction between Company or one of its Subsidiaries and
the beneficiary for which any Letter of Credit was procured);
(iii) any draft or other document presented under any
Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iv) payment by Issuing Lender under any Letter of Credit
against presentation of a draft or other document which does not
substantially comply with the terms of such Letter of Credit;
(v) any adverse change in the business, operations,
properties, assets, condition (financial or otherwise) or prospects of
Company or any of its Subsidiaries;
(vi) any breach of this Agreement or any other Loan
Document by any party thereto;
(vii) any other circumstance or happening whatsoever,
whether or not similar to any of the foregoing; or
(viii) the fact that an Event of Default or a Potential
Event of Default shall have occurred and be continuing;
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provided, in each case, that payment by Issuing Lender under the applicable
Letter of Credit shall not have constituted gross negligence or willful
misconduct of Issuing Lender under the circumstances in question (as determined
by a final judgment of a court of competent jurisdiction).
3.5 INDEMNIFICATION; NATURE OF ISSUING LENDER'S DUTIES.
A. INDEMNIFICATION. In addition to amounts payable as provided
in subsection 3.6, Company hereby agrees to protect, indemnify, pay and save
harmless Issuing Lender from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses (including reasonable
fees, expenses and disbursements of counsel and allocated costs of internal
counsel) which Issuing Lender may incur or be subject to as a consequence,
direct or indirect, of (i) the issuance of any Letter of Credit by Issuing
Lender, other than as a result of (a) the gross negligence or willful
misconduct of Issuing Lender as determined by a final judgment of a court of
competent jurisdiction or (b) subject to the following clause (ii), the
wrongful dishonor by Issuing Lender of a proper demand for payment made under
any Letter of Credit issued by it or (ii) the failure of Issuing Lender to
honor a drawing under any such Letter of Credit as a result of any act or
omission, whether rightful or wrongful, of any present or future de jure or de
facto government or governmental authority (all such acts or omissions herein
called "GOVERNMENTAL ACTS").
B. NATURE OF ISSUING LENDER'S DUTIES. As between Company and
Issuing Lender, Company assumes all risks of the acts and omissions of, or
misuse of the Letters of Credit issued by Issuing Lender by, the respective
beneficiaries of such Letters of Credit. In furtherance and not in limitation
of the foregoing, Issuing Lender shall not be responsible for: (i) the form,
validity, sufficiency, accuracy, genuineness or legal effect of any document
submitted by any party in connection with the application for and issuance of
any such Letter of Credit, even if it should in fact prove to be in any or all
respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the
validity or sufficiency of any instrument transferring or assigning or
purporting to transfer or assign any such Letter of Credit or the rights or
benefits thereunder or proceeds thereof, in whole or in part, which may prove
to be invalid or ineffective for any reason; (iii) failure of the beneficiary
of any such Letter of Credit to comply fully with any conditions required in
order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions
or delays in transmission or delivery of any messages, by mail, cable,
telegraph, telex or otherwise, whether or not they be in cipher; (v) errors in
interpretation of technical terms; (vi) any loss or delay in the transmission
or otherwise of any document required in order to make a drawing under any such
Letter of Credit or of the proceeds thereof; (vii) the misapplication by the
beneficiary of any such Letter of Credit of the proceeds of any drawing under
such Letter of Credit; or (viii) any consequences arising from causes beyond
the control of Issuing Lender, including any Governmental Acts, and none of the
above shall affect or impair, or prevent the vesting of, any of Issuing
Lender's rights or powers hereunder.
In furtherance and extension and not in limitation of the specific
provisions set forth in the first paragraph of this subsection 3.5B, any action
taken or omitted by Issuing Lender under or in connection with the Letters of
Credit issued by it or any documents and certificates
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delivered thereunder, if taken or omitted in good faith, shall not put Issuing
Lender under any resulting liability to Company.
Notwithstanding anything to the contrary contained in this subsection
3.5, Company shall retain any and all rights it may have against Issuing Lender
for any liability arising solely out of the gross negligence or willful
misconduct of Issuing Lender, as determined by a final judgment of a court of
competent jurisdiction.
3.6 INCREASED COSTS AND TAXES RELATING TO LETTERS OF CREDIT.
Subject to the provisions of subsection 2.7B (which shall be
controlling with respect to the matters covered thereby), in the event that
Issuing Lender or any Lender shall determine (which determination shall, absent
manifest error, be final and conclusive and binding upon all parties hereto)
that any law, treaty or governmental rule, regulation or order, or any change
therein or in the interpretation, administration or application thereof
(including the introduction of any new law, treaty or governmental rule,
regulation or order), or any determination of a court or governmental
authority, in each case that becomes effective after the date hereof, or
compliance by Issuing Lender or any Lender with any guideline, request or
directive issued or made after the date hereof by any central bank or other
governmental or quasi-governmental authority (whether or not having the force
of law):
(i) subjects Issuing Lender or such Lender (or its
applicable lending or letter of credit office) to any additional Tax
(other than any Tax on the overall net income of Issuing Lender or
such Lender) with respect to the issuing or maintaining of any Letters
of Credit or the purchasing or maintaining of any participations
therein or any other obligations under this Section 3, whether
directly or by such being imposed on or suffered by Issuing Lender;
(ii) imposes, modifies or holds applicable any reserve
(including any marginal, emergency, supplemental, special or other
reserve), special deposit, compulsory loan, FDIC insurance or similar
requirement in respect of any Letters of Credit issued by Issuing
Lender or participations therein purchased by such Lender; or
(iii) imposes any other condition (other than with respect
to a Tax matter) on or affecting Issuing Lender or such Lender (or its
applicable lending or letter of credit office) regarding this Section
3 or any Letter of Credit or any participation therein;
and the result of any of the foregoing is to increase the cost to Issuing
Lender or such Lender of agreeing to issue, issuing or maintaining any Letter
of Credit or agreeing to purchase, purchasing or maintaining any participation
therein or to reduce any amount received or receivable by such Issuing Lender
or such Lender (or its applicable lending or letter of credit office) with
respect thereto; then, in any case, Company shall promptly pay to Issuing
Lender or such Lender, upon receipt of the statement referred to in the next
sentence, such additional amount or amounts as may be necessary to compensate
Issuing Lender or such Lender for any such increased cost or reduction in
amounts received or receivable hereunder. Issuing Lender
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or such Lender shall deliver to Company a written statement, setting forth in
reasonable detail the basis for calculating the additional amounts owed to
Issuing Lender or such Lender under this subsection 3.6, which statement shall
be conclusive and binding upon all parties hereto absent manifest error.
SECTION 4.
CONDITIONS TO LOANS AND LETTERS OF CREDIT
The obligations of Lenders to make Loans and of Issuing Lender to
issue Letters of Credit hereunder are subject to the satisfaction of the
following conditions.
4.1 CONDITIONS TO AXELS AND REVOLVING LOANS.
The obligations of Lenders to make the AXELs and any Revolving Loans
to be made on the Closing Date are, in addition to the conditions precedent
specified in subsection 4.2, subject to prior or concurrent satisfaction of the
following conditions:
A. LOAN PARTY DOCUMENTS. On or before the Closing Date, Company
shall, and shall cause each other Loan Party to, deliver to Lenders (or to
Administrative Agent for Lenders with sufficient originally executed copies,
where appropriate, for each Lender and its counsel) the following with respect
to Company or such Loan Party, as the case may be, each, unless otherwise
noted, dated the Closing Date:
(i) Certified copies of the Certificate or Articles of
Incorporation of such Person, together with a good standing
certificate from the Secretary of State of its jurisdiction of
incorporation and each other state in which such Person is qualified
as a foreign corporation to do business and, to the extent generally
available, a certificate or other evidence of good standing as to
payment of any applicable franchise or similar taxes from the
appropriate taxing authority of each of such jurisdictions, each dated
a recent date prior to the Closing Date;
(ii) Copies of the Bylaws of such Person, certified as of
the Closing Date by such Person's corporate secretary or an assistant
secretary;
(iii) Resolutions of the Board of Directors of such Person
approving and authorizing the execution, delivery and performance of
the Loan Documents, certified as of the Closing Date by the corporate
secretary or an assistant secretary of such Person as being in full
force and effect without modification or amendment;
(iv) Signature and incumbency certificates of the officers
of such Person executing the Loan Documents to which it is a party;
(v) Executed originals of the Loan Documents to which
such Person is a party; and
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(vi) Such other documents as Arranger or Administrative
Agent may reasonably request.
B. MINIMUM BORROWING. On the Closing Date, Company shall borrow
AXELs totalling not less than $125,000,000.
C. MATTERS RELATING TO EXISTING RESTRICTED INDEBTEDNESS. On or
prior to the Closing Date, Holdings shall have delivered to Administrative
Agent (i) a fully executed or conformed copy of the Existing Holdings Senior
Note Indenture and the Existing Holdings Convertible Note Agreement, (ii) the
terms of the Existing Holdings Convertible Note Agreement shall be satisfactory
to Arranger and Administrative Agent and (iii) evidence satisfactory to
Administrative Agent and Arranger that the Loans made on the Closing Date are
permitted under the Existing Holdings Senior Note Indenture.
D. SECURITY INTERESTS IN PERSONAL AND MIXED PROPERTY. Each of
Arranger and Administrative Agent shall have received evidence satisfactory to
it that Holdings, Company and Subsidiary Guarantors shall have taken or caused
to be taken all such actions, executed and delivered or caused to be executed
and delivered all such agreements, documents and instruments, and made or
caused to be made all such filings and recordings (other than the filing or
recording of items described in clauses (iii) and (iv) below) that may be
necessary or, in the opinion of Arranger and Administrative Agent, desirable in
order to create in favor of Administrative Agent, for the benefit of Lenders, a
valid and (upon such filing and recording) perfected First Priority security
interest in the entire personal and mixed property Collateral. Such actions
shall include the following:
(i) Schedules to Collateral Documents. Delivery to
Administrative Agent of accurate and complete schedules to all of the
applicable Collateral Documents.
(ii) Stock Certificates and Instruments. Delivery to
Administrative Agent of (a) certificates (which certificates shall be
accompanied by irrevocable undated stock powers, duly endorsed in
blank and otherwise satisfactory in form and substance to
Administrative Agent) representing all capital stock pledged pursuant
to the Holdings Pledge Agreement, the Company Pledge Agreement, the
Subsidiary Pledge Agreements and the License Co. Stockholders Pledge
Agreement and (b) all promissory notes or other instruments (duly
endorsed, where appropriate, in a manner satisfactory to
Administrative Agent) evidencing any Collateral;
(iii) Lien Searches and UCC Termination Statements.
Delivery to Arranger and Administrative Agent of (a) the results of a
recent search, by a Person satisfactory to Arranger and Administrative
Agent, of all effective UCC financing statements and fixture filings
and all judgment and tax lien filings which may have been made with
respect to any personal or mixed property of any Loan Party, together
with copies of all such filings disclosed by such search, and (b) UCC
termination statements duly executed by all applicable Persons for
filing in all applicable jurisdictions as may be necessary to
terminate any effective UCC financing statements or fixture filings
disclosed in such
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search (other than any such financing statements or fixture filings in
respect of Liens permitted to remain outstanding pursuant to the terms
of this Agreement); and
(iv) UCC Financing Statements and Fixture Filings.
Delivery to Administrative Agent of UCC financing statements and,
where appropriate, fixture filings, duly executed by each applicable
Loan Party with respect to all personal and mixed property Collateral
of such Loan Party, for filing in all jurisdictions as may be
necessary or, in the opinion of Arranger and Administrative Agent,
desirable to perfect the security interests created in such Collateral
pursuant to the Collateral Documents.
E. LICENSES; COMPLIANCE WITH COMMUNICATIONS ACT; OTHER NECESSARY
GOVERNMENTAL AUTHORIZATIONS AND CONSENTS; FRANCHISES.
(i) Licenses. Each License with respect to the business
of Holdings and its Subsidiaries shall be in full force and effect
except to the extent the failure to be in full force and effect would
not individually or in the aggregate have a Material Adverse Effect.
(ii) Compliance with Communications Act. Arranging Agent
and Administrative Agent shall be satisfied that Holdings and its
Subsidiaries are in compliance with the Communications Act and State
Law except to the extent the failure to be in compliance would not
individually or in the aggregate have a Material Adverse Effect.
(iii) Other Necessary Governmental Authorizations and
Consents. Holdings shall have obtained all other Governmental
Authorizations and all consents of other Persons, in each case that
are necessary or advisable in connection with transactions
contemplated by the Loan Documents and the continued operation of the
business conducted by Holdings and its Subsidiaries, and each of the
foregoing shall be in full force and effect, in each case other than
those the failure to obtain or maintain which, either individually or
in the aggregate, would not reasonably be expected to have a Material
Adverse Effect.
F. EVIDENCE OF INSURANCE. Arranger and Administrative Agent
shall have received a certificate from Company's insurance broker or other
evidence satisfactory to it that all insurance required to be maintained
pursuant to subsection 6.4 is in full force and effect and that Administrative
Agent on behalf of Lenders has been named as additional insured and/or loss
payee thereunder to the extent required under subsection 6.4.
G. OPINIONS OF COUNSEL TO LOAN PARTIES. Lenders and their
respective counsel shall have received (i) originally executed copies of one or
more favorable written opinions of (i) Michael E. Katzenstein, Esq., Vice
President and General Counsel of Holdings, (ii) Kronish, Lieb, Weiner & Hellman
LLP and (ii) Goldberg, Godles, Weiner & Wright, counsel for Loan Parties, in
form and substance reasonably satisfactory to Administrative Agent and Arranger
and its counsel, dated as of the Closing Date and setting forth substantially
the matters in the opinions designated in Exhibit VIII annexed hereto and as to
such other matters as
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Administrative Agent or Arranger and acting on behalf of Lenders may reasonably
request and (ii) evidence satisfactory to Arranger and Administrative Agent
that Company has requested such counsel to deliver such opinions to Lenders.
H. OPINIONS OF ADMINISTRATIVE AGENT'S COUNSEL. Lenders shall
have received originally executed copies of one or more favorable written
opinions of O'Melveny & Myers LLP, counsel to Arranger, dated as of the Closing
Date, substantially in the form of Exhibit IX annexed hereto and as to such
other matters as Arranger may reasonably request.
I. LENDER SUBORDINATION AGREEMENT AND VPC AND CPDQ AGREEMENT.
Administrative Agent shall have received fully executed copies of the Lender
Subordination Agreement and VPC and CPDQ Agreement.
J. FEES. Company shall have paid to Arranger and Administrative
Agent, for distribution (as appropriate) to Arranger, Administrative Agent and
Lenders, the fees payable on the Closing Date referred to in subsection 2.3.
K. COMPLETION OF PROCEEDINGS. All corporate and other
proceedings taken or to be taken in connection with the transactions
contemplated hereby and all documents incidental thereto not previously found
acceptable by Administrative Agent, acting on behalf of Lenders, or Arranger
and its counsel shall be satisfactory in form and substance to Administrative
Agent and Arranger and such counsel, and Administrative Agent, Arranger and
such counsel shall have received all such counterpart originals or certified
copies of such documents as Administrative Agent or Arranger may reasonably
request.
4.2 CONDITIONS TO ALL LOANS.
The obligations of Lenders to make Loans on each Funding Date are
subject to the following further conditions precedent:
A. Administrative Agent shall have received before that Funding
Date, in accordance with the provisions of subsection 2.1B, an originally
executed Notice of Borrowing, in each case signed by the chief executive
officer, the chief financial officer or the treasurer of Company or by any
executive officer of Company designated by any of the above-described officers
on behalf of Company in a writing delivered to Administrative Agent.
B. As of that Funding Date:
(i) The representations and warranties contained herein
and in the other Loan Documents shall be true, correct and complete in
all material respects on and as of that Funding Date to the same
extent as though made on and as of that date, except to the extent
such representations and warranties specifically relate to an earlier
date, in which case such representations and warranties shall have
been true, correct and complete in all material respects on and as of
such earlier date;
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(ii) No event shall have occurred and be continuing or
would result from the consummation of the borrowing contemplated by
such Notice of Borrowing that would constitute an Event of Default or
a Potential Event of Default;
(iii) Each Loan Party shall have performed in all material
respects all agreements and satisfied all conditions which this
Agreement provides shall be performed or satisfied by it on or before
that Funding Date;
(iv) No order, judgment or decree of any court, arbitrator
or governmental authority shall purport to enjoin or restrain any
Lender from making the Loans to be made by it on that Funding Date;
(v) The making of the Loans requested on such Funding
Date shall not violate any law including Regulation G, Regulation T,
Regulation U or Regulation X of the Board of Governors of the Federal
Reserve System; and
(vi) There shall not be pending or, to the knowledge of
Company, threatened, any action, suit, proceeding, governmental
investigation or arbitration against or affecting Holdings or any of
its Subsidiaries or any property of Holdings or any of its
Subsidiaries that has not been disclosed by Company in writing
pursuant to subsection 5.6 or 6.1(x) prior to the making of the last
preceding Loans (or, in the case of the initial Loans, prior to the
execution of this Agreement), and there shall have occurred no
development not so disclosed in any such action, suit, proceeding,
governmental investigation or arbitration so disclosed, that, in
either event, in the opinion of Administrative Agent or of Requisite
Lenders, would be expected to have a Material Adverse Effect.
4.3 CONDITIONS TO LETTERS OF CREDIT.
The issuance of any Letter of Credit hereunder (whether or not the
applicable Issuing Lender is obligated to issue such Letter of Credit) is
subject to the following conditions precedent:
A. On or before the date of issuance of the initial
Letter of Credit pursuant to this Agreement, the initial Loans shall
have been made.
B. On or before the date of issuance of such Letter of
Credit, Administrative Agent shall have received, in accordance with
the provisions of subsection 3.1B(i), an originally executed Notice of
Issuance of Letter of Credit, in each case signed by the chief
executive officer, the chief financial officer or the treasurer of
Company or by any executive officer of Company designated by any of
the above-described officers on behalf of Company in a writing
delivered to Administrative Agent, together with all other information
specified in subsection 3.1B(i) and such other documents or
information as the applicable Issuing Lender may reasonably require in
connection with the issuance of such Letter of Credit.
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C. On the date of issuance of such Letter of Credit, all
conditions precedent described in subsection 4.2B shall be satisfied
to the same extent as if the issuance of such Letter of Credit were
the making of a Loan and the date of issuance of such Letter of Credit
were a Funding Date.
SECTION 5.
REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Agreement and to make
the Loans, to induce Issuing Lender to issue Letters of Credit and to induce
other Lenders to purchase participations therein, Holdings and Company
represent and warrant to each Lender, on the date of this Agreement, on each
Funding Date and on the date of issuance of each Letter of Credit, that the
following statements are true, correct and complete:
5.1 ORGANIZATION, POWERS, QUALIFICATION, GOOD STANDING, BUSINESS AND
SUBSIDIARIES.
A. ORGANIZATION AND POWERS. Each Loan Party is a corporation or
partnership duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation as specified in Schedule 5.1A annexed
hereto. Each Loan Party has all requisite corporate or partnership power and
authority to own and operate its properties, to carry on its business as now
conducted and as proposed to be conducted, to enter into the Loan Documents to
which it is a party and to carry out the transactions contemplated thereby.
B. QUALIFICATION AND GOOD STANDING. Each Loan Party is qualified
to do business and in good standing in every jurisdiction where its assets are
located and wherever necessary to carry out its business and operations, except
in jurisdictions where the failure to be so qualified or in good standing has
not had and will not have a Material Adverse Effect.
C. CONDUCT OF BUSINESS. Loan Parties are engaged only in the
businesses permitted to be engaged in pursuant to subsection 7.13.
D. SUBSIDIARIES. All of the Subsidiaries of Holdings as of the
Closing Date are identified in Schedule 5.1A annexed hereto, as said Schedule
5.1A may be supplemented from time to time pursuant to the provisions of
subsection 6.1(xvi). The capital stock of each of the Subsidiaries of Holdings
identified in Schedule 5.1A annexed hereto (as so supplemented) is duly
authorized, validly issued, fully paid and nonassessable and none of such
capital stock constitutes Margin Stock. Each of the Subsidiaries of Holdings
identified in Schedule 5.1A annexed hereto (as so supplemented) is a
corporation or partnership duly organized, validly existing and in good
standing under the laws of its respective jurisdiction of incorporation set
forth therein, has all requisite corporate or partnership power and authority
to own and operate its properties and to carry on its business as now conducted
and as proposed to be conducted, and is qualified to do business and in good
standing in every jurisdiction where its assets are located and wherever
necessary to carry out its business and operations, in each case except where
failure to be so qualified or in good standing or a lack of such corporate
power and authority has not had and
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will not have a Material Adverse Effect. Schedule 5.1A annexed hereto (as so
supplemented) correctly sets forth the ownership interest of Holdings and each
of its Subsidiaries in each of the Subsidiaries of Holdings identified therein.
E. REGULATORY AUTHORIZATIONS.
(i) Licenses. Except as set forth in Part I of Schedule
5.1E annexed hereto, each of the Loan Parties has obtained all
licenses, permits, certifications or other authorizations required by
the Communications Regulatory Authorities under the Communications
Act, State Law and local law in order to carry out its business and
operations as presently conducted and as proposed to be conducted,
including the provision of the telecommunications services set forth
in any Licenses except to the extent the failure to obtain
such licenses, permits, certifications or other authorizations would
not individually or in the aggregate have a Material Adverse Effect.
Part II of Schedule 5.1E annexed hereto accurately lists all Licenses,
including their expiration dates, held by each of the Loan Parties as
of the date of this Agreement. Each such License was duly and validly
issued by the FCC, the appropriate State PUC or local governmental
authority pursuant to procedures which materially comply with all
requirements of all applicable federal, state or local laws and is in
full force and effect except to the extent the failure to be in full
force and effect would not individually or in the aggregate have a
Material Adverse Effect. None of the Loan Parties has any knowledge
of the occurrence of any event or the existence of any circumstance
which, in the reasonable judgment of such Loan Party, is likely to
lead to the revocation, suspension, non-renewal or adverse
modification of any material Licenses.
(ii) Compliance with Licenses and Applicable Laws. The
Loan Parties are in compliance with the terms of all Licenses and with
all applicable Regulations except to the extent noncompliance would
not individually or in the aggregate have a Material Adverse Effect.
Each of the Loan Parties has duly filed in a timely manner all
filings, including tariff filings, required by the FCC, any State PUC
or any local governmental authority to be filed by such Loan Party as
a precondition to the provision of the video programming
telecommunications or other communications services which it offers
except to the extent failure to do so would not individually or in the
aggregate have a Material Adverse Effect. None of the Loan Parties is
a party to, or is aware of any overt threat of, any litigation,
proceeding, action, notice of violation or apparent liability, order
to show cause, order of forfeiture, formal or informal complaint,
inquiry or investigation by or before the FCC, any State PUC or any
local governmental authority with jurisdiction over the services which
it offers which would individually or in the aggregate if adversely
determined have a Material Adverse Effect.
(iii) Compliance with Certain Cable, Copyright and Other
Laws. The Loan Parties have duly filed in a timely manner all
material cable television registration statements and all other
material filings which are required to be filed by such Loan Parties
under the Communications Act except to the extent the failure to do so
would not individually or in the aggregate have a Material Adverse
Effect. The Loan Parties are
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in compliance with the Communications Act, including, without
limitation, the FCC Regulations relating to the carriage of television
signals and rules and regulations related to syndicated exclusivity
except to the extent noncompliance would not individually or in the
aggregate have a Material Adverse Effect. Except as set forth in
Schedule 5.1E(iii) annexed hereto, the Loan Parties have submitted all
requisite notices (if any are required) under Section 111 of the
United State Copyright Act of 1976 and the rules and regulations of
the United States Copyright Office for the carriage of all broadcast
stations as currently carried except to the extent failure to do so
would not individually or in the aggregate have a Material Adverse
Effect. Except as set forth in Schedule 5.1E(iii) and except as would
not individually or in the aggregate have a Material Adverse Effect,
the Loan Parties have filed with the United States Copyright Office
all required documents, instruments and statements of account, have
remitted payments of all required royalty fees and have obtained the
compulsory licenses provided for in Section 111 of the United States
Copyright Act of 1976 for the carriage of broadcast signals, which
licenses are currently valid and in full force and effect. No Loan
Party is liable to any Person for copyright infringement under the
Copyright Act as a result of its business operations except as would
not individually or in the aggregate have a Material Adverse Effect.
5.2 AUTHORIZATION OF BORROWING, ETC.
A. AUTHORIZATION OF BORROWING. The execution, delivery and
performance of the Loan Documents have been duly authorized by all necessary
corporate action on the part of each Loan Party that is a party thereto.
B. NO CONFLICT. The execution, delivery and performance by Loan
Parties of the Loan Documents to which they are parties and the consummation of
the transactions contemplated by the Loan Documents do not and will not (i)
violate any provision of any law or any governmental rule or regulation
applicable to any Loan Party or any of its Subsidiaries, the Certificate or
Articles of Incorporation or Bylaws or other organizational documents of any
Loan Party or any of its Subsidiaries or any order, judgment or decree of any
court or other agency of government binding on any Loan Party or any of its
Subsidiaries, (ii) conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any Contractual Obligation of
any Loan Party or any of its Subsidiaries except to the extent any such breach
or default would not individually or in the aggregate have a Material Adverse
Effect, (iii) result in or require the creation or imposition of any Lien upon
any of the properties or assets of any Loan Party or any of its Subsidiaries
(other than any Liens created under any of the Loan Documents in favor of
Administrative Agent on behalf of Lenders), or (iv) require any approval of
stockholders or any approval or consent of any Person under any Contractual
Obligation of any Loan Party or any of its Subsidiaries, except for such
approvals or consents which will be obtained on or before the Closing Date and
disclosed in writing to Lenders and except to the extent, with respect to any
consents required under any Contractual Obligations, the failure to obtain such
consents would not individually or in the aggregate have a Material Adverse
Effect.
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C. GOVERNMENTAL CONSENTS. The execution, delivery and
performance by Loan Parties of the Loan Documents to which they are parties and
the consummation of the transactions contemplated by the Loan Documents do not
and will not require any registration with, consent or approval of, or notice
to, or other action to, with or by, any federal, state or other governmental
authority or regulatory body (other than filings required in connection with
the perfection of security interests granted pursuant to the Collateral
Documents and routine and customary filings, or consents or approvals of, or
notices to, governmental or regulatory bodies required in connection with the
conduct of the business of Holdings and its Subsidiaries or the absence of
which would not individually or in the aggregate have a Material Adverse
Effect.
D. BINDING OBLIGATION. Each of the Loan Documents has been duly
executed and delivered by each Loan Party that is a party thereto and is the
legally valid and binding obligation of such Loan Party, enforceable against
such Loan Party in accordance with its respective terms, except as may be
limited by bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or limiting creditors' rights generally or by equitable principles
relating to enforceability.
5.3 FINANCIAL CONDITION.
Company has heretofore delivered to Lenders, at Lenders' request, the
following financial statements and information: (i) the audited consolidated
and consolidating balance sheets of Holdings and its Subsidiaries as at August
31, 1997 and the related consolidated and consolidating statements of income,
stockholders' equity and cash flows of Holdings and its Subsidiaries for the
Fiscal Year then ended and (ii) the unaudited consolidated and consolidating
balance sheets of Holdings and its Subsidiaries as at October 31, 1997 and the
related unaudited consolidated and consolidating statements of income,
stockholders' equity and cash flows of Holdings and its Subsidiaries for the
two months then ended. All such statements were prepared in conformity with
GAAP and fairly present, in all material respects, the financial position (on
a consolidated basis) of the entities described in such financial statements as
at the respective dates thereof and the results of operations and cash flows
(on a consolidated basis) of the entities described therein for each of the
periods then ended, subject, in the case of any such unaudited financial
statements, to changes resulting from audit and normal year-end adjustments.
Holdings does not (and will not following the funding of the initial Loans)
have any Contingent Obligation, contingent liability or liability for taxes,
long-term lease or unusual forward or long-term commitment that is not
reflected in the foregoing financial statements or the notes thereto and which
in any such case is material in relation to the business, operations,
properties, assets, condition (financial or otherwise) or prospects of Holdings
and its Subsidiaries, taken as a whole.
5.4 NO MATERIAL ADVERSE CHANGE; NO RESTRICTED PAYMENTS.
Since August 31, 1997, no event or change has occurred that has caused
or evidences, either in any case or in the aggregate, a Material Adverse
Effect. Neither Holdings nor any of its Subsidiaries has directly or
indirectly declared, ordered, paid or made, or set apart any sum
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or property for, any Restricted Payment or agreed to do so except as permitted
by subsection 7.5.
5.5 TITLE TO PROPERTIES; LIENS; REAL PROPERTY.
A. TITLE TO PROPERTIES; LIENS. Loan Parties have (i) good,
sufficient and legal title to (in the case of fee interests in real property),
(ii) valid leasehold interests in (in the case of leasehold interests in real
or personal property), or (iii) good title to (in the case of all other
personal property), all of their respective properties and assets reflected in
the financial statements referred to in subsection 5.3 or in the most recent
financial statements delivered pursuant to subsection 6.1, in each case except
for Permitted Encumbrances and assets disposed of since the date of such
financial statements in the ordinary course of business or as otherwise
permitted under subsection 7.7 and except as would not individually or in the
aggregate have a Material Adverse Effect. Except as permitted by this
Agreement, all such properties and assets are free and clear of Liens.
B. REAL PROPERTY. As of the Closing Date, Schedule 5.5 annexed
hereto contains a true, accurate and complete list of (i) all Fee Properties
and (ii) all leases, subleases or assignments of leases (together with all
amendments, modifications, supplements, renewals or extensions of any thereof)
affecting each Real Property Asset of any Loan Party, regardless of whether
such Loan Party is the landlord or tenant (whether directly or as an assignee
or successor in interest) under such lease, sublease or assignment. Except as
specified in Schedule 5.5 annexed hereto or as would not individually or in the
aggregate have a Material Adverse Effect, each agreement listed in clause (ii)
of the immediately preceding sentence is in full force and effect and Company
does not have knowledge of any default that has occurred and is continuing
thereunder, and each such agreement constitutes the legally valid and binding
obligation of each applicable Loan Party, enforceable against such Loan Party
in accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or limiting creditors' rights generally or by equitable principles.
5.6 LITIGATION; ADVERSE FACTS.
Except as set forth in Schedule 5.6 annexed hereto, there are no
actions, suits, proceedings, arbitrations or governmental investigations
(whether or not purportedly on behalf of any Loan Party or any of its
Subsidiaries) at law or in equity, or before or by any federal, state,
municipal or other governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign (including any Environmental Claims)
that are pending or, to the knowledge of Holdings or Company, threatened
against or affecting any Loan Party or any of its Subsidiaries or any property
of any Loan Party or any of its Subsidiaries and that, individually or in the
aggregate, could reasonably be expected to result in a Material Adverse Effect.
No Loan Party nor any of its Subsidiaries (i) is in violation of any applicable
laws (including Environmental Laws) that, individually or in the aggregate,
could reasonably be expected to result in a Material Adverse Effect, or (ii) is
subject to or in default with respect to any final judgments, writs,
injunctions, decrees, rules or regulations of any court or any federal,
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state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, that, individually or in the
aggregate, could reasonably be expected to result in a Material Adverse Effect.
5.7 PAYMENT OF TAXES.
Except to the extent permitted by subsection 6.3, all material tax
returns and reports of Holdings and its Subsidiaries required to be filed by
any of them have been timely filed, and all material taxes shown on such tax
returns to be due and payable and all assessments, fees and other governmental
charges upon Holdings and its Subsidiaries and upon their respective
properties, assets, income, businesses and franchises which are due and payable
have been paid when due and payable. No Loan Party knows of any proposed
material tax assessment against any Loan Party or any of its Subsidiaries which
is not being actively contested by such Loan Party or such Subsidiary in good
faith and by appropriate proceedings; provided that such reserves or other
appropriate provisions, if any, as shall be required in conformity with GAAP
shall have been made or provided therefor.
5.8 PERFORMANCE OF AGREEMENTS; MATERIALLY ADVERSE AGREEMENTS; MATERIAL
CONTRACTS.
A. No Loan Party nor any of its Subsidiaries is in default in the
performance, observance or fulfillment of any of the obligations, covenants or
conditions contained in any of its Contractual Obligations, and no condition
exists that, with the giving of notice or the lapse of time or both, would
constitute such a default, except where the consequences, direct or indirect,
of such default or defaults, if any, would not have a Material Adverse Effect.
B. To the best knowledge of Holdings and Company, no Loan Party
nor any of its Subsidiaries is a party to or is otherwise subject to any
agreements or instruments or any charter or other internal restrictions which,
individually or in the aggregate, could reasonably be expected to result in a
Material Adverse Effect.
C. Schedule 5.8 contains a true, correct and complete list of all
the Material Contracts in effect on the Closing Date. Except as described on
Schedule 5.8, all such Material Contracts are in full force and effect and no
material defaults by Holdings or any of its Subsidiaries, or to the knowledge
of Holdings and Company, any other party thereto, currently exist thereunder.
5.9 GOVERNMENTAL REGULATION.
No Loan Party nor any of its Subsidiaries is subject to regulation
under the Public Utility Holding Company Act of 1935, the Federal Power Act,
the Interstate Commerce Act or the Investment Company Act of 1940 or under any
other federal or state statute or regulation which may limit its ability to
incur Indebtedness or which may otherwise render all or any portion of the
Obligations unenforceable.
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5.10 SECURITIES ACTIVITIES.
A. No Loan Party nor any of its Subsidiaries is engaged
principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying any Margin Stock.
B. Following application of the proceeds of each Loan, not more
than 25% of the value of the assets (either Company only or of Holdings and its
Subsidiaries on a consolidated basis) subject to the provisions of subsection
7.2 or 7.7 or subject to any restriction contained in any agreement or
instrument, between Company and any Lender or any Affiliate of any Lender,
relating to Indebtedness and within the scope of subsection 8.2, will be Margin
Stock.
5.11 EMPLOYEE BENEFIT PLANS.
A. Each Loan Party and each of their respective ERISA Affiliates
are in compliance with all applicable provisions and requirements of ERISA and
the regulations and published interpretations thereunder with respect to each
Employee Benefit Plan, and have performed all their obligations under each
Employee Benefit Plan. Each Employee Benefit Plan which is intended to qualify
under Section 401(a) of the Internal Revenue Code is so qualified.
B. No ERISA Event has occurred or is reasonably expected to
occur.
C. Except to the extent required under Section 4980B of the
Internal Revenue Code or except as set forth in Schedule 5.11 annexed hereto,
no Employee Benefit Plan provides health or welfare benefits (through the
purchase of insurance or otherwise) for any retired or former employee of any
Loan Party or any of their respective ERISA Affiliates.
D. As of the most recent valuation date for any Pension Plan,
there is no amount of unfunded benefit liabilities (as defined in Section
4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans
(excluding for purposes of such computation any Pension Plans with respect to
which assets exceed benefit liabilities).
E. The Loan Parties have no liability or potential liability
under any Multiemployer Plan.
5.12 CERTAIN FEES.
No broker's or finder's fee or commission will be payable with respect
to this Agreement or any of the transactions contemplated hereby, and Holdings
hereby indemnifies Lenders against, and agrees that it will hold Lenders
harmless from, any claim, demand or liability for any such broker's or finder's
fees alleged to have been incurred in connection herewith or therewith and any
expenses (including reasonable fees, expenses and disbursements of counsel)
arising in connection with any such claim, demand or liability.
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5.13 ENVIRONMENTAL PROTECTION.
(i) No Loan Party nor any of its Subsidiaries nor any of
their respective Facilities or operations are subject to any
outstanding written order, consent decree or settlement agreement with
any Person relating to (a) any Environmental Law, (b) any
Environmental Claim, or (c) any Hazardous Materials Activity that,
individually or in the aggregate, could reasonably be expected to have
a Material Adverse Effect;
(ii) No Loan Party nor any of its Subsidiaries has
received any letter or request for information under Section 104 of
the Comprehensive Environmental Response, Compensation, and Liability
Act (42 U.S.C. Section 9604) or any comparable state law;
(iii) There are and, to Company's knowledge, have been no
conditions, occurrences, or Hazardous Materials Activities which could
reasonably be expected to form the basis of an Environmental Claim
against any Loan Party or any of its Subsidiaries that, individually
or in the aggregate, could reasonably be expected to have a Material
Adverse Effect;
(iv) No Loan Party nor any of its Subsidiaries nor, to
Company's knowledge, any predecessor of Company or any of its
Subsidiaries has filed any notice under any Environmental Law
indicating past or present treatment of Hazardous Materials at any
Facility, and no Loan Party or any of its Subsidiaries' operations
involves the generation, transportation, treatment, storage or
disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270
or any state equivalent; and
(v) Compliance with all current or reasonably foreseeable
future requirements pursuant to or under Environmental Laws could not,
individually or in the aggregate, be reasonably expected to give rise
to a Material Adverse Effect.
Notwithstanding anything in this subsection 5.13 to the contrary, no
event or condition has occurred or is occurring with respect to any Loan Party
or any of its Subsidiaries relating to any Environmental Law, any Release of
Hazardous Materials, or any Hazardous Materials Activity which individually or
in the aggregate has had or could reasonably be expected to have a Material
Adverse Effect.
5.14 EMPLOYEE MATTERS.
Except as set forth in Schedule 5.14 annexed hereto, no Loan Party or
any of its Subsidiaries is a party to any collective bargaining agreement and,
to the knowledge of any Loan Party, no union representation question exists
with respect to the employees of any Loan Party or any of its Subsidiaries.
There is no strike, work stoppage, slowdown, lockout or any other labor dispute
pending, or to the knowledge of Holdings, threatened, involving any Loan Party
or any of its Subsidiaries that individually or in the aggregate could
reasonably be expected to have a Material Adverse Effect.
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5.15 SOLVENCY.
Each Loan Party is and, upon the incurrence of any Obligations by such
Loan Party on any date on which this representation is made, will be, Solvent.
5.16 MATTERS RELATING TO COLLATERAL.
A. CREATION, PERFECTION AND PRIORITY OF LIENS. The execution and
delivery of the Collateral Documents by Loan Parties, together with (i) the
actions taken on or prior to the date hereof pursuant to subsections 4.1D, 6.8
and 6.9 and (ii) the delivery to Administrative Agent of any Pledged Collateral
not delivered to Administrative Agent at the time of execution and delivery of
the applicable Collateral Document (all of which Pledged Collateral has been so
delivered) are effective to create in favor of Administrative Agent for the
benefit of Lenders, as security for the respective Secured Obligations (as
defined in the applicable Collateral Document in respect of any Collateral), a
valid and perfected First Priority Lien on all of the Collateral, and all
filings and other actions necessary or desirable to perfect and maintain the
perfection and First Priority status of such Liens have been duly made or taken
and remain in full force and effect, other than the filing of any UCC financing
statements delivered to Administrative Agent for filing (but not yet filed) and
the periodic filing of UCC continuation statements in respect of UCC financing
statements filed by or on behalf of Administrative Agent.
B. GOVERNMENTAL AUTHORIZATIONS. No authorization, approval or
other action by, and no notice to or filing with, any governmental authority or
regulatory body is required for either (i) the pledge or grant by any Loan
Party of the Liens purported to be created in favor of Administrative Agent
pursuant to any of the Collateral Documents or (ii) the exercise by
Administrative Agent of any rights or remedies in respect of any Collateral
(whether specifically granted or created pursuant to any of the Collateral
Documents or created or provided for by applicable law), except for filings or
recordings contemplated by subsection 5.16A and except as may be required, in
connection with the disposition of any Pledged Collateral, by laws generally
affecting the offering and sale of securities or by the FCC or any State PUC.
C. ABSENCE OF THIRD-PARTY FILINGS. Except such as may have been
filed in favor of Administrative Agent as contemplated by subsection 5.16A and
in respect of Liens permitted under subsection 7.2A, (i) no effective UCC
financing statement, fixture filing or other instrument similar in effect
covering all or any part of the Collateral is on file in any filing or
recording office and (ii) no effective filing covering all or any part of the
intellectual property Collateral is on file in the Patent and Trademark Office.
D. MARGIN REGULATIONS. The pledge of the Pledged Collateral
pursuant to the Collateral Documents does not violate Regulation G, T, U or X
of the Board of Governors of the Federal Reserve System.
E. INFORMATION REGARDING COLLATERAL. All information supplied to
Administrative Agent by or on behalf of any Loan Party with respect to any of
the Collateral (in each case taken
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as a whole with respect to any particular Collateral) is accurate and complete
in all material respects.
5.17 DISCLOSURE.
No representation or warranty of any Loan Party or any of its
Subsidiaries contained in the Confidential Information Memorandum or in any
Loan Document or in any Officers' Certificate or Compliance Certificate
furnished to Lenders by or on behalf of any Loan Party or any of its
Subsidiaries for use in connection with the transactions contemplated by this
Agreement contains any untrue statement of a material fact or omits to state a
material fact (known to Holdings or Company, in the case of any document not
furnished by it) necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances in which the same were
made. Any projections and pro forma financial information contained in such
materials are based upon good faith estimates and assumptions believed by
Holdings or Company to be reasonable at the time made, it being recognized by
Lenders that such projections as to future events are not to be viewed as facts
and that actual results during the period or periods covered by any such
projections may differ from the projected results. There are no facts known
(or which should upon the reasonable exercise of diligence be known) to
Holdings or Company (other than matters of a general economic nature or
competitive conditions in the telecommunications and cable television
industries applicable generally) that, individually or in the aggregate, could
reasonably be expected to result in a Material Adverse Effect and that have not
been disclosed herein or in such other documents, certificates and statements
furnished to Lenders for use in connection with the transactions contemplated
hereby.
SECTION 6.
AFFIRMATIVE COVENANTS
Each of Holdings and Company covenants and agrees that, so long as any
of the Commitments hereunder shall remain in effect and until payment in full
of all of the Loans and other Obligations and the cancellation or expiration of
all Letters of Credit, unless Requisite Lenders shall otherwise give prior
written consent, each of Holdings and Company shall perform, and shall cause
each of its Subsidiaries to perform, all covenants in this Section 6.
6.1 FINANCIAL STATEMENTS AND OTHER REPORTS.
Holdings will maintain, and cause each of its Subsidiaries to
maintain, a system of accounting established and administered in accordance
with sound business practices to permit preparation of financial statements in
conformity with GAAP. Company will deliver to Administrative Agent and
Lenders:
(i) Monthly Financials: as soon as available and in any
event within 20 days after the end of each month ending after the
Closing Date, (a) the consolidated balance sheet of Holdings and its
Subsidiaries as at the end of such month and the related consolidated
statement of income, stockholders' equity and cash flows of Holdings
and
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its Subsidiaries for such month and for the period from the beginning
of the then current Fiscal Year to the end of such month, setting
forth in each case in comparative form the corresponding figures for
the corresponding periods of the previous Fiscal Year and the
corresponding figures from the Financial Plan for the current Fiscal
Year, to the extent prepared on a monthly basis, all in reasonable
detail and certified by the chief financial officer of Company that
they fairly present, in all material respects, the financial condition
of Company and its Subsidiaries as at the dates indicated and the
results of their operations and their cash flows for the periods
indicated, subject to changes resulting from audit and normal year-end
adjustments, and (b) a narrative report describing the operations of
Holdings and its Subsidiaries in the form prepared for presentation to
senior management for such month and for the period from the beginning
of the then current Fiscal Year to the end of such month;
(ii) Quarterly Financials: as soon as available and in
any event within 45 days after the end of each Fiscal Quarter, (a) the
consolidated balance sheet of Holdings and its Subsidiaries as at the
end of such Fiscal Quarter and the related consolidated statement of
income, stockholders' equity and cash flows of Holdings and its
Subsidiaries for such Fiscal Quarter and for the period from the
beginning of the then current Fiscal Year to the end of such Fiscal
Quarter, setting forth in each case in comparative form the
corresponding figures for the corresponding periods of the previous
Fiscal Year and the corresponding figures from the Financial Plan for
the current Fiscal Year, all in reasonable detail and certified by the
chief financial officer of Holdings that they fairly present, in all
material respects, the financial condition of Holdings and its
Subsidiaries as at the dates indicated and the results of their
operations and their cash flows for the periods indicated, subject to
changes resulting from audit and normal year-end adjustments, and (b)
a narrative report describing the operations of Holdings and its
Subsidiaries in the form prepared for presentation to senior
management for such Fiscal Quarter and for the period from the
beginning of the then current Fiscal Year to the end of such Fiscal
Quarter;
(iii) Year-End Financials: as soon as available and in any
event within 90 days after the end of each Fiscal Year, (a) the
consolidated balance sheet of Holdings and its Subsidiaries as at the
end of such Fiscal Year and the related consolidated statement of
income, stockholders' equity and cash flows of Holdings and its
Subsidiaries for such Fiscal Year, setting forth in each case in
comparative form the corresponding figures for the previous Fiscal
Year and the corresponding figures from the Financial Plan for the
Fiscal Year covered by such financial statements, all in reasonable
detail and certified by the chief financial officer of Holdings that
they fairly present, in all material respects, the financial condition
of Holdings and its Subsidiaries as at the dates indicated and the
results of their operations and their cash flows for the periods
indicated, (b) a narrative report describing the operations of
Holdings and its Subsidiaries in the form prepared for presentation to
senior management for such Fiscal Year, (c) in the case of such
consolidated financial statements, a report thereon of Deloitte &
Touche or other independent certified public accountants of recognized
national standing selected by Holdings and reasonably satisfactory to
Administrative Agent, which report shall be
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unqualified, shall express no doubts about the ability of Holdings and
its Subsidiaries to continue as a going concern, and shall state that
such consolidated financial statements fairly present, in all material
respects, the consolidated financial position of Holdings and its
Subsidiaries as at the dates indicated and the results of their
operations and their cash flows for the periods indicated in
conformity with GAAP applied on a basis consistent with prior years
(except as otherwise disclosed in such financial statements) and that
the examination by such accountants in connection with such
consolidated financial statements has been made in accordance with
generally accepted auditing standards and (d) copies of any management
letters provided to Holdings or its Subsidiaries delivered by such
accountants for such period;
(iv) Officers' and Compliance Certificates: together with
each delivery of financial statements of Holdings and its Subsidiaries
pursuant to subdivisions (ii) and (iii) above, (a) an Officers'
Certificate of Holdings stating that the signers have reviewed the
terms of this Agreement and have made, or caused to be made under
their supervision, a review in reasonable detail of the transactions
and condition of Holdings and its Subsidiaries during the accounting
period covered by such financial statements and that such review has
not disclosed the existence during or at the end of such accounting
period, and that the signers do not have knowledge of the existence as
at the date of such Officers' Certificate, of any condition or event
that constitutes an Event of Default or Potential Event of Default,
or, if any such condition or event existed or exists, specifying the
nature and period of existence thereof and what action Holdings has
taken, is taking and proposes to take with respect thereto; and (b) a
Compliance Certificate demonstrating in reasonable detail compliance
during and at the end of the applicable accounting periods with the
restrictions contained in Section 7;
(v) Reconciliation Statements: if, as a result of any
change in accounting principles and policies from those used in the
preparation of the audited financial statements referred to in
subsection 5.3, the consolidated financial statements of Holdings and
its Subsidiaries delivered pursuant to subdivisions (i), (ii), (iii)
or (xiii) of this subsection 6.1 will differ in any material respect
from the consolidated financial statements that would have been
delivered pursuant to such subdivisions had no such change in
accounting principles and policies been made, then (a) together with
the first delivery of financial statements pursuant to subdivision
(i), (ii), (iii) or (xiii) of this subsection 6.1 following such
change, consolidated financial statements of Holdings and its
Subsidiaries for (1) the current Fiscal Year to the effective date of
such change and (2) the two full Fiscal Years immediately preceding
the Fiscal Year in which such change is made, in each case prepared on
a pro forma basis as if such change had been in effect during such
periods, and (b) together with each delivery of financial statements
pursuant to subdivision (i), (ii), (iii) or (xiii) of this subsection
6.1 following such change, a written statement of the chief accounting
officer or chief financial officer of Holdings setting forth the
differences (including any differences that would affect any
calculations relating to the financial covenants set forth in
subsection 7.6) which would have resulted if such financial statements
had been prepared without giving effect to such change;
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(vi) Accountants' Certification: together with each
delivery of consolidated financial statements of Holdings and its
Subsidiaries pursuant to subdivision (iii) above, a written statement
by the independent certified public accountants giving the report
thereon stating that based on their audit examination nothing has come
to their attention that causes them to believe either or both that the
information contained in the certificates delivered therewith pursuant
to subdivision (iv) above is not correct or that the matters set forth
in the Compliance Certificates delivered therewith pursuant to clause
(b) of subdivision (iv) above for the applicable Fiscal Year are not
stated in accordance with the terms of this Agreement as they relate
to financial and accounting matters;
(vii) Accountants' Reports: promptly upon receipt thereof
(unless restricted by applicable professional standards), copies of
all written reports submitted to Holdings by independent certified
public accountants in connection with each annual, interim or special
audit of the financial statements of Holdings and its Subsidiaries
made by such accountants, including any comment letter submitted by
such accountants to management in connection with their annual audit;
(viii) SEC Filings and Press Releases: promptly upon their
becoming available, copies of (a) all financial statements, reports,
notices and proxy statements sent or made available generally by
Holdings to its security holders or by any Subsidiary of Holdings to
its security holders other than Holdings or another Subsidiary of
Holdings, (b) all regular and periodic reports and all registration
statements (other than on Form S-8 or a similar form) and
prospectuses, if any, filed by Holdings or any of its Subsidiaries
with any securities exchange or with the Securities and Exchange
Commission or any governmental or private regulatory authority, and
(c) all press releases and other statements made available generally
by Holdings or any of its Subsidiaries to the public concerning
material developments in the business of Holdings or any of its
Subsidiaries;
(ix) Events of Default, etc.: promptly upon any officer
of Holdings or Company obtaining knowledge (a) of any condition or
event that constitutes an Event of Default or Potential Event of
Default, or becoming aware that any Lender has given any notice (other
than to Administrative Agent) or taken any other action with respect
to a claimed Event of Default or Potential Event of Default, (b) that
any Person has given any notice to Holdings or any of its Subsidiaries
or taken any other action with respect to a claimed default or event
or condition of the type referred to in subsection 8.2, (c) of any
condition or event that would be required to be disclosed in a current
report filed by Company with the Securities and Exchange Commission on
Form 8-K (Items 1, 2, 4, 5 and 6 of such Form as in effect on the date
hereof) if Company were required to file such reports under the
Exchange Act, or (d) of the occurrence of any event or change that has
caused or evidences, either in any case or in the aggregate, a
Material Adverse Effect, an Officers' Certificate specifying the
nature and period of existence of such condition, event or change, or
specifying the notice given or action taken by any such Person and the
nature of such claimed Event of Default, Potential Event of Default,
default, event or condition, and what action Company has taken, is
taking and proposes to take with respect thereto;
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(x) Litigation or Other Proceedings: promptly upon any
officer of Holdings or Company obtaining knowledge of (a) the
institution of, or non-frivolous threat of, any action, suit,
proceeding (whether administrative, judicial or otherwise),
governmental investigation or arbitration against or affecting any
Loan Party or any of its Subsidiaries or any property of any Loan
Party or any of its Subsidiaries (collectively, "PROCEEDINGS") not
previously disclosed in writing by Company to Lenders or (b) any
material development in any Proceeding that, in the case of (a) or
(b):
(1) if adversely determined, has a reasonable
possibility of giving rise to a Material Adverse Effect; or
(2) seeks to enjoin or otherwise prevent the
consummation of, or to recover any damages or obtain relief as
a result of, the transactions contemplated hereby;
written notice thereof together with such other information as may be
reasonably available to Company to enable Lenders and their counsel to
evaluate such matters;
(xi) ERISA Events: promptly upon becoming aware of the
occurrence of or forthcoming occurrence of any ERISA Event, a written
notice specifying the nature thereof, what action Loan Parties or any
of their respective ERISA Affiliates has taken, is taking or proposes
to take with respect thereto and, when known, any action taken or
threatened by the Internal Revenue Service, the Department of Labor or
the PBGC with respect thereto;
(xii) ERISA Notices: with reasonable promptness, copies of
(a) each Schedule B (Actuarial Information) to the annual report (Form
5500 Series) filed by Loan Parties or any of their respective ERISA
Affiliates with the Internal Revenue Service with respect to each
Pension Plan; (b) all notices received by Loan Parties or any of their
respective ERISA Affiliates from a Multiemployer Plan sponsor
concerning an ERISA Event; and (c) copies of such other documents or
governmental reports or filings relating to any Employee Benefit Plan
as Administrative Agent shall reasonably request;
(xiii) Financial Plans: as soon as practicable and in any
event not later than 90 days after the end of each Fiscal Year, a
consolidated plan and financial forecast for the then current Fiscal
Year and each succeeding Fiscal Year through May 31, 2004 (the
"FINANCIAL PLAN" for such Fiscal Years), including (a) forecasted
consolidated balance sheets and forecasted consolidated statements of
income and cash flows of Holdings and its Subsidiaries for each such
Fiscal Year, together with pro forma Compliance Certificates for each
such Fiscal Year and an explanation of the assumptions on which such
forecasts are based, (b) forecasted consolidated statements of income
and cash flows of Holdings and its Subsidiaries for each month of such
Fiscal Year, together with an explanation of the assumptions on which
such forecasts are based, (c) forecasted plans for raising debt and
equity capital and how the proceeds of such issuances will be applied
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to meet Holdings' Financial Plan, and (d) such other information and
projections as any Lender may reasonably request;
(xiv) Insurance: as soon as practicable and in any event
by the last day of each Fiscal Year, a report in form and substance
satisfactory to Administrative Agent outlining all material insurance
coverage maintained as of the date of such report by Holdings and its
Subsidiaries and all material insurance coverage planned to be
maintained by Holdings and its Subsidiaries in the immediately
succeeding Fiscal Year;
(xv) Board of Directors: with reasonable promptness,
written notice of any change in the Board of Directors of Holdings or
Company;
(xvi) New Subsidiaries: promptly upon any Person becoming
a Subsidiary of Holdings or any Subsidiary of Holdings, a written
notice setting forth with respect to such Person (a) the date on which
such Person became a Subsidiary of Holdings and (b) all of the data
required to be set forth in Schedule 5.1 annexed hereto with respect
to all Subsidiaries of Holdings (it being understood that such written
notice shall be deemed to supplement Schedule 5.1 annexed hereto for
all purposes of this Agreement);
(xvii) Licenses, Regulations, etc.: promptly (a) upon
receipt of notice of (1) any forfeiture, non- renewal, cancellation,
termination, revocation, suspension, material impairment or material
modification of any material License used by Holdings or any of its
Subsidiaries, or any notice of default or forfeiture with respect to
any such License, or (2) any refusal by any Communications Regulatory
Authority to renew or extend any material License, an Officers'
Certificate specifying the nature of such event, the period of
existence thereof, and what action Holdings or its Subsidiaries are
taking and propose to take with respect thereto, (b) any acquisition,
a written notice setting forth with respect to the business acquired
all of the data required to be set forth in Schedule 5.1E under
subsection 5.1E with respect to such business and the Licenses
required in connection with the operation of such business (it being
understood that such written notice shall be deemed to supplement
Schedule 5.1E annexed hereto for all purposes of this Agreement) and
(c) becoming aware of any material change in the federal, state or
local regulations which govern the business of Holdings and its
Subsidiaries which could reasonably be expected to have a Material
Adverse Effect, a written notice setting forth a description of such
change and the expected impact on Holdings and its Subsidiaries;
(xviii) UCC Search Report: As promptly as practicable after
the date of delivery to Administrative Agent of any UCC financing
statement executed by any Loan Party pursuant to subsection 4.1D(iv)
or 6.8A, copies of completed UCC searches evidencing the proper
filing, recording and indexing of all such UCC financing statement and
listing all other effective financing statements that name such Loan
Party as debtor, together with copies of all such other financing
statements not previously delivered to Administrative Agent by or on
behalf of Holdings or such Loan Party;
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(xix) promptly upon the sale of any Loan Party or upon any
Loan Party ceasing to exist, written notice of such sale or
dissolution; and
(xx) Other Information: with reasonable promptness, such
other information and data with respect to Holdings or any of its
Subsidiaries as from time to time may be reasonably requested by any
Lender.
6.2 CORPORATE EXISTENCE, ETC.
Except as permitted under subsection 7.7, Holdings will, and will
cause each of its Subsidiaries to, at all times preserve and keep in full force
and effect its corporate existence and all rights and franchises (including the
Licenses) material to its business; provided, however that neither Holdings nor
any of its Subsidiaries shall be required to preserve any such right or
franchise if the Board of Directors of Holdings or such Subsidiary shall
determine that the preservation thereof is no longer desirable in the conduct
of the business of Holdings or such Subsidiary, as the case may be, and that
the loss thereof is not disadvantageous in any material respect to Holdings,
such Subsidiary or Lenders.
6.3 PAYMENT OF TAXES AND CLAIMS; TAX CONSOLIDATION.
A. Holdings will, and will cause each of its Subsidiaries to, pay
all taxes, assessments and other governmental charges imposed upon it or any of
its properties or assets or in respect of any of its income, businesses or
franchises before any penalty accrues thereon, and all claims (including claims
for labor, services, materials and supplies) for sums that have become due and
payable and that by law have or may become a Lien upon any of its properties or
assets, prior to the time when any penalty or fine shall be incurred with
respect thereto; provided that no such charge or claim need be paid if it is
being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted, so long as (1) such reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor and (2) in the case of a charge or claim which has or may become
a Lien against any of the Collateral, such contest proceedings conclusively
operate to stay the sale of any portion of the Collateral to satisfy such
charge or claim.
B. Holdings will not, nor will it permit any of its Subsidiaries
to, file or consent to the filing of any consolidated income tax return with
any Person (other than Holdings or any of its Subsidiaries).
6.4 MAINTENANCE OF PROPERTIES; INSURANCE; APPLICATION OF NET
INSURANCE/CONDEMNATION PROCEEDS.
A. MAINTENANCE OF PROPERTIES. Holdings will, and will cause each
of its Subsidiaries to, maintain or cause to be maintained in good repair,
working order and condition, ordinary wear and tear excepted, all material
properties used or useful in the business of Holdings and its Subsidiaries
(including all Intellectual Property) and from time to time will make or cause
to be made all appropriate repairs, renewals and replacements thereof
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except to the extent the failure to make such repairs, renewals or replacements
would not individually or in the aggregate have a Material Adverse Effect.
B. INSURANCE. Holdings will maintain or cause to be maintained,
with financially sound and reputable insurers, such public liability insurance,
third party property damage insurance, business interruption insurance and
casualty insurance with respect to liabilities, losses or damage in respect of
the assets, properties and businesses of Holdings and its Subsidiaries as may
customarily be carried or maintained under similar circumstances by
corporations of established reputation engaged in similar businesses, in each
case in such amounts (giving effect to self-insurance), with such deductibles,
covering such risks and otherwise on such terms and conditions as shall be
customary for corporations similarly situated in the industry. Without
limiting the generality of the foregoing, Holdings will maintain or cause to be
maintained (i) in the case of any property subject to a Mortgage, flood
insurance with respect to each Flood Hazard Property that is located in a
community that participates in the National Flood Insurance Program, in each
case in compliance with any applicable regulations of the Board of Governors of
the Federal Reserve System, and (ii) replacement value casualty insurance on
the Collateral under such policies of insurance, with such insurance companies,
in such amounts, with such deductibles, and covering such risks as are at all
times satisfactory to Administrative Agent in its commercially reasonable
judgment. Each such policy of insurance shall (a) name Administrative Agent for
the benefit of Lenders as an additional insured thereunder as its interests may
appear and (b) in the case of each business interruption and casualty insurance
policy, contain a loss payable clause or endorsement, satisfactory in form and
substance to Administrative Agent, that names Administrative Agent for the
benefit of Lenders as the loss payee thereunder and provides for at least 30
days prior written notice to Administrative Agent of any modification or
cancellation of such policy.
C. APPLICATION OF NET INSURANCE/CONDEMNATION PROCEEDS.
(i) Business Interruption Insurance. Upon receipt by
Holdings or any of its Subsidiaries of any business interruption
insurance proceeds constituting Net Insurance/Condemnation Proceeds,
(a) so long as no Event of Default or Potential Event of Default shall
have occurred and be continuing, Holdings or such Subsidiary may
retain and apply such Net Insurance/Condemnation Proceeds for working
capital purposes, and (b) if an Event of Default or Potential Event of
Default shall have occurred and be continuing, Holdings shall apply an
amount equal to such Net Insurance/Condemnation Proceeds to prepay the
Loans (and/or the Revolving Loan Commitments shall be reduced) as
provided in subsection 2.4B(ii)(b);
(ii) Casualty Insurance/Condemnation Proceeds. Upon
receipt by Holdings or any of its Subsidiaries of any Net
Insurance/Condemnation Proceeds other than from business interruption
insurance, (a) so long as no Event of Default or Potential Event of
Default shall have occurred and be continuing, Company may deliver to
Administrative Agent an Officers' Certificate setting forth the amount
of the Net Insurance/Condemnation Proceeds received and that Holdings
or such Subsidiary intends to use such Net Insurance/Condemnation
Proceeds within 180 days of such date of
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receipt to pay or reimburse the cost of repairing, restoring or
replacing the assets in respect of which such Net
Insurance/Condemnation Proceeds were received or to reinvest in
equipment or other assets useful in the conduct of the business.
Holdings shall, or shall cause one or more of its Subsidiaries to,
promptly and diligently apply such Net Insurance/Condemnation Proceeds
to pay or reimburse the costs of repairing, restoring or replacing the
assets in respect of which such Net Insurance/Condemnation Proceeds
were received or, to the extent not so applied, to prepay the Loans
(and/or the Revolving Loan Commitments shall be reduced) as provided
in subsection 2.4B(ii)(b), and (b) if an Event of Default or Potential
Event of Default shall have occurred and be continuing, Holdings shall
apply an amount equal to such Net Insurance/Condemnation Proceeds to
prepay the Loans (and/or the Revolving Loan Commitments shall be
reduced) as provided in subsection 2.4B(ii)(b).
(iii) Net Insurance/Condemnation Proceeds Received by
Administrative Agent. Upon receipt by Administrative Agent of any Net
Insurance/Condemnation Proceeds as loss payee, (a) if and to the
extent Holdings would have been required to apply such Net
Insurance/Condemnation Proceeds (if it had received them directly) to
prepay the Loans and/or reduce the Revolving Loan Commitments,
Administrative Agent shall, and Company hereby authorizes
Administrative Agent to, apply such Net Insurance/Condemnation
Proceeds to prepay the Loans (and/or the Revolving Loan Commitments
shall be reduced) as provided in subsection 2.4B(ii)(b), and (b) to
the extent the foregoing clause (a) does not apply, Administrative
Agent shall deliver such Net Insurance/Condemnation Proceeds to
Company, and Company shall, or shall cause one or more of its
Subsidiaries to, promptly and diligently apply such Net
Insurance/Condemnation Proceeds to the cost of repairing, restoring or
replacing the assets in respect of which such Net
Insurance/Condemnation Proceeds were received and/or reinvest such Net
Insurance/Condemnation Proceeds in equipment or other productive
assets used in the business of the Company.
6.5 INSPECTION RIGHTS; LENDER MEETING.
A. INSPECTION RIGHTS. Holdings shall, and shall cause each of its
Subsidiaries to, permit any authorized representatives designated by any Lender
to visit and inspect any of the properties of Holdings or of any of its
Subsidiaries, to inspect, copy and take extracts from its and their financial
and accounting records, and to discuss its and their affairs, finances and
accounts with its and their officers and independent public accountants
(provided that Holdings and Company may, if it so chooses, be present at or
participate in any such discussion), all upon reasonable notice and at such
reasonable times during normal business hours and as often as may reasonably be
requested; provided that Lenders will make reasonable efforts to coordinate any
such inspections in order to minimize the number of inspections.
B. LENDER MEETING. Holdings and Company will, upon the request
of Arranger, Administrative Agent or Requisite Lenders, participate in a
meeting of Administrative Agent and Lenders once during each Fiscal Year to be
held at Holdings's corporate offices (or at such other
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location as may be agreed to by Holdings and Administrative Agent) at such time
as may be agreed to by Holdings and Administrative Agent.
6.6 COMPLIANCE WITH LAWS, ETC.
Holdings shall comply, and shall cause each of its Subsidiaries and
all other Persons on or occupying any Facilities to comply, with the
requirements of all applicable laws, rules, regulations and orders (including
all Environmental Laws, the Communications Act, all State Laws and all
Regulations) of any governmental authority (including any Communications
Regulatory Authority) and the terms and conditions of all Interconnection
Agreements, noncompliance with which could reasonably be expected to cause,
individually or in the aggregate, a Material Adverse Effect.
6.7 EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY COLLATERAL
DOCUMENTS BY CERTAIN SUBSIDIARIES AND FUTURE SUBSIDIARIES.
A. EXECUTION OF SUBSIDIARY GUARANTY AND PERSONAL PROPERTY
COLLATERAL DOCUMENTS. In the event that any Person becomes a Subsidiary of
Holdings (other than a Permitted Joint Venture) after the date hereof, Company
will promptly notify Administrative Agent of that fact and cause such
Subsidiary to execute and deliver to Administrative Agent a counterpart of the
Subsidiary Guaranty and a Subsidiary Pledge Agreement and a Subsidiary Security
Agreement (or in the case of a License Subsidiary, a guaranty and security
agreement substantially in the forms of the License Co. Guaranty and License
Co. Security Agreement, respectively) and to take all such further actions and
execute all such further documents and instruments (including actions,
documents and instruments comparable to those described in subsection 4.1D) as
may be necessary or, in the opinion of Administrative Agent, desirable to
create in favor of Administrative Agent, for the benefit of Lenders, a valid
and perfected First Priority Lien on all of the personal and mixed property
assets of such Subsidiary described in the applicable forms of Collateral
Documents.
B. SUBSIDIARY CHARTER DOCUMENTS, LEGAL OPINIONS, ETC. Company
shall deliver to Administrative Agent, together with such Loan Documents, (i)
certified copies of such Subsidiary's Certificate or Articles of Incorporation,
together with a good standing certificate from the Secretary of State of the
jurisdiction of its incorporation and each other state in which such Person is
qualified as a foreign corporation to do business and, to the extent generally
available, a certificate or other evidence of good standing as to payment of
any applicable franchise or similar taxes from the appropriate taxing authority
of each of such jurisdictions, each to be dated a recent date prior to their
delivery to Administrative Agent, (ii) a copy of such Subsidiary's Bylaws,
certified by its corporate secretary or an assistant secretary as of a recent
date prior to their delivery to Administrative Agent, (iii) a certificate
executed by the secretary or an assistant secretary of such Subsidiary as to
(a) the fact that the attached resolutions of the Board of Directors of such
Subsidiary approving and authorizing the execution, delivery and performance of
such Loan Documents are in full force and effect and have not been modified or
amended and (b) the incumbency and signatures of the officers of such
Subsidiary executing such Loan Documents, and (iv) a favorable opinion of
counsel to such Subsidiary, in form and
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substance satisfactory to Administrative Agent and its counsel, as to (a) the
due organization and good standing of such Subsidiary, (b) the due
authorization, execution and delivery by such Subsidiary of such Loan
Documents, (c) the enforceability of such Loan Documents against such
Subsidiary, (d) such other matters (including matters relating to the creation
and perfection of Liens in any Collateral pursuant to such Loan Documents) as
Administrative Agent may reasonably request, all of the foregoing to be
satisfactory in form and substance to Administrative Agent and its counsel.
6.8 CONFORMING LEASEHOLD INTERESTS; MATTERS RELATING TO ADDITIONAL REAL
PROPERTY COLLATERAL.
A. MORTGAGES, ETC. From and after the Closing Date, in the event
that (i) Holdings, Company or any Subsidiary Guarantor acquires any Material
Fee Property or any Material Leasehold Property or (ii) at the time any Person
becomes a Subsidiary Guarantor, such Person owns or holds any Material Fee
Property or any Material Leasehold Property, in either case excluding any such
Real Property Asset the encumbrancing of which requires the consent of any
applicable lessor or (in the case of clause (ii) above) then-existing senior
lienholder, where Holdings, Company and its Subsidiaries are unable to obtain
such lessor's or senior lienholder's consent (any such non-excluded Real
Property Asset described in the foregoing clause (i) or (ii) being a "MORTGAGED
PROPERTY"), Holdings, Company or such Subsidiary Guarantor shall deliver to
Administrative Agent, as soon as practicable after receiving a written notice
from Administrative Agent requesting such action and after such Person acquires
such Mortgaged Property or becomes a Subsidiary Guarantor, as the case may be,
the following:
(i) Mortgage. A fully executed and notarized Mortgage,
in proper form for recording in all appropriate places in all
applicable jurisdictions, encumbering the interest of such Loan Party
in such Mortgaged Property;
(ii) Opinions of Counsel. (a) A favorable opinion of
counsel to such Loan Party, in form and substance satisfactory to
Administrative Agent and its counsel, as to the due authorization,
execution and delivery by such Loan Party of such Mortgage and such
other matters as Administrative Agent may reasonably request, and (b)
if required by Administrative Agent, an opinion of counsel (which
counsel shall be reasonably satisfactory to Administrative Agent) in
the state in which such Mortgaged Property is located with respect to
the enforceability of such Mortgage and such other matters (including
any matters governed by the laws of such state regarding personal
property security interests in respect of any Collateral) as
Administrative Agent may reasonably request, in each case in form and
substance reasonably satisfactory to Administrative Agent;
(iii) Landlord Consent and Estoppel; Recorded Leasehold
Interest. In the case of a Mortgaged Property consisting of a
Leasehold Property, (a) a Landlord Consent and Estoppel and (b)
evidence that such Leasehold Property is a Recorded Leasehold
Interest;
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(iv) Title Insurance. (a) If required by Administrative
Agent, an ALTA mortgagee title insurance policy or an unconditional
commitment therefor (a "MORTGAGE POLICY") issued by the Title Company
with respect to such Mortgaged Property, in an amount satisfactory to
Administrative Agent, insuring fee simple title to, or a valid
leasehold interest in, such Mortgaged Property vested in such Loan
Party and assuring Administrative Agent that such Mortgage creates a
valid and enforceable First Priority mortgage Lien on such Mortgaged
Property, subject only to a standard survey exception, which Mortgage
Policy (1) shall include an endorsement for mechanics' liens, for
future advances under this Agreement and for any other matters
reasonably requested by Administrative Agent and (2) shall provide for
affirmative insurance and such reinsurance as Administrative Agent may
reasonably request, all of the foregoing in form and substance
reasonably satisfactory to Administrative Agent; and (b) evidence
satisfactory to Administrative Agent that such Loan Party has (i)
delivered to the Title Company all certificates and affidavits
required by the Title Company in connection with the issuance of the
Mortgage Policy and (ii) paid to the Title Company or to the
appropriate governmental authorities all expenses and premiums of the
Title Company in connection with the issuance of the Mortgage Policy
and all recording and stamp taxes (including mortgage recording and
intangible taxes) payable in connection with recording the Mortgage in
the appropriate real estate records;
(v) Title Report. If no Mortgage Policy is required with
respect to such Mortgaged Property, a title report issued by the Title
Company with respect thereto, dated not more than 30 days prior to the
date such Mortgage is to be recorded and satisfactory in form and
substance to Administrative Agent;
(vi) Copies of Documents Relating to Title Exceptions.
Copies of all recorded documents listed as exceptions to title or
otherwise referred to in the Mortgage Policy or title report delivered
pursuant to clause (v) or (vi) above;
(vii) Matters Relating to Flood Hazard Properties. (a)
Evidence, which may be in the form of a letter from an insurance
broker or a municipal engineer, as to (1) whether such Mortgaged
Property is a Flood Hazard Property and (2) if so, whether the
community in which such Flood Hazard Property is located is
participating in the National Flood Insurance Program, (b) if such
Mortgaged Property is a Flood Hazard Property, such Loan Party's
written acknowledgement of receipt of written notification from
Administrative Agent (1) that such Mortgaged Property is a Flood
Hazard Property and (2) as to whether the community in which such
Flood Hazard Property is located is participating in the National
Flood Insurance Program, and (c) in the event such Mortgaged Property
is a Flood Hazard Property that is located in a community that
participates in the National Flood Insurance Program, evidence that
Company has obtained flood insurance in respect of such Flood Hazard
Property to the extent required under the applicable regulations of
the Board of Governors of the Federal Reserve System; and
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(viii) Environmental Audit. If required by Administrative
Agent, reports and other information, in form, scope and substance
reasonably satisfactory to Administrative Agent and prepared by
environmental consultants satisfactory to Administrative Agent,
concerning any environmental hazards or liabilities to which Company
or any of its Subsidiaries may be subject with respect to such
Mortgaged Property.
B. REAL ESTATE APPRAISALS. Company shall, and shall cause each
of its Subsidiaries to, permit an independent real estate appraiser
satisfactory to Administrative Agent, upon reasonable notice, to visit and
inspect any Mortgaged Property for the purpose of preparing an appraisal of
such Mortgaged Property satisfying the requirements of any applicable laws and
regulations (in each case to the extent required under such laws and
regulations as determined by Administrative Agent in its discretion).
6.9 INTEREST RATE PROTECTION.
At all times after the date which is 90 days after the Closing Date,
Company shall maintain in effect one or more Interest Rate Agreements with
respect to the Loans, in an aggregate notional principal amount of not less
than 50% of the aggregate principal amount of the Loans outstanding from time
to time, each such Interest Rate Agreement to be in form and substance
satisfactory to Administrative Agent and with a term of not less than two
years; provided that Company shall use its best efforts to obtain such
protection for a period of three years.
6.10 LICENSE COMPANY.
All Licenses of Holdings and its Subsidiaries shall be held in one or
more License Subsidiaries. Notwithstanding anything in this Agreement to the
contrary: (i) if a License is required by law or applicable regulations to
held in a specific jurisdiction or in a specific entity conducting business
related to such License, then such License shall not be required to held in a
License Subsidiary; provided that Company has given Administrative Agent
written notice specifying the nature of the License and legal or regulatory
requirements preventing such License from being held in a License Subsidiary
and (ii) Company may at any time acquire all of the outstanding capital stock
of License Co. and upon License Co. becoming a wholly owned Subsidiary of
Company, Company may terminate the License Co. Documents; provided that
Company shall give Administrative Agent written notice of such acquisition and
termination and shall pledge all of the outstanding stock of License Co. to
secure the Obligations hereunder pursuant to the Company Pledge Agreement.
6.11 ASSIGNMENT PROVISIONS.
Holdings and Company shall, and shall cause each of its respective
Subsidiaries to, use its commercially reasonable efforts to include in each of
its exclusive right of entry contracts with property owners a provision which
specifically permits the applicable Subsidiary of Holdings to pledge and assign
such contract to lenders to such Subsidiary to secure indebtedness incurred by
such Subsidiary and specifically states that such pledge and assignment for the
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benefit of the Lenders or to otherwise secure indebtedness of such Subsidiary
is made with the consent of the property owner and does not violate any
anti-assignment provisions in such contract.
SECTION 7.
NEGATIVE COVENANTS
Each of Holdings and Company covenants and agrees that, so long as any
of the Commitments hereunder shall remain in effect and until payment in full
of all of the Loans and other Obligations and the cancellation or expiration of
all Letters of Credit, unless Requisite Lenders shall otherwise give prior
written consent, each of Holdings and Company shall perform, and shall cause
each of its Subsidiaries to perform, all covenants in this Section 7.
7.1 INDEBTEDNESS.
Holdings shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, create, incur, assume or guaranty, or otherwise become
or remain directly or indirectly liable with respect to, any Indebtedness,
except:
(i) Company may become and remain liable with respect to
the Obligations;
(ii) Holdings and its Subsidiaries may become and remain
liable with respect to Contingent Obligations permitted by subsection
7.4 and, upon any matured obligations actually arising pursuant
thereto, the Indebtedness corresponding to the Contingent Obligations
so extinguished;
(iii) Company may become and remain liable with respect to
Indebtedness to any wholly-owned Subsidiaries of Holdings, and any
wholly-owned Subsidiary of Holdings or Permitted Joint Venture may
become and remain liable with respect to Indebtedness to Company or
any other wholly owned Subsidiary of Holdings; provided that (a) all
such intercompany Indebtedness shall be evidenced by Intercompany
Notes, (b) all such intercompany Indebtedness owed by Company to any
of its Subsidiaries shall be subordinated in right of payment to the
payment in full of the Obligations pursuant to the terms of the
applicable Intercompany Notes agreement, and (c) any payment by any
Guarantor Subsidiary under any guaranty of the Obligations shall
result in a pro tanto reduction of the amount of any intercompany
Indebtedness owed by such Subsidiary to Company or to any Subsidiaries
of Holdings for whose benefit such payment is made;
(iv) Holdings and its Subsidiaries, as applicable, may
remain liable with respect to Indebtedness outstanding on the Closing
Date and described in Schedule 7.1 annexed hereto;
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(v) Holdings may remain liable with respect to
Indebtedness evidenced by the Existing Holdings Senior Notes in an
aggregate principal amount not to exceed $225,000,000;
(vi) Holdings may remain liable with respect to
Indebtedness evidenced by the Existing Holdings Con- vertible Notes;
(vii) (a) Company and Subsidiaries of Holdings (other than
Permitted Joint Ventures except as set forth in clause (b)) may become
and remain liable with respect to Purchase Money Indebtedness in an
aggregate principal amount not to exceed $15,000,000 and (b) Limited
Investment Joint Ventures may incur and remain liable for Purchase
Money Indebtedness and the amount of such Indebtedness incurred by
Limited Investment Joint Ventures shall not be included in the
calculation of the maximum amount of Purchase Money Indebtedness
permitted under clause (a) of this subsection 7.1(vii);
(viii) Holdings may become liable with respect to
Indebtedness representing earn-out payments (a) in the ordinary course
of business in an amount not to exceed $10,000,000 at any time or (b)
approved by Requisite Lenders in connection with the approval of an
acquisition pursuant to a Request for Acquisition Approval, in which
case the amount of such earn-outs shall not be included for purposes
of determining compliance with the $10,000,000 limitation set forth in
clause (a) of this subsection 7.1(viii);
(ix) Holdings may become liable with respect to
Indebtedness evidenced by additional notes in an aggregate amount not
to exceed $150,000,000 (plus an additional amount equal to any
proceeds thereof put in escrow to make interest payments on such
notes) during the term of this Agreement; provided that such
Indebtedness shall (a) be unsecured; (b) have terms no less favorable
to Holdings than the Existing Holdings Senior Notes, including,
without limitation, that no interest payments shall be made for the
first three years after issuance except out of escrowed proceeds; and
(c) have no mandatory payments due until November 30, 2005;
(x) Subsidiaries of Holdings (other than any Permitted
Joint Venture) may become liable for any Acquired Indebtedness
acquired in a Permitted Acquisition or consented to by Requisite
Lenders pursuant to a Request for Acquisition Approval;
(xi) Holdings may become and remain liable with respect to
Additional Subordinated Indebtedness in an aggregate principal amount
not to exceed $100,000,000; and
(xii) Holdings may become and remain liable with respect to
other Indebtedness approved by Requisite Lenders.
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7.2 LIENS AND RELATED MATTERS.
A. PROHIBITION ON LIENS. Holdings shall not, and shall not
permit any of its Subsidiaries to, directly or indirectly, create, incur,
assume or permit to exist any Lien on or with respect to any property or asset
of any kind (including any document or instrument in respect of goods or
accounts receivable) of Holdings or any of its Subsidiaries, whether now owned
or hereafter acquired, or any income or profits therefrom, or file or permit
the filing of, or permit to remain in effect, any financing statement or other
similar notice of any Lien with respect to any such property, asset, income or
profits under the Uniform Commercial Code of any State or under any similar
recording or notice statute, except:
(i) Permitted Encumbrances;
(ii) Liens granted pursuant to the Collateral Documents;
(iii) Liens existing on the Closing Date and described in
Schedule 7.2 annexed hereto; and
(iv) Liens securing Indebtedness permitted pursuant to
subsection 7.1(vii) and 7.1(x); provided that such Liens relate solely
to the assets financed with such Indebtedness or acquired assets
acquired in the case of subsection 7.1(x).
B. EQUITABLE LIEN IN FAVOR OF LENDERS. If Holdings or any of its
Subsidiaries shall create or assume any Lien upon any of its properties or
assets, whether now owned or hereafter acquired, other than Liens excepted by
the provisions of subsection 7.2A, it shall make or cause to be made effective
provision whereby the Obligations will be secured by such Lien equally and
ratably with any and all other Indebtedness secured thereby as long as any such
Indebtedness shall be so secured; provided that, notwithstanding the foregoing,
this covenant shall not be construed as a consent by Requisite Lenders to the
creation or assumption of any such Lien not permitted by the provisions of
subsection 7.2A.
C. NO FURTHER NEGATIVE PLEDGES. Except with respect to specific
property encumbered to secure payment of particular Indebtedness or to be sold
pursuant to an executed agreement with respect to an Asset Sale, neither
Holdings nor any of its Subsidiaries shall enter into any agreement prohibiting
the creation or assumption of any Lien upon any of its properties or assets,
whether now owned or hereafter acquired.
D. NO RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS TO HOLDINGS OR
OTHER SUBSIDIARIES. Except as provided herein, Holdings will not, and will not
permit any of its Subsidiaries to, create or otherwise cause or suffer to exist
or become effective any consensual encumbrance or restriction of any kind on
the ability of any such Subsidiary to (i) pay dividends or make any other
distributions on any of such Subsidiary's capital stock owned by Holdings or
any other Subsidiary of Holdings, (ii) repay or prepay any Indebtedness owed by
such Subsidiary to Holdings or any other Subsidiary of Holdings, (iii) make
loans or advances to Holdings or any
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other Subsidiary of Holdings, or (iv) transfer any of its property or assets to
Holdings or any other Subsidiary of Holdings.
7.3 INVESTMENTS; JOINT VENTURES.
Holdings shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, make or own any Investment in any Person, including any
Joint Venture, except:
(i) Holdings and its Subsidiaries may make and own
Investments in Cash Equivalents;
(ii) Holdings and its Subsidiaries may continue to own the
Investments owned by them as of the Closing Date in any Subsidiaries
of Holdings and Investments in newly formed, wholly owned Subsidiaries
provided by the provisions of subsection 6.7 have been complied with;
(iii) Holdings and its Subsidiaries may make intercompany
loans to the extent permitted under subsection 7.1(iv);
(iv) Holdings and its Subsidiaries may make Consolidated
Capital Expenditures permitted by subsection 7.8;
(v) Holdings and its Subsidiaries may make Permitted
Acquisitions;
(vi) Holdings and its Subsidiaries may continue to own the
Investments owned by them as of the Closing Date and described in
Schedule 7.3 annexed hereto;
(vii) Holdings and its Subsidiaries may make and own
Investments consisting of notes received in connection with Assets
Sales limited to 20% of the gross consideration for such assets in any
Asset Sale;
(viii) Holdings and its Subsidiaries may make and own
Investments in Permitted Joint Ventures to the extent the aggregate
amount of such Investments does not exceed $25,000,000; and
(ix) Holdings and its Subsidiaries may make and own other
Investments in an aggregate amount not to exceed at any time
$5,000,000.
7.4 CONTINGENT OBLIGATIONS.
Holdings shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, create or become or remain liable with respect to any
Contingent Obligation, except:
(i) Holdings, the Subsidiary Guarantors and License Co.
may become and remain liable with respect to Contingent Obligations in
respect of the Guaranties;
98
<PAGE> 106
(ii) Company may become and remain liable with respect to
Contingent Obligations in respect of Letters of Credit;
(iii) Company may become and remain liable with respect to
Contingent Obligations under Hedge Agreements required under
subsection 6.9 (or, at Company's option, up to the total amount of the
Loans);
(iv) Holdings and its Subsidiaries may become and remain
liable with respect to Contingent Obligations in respect of customary
indemnification and purchase price adjustment obligations incurred in
connection with Asset Sales or other sales of assets and earn-out
payments permitted pursuant to subsection 7.1(viii);
(v) Holdings and its Subsidiaries, as applicable, may
remain liable with respect to Contingent Obligations existing on the
Closing Date and described in Schedule 7.4 annexed hereto; and
(vi) Holdings and its Subsidiaries (other than Permitted
Joint Ventures) may become and remain liable with respect to other
Contingent Obligations; provided that the maximum aggregate liability,
contingent or otherwise, of Holdings and its Subsidiaries in respect
of all such Contingent Obligations shall at no time exceed $5,000,000.
7.5 RESTRICTED PAYMENTS.
Holdings shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, declare, order, pay, make or set apart any sum for any
Restricted Payment; provided that so long as no Potential Event of Default or
Event of Default shall have occurred and be continuing (i) Company may make
Restricted Payments to Holdings to the extent necessary to permit Holdings to
make cash interest and principal payments to the holders of the Existing
Holdings Senior Notes and any other Indebtedness of Holdings permitted under
subsection 7.1, in accordance with the terms of, and only to the extent
required under the Existing Holdings Senior Note Indenture or the instrument
governing such other permitted Indebtedness, so long as Holdings applies the
amount of any such Restricted Payment for such purpose, (ii) Holdings may make
scheduled payments of principal and interest in respect of the Existing
Holdings Senior Notes and any other Indebtedness of Holdings permitted under
subsection 7.1, in accordance with the terms of, and only to the extent
required by, the Existing Holdings Senior Notes and the Existing Holdings
Senior Note Indenture or the instrument governing such other permitted
Indebtedness, (iii) to the extent Holdings makes any issuance of equity
securities, Holdings may use the net cash proceeds from such equity issuance to
make payments of principal and interest on or to redeem or repurchase
Indebtedness of Holdings and its Subsidiaries other than Subordinated Indebted-
ness; (iv) Holdings may purchase or redeem capital stock (including cash
settlement of stock options) held by employees, officers and directors upon or
following termination of their employment with Holdings or one of its
Subsidiaries; provided that the aggregate amount of Restricted Payments made
pursuant to this clause (iv) shall not exceed $1,000,000 in the aggregate in
any Fiscal Year and (v) Company and other Subsidiaries of
99
<PAGE> 107
Holdings may make Restricted Payments to Holdings to the extent necessary to
permit Holdings to make Restricted Payments permitted by the foregoing clause
(iv).
7.6 FINANCIAL COVENANTS.
A. MINIMUM CONSOLIDATED NET CABLE REVENUE. Holdings shall not
permit Consolidated Net Cable Revenue as of the last day of any Fiscal Quarter
for the four-Fiscal Quarter period then ended during any period set forth below
to be less than the correlative amount indicated:
<TABLE>
<CAPTION>
==========================================
MINIMUM
CONSOLIDATED NET
PERIOD CABLE REVENUE
------------------------------------------
<S> <C>
02/28/98 $ 26,580,000
------------------------------------------
05/31/98 30,830,000
------------------------------------------
08/31/98 36,060,000
------------------------------------------
11/30/98 39,240,000
------------------------------------------
02/28/99 42,790,000
------------------------------------------
05/31/99 46,140,000
------------------------------------------
08/31/99 49,600,000
------------------------------------------
11/30/99 54,400,000
------------------------------------------
02/28/00 59,430,000
------------------------------------------
05/31/00 64,700,000
------------------------------------------
08/31/00 70,210,000
------------------------------------------
11/30/00 73,420,000
------------------------------------------
02/28/01 78,240,000
------------------------------------------
05/31/01 82,660,000
------------------------------------------
08/31/01 86,580,000
------------------------------------------
11/30/01 90,510,000
------------------------------------------
02/28/02 94,590,000
------------------------------------------
05/31/02 98,820,000
------------------------------------------
08/31/02 103,220,000
==========================================
</TABLE>
100
<PAGE> 108
<TABLE>
<CAPTION>
==========================================
MINIMUM
CONSOLIDATED NET
PERIOD CABLE REVENUE
==========================================
<S> <C>
11/30/02 104,450,000
------------------------------------------
02/28/03 108,500,000
------------------------------------------
05/31/03 112,400,000
------------------------------------------
08/31/03 116,130,000
------------------------------------------
11/30/03 119,870,000
------------------------------------------
02/28/04 123,610,000
------------------------------------------
05/30/04 127,340,000
==========================================
</TABLE>
B. MINIMUM FIXED CHARGE COVERAGE RATIO. Holdings shall not
permit the ratio of (i) Consolidated Cash Available for Fixed Changes to (ii)
Consolidated Fixed Charges as of the last day of any Fiscal Quarter to be less
than 1:1.00.
C. MAXIMUM SENIOR BANK DEBT LEVERAGE RATIO.
(i) Prior to the Fiscal Year ending August 31, 2000,
Holdings shall not permit the ratio of (i) the aggregate amount of
Loans outstanding under this Agreement to (ii) Adjusted Cable
Subscribers at any time during any of the periods set forth below to
exceed the correlative ratio indicated:
<TABLE>
<CAPTION>
==========================================
MAXIMUM
SENIOR BANK DEBT
PERIOD LEVERAGE RATIO
==========================================
<S> <C>
02/28/98 $ 965.38
------------------------------------------
05/31/98 894.54
------------------------------------------
08/31/98 836.16
------------------------------------------
11/30/98 808.23
------------------------------------------
02/28/99 808.26
------------------------------------------
05/31/99 800.61
------------------------------------------
08/31/99 803.77
------------------------------------------
11/30/99 751.72
==========================================
</TABLE>
101
<PAGE> 109
<TABLE>
<CAPTION>
==========================================
MAXIMUM
SENIOR BANK DEBT
PERIOD LEVERAGE RATIO
==========================================
<S> <C>
02/28/00 701.99
------------------------------------------
05/31/00 655.53
------------------------------------------
08/31/00 611.79
==========================================
</TABLE>
(ii) From and after the Fiscal Year ending August 31,
2000, Holdings shall not permit the ratio of (i) the aggregate amount
of Loans outstanding under this Agreement to (ii) Consolidated
Adjusted EBITDA for the four Fiscal Quarter period then ended, as of
the last day of any Fiscal Quarter ending during any of the periods
set forth below to exceed the correlative ratio indicated:
<TABLE>
<CAPTION>
==========================================
MAXIMUM
SENIOR BANK DEBT
PERIOD LEVERAGE RATIO
==========================================
<S> <C>
11/30/00 3.15:1
------------------------------------------
02/28/01 2.61:1
------------------------------------------
05/31/01 2.18:1
------------------------------------------
08/31/01 1.84:1
------------------------------------------
11/30/01 1.58:1
------------------------------------------
02/28/02 1.37:1
------------------------------------------
05/31/02 1.18:1
------------------------------------------
08/31/02 1.03:1
------------------------------------------
11/30/02 0.90:1
------------------------------------------
02/28/03 0.90:1
------------------------------------------
05/31/03 0.90:1
------------------------------------------
08/31/03 0.90:1
------------------------------------------
11/30/03 0.90:1
------------------------------------------
02/28/04 0.90:1
------------------------------------------
05/30/04 0.90:1
==========================================
</TABLE>
102
<PAGE> 110
D. MINIMUM CONSOLIDATED ADJUSTED EBITDA. Holdings shall not
permit Consolidated Adjusted EBITDA as of the last day of any Fiscal Quarter
for the four Fiscal Quarter period then ended during any period set forth below
to be less than the correlative amount indicated:
<TABLE>
<CAPTION>
==========================================
MINIMUM
CONSOLIDATED ADJUSTED
PERIOD EBITDA
==========================================
<S> <C>
02/28/98 $ (7,170,000)
------------------------------------------
05/31/98 (3,500,000)
------------------------------------------
08/31/98 660,000
------------------------------------------
11/30/98 4,580,000
------------------------------------------
02/28/99 7,990,000
------------------------------------------
05/31/99 10,920,000
------------------------------------------
08/31/99 13,490,000
------------------------------------------
11/30/99 19,340,000
------------------------------------------
02/28/00 25,460,000
------------------------------------------
05/31/00 32,330,000
------------------------------------------
08/31/00 39,920,000
------------------------------------------
11/30/00 46,390,000
------------------------------------------
02/28/01 54,550,000
------------------------------------------
05/31/01 63,500,000
------------------------------------------
08/31/01 73,320,000
------------------------------------------
11/30/01 81,690,000
------------------------------------------
02/28/02 90,560,000
------------------------------------------
05/31/02 99,900,000
------------------------------------------
08/31/02 109,620,000
------------------------------------------
11/30/02 117,250,000
------------------------------------------
02/28/03 126,830,000
==========================================
</TABLE>
103
<PAGE> 111
<TABLE>
<CAPTION>
==========================================
MINIMUM
CONSOLIDATED ADJUSTED
PERIOD EBITDA
==========================================
<S> <C>
05/31/03 136,970,000
------------------------------------------
08/31/03 147,710,000
------------------------------------------
11/30/03 156,930,000
------------------------------------------
02/28/04 166,910,000
------------------------------------------
05/30/04 177,260,000
==========================================
</TABLE>
E. MINIMUM RETAIL CABLE SUBSCRIBER PENETRATION. Holdings shall
not permit Retail Cable Subscribers Penetration as of the last day of any
Fiscal Quarter ended during any of the periods set forth below to be less than
the correlative amount indicated:
<TABLE>
<CAPTION>
==========================================
MINIMUM
RETAIL CABLE
PERIOD SUBSCRIBER PENETRATION
==========================================
<S> <C>
02/28/98 42.0%
------------------------------------------
05/31/98 42.0%
------------------------------------------
08/31/98 42.0%
------------------------------------------
11/30/98 42.5%
------------------------------------------
02/28/99 43.0%
------------------------------------------
05/31/99 43.5%
------------------------------------------
08/31/99 44.0%
------------------------------------------
11/30/99 44.8%
------------------------------------------
02/28/00 45.5%
------------------------------------------
05/31/00 46.3%
------------------------------------------
08/31/00 47.0%
------------------------------------------
11/30/00 47.5%
------------------------------------------
02/28/01 48.0%
------------------------------------------
05/31/01 48.5%
==========================================
</TABLE>
104
<PAGE> 112
<TABLE>
<CAPTION>
==========================================
MINIMUM
RETAIL CABLE
PERIOD SUBSCRIBER PENETRATION
==========================================
<S> <C>
08/31/01 49.0%
------------------------------------------
11/30/01 49.5%
------------------------------------------
02/28/02 50.0%
------------------------------------------
05/31/02 50.5%
------------------------------------------
08/31/02 51.0%
------------------------------------------
11/30/02 51.0%
------------------------------------------
02/28/03 51.0%
------------------------------------------
05/31/03 51.0%
------------------------------------------
08/31/03 51.0%
------------------------------------------
11/30/03 51.0%
------------------------------------------
02/28/04 51.0%
------------------------------------------
05/30/04 51.0%
==========================================
</TABLE>
F. MINIMUM CONSOLIDATED NET TELEPHONY REVENUE. Holdings shall
not permit Consolidated Net Telephony Revenue as of the last day of any Fiscal
Quarter for the four-Fiscal Quarter period then ended during any of the periods
set forth below to be less than the correlative amount indicated:
<TABLE>
<CAPTION>
==========================================
MINIMUM
CONSOLIDATED NET
PERIOD TELEPHONY REVENUE
==========================================
<S> <C>
02/28/98 $ (800,000)
------------------------------------------
05/31/98 (40,000)
------------------------------------------
08/31/98 680,000
------------------------------------------
11/30/98 2,730,000
------------------------------------------
02/28/99 5,010,000
------------------------------------------
05/31/99 8,450,000
------------------------------------------
08/31/99 13,070,000
==========================================
</TABLE>
105
<PAGE> 113
<TABLE>
<CAPTION>
==========================================
MINIMUM
CONSOLIDATED NET
PERIOD TELEPHONY REVENUE
==========================================
<S> <C>
11/30/99 19,020,000
------------------------------------------
02/28/00 25,320,000
------------------------------------------
05/31/00 31,720,000
------------------------------------------
08/31/00 37,730,000
------------------------------------------
11/30/00 44,650,000
------------------------------------------
02/28/01 52,470,000
------------------------------------------
05/31/01 61,310,000
------------------------------------------
08/31/01 71,270,000
------------------------------------------
11/30/01 80,670,000
------------------------------------------
02/28/02 89,960,000
------------------------------------------
05/31/02 98,990,000
------------------------------------------
08/31/02 107,670,000
------------------------------------------
11/30/02 116,510,000
------------------------------------------
02/28/03 125,720,000
------------------------------------------
05/31/03 135,300,000
------------------------------------------
08/31/03 145,180,000
------------------------------------------
11/30/03 154,960,000
------------------------------------------
02/28/04 164,750,000
------------------------------------------
05/30/04 174,510,000
==========================================
</TABLE>
G. MINIMUM AVERAGE LIFE OF REMAINING CONTRACTS. Holdings shall
not permit the Average Life of Remaining Contracts to be less than the
Remaining Time to Maturity of the Loans, as of the last day of any Fiscal
Quarter.
7.7 RESTRICTION ON FUNDAMENTAL CHANGES; ASSET SALES AND ACQUISITIONS.
Holdings shall not, and shall not permit any of its Subsidiaries to,
alter the corporate, capital or legal structure of Holdings or any of its
Subsidiaries, or enter into any transaction of merger or consolidation, or
liquidate, wind-up or dissolve itself (or suffer any liquidation or
106
<PAGE> 114
dissolution), or convey, sell, lease or sub-lease (as lessor or sublessor),
transfer or otherwise dispose of, in one transaction or a series of
transactions, all or any part of its business, property or assets, whether now
owned or hereafter acquired, or acquire by purchase or otherwise all or
substantially all the business, property or fixed assets of, or stock or other
evidence of beneficial ownership of, any Person or any division or line of
business of any Person, except:
(i) any Subsidiary of Holdings may be merged with or into
Company or any wholly-owned Subsidiary Guarantor, or be liquidated,
wound up or dissolved, or all or any part of its business, property or
assets may be conveyed, sold, leased, transferred or otherwise
disposed of, in one transaction or a series of transactions, to
Company or any wholly-owned Subsidiary Guarantor; provided that, in
the case of such a merger, Company or such wholly-owned Subsidiary
Guarantor shall be the continuing or surviving corporation;
(ii) Holdings and its Subsidiaries may make Consolidated
Capital Expenditures permitted under subsection 7.8;
(iii) Holdings and its Subsidiaries may dispose of
obsolete, worn out or surplus property in the ordinary course of
business;
(iv) Holdings and its Subsidiaries may sell or otherwise
dispose of assets in transactions that do not constitute Asset Sales;
provided that the consideration received for such assets shall be in
an amount at least equal to the fair market value thereof;
(v) subject to subsection 7.13, Holdings and its
Subsidiaries may make Asset Sales (including Swaps) of assets having a
fair market value not in excess of an aggregate of (a) $25,000,000
during the eighteenth-month period following the Closing Date and
(b) $35,000,000 (including the $25,000,000 permitted pursuant to
clause (a)) during the term of this Agreement; provided that (1) the
consideration received for such assets shall be in an amount at least
equal to the fair market value thereof; (2) in the case of any Asset
Sale other than a Swap, the gross consideration received shall be at
least 80% Cash and the balance as promissory notes payable to a Loan
Party; and (3) the Cash proceeds of such Asset Sales shall be applied
as required by subsection 2.4B(iii)(a);
(vi) Holdings and its Subsidiaries may make acquisitions
(each a "PERMITTED ACQUISITION"); provided that (a) the Person or
business so acquired shall be in the line of business described in
subsection 7.13; (b) Company shall deliver to Administrative Agent a
Compliance Certificate demonstrating that, after giving effect to the
acquisition, Holdings and its Subsidiaries, taken as a whole, shall be
in pro forma compliance with the covenants in Section 7; (c) such
acquired Person shall become a Guarantor under and shall comply with
the provisions of subsection 6.7; and (d) the aggregate consideration
for such acquisitions (including any Acquired Indebtedness acquired or
assumed in connection with such acquisition) shall not exceed
$10,000,000 for any single acquisition and $25,000,000 for all such
acquisitions, without the consent of Requisite Lenders; provided
further that the amount of the consideration paid for any acquisition
consented
107
<PAGE> 115
to by Requisite Lenders (either before or after the date of
consummation of such acquisition) in accordance with this clause (d)
shall not be included in any determination as to the maximum amount of
expenditures permitted by this clause (d); and
(vii) Holdings may issue (a) Holdings Common Stock in one
or more classes and (b) Permitted Preferred Stock.
To the extent Company receives proceeds from an equity offering and desires to
apply such proceeds to make an acquisition or to make capital expenditures not
otherwise permitted by this Agreement, upon request of Company that Requisite
Lenders consent to such use of such proceeds, Lenders will give reasonable
consideration to such request, taking into account all relevant factors at the
time of such request.
7.8 CONSOLIDATED CAPITAL EXPENDITURES.
Holdings shall not, and shall not permit its Subsidiaries to, make or
incur Consolidated Capital Expenditures, in any Fiscal Year indicated below, in
an aggregate amount in excess of the corresponding amount (the "MAXIMUM
CONSOLIDATED CAPITAL EXPENDITURES AMOUNT") set forth below opposite such Fiscal
Year; provided that the Maximum Consolidated Capital Expenditures Amount for
any Fiscal Year shall be increased by an amount equal to 25% of the excess, if
any, of the Maximum Consolidated Capital Expenditures Amount for the previous
Fiscal Year over the actual amount of Consolidated Capital Expenditures for
such previous Fiscal Year:
<TABLE>
<CAPTION>
============================================
FISCAL YEAR MAXIMUM CONSOLIDATED
ENDING CAPITAL EXPENDITURES
============================================
<S> <C>
08/31/98 $113,600,000
--------------------------------------------
08/31/99 121,100,000
--------------------------------------------
08/31/00 144,600,000
--------------------------------------------
08/31/01 132,000,000
--------------------------------------------
08/31/02 103,100,000
--------------------------------------------
08/31/03 83,100,000
--------------------------------------------
08/31/04 52,000,000
============================================
</TABLE>
7.9 RESTRICTION ON LEASES.
Holdings shall not, and shall not permit any of its Subsidiaries to,
become liable in any way, whether directly or by assignment or as a guarantor
or other surety, for the obligations of the lessee under any Operating Lease
(other than intercompany leases between wholly owned Subsidiaries of Holdings),
unless, immediately after giving effect to the incurrence of liability
108
<PAGE> 116
with respect to such lease, the Consolidated Rental Payments in effect during
the then current Fiscal Year shall not exceed $10,000,000.
7.10 SALE OR DISCOUNT OF RECEIVABLES.
Holdings shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, sell with recourse, or discount or otherwise sell for
less than the face value thereof, any of its notes or accounts receivable.
7.11 TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES.
Holdings shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, enter into or permit to exist any transaction
(including the purchase, sale, lease or exchange of any property or the
rendering of any service) with any holder of 5% or more of any class of equity
Securities of Holdings or with any Affiliate of Holdings or of any such holder,
on terms that are less favorable to Holdings or that Subsidiary, as the case
may be, than those that might be obtained at the time from Persons who are not
such a holder or Affiliate; provided that the foregoing restriction shall not
apply to (i) any transaction between Holdings and any of its wholly-owned
Subsidiaries or between any of its wholly-owned Subsidiaries or (ii) reasonable
and customary fees paid to members of the Boards of Directors of Holdings and
its Subsidiaries.
7.12 DISPOSAL OF SUBSIDIARY STOCK.
Holdings shall not:
(i) directly or indirectly sell, assign, pledge or
otherwise encumber or dispose of any shares of capital stock or other
equity Securities of any of its Subsidiaries, except issuances of
capital stock to qualify directors if required by applicable law; or
(ii) permit any of its Subsidiaries directly or indirectly
to sell, assign, pledge or otherwise encumber or dispose of any shares
of capital stock or other equity Securities of any of its Subsidiaries
(including such Subsidiary), except to Holdings, another Subsidiary of
Holdings, or issuances of capital stock to qualify directors if
required by applicable law.
7.13 CONDUCT OF BUSINESS.
(i) From and after the Closing Date, Subsidiaries of
Holdings shall not engage in any business other than providing cable
television services and telecommunications services and related
products and services to residents of multiple dwelling unit
developments in the United States and similar or related businesses
and such other lines of business as may be consented to by Requisite
Lenders.
(ii) Holdings shall engage in no business and have no
assets or liabilities other than (a) owning the stock of its
Subsidiaries, (b) the performance of its obligations under
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<PAGE> 117
the Loan Documents, (c) liabilities associated with the maintenance of
its corporate existence and with respect to consolidated tax
liabilities of Holdings and its Subsidiaries, (d) receipt of Cash
Dividends or Cash distributions from Company in accordance with the
provisions of Subsection 7.5, (e) activities related to the
maintenance and performance of its obligations under the Existing
Holdings Senior Notes and Existing Holdings Senior Note Indenture and
the Existing Holdings Convertible Notes and under any agreements
governing Additional Subordinated Indebtedness or other indebtedness
permitted to be incurred by Holdings under this Agreement.
7.14 AMENDMENTS OR WAIVERS OF RELATED AGREEMENTS.
Neither Holdings nor any of its Subsidiaries will agree to any
amendment to, or request any waiver of (other than a waiver for which no fee is
paid and no other concessions or considerations are granted by Holdings or
Company), or waive any of their respective rights under, any of the Related
Agreements (other than any amendment or waiver described in the next succeeding
sentence) without in each case obtaining the prior written consent of
Administrative Agent and Requisite Lenders to such amendment, request or waiver
and giving notice to Arranging Agent. Notwithstanding the foregoing, (i)
Holdings may agree to amend or waive any provisions of the Existing Holdings
Senior Note Indenture (a) to cure any ambiguity, to correct or supplement any
provision therein which may be defective or inconsistent with any other
provision therein, or (b) to comply with the Trust Indenture Act of 1939, as
amended, or (c) to make modifications of a technical or clarifying nature or
which are no less favorable to the Lenders, in the reasonable opinion of
Administrative Agent and Requisite Lenders, than the provisions of the Existing
Holdings Senior Note Indenture as in effect on the Closing Date (for the
purposes of this subsection 7.14, any amendment, modification or change which
would extend the maturity or reduce the amount of any payment of principal on
the Existing Holdings Senior Notes or which would reduce the rate or extend the
date for payment of interest thereon, provided that no fee is payable in
connection therewith, shall be deemed to be an amendment, modification or
change that is no less favorable to the Lenders) and (ii) the License Co.
Documents may be terminated as set forth in subsection 6.10.
7.15 FISCAL YEAR
Holdings shall not change its Fiscal Year-end from August 31 without
the prior written consent of Requisite Lenders which shall not be unreasonably
withheld or delayed.
7.16 AXEL EXCESS PROCEEDS ACCOUNT
A. Company shall deposit any proceeds from AXELs made on the
Closing Date which are not to be immediately used to pay current expenses, make
Capital Expenditures or otherwise applied in the business of Holdings and its
Subsidiaries into the AXEL Excess Proceeds Account and shall maintain such
funds in the AXEL Excess Proceeds Account pending application of such funds in
the business of Holdings and its Subsidiaries; provided that at any time the
Cash Balances of Holdings and its Subsidiaries are less that $20,000,000,
Company may, subject to compliance with this subsection 7.16, withdraw funds
from the AXEL Excess
110
<PAGE> 118
Proceeds Account in an amount equal to the amount by which $20,000,000 exceeds
the then current Cash Balances of Holdings and its Subsidiaries. Except as
provided in subsection 7.16B below following a Blockage Expiration or a
Blockage Waiver, Company shall not withdraw any funds on deposit in the AXEL
Excess Proceeds Account (including funds withdrawn to replenish Cash Balances)
unless and until Company has delivered to Administrative Agent an Officers'
Certificate stating that, to the best knowledge of Company, no Event of Default
has occurred or is continuing (it being understood that for purposes of
determining compliance with the financial covenants set forth in subsection
7.6, compliance shall be determined on the basis of the most recent Compliance
Certificate delivered pursuant to subsection 6.1(iv)).
B. If an Event of Default shall have occurred and be continuing,
then for the period commencing on the date of receipt by Administrative Agent
of notice of such Event of Default from Company pursuant to subsection 6.1(ix)
or upon delivery by Administrative Agent of notice of such Event of Default to
Company and continuing for a period of 45 days thereafter (the "BLOCKAGE
PERIOD"), Company shall not be entitled to withdraw funds from the AXEL Excess
Proceeds Account (such prohibition on the ability of Company to withdraw funds
from the AXEL Excess Proceeds Account being a "BLOCKAGE"). Requisite Lenders
may agree in writing to waive a Blockage (a "BLOCKAGE WAIVER"); provided that
any such Blockage Waiver shall not be deemed to be a waiver of any existing
Event of Default unless such Blockage Waiver expressly so states. A Blockage
Waiver shall become effective upon receipt by Administrative Agent of written
notice of such Blockage Waiver. If Requisite Lenders do not agree to a
Blockage Waiver and the Blockage Period expires (a "BLOCKAGE EXPIRATION"),
Company shall be entitled to withdraw funds from the AXEL Excess Proceeds
Account. Notwithstanding anything herein to the contrary, the AXEL Excess
Proceeds Account shall not be subject to a Blockage for more than an aggregate
of 45 days (it being understood that only days during which the account is
actually blocked shall be counted) in any consecutive 120-day period. In no
event shall Company be entitled to withdraw funds from the AXEL Excess Proceeds
Account following an acceleration of the Obligations pursuant to Section 8
unless and until such acceleration shall have been rescinded. Company may at
any time upon written notice to Administrative Agent direct that funds on
deposit in the AXEL Excess Proceeds Account be applied to repay outstanding
AXELs in accordance with this Agreement.
SECTION 8.
EVENTS OF DEFAULT
If any of the following conditions or events ("EVENTS OF DEFAULT")
shall occur:
8.1 FAILURE TO MAKE PAYMENTS WHEN DUE.
Failure by Company to pay any installment of principal of any Loan
when due, whether at stated maturity, by acceleration, by notice of voluntary
prepayment, by mandatory prepayment or otherwise; failure by Company to pay
when due any amount payable to Issuing Lender in reimbursement of any drawing
under a Letter of Credit; or failure by Company to pay any
111
<PAGE> 119
interest on any Loan or any fee or any other amount due under this Agreement
within five days after the date due; or
8.2 DEFAULT IN OTHER AGREEMENTS.
(i) Failure of Holdings or any of its Subsidiaries to pay when due any
principal of or interest on or any other amount payable in respect of one or
more items of Indebtedness (other than Indebtedness referred to in subsection
8.1) or Contingent Obligations in an individual principal amount of $2,500,000
or more or with an aggregate principal amount of $5,000,000 or more, in each
case beyond the end of any grace period provided therefor; or (ii) breach or
default by Holdings or any of its Subsidiaries with respect to any other
material term of (a) one or more items of Indebtedness or Contingent
Obligations in the individual or aggregate principal amounts referred to in
clause (i) above or (b) any loan agreement, mortgage, indenture or other
agreement relating to such item(s) of Indebtedness or Contingent Obligation(s),
if the effect of such breach or default is to cause, or to permit the holder or
holders of that Indebtedness or Contin- gent Obligation(s) (or a trustee on
behalf of such holder or holders) to cause, that Indebtedness or Contingent
Obligation(s) to become or be declared due and payable prior to its stated
maturity or the stated maturity of any underlying obligation, as the case may
be (upon the giving or receiving of notice, lapse of time, both, or otherwise);
or
8.3 BREACH OF CERTAIN COVENANTS.
Failure of Holdings or Company to perform or comply with any term or
condition contained in subsection 2.5 or 6.2 or Section 7 of this Agreement; or
8.4 BREACH OF WARRANTY.
Any representation, warranty, certification or other statement made by
any Loan Party in any Loan Document or in any statement or certificate at any
time given by any Loan Party in writing pursuant hereto or thereto or in
connection herewith or therewith shall be false in any material respect on the
date as of which made; or
8.5 OTHER DEFAULTS UNDER LOAN DOCUMENTS.
Any Loan Party shall default in the performance of or compliance with
any term contained in this Agreement or any of the other Loan Documents, other
than any such term referred to in any other subsection of this Section 8, and
such default shall not have been remedied or waived within 30 days after the
earlier of (i) an officer of Holdings or Company or such Loan Party becoming
aware of such default or (ii) receipt by Company and such Loan Party of notice
from Administrative Agent or any Lender of such default; or
8.6 INVOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.
(i) A court having jurisdiction in the premises shall enter a decree
or order for relief in respect of any Loan Party in an involuntary case under
the Bankruptcy Code or under any other
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applicable bankruptcy, insolvency or similar law now or hereafter in effect,
which decree or order is not stayed; or any other similar relief shall be
granted under any applicable federal or state law; or (ii) an involuntary case
shall be commenced against any Loan Party under the Bankruptcy Code or under
any other applicable bankruptcy, insolvency or similar law now or hereafter in
effect; or a decree or order of a court having jurisdiction in the premises for
the appointment of a receiver, liquidator, sequestrator, trustee, custodian or
other officer having similar powers over any Loan Party, or over all or a
substantial part of its property, shall have been entered; or there shall have
occurred the involuntary appointment of an interim receiver, trustee or other
custodian of any Loan Party for all or a substantial part of its property; or a
warrant of attachment, execution or similar process shall have been issued
against any substantial part of the property of any Loan Party, and any such
event described in this clause (ii) shall continue for 60 days unless
dismissed, bonded or discharged; or
8.7 VOLUNTARY BANKRUPTCY; APPOINTMENT OF RECEIVER, ETC.
(i) Any Loan Party shall have an order for relief entered with respect
to it or commence a voluntary case under the Bankruptcy Code or under any other
applicable bankruptcy, insolvency or similar law now or hereafter in effect, or
shall consent to the entry of an order for relief in an involuntary case, or to
the conversion of an involuntary case to a voluntary case, under any such law,
or shall consent to the appointment of or taking possession by a receiver,
trustee or other custodian for all or a substantial part of its property; or
any Loan Party shall make any assignment for the benefit of creditors; or (ii)
any Loan Party shall be unable, or shall fail generally, or shall admit in
writing its inability, to pay its debts as such debts become due; or the Board
of Directors of any Loan Party (or any committee thereof) shall adopt any
resolution or otherwise authorize any action to approve any of the actions
referred to in clause (i) above or this clause (ii); or
8.8 JUDGMENTS AND ATTACHMENTS.
Any money judgment, writ or warrant of attachment or similar process
involving (i) in any individual case an amount in excess of $2,500,000 or (ii)
in the aggregate at any time an amount in excess of $5,000,000 (in either case
not adequately covered by insurance as to which a solvent and unaffiliated
insurance company has acknowledged coverage) shall be entered or filed against
any Loan Party or any of their respective assets and shall remain undischarged,
unvacated, unbonded or unstayed for a period of 60 days (or in any event later
than five days prior to the date of any proposed sale thereunder); or
8.9 DISSOLUTION.
Any order, judgment or decree shall be entered against any Loan Party
decreeing the dissolution or split up of any Loan Party and such order shall
remain undischarged or unstayed for a period in excess of 60 days; or
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8.10 EMPLOYEE BENEFIT PLANS.
There shall occur one or more ERISA Events which individually or in
the aggregate results in or might reasonably be expected to result in liability
of Holdings, any of its Subsidiaries or any of their respective ERISA
Affiliates in excess of $5,000,000 during the term of this Agreement; or there
shall exist an amount of unfunded benefit liabilities (as defined in Section
4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans
(excluding for purposes of such computation any Pension Plans with respect to
which assets exceed benefit liabilities), which exceeds $5,000,000; or
8.11 CHANGE IN CONTROL.
(i) Holdings shall cease to own 100% of the outstanding capital stock
of Company; or (ii) a "Change of Control" under the Existing Holdings Senior
Note Indenture shall occur; or (iii) Videotron shall cease to directly or
indirectly beneficially own and control at least 51% of the issued and
outstanding shares of capital stock of Holdings entitled (without regard to the
occurrence of any contingency) to vote for the election of members of the Board
of Directors of Holdings or (iv) (a) or any wholly owned Subsidiary of
Videotron shall sell or pledge (1) any of the shares of the issued and
outstanding shares of capital stock of Holdings held by it to a Person other
than Videotron or a wholly owned Subsidiary of Videotron or (2) any of the
Existing Holdings Convertible Notes held by it to a Person other than Videotron
or a wholly owned Subsidiary of Videotron, or (b) CDPQ or any of its
Subsidiaries shall pledge any of its shares of the issued and outstanding
shares of capital stock of Holdings, in the case of each of clauses (a) and
(b), unless such sales or pledges shall have been approved by Requisite
Lenders; provided that notwithstanding the foregoing it shall not be an Event
of Default if Holdings Common Stock and Existing Holdings Convertible Notes
constitute all or substantially all of the assets of a wholly owned Subsidiary
of Videotron and such wholly owned Subsidiary ceases to be wholly owned by
Videotron as a result of the issuance of equity securities by it to another
Person, the proceeds of which issuance are contributed to Holdings pursuant to
documentation in form and substance satisfactory to Administrative Agent (such
Subsidiary after ceasing to be a wholly owned Subsidiary of Videotron being a
"CONDUIT FINANCING SUBSIDIARY"); or (v) Videotron shall sell or pledge any of
its equity interests in any Conduit Financing Subsidiary; or
8.12 INVALIDITY OF GUARANTIES; FAILURE OF SECURITY; REPUDIATION OF
OBLIGATIONS.
At any time after the execution and delivery thereof, (i) any Guaranty
for any reason, other than the satisfaction in full of all Obligations, shall
cease to be in full force and effect (other than in accordance with its terms)
or shall be declared to be null and void, (ii) any Collateral Document shall
cease to be in full force and effect (other than by reason of a release of
Collateral thereunder in accordance with the terms hereof or thereof, the
satisfaction in full of the Obligations or any other termination of such
Collateral Document in accordance with the terms hereof or thereof) or shall be
declared null and void, or Administrative Agent shall not have or shall cease
to have a valid and perfected First Priority Lien in any Collateral purported
to be covered thereby (other than Collateral having a fair market value,
individually or in the
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aggregate, not in excess of $2,000,000), in each case for any reason other than
the failure of Administrative Agent or any Lender to take any action within its
control, or (iii) any Loan Party shall contest the validity or enforceability
of any Loan Document in writing or deny in writing that it has any further
liability, including with respect to future advances by Lenders, under any Loan
Document to which it is a party; or
8.13 SUBORDINATED INDEBTEDNESS.
Holdings shall fail to comply with any provisions contained in any
Subordinated Indebtedness subordinating such Indebtedness to the Obligations of
the Loan Parties under the Loan Documents; or
8.14 LICENSES.
Any material License shall be cancelled, terminated, rescinded,
revoked, suspended, impaired, otherwise finally denied renewal, or otherwise
modified in any material adverse respect, or shall be renewed on terms that
materially and adversely affect the economic or commercial value or usefulness
thereof; or any material License shall cease to be in full force and effect; or
the grant of any material License shall have been stayed, vacated or reversed,
or modified in any material adverse respect by judicial or administrative
proceedings; or any administrative law judge or other representative of the FCC
or State PUC shall have issued an initial decision in any non-comparative
license renewal, license revocation or any comparative (multiple applicant)
proceeding to the effect that any material License should be revoked or not be
renewed; or any other proceeding shall have been instituted by or shall have
been commenced before any court, the FCC or any State PUC that could reasonably
be expected to result in (i) cancellation, termination, rescission, revocation,
material impairment, suspension or denial of renewal of a material License, or
(ii) a modification of a material License in a material adverse respect or a
renewal thereof on terms that materially and adversely affect the economic or
commercial value or usefulness thereof; or any material Interconnection
Agreement shall be terminated, reformed, suspended or otherwise impaired in any
material adverse respect, or shall be renegotiated and renewed or replaced on
terms that materially and adversely affect the economic or commercial value or
usefulness thereof, whether by action of the parties thereto or by action of or
under, modification to, or rescinding of the Communications Act, State Law or
any Regulations, in whole or in part, in each case which would have a Material
Adverse Effect.
THEN (i) upon the occurrence of any Event of Default described in subsection
8.6 or 8.7, each of (a) the unpaid principal amount of and accrued interest on
the Loans, (b) an amount equal to the maximum amount that may at any time be
drawn under all Letters of Credit then outstanding (whether or not any
beneficiary under any such Letter of Credit shall have presented, or shall be
entitled at such time to present, the drafts or other documents or certificates
required to draw under such Letter of Credit), and (c) all other Obligations
shall automatically become immediately due and payable, without presentment,
demand, protest or other requirements of any kind, all of which are hereby
expressly waived by Company, and the obligation of each Lender to make any
Loan, the obligation of Issuing Lender to issue any Letter of Credit, and (ii)
upon the occurrence and during the continuation of any other Event of Default,
Administra-
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tive Agent shall, upon the written request or with the written consent of
Requisite Lenders, by written notice to Company, declare all or any portion of
the amounts described in clauses (a) through (c) above to be, and the same
shall forthwith become, immediately due and payable, and the obligation of each
Lender to make any Loan, the obligation of Issuing Lender to issue any Letter
of Credit hereunder shall thereupon terminate; provided that the foregoing
shall not affect in any way the obligations of Lenders under subsection
3.3C(i).
Any amounts described in clause (b) above, when received by
Administrative Agent, shall be held by Administrative Agent pursuant to the
terms of the Collateral Account Agreement and shall be applied as therein
provided.
Notwithstanding anything contained in the second preceding paragraph,
if at any time within 60 days after an acceleration of the Loans pursuant to
clause (ii) of such paragraph Company shall pay all arrears of interest and all
payments on account of principal which shall have become due otherwise than as
a result of such acceleration (with interest on principal and, to the extent
permitted by law, on overdue interest, at the rates specified in this
Agreement) and all Events of Default and Potential Events of Default (other
than non-payment of the principal of and accrued interest on the Loans, in each
case which is due and payable solely by virtue of acceleration) shall be
remedied or waived pursuant to subsection 10.6, then Requisite Lenders, by
written notice to Company, may at their option rescind and annul such
acceleration and its consequences; but such action shall not affect any
subsequent Event of Default or Potential Event of Default or impair any right
consequent thereon. The provisions of this paragraph are intended merely to
bind Lenders to a decision which may be made at the election of Requisite
Lenders and are not intended, directly or indirectly, to benefit Company, and
such provisions shall not at any time be construed so as to grant Company the
right to require Lenders to rescind or annul any acceleration hereunder or to
preclude Administrative Agent or Lenders from exercising any of the rights or
remedies available to them under any of the Loan Documents, even if the
conditions set forth in this paragraph are met.
SECTION 9.
AGENTS
9.1 APPOINTMENT.
A. APPOINTMENT OF AGENTS. GSCP is hereby appointed Arranger and
Syndication Agent hereunder, and each Lender hereby authorizes Arranger and
Syndication Agent to act as its agent in accordance with the terms of this
Agreement and the other Loan Documents. Each of CIBC and General Electric
Capital Corporation is hereby appointed Administrative Agent and Documentation
Agent, respectively, hereunder and under the other Loan Documents and each
Lender hereby authorizes Administrative Agent and Documentation Agent to act as
its agent in accordance with the terms of this Agreement and the other Loan
Documents. Each Agent hereby agrees to act upon the express conditions
contained in this Agreement and the other Loan Documents, as applicable. The
provisions of this Section 9 are solely for the benefit of Agents and Lenders
and Company shall have no rights as a third party beneficiary of any of the
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provisions thereof. In performing its functions and duties under this
Agreement, each Agent shall act solely as an agent of Lenders and does not
assume and shall not be deemed to have assumed any obligation towards or
relationship of agency or trust with or for Company or any of its Subsidiaries.
Each of Arranger and Syndication Agent, without consent of or notice to any
party hereto, may assign any and all of its rights or obligations hereunder to
any of its Affiliates. As of the Closing Date, all obligations of Arranger and
Syndication Agent hereunder shall terminate.
B. APPOINTMENT OF SUPPLEMENTAL COLLATERAL AGENTS. It is the
purpose of this Agreement and the other Loan Documents that there shall be no
violation of any law of any jurisdiction denying or restricting the right of
banking corporations or associations to transact business as agent or trustee
in such jurisdiction. It is recognized that in case of litigation under this
Agreement or any of the other Loan Documents, and in particular in case of the
enforcement of any of the Loan Documents, or in case Administrative Agent deems
that by reason of any present or future law of any jurisdiction it may not
exercise any of the rights, powers or remedies granted herein or in any of the
other Loan Documents or take any other action which may be desirable or
necessary in connection therewith, it may be necessary that Administrative
Agent appoint an additional individual or institution as a separate trustee,
co-trustee, collateral agent or collateral co-agent (any such additional
individual or institution being referred to herein individually as a
"SUPPLEMENTAL COLLATERAL AGENT" and collectively as "SUPPLEMENTAL COLLATERAL
AGENTS").
In the event that Administrative Agent appoints a Supplemental
Collateral Agent with respect to any Collateral, (i) each and every right,
power, privilege or duty expressed or intended by this Agreement or any of the
other Loan Documents to be exercised by or vested in or conveyed to
Administrative Agent with respect to such Collateral shall be exercisable by
and vest in such Supplemental Collateral Agent to the extent, and only to the
extent, necessary to enable such Supplemental Collateral Agent to exercise such
rights, powers and privileges with respect to such Collateral and to perform
such duties with respect to such Collateral, and every covenant and obligation
contained in the Loan Documents and necessary to the exercise or performance
thereof by such Supplemental Collateral Agent shall run to and be enforceable
by either Agent or such Supplemental Collateral Agent, and (ii) the provisions
of this Section 9 and of subsections 10.2 and 10.3 that refer to Administrative
Agent shall inure to the benefit of such Supplemental Collateral Agent and all
references therein to Administrative Agent shall be deemed to be references to
Administrative Agent and/or such Supplemental Collateral Agent, as the context
may require.
Should any instrument in writing from Company or any other Loan Party
be required by any Supplemental Collateral Agent so appointed by Administrative
Agent for more fully and certainly vesting in and confirming to him or it such
rights, powers, privileges and duties, Company shall, or shall cause such Loan
Party to, execute, acknowledge and deliver any and all such instruments
promptly upon request by Administrative Agent. In case any Supplemental
Collateral Agent, or a successor thereto, shall die, become incapable of
acting, resign or be removed, all the rights, powers, privileges and duties of
such Supplemental Collateral Agent,
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to the extent permitted by law, shall vest in and be exercised by
Administrative Agent until the appointment of a new Supplemental Collateral
Agent.
9.2 POWERS AND DUTIES; GENERAL IMMUNITY.
A. POWERS; DUTIES SPECIFIED. Each Lender irrevocably authorizes
each Agent to take such action on such Lender's behalf and to exercise such
powers, rights and remedies hereunder and under the other Loan Documents as are
specifically delegated or granted to such Agent by the terms hereof and
thereof, together with such powers, rights and remedies as are reasonably
incidental thereto. Each Agent shall have only those duties and
responsibilities that are expressly specified in this Agreement and the other
Loan Documents. Each Agent may exercise such powers, rights and remedies and
perform such duties by or through its agents or employees. No Agent shall
have, by reason of this Agreement or any of the other Loan Documents, a
fiduciary relationship in respect of any Lender; and nothing in this Agreement
or any of the other Loan Documents, expressed or implied, is intended to or
shall be so construed as to impose upon any Agent any obligations in respect of
this Agreement or any of the other Loan Documents except as expressly set forth
herein or therein.
B. NO RESPONSIBILITY FOR CERTAIN MATTERS. No Agent shall be
responsible to any Lender for the execution, effectiveness, genuineness,
validity, enforceability, collectibility or sufficiency of this Agreement or
any other Loan Document or for any representations, warranties, recitals or
statements made herein or therein or made in any written or oral statements or
in any financial or other statements, instruments, reports or certificates or
any other documents furnished or made by any of Agent to Lenders or by or on
behalf of Company to any Agent or any Lender in connection with the Loan
Documents and the transactions contemplated thereby or for the financial
condition or business affairs of Company or any other Person liable for the
payment of any Obligations, nor shall any Agent be required to ascertain or
inquire as to the performance or observance of any of the terms, conditions,
provisions, covenants or agreements contained in any of the Loan Documents or
as to the use of the proceeds of the Loans or as to the existence or possible
existence of any Event of Default or Potential Event of Default. Anything
contained in this Agreement to the contrary notwithstanding, Administrative
Agent shall not have any liability arising from confirmations of the amount of
outstanding Loans or the Letter of Credit Usage or the component amounts
thereof.
C. EXCULPATORY PROVISIONS. None of Agents nor any of their
respective officers, partners, directors, employees or agents shall be liable
to Lenders for any action taken or omitted by any Agent under or in connection
with any of the Loan Documents except to the extent caused by such Agent's
gross negligence or willful misconduct. Each Agent shall be entitled to
refrain from any act or the taking of any action (including the failure to take
an action) in connection with this Agreement or any of the other Loan Documents
or from the exercise of any power, discretion or authority vested in it
hereunder or thereunder unless and until such Agent shall have received
instructions in respect thereof from Requisite Lenders (or such other Lenders
as may be required to give such instructions under subsection 10.6) and, upon
receipt of such instructions from Requisite Lenders (or such other Lenders, as
the case may be), such Agent shall be entitled to act or (where so instructed)
refrain from acting, or to
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exercise such power, discretion or authority, in accordance with such
instructions. Without prejudice to the generality of the foregoing, (i) each
Agent shall be entitled to rely, and shall be fully protected in relying, upon
any communication, instrument or document believed by it to be genuine and
correct and to have been signed or sent by the proper person or persons, and
shall be entitled to rely and shall be protected in relying on opinions and
judgments of attorneys (who may be attorneys for Company and its Subsidiaries),
accountants, experts and other professional advisors selected by it; and (ii)
no Lender shall have any right of action whatsoever against any Agent as a
result of such Agent acting or (where so instructed) refraining from acting
under this Agreement or any of the other Loan Documents in accordance with the
instructions of Requisite Lenders (or such other Lenders as may be required to
give such instructions under subsection 10.6).
D. AGENT ENTITLED TO ACT AS LENDER. The agency hereby created
shall in no way impair or affect any of the rights and powers of, or impose any
duties or obligations upon, any Agent in its individual capacity as a Lender
hereunder. With respect to its participation in the Loans and the Letters of
Credit, each Agent shall have the same rights and powers hereunder as any other
Lender and may exercise the same as though it were not performing the duties
and functions delegated to it hereunder, and the term "Lender" or "Lenders" or
any similar term shall, unless the context clearly otherwise indicates, include
each Agent in its individual capacity. Any Agent and its Affiliates may accept
deposits from, lend money to and generally engage in any kind of banking,
trust, financial advisory or other business with Company or any of its
Affiliates as if it were not performing the duties specified herein, and may
accept fees and other consideration from Company for services in connection
with this Agreement and otherwise without having to account for the same to
Lenders.
9.3 REPRESENTATIONS AND WARRANTIES; NO RESPONSIBILITY FOR APPRAISAL OF
CREDITWORTHINESS.
Each Lender represents and warrants that it has made its own
independent investigation of the financial condition and affairs of Company and
its Subsidiaries in connection with the making of the Loans and the issuance of
Letters of Credit hereunder and that it has made and shall continue to make its
own appraisal of the creditworthiness of Company and its Subsidiaries. No
Agent shall have any duty or responsibility, either initially or on a
continuing basis, to make any such investigation or any such appraisal on
behalf of Lenders or to provide any Lender with any credit or other information
with respect thereto, whether coming into its possession before the making of
the Loans or at any time or times thereafter, and no Agent shall have any
responsibility with respect to the accuracy of or the completeness of any
information provided to Lenders.
9.4 RIGHT TO INDEMNITY.
Each Lender, in proportion to its Pro Rata Share, severally agrees to
indemnify each Agent, to the extent that such Agent shall not have been
reimbursed by Company, for and against any and all liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses
(including counsel fees and disbursements) or disbursements of any kind or
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nature whatsoever which may be imposed on, incurred by or asserted against such
Agent in exercising its powers, rights and remedies or performing its duties
hereunder or under the other Loan Documents or otherwise in its capacity as
such Agent in any way relating to or arising out of this Agreement or the other
Loan Documents; provided that no Lender shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements resulting from such Agent's gross
negligence or willful misconduct. If any indemnity furnished to any Agent for
any purpose shall, in the opinion of such Agent, be insufficient or become
impaired, such Agent may call for additional indemnity and cease, or not
commence, to do the acts indemnified against until such additional indemnity is
furnished; provided that in no event shall this sentence require any Lender to
indemnify any Agent against any liability, obligation, loss, damage, penalty,
action, judgment, suit, cost, expense or disbursement in excess of such
Lender's Pro Rata Share thereof; and provided, further, that this sentence
shall not be deemed to require any Lender to indemnify any Agent against any
liability, obligation, loss, damage, penalty, action, judgment, suit, cost,
expense or disbursement described in the proviso in the immediately preceding
sentence.
9.5 SUCCESSOR ADMINISTRATIVE AGENT.
SUCCESSOR ADMINISTRATIVE AGENT. Administrative Agent may resign at
any time by giving 30 days' prior written notice thereof to Lenders and
Company, and Administrative Agent may be removed at any time with or without
cause by an instrument or concurrent instruments in writing delivered to
Company and Administrative Agent and signed by Requisite Lenders. Upon any
such notice of resignation or any such removal, Requisite Lenders shall have
the right, upon five Business Days' notice to Company, to appoint a successor
Administrative Agent. Upon the acceptance of any appointment as Administrative
Agent hereunder by a successor Administrative Agent, that successor
Administrative Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the retiring or removed Administrative
Agent and the retiring or removed Administrative Agent shall be discharged from
its duties and obligations under this Agreement. After any retiring or removed
Administrative Agent's resignation or removal hereunder as Administrative
Agent, the provisions of this Section 9 shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Agent under this
Agreement.
9.6 COLLATERAL DOCUMENTS AND GUARANTIES.
Each Lender hereby further authorizes Administrative Agent, on behalf
of and for the benefit of Lenders, to enter into each Collateral Document as
secured party and to be the agent for and representative of Lenders under each
Guaranty and the Lender Subordination Agreement, and each Lender agrees to be
bound by the terms of each Collateral Document and Guaranty; provided that
Administrative Agent shall not (i) enter into or consent to any material
amendment, modification, termination or waiver of any provision contained in
any Collateral Document or Guaranty or (ii) release any Collateral (except as
otherwise expressly permitted or required pursuant to the terms of this
Agreement or the applicable Collateral Document), in each case without the
prior consent of Requisite Lenders (or, if required pursuant to subsection
10.6, all Lenders); provided further, however, that, without further written
consent or authorization from
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Lenders, Administrative Agent may execute any documents or instruments
necessary to (a) release any Lien encumbering any item of Collateral that is
the subject of a sale or other disposition of assets permitted by this
Agreement or to which Requisite Lenders have otherwise consented or (b) release
any Subsidiary Guarantor from the Subsidiary Guaranty if all of the capital
stock of such Subsidiary Guarantor is sold to any Person (other than an
Affiliate of Company) pursuant to a sale or other disposition permitted
hereunder or to which Requisite Lenders have otherwise consented. In the event
Collateral is sold in an Asset Sale permitted hereunder or otherwise consented
to by Requisite Lenders, Administrative Agent may, without further consent or
authorization from Lenders, release the Liens granted under the Collateral
Documents on the Collateral that is the subject of such Asset Sale concurrently
with the consummation of such Asset Sale; provided that Administrative Agent
shall have received (i) reasonable, and in any event not less than 30 days'
prior written notice of such Asset Sale from Company unless a shorter notice
period is agreed to by Administrative Agent; (ii) an Officers' Certificate (1)
certifying that no Event of Default or Potential Event of Default shall have
occurred and be continuing as of the date of such release of Collateral, (2)
setting forth a detailed description of the Collateral subject to such Asset
Sale, and (3) certifying that such Asset Sale is permitted under this Agreement
and that all conditions precedent to such Asset Sale under this Agreement have
been met; and (iii) Administrative Agent shall have received all Net Cash
Proceeds of Asset Sale, if any, required to be applied to repay Secured
Obligations under this Agreement. Upon payment in full of all of the
Obligations and termination of the Commitments, Administrative Agent shall
release the Liens on such Collateral granted pursuant to the Collateral
Documents. Upon any release of Collateral pursuant to the foregoing,
Administrative Agent shall, at Borrowers' expense, execute and deliver such
documents (without recourse or representation or warranty) as reasonably
requested to evidence such release. Anything contained in any of the Loan
Documents to the contrary notwithstanding, Company, Administrative Agent and
each Lender hereby agree that (1) no Lender shall have any right individually
to realize upon any of the Collateral under any Collateral Document or to
enforce any Guaranty, it being understood and agreed that all powers, rights
and remedies under the Collateral Documents and the Guaranties may be exercised
solely by Administrative Agent for the benefit of Lenders in accordance with
the terms thereof, and (2) in the event of a foreclosure by Administrative
Agent on any of the Collateral pursuant to a public or private sale,
Administrative Agent or any Lender may be the purchaser of any or all of such
Collateral at any such sale and Administrative Agent, as agent for and
representative of Lenders (but not any Lender or Lenders in its or their
respective individual capacities unless Requisite Lenders shall otherwise agree
in writing) shall be entitled, for the purpose of bidding and making settlement
or payment of the purchase price for all or any portion of the Collateral sold
at any such public sale, to use and apply any of the Obligations as a credit on
account of the purchase price for any collateral payable by Administrative
Agent at such sale.
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SECTION 10.
MISCELLANEOUS
10.1 ASSIGNMENTS AND PARTICIPATIONS IN LOANS AND LETTERS OF CREDIT.
A. GENERAL. Subject to subsection 10.1B, each Lender shall have
the right at any time to (i) sell, assign or transfer to any Eligible Assignee,
or (ii) sell participations to any Person in, all or any part of its
Commitments or any Loan or Loans made by it or its Letters of Credit or
participations therein or any other interest herein or in any other Obligations
owed to it; provided that no such sale, assignment, transfer or participation
shall, without the consent of Company, require Company to file a registration
statement with the Securities and Exchange Commission or apply to qualify such
sale, assignment, transfer or participation under the securities laws of any
state; provided, further that no such sale, assignment or transfer described in
clause (i) above shall be effective unless and until an Assignment Agreement
effecting such sale, assignment or transfer shall have been accepted by
Administrative Agent and recorded in the Register as provided in subsection
10.1B(ii); and provided, further that no such sale, assignment, transfer or
participation of any Letter of Credit or any participation therein may be made
separately from a sale, assignment, transfer or participation of a
corresponding interest in the Revolving Loan Commitment and the Revolving Loans
of the Lender effecting such sale, assignment, transfer or participation.
Except as otherwise provided in this subsection 10.1, no Lender shall, as
between Company and such Lender, be relieved of any of its obligations
hereunder as a result of any sale, assignment or transfer of, or any granting
of participations in, all or any part of its Commitments or the Loans, the
Letters of Credit or participations therein, or the other Obligations owed to
such Lender.
B. ASSIGNMENTS.
(i) Amounts and Terms of Assignments. Each Commitment,
Loan, Letter of Credit or participation therein, or other Obligation
may (a) be assigned in any amount to another Lender, or to an
Affiliate of the assigning Lender or another Lender or to a Related
Fund, with the giving of notice to Company and Administrative Agent or
(b) be assigned in an aggregate amount of not less than $5,000,000 (or
such lesser amount as shall constitute the aggregate amount of the
Commitments, Loans, Letters of Credit and participations therein, and
other Obligations of the assigning Lender) to any other Eligible
Assignee with the giving of notice to, and reasonable consultation
with, Company and with the consent of Administrative Agent (which
consent of Administrative Agent shall not be unreasonably withheld or
delayed);provided that (1) any assignment from Arranger to any
Eligible Assignee shall not require the consent of Administrative
Agent and (2) no consultation with Company shall be required if at the
time of the assignment an Event of Default shall have occurred and be
continuing. To the extent of any such assignment in accordance with
either clause (a) or (b) above, the assigning Lender shall be relieved
of its obligations with respect to its Commitments, Loans, Letters of
Credit or participations therein, or other Obligations or the portion
thereof so assigned. The parties to each such assignment shall
execute and deliver to Administrative Agent, for its acceptance and
recording in the Register, an Assignment
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Agreement, together with a processing and recordation fee of $3000 and
such forms, certificates or other evidence, if any, with respect to
United States federal income tax withholding matters as the assignee
under such Assignment Agreement may be required to deliver to
Administrative Agent pursuant to subsection 2.7B(iii)(a). Upon such
execution, delivery, acceptance and recordation, from and after the
effective date specified in such Assignment Agreement, (1) the
assignee thereunder shall be a party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to
such Assignment Agreement, shall have the rights and obligations of a
Lender hereunder and (2) the assigning Lender thereunder shall, to the
extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment Agreement, relinquish its rights (other
than any rights which survive the termination of this Agreement under
subsection 10.9B) and be released from its obligations under this
Agreement (and, in the case of an Assignment Agreement covering all or
the remaining portion of an assigning Lender's rights and obligations
under this Agreement, such Lender shall cease to be a party hereto;
provided that, anything contained in any of the Loan Documents to the
contrary notwithstanding, if such Lender is Issuing Lender with
respect to any outstanding Letters of Credit such Lender shall
continue to have all rights and obligations of Issuing Lender with
respect to such Letters of Credit until the cancellation or expiration
of such Letters of Credit and the reimbursement of any amounts drawn
thereunder). The Commitments hereunder shall be modified to reflect
the Commitment of such assignee and any remaining Commitment of such
assigning Lender and, if any such assignment occurs after the issuance
of any Notes hereunder, the assigning Lender shall, upon the
effectiveness of such assignment or as promptly thereafter as
practicable, surrender its applicable Notes to Administrative Agent
for cancellation, and thereupon, upon the request of the assignee
and/or the assigning Lender, new Notes shall be issued to the assignee
and/or to the assigning Lender, substantially in the form of Exhibit
IV or Exhibit VI annexed hereto, as the case may be, with appropriate
insertions, to reflect the new Commitments and/or outstanding AXELs
and/or Converted Term Loans, as the case may be, of the assignee
and/or the assigning Lender.
(ii) Acceptance by Administrative Agent; Recordation in
Register. Upon its receipt of an Assignment Agreement executed by an
assigning Lender and an assignee representing that it is an Eligible
Assignee, together with the processing and recordation fee referred to
in subsection 10.1B(i) and any forms, certificates or other evidence
with respect to United States federal income tax withholding matters
that such assignee may be required to deliver to Administrative Agent
pursuant to subsection 2.7B(iii)(a), Administrative Agent shall, if
Administrative Agent has consented to the assignment evidenced thereby
(to the extent such consent is required pursuant to subsection
10.1B(i)), (a) accept such Assignment Agreement by executing a
counterpart thereof as provided therein (which acceptance shall
evidence any required consent of Administrative Agent to such
assignment), (b) record the information contained therein in the
Register, and (c) give prompt notice thereof to Company.
Administrative Agent shall maintain a copy of each Assignment
Agreement delivered to and accepted by it as provided in this
subsection 10.1B(ii).
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C. PARTICIPATIONS. The holder of any participation, other than
an Affiliate of the Lender granting such participation, shall not be entitled
to require such Lender to take or omit to take any action hereunder except
action directly affecting (i) the extension of the scheduled final maturity
date of any Loan allocated to such participation or (ii) a reduction of the
principal amount of or the rate of interest or fees payable on any Loan
allocated to such participation or (iii) the release of all or substantially
all of the Collateral or Guaranties, and all amounts payable by Company
hereunder (including amounts payable to such Lender pursuant to subsections
2.6D, 2.7 and 3.6) shall be determined as if such Lender had not sold such
participation. Company and each Lender hereby acknowledge and agree that,
solely for purposes of subsections 10.4 and 10.5, (a) any participation will
give rise to a direct obligation of Company to the participant and (b) the
participant shall be considered to be a "Lender".
D. ASSIGNMENTS TO FEDERAL RESERVE BANKS. In addition to the
assignments and participations permitted under the foregoing provisions of this
subsection 10.1, any Lender may assign and pledge all or any portion of its
Loans, the other Obligations owed to such Lender, and its Notes to any Federal
Reserve Bank as collateral security pursuant to Regulation A of the Board of
Governors of the Federal Reserve System and any operating circular issued by
such Federal Reserve Bank; provided that (i) no Lender shall, as between
Company and such Lender, be relieved of any of its obligations hereunder as a
result of any such assignment and pledge and (ii) in no event shall such
Federal Reserve Bank be considered to be a "Lender" or be entitled to require
the assigning Lender to take or omit to take any action hereunder.
E. INFORMATION. Each Lender may furnish any information
concerning Company and its Subsidiaries in the possession of that Lender from
time to time to assignees and participants (including prospective assignees and
participants), subject to subsection 10.19.
F. REPRESENTATIONS OF LENDERS. Each Lender listed on the
signature pages hereof hereby represents and warrants (i) that it is an
Eligible Assignee described in clause (i) of the definition thereof; (ii) that
it has experience and expertise in the making of or investment in loans such as
the Loans; and (iii) that it will make or invest its Loans for its own account
in the ordinary course of its business and without a view to distribution of
such Loans within the meaning of the Securities Act or the Exchange Act or
other federal securities laws (it being understood that, subject to the
provisions of this subsection 10.1, the disposition of such Loans or any
interests therein shall at all times remain within its exclusive control).
Each Lender that becomes a party hereto pursuant to an Assignment Agreement
shall be deemed to agree that the representations and warranties of such Lender
contained in Section 2(c) of such Assignment Agreement are incorporated herein
by this reference.
10.2 EXPENSES.
Whether or not the transactions contemplated hereby shall be
consummated, Company agrees to pay promptly (i) all the actual and reasonable
costs and expenses of preparation of the Loan Documents and any consents,
amendments, waivers or other modifications thereto; (ii) all the costs of
furnishing all opinions by counsel for Company (including any opinions
requested by Lenders as to any legal matters arising hereunder) and of
Company's performance of and
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compliance with all agreements and conditions on its part to be performed or
complied with under this Agreement and the other Loan Documents including with
respect to confirming compliance with environmental, insurance and solvency
require- ments; (iii) the reasonable fees, expenses and disbursements of
counsel to Arranger and counsel to Administrative Agent (in each case including
allocated costs of internal counsel) in connection with the negotiation,
preparation, execution and administration of the Loan Documents and any
consents, amendments, waivers or other modifications thereto and any other
documents or matters requested by Company; (iv) all the actual costs and
reasonable expenses of creating and perfecting Liens in favor of Administrative
Agent on behalf of Lenders pursuant to any Collateral Document, including
filing and recording fees, expenses and taxes, stamp or documentary taxes,
search fees, title insurance premiums, and reasonable fees, expenses and
disbursements of counsel to Arranger and counsel to Administrative Agent and of
counsel providing any opinions that Arranger, Administrative Agent or Requisite
Lenders may request in respect of the Collateral Documents or the Liens created
pursuant thereto; (v) all the actual costs and reasonable expenses (including
the reasonable fees, expenses and disbursements of any auditors, accountants or
appraisers and any environmental or other consultants, advisors and agents
employed or retained by Administrative Agent or Arranger and its counsel) of
obtaining and reviewing any appraisals provided for under subsection 4.1G or
6.8C, any environmental audits or reports provided for under subsection 4.1H or
6.8B(viii); (vi) all the actual costs and reasonable expenses (including the
reasonable fees, expenses and disbursements of any consultants, advisors and
agents employed or retained by Administrative Agent and its counsel) in
connection with the custody or preservation of any of the Collateral; (vii) all
other actual and reasonable costs and expenses incurred by Syndication Agent,
Arranger or Administrative Agent in connection with the syndication of the
Commitments and the negotiation, preparation and execution of the Loan
Documents and any consents, amendments, waivers or other modifications thereto
and the transactions contemplated thereby; and (viii) after the occurrence of
an Event of Default, all costs and expenses, including reasonable attorneys'
fees (including allocated costs of internal counsel) and costs of settlement,
incurred by Arranger, Administrative Agent and Lenders in enforcing any
Obligations of or in collecting any payments due from any Loan Party hereunder
or under the other Loan Documents by reason of such Event of Default (including
in connection with the sale of, collection from, or other realization upon any
of the Collateral or the enforcement of the Guaranties) or in connection with
any refinancing or restructuring of the credit arrangements provided under this
Agreement in the nature of a "work-out" or pursuant to any insolvency or
bankruptcy proceedings.
10.3 INDEMNITY.
In addition to the payment of expenses pursuant to subsection 10.2,
whether or not the transactions contemplated hereby shall be consummated,
Company agrees to defend (subject to Indemnitees' selection of counsel),
indemnify, pay and hold harmless Agents and Lenders, and the officers,
partners, directors, employees, agents and affiliates of any of Agents and
Lenders (collectively called the "INDEMNITEES"), from and against any and all
Indemnified Liabilities (as hereinafter defined) and to periodically reimburse
Agents and Lenders for all legal and other expenses (including the cost of any
investigation and preparation) in the event that any of the Indemnitees becomes
involved in any action, proceeding or investigation brought by or against
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any such Indemnitee relating to the Indemnified Liabilities; provided that
Company shall not have any obligation to any Indemnitee hereunder with respect
to any Indemnified Liabilities to the extent such Indemnified Liabilities arise
solely from the gross negligence or willful misconduct of that Indemnitee as
determined by a final judgment of a court of competent jurisdiction.
As used herein, "INDEMNIFIED LIABILITIES" means, collectively, any and
all liabilities, obligations, losses, damages (including natural resource
damages), penalties, actions, judgments, suits, claims (including Environmental
Claims), costs (including the costs of any investigation, study, sampling,
testing, abatement, cleanup, removal, remediation or other response action
necessary to remove, remediate, clean up or abate any Hazardous Materials
Activity), expenses and disbursements of any kind or nature whatsoever
(including the reasonable fees and disbursements of counsel for Indemnitees in
connection with any investigative, administrative or judicial proceeding
commenced or threatened by any Person, whether or not any such Indemnitee shall
be designated as a party or a potential party thereto, and any fees or expenses
incurred by Indemnitees in enforcing this indemnity), whether direct, indirect
or consequential and whether based on any federal, state or foreign laws,
statutes, rules or regulations (including securities and commercial laws,
statutes, rules or regulations and Environmental Laws), on common law or
equitable cause or on contract or otherwise, that may be imposed on, incurred
by, or asserted against any such Indemnitee, in any manner relating to or
arising out of (i) this Agreement or the other Loan Documents or the
transactions contemplated hereby or thereby (including Lenders' agreement to
make the Loans hereunder or the use or intended use of the proceeds thereof or
the issuance of Letters of Credit hereunder or the use or intended use of any
thereof, or any enforcement of any of the Loan Documents (including any sale
of, collection from, or other realization upon any of the Collateral or the
enforcement of the Guaranties)), (ii) the statements contained in the
commitment letter delivered by any Lender to Company with respect thereto, or
(iii) any Environmental Claim or any Hazardous Materials Activity relating to
or arising from, directly or indirectly, any past or present activity,
operation, land ownership, or practice of Company or any of its Subsidiaries.
To the extent that the undertakings to defend, indemnify, pay and hold
harmless set forth in this subsection 10.3 may be unenforceable in whole or in
part because they are violative of any law or public policy, Company shall
contribute the maximum portion that it is permitted to pay and satisfy under
applicable law to the payment and satisfaction of all Indemnified Liabilities
incurred by Indemnitees or any of them.
10.4 SET-OFF; SECURITY INTEREST IN DEPOSIT ACCOUNTS.
In addition to any rights now or hereafter granted under applicable
law and not by way of limitation of any such rights, upon the occurrence of any
Event of Default each Lender is hereby authorized by Company at any time or
from time to time, without notice to Company or to any other Person, any such
notice being hereby expressly waived, to set off and to appropriate and to
apply any and all deposits (general or special, including Indebtedness
evidenced by certificates of deposit, whether matured or unmatured, but not
including trust accounts) and any other Indebtedness at any time held or owing
by that Lender to or for the credit or the account
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of Company against and on account of the obligations and liabilities of Company
to that Lender under this Agreement, the Letters of Credit and participations
therein and the other Loan Documents, including all claims of any nature or
description arising out of or connected with this Agreement, the Letters of
Credit and participations therein or any other Loan Document, irrespective of
whether or not (i) that Lender shall have made any demand hereunder or (ii) the
principal of or the interest on the Loans or any amounts in respect of the
Letters of Credit or any other amounts due hereunder shall have become due and
payable pursuant to Section 8 and although said obligations and liabilities, or
any of them, may be contingent or unmatured. Company hereby further grants to
Administrative Agent and each Lender a security interest in all deposits and
accounts maintained with Administrative Agent or such Lender as security for
the Obligations.
10.5 RATABLE SHARING.
Lenders hereby agree among themselves that if any of them shall,
whether by voluntary payment (other than a voluntary prepayment of Loans made
and applied in accordance with the terms of this Agreement), by realization
upon security, through the exercise of any right of set-off or banker's lien,
by counterclaim or cross action or by the enforcement of any right under the
Loan Documents or otherwise, or as adequate protection of a deposit treated as
cash collateral under the Bankruptcy Code, receive payment or reduction of a
proportion of the aggregate amount of principal, interest, amounts payable in
respect of Letters of Credit, fees and other amounts then due and owing to that
Lender hereunder or under the other Loan Documents (collectively, the
"AGGREGATE AMOUNTS DUE" to such Lender) which is greater than the proportion
received by any other Lender in respect of the Aggregate Amounts Due to such
other Lender, then the Lender receiving such proportionately greater payment
shall (i) notify Administrative Agent and each other Lender of the receipt of
such payment and (ii) apply a portion of such payment to purchase
participations (which it shall be deemed to have purchased from each seller of
a participation simultaneously upon the receipt by such seller of its portion
of such payment) in the Aggregate Amounts Due to the other Lenders so that all
such recoveries of Aggregate Amounts Due shall be shared by all Lenders in
proportion to the Aggregate Amounts Due to them; provided that if all or part
of such proportionately greater payment received by such purchasing Lender is
thereafter recovered from such Lender upon the bankruptcy or reorganization of
Company or otherwise, those purchases shall be rescinded and the purchase
prices paid for such participations shall be returned to such purchasing Lender
ratably to the extent of such recovery, but without interest. Company
expressly consents to the foregoing arrangement and agrees that any holder of a
participation so purchased may exercise any and all rights of banker's lien,
set-off or counterclaim with respect to any and all monies owing by Company to
that holder with respect thereto as fully as if that holder were owed the
amount of the participation held by that holder.
10.6 AMENDMENTS AND WAIVERS.
No amendment, modification, termination or waiver of any provision of
the Loan Documents, or consent to any departure by Company therefrom, shall in
any event be effective without the written concurrence of Requisite Lenders;
provided that no such amendment,
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modification, termination, waiver or consent shall, without the consent of each
Lender (with Obligations directly affected in the case of the following clause
(i)): (i) extend the scheduled final maturity of any Loan or Note, or extend
the stated expiration date of any Letter of Credit beyond the Revolving Loan
Commitment Termination Date, or reduce the rate of interest on any Loan (other
than any waiver of any increase in the interest rate applicable to any Loan
pursuant to subsection 2.2E) or any commitment fees or letter of credit fees
payable hereunder, or extend the time for payment of any such interest or fees,
or reduce the principal amount of any Loan or any reimbursement obligation in
respect of any Letter of Credit, (ii) amend, modify, terminate or waive any
provision of this subsection 10.6, (iii) reduce the percentage specified in the
definition of "Requisite Lenders" (it being understood that, with the consent
of Requisite Lenders, additional extensions of credit pursuant to this
Agreement may be included in the determination of "Requisite Lenders" on
substantially the same basis as the AXEL Commitments, the Term Loans, the
Revolving Loan Commitments and the Revolving Loans are included on the Closing
Date), (iv) consent to the assignment or transfer by Company of any of its
rights and obligations under this Agreement, (v) release all or substantially
all of the Collateral or all or substantially all of the Subsidiary Guarantors
from the Subsidiary Guaranty except as expressly provided in the Loan Documents
or (vi) to amend or modify the last paragraph of Section 8; provided, further
that no such amendment, modification, termination or waiver shall (a) increase
the Commitments of any Lender over the amount thereof then in effect without
the consent of such Lender (it being understood that no amendment, modification
or waiver of any condition precedent, covenant, Potential Event of Default or
Event of Default shall constitute an increase in the Commitment of any Lender,
and that no increase in the available portion of any Commitment of any Lender
shall constitute an increase in such Commitment of such Lender); (b) amend,
modify, terminate or waive any obligation of Lenders relating to the purchase
of participations in Letters of Credit as provided in subsection 3.1C without
the written concurrence of Administrative Agent and of each Issuing Lender
which has a Letter of Credit then outstanding or which has not been reimbursed
for a drawing under a Letter of Credit issued it; or (c) amend, modify,
terminate or waive any provision of Section 9 as the same applies to any Agent,
or any other provision of this Agreement as the same applies to the rights or
obligations of any Agent, in each case without the consent of such Agent.
Administrative Agent may, but shall have no obligation to, with the concurrence
of any Lender, execute amendments, modifications, waivers or consents on behalf
of that Lender. Any waiver or consent shall be effective only in the specific
instance and for the specific purpose for which it was given. No notice to or
demand on Company in any case shall entitle Company to any other or further
notice or demand in similar or other circumstances. Any amendment,
modification, termination, waiver or consent effected in accordance with this
subsection 10.6 shall be binding upon each Lender at the time outstanding, each
future Lender and, if signed by Company, on Company.
10.7 INDEPENDENCE OF COVENANTS.
All covenants hereunder shall be given independent effect so that if a
particular action or condition is not permitted by any of such covenants, the
fact that it would be permitted by an exception to, or would otherwise be
within the limitations of, another covenant shall not avoid the occurrence of
an Event of Default or Potential Event of Default if such action is taken or
condition exists.
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10.8 NOTICES.
Unless otherwise specifically provided herein, any notice or other
communication herein required or permitted to be given shall be in writing and
may be personally served, telexed or sent by telefacsimile or United States
mail or courier service and shall be deemed to have been given when delivered
in person or by courier service, upon receipt of telefacsimile or telex, or
three Business Days after depositing it in the United States mail with postage
prepaid and properly addressed; provided that notices to Arranger, Syndication
Agent or Administrative Agent shall not be effective until received. For the
purposes hereof, the address of each party hereto shall be as set forth under
such party's name on the signature pages hereof or (i) as to Company and
Administrative Agent, such other address as shall be designated by such Person
in a written notice delivered to the other parties hereto and (ii) as to each
other party, such other address as shall be designated by such party in a
written notice delivered to Administrative Agent.
10.9 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
A. All representations, warranties and agreements made herein
shall survive the execution and delivery of this Agreement and the making of
the Loans and the issuance of the Letters of Credit hereunder.
B. Notwithstanding anything in this Agreement or implied by law
to the contrary, the agreements of Company set forth in subsections 2.6D, 2.7,
3.5A, 3.6, 10.2, 10.3 and 10.4 and the agreements of Lenders set forth in
subsections 9.2C, 9.4 and 10.5 shall survive the payment of the Loans, the
cancellation or expiration of the Letters of Credit and the reimbursement of
any amounts drawn thereunder, and the termination of this Agreement.
10.10 FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE.
No failure or delay on the part of Administrative Agent or any Lender
in the exercise of any power, right or privilege hereunder or under any other
Loan Document shall impair such power, right or privilege or be construed to be
a waiver of any default or acquiescence therein, nor shall any single or
partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other power, right or privilege. All rights
and remedies existing under this Agreement and the other Loan Documents are
cumulative to, and not exclusive of, any rights or remedies otherwise
available.
10.11 MARSHALLING; PAYMENTS SET ASIDE.
Neither Administrative Agent nor any Lender shall be under any
obligation to marshal any assets in favor of Company or any other party or
against or in payment of any or all of the Obligations. To the extent that
Company makes a payment or payments to Administrative Agent or Lenders (or to
Administrative Agent for the benefit of Lenders), or Administrative Agent or
Lenders enforce any security interests or exercise their rights of setoff, and
such payment or payments or the proceeds of such enforcement or setoff or any
part thereof are subsequently
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invalidated, declared to be fraudulent or preferential, set aside and/or
required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, any other state or federal law, common law or any equitable
cause, then, to the extent of such recovery, the obligation or part thereof
originally intended to be satisfied, and all Liens, rights and remedies
therefor or related thereto, shall be revived and continued in full force and
effect as if such payment or payments had not been made or such enforcement or
setoff had not occurred.
10.12 SEVERABILITY.
In case any provision in or obligation under this Agreement or the
Notes shall be invalid, illegal or unenforceable in any jurisdiction, the
validity, legality and enforceability of the remaining provisions or
obligations, or of such provision or obligation in any other jurisdiction,
shall not in any way be affected or impaired thereby.
10.13 OBLIGATIONS SEVERAL; INDEPENDENT NATURE OF LENDERS' RIGHTS.
The obligations of Lenders hereunder are several and no Lender shall
be responsible for the obligations or Commitments of any other Lender
hereunder. Nothing contained herein or in any other Loan Document, and no
action taken by Lenders pursuant hereto or thereto, shall be deemed to
constitute Lenders as a partnership, an association, a joint venture or any
other kind of entity. The amounts payable at any time hereunder to each Lender
shall be a separate and independent debt, and each Lender shall be entitled to
protect and enforce its rights arising out of this Agreement and it shall not
be necessary for any other Lender to be joined as an additional party in any
proceeding for such purpose.
10.14 HEADINGS.
Section and subsection headings in this Agreement are included herein
for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose or be given any substantive effect.
10.15 APPLICABLE LAW.
THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER
SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS
OF LAWS PRINCIPLES.
10.16 SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon the parties hereto and their
respective successors and assigns and shall inure to the benefit of the parties
hereto and the successors and assigns of Lenders (it being understood that
Lenders' rights of assignment are subject to subsection 10.1).
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Neither Company's rights or obligations hereunder nor any interest therein may
be assigned or delegated by Company without the prior written consent of all
Lenders.
10.17 CONSENT TO JURISDICTION AND SERVICE OF PROCESS.
ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST COMPANY OR HOLDINGS ARISING
OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY
OBLIGATIONS THEREUNDER, MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF
COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. BY EXECUTING
AND DELIVERING THIS AGREEMENT, EACH OF COMPANY AND HOLDINGS, FOR ITSELF AND IN
CONNECTION WITH ITS PROPERTIES, IRREVOCABLY (I) ACCEPTS GENERALLY AND
UNCONDITIONALLY THE NONEXCLUSIVE JURISDICTION AND VENUE OF SUCH COURTS; (II)
WAIVES ANY DEFENSE OF FORUM NON CONVENIENS; (III) AGREES THAT SERVICE OF ALL
PROCESS IN ANY SUCH PROCEEDING IN ANY SUCH COURT MAY BE MADE BY REGISTERED OR
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO COMPANY AT ITS ADDRESS PROVIDED IN
ACCORDANCE WITH SUBSECTION 10.8; (IV) AGREES THAT SERVICE AS PROVIDED IN CLAUSE
(III) ABOVE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER COMPANY IN ANY
SUCH PROCEEDING IN ANY SUCH COURT, AND OTHERWISE CONSTITUTES EFFECTIVE AND
BINDING SERVICE IN EVERY RESPECT; (V) AGREES THAT LENDERS RETAIN THE RIGHT TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO BRING PROCEEDINGS
AGAINST COMPANY IN THE COURTS OF ANY OTHER JURISDICTION; AND (VI) AGREES THAT
THE PROVISIONS OF THIS SUBSECTION 10.17 RELATING TO JURISDICTION AND VENUE
SHALL BE BINDING AND ENFORCEABLE TO THE FULLEST EXTENT PERMISSIBLE UNDER NEW
YORK GENERAL OBLIGATIONS LAW SECTION 5-1402 OR OTHERWISE.
10.18 WAIVER OF JURY TRIAL.
EACH OF THE PARTIES TO THIS AGREEMENT HEREBY AGREES TO WAIVE ITS
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR ANY
DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS LOAN TRANSACTION
OR THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of
this waiver is intended to be all-encompassing of any and all disputes that may
be filed in any court and that relate to the subject matter of this
transaction, including contract claims, tort claims, breach of duty claims and
all other common law and statutory claims. Each party hereto acknowledges that
this waiver is a material inducement to enter into a business relationship,
that each has already relied on this waiver in entering into this Agreement,
and that each will continue to rely on this waiver in their related future
dealings. Each party hereto further warrants and represents that it has
reviewed this waiver with its legal counsel and that it knowingly and
voluntarily waives its jury trial rights following consultation with legal
counsel.
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THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY
OR IN WRITING (OTHER THAN BY A MUTUAL WRITTEN WAIVER SPECIFICALLY REFERRING TO
THIS SUBSECTION 10.18 AND EXECUTED BY EACH OF THE PARTIES HERETO), AND THIS
WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO ANY
OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS MADE HEREUNDER. In the
event of litigation, this Agreement may be filed as a written consent to a
trial by the court.
10.19 CONFIDENTIALITY.
Each Lender shall hold all non-public information obtained pursuant to
the requirements of this Agreement which has been identified as confidential by
Company in accordance with such Lender's customary procedures for handling
confidential information of this nature and in accordance with prudent lending
or investing practices, it being understood and agreed by Company that in any
event a Lender may make disclosures to Affiliates of such Lender or disclosures
reasonably required by any bona fide assignee, transferee or participant in
connection with the contemplated assignment or transfer by such Lender of any
Loans or any participations therein or disclosures required or requested by any
governmental agency or representative thereof or by the National Association of
Insurance Commissioners or pursuant to legal process; provided that, unless
specifically prohibited by applicable law or court order, each Lender shall
notify Company of any request by any governmental agency or representative
thereof (other than any such request in connection with any examination of the
financial condition of such Lender by such governmental agency) for disclosure
of any such non-public information prior to disclosure of such information; and
provided, further that in no event shall any Lender be obligated or required to
return any materials furnished by Company or any of its Subsidiaries.
10.20 MAXIMUM AMOUNT.
A. It is the intention of Company and Lenders to conform strictly
to the usury and similar laws relating to interest from time to time in force,
and all agreements between Company, Administrative Agent and Lenders, whether
now existing or hereafter arising and whether oral or written, are hereby
expressly limited so that in no contingency or event whatsoever, whether by
acceleration of maturity hereof or otherwise, shall the amount paid or agreed
to be paid in the aggregate to Lenders or to Administrative Agent on behalf of
Lenders as interest hereunder or under the other Loan Documents or in any other
security agreement given to secure the Obligations, or in any other document
evidencing, securing or pertaining to the indebtedness evidenced hereby or
thereby, exceed the maximum amount permissible under applicable usury or such
other laws (the "MAXIMUM AMOUNT"). If under any circumstances whatsoever
fulfillment of any provision hereof, or of any of the other Loan Documents, at
the time performance of such provision shall be due, shall involve exceeding
the Maximum Amount, then, ipso facto, the obligation to be fulfilled shall be
reduced to the Maximum Amount. For the purposes of calculating the actual
amount of interest paid and/or payable hereunder in respect of laws pertaining
to usury or such other laws, all sums paid or agreed to be paid to Lenders
132
<PAGE> 140
for the use, forbearance or detention of the indebtedness of Company evidenced
hereby, outstanding from time to time shall, to the extent permitted by
applicable law, be amortized, pro rated, allocated and spread from the date of
disbursement of the proceeds of the Loans until payment in full of all of such
indebtedness, so that the actual rate of interest on account of such
indebtedness is uniform throughout the term hereof. The terms and provisions
of this subsection shall control and supersede every other provision of all
agreements between Company, Administrative Agent and Lenders.
B. If under any circumstances Lenders shall receive an amount
which would exceed the Maximum Amount, such amount shall be deemed a payment in
reduction of the principal amount of the Loans and shall be treated as a
voluntary prepayment under subsection 2.4B(i), and shall be so applied in
accordance with subsection 2.4B(iv) hereof, or if such amount exceeds the
unpaid balance of the Loans and any other indebtedness of Company in favor of
Lenders, the excess shall be deemed to have been a payment made by mistake and
shall be refunded to Company.
10.21 COUNTERPARTS; EFFECTIVENESS.
This Agreement and any amendments, waivers, consents or supplements
hereto or in connection herewith may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document. This Agreement shall become effective upon the execution of a
counterpart hereof by each of the parties hereto and receipt by Company and
Administrative Agent of written or telephonic notification of such execution
and authorization of delivery thereof.
[Remainder of page intentionally left blank]
133
<PAGE> 141
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
COMPANY AND HOLDINGS:
TVMAX TELECOMMUNICATIONS, INC.
OPTEL, INC.
By:
--------------------------
Michael E. Katzenstein
Vice President
of each of the above
By:
--------------------------
Richard Alden
Treasurer
of each of the above
Notice Address:
c/o Optel, Inc.
1111 West Mockingbird Lane
Dallas, TX 75247
Attention: Michael E. Katzenstein
Telephone: 214-634-3824
Facsimile: 214-634-3889
S-1
<PAGE> 142
AGENTS AND LENDERS:
GOLDMAN SACHS CREDIT PARTNERS L.P.,
individually, as Arranger and as
Syndication Agent
By:
-------------------------------
Authorized Signatory
Notice Address:
Goldman Sachs Credit Partners L.P.
c/o Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004
Attention: Richard Katz
Telephone: 212-902-5492
Facsimile: 212-357-4451
Attention: Stephen King
Telephone: 212-902-8123
Facsimile: 212-902-3000
Attention: Maria Merrill
Telephone: 212-902-7379
Facsimile: 212-902-2417
Attention: Tina Hsiao
Telephone: 212-902-1076
Facsimile: 212-357-4451
S-2
<PAGE> 143
CANADIAN IMPERIAL BANK OF COMMERCE,
individually and as Administrative Agent
By:
-----------------------------------------
Tefta Ghilaga
Executive Director, CIBC Oppenheimer Corp.,
as Agent
Notice Address:
CIBC Oppenheimer Corp.
425 Lexington Avenue
New York, NY 10017
Attention: Ms. Tefta Ghilaga
Telephone: 212-856-3867
Facsimile: 212-856-3558
and
Attention: Ms. Jennifer Cohen
Telephone: 212-856-3704
Facsimile:
S-3
<PAGE> 144
GENERAL ELECTRIC CAPITAL CORPORATION,
individually and as Documentation Agent
By:
---------------------------------------
Molly S. Ferguson
Manager-Operations
Notice Address:
GE Capital Services Structured Finance
Group
120 Long Ridge Road
Third Floor
Stamford, CT 06927
Attention: Manager-Domestic
Portfolio (Telecom)
Telephone: 203-357-6859
Facsimile: 203-357-4329
S-4
<PAGE> 145
[Intentionally Omitted]
S-5
<PAGE> 146
[Intentionally Omitted]
S-6
<PAGE> 147
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
By:
------------------------------------
Joseph P. Matteo
Authorized Signatory
Notice Address:
Merrill Lynch Asset Management
800 Scudders Mill Road
Section 1B
Plainsboro, New Jersey 08536
Attention: Joe Matteo
Telephone: 609-282-2055
Facsimile: 609-282-2756
and
Attention: Colleen Wade
Telephone: 609-282-3136
Facsimile: 609-282-3542
S-7
<PAGE> 1
EXHIBIT 10.28
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is
dated as of April 29, 1998, and entered into by and among TVMAX
TELECOMMUNICATIONS, INC., a Delaware corporation ("COMPANY"), OPTEL, INC., a
Delaware corporation ("HOLDINGS"), the financial institutions listed on the
signature pages hereof ("LENDERS"), GOLDMAN SACHS CREDIT PARTNERS L.P., as
Arranger and Syndication Agent (in such capacities, "ARRANGER"), CANADIAN
IMPERIAL BANK OF COMMERCE, as Administrative Agent for Lenders (in such
capacity, "ADMINISTRATIVE AGENT"), GENERAL ELECTRIC CAPITAL CORPORATION, as
Documentation Agent (in such capacity, "DOCUMENTATION AGENT") and, for purposes
of Section 3 hereof, each of the Guarantors, and is made with reference to that
certain Credit Agreement, dated as of December 19, 1997 (the "CREDIT
AGREEMENT"), by and among Company, Holdings, Lenders, Arranger, Administrative
Agent and Documentation Agent. Capitalized terms used herein without definition
shall have the same meanings herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, Company and the Lenders desire to amend certain
provisions pertaining to the minimum fixed charge coverage ratio required to be
maintained by Company to accurately reflect the intent of the parties;
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
1
<PAGE> 2
Section 1. AMENDMENTS
A. Amendment to Section 1.1 Certain Defined Terms.
Subsection 1.01 of the Credit Agreement is hereby amended by
amending clause (iii) of the definition of "Consolidated Cash Available for
Fixed Charges" to read in its entirety as follows:
"(iii) cash balances (excluding amounts held in the Holdings
Senior Note Escrow Account but including amounts held in the
AXEL Excess Proceeds Account) of Holdings and its Subsidiaries
in excess of $10,000,000 as of the date of determination and
plus".
B. Amendment to Section 7.6 Financial Covenants.
Subsection 7.6B of the Credit Agreement is hereby amended by
amending clause (i) thereof to read in its entirety as follows:
"(i) Consolidated Cash Available for Fixed Charges".
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS
A. As of the date hereof, (i) after giving effect to
this Amendment, there exists no Event of Default or Potential Event of Default
under the Credit Agreement and (ii) all representations and warranties contained
in the Credit Agreement and the other Loan Documents are true, correct and
complete in all material respects except to the extent such representations and
warranties specifically relate to an earlier date, in which case they were true,
correct and complete in all material respects on and as of such earlier date.
B. As of the date hereof, each Loan Party has performed
all agreements to be performed on its part as set forth in the Credit Agreement
and the other Loan Documents.
SECTION 3. ACKNOWLEDGEMENT AND CONSENT
The Guaranties and Collateral Documents to which each Guarantor
and Company, as applicable, are party are herein referred to collectively as the
"CREDIT SUPPORT DOCUMENTS". Each Loan Party hereby acknowledges that it has
reviewed the terms and provisions of the Credit Agreement and this Amendment.
Each Loan Party hereby confirms that each Credit Support Document to which it is
a party or otherwise bound and all Collateral encumbered thereby will continue
to guaranty or secure, as the case may be, to the fullest extent possible the
payment and performance of all "Guarantied Obligations" and "Secured
Obligations" as the case may be (in each case as such terms are defined in the
applicable Credit Support Document), including without
2
<PAGE> 3
limitation the payment and performance of all such "Guarantied Obligations" or
"Secured Obligations," as the case may be, in respect of the Obligations of
Company now or hereafter existing under or in respect of the Credit Agreement.
Each Credit Support Party acknowledges and agrees that any of the Credit
Support Documents to which it is a party or otherwise bound shall continue in
full force and effect and that all of its obligations thereunder shall be valid
and enforceable and shall not be impaired or limited by the execution or
effectiveness of this Amendment. Each Credit Support Party (other than Company)
acknowledges and agrees that (i) notwithstanding the conditions to
effectiveness set forth in this Amendment, such Credit Support Party is not
required by the terms of the Credit Agreement or any other Loan Document to
consent to this Amendment and (ii) nothing in the Credit Agreement, this
Amendment or any other Loan Document shall be deemed to require the consent of
such Credit Support Party to any future consents or waivers to the Credit
Agreement.
SECTION 4. EFFECT ON CREDIT AGREEMENT
A. On and after the First Amendment Effective Date (as
defined in Section 7 hereof), each reference in the Credit Agreement to "this
Agreement", "hereunder", "hereof" "herein" or words of like import referring to
the Credit Agreement, and each reference in the other Loan Documents to the
"Credit Agreement", "thereunder", "thereof" or words of like import referring to
the Credit Agreement shall mean and be a reference to the Credit Agreement as
amended by this Amendment.
B. Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
C. The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a waiver
of any provision of, or operate as a waiver of any right, power or remedy of
the Administrative Agent or any Lender under, the Credit Agreement or any of
the other Loan Documents.
SECTION 5. FEES AND EXPENSES
Company acknowledges that all costs, fees and expenses as
described in subsection 10.2 of the Credit Agreement incurred by Administrative
Agent and its counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of Company.
SECTION 6. GOVERNING LAW
THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE
3
<PAGE> 4
GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS
OF LAWS PRINCIPLES.
SECTION 7. COUNTERPARTS; EFFECTIVENESS
This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterpart and attached to a single
counterpart so that all signature pages are physically attached to the same
document. This Amendment shall become effective (the "FIRST AMENDMENT
EFFECTIVE DATE") upon the execution of a counterpart hereof by each of the Loan
Parties and Requisite Lenders and receipt by the Administrative Agent of
written or telephonic notification of such execution and authorization of
delivery thereof.
(Remainder of Page Intentionally Left Blank)
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
TVMAX TELECOMMUNICATIONS, INC.
OPTEL, INC.
By:
------------------------
Bertrand Blanchette
Vice President
By:
------------------------
Michael E. Katzenstein
Vice President
S-1
<PAGE> 6
For Purposes of Section 3:
GUARANTORS:
OPTEL (ARIZONA) TELECOM, INC.
OPTEL (CALIFORNIA) TELECOM, INC.
OPTEL (COLORADO) TELECOM, INC.
OPTEL (FLORIDA) TELECOM, INC.
OPTEL (ILLINOIS) TELECOM, INC.
OPTEL (TEXAS) TELECOM, INC.
TVMAX COMMUNICATIONS (TEXAS), INC.
TA V GP HOLDINGS CORP.
OPTEL (ILLINOIS) L.P.
RICHEY PACIFIC CABLEVISION, INC.
RICHEY PACIFIC CABLE PARTNERS V, L P.
RICHEY PACIFIC CABLE PARTNERS VI, L.P.
RICHEY PACIFIC CABLE PARTNERS VII, L.P.
IRPC TEXAS, INC.
IRPC TEXAS-VENTANA,INC.
IRPC-ARIZONA, INC.
SUNSHINE TELEVISION ENTERTAINMENT, INC.
TARA COMMUNICATION SYSTEMS, INC.
PHONOSCOPE ENTERTAINMENT, INC.
PHONOSCOPE VILLAGE CABLE, INC.
BAY AREA CABLE TELEVISION, INC.
By:
-----------------------------
Bertrand Blanchette
Vice President
of each of the foregoing Guarantors
By:
-----------------------------
Michael E. Katzenstein
Vice President,
of each of the foregoing Guarantors
TRANSMISSION HOLDINGS, INC.
By:
-----------------------------
Name:
Title:
S-2
<PAGE> 7
GOLDMAN SACHS CREDIT PARTNERS L.P.,
individually and as Arranger and Syndication Agent
By:
--------------------------
Authorized Signatory
CANADIAN IMPERIAL BANK OF COMMERCE,
individually and as Administrative Agent
By:
--------------------------
Tefta Ghilaga
Executive Director, CIBC Oppenheimer Corp.,
as Agent
GENERAL ELECTRIC CAPITAL CORPORATION,
individually and as Documentation Agent
By:
--------------------------
Name:
Title:
INDOSUEZ CAPITAL FUNDING, II LIMITED
By: Indosuez Capital Luxembourg,
as Collateral Manager
By:
--------------------------
Name:
Title:
CYPRESSTREE INVESTMENT PARTNERS I, LTD.
By: CypressTree Investment Management
Company, Inc. as Portfolio Manager
By:
--------------------------
Name:
Title:
S-3
<PAGE> 8
THE TORONTO-DOMINION BANK
By:
--------------------------
Name:
Title:
MERRILL LYNCH PRIME RATE PORTFOLIO
By: Merrill Lynch Asset Management, L.P.,
as Investment Advisor
By:
--------------------------
Name:
Title:
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
By:
--------------------------
Name:
Title:
KZH HOLDING CORPORATION III
By:
--------------------------
Name:
Title:
S-4
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of OpTel, Inc. on Form
S-1 of our report dated October 14, 1997, on the financial statements of OpTel,
Inc. and to the use of our report dated May 15, 1998 on the financial statements
of the Assets and Liabilities of ICS Communications, LLC acquired by OpTel, Inc.
as of and for the year ended December 31, 1997, each appearing in the
Prospectus, which is part of this Registration Statement. We also consent to the
reference to us under the headings "Summary Consolidated Financial and Operating
Data", "Selected Historical Consolidated Financial and Operating Data" and
"Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
June 5, 1998
Dallas, Texas
