<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1999
REGISTRATION NO. 333-56231
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
OPTEL, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 4841 95-4495524
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
1111 W. MOCKINGBIRD LANE
DALLAS, TEXAS 75247
(214) 634-3800
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
LOUIS BRUNEL, PRESIDENT AND CHIEF EXECUTIVE OFFICER
OPTEL, INC.
1111 W. MOCKINGBIRD LANE
DALLAS, TEXAS 75247
(214) 634-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C> <C>
RALPH J. SUTCLIFFE, 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>
---------------------
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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<TABLE>
<CAPTION>
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.... 7,577,870 $17.00 $128,823,790 $35,813.01(2)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act.
(2) Previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT 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
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 19, 1999
PROSPECTUS [OPTEL LOGO]
6,640,370 SHARES
OPTEL, INC.
COMMON STOCK
------------------
OpTel, Inc. is selling 6,250,000 shares of its common stock, and the
selling stockholders named in this prospectus are selling 390,370 shares. OpTel
will not receive any proceeds from the sale of the shares by the selling
stockholders. The underwriters named in this prospectus may purchase up to
937,500 additional shares of common stock from OpTel under certain
circumstances.
This is an initial public offering of common stock. OpTel currently expects
the initial public offering price to be between $15.00 and $17.00 per share. The
common stock has been approved for listing on the Nasdaq National Market under
the symbol "OTEL" subject to notice of issuance.
------------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------ ------------
<S> <C> <C>
Public offering price $ $
Underwriting discount $ $
Proceeds to OpTel (before expenses) $ $
Proceeds to the selling stockholders (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about
, 1999.
------------------
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
CIBC WORLD MARKETS
, 1999
<PAGE> 3
OPTEL MARKETS
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[Map of the United States highlighting markets in which OpTel, Inc.
operates and the expected telephone roll-out schedule.]
[OPTEL LOGO]
<PAGE> 4
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. 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, cable television and high
speed Internet access services, to residents of multiple dwelling units ("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 ability to deliver an integrated service offering to
MDU residents over its own networks and its long-term contractual relationships
with MDU owners and associations provide it with a competitive advantage.
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 there are
approximately 3.0 million dwelling units within these Large MDUs.
The Company currently provides cable television and telecommunications
services in a number of metropolitan areas including Houston, Dallas-Fort Worth,
Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta, Orlando-Tampa and Indianapolis. The Company is licensed as a
competitive local exchange carrier ("CLEC") in each of its major markets. The
Company has commenced offering central office switched local exchange services
in Houston and Dallas-Fort Worth and intends to offer these services in
substantially all of its major markets by the end of calendar 2000. In addition,
the Company commenced offering high speed Internet access at select MDUs in
Houston, Dallas-Fort Worth, and San Francisco in January 1999 and intends to
introduce its high speed Internet access services in substantially all of its
major markets over the next 12 months. As of February 28, 1999, the Company had
435,738 units under contract and 401,600 units passed for cable television
services and 218,023 cable television subscribers. At that date, the Company had
107,109 units under contract and 47,462 units passed for telecommunications and
13,229 telecommunications lines in service.
OpTel secures long-term rights of entry agreements ("Rights of Entry") with
MDU owners. Rights of Entry generally grant OpTel the exclusive right to provide
cable television service to an MDU or group of MDUs and provide that the MDU
owner will promote OpTel as the preferred provider of telecommunications
services within the MDU. Rights of Entry generally provide OpTel with the
exclusive services of the MDU's leasing staff to market the Company's services
to residents. Rights of Entry also generally grant OpTel the exclusive right to
use the coaxial cable network at the MDU. As a result, at MDUs where OpTel has
cable television Rights of Entry, OpTel effectively will be the only company
positioned to provide high speed Internet access via cable modem. Rights of
Entry generally provide financial incentives to property owners to promote and
sell the Company's services to MDU residents. 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
<PAGE> 5
average unexpired term of the Company's Rights of Entry was approximately eight
and one half years as of February 28, 1999 (assuming the Company's exercise of
available renewal options).
The Company intends to continue to develop and utilize its own networks to
deliver its service offerings. The Company also plans to collocate network
facilities for telecommunications services in selected ILEC end offices in
certain of its markets. Through collocation, the Company will lease the ILEC's
transport network on an unbundled basis to initially reach a subscriber. The
Company believes collocation will decrease the time required to provide
telephone services to a subscriber, increase the Company's addressable market by
providing a cost effective means of servicing smaller MDUs and, over time,
promote new Rights of Entry. The Company will select the ILEC end offices in
which it will collocate based upon MDU concentration. When it has secured a
Right of Entry and a sufficient subscriber base at an MDU, the Company intends
to bring its own network transport facilities to the MDU and discontinue
collocation services in order to increase operating margins. In addition, the
Company intends to test market telephone services to residents of single family
dwellings in certain markets where it has collocated facilities. The initial
test will be conducted in the Houston market.
STRATEGY
OpTel's goal is to become the nation's largest integrated communications
provider for Large MDUs. In order to achieve this objective, OpTel has
customized strategies to rapidly and cost effectively address its markets,
deploy its networks and offer an integrated service package supported by
superior customer service. The following highlights key elements of OpTel's
growth and operating strategies:
Provide an Integrated Service Offering. In order to establish the broadest
possible relationship with its subscribers, OpTel offers an integrated package
of communications services at competitive rates. OpTel's service offerings
include: (i) basic and premium tier cable television services, which the Company
can customize on a sub-market basis to meet local preferences; (ii) a full
featured switched local and long distance telephone offering; (iii) high speed
Internet access via cable modem with downstream transmission speeds of up to 1.5
MB per second, which is delivered through a venture with an independent Internet
service provider; and (iv) where market conditions justify, an additional tier
of direct broadcast satellite ("DBS") programming from EchoStar Satellite
Corporation ("EchoStar") that includes over 300 channels of digital video and
audio programming. The Company believes its integrated service offering will
capitalize on MDU residents' preference for a single source provider of
communications services, enhancing OpTel's ability to attract and retain
subscribers.
Continue to Rapidly Expand Subscriber Base. The Company intends to rapidly
expand its subscriber base by: (i) securing additional Rights of Entry from MDU
owners through the use of its experienced and growing sales force and (ii)
increasing penetration and cross-selling additional services to existing
subscribers in MDUs where the Company has Rights of Entry through the use of
marketing and incentive programs. The Company will continue to market its Rights
of Entry on a business to business basis to local, regional and national MDU
owners, including real estate investment trusts ("REITs"). The Company's
strategy to promote subscriber growth includes having MDU leasing agents provide
an effective point of sale including at the time MDU residents initially secure
their leases. As an additional strategy to drive growth, the Company will
directly market local and long distance telephone services to tenants residing
in MDUs not covered by Rights of Entry but who can be served by collocating
telecommunications network facilities at certain ILEC end offices and leasing
unbundled transport network from that ILEC. The Company believes that its
ability to directly market services to MDU residents will drive Rights of Entry
with owners who will want to share in OpTel's success. When it has secured a
Right of Entry and a sufficient subscriber base at an MDU, the Company intends
to bring its own network transport facilities to the MDU and discontinue
collocation services in order to increase operating margins.
Deploy Cost Effective Networks. OpTel's networks are specifically designed
to provide services to MDUs. OpTel's advanced proprietary network infrastructure
utilizes a combination of point-to-point microwave transmission equipment and
fiber optic cable to efficiently deliver the Company's various services to
2
<PAGE> 6
MDU residents. A substantial portion of the Company's network cost to serve an
MDU is related to the infrastructure specific to that MDU and is invested only
after the Company and the MDU owner have entered into a long-term Right of
Entry. The Company plans to interconnect its microwave network hubs to provide a
redundant ring architecture for telecommunications and to permit the future
transport of digital video programming and Internet traffic from a single source
within a market. The Company intends to expand its use of central office
switches in order to improve cost efficiencies and enhance its local service
offering. The Company expects to serve substantially all of its major markets
with its own central office switches by the end of calendar 2000. As a licensed
CLEC in each of its major markets, the Company also intends to collocate
facilities and lease ILEC transport network in order to offer telecommunications
services in advance of installing network transport facilities from its switch
to the subscriber. Over time, OpTel believes substantially all
telecommunications services to MDUs serviced under Rights of Entry will be
migrated from ILEC leased transport network to its own network facilities.
Provide Superior Customer Service. The Company believes that an important
success factor for competitive service providers will be to ensure superior
customer service. Accordingly, the Company has focused on implementing,
provisioning and servicing practices designed around the residential MDU
customer. The Company has a national customer service center staffed with
knowledgeable representatives to address the needs of residents 24-hours-a-day,
seven-days-a-week and dedicated local service teams, trained to support all of
the Company's service offerings, that provide prompt installation and response
to customer service calls. The Company also has service center staff dedicated
to responding to calls from MDU owners and their leasing agents. 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 and
dedicates individual technical service teams to a few proximate MDUs.
Pursue Selective Acquisitions and Strategic Relationships. 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. Since May 1996, the Company has completed and successfully integrated six
acquisitions of MDU oriented video providers representing approximately 700 MDUs
served and 103,000 subscribers. The Company intends to continue to seek
acquisition opportunities in order to capitalize on economies of scale, expand
its subscriber base, provide a client base to cross-sell its other services and
decrease the time to market. The Company delivers high speed Internet access
services through a strategic relationship with an Internet service provider that
specializes in delivering broadband Internet connectivity and content to MDUs.
In addition, the Company has entered into a strategic relationship with EchoStar
for the delivery of an additional tier of DBS programming and will continue to
evaluate other strategic alliances.
EXPERIENCED MANAGEMENT AND COMMITTED SHAREHOLDER
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 of equity capital in OpTel. These invested amounts
have been critical to OpTel's growth.
OpTel benefits from GVL's experience developing and providing cable
television and telecommunications services to residential customers in the
United Kingdom. The President and Chief Executive Officer and Chief Financial
Officer of OpTel served as the Vice-Chairman and Chief Executive Officer and
Chief Financial Officer, respectively, of the since-divested 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.
3
<PAGE> 7
RISK FACTORS
The Company operates in highly competitive market segments which are
subject to extensive regulation at the federal, state and local level. The
Company's success in providing telecommunications services, as well as cable
television and Internet access services, is dependent upon a number of factors,
some of which are controlled by the Company and some of which are controlled by
third parties, including ILECs, MDU owners and residents and government
entities. Such factors include risks associated with the Company's history of
net losses and negative cash flow, the Company's substantial indebtedness and
the insufficiency of its earnings to cover fixed charges, the significant
capital requirements of the Company's operations and the Company's dependence
upon its strategic relationships with MDU owners. See "Risk Factors" for a
detailed discussion of certain factors which should be considered by purchasers
of the common stock.
ORGANIZATION AND PRINCIPAL OFFICE
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.
4
<PAGE> 8
THE OFFERING
Unless otherwise indicated, the information in this Prospectus assumes (i)
an initial public offering price of $16.00 per share, (ii) that the
Underwriters' over-allotment option will not be exercised, (iii) a 5 for 1 stock
split which will be effected upon consummation of the Offering (the "Split") and
(iv) the conversion of all the outstanding classes of common stock and all
outstanding series of preferred stock into shares of Class A Common Stock, par
value $.01 per share (the "Common Stock") immediately prior to the consummation
of the Offering. While the information in this Prospectus assumes the conversion
of all of the outstanding shares of the Company's Class B Common Stock, $.01 per
share (the "Class B Common"), and 9.75% Series A Preferred Stock, par value $.01
per share (the "Series A Preferred"), immediately prior to the consummation of
the Offering, the actual conversion will occur after the Offering is
consummated. See "Risk Factors -- Risks Associated with GVL's Series A Preferred
Stock and Class B Common Stock."
Common Stock offered by the Company..... 6,250,000 shares
Common Stock offered by the Selling
Stockholders............................ 390,370 shares
________
Total.............................. 6,640,370 shares
Common Stock outstanding after the
Offering................................ 33,539,458 shares(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. The
Company will not receive any
proceeds from the sale of shares by
the Selling Stockholders. See "Use
of Proceeds."
Nasdaq National Market Symbol........... OTEL
- ---------------
(1) Excludes (i) 140,195.80 shares of Common Stock issuable upon exercise of
presently exercisable stock options granted to officers, employees and
consultants at a weighted average exercise price of $16.78 per share and
(ii) 175,636.10 shares of Common Stock issuable upon exercise of presently
exercisable warrants at a weighted average exercise price of $11.96 per
share. If the Series A Preferred is not converted until 90 days following
the Offering, up to approximately 250,258 additional shares of Common Stock
may be issued upon conversion of the Series A Preferred as a result of the
conversion of additional accrued and unpaid dividends on the outstanding
shares.
5
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data as of August 31, 1998 and for the
years ended August 31, 1996, 1997 and 1998 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 months ended
February 28, 1998 and 1999 have been derived from unaudited consolidated
financial statements of the Company. In the opinion of management, the unaudited
interim 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.
Operating results for the six months ended February 28, 1998 and 1999, are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other interim period. As a result of 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>
HISTORICAL
----------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television...................... $ 25,893 $ 36,915 $ 61,081 $ 25,247 $ 38,095
Telecommunications.................... 1,711 2,922 3,882 1,644 2,870
-------- -------- -------- -------- --------
Total revenues................ 27,604 39,837 64,963 26,891 40,965
Operating expenses:
Programming, access fees and revenue
sharing............................ 11,868 19,202 28,825 12,419 18,689
Customer support, general and
administrative..................... 19,636 28,926 35,847 15,855 26,335
Depreciation and amortization......... 8,676 14,505 28,481 10,759 17,997
-------- -------- -------- -------- --------
Total operating expenses................ 40,180 62,633 93,153 39,033 63,021
-------- -------- -------- -------- --------
Loss from operations.................... (12,576) (22,796) (28,190) (12,142) (22,056)
Interest expense, net(1)................ (5,854) (25,739) (39,564) (21,885) (22,558)
-------- -------- -------- -------- --------
Loss before income taxes and
extraordinary item.................... (18,430) (48,535) (67,754) (34,027) (44,614)
Net loss(2)............................. $(18,430) $(48,535) $(74,398) $(34,027) $(44,614)
-------- -------- -------- -------- --------
Dividends on preferred stock............ -- -- (8,748) -- (9,710)
Loss attributable to common equity...... $(18,430) $(48,535) $(83,146) $(34,027) $(54,324)
======== ======== ======== ======== ========
Basic and diluted loss per share of
common equity(3)...................... $ (1.66) $ (4.00) $ (6.29) $ (2.64) $ (3.96)
</TABLE>
6
<PAGE> 10
<TABLE>
<CAPTION>
HISTORICAL
------------------------- AS ADJUSTED
AUGUST 31, FEBRUARY 28, FEBRUARY 28,
1998 1999 1999(4)
---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents.................................. $123,774 $ 60,032 $152,282
Restricted investments..................................... 63,207 38,645 38,645
Property, plant and equipment, net......................... 268,044 308,289 308,289
Intangible assets.......................................... 160,370 159,055 159,055
Total assets............................................... 627,170 581,459 673,709
Notes payable and long-term obligations.................... 429,278 428,853 428,853
Total liabilities.......................................... 466,394 465,297 465,297
Stockholders' equity....................................... 160,776 116,162 208,412
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
AUGUST 31, FEBRUARY 28,
-------------------------------- --------------------
1996 1997 1998 1998 1999
-------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Net cash flows used in operating
activities......................... $ (453) $ (15,935) $ (26,268) $ (15,215) $(31,441)
Net cash flows used in investing
activities......................... (72,037) (143,125) (121,532) (60,293) (31,186)
Net cash flows provided by (used in)
financing activities............... 72,131 244,688 184,269 117,745 (1,115)
Capital expenditures(5).............. 62,121 71,505 85,643 37,900 56,928
EBITDA(6)............................ (3,900) (8,291) 291 (1,383) (4,059)
</TABLE>
<TABLE>
<CAPTION>
AS OF
----------------------------------------------
AUGUST 31,
------------------------------ FEBRUARY 28,
1996 1997 1998 1999
-------- -------- -------- ------------
<S> <C> <C> <C> <C>
OPERATING DATA
CABLE TELEVISION
Units under contract(7).......................... 241,496 295,149 432,955 435,738
Units passed(8).................................. 225,433 254,032 399,210 401,600
Basic subscribers................................ 114,163 132,556 216,249 218,023
Basic penetration(9)............................. 50.6% 52.2% 54.2% 54.3%
Premium units(10)................................ 60,641 95,150 182,788 176,411
Pay-to-basic ratio(10)(11)....................... 53.1% 71.8% 84.5% 80.9%
Average monthly revenue per basic
subscriber(12)................................. $22.70 $24.94 $27.95 $29.20
TELECOMMUNICATIONS
Units under contract(7).......................... 20,945 39,831 94,338 107,109
Units passed(8).................................. 12,364 16,572 35,671 47,462
Lines(13)........................................ 4,126 6,185 9,244 13,229
Line penetration(14)............................. 33.4% 37.3% 25.9% 27.9%
Average monthly revenue per line(15)............. $42.10 $47.23 $46.62 $44.50
</TABLE>
- ---------------
(1) Interest expense, net is reflected net of interest income and interest
capitalized in property, plant and equipment. Includes interest expense on
the Company's 15% Convertible Notes (the "GVL Notes") of approximately
$5,342,000, $15,204,000 and $9,640,000 for the years ended August 31, 1996,
1997 and 1998, respectively and $9,640,000 for the six months ended
February 28, 1998. Effective March 1, 1998, the GVL Notes were exchanged
for approximately 6,962 shares of Series A Preferred.
(2) The Company reported an extraordinary loss on debt extinguishment of
$6,644,000 for the year ended August 31, 1998 due to the repayment and
termination of a senior secured credit facility (the "Senior Credit
Facility").
(3) Loss per share has been restated to reflect the adoption of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" and the Split.
Basic and diluted loss per share are computed in the same manner since
common stock equivalents are antidilutive.
7
<PAGE> 11
(4) Gives effect to the Offering and the assumed conversion of all outstanding
classes of common stock and all outstanding series of preferred stock into
Common Stock immediately prior to the consummation of the Offering. Such
conversions will have no impact on stockholders' equity.
(5) Capital expenditures include expenditures on property, plant and equipment
together with intangible assets excluding expenditures for business
acquisitions.
(6) EBITDA represents earnings (loss) 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.
(7) 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 the
majority of all units under contract for telecommunications are also under
contract for cable television.
(8) 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 for cable television and telecommunications
services, respectively.
(9) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(10) 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. For comparative
purposes, the premium units and the pay-to-basic ratio as of August 31,
1997 and 1998 and February 28, 1999 presented under the previous method of
reporting are 84,875, 136,863 and 128,137, respectively, and 64.0%, 63.3%
and 58.8%, respectively.
(11) Pay-to-basic ratio is calculated by dividing the total number of premium
units by the total number of basic subscribers.
(12) Represents average monthly revenue divided by the average number of basic
subscribers for the fiscal periods ended as of the date shown.
(13) 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.
(14) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.
(15) Represents average monthly revenue divided by the average number of lines
for the fiscal periods ended as of the date shown.
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RISK FACTORS
Any investment in the 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. There is, therefore, 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. Furthermore, as
a result of its rapid growth and implementation of various new business
strategies, including the expansion of its telecommunications business, the
Company has incurred in the past, and may incur the future, certain
unanticipated costs and capital expenses. 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 $22.1 million, $28.2 million, $22.8
million and $12.6 million for the six months ended February 28, 1999, fiscal
1998, fiscal 1997 and fiscal 1996, respectively, as its cable television and
telecommunications customer base has grown. While the Company reported positive
EBITDA (as defined in the Glossary) of $0.3 million for fiscal 1998, the Company
reported negative EBITDA of $4.1 million, $8.3 million and $3.9 million for the
six months ended February 28, 1999, fiscal 1997 and fiscal 1996, respectively.
There can be no assurance that OpTel will achieve profitability or positive
EBITDA in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT
The Company's indebtedness is substantial in relation to its stockholders'
equity and cash flow. As of February 28, 1999, assuming the Offering had been
completed on such date, the Company would have had total consolidated
indebtedness of approximately $428.9 million and stockholders' equity of
approximately $208.4 million. The Company's earnings were insufficient to cover
its debt service by approximately $77.2 million for fiscal 1998 and $45.7
million for the six months ended February 28, 1999. See "Capitalization" and
"Selected Historical Consolidated Financial and Operating Data."
The indentures governing the Company's two series of outstanding notes (the
"Indentures") impose certain restrictions on the operations and activities of
the Company. The Company's ability 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. Furthermore, the Company expects that it may need to
refinance the principal amount of its outstanding 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.
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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 its 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, telecommunications and Internet 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 its cash on hand, together with the proceeds of the Offering, 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. Under the terms of the
more restrictive of the Company's Indentures, the Company can only incur
approximately $50 million of additional indebtedness. The aggregate amount of
indebtedness which can be incurred by the Company under its more restrictive
Indenture is directly related to the number of cable television subscribers
served by the Company. As a result, growth of the Company's telecommunications
business, where the Company has focused significant management attention and
resources, will not increase the Company's ability to incur indebtedness under
the terms of the more restrictive Indenture. The Company may need to incur
indebtedness in excess of its current capacity. 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,
telecommunications and Internet access 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 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
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 those of 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 materially adversely affected by these or other matters arising from past
or future
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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 acquisitions, if completed, could adversely 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.
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
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
any 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 its Houston and Dallas-Fort Worth markets 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 areas. 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.
The failure to negotiate the necessary interconnection agreements could have a
material adverse effect upon the Company's ability to expand its
telecommunication services. See "-- Uncertainties Related to Subscriber Access."
Currently, the Company provides local telephone service as an STS provider in
most of its markets. STS providers generally use an ILEC's facilities (although
in many states CLECs can now supply STS
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operators with facilities) to provide local telephone service as a reseller,
subject to state regulation. If ILECs 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 Collocation Strategy. In order to accelerate the
Company's time to market and increase the Company's addressable market, the
Company intends to collocate facilities in certain ILEC end offices and to lease
from the ILEC unbundled transport network from the office to the customer.
Collocation space is obtained on a first come/first served basis. As a result,
there can be no assurance the Company will be able to obtain collocation sites
in the end offices it desires. Where the Company relies on leased unbundled
network elements, the Company and its customer are dependent on the ILEC to
assure uninterrupted service. The ILECs have limited experience in providing
unbundled network elements, and there can be no assurance the ILECs will provide
and maintain these elements in a prompt and efficient manner. The failure to
obtain collocation space or unbundled network elements on a timely basis or of
the ILEC to maintain such unbundled network elements in a prompt and efficient
manner could have a material adverse effect on the Company's ability to expand
its telecommunications services. Pursuing a collocation strategy requires the
Company to invest in network infrastructure in advance of signing up customers.
The Company's marketing strategy to date has relied heavily on its ability,
derived from its Rights of Entry, to maintain a presence at the MDU, to market
to the residents of an MDU through the leasing agent and to offer a bundled
service offering. As part of the Company's collocation strategy, the Company
will be marketing its services directly to residents of MDUs where the Company
does not have a Right of Entry. There can be no assurance that the Company will
be able to successfully market its services directly to MDU residents and, as a
result, generate a return on its invested capital.
Uncertainties Related to Reciprocal Compensation. The Communications Act of
1934, as amended, (the "Communications Act") requires LECs 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, the FCC has determined that ISP-bound calls
constitute interstate traffic for jurisdictional purposes and it is considering
the adoption of a federal rule regarding the appropriate inter-carrier
compensation for such traffic. There can be no assurance that traffic terminated
to an ISP will not ultimately be held to be exempt from the reciprocal
compensation requirements. If that were the case, the Company may not receive
compensation for traffic originated on another carriers' network and terminated
by the Company to an ISP.
Uncertainties Related to Subscriber Access. ILECs often refuse to
reconfigure their networks so that CLECs may access on-property distribution
facilities at a single point on or near an MDU property. Accordingly, the
Company has experienced and can be expected to continue to experience
difficulties bringing its network-based telephone services to subscribers at
some of the MDUs that it seeks to serve. Where the Company is not able to access
on-property ILEC distribution facilities, it must either install duplicative
distribution facilities or lease unbundled loops from an ILEC in order to reach
individual subscribers within an MDU. Either of these alternatives may raise the
cost of service or delay entry. While the Company is seeking regulatory changes
to address access to on-property MDU telephone wiring, there can be no assurance
that this barrier to entry will be reduced or diminished, or that it will not
have an adverse effect on the Company's efforts to expand its competitive
telephone services. See "Business -- Regulation -- Telecommunications
Regulation -- Competitive Local Exchange Carrier Regulation."
Uncertainties Related to Access Charges. The Company charges IXCs "access
charges" for the right to terminate and originate traffic on the Company's local
network. The Company depends in substantial part upon these access charges to
defray the costs of its network build-out. At least one IXC has questioned the
reasonableness of the Company's access rate and has refused to pay any access
rate greater than that charged by the ILEC in the same local calling area. There
can be no assurance that the Company's access rates will
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not be found to be unreasonable, or that regulatory or market forces will not
compel the Company to lower its access rates, which could, in either case,
materially adversely affect the profitability or the speed of deployment of the
Company's local telephone network.
Potential 911, E-911 and Intrusion Alarm Liability. The Company delivers
local exchange service, including access to emergency ("911") services, to MDU
residents. 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 permit 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 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. 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 provider of telecommunications services within the MDU. 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, where the Company
serves two MDUs, prohibits private cable television operators from entering into
revenue sharing or up front incentive payment arrangements with MDU owners.
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At least one state outside of the Company's markets has imposed restrictions on
the use of marketing agreements between local exchange carriers and MDU owners,
and legislation is pending in California, which already has adopted regulations
to this effect, which would prohibit exclusive access arrangements for local
exchange services and potentially limit other types of marketing agreements
between carriers and MDU owners. Further, the Federal Communications Commission
(the "FCC") has initiated a notice of proposed rulemaking seeking comment on
whether the FCC should adopt regulations restricting exclusive contracts for
video services. There can be no assurance that laws or regulations that either
limit the Company's ability to enter into exclusive Rights of Entry or restrict
the Company's ability to enter into marketing agreements with MDU owners will
not be adopted at the federal or state level, or that, if adopted, such laws or
regulations 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 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."
UNCERTAINTIES RELATED TO THE AVAILABILITY OF RADIO SPECTRUM
The Company relies upon use of the radio spectrum, principally 18 GHz
microwave radio, in its network architecture. The 18 GHz point-to-point
microwave paths that the Company uses, and the other microwave frequencies that
the Company uses or intends to use, are licensed by the FCC. The FCC has issued
a Notice of Proposed Rulemaking seeking comment on a proposal to make
terrestrial microwave users, like the Company, secondary to satellite downlinks
in portions of the 18 GHz band that currently are used by the Company. Under the
proposal, any 18GHz microwave paths licensed to the Company pursuant to
applications filed with the FCC after the date the new rules are released to the
public would not be permitted to cause harmful interference to satellite
downlinks in the 18GHz band. If adopted, the proposal would severely limit the
Company's use of the 18 GHz microwave band and potentially strand some of the
Company's investment in network facilities. If the proposal is adopted, the
Company would seek authority to use other portions of the radio spectrum, but
such use will likely require other FCC rule changes, as to which there can be no
assurance, and there can be no assurance that migration by the Company to other
bands is technically feasible or that such migration would not negatively affect
the cost of the Company's networks. In addition, the bands of spectrum that the
Company uses or intends to use, including but not limited to the 18 GHz band,
are shared with other users. There can be no assurance that the FCC will not
change the allocation for, or the rules applicable to, any frequency band that
the Company uses or seeks to use in such a way as to limit the Company's access
to or use of the band. See "Business -- Regulation -- Microwave and Private
Cable Regulation."
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
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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.
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.
DEPENDENCE ON STRATEGIC RELATIONSHIPS
OpTel has entered into a number of important strategic relationships which
are necessary for OpTel to provide certain of its service offerings. These
include OpTel's alliance with I(3)S, Inc. ("I(3)S"), an ISP, to provide
high-speed Internet access services and OpTel's agreement with EchoStar which
permits OpTel to provide an additional digital tier of DBS programming. The
failure of these parties to deliver the services for which OpTel has contracted
could adversely affect the Company's ability to deliver these services.
RAPID TECHNOLOGICAL CHANGES AND UNCERTAIN MARKET DEVELOPMENT
The multichannel television and telecommunications industries, including
Internet services, 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. 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 recently implemented a new customer management information
system and has migrated its telephone subscribers to the new system. The Company
intends to migrate its cable television subscribers to the new system during
fiscal 1999. The Company expects the new customer management information system
to be an important factor in its operations. If the conversion is not completed
in a timely manner, or is not completed at all or, if after conversion, the new
system 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. The Company's Year 2000
compliance depends in part on the successful conversion to the new system and on
the new system
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<PAGE> 19
being Year 2000 compliant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Compliance."
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 Company to effectively manage its
growth and attract and retain qualified personnel could have a material adverse
effect on its business.
COMPETITION
Substantially all markets for voice, video and Internet services are highly
competitive and the Company expects that competition will intensify. See
"Business -- Competition." 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, STS providers, CLECs and competitive access providers
("CAPs") and will compete with long distance telephone companies, franchise
cable television operators and Internet protocol telephone services as they
begin to enter the local telephone business. The Company's long distance service
competes with established IXCs and resellers and with long distance Internet
protocol telephone services. 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, franchise cable television operators and IXCs begin to enter
the local telephone market and ILECs enter the interexchange market. See
"Business -- Regulation." Similarly, mergers, joint ventures and alliances among
franchise, wireless or private cable television operators, regional Bell
operating companies ("RBOCs") and IXCs may result in providers capable of
offering bundled cable television and telecommunications services in direct
competition with the Company. For example, the recent merger of AT&T and Tele-
Communications, Inc. ("TCI") has resulted in a single large, well financed
integrated communications provider with which the Company may compete.
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 in
exchange for exclusive rights of entry agreements. 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 residents of MDUs. Although the Company's Rights of
Entry prohibit residents from installing receiving equipment on the exterior of
the building, these provisions are not always enforced and do not prohibit
residents 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
16
<PAGE> 20
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. See "Business -- Regulation -- Regulation of Cable
Television -- Subscriber Access."
As an emerging CLEC in each of its major 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
integrated communications carriers and CLECs, including OpTel, could be
materially adversely affected.
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. In recent years the cable industry has
experienced a rapid escalation in the cost of programming. This escalation may
continue and the Company may not be able to pass the full programming cost
increases on to its subscribers. In addition, 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 in the past 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
17
<PAGE> 21
provisions may be uncertain. The FCC is seeking comment on whether such
exclusive contracts should be limited to a maximum period of seven years.
Although it is open to question whether the FCC has statutory and constitutional
authority to compel mandatory access, 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." The FCC also has issued a rule preempting certain state, local
and private restrictions on over-the-air reception antennas. 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 ability to receive 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
which are licensed by the FCC. 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 desirable frequencies for the distribution of its services, or otherwise
impair the Company's microwave licenses. See "-- Uncertainties Related to the
Availability of Radio Spectrum." 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 time permitted by 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
in which 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
yet approved an RBOC application to provide in-region long distance service it
may do so in the future.
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.
The Company, increasingly uses ILEC network elements for transport and
other network functions as it expands its telecommunications offering. The ILECs
were required to make these unbundled network elements ("UNEs") available to
CLECs by FCC regulation. The Supreme Court, however, recently vacated the FCC's
UNE regulations. As a result, it is unclear at this time whether, and to what
extent, the ILEC UNEs that OpTel has used or intends to use will be available in
the future.
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
18
<PAGE> 22
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.
LATE FEES CLASS ACTION LITIGATION
On April 12, 1999, a purported class action complaint was filed in the
District Court of Harris County, Texas by Marc H. Levy, individually and on
behalf of all cable subscribers that have paid late fees to the Company. The
plaintiff alleges that late fees charged to plaintiff for delinquent payments of
cable subscription charges are an illegal penalty. The plaintiff seeks
unspecified damages and other relief. The case is in its very early stages, and
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 has
meritorious factual and legal defenses, and intends to defend vigorously against
these claims.
FOREIGN OWNERSHIP RESTRICTIONS
The Communications 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. As the Company expands its telecommunications services, it plans to
offer services which may constitute "common carrier" services. To the extent
that the Company seeks to use its frequency licenses to provide "common carrier"
telecommunications services, it will be required to obtain FCC approval.
Although grant of such authority will be presumed to be in the public interest,
there can be no assurance that the FCC will permit the Company to hold common
carrier authorizations. The failure to obtain such common carrier authorizations
could limit the Company's ability to offer certain telecommunications services
and therefore have a material adverse effect on its marketing plan.
CONTROL BY GVL
General. After consummation of the Offering and assuming the conversion of
all outstanding classes of common stock and all outstanding series of preferred
stock into Common Stock immediately prior to the consummation of the Offering,
VPC Corporation ("VPC"), an indirect wholly-owned subsidiary of GVL, will own
approximately 57.1% of the outstanding Common Stock and 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 control the vote on matters submitted to the vote of the
Company's stockholders.
Potentially Competing Ventures. 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 wireless cable systems, 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 commenced delivering high
19
<PAGE> 23
speed Internet access in the San Francisco area. These services may compete with
the Company's high speed Internet offering.
GVL Indenture. 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, 1999, GVL was able to incur approximately Cdn $560 million
(approximately $376 million based on an exchange rate of $1.00 = Cdn $1.487 as
reported by the Wall Street Journal for April 16, 1999) of indebtedness under
its indenture. 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.
Stockholders' Agreement. 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, VPC and CDPQ agreed to vote for certain of CDPQ's nominees
for director and CDPQ was granted 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 Common Stock. See "Principal and Selling Stockholders -- Stockholders'
Agreement."
RISKS ASSOCIATED WITH GVL'S SERIES A PREFERRED STOCK AND CLASS B COMMON STOCK
VPC, an indirect wholly-owned subsidiary of GVL, holds all of the
outstanding shares of Series A Preferred and 9,617,795 shares of Class B Common.
The Series A Preferred and Class B Common are expected to be converted into
Common Stock and therefore all financial and stockholder ownership information
in the Prospectus assumes such conversion occurred immediately prior to the
consummation of the Offering. The actual conversion, however, will not take
place until a date expected to occur not more than 90 days after the Offering.
Pursuant to an agreement to be executed prior to the consummation of the
Offering among the Company, VPC and GVL (the "Conversion and Exchange
Agreement"), VPC is required, on or before the earlier to occur of August 29,
1999 or the 90th day following the consummation of the Offering, (a)(i) to
convert all of the Series A Preferred then outstanding into Class B Common, and
(ii) immediately upon receipt of these shares of Class B Common to convert them
into shares of Common Stock and (b) to convert all of the shares of Class B
Common held by VPC into Common Stock. Upon conversion of all of the then
outstanding shares of Class B Common held by VPC into Common Stock all other
outstanding shares of Class B Common will automatically convert into Common
Stock. Dividends will continue to accrue on the outstanding shares of Series A
Preferred until such shares are converted into Common Stock in accordance with
their terms. See "Description of the Capital Stock -- Preferred Stock."
In the event of a breach by VPC or GVL of the Conversion and Exchange
Agreement it is possible that (i) the Series A Preferred would remain
outstanding and, under the terms of such securities, accrue dividends at 9.75%
per annum in kind until August 29, 1999 and thereafter in cash, (ii) the Series
A Preferred would be converted by VPC into Class B Common but not then converted
into Common Stock or (iii) the outstanding Class B Common would not be converted
into Common Stock and would remain outstanding. If the Series A Preferred were
to remain outstanding, it would continue to enjoy a dividend and liquidation
preference over the Common Stock and to restrict the Company's ability to pay
dividends on the Common Stock. If the Class B Common were to remain outstanding
after the conversion of the Series A Preferred or otherwise, it would enjoy ten
votes per share, while the Common Stock is entitled to one vote per share. In
either event, the equity interest or voting power, or both, of the holders of
the Common Stock would be diluted. There can be no assurance that the Company or
the holders of the Common Stock would have an adequate remedy in the
20
<PAGE> 24
event of a breach of the Conversion and Exchange Agreement by VPC or GVL. See
"Description of Capital Stock."
CHANGE OF CONTROL UNDER THE INDENTURES
A transfer by VPC of its interest in OpTel or a transfer by GVL of its
interest in VPC or the conversion by VPC of its Class B Common together with an
election by VPC not to convert its Series A Preferred may result in a "Change of
Control" as defined under the Indentures, which would require the Company to
offer to purchase its outstanding notes.
There can be no assurance that the Company would have the financial
resources to meet its obligations under the Indentures in the event of a Change
of Control. A Change of Control could also result in the acceleration of or an
event of default in respect of other indebtedness of the Company allowing the
lenders or holders thereof to require repayment of such indebtedness in full.
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 subscriber
serving cable and telecommunications equipment and its critical computer
systems, applications and other technology will function properly beyond
December 31, 1999. There can, however, be no assurance that the Year 2000
program will be successful. If the Company's Year 2000 program is not
successfully completed, the Company may not be able to deliver or bill for its
cable television, telecommunications or Internet access services after December
31, 1999. The ability of third parties with whom OpTel transacts business to
adequately address their Year 2000 issues is outside of the Company's control.
There can be no assurance that the failure of the Company or such third parties
to adequately address their respective Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance."
LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the 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 Common Stock will be
determined through negotiations among the Company and the Underwriters and may
not be indicative of the market price of the 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 Common
Stock.
DILUTION
There will be an immediate and substantial dilution of a purchaser's
investment in the Common Stock in that the net tangible book value per share of
Common Stock after the Offering will be substantially less than the per share
offering price of the 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,
21
<PAGE> 25
the terms of OpTel's outstanding indebtedness restrict the payment of dividends
on Common Stock. See "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
Common Stock. In addition, the Board has the authority to issue shares of a
class of common stock which has multiple votes per share and 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" and "-- Common Stock."
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, could materially adversely
affect the market price of shares of 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 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 $16.00 per share) are estimated to be
approximately $92.25 million ($106.2 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. Upon consummation of the Offering, the Company will have cash on
hand of approximately $152.3 million. The Company anticipates its capital
requirements over the next five years to be approximately $650 million. The
Company cannot precisely quantify the amount of the proceeds from the Offering
which will be used for capital expenditures. 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. In addition, the Company may use a portion of the net
proceeds for acquisitions. Although the Company is currently evaluating and
often engages in discussions regarding various acquisition opportunities, no
agreement or agreement in principle 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.
The Company will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Stockholders.
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. See "Risk
Factors -- Lack of Dividend History; Restrictions on Payment of Dividends."
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<PAGE> 27
CAPITALIZATION
The following table sets forth, on an unaudited basis at February 28, 1999,
(i) the historical capitalization of the Company as adjusted to give effect to
the Split and (ii) the capitalization as adjusted to give effect to the
Offering, the Split and the conversion of all outstanding classes of common
stock and all outstanding series of preferred stock into Common Stock, each of
which will occur on or before the 90th day after the consummation of the
Offering. This table should be read in connection with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements of the Company and the notes thereto appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF FEBRUARY 28, 1999
-----------------------
AS
ACTUAL ADJUSTED(1)
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 60,032 $ 152,282
Restricted Investments...................................... 38,645 38,645
--------- ---------
Total..................................................... $ 98,677 $ 190,927
========= =========
Indebtedness:
13% Senior Notes Due 2005................................. $ 219,786 $ 219,786
11 1/2% Senior Notes Due 2008............................. 200,000 200,000
Notes payable and other long-term liabilities............. 3,476 3,476
Deferred acquisition liabilities.......................... 5,591 5,591
--------- ---------
Subtotal............................................. 428,853 428,853
Stockholders' equity:
Class A common stock, $0.01 par value ("Common Stock");
180,000,000 shares authorized; 821,360 issued and
outstanding; 33,282,619 issued and outstanding as
adjusted;.............................................. 8 333
Class B common stock, $0.01 par value ("Class B Common");
60,000,000 shares authorized; 11,767,490 issued and
outstanding; none issued and outstanding as
adjusted;.............................................. 118 --
Class C common stock, $0.01 par value ("Class C Common");
3,000,000 shares authorized; 1,125,000 issued and
outstanding; none issued and outstanding as
adjusted;.............................................. 11 --
Series A Preferred Stock, $0.01 par value, 10,000 shares
authorized; 7,301.6 issued and outstanding; none issued
and outstanding as adjusted............................ 153,341 --
Series B Preferred Stock, $0.01 par value; 1,000 shares
authorized; 1,042.6 issued and outstanding; none issued
and outstanding as adjusted............................ 63,827 --
Additional paid-in capital................................ 113,671 422,893
Accumulated deficit....................................... (214,814) (214,814)
--------- ---------
Subtotal............................................. 116,162 208,412
--------- ---------
Total capitalization.............................. $ 545,015 $ 637,265
========= =========
</TABLE>
- ---------------
(1) Gives effect to the Offering (assuming an initial public offering price of
$16.00 per share and after deducting estimated underwriting discounts and
commissions and estimated fees and expenses of $7,750,000) and to the
conversion of all outstanding classes of common stock and all outstanding
series of preferred stock into Common Stock upon consummation of the
Offering. Does not give effect to the conversion of accrued and unpaid
dividends on the Series A Preferred and Series B Preferred from February 28,
1999 through the date of conversion. Approximately 69,146 additional shares
of Common Stock will be issued in respect of dividends accrued after
February 28, 1999 with respect to the Series B Preferred. If the Series A
Preferred is not converted until 90 days following the Offering, up to
approximately 437,951 additional shares of Common Stock may be issued upon
conversion of the Series A Preferred as a result of the conversion of
additional accrued and unpaid dividends on the outstanding shares. See "Risk
Factors -- Risks Associated with GVL's Series A Preferred Stock and Class B
Common Stock" and "Description of Capital Stock."
24
<PAGE> 28
DILUTION
The net tangible book value per share of Common Stock is the difference
between the Company's tangible assets and its liabilities, divided by the number
of shares of common stock outstanding. For investors in the Common Stock,
dilution is the per share difference between the assumed $16.00 per share
initial offering price of the Common Stock offered hereby and the net tangible
book value of the Common Stock immediately after completing the Offering.
Dilution in this case results from the fact that the per share offering price of
the Common Stock is substantially in excess of the per share net tangible book
value of the Common Stock prior to the Offering.
As of February 28, 1999, 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 assumed conversion of all outstanding classes of common stock and
all outstanding series of preferred stock into an aggregate of 26,468,098 shares
of Common Stock, (based on an assumed offering price of $16.00 per share), the
as adjusted net tangible book value of each of the assumed outstanding shares of
Common Stock would have been $(1.57) per share. As of February 28, 1999, 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 Common
Stock offered hereby based on an assumed offering price of $14.76 per share
(after deducting estimated offering expenses including discounts and
commissions) and the conversions described above, the as adjusted net tangible
book value of each of the assumed outstanding shares of Common Stock would have
been $1.48 per share. Therefore, investors in the Common Stock would have paid
$16.00 for a share of Common Stock having a net tangible book value of
approximately $1.48 per share after the Offering; that is, their investment
would have been diluted by approximately $14.52 per share. At the same time,
existing stockholders would have realized an increase in net tangible book value
of $3.05 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 Common
Stock..................................................... $16.00
Net tangible book value per share of Common Stock before the
Offering.................................................. $(52.22)
Increase in net tangible book value per share resulting from
conversions(1)............................................ $ 50.65
Increase in net tangible book value per share of Common
Stock attributable to investors in the Offering(1)(2)..... $ 3.05
As adjusted net tangible book value per share of Common
Stock after the Offering(1)(2)............................ $ 1.48
------
Dilution to new investors(1)(2)............................. $14.52
======
</TABLE>
- ---------------
(1) 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." Assumes the conversion of all
outstanding classes of common stock and all outstanding series of preferred
stock into an aggregate of 26,468,098 shares of Common Stock, respectively,
all based on an assumed initial offering price of $16.00 per share of Common
Stock.
(2) After deduction of the estimated offering expenses payable by the Company
(including the underwriting discounts and commissions).
25
<PAGE> 29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected historical consolidated financial
data as of August 31, 1997 and 1998 and for the years ended
August 31, 1996, 1997 and 1998 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 periods ended December 31, 1993, December 31,
1994 and August 31, 1995 and as of August 31, 1996 have been
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, 1998 and
1999 have been derived from unaudited interim 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. Operating results for the six
months ended February 28, 1998 and 1999, are not necessarily
indicative of the results that may be expected for the entire
fiscal year or any other interim period. 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 YEAR ENDED AUGUST 31,
TO DECEMBER 31, DECEMBER 31, AUGUST 31, ------------------------------
1993 1994 1995 1996 1997 1998
------------------- ------------ ------------ -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television............ $ 12 $ 240 $ 8,783 $ 25,893 $ 36,915 $ 61,081
Telecommunications.......... -- 202 788 1,711 2,922 3,882
----- ------- -------- -------- -------- --------
Total revenues.............. 12 442 9,571 27,604 39,837 64,963
Operating expenses:
Programming, access fees and
revenue sharing........... 6 470 4,558 11,868 19,202 28,825
Customer support, general
and administrative........ 304 7,733 12,055 19,636 28,926 35,847
Depreciation and
amortization.............. 8 117 2,420 8,676 14,505 28,481
----- ------- -------- -------- -------- --------
Total operating expenses...... 318 8,320 19,033 40,180 62,633 93,153
----- ------- -------- -------- -------- --------
Loss from operations.......... (306) (7,878) (9,462) (12,576) (22,796) (28,190)
Interest expense, net(1)...... (1) (66) (1,169) (5,854) (25,739) (39,564)
----- ------- -------- -------- -------- --------
Loss before income taxes and
extraordinary item.......... (307) (7,944) (10,631) (18,430) (48,535) (67,754)
Net loss(2)................... $(307) $(7,944) $(10,161) $(18,430) $(48,535) $(74,398)
===== ======= ======== ======== ======== ========
Basic and diluted loss per
share of Common Equity(3)... N/A N/A $ (1.38) $ (1.66) $ (4.00) $ (6.29)
<CAPTION>
SIX MONTHS ENDED
FEBRUARY 28,
-------------------
1998 1999
-------- --------
<S> <C> <C>
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television............ $ 25,247 $ 38,095
Telecommunications.......... 1,644 2,870
-------- --------
Total revenues.............. 26,891 40,965
Operating expenses:
Programming, access fees and
revenue sharing........... 12,419 18,689
Customer support, general
and administrative........ 15,855 26,335
Depreciation and
amortization.............. 10,759 17,997
-------- --------
Total operating expenses...... 39,033 63,021
-------- --------
Loss from operations.......... (12,142) (22,056)
Interest expense, net(1)...... (21,885) (22,558)
-------- --------
Loss before income taxes and
extraordinary item.......... (34,027) (44,614)
Net loss(2)................... $(34,027) $(44,614)
======== ========
Basic and diluted loss per
share of Common Equity(3)... $ (2.64) $ (3.96)
</TABLE>
26
<PAGE> 30
<TABLE>
<CAPTION>
DECEMBER 31, AUGUST 31,
-------------- ----------------------------------------- FEBRUARY 28,
1993 1994 1995 1996 1997 1998 1999
---- ------- -------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents......................... $ 41 $ 5,019 $ 2,036 $ 1,677 $ 87,305 $123,774 $ 60,032
Restricted investments............................ -- -- -- -- 67,206 63,207 38,645
Property, plant and equipment, net................ 509 11,379 48,060 103,800 160,442 268,044 308,289
Intangible assets................................. -- 16,189 55,443 65,876 82,583 160,370 159,055
Total assets...................................... 588 33,820 108,072 175,978 403,416 627,170 581,459
Convertible notes due stockholder................. -- 15,000 17,950 89,414 129,604 -- --
Notes payable and long-term obligations........... 52 7,675 9,023 8,963 228,573 429,278 428,853
Total liabilities................................. 206 31,007 39,527 116,700 383,051 466,394 465,297
Stockholders' equity.............................. 382 2,813 68,545 59,279 20,365 160,776 116,162
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 20, 1993
(DATE OF EIGHT MONTH
INCEPTION) YEAR ENDED PERIOD ENDED
TO DECEMBER 31, DECEMBER 31, AUGUST 31,
1993 1994 1995
--------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OTHER FINANCIAL DATA
Net cash flows used in
operating activities......... $(183) $ (3,332) $ (3,494)
Net cash flows used in
investing activities......... (517) (10,576) (72,144)
Net cash flows provided by
(used in) financing
activities................... 741 18,886 72,655
Capital expenditures(4)........ 517 9,278 22,170
EBITDA(5)...................... (298) (7,761) (7,042)
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
-------------------------------- ---------------------
1996 1997 1998 1998 1999
-------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
Net cash flows used in
operating activities......... $ (453) $ (15,935) $ (26,268) $ (15,215) $ (31,441)
Net cash flows used in
investing activities......... (72,037) (143,125) (121,532) (60,293) (31,186)
Net cash flows provided by
(used in) financing
activities................... 72,131 244,688 184,269 117,745 (1,115)
Capital expenditures(4)........ 62,121 71,505 85,643 37,900 56,928
EBITDA(5)...................... (3,900) (8,291) 291 (1,383) (4,059)
</TABLE>
<TABLE>
<CAPTION>
AS OF AUGUST 31,
------------------------------------------ FEBRUARY 28,
1995 1996 1997 1998 1999
------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA(6)
CABLE TELEVISION
Units under contract(7)..................................... 173,324 241,496 295,149 432,955 435,738
Units passed(8)............................................. 170,336 225,433 254,032 399,210 401,600
Basic subscribers........................................... 75,944 114,163 132,556 216,249 218,023
Basic penetration(9)........................................ 44.6% 50.6% 52.2% 54.2% 54.3%
Premium units(10)........................................... 39,753 60,641 95,150 182,788 176,411
Pay-to-basic ratio(10)(11).................................. 52.3% 53.1% 71.8% 84.5% 80.9%
Average monthly revenue per basic subscriber(12)............ $ 22.84 $ 22.70 $ 24.94 $ 27.95 $ 29.20
TELECOMMUNICATIONS
Units under contract(9)..................................... 10,322 20,945 39,831 94,338 107,109
Units passed(10)............................................ 9,116 12,364 16,572 35,671 47,462
Lines(13)................................................... 2,650 4,126 6,185 9,244 13,229
Line penetration(14)........................................ 29.1% 33.4% 37.3% 25.9% 27.9%
Average monthly revenue per line(15)........................ $ 36.86 $ 42.10 $ 47.23 $ 46.62 $ 44.50
</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 and $9,640,000 for the
eight month period ended August 31, 1995, the years ended
August 31, 1996, 1997 and 1998, respectively and $9,640,000
for the six months ended February 28, 1998. Effective March
1, 1998, the GVL Notes were exchanged for approximately
6,962 shares of Series A Preferred.
(2) The Company had no taxable income for the periods reported.
The Company reported an income tax benefit of approximately
$470,000 in the eight month period ended August 31, 1995.
In addition, the Company incurred an extraordinary loss of
$6,644,000 in the year ended August 31, 1998.
(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" and the
Split. Basic and diluted loss per share are computed in the
same manner since common stock equivalents have an
antidilutive effect.
(4) Capital expenditures include expenditures on property,
plant and equipment together with intangible assets
excluding expenditures for business acquisitions.
27
<PAGE> 31
(5) EBITDA represents earnings (loss) 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) Operating data for 1993 and 1994 is not available because
such information was not tracked prior to the acquisition
of the Company by VPC. The Company does not believe that
the operating statistics for 1993 and 1994, if they were
available, would be material because the Company's revenues
during such periods were minimal.
(7) 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 the majority of all units
under contract for telecommunications are also under
contract for cable television.
(8) 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 for cable television and
telecommunications services, respectively.
(9) Basic penetration is calculated by dividing the total
number of basic subscribers at such date by the total
number of units passed.
(10) 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. For comparative purposes, the
premium units and the pay-to-basic ratios as of August 31,
1997 and 1998, and February 28, 1999, presented under the
previous method of reporting are 84,875, 136,863 and
128,137, respectively, and 64.0%, 63.3% and 58.8%,
respectively.
(11) Pay-to-basic ratio is calculated by dividing the total
number of premium units by the total number of basic
subscribers.
(12) Represents average monthly revenue divided by the average
number of basic subscribers for the fiscal periods ended as
of the date shown.
(13) 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.
(14) Line penetration is calculated by dividing the total number
of telecommunications lines at such date by the total
number of units passed.
(15) Represents average monthly revenue divided by the average
number of lines for the fiscal period ended as of the date
shown.
28
<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, cable television and high
speed Internet access 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 Large 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 2000. In addition, the Company recently commenced offering high speed
Internet access at select MDUs in several of its markets and intends to
introduce its high speed Internet access services in all of its major markets
over the next 12 months.
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. 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.
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") representing
approximately 56,000 units under contract for cable television. On April 13,
1998, OpTel acquired, subject to the consummation of certain transfer
conditions, the private cable television and telecommunications services and
related agreements of Interactive Cable Systems, Inc. ("ICS"), representing
approximately 90,000 cable television and telecommunication units under
contract. The Company has included 100% of the assets and operating results of
the ICS operations in its consolidated financial statements since April 13, 1998
because (i) although the transfer of legal title to the Rights of Entry relating
to the remaining MDUs is subject to the receipt of certain third party consents,
the Company may elect to waive the consent conditions, (ii) under the terms of a
management agreement, the Company services the units with respect to which there
remained unsatisfied transfer conditions and, in connection therewith, during
the period that ICS has to secure the necessary consents, the Company receives
all the economic benefit of (including all the revenues associated with) and
incurs the costs and economic risks associated with these units and (iii) the
entire purchase price was paid (although a portion of the purchase price is
being held in escrow for the protection of the Company, subject to the receipt
of the necessary consents). The Company and ICS are in the process of making
final adjustments to the purchase which are expected to result in the Company
returning several serviced properties to ICS and in an agreed reduction to the
purchase price. The aggregate adjustments are not expected to represent more
than 8% of the transaction.
As of February 28, 1999, the Company had 435,738 and 107,109 units under
contract for cable television and telecommunications, respectively, and 401,600
and 47,462 units passed for cable television and telecommunications,
respectively. As of such date, OpTel had 218,023 cable television subscribers
and 13,229 telecommunication lines in service.
OpTel believes that by utilizing an advanced proprietary network
infrastructure it can market a competitive integrated package of voice, video
and Internet access services in its serviced markets. As of
29
<PAGE> 33
February 28, 1999, approximately 258,989 units representing approximately 64% of
the Company's units passed for cable television were passed by the Company's
networks. OpTel expects to connect a majority 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 rates per unit than under retail agreements. The effect of
this lower per unit rate on revenue is generally offset by the 100% penetration
achieved by bulk agreements. Premium services are contracted for 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 line item programming, access fees and revenue sharing with respect to
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 MDUs 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 represent certain fees paid to owners of MDUs pursuant to the terms of
Rights of Entry.
The line item programming, access fees and revenue sharing with respect to
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
represent certain fees paid to owners of MDUs pursuant to the terms of Rights of
Entry.
The Company's customer support, general and administrative expenses include
selling and marketing costs, customer service, engineering, facilities and
corporate and regional administration.
Through February 28, 1999, the Company had invested approximately $526
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 $65.0 million for fiscal 1998 and $41.0 million for the six months ended
February 28, 1999. 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 $22.1 million,
$28.2 million, $22.8 million and $12.6 million for the six months ended February
28, 1999 and the years ended August 31, 1998, 1997, 1996, respectively, as its
cable television and telecommunications customer base has grown. The Company
reported positive EBITDA of $0.3 million for the year ended August 31, 1998 as
compared with negative EBITDA of $8.3 million and $3.9 million for
30
<PAGE> 34
the years ended August 31, 1997 and 1996, respectively. For the six months ended
February 28, 1999, the Company reported negative EBITDA of $4.1 million. The
decline in EBITDA is primarily the result of the increased costs associated with
the roll out of telecommunications services in the Company's major markets and
the deployment of switch collocation access and Internet access services. For
the six months ended February 28, 1999, telephone passings, revenues and line
growth have been gaining momentum, however, cable passings, revenues and
subscribers remained flat. To address the situation, the Company is reorganizing
marketing and sales management, has launched direct sales activities and will
introduce other direct marketing initiatives in the third quarter. There can be
no assurance that the Company will generate operating profits or achieve
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, (vi) financing costs, and
(vii) 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, as well as by various initiatives to broaden
the Company's service offering and addressable market. The first of such
initiatives is to collocate network facilities for telecommunication services in
selected ILEC end offices in certain of its markets. The Company will select the
ILEC end offices in which it will collocate based upon MDU concentration.
Through collocation, the Company will lease the ILEC's transport network on an
unbundled basis to initially reach a subscriber. The Company believes
collocation will decrease the time required to provide telephone services to a
subscriber, increase the Company's addressable market by providing a cost
effective means of servicing smaller MDUs and, over time, promote new Rights of
Entry. Other initiatives aim at creating new revenue sources by offering related
services including a range of Internet access and DBS services.
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 installation revenue
per unit that is higher than for a franchise cable television operator. Although
this may also require higher installation expenses per subscriber, because of
the layout of MDUs and the Company's ability to obtain "permission to enter"
from the MDU owner, installations can often be completed when the subscriber is
not home, limiting the expense of installation. Accordingly, the Company does
not believe that churn is as significant an operating statistic as it is 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 of its central office switched telecommunications services in a market it
benefits from the high rate of MDU resident turnover.
RESULTS OF OPERATIONS
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.
31
<PAGE> 35
The following table sets forth, for the periods indicated, certain
operating and financial information relating to the Company.
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF FEBRUARY 28,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
CABLE TELEVISION
Units under contract(1)...................... 241,496 295,149 432,955 372,138 435,738
Units passed(2).............................. 225,433 254,032 399,210 320,286 401,600
Basic subscribers............................ 114,163 132,556 216,249 172,643 218,023
Basic penetration(3)......................... 50.6% 52.2% 54.2% 53.9% 54.3%
Average monthly revenue per basic
subscriber(4).............................. $22.70 $24.94 $27.95 $27.57 $29.20
TELECOMMUNICATIONS
Units under contract(1)...................... 20,945 39,831 94,338 61,082 107,109
Units passed(2).............................. 12,364 16,572 35,671 17,551 47,462
Lines(5)..................................... 4,126 6,185 9,244 6,375 13,229
Line penetration(6).......................... 33.4% 37.3% 25.9% 36.3% 27.9%
Average monthly revenue per line(7).......... $42.10 $47.23 $46.62 $43.64 $44.50
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
-------------------------------- -------------------
1996 1997 1998 1998 1999
-------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA
Revenues:
Cable television................... $ 25,893 $ 36,915 $ 61,081 $ 25,247 $ 38,095
Telecommunications................. 1,711 2,922 3,882 1,644 2,870
-------- --------- --------- -------- --------
Total revenues............. $ 27,604 $ 39,837 $ 64,963 $ 26,891 $ 40,965
EBITDA(8)............................ $ (3,900) $ (8,291) $ 291 $ (1,383) $ (4,059)
Net cash flows used in operating
activities......................... $ (453) $ (15,935) $ (26,268) $(15,215) $(31,441)
Net cash flows used in investing
activities......................... (72,037) (143,125) (121,532) (60,293) (31,186)
Net cash flows provided by (used in)
financing activities............... 72,131 244,688 184,269 117,745 (1,115)
Net loss............................. (18,430) (48,535) (74,398) (34,027) (44,614)
</TABLE>
- ---------------
(1) 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 the
majority of all units under contract for telecommunications are also under
contract for cable television.
(2) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications systems,
respectively.
(3) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(4) Represents average monthly revenue divided by the average number of basic
subscribers for the fiscal periods ended as of the date shown.
(5) 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.
(6) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.
(7) Represents average monthly revenue divided by the average number of lines
for the fiscal period ended as of the date shown.
(8) 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.
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<PAGE> 36
Six months ended February 28, 1999 compared to six months ended February 28,
1998
Total Revenues. Total revenues for the first six months of fiscal 1999
increased by $14.1 million, or 52%, to $41.0 million compared to revenues of
$26.9 million for the first six months of fiscal 1998. The increase in total
revenue is principally the result of the acquisition of ICS in April 1998 and
the inclusion of the operating results of Phonoscope, which was acquired in
October 1997, for the full six month period.
Cable Television. Cable television revenues for the first six months of
fiscal 1999 increased by $12.8 million, or 51%, to $38.1 million from $25.2
million for the comparable period in fiscal 1998. This reflected a 26% increase
in the number of basic subscribers and a 6% increase in the average monthly
revenue per basic subscriber. The average monthly revenue per basic subscriber
increased from $27.57 for the first six months of fiscal 1998 to $29.20 for the
first six months of fiscal 1999. The increase in average monthly revenue per
basic subscriber mainly resulted from annual rate increases, rate increases
following property upgrades and a shift in the mix of basic subscribers to favor
cities with higher average monthly revenue per basic subscriber. The Company
maintained basic penetration at 54%.
Telecommunications. Telecommunications revenues for the first six months of
fiscal 1999 increased by 75% to $2.9 million, up from $1.6 million for the
comparable period of the preceding year, reflecting both a 108% increase in the
number of lines compared to the first six months of fiscal 1998 and a 2%
increase in the average monthly revenue per line, which rose from $43.64 to
$44.50. Since launching central office switches in Houston and Dallas during
fiscal 1998, the Company has increased its efforts to market its telephone
product in these markets. Although the average monthly revenue per line for the
six months ended February 28, 1999 increased from the six months ended February
28, 1998, it decreased from the year ended August 31, 1998. This decrease
reflects a combination of (i) seasonal variations in long distance usage; (ii)
the impact of incentives offered by the Company to subscribers as part of the
initial marketing of its central office switched services in Dallas; and (iii)
the impact of changes in call volumes. The Company does not believe the changes
in call volumes are reflective of a trend. However, because of the relatively
small number of lines serviced by the Company, changes in the number or length
of calls made by a small group of individual subscribers can have a noticeable
impact on the average revenue per line.
Programming, Access Fees and Revenue Sharing. Programming, access fees and
revenue sharing increased from $12.4 million for the first six months of fiscal
1998 to $18.7 million for the first six months of fiscal 1999. The increased
cost is primarily attributed to the subscriber growth mentioned above and to
increases in rates charged by programming suppliers.
Customer Support, General and Administrative. Customer support, general and
administrative expenses were $26.3 million for the first six months of fiscal
1999 compared to $15.9 million for the first six months of fiscal 1998. The
increase in customer support, general and administrative expenses was largely
due to an increase in personnel associated with the expansion of the Company's
operations and the roll-out of telephone and Internet services.
EBITDA. The Company's EBITDA (earnings (loss) before interest, income
taxes, and depreciation and amortization) for the first six months of fiscal
1999 was negative $4.1 million compared to negative $1.4 million for the first
six months of fiscal 1998. EBITDA is not intended to represent cash flow from
operations or an alternative to net loss, each as defined by generally accepted
accounting principles.
Depreciation and Amortization. Depreciation and amortization was $18.0
million for the first six months of fiscal 1999 compared to $10.8 million for
the first six months of fiscal 1998. This increase is primarily attributable to
an increase in cable and telephone systems and intangible assets resulting from
continued purchases and construction of such systems and from acquisitions of
businesses.
Interest Expense. Interest expense (net of amounts capitalized) was $25.8
million for the first six months of fiscal 1999, a small decrease from interest
expense of $26.0 million for the first six months of fiscal 1998. This decrease
is attributable to the elimination of interest expense associated with the
convertible notes payable to stockholders in March 1998 with the conversion of
these notes to preferred stock.
33
<PAGE> 37
Interest and Other Income. For the first six months of fiscal 1999,
interest and other income was $3.3 million, compared to $4.1 million for the
first six months of fiscal 1998, reflecting a decrease of $0.9 million. This is
primarily the result of the Company having a smaller average balance of invested
cash during the first six months of fiscal 1999 than fiscal 1998. The Company
invests its cash in money market funds and other short-term, high grade
instruments according to its investment policy and certain restrictions of its
indebtedness.
Fiscal year ended August 31, 1998 compared to fiscal year ended August 31,
1997
Total Revenues. Total revenues for the fiscal year ended August 31, 1998
increased by $25.1 million or 63% to $64.9 million compared to revenues of $39.8
million for the fiscal year ended August 31, 1997.
Cable Television. Compared to fiscal 1997, cable television revenues
increased by $24.2 million, or 66%, to $61.1 million from $36.9 million,
reflecting both a 63% increase in the number of subscribers and a 12% increase
in the average monthly revenue per basic subscriber which rose from $24.94 for
fiscal 1997 to $27.95 for fiscal 1998. The increase in average monthly revenue
per basic 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 72% to 85% over the course of the
year. The Company continued to grow basic penetration which increased by 2% over
the year.
Telecommunications. Compared to fiscal 1997, telecommunications revenues
increased by $1.0 million, or 33%, to $3.9 million from $2.9 million. This
increase is mainly due to the increase in the number of lines served by the
Company and higher average monthly revenue per line associated with the lines
served by the Company's central office switches.
Programming, Access Fees and Revenue Sharing. Programming, access fees and
revenue sharing was $28.8 million for fiscal 1998 compared to $19.2 million for
fiscal 1997. Substantially all of the increased cost is attributable to the
subscriber growth mentioned above.
Customer Support, General and Administrative. Customer support, general and
administrative expenses were $35.8 million for fiscal 1998 compared to $28.9
million for fiscal 1997. 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.
EBITDA. The Company's EBITDA increased from negative $8.3 million to
positive $0.3 million over the year. There can be no assurance that the Company
will be able to achieve or sustain positive EBITDA in the future.
Depreciation and Amortization. Depreciation and amortization was $28.5
million for fiscal 1998 compared to $14.5 million in fiscal 1997. This increase
is primarily attributable to an increase in cable and telephone systems and
intangible assets resulting from continued purchases and construction of such
systems and from acquisitions of businesses.
Interest Expense, Net. Interest expense (net of amounts capitalized) was
$48.5 million for fiscal 1998, an increase of $17.1 million over interest
expense of $31.4 million for fiscal 1997, reflecting the increase in the
Company's debt incurred principally to fund the build out of its networks.
Interest and Other Income. Interest and other income was $8.9 million for
fiscal 1998, an increase of $3.2 million over interest income and other income
of $5.7 million for fiscal 1997. The increase in interest and other income was
largely due to an increase in cash and cash equivalents and restricted
investments resulting from the proceeds of the offering of $225 million of 13%
Senior Notes due 2005 (the "1997 Notes") in February 1997, and from the proceeds
of the offering of the 11.5% Senior Notes due 2008 (the "1998 Notes") in July
1998.
Income Tax Benefit. The Company has experienced net operating losses for
the years ended August 31, 1998 and 1997. Realization of deferred tax assets is
dependent on generating sufficient taxable income prior to
34
<PAGE> 38
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 and no benefit has been recognized.
Extraordinary Loss. The Company incurred an extraordinary loss of $6.7
million in 1998. This loss can be directly attributed to the repayment of the
Senior Credit Facility, which was retired in July of 1998. Included in the
extraordinary loss are $5.4 million for write off of debt issue costs and $1.3
million associated with the prepayment penalty.
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 $22.70 for
fiscal 1996 to $24.94 for fiscal 1997. The increase in average monthly revenue
per basic 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 72% 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.
Programming, Access Fees and Revenue Sharing. Programming, access fees and
revenue sharing was $19.2 million for fiscal 1997 compared to $11.9 million for
fiscal 1996. Such costs are generally variable based on the number of
subscribers or gross revenues. Overall, programming, access fees and revenue
sharing as a percentage of total revenues increased over the year from 43.0% to
48.2%, 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.
Customer Support, General and Administrative. Customer support, 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 such
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 certain residential cable television and
associated fiber optic network assets also in Houston.
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<PAGE> 39
Depreciation and Amortization. Depreciation and amortization was $14.5
million for fiscal 1997 compared to $8.7 million in fiscal 1996. This increase
is primarily attributable to an increase in cable and telephone systems and
intangible assets resulting from continued purchases and construction of such
systems and from acquisitions of businesses.
Interest Expense, Net. Interest expense (net of amounts capitalized) was
$31.4 million for fiscal 1997, an increase of $25.4 million over interest
expense of $6.0 million for fiscal 1996, reflecting the increase in the
Company's debt incurred principally to fund the build out of its network.
Interest and Other Income. Interest and other income was $5.7 million for
fiscal 1997, an increase of $5.6 million over interest income and other income
of $0.1 million for fiscal 1996. The increase in interest income and other
income was largely due to an increase in cash and cash equivalents and
restricted investments resulting from the proceeds of the offering of the 1997
Notes in February 1997.
Income Tax Benefit. The Company has experienced net operating losses for
the years ended August 31, 1997 and 1996. 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
and no benefit has been recognized.
LIQUIDITY AND CAPITAL RESOURCES
The development of OpTel's business and the expansion of its network have
required substantial capital, operational and administrative expenditures, a
significant portion of which have been incurred before the realization of
revenues. These expenditures will continue to 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 $22.1 million, $28.2
million, $22.8 million and $12.6 million for the six months ended February 28,
1999 and for the years ended August 31, 1998, 1997, and 1996, respectively, as
its cable television and telecommunications customer base has grown. The Company
reported net losses of $44.6 million for the six months ended February 28, 1999
as compared with net losses of $74.4 million, $48.5 million and $18.4 million
for the years ended August 31, 1998, 1997 and 1996, respectively.
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
the acquisition and construction of the Company's cable television and
telecommunications networks and related business activities was $56.9 million
for the first six months of fiscal 1999 compared to $129.0 million for fiscal
1998 and $78.2 million for fiscal 1997.
From inception and until February 1997, 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%, initially payable in additional shares. Pursuant to the terms of the
Conversion and Exchange Agreement, VPC has agreed to convert all of its shares
of Series A Preferred, including accrued and unpaid dividends thereon through
the conversion date, and all of its Class B Common, into Common Stock on or
before the earlier to occur of August 29, 1999 or the 90th day after the
consummation of the Offering. See "Risk Factors -- Risks Associated with GVL's
Series A Preferred Stock and Class B Common Stock." None of the Company's
stockholders or affiliates is under any contractual obligation to provide
additional financing to the Company.
In February 1997, the Company issued $225 million principal amount at
maturity of 13% Senior Notes Due 2007 (the "1997 Notes") along with 1,125,000
shares of Class C Common for aggregate net proceeds of $219.2 million. Of this
amount, approximately $79.6 million was placed in an escrow account in order to
cover
36
<PAGE> 40
the first six semi-annual interest payments due on the 1997 Notes. At February
28, 1999, approximately $28.0 million remained in such escrow account. On July
7, 1998, the Company issued $200 million principal amount of 1998 Notes. The
aggregate net proceeds of the 1998 Notes were approximately $193.5 million. Of
this amount, approximately $126.3 million was used to repay all outstanding
amounts under the Senior Credit Facility and to pay other costs associated with
terminating the Senior Credit Facility and approximately $22.0 million was
placed in an escrow account to fund the first two semi-annual interest payments
on the 1998 Notes. At February 28, 1999, approximately $10.7 million remained in
such escrow account.
The Company's future results of operations will be materially impacted by
its ability to finance its planned business strategies. The Company expects that
it will spend approximately $650 million on capital expenditures over the next
five years. The Company expects it will need approximately $550 million in
financing in addition to the proceeds of the Offering over the next five years
in order to achieve its business strategy within its targeted markets. The
Company will incur approximately $260 million in cash interest expense on its
outstanding indebtedness, including the $38.7 million currently held in escrow,
over the next five years. A considerable portion of the Company's capital
expenditure requirements is scaleable dependent upon the number of Rights of
Entry that the Company signs. 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 networks and the
telecommunications roll out, each of which may vary significantly from the
Company's plan. The capital expenditure requirements will be larger or smaller
depending upon whether the Company is able to achieve its expected market share
among the potential MDUs in its markets. The Company plans to finance its future
capital requirements through additional public or private equity or debt
offerings. There can be no assurance that the Company will be successful in
obtaining any necessary financing on reasonable terms or at all.
Under the terms of the more restrictive of the Company's Indentures, the
Company can only incur approximately $50 million of additional indebtedness. The
aggregate amount of indebtedness which can be incurred by the Company under its
more restrictive Indenture is directly related to the number of cable television
subscribers served by the Company. As a result, growth of the Company's
telecommunications business, where the Company has focused significant
management attention and resources, will not increase the Company's ability to
incur indebtedness under the terms of the more restrictive Indenture. The
Company may need to incur indebtedness in excess of its current capacity.
In addition, GVL has the power to prevent the Company from obtaining
additional debt or equity financing. See "Risk Factors -- Control by GVL." GVL
is party to an indenture which limits the aggregate amount of indebtedness which
can be incurred by GVL and its subsidiaries, including the Company, taken as a
whole (based upon a ratio of total consolidated indebtedness to consolidated
operating cash flow). As a result, GVL's strategies and the operating results of
its subsidiaries other than the Company may affect the ability of the Company to
incur additional indebtedness. As of February 28, 1999, GVL was able to incur
approximately Cdn. $560 million (approximately $376 million based on an exchange
rate of $1.00 = Cdn. $1.487 as reported by the Wall Street Journal for April 16,
1999) of indebtedness under its indenture. There can be no assurance that this
number may not decrease substantially in the future. There can be no assurance
that GVL will not restrain the Company's growth or limit the indebtedness
incurred by the Company so as to ensure GVL's compliance with the terms of its
debt instruments.
The Company benefits from the fact that it does not require a substantial
capital investment in its cable television and telecommunications networks in
advance of connecting subscribers to its networks. A significant portion of the
capital investment required to connect subscribers consists of costs associated
with establishing a minimum point of entry, the costs of internal wiring and
distribution equipment 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
37
<PAGE> 41
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 is currently evaluating and often engages in discussions regarding
various acquisition opportunities. The Company also engages from time to time in
preliminary discussions relating to possible investments in the Company by
strategic investors. There can be no assurance that any agreement with any
potential acquisition target or strategic investor will be reached nor does
management believe that any thereof is necessary to achieve its strategic goals.
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to provide services to subscribers, process
transactions, send invoices, or engage in similar normal business activities. To
ensure that its subscriber serving cable and telecommunications equipment and
its critical computer systems, applications and other technology (collectively
"Date Sensitive Technology") will function properly beyond 1999, the Company has
implemented a Year 2000 program.
PROJECT AND STATE OF READINESS
The Company has developed a three-phase plan that is designed to assess the
impact of the Year 2000 issue on its Date Sensitive Technology.
Due to the fact that it is not always necessary to complete one phase prior
to commencing the next, some projects within a given phase have been started,
while there may be outstanding tasks associated with prior phases. Priority is
always placed on mission critical systems affecting large numbers of customers
or the Company's ability to take and process service orders and bill for its
services.
Phase I -- Problem Determination
In this phase the Company performed an inventory and assessment to
determine which portions of its Date Sensitive Technology would have to be
replaced or modified in order for its networks, office equipment and information
management systems to function properly after December 31, 1999. While the
Company believes its inventory is substantially complete, the equipment utilized
by OpTel is disbursed throughout the markets that the Company serves, and there
can be no assurances that mission critical equipment has not been overlooked.
The Company also conducted a risk assessment to identify those systems whose
failure would be expected to result in the greatest risk to the Company's
business. The Company's risk assessment and determinations as to the need for
remediation were based in part on representations made by hardware and software
vendors as to the Year 2000 compliance of systems and equipment utilized by the
Company and in part on the results of Year 2000 equipment testing done by GVL.
There can be no assurances that any vendor representations received and relied
upon by the Company were accurate or complete or that the results of GVL's Year
2000 equipment tests are a reliable indicator of the Year 2000 compatability of
the Company's equipment. In addition, OpTel has not yet received responses from
all of its equipment vendors, and there can be no assurance that OpTel will
receive responses from all of its vendors in a timely manner or that responses
will be accurate or complete. As of March 15, 1999, the Company estimated that
this phase was 95% complete.
Phase II -- Plan for Remediation of Mission Critical Known Non-Compliant Date
Sensitive Technology
During Phase II, the Company designed a plan to make the necessary
modifications to and/or replace Date Sensitive Technology that is mission
critical and known to be non-compliant. While the Company believes that as of
March 15, 1999, its planning for achieving Year 2000 compliance was 75%
complete, the discovery of additional Date Sensitive Technology requiring
remediation could adversely impact the current plan and increase the resources
required to implement the plan. The plan includes the conversion of the
Company's current customer management system to a vendor certified compliant
platform and the upgrade of
38
<PAGE> 42
PBX switches that the Company does not currently plan to replace with central
office switches prior to December 31, 1999.
Phase III -- Operational Sustainability
The Company has begun the process of remediating its non-compliant Date
Sensitive Technology and plans to use both internal and external resources to
reprogram or replace and test certain components of its networks and information
processing systems for Year 2000 compliance. The Company is currently scheduling
the installation of other necessary upgrades to Date Sensitive Technology.
Although the Company intends to conduct tests to ensure its equipment is Year
2000 compliant, it will focus primarily on those systems whose failure would
pose the greatest risks to the Company's operations. The Company will endeavor
to test all mission critical equipment but will likely not test all of its
equipment that is not deemed mission critical. The Company will rely upon vendor
representations, if received, or on the results of Year 2000 equipment testing
done by GVL, where tests are not conducted. There can be no assurance that any
vendor representations received and relied upon will be accurate or complete or
that the results of GVL's Year 2000 equipment tests will be a reliable indicator
of the Year 2000 compatibility of the Company's equipment or that the Company
will have recourse against any vendors whose representations or certifications
as to the Year 2000 compliance of their products prove misleading.
The Company is striving to achieve operational sustainability no later than
September 30, 1999, which is prior to any anticipated impact on its operating
systems. Though the majority of the work will be completed by that date, certain
elements will not be completed until the fourth quarter of calendar 1999,
primarily due to limited availability of compliant software and hardware and
prioritization of mission critical systems. As of March 15, 1999, the Company
estimated that its remediation efforts were approximately 25% complete.
Successful completion of the Year 2000 conversion program is substantially
dependent upon successful implementation of the Company's new customer
management information system which is dependent upon a third party vendor
meeting an implementation schedule and delivering a system that is Year 2000
compliant. As a contingency plan, the Company will be upgrading its existing
cable subscriber billing system to a version represented by the vendor to be
Year 2000 compliant. There can be no assurance that (i) the new customer
management information system will be implemented on schedule, (ii) the Company
will successfully implement all of the other necessary hardware and software
upgrades or (iii) other components of the Year 2000 conversion program will be
completed in a timely manner. See "Risk Factors -- Information Systems and
Automation."
COSTS
The Company estimates the cost of its Year 2000 program will be $4.2
million, of which $4.1 million remains to be incurred. Remediation costs and
costs to replace non-compliant systems are expensed as incurred. Additionally,
the Company has incurred and will incur costs related to the purchase and
implementation of its new accounting system and customer management information
systems. The estimated total cost of these systems is $7.6 million, of which
$3.6 million remains to be incurred. The foregoing estimates will likely be
revised and there can be no assurance that the revisions will not be
significant.
The estimated costs of the project and the date which the Company has
established to complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans, the cost of third party hardware, software and services, and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, unanticipated mergers
and acquisitions and similar uncertainties. The failure of the Company to become
Year 2000 compliant on a timely basis could have a material adverse effect on
the Company's business, financial condition, cash flows and results of
operations.
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<PAGE> 43
RISKS AND CONTINGENCY PLAN
While the Company is working to test its own mission-critical systems for
Year 2000 compliance, the Company does not control the systems of its service or
content providers. The Company has taken an inventory of its third party service
or content providers and believes that its inventory is complete. However, there
can be no assurance that mission critical providers have not been overlooked.
Based on this inventory, the Company is currently seeking assurances from its
suppliers and strategic business partners regarding the Year 2000 readiness of
their systems. Many of the Company's third party providers have indicated that
they are, or will be, Year 2000 compliant. The Company, however, has not
undertaken an in-depth evaluation of such providers in relation to the Year 2000
issue and the ability of third parties with which OpTel transacts business to
adequately address their Year 2000 issues is outside of OpTel's control. The
Company has not obtained and will not obtain Year 2000 certifications from video
programming suppliers, ILECs, CLECs and IXCs with whom it does business. There
is risk that the interaction of the Company's systems and those of its suppliers
or business partners may be impacted by the Year 2000 change. In addition, in
light of the vast interconnection and interoperability of telecommunications
networks worldwide and the reliance of cable television systems on satellite
distribution of programming, the ability of any cable television or
telecommunications provider, including the Company, to provide services to its
customers (e.g., to complete calls and deliver programming and to bill for such
services) is dependent, to some extent, on the networks and systems of other
parties. To the extent the networks and systems of those parties are adversely
impacted by Year 2000 problems, the ability of the Company to service its
customers may be adversely impacted as well. 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.
In a recent release regarding Year 2000 disclosure, the Commission stated
that public companies must disclose the most reasonably likely worst case Year
2000 scenario. Although it is not possible to assess the likelihood of any of
the following events, each must be included in a consideration of worst case
scenarios: widespread failure of electrical, gas, and similar supplies serving
the Company; widespread disruption of the services provided by common
communications carriers and satellites that transmit video programming; similar
disruption to the means and modes of transportation for the Company and its
employees, contractors, suppliers, and customers; significant disruption to the
Company's ability to gain access to, and remain working in, office buildings and
other facilities; failure of controllers contained in the cable television
system headends and of the Company's video distribution network; failure of the
Company's switches, telephone network and telephone traffic distribution system;
failure in customer service networks and/or automated voice response systems;
and failure of substantial numbers of the Company's critical computer hardware
and software systems, including both internal business systems and systems
controlling operational facilities such as electrical generation, transmission,
and distribution systems; and the failure of outside entities' systems,
including systems related to billing, banking and finance.
The financial impact of any or all of the above worst-case scenarios has
not been and cannot be estimated by the Company due to the numerous
uncertainties and variables associated with such scenarios. Such failures could
materially and adversely affect the Company's results of operations, liquidity
and financial condition. Due to the general uncertainty inherent in the Year
2000 problem, resulting in part from the uncertainty of the Year 2000 readiness
of third party providers, the Company is unable to determine at this time
whether the consequences of Year 2000 failures will have a material impact on
the Company's results of operations, liquidity or financial condition. The
Company believes that, with the implementation of new business systems and
completion of the Year 2000 project as scheduled, the possibility of significant
interruptions of normal operations should be reduced. In addition, the Company
is currently developing appropriate contingency plans to address situations in
which various systems of the Company, or of third party providers, are not Year
2000 compliant. The Company also intends to participate in industry wide efforts
to address Year 2000 issues, the goal of which is to develop contingency plans
which address not only the Company's issues but those of the industry as a
whole.
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<PAGE> 44
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, which did not have a
significant impact upon the Company's reported earnings per share, and its
earnings per share computations have been restated for all prior periods.
Effective September 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for the reporting and display
of comprehensive income and its components in the financial statements. The
Company has no items of other comprehensive income to report in the periods
presented.
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 fiscal years 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 for fiscal 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for accounting
and reporting for derivative instruments. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999; however, earlier application is permitted.
Management is currently not planning on early adoption of this statement and has
not completed an evaluation of the impact of the provisions of this statement on
the Company's consolidated financial statement.
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.
MARKET RISK
At February 28, 1999, the Company had no derivative financial instruments.
Furthermore, substantially all of the Company's indebtedness bears a fixed
interest rate. Therefore, the Company is not sensitive to changes in market
interest rates.
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<PAGE> 45
BUSINESS
THE COMPANY
OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone, cable television and high
speed Internet access services, to residents of 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 ability to deliver an integrated service
offering to MDU residents over its own networks and its long-term contractual
relationships with MDU owners and associations provide it with a competitive
advantage.
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 there are approximately 3.0 million dwelling units
within these Large MDUs.
The Company currently provides cable television and telecommunications
services in a number of metropolitan areas including Houston, Dallas-Fort Worth,
Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta, Orlando-Tampa and Indianapolis. The Company is licensed as a
CLEC in each of its major markets. The Company has commenced offering central
office switched local exchange services in Houston and Dallas-Fort Worth and
intends to offer these services in substantially all of its major markets by the
end of calendar 2000. In addition, the Company commenced offering high speed
Internet access at select MDUs in Houston, Dallas-Fort Worth and San Francisco
in January 1999 and intends to introduce its high speed Internet access services
in substantially all of its major markets over the next 12 months. As of
February 28, 1999, the Company had 435,738 units under contract and 401,600
units passed for cable television services and 218,023 cable television
subscribers. At that date, the Company had 107,109 units under contract and
47,462 units passed for telecommunications and 13,229 telecommunications lines
in service.
OpTel secures long-term Rights of Entry with MDU owners. Rights of Entry
generally grant OpTel the exclusive right to provide cable television service to
an MDU or group of MDUs and provide that the MDU owner will promote OpTel as the
preferred provider of telecommunications services within the MDU. Rights of
Entry generally provide OpTel with the exclusive services of the MDU's leasing
staff to market the Company's services to residents. Rights of Entry also
generally grant OpTel the exclusive right to use the coaxial cable network at
the MDU. As a result, at MDUs where OpTel has cable television Rights of Entry,
OpTel effectively will be the only company positioned to provide high speed
Internet access via cable modem. Rights of Entry generally provide financial
incentives to property owners to promote and sell the Company's services to MDU
residents. 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 and one half years as of February 28, 1999 (assuming the
Company's exercise of available renewal options).
The Company intends to continue to develop and utilize its own networks to
deliver its service offerings. The Company also plans to collocate network
facilities for telecommunications services in selected ILEC end offices in
certain of its markets. Through collocation, the Company will lease the ILEC's
transport network on an unbundled basis to initially reach a subscriber. The
Company believes collocation will decrease the time required to provide
telephone services to a subscriber, increase the Company's addressable market by
providing a cost effective means of servicing smaller MDUs and, over time,
promote new Rights of Entry. The Company will select the ILEC end offices in
which it will collocate based upon MDU concentration. When it has secured a
Right of Entry and a sufficient subscriber base at an MDU, the Company intends
to bring its own network transport facilities to the MDU and discontinue
collocation services in order to increase operating margins. In addition, the
Company intends to test market telephone services to residents of single
42
<PAGE> 46
family dwellings in certain markets where it has collocated facilities. The
initial test will be conducted in the Houston market.
OpTel is a holding company with limited assets that conducts substantially
all of its operations through its subsidiaries. OpTel derives substantially all
of its revenue from the operations of its subsidiaries. OpTel has 22
subsidiaries, each of which generally operates in a specific geographic area.
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 makers
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
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
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<PAGE> 47
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 relatively few 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.
Rapid Growth of Internet Access Services. In recent years, the Internet has
experienced rapid growth and the number of subscribers accessing the Internet is
expected to increase significantly in the foreseeable future. ISPs provide a
means for subscribers to access the Internet's resources. ISP Internet access
services vary from dial-up access to high speed dedicated transmission lines and
high speed cable modem access for broadband services.
OpTel's Opportunity. The Company believes that its ability to serve a
single subscriber with both twisted pair and coaxial cable "last mile"
connections positions the Company to take advantage of the new regulatory and
market environment. As a result, the Company believes 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 services
offered by CLECs with high quality video programming and high speed cable modem
based Internet access, 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 integrated communications
provider for Large MDUs. In order to achieve this objective, OpTel has
customized strategies to rapidly and cost effectively address its markets,
deploy its networks and offer an integrated service package supported by
superior customer service. The following highlights key elements of OpTel's
growth and operating strategies:
Provide an Integrated Service Offering. In order to establish the broadest
possible relationship with its subscribers, OpTel offers an integrated package
of communications services at competitive rates. OpTel's service offerings
include: (i) basic and premium tier cable television services, which the Company
can customize on a sub-market basis to meet local preferences; (ii) a full
featured switched local and long distance telephone offering; (iii) high speed
Internet access via cable modem with downstream transmission speeds of up to 1.5
MB per second, which is delivered through a venture with an independent ISP; and
(iv) where market conditions justify, an additional tier of DBS programming from
EchoStar that includes over 300 channels of digital video and audio programming.
The Company believes its integrated service offering will capitalize on MDU
residents' preference for a single source provider of communications services,
enhancing OpTel's ability to attract and retain subscribers.
Continue to Rapidly Expand Subscriber Base. The Company intends to rapidly
expand its subscriber base by: (i) securing additional Rights of Entry from MDU
owners through the use of its experienced and growing sales force and (ii)
increasing penetration and cross-selling additional services to existing
subscribers in MDUs where the Company has Rights of Entry through the use of
marketing and incentive programs. The Company will continue to market its Rights
of Entry on a business to business basis to local, regional and national MDU
owners, including REITs. The Company's strategy to promote subscriber growth
includes having MDU leasing agents provide an effective point of sale including
at the time MDU residents initially secure their leases. As an additional
strategy to drive growth, the Company will directly market local and long
distance telephone services to tenants residing in MDUs not covered by Rights of
Entry but who can be served by collocating telecommunications network facilities
at certain ILEC end offices and leasing unbundled transport network from that
ILEC. The Company believes that its ability to directly market services to MDU
residents will drive Rights of Entry with owners who will want to share in
OpTel's success. When it has
44
<PAGE> 48
secured a Right of Entry and a sufficient subscriber base at an MDU, the Company
intends to bring its own network transport facilities to the MDU and discontinue
collocation services in order to increase operating margins.
Deploy Cost Effective Networks. OpTel's networks are specifically designed
to provide services to MDUs. OpTel's advanced proprietary network infrastructure
utilizes a combination of point-to-point microwave transmission equipment and
fiber optic cable to efficiently deliver the Company's various services to MDU
residents. A substantial portion of the Company's network cost to serve an MDU
is related to the infrastructure specific to that MDU and is invested only after
the Company and the MDU owner have entered into a long-term Right of Entry. The
Company plans to interconnect its microwave network hubs to provide a redundant
ring architecture for telecommunications and to permit the future transport of
digital video programming and Internet traffic from a single source within a
market. The Company intends to expand its use of central office switches in
order to improve cost efficiencies and enhance its local service offering. The
Company expects to serve substantially all of its major markets with its own
central office switches by the end of calendar 2000. As a licensed CLEC in each
of its major markets, the Company also intends to collocate facilities and lease
ILEC transport in order to offer telecommunications services in advance of
installing network transport facilities from its switch to the subscriber. Over
time, OpTel believes substantially all telecommunications services to MDUs
serviced under Rights of Entry will be migrated from ILEC leased transport
network to its own network facilities.
Provide Superior Customer Service. The Company believes that an important
success factor for competitive service providers will be to ensure superior
customer service. Accordingly, the Company has focused on implementing,
provisioning and servicing practices designed around the residential MDU
customer. The Company has a national customer service center staffed with
knowledgeable representatives to address the needs of residents 24-hours-a-day,
seven-days-a-week and dedicated local service teams, trained to support all of
the Company's service offerings, that provide prompt installation and response
to customer service calls. The Company also has service center staff dedicated
to responding to calls from MDU owners and their leasing agents. 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 and
dedicates individual technical service teams to a few proximate MDUs.
Pursue Selective Acquisitions and Strategic Relationships. 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. Since May 1996, the Company has completed and successfully integrated six
acquisitions of MDU oriented video providers representing approximately 700 MDUs
served and 103,000 subscribers. The Company intends to continue to seek
acquisition opportunities in order to capitalize on economies of scale, expand
its subscriber base, provide a client base to cross-sell its other services and
decrease the time to market. The Company delivers high speed Internet access
services through a strategic relationship with an ISP that specializes in
delivering broadband Internet connectivity and content to MDUs. In addition, the
Company has entered into a strategic relationship with EchoStar for the delivery
of an additional tier of DBS programming and will continue to evaluate other
strategic alliances.
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 deploying telecommunications
services in its markets is through developing network infrastructure which
utilizes, to the extent possible, elements of the Company's existing video
distribution network. See "-- Network Architecture."
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The following table sets forth, as of February 28, 1999 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 IN UNITS UNDER
NUMBER OF MDUS UNITS UNDER CABLE CONTRACT FOR TELE-
UNITS IN WITH OVER CONTRACT UNITS PASSED TELEVISION TELE- COMMUNICATIONS
LOCATION MARKET(1) 150 UNITS(2) FOR CABLE FOR CABLE(3) SUBSCRIBERS COMMUNICATIONS(4) LINES IN SERVICE
- -------- --------- ------------ ----------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Houston.............. 363,000 315,000 144,565 138,113 65,231 30,926 5,059
Dallas-Fort Worth.... 486,000 405,000 62,207 52,577 25,531 26,198 4,289
Los Angeles.......... 730,000 295,000 27,815 20,634 13,467 9,202 93
Phoenix.............. 219,000 155,000 26,359 25,848 10,119 3,326 368
San Francisco........ 410,000 246,000 25,724 23,930 16,138 5,046 70
Denver............... 142,000 106,000 19,402 19,009 10,661 7,031 298
San Diego............ 504,000 304,000 24,051 23,348 14,031 4,998 943
Miami-Ft. 234,000 225,000 27,825 25,079 19,530 8,343 165
Lauderdale.........
Chicago.............. 417,000 342,000 30,552 29,933 18,726 3,109 90
Atlanta.............. 285,000 233,000 11,084 10,530 6,116 1,291 132
Orlando-Tampa........ 240,000 205,000 18,372 17,231 10,339 2,494 286
Other markets(5)..... -- -- 17,782 15,368 8,134 5,145 1,436
--------- --------- ------- ------- ------- ------- ------
Total........ 4,030,000 2,831,000 435,738 401,600 218,023 107,109 13,229
========= ========= ======= ======= ======= ======= ======
<CAPTION>
EXPECTED
CLEC SERVICES
LOCATION LAUNCH DATE
- -------- ----------------
<S> <C>
Houston.............. In service
Dallas-Fort Worth.... In service
Los Angeles.......... 3rd Quarter 1999
Phoenix.............. 3rd Quarter 1999
San Francisco........ 3rd Quarter 1999
Denver............... 4th Quarter 1999
San Diego............ Fiscal 2000
Miami-Ft. Fiscal 2000
Lauderdale.........
Chicago.............. Fiscal 2000
Atlanta.............. Fiscal 2001
Orlando-Tampa........ Fiscal 2001
Other markets(5).....
Total........
</TABLE>
- ---------------
(1) Represents rental units in MDUs and is based on March 25, 1998 information
published by industry sources. The number of units does 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 March 25, 1998 information published by
industry sources. The number of units in MDUs with greater than 150 units
does not include condominiums.
(3) Units passed represents the number of units to which the Company has
connected its cable television systems.
(4) The Company has connected telecommunications infrastructure at only 47,462
of the units under contract for telecommunications.
(5) Other markets include Austin, Texas; Las Vegas, Nevada; Indianapolis,
Indiana; and greater Washington, D.C.
The Company installed its first central office switches in the Houston and
Dallas-Fort Worth markets and currently offers switched access local exchange
services to most of its telecommunications customers in these markets. As of
February 28, 1999, the Company had 57,124 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 substantially all of its major markets by the end
of calendar 2000. 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. The Company commenced offering high
speed Internet access at select MDUs in Houston, Dallas-Fort Worth and San
Francisco in January 1999, and intends to introduce its high speed Internet
access services in substantially all of its major markets over the next 12
months.
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 offers 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-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 and calling card services,
through a resale arrangement with a large national interexchange carrier. OpTel
contracts or plans to contract
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<PAGE> 50
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, and to a limited extent in Houston and Dallas-Fort Worth, OpTel
provides telephone services as an STS provider. The Company intends to convert a
substantial portion of its STS telephone operations to CLEC operations and to
provide switched access local exchange services to a substantial portion of its
telephone customers by the end of calendar 2000.
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 served by the
Company's microwave networks can be tailored on a sub-market basis to meet local
preferences and, unlike franchise cable television systems which may be required
to carry all local broadcast channels and public access channels, the Company's
microwave networks can utilize all of their 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 distributor of DBS programming services providing for the
Company's receipt of programming via DBS technology and the insertion of that
programming into its analog lineup ("DBS Transport Right"). The Company
currently uses the DBS Transport Right on a limited basis to service MDUs in its
San Francisco and Miami-Ft. Lauderdale markets using a single, standard DBS
receiving antenna at each serviced MDU. The DBS signal is received in digital
form, converted at the MDU receiver site to analog form and distributed over the
existing coaxial cable to the subscriber's unit. The DBS Transport Right permits
the Company to provide basic programming or to supplement the Company's other
programming services.
DBS Services. To augment its own video programming offerings, the Company
has entered into an agreement with EchoStar that provides OpTel with the right
to order and receive, on behalf of OpTel's MDU customers, EchoStar's DISH
Network DBS programming. At MDUs where the Company decides to offer this
service, its basic and expanded basic cable customers will be able to select any
one or more of DISH Network's programming services or packages as additional
tiers. DISH Network's digital service offers CD-quality audio and high-quality
video channels providing over 300 programming services consisting of local,
national and international video and music entertainment. To receive and
distribute DISH Network's programming at a particular MDU, the Company will
install on the property one or more DBS receiving antennae and signal
distribution equipment. The Company will then distribute DISH Network's DBS
services in digital format to MDU customers through the Company's on-property
cable distribution network. The Company's agreement with EchoStar has an initial
term ending December 31, 2001.
High-Speed Internet Access. OpTel has recently initiated a cable modem
based high-speed Internet access service in its Houston, Dallas-Fort Worth, San
Francisco and Denver markets in conjunction with I(3)S, an ISP that specializes
in delivering broadband Internet connectivity and content to MDUs. The Company
and I(3)S have a strategic alliance to provide high-speed Internet services in
the Company's major markets. The
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Company intends to roll out its high speed Internet access service in
substantially all of its major markets over the next 12 months.
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 1.5 megabits ("MB") per
second. Internet connections providing transmission speeds greater than 128 KB
per second are generally referred to as "high-speed." The transmission speeds of
the services that the Company intends to offer will greatly exceed the speed of
services typically offered by ILECs and compare favorably to Integrated Services
Digital Network ("ISDN") and to digital subscriber line ("DSL") services that
might be offered by competitors.
OpTel initially will connect each property to the ISP's point of presence
using OpTel's microwave transport or its owned or leased local loop 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.
Optel intends to explore the possibility of providing dial-up Internet
access services in addition to its current high-speed Internet access services.
The Company is also evaluating offering a DSL high speed Internet access
service. If offered, such services may be bundled with other services or offered
on a stand-alone basis.
NETWORK ARCHITECTURE
The Company's strategy is to deliver its service offerings through
integrated networks. The diagram below depicts the configuration of a typical
microwave network used by the Company to deliver cable television,
telecommunications and high speed Internet access services.
DIAGRAM
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 February 28, 1999, the Company had 56 microwave networks in service
(consisting of over 650 microwave paths) 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
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within existing network coverage to its 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 using
18GHz for video, 23 GHz for telephone and, in certain markets, 12GHz for video.
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 and
Internet services via conventional coaxial cable. The on-property network uses a
combination of traps (electronic filtering devices), addressable
decoder-converter boxes and interdiction.
OpTel's network design is digital capable. All voice traffic over OpTel's
networks is digitally encoded. 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.
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 the majority of its SMATV
systems to microwave or fiber optic networks by the end of calendar 2000.
To roll out its central office switched voice telecommunications offering
in areas covered by its microwave networks, the Company will link certain of its
Network Hubs to both the central office switch and other Network Hubs to form a
network backbone. When fully deployed in a market, this network backbone will
utilize either of 6GHz or 11GHz microwave or fiber 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 commenced offering
network based central office switched telecommunication services in Houston over
its fiber optic networks and in Dallas-Fort Worth over its microwave networks.
The Company has chosen the 5ESS-2000 digital switch manufactured by Lucent
Technologies Inc. ("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. Prior to or in lieu of establishing a microwave link for
telecommunications services, the Company may lease transport (T-1 service) from
another facilities based carrier. As an initial entry strategy in certain
markets, the Company may 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. The Company has not yet used the services of the CLEC in any
market.
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The Company intends to continue to develop and utilize its own networks to
deliver its service offerings. The Company also plans to collocate network
facilities for telecommunication services in selected ILEC end offices in
certain of its markets. Through collocation, the Company will lease the ILEC's
transport network on an unbundled basis to initially reach a subscriber. The
Company believes collocation will decrease the time required to provide
telephone services to a subscriber, increase the Company's addressable market by
providing a cost effective means of servicing smaller MDUs and, over time,
promote new Rights of Entry. The Company will select the ILEC end offices in
which it will collocate based upon MDU concentration. When it has secured a
Right of Entry and a sufficient subscriber base at an MDU, the Company intends
to bring its own network transport facilities to the MDU and discontinue
collocation services in order to increase operating margins.
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 central office
switches and certain network elements connected to those switches. In 1999,
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 will be located
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 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. As an additional strategy to drive growth, the
Company will directly market local and long distance telephone services to
tenants residing in MDUs not covered by Rights of Entry but who can be served by
collocating telecommunications network facilities at certain ILEC end offices
and leasing unbundled transport network from that ILEC. The Company believes
that its ability to directly market services to MDU residents will drive Rights
of Entry with owners who will want to share in OpTel's success.
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 obtained Rights of Entry. Each constituency is served
by a separate sales and marketing team.
Sales 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 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.
Promotion of sales 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
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multiregional portfolios of MDUs. When marketing to MDU owners, 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.
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.
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 residents of MDUs covered by Rights of Entry 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 intends to market telephone
services to residents of MDUs not covered by Rights of Entry but that can be
serviced using the Company's collocation strategy by (i) direct mail and direct
sales campaigns, including telemarketing, and (ii) where the MDU owner permits,
through on property sales activities similar to those described above. 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 offered at that MDU 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.
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.
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Competitive Video Offering. The Company's analog video programming offering
at an MDU is generally competitive with or superior to the analog offering of
the local franchise operator in that market. In addition, the programming
selections available at an MDU served by the Company's microwave networks can be
tailored on a sub-market basis to meet local preferences and, unlike franchise
cable television systems which may be required to carry all local broadcast
channels and public access channels, the Company's microwave networks can
utilize all of their available channels to provide popular programming. The
Company believes that its additional tier of DBS programming will be superior to
the current or announced offerings of the franchise cable television operator in
each of its markets.
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)
maintaining a 24-hour-a-day, seven-day-a-week subscriber telephone support, (ii)
com-puterized tracking of all incoming calls to minimize waiting times, (iii)
service calls generally made the same day the subscriber indicates a service
problem, (iv) scheduling flexible, seven-day-a-week installation and service
appointments, (v) placing follow-up calls and on-site inspections to verify
subscriber satisfaction and (vi) completing 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. 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 and one half years as of
February 28, 1999 (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. A substantial majority of the Company's Rights of
Entry were acquired through various acquisitions and, as a result, 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 provider of telecommunications services 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, legal and regulatory 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" and
"-- Regulation -- Telecommunications Regulation -- Competitive Local Exchange
Carrier Regulation."
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COMPETITION
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, STS providers,
CLECs and CAPs and will compete with long distance telephone companies,
franchise cable television operators and Internet protocol telephone services as
they begin to enter the local telephone business. The Company's long distance
services compete with established IXCs and resellers and long distance Internet
protocol telephone services. 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, RBOCs and IXCs may
result in providers capable of offering bundled cable television and
telecommunications services in direct competition with the Company. For example,
the recent merger of AT&T and TCI has resulted in the formation of a single
large, well-financed ICP with which the Company may compete. Although certain
technological and regulatory barriers remain, the proposed merger could have a
substantial impact on the telecommunications and cable television markets.
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 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 Worldcom 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.
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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.
CLECs and Other Competitors. 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 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.
Wireless Cable. Wireless cable systems are similar to the Company's 18GHz
and 12GHz networks in that they use microwave transmitting and receiving
equipment. Wireless cable systems differ from 18GHz and 12GHz systems in that
(i) they "broadcast" their video programming directly to individual subscribers
and generally not to an MDU's receiver (ii) their systems transmit in an
omni-directional manner, which allows them to provide service to all households
within a wireless operator's "line-of-sight," and (iii) wireless cable systems
may include subscriber-to-hub transmission capabilities, which would allow them
to provide interactive and telecommunication services. Historically, wireless
operators have had difficulty acquiring or leasing the critical mass of channels
required to offer a competitive programming lineup.
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 systems, like wireless cable systems, will use point-to-multipoint
microwave distribution. Unlike wireless cable systems, however, LMDS systems
will be able to provide channel capacity equal or greater to that of most cable
systems, including the Company's cable systems. 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
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significant (unless an entire MDU is connected to the service) because a DBS
antenna must be pointed in the proper direction to receive video programming
from the satellite. 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 subject to legal and regulatory limitations.
See "-- Regulation -- Regulation of Cable Television -- Subscriber Access" for
discussion of limits on the enforceability of restrictions on DBS antennae
placement in MDU areas (such as apartment balconies or patios).
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 and have initiated in certain
markets "always on" service such as DSL. 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 towards 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. See "Risk Factors -- Risks Associated with Acquisitions."
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.
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Competitive Local Exchange Carrier Regulation
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.
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, to resell their services, to
provide number portability, to provide dialing parity, to 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.
The Supreme Court recently vacated the FCC's regulations regarding the UNEs
that ILECs are required to make available to CLECs. Although the Court concluded
that the FCC does have jurisdiction to establish certain national pricing
standards for UNEs, it determined that the FCC had not applied an appropriate
limiting principle in identifying the UNEs subject to its rules. Accordingly,
the FCC will, on remand, again consider which network elements ILECs must
unbundle and make available to CLECs.
In its first implementing order, issued prior to the Supreme Court
decision, the FCC identified as UNEs most network functionalities for which
access is technically feasible. The FCC declined, however, to define any subloop
elements as UNEs. As a result, ILECs often refuse to reconfigure their networks
so that CLECs may access on-property distribution facilities at a single point
on or near an MDU property. Accordingly, the Company has experienced, and can be
expected to continue to experience, practical difficulties bringing its
network-based telephone services to subscribers at some of the MDUs that it
seeks to serve. Where the Company is not able to access on-property ILEC
distribution facilities, it must either install duplicative distribution
facilities on the MDU property or lease unbundled loops from an ILEC in order to
reach individual subscribers within the MDU. Either of these alternatives may
raise the cost of service or delay entry by the Company. If, on remand, the FCC
identifies subloop distribution facilities as UNEs, as advocated by the Company,
the Company would likely have increased access to subscribers at the properties
that it serves.
The Communications Act requires LECs to pay reciprocal compensation to
other carriers for terminating their local traffic. A number of ILECs have taken
the position that traffic terminated to an ISP is not local and that no
reciprocal compensation payment by the originating carrier to the terminating
carrier for such traffic
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therefore is required. The vast majority of states that have addressed the issue
have rejected that argument and concluded that LECs are entitled to reciprocal
compensation for terminating ISP-bound traffic. However, the FCC has determined
that ISP-bound calls constitute interstate traffic for jurisdictional purposes
and it is considering the adoption of a federal rule regarding the appropriate
inter-carrier compensation for such traffic. There can be no assurance that
traffic terminated to an ISP will not ultimately be held to be exempt from the
reciprocal compensation requirements.
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.
The California Public Utilities Commission ("CPUC") recently issued a
decision prohibiting any carrier from entering into an agreement or other
arrangement with a MDU owner that has the effect of restricting access by other
carriers to the property or affords other carriers with inferior access to the
property. By way of example, the CPUC decision explains that an agreement that
provides for the exclusive marketing of ILEC services to MDU tenants may be
improper if the agreement has the effect of preventing other carriers from
accessing, and providing service to, a MDU because of the building owner's
financial incentives under the marketing agreement. Under the Company's Rights
of Entry, the Company typically assumes ownership or management of the
on-property telephone wiring and secures exclusive marketing arrangements with
MDU management. The Company provides all other carriers with non-discriminatory
and competitively-neutral access to the on-property wiring and believes that its
Rights of Entry are consistent with the CPUC's decision. However, there can be
no assurance that, if such Rights of Entry were challenged in a complaint
brought by another carrier, the CPUC would not conclude otherwise.
From time to time state legislative and regulatory proposals are introduced
or considered in states where the Company operates which, if adopted, would
limit the Company's ability to enter into exclusive marketing agreements for its
telephone services. While the Company does not believe that these proposals have
broad support, there can be no assurance as to the likelihood of their passage
or adoption in any state.
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
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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 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.
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.
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. 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 microwave and SMATV systems are not
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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 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 the network. In addition, rates for basic cable service on Cable Systems not
subject to "effective competition" are regulated by local franchising
authorities. 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."
Cable Systems are 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%, (iii) the local franchising authority itself
offers multichannel television to at least 50% of the households in the
franchise area, or (iv) 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. No assurance can be given that the Company does
not, or will not in the future, constitute "effective competition" to any
franchise cable television operator with which it competes.
Copyright Licensing. Cable Systems and private cable television systems are
entitled to federal compulsory copyright licensing privileges. In order to
obtain a compulsory copyright, such systems must make semi-annual payments to a
copyright royalty pool administered by the Library of Congress. A compulsory
copyright provides a blanket license to retransmit the programming carried on
television broadcast stations. Non-broadcast programming, often referred to as
cable channel programming, is not subject to the compulsory copyright license.
The Company purchases this copyrighted programming from program suppliers (e.g.,
ESPN), which in turn obtain rights to the programming directly from the program
copyright owner pursuant to a private negotiated agreement. Bills have been
introduced in Congress over the past several years that would eliminate or
modify the cable compulsory license. The need to negotiate with the copyright
owners for each program carried on each broadcast station in the channel lineup
could increase the cost of carrying broadcast signals or could impair the
Company's ability to obtain programming.
Must-Carry and Retransmission Consent. The Communications Act grants local
television stations the right to elect 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., commer-
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cial 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. 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 HDTV signals. The resolution of these must-carry issues may have a
significant impact on the programming carried on the Company's systems.
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) or
(iv) provide video programming by means of an "open video system." Open video
systems are not required to comply with the full panoply of federal Cable System
regulation, but they are subject to certain additional programming selection
limitations. It is unclear at this time the extent to which any of these market
entry options will be used by LECs.
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. Although it is open to
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question whether the FCC has statutory and constitutional authority to compel
mandatory access or restrict exclusive agreements, 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. The
FCC also has preempted certain state, local and private restrictions on
over-the-air reception antennas placed on MDU properties, including rental
properties and properties occupied by, but not within the exclusive control of
the viewer. This limits the extent to which MDU owners and the Company may
enforce certain aspects of the Company's Rights of Entry agreements which
otherwise would prohibit, for example, placement of DBS receive antennae in MDU
areas (such as apartment balconies or patios) under the exclusive occupancy of a
renter.
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.
Cable franchises typically contain provisions governing fees to be paid to
the franchising authority, length of the franchise term, renewal, sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public rights-of-way and types
of cable services provided.
Although federal law contains certain procedural safeguards to protect
incumbent Cable Systems from arbitrary denials of franchise renewal, the renewal
of a cable franchise cannot be assured unless the franchisee has met certain
statutory standards. Moreover, even if a franchise is renewed, a franchising
authority may impose new requirements, such as the upgrading of facilities and
equipment or higher franchise fees. At least two states, Massachusetts and
Connecticut, have adopted legislation subjecting Cable Systems to regulation by
a centralized state government agency. There can be no assurance that other
states will not similarly adopt state level regulation.
The Company's Houston cable television franchise and its other limited
cable television franchises are subject to state and local franchise laws.
Moreover, although 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, 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 with a provider of cable or other video programming
services. In addition, 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 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.
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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. New licenses are
valid for ten years from the date of grant, after which the licensee must apply
to the FCC for license renewal. License renewal is not an automatic right,
although it is routinely granted if the licensee is in substantial compliance
with the FCC rules.
Licensing procedures include (i) obtaining an engineering report confirming
that the proposed path does not interfere with existing paths and (ii) filing
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 network. 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 Network Hubs 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.
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 Company also intends to use the 11 GHz frequencies for hub-to-hub
transmission of video entertainment material. The FCC recently denied a request
filed by the Company for waiver of the FCC rule that prohibits private microwave
licensees from using the 11 GHz frequencies for the delivery of video
entertainment materials to customers or for the final radio link to a private
cable system. Although there can be no assurance, the Company does not believe
that the denial will have an adverse impact on its proposed use of 11 GHz
frequencies for hub-to-hub transport. 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 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.
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
has limited the Company's ability to use 18GHz
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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, the Company has
been granted a waiver by the FCC of the rule prohibiting the use of the 12 GHz
band by private microwave licensees for the carriage of video programming
material, and special temporary authority to use the 12 GHz frequencies, on
selected paths in Denver. There can, however, be no assurance that 12 GHz paths
will be available for the Company's future needs in Denver or the Washington,
D.C. area.
The FCC also has issued a Notice of Proposed Rulemaking seeking comment on
a proposal to make terrestrial microwave systems secondary to satellite
downlinks in 250 MHz of spectrum between 18.3 GHz and 18.55 GHz. The Company's
18 GHz networks currently use 440 MHz of spectrum in the frequencies between
18.140 GHz and 18.580 GHz. Under the proposal as originally released,
terrestrial stations in existence or applied for as of September 18, 1998, would
have been grandfathered as co-primary with satellite services in the 18.3-18.55
GHz band, but terrestrial systems for which applications were filed after that
date would not have been permitted to cause harmful interference to satellite
downlinks in the band. The Company, however, working in cooperation with the
private cable industry, successfully petitioned the FCC to amend its
grandfathering proposal. Under the new proposal, all terrestrial microwave
stations operated in this band by private cable operators, such as those
operated by the Company, that are constructed or for which an application has
been filed by the date of the release of the order implementing the new rules,
if such new rules are adopted, will be grandfathered as co-primary in the band.
Further, in its order amending the grandfathering proposal, the FCC suggested
that it would make every effort to preserve an appropriate spectrum allocation
for private cable services such as those offered by the Company. Nonetheless, if
terrestrial microwave systems ultimately are made secondary to satellite
downlinks in the 18 GHz band, the Company's use of that band would be severely
limited and there can be no assurance that the Company would be able to migrate
its networks to alternative spectrum, or that such migration would not
negatively affect the cost of the Company's systems.
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 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.
This band, which the Company has obtained limited authority to use in the Denver
market, normally is not available for video distribution services by private
microwave licensees. There can be no assurance that this proceeding will be
resolved in a manner satisfactory to the Company. Further, the FCC has issued a
Notice of Proposed Rulemaking seeking comment on rule changes that would permit
increased use of both the 11 GHz and 12 GHz bands by satellite operators. There
can be no assurance that the FCC will not adopt rules in this proceeding that
would negatively affect the Company's proposed use of these bands.
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
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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 who 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.
EMPLOYEES
As of February 28, 1999, the Company had a total of 747 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. In September 1998, the
Company 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 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 has relocated its
Dallas regional operations to the same building. The Company also leases
facilities in each of the thirteen 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. These 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
The Company is not a party to any legal proceedings except for those
described below and 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, results of
operations or cash flows.
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 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."
Although the Company does not believe that its use of the name "OpTel" infringes
on
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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 related
administrative proceedings, if either go forward, or that any such outcome would
not materially adversely affect the Company.
Shortly after the filing of the Civil Action, the parties commenced
settlement discussions and the Company's time to answer the complaint and assert
counterclaims has been continuously extended by agreement of the parties. The
parties have reached an agreement in principle, subject to definitive agreement
(the "Proposed Settlement), that would resolve all issues between the parties
and settle the Civil Action and related administrative proceedings. Under the
Proposed Settlement, the Company will change the name under which it conducts
business from OPTEL to OPTELNET, or such other name or names as determined by
the Company. The change of business name will occur over time, enabling the
Company to transition signage over a nearly three year period, change markings
on vehicles as they are phased out of service and use existing supplies of
printed materials. The Company will retain the right to use "Optel, Inc." as its
corporate name and as a service mark in conjunction with certain services and
the Company will receive trademark registrations for OPTEL for which it has
previously applied. Under the Proposed Settlement, Octel will assign to the
Company its common law rights in the name OCTELNET and will discontinue use of
that name over an agreed time period. The settlement, if consummated, is not
expected to have a material financial or other impact on the Company.
On April 12, 1999, a purported class action complaint was filed in the
District Court of Harris County, Texas by Marc H. Levy, individually and on
behalf of all cable subscribers that have paid late fees to the Company. The
plaintiff alleges that late fees charged to plaintiff for delinquent payments of
cable subscription charges are an illegal penalty. The plaintiff seeks
unspecified damages and other relief. The case is in its very early stages, and
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 has
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 April 19, 1999:
<TABLE>
<CAPTION>
NAME POSITION AGE
- ---- -------- ---
<S> <C> <C>
Andre Chagnon.................. Chairman of the Board and Director 71
Louis Brunel................... Director; President and Chief Executive Officer 57
Frederick W. Benn.............. Director 64
Christian Chagnon.............. Director 43
William O. Hunt................ Director 65
R. Douglas Leonhard............ Director 62
Lynn McDonald.................. Director 39
Alain Michel................... Vice Chairman of the Board and Director 49
Jayne L. Stowell............... Director 47
Bertrand Blanchette............ Chief Financial Officer 41
David J. Curtin................ Vice President, Engineering 43
Stephen Dube................... Chief Operating Officer 43
James Greene................... Vice President, Telephone 53
Michael E. Katzenstein......... Vice President, Legal Affairs and General Counsel 39
Dan R. Smith................... Vice President, Sales 52
Lynn Zera...................... Vice President, Human Resources 51
</TABLE>
Andre Chagnon has served as Chairman of the Board and as a Director since
October 1998. Since October 1998, Mr. Chagnon has served as Chairman of the
Board, President and Chief Executive Officer of GVL; prior thereto he was its
Chairman of the Board and Chief Executive Officer. Mr. Chagnon is also a
director of Cable Television Laboratories, Inc.
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 since-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.
Frederick W. Benn was appointed as a Director in November 1998. From 1987
until his retirement at the end of 1995, Mr. Benn was a partner with the law
firm of Smith Lyons in Toronto, Canada. Mr. Benn also serves as a director of
both GVL and its affiliate, Videotron Ltee.
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 son of Mr. Andre 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. Mr. Hunt also serves as a Director of The Allen Group Inc., American
Homestar Corporation, DSC Communications Corporation and Dr. Pepper Bottling
Company of Texas.
R. Douglas Leonhard was appointed as a Director in November 1998. From 1986
until his retirement in 1997, Mr. Leonhard was Senior Vice President of the
LaCantera Development Company, a wholly owned subsidiary of United Services
Automobile Association, a large financial services company that provides an
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array of services including property and casualty insurance, personal financial
service products, and travel and personal banking services. Mr. Leonhard also
serves on the board of Continental Mortgage and Equity Trust, Income Opportunity
Realty Investors, Inc., and Transcontinental Realty Investors, Inc., each a
publicly traded REIT.
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
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.
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.
Jayne L. Stowell was appointed as a Director in December 1998. Since
December 1998, Ms. Stowell has served as a Senior Vice President of Level 3
Communications, Ltd. From May 1996 to December 1998, Ms. Stowell served as a
Senior Vice President of MCI WorldCom. From June 1993 to January 1996, Ms.
Stowell served as a Managing Director of Bell Canada International. Ms. Stowell
also serves as a director of another affiliate of GVL.
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.
David J. Curtin was appointed Vice President, Engineering in April 1999.
From 1983 to April 1999, Mr. Curtin held various management positions of
Southern New England Telephone, including most recently, President of SNET
Cellular, Inc.
Stephen Dube was appointed Chief Operating Officer in October 1998. Since
July 1995 Mr. Dube has held various senior management positions at OpTel,
including Vice President, Operations and Vice President, Marketing and Corporate
Development. From July 1995 to March 1997, Mr. Dube served as a Director of
OpTel. From July 1995 to December 1996, Mr. Dube served as a Vice President of
Videotron International. 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 & Hellman LLP. Mr. Katzenstein received his J.D.
from Boston University School of Law in 1985.
Dan R. Smith was appointed Vice President, Sales in April 1999. From 1990
to April 1999, Mr. Smith served in various sales related management positions at
Intermedia Communications Inc., Shared Technologies Fairchild and Fairchild
Communications Services.
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.
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Pursuant to the Company's Bylaws, Directors are elected annually and serve
in such capacity until the earlier of their removal or resignation or the
election of their successors.
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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ ------------------------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS* COMPENSATION OPTIONS COMPENSATION(17)
--------------------------- ------ -------- ------- ------------ ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Louis Brunel...................... 1998 $309,600 $25,000 $ 89,179(7)(8) 51,022.75 --
President and Chief 1997 $269,623 -- $ 66,062(8)(9) 80,173.95 --
Executive Officer 1996 $ 35,095(1) -- -- -- --
Michael E. Katzenstein............ 1998 $182,000 $30,000 -- -- $4,184
Vice President, Legal Affairs 1997 $175,000 $57,500 $ 65,196(10) 45,688.05 $2,820
and General Counsel 1996 $135,346(2) $40,000 $103,756(11) -- $3,334
Bertrand Blanchette............... 1998 $158,000 $17,500 $ --(12) -- --
Vice President and 1997 $129,702(3) $ 5,000 $ 33,961(12)(13) 21,865.60 --
Chief Financial Officer 1996 -- -- -- -- --
Stephen Dube...................... 1998 $170,775 $30,000 $ 24,172(14)(15) 14,577.50 $3,006
Vice President and Chief
Operating 1997 $119,139 $15,000 $ 63,514(15)(16) 16,909.40 $2,844
Officer 1996 $ 36,542(4) -- -- -- --
John Czapko....................... 1998 $150,000 -- -- 16,326.55 $ 346(18)
Vice President, Sales and
Marketing 1997 $ 70,000(5) $10,000 -- -- --
1996 -- -- -- -- --
Lynn Zera......................... 1998 $124,000 $17,500 $ 6,000 -- $2,575
Vice President, Human Resources 1997 $112,877 $21,040 -- 12,827.85 $2,809
1996 $ 83,750(6) -- -- -- $2,513
</TABLE>
- ---------------
* In fiscal 1999, bonuses in respect of fiscal 1998 services were paid as
follows: Mr. Brunel $135,000; Mr. Katzenstein $45,500; Mr. Blanchette
$39,500; Mr. Dube $41,000; Mr. Czapko $37,500; and Ms. Zera $31,000. These
bonuses are not reflected in the schedule.
(1) During fiscal 1996, Mr. Brunel was paid primarily by GVL. Beginning June 1,
1996, a portion of Mr. Brunel's salary was allocated to the Company.
Effective November 1, 1996, Mr. Brunel accepted the position of President
and Chief Executive Officer on a full-time basis.
(2) Mr. Katzenstein commenced employment with the Company in November 1995.
(3) 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.
(4) 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.
(5) Mr. Czapko commenced employment with the Company in March 1997.
(6) Ms. Zera commenced employment with the Company in November 1995.
(7) $51,960 represents temporary housing and commuting reimbursements.
(8) Does not include tax return preparation fees paid or reimbursed by the
Company.
(9) $39,790 represents temporary housing and commuting reimbursements and
$21,680 represents an automobile allowance.
(10) $49,823 represents tax reimbursements resulting from relocation.
(11) $93,706 represents relocation payments.
(12) Does not include tax return preparation fees and the cost of family travel
to Montreal paid or reimbursed by the Company.
(13) $29,161 represents relocation payments.
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(14) $22,179 represents tax reimbursements resulting from relocation payments.
(15) Does not include tax return preparation fees, the cost of family travel to
Montreal and family education costs paid or reimbursed by the Company.
(16) $54,288 represents relocation payments.
(17) Represents 401(k) matching fund contributions by the Company.
(18) Mr. Czapko resigned effective January 19, 1999. As part of a severance
package, Mr. Czapko was, among other things, paid a lump sum amount of
$155,000. Such payment was made in fiscal 1999.
OPTION GRANTS IN FISCAL 1998
The following table sets forth options to purchase shares of the Common
Stock granted to the Named Executive Officers during fiscal 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZED VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- ---------- ------------ -------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Louis Brunel.................... 51,022.75 31.06% $17.15 March, 2008 $676,359.26 $1,483,015.76
Stephen Dube.................... 6,997.30 4.26% $17.15 January, 2008 $ 92,756.44 $ 203,381.95
7,580.20 4.62% $17.15 April, 2008 $100,483.38 $ 220,324.39
John Czapko..................... 16,326.55 9.94% $17.15 March, 2007 $216,425.29 $ 474,543.82
</TABLE>
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR END 1998 OPTION
VALUES
The following table shows the values of options held by the Named Executive
Officers as of the end of fiscal 1998. No options were exercised by the Named
Executive Officers during fiscal 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
1998 1998(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Louis Brunel........................ 32,799.55 98,398.70 $80,358.90 $241,076.82
Michael E. Katzenstein.............. 11,422.00 34,266.05 $53,866.15 $161,598.69
Bertrand Blanchette................. -- 21,865.60 -- $ 53,570.72
Stephen Dube........................ 5,976.70 25,510.65 $14,642.92 $ 62,501.08
John Czapko......................... -- 16,327.05 -- $ 40,001.27
Lynn Zera........................... 6,413.90 6,413.95 $15,714.06 $ 15,714.18
</TABLE>
- ---------------
(1) Based on an assumed fair market value of $19.60 per share of Common Stock as
of August 31, 1998.
EMPLOYMENT AGREEMENTS
Louis Brunel is employed as President and Chief Executive Officer of the
Company pursuant to an employment agreement expiring on October 31, 2000,
subject to automatic one year extensions. Mr. Brunel receives an annual base
salary of $350,000, a Company automobile and apartment for his use. Mr. Brunel
is also entitled to participate in the Company's Incentive Stock Plan (as
described below) and Bonus Plan (as described below). In the event of
termination due to death or disability, Mr. Brunel will be entitled to receive
his then current base salary for the remaining term of the agreement, the pro
rata portion of his bonus for the then current bonus period and, in the case of
a disability, certain relocation expenses. In the event the Company elects not
to extend the term of the agreement, Mr. Brunel will be entitled to receive his
then current base salary for 24 months thereafter, the pro rata portion of his
bonus for the then current bonus period, a bonus based on the average bonus for
the prior two years pro rated for the 24 month severance period and certain
outplacement services and relocation expenses. In the event the agreement is
terminated by the Company "without cause" or by Mr. Brunel for "good reason,"
Mr. Brunel will be entitled to receive his then
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current salary for the remaining term of the agreement or 24 months, whichever
is longer, the pro rata portion of his bonus for the then current bonus period,
a bonus based on the average bonus for the prior two years pro rated for the
severance period and certain outplacement services and relocation expenses. Upon
a change in control of the Company or the termination of the employment
agreement for any reason other than "for cause," all options will immediately
vest and become exercisable and remain exercisable for the shorter of the term
of the option agreement or 12 months, even if Mr. Brunel is no longer an
employee of the Company. The agreement provides that Mr. Brunel is subject to
non-competition restrictions during the term of the agreement and, unless the
term of the agreement is not renewed by the Company or the agreement is
terminated by the Company "without cause" or by Mr. Brunel for "good reason,"
for nine months thereafter. In addition, Mr. Brunel receives from GVL certain
expatriate benefits, including participation in certain GVL-sponsored benefit
plans.
Michael E. Katzenstein is employed as Vice President, Legal Affairs and
General Counsel of the Company pursuant to an employment agreement expiring
April 15, 2001, subject to automatic one year extensions. Mr. Katzenstein
currently receives an annual base salary of $235,000 and a Company automobile.
Bertrand Blanchette is employed as Chief Financial Officer of the Company
pursuant to an employment agreement expiring on April 15, 2001, subject to
automatic one year extensions. Mr. Blanchette receives an annual base salary of
$210,000, a monthly automobile allowance and a pension contribution equal to 5%
of his salary.
Stephen Dube is employed as Chief Operating Officer of the Company pursuant
to an employment agreement expiring on April 15, 2001, subject to automatic one
year extensions. Mr. Dube receives an annual base salary of $245,000 and a
Company automobile.
Lynn Zera is employed as Vice President, Human Resources of the Company
pursuant to an employment agreement expiring on April 15, 2001, subject to
automatic one year extensions. Ms. Zera receives an annual base salary of
$138,000 and a monthly automobile allowance.
Each of Messrs. Blanchette, Dube and Katzenstein and Ms. Zera are entitled
to participate in the Company's Incentive Stock Plan and Bonus Plan. In the
event of termination due to death or disability, such individual will be
entitled to receive his or her then current base salary for the remaining term
of the agreement, the pro rata portion of his or her bonus for the then current
bonus period and, except in the case of Ms. Zera, in the case of a disability,
certain relocation expenses. In the event the Company elects not to extend the
term of such individual's employment, such individual will be entitled to
receive his or her then current base salary for the remaining term of the
employment agreement and for 12 months (or, if a change of control of the
Company has occurred since the most recent extension of the employment term, 24
months) thereafter, the pro rata portion of his or her bonus for the then
current bonus period, a bonus based on his or her average bonus for the prior
two years pro rated for the severance period and certain outplacement services
and, except in the case of Ms. Zera, relocation expenses. In the event such
individual's employment agreement is terminated by the Company "without cause"
or by such individual for "good reason," such individual will be entitled to
receive his or her then current salary for the remaining term of the agreement
or 12 months (or, if such termination is within 12 months of a change of control
of the Company, 24 months), whichever is longer, the pro rata portion of his or
her bonus for the then current bonus period, a bonus based on his or her average
bonus for the prior two years pro rated for the severance period and certain
outplacement services and, except in the case of Ms. Zera, relocation expenses.
Upon a change in control of the Company, all options held by Messrs. Blanchette,
Dube and Katzenstein and by Ms. Zera will immediately vest and become
exercisable and remain exercisable for the remaining term of such options, even
if such individual is no longer an employee of the Company. Upon termination
other than "for cause," all options held by the respective executive will
continue to vest in accordance with their terms and will remain exercisable
until 12 months after the expiration of the term of the employment agreement.
Each of Messrs. Blanchette, Dube and Katzenstein and Ms. Zera are subject to
non-competition restrictions during the term of their respective employment
agreements and, unless the term of such agreement is not renewed by the Company
or such agreement is terminated by the Company "without cause" or by such
individual for "good reason," for nine months thereafter. In addition, Messrs.
Blanchette and Dube receive certain expatriate benefits, including participa-
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tion in certain GVL-sponsored benefit plans and, in the case of Mr. Blanchette,
post-termination relocation and severance benefits, from GVL.
INCENTIVE STOCK PLAN
In fiscal 1997, the Company adopted an Incentive Stock Plan. In fiscal
1998, the Company adopted amendments to such plan, certain of which will become
effective, subject to stockholder approval, on the date the Offering is
consummated (as so amended, the "Plan"). Twelve percent of the 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 12% of the then outstanding
Common Stock, on a fully diluted basis, if such adjustment would increase the
number of shares. As of February 28, 1999, options to purchase 916,987.65 shares
of Common Stock have been granted under the Plan, none of which have been
exercised, at a weighted average exercise price of $18.48 per share of Common
Stock. The Company intends to issue a significant number of options to purchase
shares of Common Stock at the initial public offering price to employees of the
Company, including the Named Executive Officers, on the date the Offering is
consummated. 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 1,000,000 shares of 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 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 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.
At the discretion of the Board, the exercise price may be paid by personal
check, bank draft, money order, or money transfers, through the delivery of
shares of the 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, Common Stock or a combination
thereof) equal to the number of shares of Common Stock with respect to which
SARs are exercised multiplied by the excess of the fair market value of the
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 Common Stock remaining
subject to such SARs and related option.
Restricted Stock. Awards of 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 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 Common Stock is subject to restrictions, including the
right to vote the Common Stock and to receive dividends. Restricted 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 Common Stock may not
be transferred.
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<PAGE> 75
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 Common
Stock delivered to the recipient, calculated from the date of award and
accounted for as if reinvested in Common Stock on the dividend payment dates.
This type of award may be paid in the form of 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 Common Stock or other 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. The Stock Purchase Plan will
become effective, subject to stockholder approval, on the date the Offering is
consummated. One percent of the Common Stock outstanding, on a fully diluted
basis, on the date the Offering is consummated, will be issuable 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 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
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 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 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 20,000 shares of 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.
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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 Andre 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 Andre Chagnon, William O. Hunt,
Lynn McDonald and Alain Michel. The Chairman of the Compensation Committee is
Mr. Chagnon.
COMPENSATION OF DIRECTORS
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
also receives options to purchase 5,000 shares of Common Stock at 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
effective date of the grant. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997 and part of fiscal 1998, 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
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<PAGE> 77
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 1999. The Company expects that this insurance will be renewed in the
ordinary course.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by (i) each Director of the Company who
beneficially owns any Common Stock, (ii) each Named Executive Officer, (iii)
each person known by the Company to beneficially own 5% or more of the
outstanding shares of Common Stock, (iv) each person (other than the Company)
including shares in the Offering and (v) all directors and executive officers of
the Company as a group, in each case as adjusted to reflect the assumed
conversion of all of the outstanding classes of common stock and all outstanding
series of preferred stock into Common Stock immediately prior to the
consummation of the Offering and the Split.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP PRIOR TO BENEFICIAL OWNERSHIP AFTER
OFFERING OFFERING
------------------------------ NUMBER ----------------------------
NUMBER OF OF SHARES NUMBER OF
BENEFICIAL OWNER SHARES(1) PERCENT(2) OFFERED SHARES(1) PERCENT(2)
- ---------------- -------------- ----------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Le Groupe Videotron Ltee...................... 19,135,069.64(3) 70.12 -- 19,135,069.64 57.05
Caisse de depot et placement du Quebec........ 2,149,695.00(4) 7.88 -- 2,149,695.00 6.41
Interactive Cable Systems, Inc................ 2,933,440.13(5) 10.75 -- 2,933,440.13 8.75
Nomura Holding America Inc.................... 1,368,956.02(5) 5.02 -- 1,368,956.02 4.08
MCI Telecommunications Corporation............ 577,297.26(5) 2.12 -- 577,297.26 1.72
Frederick W. Benn............................. --(6) * -- *
William O. Hunt............................... --(6) * -- *
R. Douglas Leonhard........................... --(6) * -- *
Louis Brunel.................................. 65,598.35(7) * -- 65,598.35 *
Michael E. Katzenstein........................ 22,844.05(8) * -- 22,844.05 *
Bertrand Blanchette........................... 5,466.40(9) * -- 5,466.40 *
Stephen Dube.................................. 11,953.35(10) * -- 11,953.35 *
Lynn Zera..................................... 6,413.90(11) * -- 6,413.90 *
All directors and executive officers as a
group (14 persons).......................... 112,276.05(12) * -- 112,276.05 *
DFG Corporation(13)........................... 8,000.00 * 8,000.00 -- *
FamCo Income Partners(13)..................... 11,250.00 * 11,250.00 -- *
FamCo Value Income Partners(13)............... 22,400.00 * 22,400.00 -- *
FamCo Offshore(13)............................ 8,500.00 * 8,500.00 -- *
ZPG Securities(13)............................ 2,000.00 * 2,000.00 -- *
Colony Partners............................... 5,000.00 * 5,000.00 -- *
Asiel & Co. LLC............................... 1,300.00 * 1,300.00 -- *
TCB as Custodian for NCRAM Client A(14)....... 52,500.00 * 52,500.00 -- *
TCB as Custodian for NCRAM Client B(14)....... 5,000.00 * 5,000.00 -- *
SEI Institutional Managed Trust(15)........... 1,500.00 * 1,500.00 -- *
Texaco Inc.(15) .............................. 1,000.00 * 1,000.00 -- *
RJR Nabisco(15)............................... 1,000.00 * 1,000.00 -- *
City of NY Employee Retirement System(15)..... 2,000.00 * 2,000.00 -- *
BEA Income Fund, Inc.(15)..................... 2,500.00 * 2,500.00 -- *
BEA Strategic Global Income Fund(15).......... 1,250.00 * 1,250.00 -- *
Douglas G. Boven and Elizabeth S. Neufeld..... 50.00 * 50.00 -- *
Julian R. Schwab.............................. 535.00 * 535.00 -- *
Eaton Vance High Income Portfolio............. 29,200.00 * 29,200.00 -- *
Eaton Vance Income Fund of Boston............. 7,300.00 * 7,300.00 -- *
Hallmark Master Trust......................... 1,000.00 * 1,000.00 -- *
Battery Park High Yield Fund(14).............. 2,500.00 * 2,500.00 -- *
GAM High Yield Fund, Inc...................... 2,500.00 * 2,500.00 -- *
Merrill Lynch Global Currency Bond Series
Corporate High Income Portfolio(16)......... 25,000.00 * 25,000.00 -- *
Prospect Street High Income Portfolio Inc..... 17,500.00 * 17,500.00 -- *
Van Kampen Income Trust....................... 2,500.00 * 2,500.00 -- *
Van Kampen High Income Corporate Bond Fund.... 16,375.00 * 16,375.00 -- *
Ameritech Pension Trust(15)................... 750.00 * 750.00 -- *
Gleacher Natwest.............................. 2,500.00 * 2,500.00 -- *
Pacific Life Insurance Company................ 27,500.00 * 27,500.00 -- *
Alliance Balanced Shares...................... 5,000.00 * 5,000.00 -- *
James A. Kofalt(17)........................... 124,960.00 * 124,960.00 -- *
</TABLE>
- ---------------
(1) Under the rules of the Commission, a person is deemed to be the beneficial
owner of a security if such person has or shares the power to vote or
direct the voting of such security or the power to dispose or direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any securities if that person has the right to acquire beneficial
ownership within 60 days. Accordingly, more than one person may be deemed
to be a beneficial owner of the same securities. Unless otherwise indicated
by footnote, the named individuals have sole and investment power with
respect to the securities beneficially owned.
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(2) "*" indicates less than one percent. 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.
(3) 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. 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.
(4) Such shares are owned by CDPQ, a wholly-owned subsidiary of Caisse. 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. In addition, Caisse holds $20.0
million of 1998 Notes. Caisse's address is 1981, Avenue McGill College,
Montreal, Quebec, H3A 3C7.
(5) 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 Telecommunications Corporation's ("MCI") address is 1801 Pennsylvania
Avenue, N.W., Washington, D.C. 20006. Includes shares currently held in
escrow pending the resolution of post-closing adjustments in connection
with the acquisition of certain assets of ICS.
(6) Excludes 5,000 shares of Common Stock underlying options which are not
exercisable until at least 60 days after the date of this Prospectus.
(7) Includes 65,598.35 shares of Common Stock underlying presently exercisable
options. Excludes 144,764.60 shares of Common Stock underlying options
which are not exercisable until at least 60 days after the date of this
Prospectus.
(8) Includes 22,844.05 shares of Common Stock underlying presently exercisable
options. Excludes 43,843.65 shares of Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.
(9) Includes 5.466.40 shares of Common Stock underlying presently exercisable
options. Excludes 36,191 shares of Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.
(10) Includes 11,953.35 shares of Common Stock underlying presently exercisable
options. Excludes 52,965.50 shares of Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.
(11) Includes 6,413.90 shares of Common Stock underlying presently exercisable
options. Excludes 25,747.30 shares of Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.
(12) With respect to executive officers who are not Named Executive Officers,
excludes 36,325.55 shares of Common Stock underlying options which are not
exercisable until at least 60 days after the date of this Prospectus.
(13) Funsten Asset Management Company is the portfolio manager for each of DFG
Corporation, FamCo Income Partners, FamCo Value Income Partners, FamCo
Offshore and ZPG Securities and may be deemed to be the beneficial owner of
the securities owned by these entities.
(14) Nomura Corporate Research and Asset Management Inc. ("NCRAM") is the
investment advisor for each of TCB as Custodian for NCRAM Client A, TCB as
Custodian for NCRAM Client B and the Battery Park High Yield Fund. NCRAM
may be deemed to be the beneficial owner of the securities owned by the
Battery Park High Yield Fund and NCRAM as Custodian for NCRAM Client B.
(15) Credit Suisse Asset Management is an investment adviser for each of the
Ameritech Pension Trust, BEA Income Fund, Inc., BEA Strategic Global Income
Fund, Inc., City of New York Employee Retirement System, RJR Nabisco, SEI
Institutional Managed Trust and Texaco, Inc., and may be deemed to be the
beneficial owner of the securities owned by each of these accounts.
(16) Merrill Lynch Global Currency Bond Series, Corporate High Income Portfolio,
is a mutual fund organized under the laws of the Grand Duchy of Luxembourg
and is advised by Merrill Lynch Asset Management, L.P. Merrill Lynch Global
Currency Bond Series, Corporate High Income Portfolio is the beneficial
owner of the securities.
(17) James Kofalt held the position as Chairman of the Board of Directors of
OpTel during 1995 and 1996 and also served as a consultant to OpTel during
1996 and 1997.
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<PAGE> 80
As of February 28, 1999, all of the outstanding shares of the Class B
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 certain assets of ICS, 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, the shares of Common Stock owned by
the ICS Group (collectively, 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"). In connection with the sale by
Vanguard of its minority stock position in the Company to CDPQ, the Company,
VPC, GVL 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 and VPC have agreed
to vote for nominees of CDPQ for 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, CDPQ has
designated Lynn McDonald as a Director of the Company.
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 certain shares of Common Stock. In addition,
CDPQ has piggyback registration rights, on three occasions, to include such
shares of Common Stock in registration
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<PAGE> 81
statements filed by the Company for the sale of 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, SERIES A PREFERRED AND CLASS B COMMON
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.
In addition, on July 26, 1995, VPC purchased from the Company (i) 1,558,260
shares of Class B Common for approximately $16.7 million and (ii) a 15%
convertible note having a principal amount of approximately $8.3 million. On
April 1, 1996, the note was converted into 776,145 shares of Class B Common
(after giving effect to the contribution, in connection with the settlement of
certain disputes between the then principal stockholders, of certain shares
received by VPC as accrued interest on the note).
Pursuant to the Conversion and Exchange Agreement, VPC is required, on or
before the earlier to occur of August 29, 1999 or the 90th day following the
consummation of the Offering, to convert all of the Series A Preferred then
outstanding and all of the Class B Common then held by it into shares of Common
Stock. The Conversion and Exchange Agreement also provides that OpTel can seek
specific enforcement of the Conversion and Exchange Agreement, and that GVL and
VPC will indemnify OpTel against all liabilities and claims that may arise in
the event of a breach by GVL and VPC of the Conversion and Exchange Agreement.
See "Risk Factors -- Risks Associated with GVL's Series A Preferred Stock and
Class B Common Stock."
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 (the "Vanguard Option")
to purchase 244,685 shares of Class B Common at an exercise price of $10.71 per
share, subject to adjustment. On August 15, 1997, Vanguard exercised the option
prior to the sale of 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 124,960 shares of Common Stock at an
exercise price of $10.71 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 has not
determined 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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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, $434,000 and $456,000 to GVL for this insurance coverage
in fiscal 1996, 1997 and 1998, 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 paid VPC $310,000 for such services in fiscal
1998.
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 were named as
defendants in a lawsuit by a former employee of the Company. GVL and the Company
agreed to joint representation by a single law firm and to share the associated
expenses. The costs to the Company of the litigation, including defense and
settlement, were not material.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Following the Offering, the authorized capital stock of the Company will
consist of 180,000,000 shares of Common Stock, 60,000,000 shares of Class B
Common, 3,000,000 shares of Class C Common and 10,000,000 shares of preferred
stock. All of the outstanding shares of Class C Common will be converted into
Common Stock concurrently with the consummation of the Offering, all of the
outstanding shares of Series B Preferred will be converted into Common Stock
promptly following the Offering and all shares of Class B Common and Series A
Preferred will be converted into Common Stock on or before the earlier to occur
of August 29, 1999 or the 90th day after the consummation of the Offering. See
"Risk Factors -- Risks Associated with GVL's Series A Preferred Stock and Class
B Common Stock." After giving effect thereto and assuming the exercise of all
outstanding options and warrants to acquire Common Stock, there will be
34,632,082 shares of Common Stock outstanding on a fully diluted basis. If the
Series A Preferred is not converted until 90 days following the Offering, up to
approximately 250,258 additional shares of Common Stock may be issued upon
conversion of the Series A Preferred as a result of the conversion of additional
accrued and unpaid dividends on the outstanding shares. Upon consummation of the
Offering and conversion of all the outstanding classes of common stock and all
the outstanding series of preferred stock into Common Stock as described above,
there will be no shares of Class B Common or Class C Common and no shares of
preferred stock issued and outstanding. All of the outstanding shares of all
classes of common stock and all series of preferred stock are fully paid and
nonassessable.
COMMON STOCK
As of February 28, 1999, after giving effect to the 5 for 1 stock split,
there were 821,360 shares of Common Stock, 11,767,490 shares of Class B Common
and 1,125,000 shares of Class C Common outstanding.
The rights of the holders of shares of all classes of common stock are
identical in all respects except that holders of the Common Stock are entitled
to one vote for each issued and outstanding share, holders of the Class B Common
are entitled to 10 votes for each issued and outstanding share and holders of
the Class C Common, except as otherwise may be required by law, are not entitled
to notice of or to vote at any meetings of the stockholders or actions taken by
written consent. Holders of common stock do not have cumulative voting 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. Certain of the Company's
stockholders who, after consummation of the Offering, will own over 63.5% of the
Common Stock and voting power of the Company, have entered into a voting
agreement pursuant to which they have agreed to vote their shares for certain
nominees. See "Principal and Selling Stockholders -- Stockholders' Agreement"
and "Risk Factors -- Control by GVL." Holders of the Common Stock and the Class
B 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. Each share of Class B Common is convertible, at
the option of the holder and automatically and irrevocably upon the occurrence
of certain events, into one share of Common Stock. Upon conversion by VPC of all
of the then outstanding shares of Class B Common held by VPC into Common Stock,
all other outstanding shares of Class B Common will automatically and
irrevocably convert into Common Stock on a one-for-one basis. Pursuant to the
terms of the Conversion and Exchange Agreement, VPC has agreed to convert all of
its shares of Class B Common into Common Stock on or before the earlier to occur
of August 29, 1999 or the 90th day following the consummation of the Offering.
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 and Selling
Stockholders -- Stockholders' Agreement."
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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 Common Stock would be diluted if the Company were to issue
preferred stock that had voting rights or that was convertible into Common Stock
or Class B 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 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.
Pursuant to the terms of the Conversion and Exchange Agreement, VPC has agreed
to convert all of its shares of Series A Preferred, including accrued and unpaid
dividends thereon through the conversion date, into Common Stock on or before
the earlier to occur of August 29, 1999 or the 90th day following the
consummation of the Offering. The Company will cause all of the shares of Series
B Preferred to be converted into approximately 4,058,333 shares of 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 will have
all the equity voting rights in the Company.
By its terms, the Series A Preferred is convertible into Class B Common, at
the option of the holder, during the period commencing on the date the Offering
is consummated and terminating on the earlier to occur of the 180th day
following the consummation of the Offering or August 29, 1999 (the "Series A
Conversion Period"). Shares of Series A Preferred may be converted by the holder
into Class B Common at the "conversion price" which is defined as the price per
share which is the highest of (i) $16.44, (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. The number
of shares of Class B 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. Pursuant to the terms of the Conversion and
Exchange Agreement, VPC has agreed to convert all of its shares of Series A
Preferred, including accrued and unpaid dividends thereon through the conversion
date, into Class B Common and has agreed to immediately thereafter exchange the
Class B Common for Common Stock on a one-for-one basis. Based on an assumed
initial public offering price of $16.00 per share and an assumed conversion date
of August 29, 1999, a total of approximately 9,767,532 shares of Common Stock
will be issued upon conversion and exchange 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 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 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 $16.00 per share, a total of approximately 4,058,333
shares of Common Stock will be issued upon conversion of all of the outstanding
shares of Series B Preferred.
As of February 28, 1999, the Company had outstanding 7,301.62157 shares of
the Series A Preferred (having an aggregate liquidation preference of
approximately $146,032,000). Holders of the Series A Preferred are entitled to
receive cumulative dividends accruing at the annual rate of 9.75% of the
aggregate liquidation preference thereof. Until the expiration of the Series A
Conversion Period, dividends are payable
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annually, in arrears, by the issuance of additional shares of Series A Preferred
having an aggregate liquidation preference equal to the amount of such
dividends. Thereafter, dividends are payable in cash. Unless full cumulative
dividends on all outstanding shares of Series A Preferred have been paid, the
Company may not make dividend payments or distributions on any securities junior
to the Series A Preferred ("Series A Junior Securities") (other than dividend
payments or other distributions paid solely in shares of Series A Junior
Securities) or redeem or make sinking fund or similar contributions for the
redemption of any Series A Junior Securities. Series B Preferred shares are
Series A Junior Securities.
The Series A Preferred is redeemable, in whole or in part, at the option of
the Company, at any time after the Series A Conversion Period, at a price, in
cash, equal to the liquidation preference plus accrued and unpaid dividends to
the date of redemption. Subject to certain limited exceptions and except as
required by law, holders of the Series A Preferred have no voting rights.
As of February 28, 1999, the Company had outstanding 1,042.60156 shares of
the Series B Preferred (having an aggregate liquidation preference $62,556,000).
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, to the certificates of designation setting forth the
rights of the holders of the Series A Preferred and Series B Preferred and to
the Conversion and Exchange Agreement.
OUTSTANDING OPTIONS AND WARRANTS
As of February 28, 1999, there were outstanding options to purchase
916,987.65 shares of the Common Stock pursuant to the Plan with a weighted
average exercise price of $18.48 per share. See "Management -- Incentive Stock
Plan." As of the same date, there were outstanding warrants to purchase
175,636.10 shares of the Common Stock with a weighted average exercise price of
$11.96 per share. Under the Kofalt Warrant, Mr. Kofalt has the right to purchase
up to 124,960 shares of Common Stock at an exercise price of $10.71 per share.
The Kofalt Warrant is presently exercisable and expires on August 31, 1999. Rory
Cole has the right to purchase up to 47,031.80 shares of Common Stock at an
exercise price of $14.88 per share (the "Cole Warrant"). The Cole Warrant is
presently exercisable and expires on July 11, 2002. Gordon Hecht has a warrant
to purchase up to 3,644.30 shares of Common Stock at an exercise price of $17.15
per share (the "Hecht Warrant"). The Hecht Warrant is presently exercisable and
expires on December 31, 2000. The Kofalt Warrant, the Cole Warrant and the Hecht
Warrant provide for adjustments to the number of exercisable shares and the
exercise price if the Company pays a common stock dividend or distribution to
its stockholders, subdivides its common stock, combines its common stock into a
smaller number of shares or issues by reclassification of its common stock other
securities, subject to certain exceptions and limitations.
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 to be issued to CDPQ upon the conversion of the Class B
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 Class C 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 Common Stock to be issued upon conversion
of the Class C Common (the "Class C Registration Shares"). Such demand
registration rights only may be exercised upon the written request of holders of
at least one-third of the Class C Registration Shares. In lieu of filing and
causing to become effective a demand registration, the Company may satisfy its
obligation with respect to such demand
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registration by making and consummating an offer to purchase all of the Class C
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 8,279,348
shares of Common Stock. In addition, certain stockholders have exercised their
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 Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have outstanding
33,539,458 shares of Common Stock. Of these shares, the 6,250,000 shares of
Common Stock offered hereby (and any additional shares of 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 Common Stock held by the existing stockholders (including
any shares of Common Stock issued upon conversion of the Series A Preferred) 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, 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 Common Stock that does not exceed the
greater of: (i) 1% of the then outstanding shares of Common Stock (approximately
335,395 shares after giving effect to the Offering) or (ii) the average weekly
trading volume of the 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 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 Common Stock. Nevertheless, sales of a
substantial amount of 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 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."
CERTAIN PROVISIONS OF OPTEL'S CERTIFICATE OF INCORPORATION AND BYLAWS AND OF
DELAWARE LAW
General. The Certificate of Incorporation and 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
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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.
Class B Common and Blank Check Preferred Stock. The Company's Certificate
of Incorporation authorizes the issuance of up to 60,000,000 shares of Class B
Common and up to 10,000,000 shares of preferred stock from time to time in one
or more designated series. The approximately 7,302 outstanding shares of Series
A Preferred and the approximately 1,043 outstanding shares of Series B Preferred
will revert to authorized but unissued status upon their conversion into Common
Stock. 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 issuance of shares of Class B Common or preferred stock could, among
other things, adversely affect the voting power or other rights of the holders
of 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
shares of Class B Common or any additional series of preferred stock.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Upon consummation of the Offering, OpTel's Bylaws will require
advance notice procedures with regard to stockholder proposals and the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors. These procedures
will provide that notice of stockholder proposals and stockholder nominations
for the election of directors at an annual meeting must be in writing and
received by the Company no earlier than 90 days and no later than 60 days prior
to the anniversary of the preceding year's annual meeting (or if the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date, no earlier than the 90th day prior to such meeting
and no later than the close of business on the later of the 60th day prior to
such meeting or the tenth day following the date the annual meeting is
announced). Nominations for the election of directors at a special meeting must
be in writing and received by the Company no earlier than the 90th day prior to
such meeting and no later than the close of business on the later of the 60th
day prior to such meeting or the tenth day following the date such meeting is
announced. The notice of stockholder nominations for the election of directors
must set forth certain information with respect to each nominee who is not an
incumbent director.
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 (except proportionately as a stockholder) of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
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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.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax considerations generally applicable to holders acquiring the Common
Stock in the Offering 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 Common Stock. The
discussion assumes that the holders of the 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 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 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
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 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 Common Stock
A cash distribution on the 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 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 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 Common Stock exceeds one year. There can be no assurance that the
Company will have sufficient earnings
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and profits to cause distributions on the 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
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 Common Stock
Upon a sale or other taxable disposition of the 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 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 Common Stock exceeds one
year.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Distributions on the Common Stock
Dividends paid to a Non-U.S. Holder of 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 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 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
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 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
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-
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U.S. Holder's holding period for the 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 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, Common
Stock at the time of his or her death or has made certain lifetime transfers of
an interest in Common Stock will be required to include the value of such Common
Stock in his or her gross estate for United States federal estate tax purposes,
and therefore may be subject to United States federal estate 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) Common Stock will be reported annually to holders of Common
Stock and to the IRS.
A U.S. Holder of 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 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 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 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 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.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE 1998 NOTES
On July 7, 1998, the Company issued $200,000,000 principal amount of
11 1/2% Senior Notes due 2008. The 1998 Notes mature on July 1, 2008. Cash
interest on the 1998 Notes is payable semi-annually in arrears on each January 1
and July 1 at a rate of 11 1/2% per annum. Upon issuance of the 1998 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 two interest payments on
the 1998 Notes, with the balance to be retained by the Company. The 1998 Notes
and the 1997 Notes are collateralized by a first priority security interest in
such escrow account. The 1998 Notes may be redeemed at the Company's option at
any time after July 1, 2003 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 1998 Notes have the right to require
the Company to purchase their 1998 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.
The Indenture governing the 1998 Notes (the "1998 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 1998 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 1998
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 1998
Indenture, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
THE 1997 NOTES
The Company has outstanding $225,000,000 principal amount of 13% Senior
Notes due 2005. The 1997 Notes mature on February 15, 2005. Cash interest on the
1997 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 1997 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 1997 Notes,
with the balance to be retained by the Company. The 1997 Notes are
collateralized by a first priority security interest in such escrow account. The
1997 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 1997 Notes have the right to require the Company to
purchase their 1997 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.
The Indenture governing the 1997 Notes (the "1997 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 1997 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 1997
Indenture also provides for customary events of default. The covenants set forth
in the 1997 Indenture are similar, but more restrictive in some instances, to
those in the 1998 Indenture. This description is intended as a summary and is
qualified in its entirety by reference to the 1997 Indenture, a copy of which
has been filed as an exhibit 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, the Selling Stockholders and the Company (the "Underwriting
Agreement"), the Company and the Selling Stockholders have agreed to sell to
each of the Underwriters named below (the "Underwriters"), and each of the
Underwriters for whom Salomon Smith Barney Inc., Goldman, Sachs & Co., Bear,
Stearns & Co. Inc. and CIBC World Markets Corp. are acting as representatives
(the "Representatives"), has severally agreed to purchase the number of shares
of Common Stock (the "Shares") set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Salomon Smith Barney Inc....................................
Goldman, Sachs & Co.........................................
Bear, Stearns & Co. Inc.....................................
CIBC World Markets Corp. ...................................
----------
Total.............................................
==========
</TABLE>
The Company and the Selling Stockholders have 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 937,500 additional shares of 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 and the Selling
Stockholders 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, executive
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 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 Common
Stock, for 180 days from the date of this Prospectus, without the prior written
consent of Salomon 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 312,500
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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The following table shows the underwriting discounts and commissions to be
paid to the Underwriters by OpTel. These amounts are shown assuming both no
exercise and full exercise of the Underwriters' option to purchase additional
shares of common stock.
<TABLE>
<CAPTION>
PAID BY OPTEL
----------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ 1.12 $ 1.12
Total....................................................... $7,000,000 $8,050,000
</TABLE>
The underwriting discounts and commissions to be paid by the Selling
Stockholders will be $1.12 per share and $437,214 total. The Underwriters have
no option to purchase additional shares from the Selling Stockholders.
During and after the Offering, the Underwriters may purchase and sell the
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 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.
In addition, in connection with this offering, certain of the Underwriters
(and selling group members) may engage in passive market making transactions in
the Common Stock on the Nasdaq National Market, prior to the pricing and
completion of the Offering. Passive market making consists of displaying bids on
the Nasdaq National Market no higher than the bid prices of independent market
makers and making purchases at prices no higher than those independent bids and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Common Stock during a specified period and
must be discontinued when such limit is reached. Passive market making may cause
the price of the Common Stock to be higher than the price that otherwise would
exist in the open market in the absence of such transactions. If passive market
making is commenced, it may be discontinued at any time.
Prior to the Offering, there has been no public market for the 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 Salomon Smith Barney Inc.), Goldman,
Sachs & Co. and CIBC Oppenheimer Corp. were initial purchasers in connection
with the Company's offering, in July 1998, of $200,000,000 aggregate principal
amount of the 1998 Notes, for which they received customary fees. Salomon
Brothers 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 1997 Notes and 1,125,000 shares of the Class C Common, for which it
received customary fees. From time to time, Salomon 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 World Markets Corp., acted as the administrative
agent for the syndicate of lenders and as a lender in connection with the Senior
Credit Facility, for which it received customary fees. Goldman Sachs
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Credit Partners, L.P., an affiliate of Goldman, Sachs & Co., arranged the Senior
Credit Facility and acted 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 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 Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "OTEL" subject to notice of issuance.
LEGAL MATTERS
The validity of the securities offered hereby 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 securities offered hereby 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.
EXPERTS
The Consolidated Financial Statements of the Company as of August 31, 1997
and 1998 and for the years ended August 31, 1996, 1997 and 1998, and the
Financial Statement of the Assets and Liabilities of ICS Communications, LLC,
acquired by the Company 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 Common Stock 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 Common Stock 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. While the Company has disclosed all the
information material to an investment decision regarding the Common Stock,
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.
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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: Bertrand Blanchette.
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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.
Collocate or Collocation -- An interface point for the interconnection of a
CLEC's network to the network of an ILEC or another CLEC. Collocation can be 1)
physical, where the CLEC "builds" a fiber optic network extension into the
ILEC's or CLEC's central office, or 2) virtual, where the ILEC or CLEC leases a
facility, similar to that which it might build, to affect a presence in the
ILEC's or CLEC's central office.
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.
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.
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.
A-1
<PAGE> 98
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.
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.
A-2
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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.
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
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
OPTEL, INC. AND SUBSIDIARIES:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of August 31, 1997 and 1998
and February 28, 1999 (unaudited)......................... F-3
Consolidated Statements of Operations for the years ended
August 31, 1996, 1997 and 1998, and the six months ended
February 28, 1998 and 1999 (unaudited).................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended August 31, 1996, 1997 and 1998 and the six
months ended February 28, 1998 and 1999 (unaudited)....... F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1996, 1997 and 1998 and the six months ended
February 28, 1998 and 1999 (unaudited).................... F-6
Notes to Consolidated Financial Statements.................. F-7
ACQUIRED COMPANY:
Assets and Liabilities Acquired of ICS Communications, LLC
by OpTel, Inc.:
Independent Auditors' Report.............................. F-24
Statements of Revenues and Direct Expenses for the year
ended December 31, 1997 and the three months ended
March 31, 1998 (unaudited)............................. F-25
Notes to Financial Statements............................. F-26
</TABLE>
F-1
<PAGE> 101
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.:
We have audited the accompanying consolidated balance sheets of OpTel, Inc.
and subsidiaries (the "Company") as of August 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended August 31, 1996, 1997 and 1998. 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 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OpTel, Inc. and subsidiaries as
of August 31, 1997 and 1998, and the results of their operations and their cash
flows for the years ended August 31, 1996, 1997 and 1998, in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 6, 1998
F-2
<PAGE> 102
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
AUGUST 31,
-------------------- FEBRUARY 28,
1997 1998 1999
-------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents.................................. $ 87,305 $ 123,774 $ 60,032
Restricted investments (Notes 6 and 12).................... 67,206 63,207 38,645
Accounts receivable (net of allowance for doubtful accounts
of $1,125, $1,803 and $2,359 respectively)............... 4,044 9,458 12,845
Prepaid expenses, deposits and other assets................ 1,836 2,317 2,593
Property and equipment, net (Note 4)....................... 160,442 268,044 308,289
Intangible assets, net (Note 5)............................ 82,583 160,370 159,055
-------- --------- ---------
TOTAL............................................ $403,416 $ 627,170 $ 581,459
======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable, accrued expenses and other liabilities... $ 21,896 $ 31,842 $ 30,759
Deferred revenue and customer deposits..................... 2,978 5,274 5,685
Convertible notes payable to stockholder (Note 9).......... 129,604 -- --
Notes payable and long-term obligations (Note 6)........... 228,573 429,278 428,853
-------- --------- ---------
Total liabilities................................ 383,051 466,394 465,297
Commitments and contingencies (Notes 3 and 7)
Stockholders' equity (Notes 9, 10 and 13):
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding............... -- -- --
Series A preferred stock, $.01 par value; 10,000 shares
authorized; none, 6,962 and 7,302 issued and
outstanding........................................... -- 146,115 153,341
Series B preferred stock, $.01 par value; 2,000 shares
authorized; none, 991 and 1,043 issued and
outstanding........................................... -- 61,343 63,827
Class A common stock, $.01 par value; 8,000,000 shares
authorized; none, 164,272 and 164,272 issued and
outstanding........................................... -- 2 2
Class B common stock, $.01 par value; 6,000,000 shares
authorized; 2,353,498 issued and outstanding.......... 24 24 24
Class C common stock, $.01 par value; 300,000 shares
authorized; 225,000 issued and outstanding............ 2 2 2
Additional paid-in capital................................. 97,683 113,780 113,780
Accumulated deficit........................................ (77,344) (160,490) (214,814)
-------- --------- ---------
Total stockholders' equity....................... 20,365 160,776 116,162
-------- --------- ---------
TOTAL............................................ $403,416 $ 627,170 $ 581,459
======== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 103
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
------------------------------ -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Cable television................................ $ 25,893 $ 36,915 $ 61,081 $ 25,247 $ 38,095
Telecommunications.............................. 1,711 2,922 3,882 1,644 2,870
-------- -------- -------- -------- --------
Total revenues.......................... 27,604 39,837 64,963 26,891 40,965
OPERATING EXPENSES:
Programming, access fees and revenue sharing.... 11,868 19,202 28,825 12,419 18,689
Customer support, general and administrative.... 19,636 28,926 35,847 15,855 26,335
Depreciation and amortization................... 8,676 14,505 28,481 10,759 17,997
-------- -------- -------- -------- --------
Total operating expenses................ 40,180 62,633 93,153 39,033 63,021
-------- -------- -------- -------- --------
LOSS FROM OPERATIONS.............................. (12,576) (22,796) (28,190) (12,142) (22,056)
OTHER INCOME (EXPENSE):
Interest expense on convertible notes payable to
stockholder (Notes 4 and 9).................. (5,342) (15,204) (9,640) (9,640) --
Other interest expense.......................... (657) (16,210) (38,837) (16,386) (25,837)
Interest and other income....................... 145 5,675 8,913 4,141 3,279
-------- -------- -------- -------- --------
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM... (18,430) (48,535) (67,754) (34,027) (44,614)
INCOME TAXES (Note 8)............................. -- -- -- -- --
-------- -------- -------- -------- --------
LOSS BEFORE EXTRAORDINARY ITEM.................... (18,430) (48,535) (67,754) (34,027) (44,614)
EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT (Note
6).............................................. -- -- (6,644) -- --
-------- -------- -------- -------- --------
NET LOSS.......................................... (18,430) (48,535) (74,398) (34,027) (44,614)
EARNINGS ATTRIBUTABLE TO PREFERRED STOCK.......... -- -- (8,748) -- (9,710)
-------- -------- -------- -------- --------
NET LOSS ATTRIBUTABLE TO COMMON EQUITY............ $(18,430) $(48,535) $(83,146) $(34,027) $(54,324)
======== ======== ======== ======== ========
BASIC AND DILUTED LOSS BEFORE EXTRAORDINARY ITEM
PER SHARE OF COMMON EQUITY...................... $ (8.30) $ (19.98) $ (28.94) $ (13.20) $ (19.81)
BASIC AND DILUTED EXTRAORDINARY LOSS PER SHARE OF
COMMON EQUITY................................... -- -- (2.51) -- --
-------- -------- -------- -------- --------
BASIC AND DILUTED LOSS PER SHARE OF COMMON EQUITY
(Notes 2 and 10)................................ $ (8.30) $ (19.98) $ (31.45) $ (13.20) $ (19.81)
======== ======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON EQUITY
OUTSTANDING (Notes 2 and 10).................... 2,220 2,430 2,644 2,578 2,743
======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 104
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
------------------------- ------------------------- ------------------- -------------------
SHARES LIQUIDATION SHARES LIQUIDATION SHARES PAR SHARES PAR
OUTSTANDING VALUE OUTSTANDING VALUE OUTSTANDING VALUE OUTSTANDING VALUE
----------- ----------- ----------- ----------- ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1995... -- $ -- -- $ -- -- $-- 2,150 $21
Issuance of stock upon debt
conversion................ -- -- -- -- -- -- 171 2
Contribution and
cancellation of shares.... -- -- -- -- -- -- (16) --
Net loss.................... -- -- -- -- -- -- -- --
-- -------- --- ------- --- --- ----- ---
BALANCE, AUGUST 31, 1996..... -- -- -- -- -- -- 2,305 23
Issuance of stock with
senior notes offering..... -- -- -- -- -- -- -- --
Stock options exercised..... -- -- -- -- -- -- 48 1
Net loss.................... -- -- -- -- -- -- -- --
-- -------- --- ------- --- --- ----- ---
BALANCE, AUGUST 31, 1997..... -- -- -- -- -- -- 2,353 24
Earnings attributable to
preferred stock........... -- 6,871 -- 1,877 -- -- -- --
Issuance of stock upon debt
conversion................ 7 139,244 -- -- -- -- -- --
Issuance of stock to acquire
the ICS operations........ -- -- 1 59,466 164 2 -- --
Net loss.................... -- -- -- -- -- -- -- --
-- -------- --- ------- --- --- ----- ---
BALANCE, AUGUST 31, 1998..... 7 146,115 1 61,343 164 2 2,353 24
Earnings attributable to
preferred stock
(unaudited)............... -- 7,226 -- 2,484 -- -- -- --
Net loss (unaudited)........ -- -- -- -- -- -- -- --
-- -------- --- ------- --- --- ----- ---
BALANCE, FEBRUARY 28, 1999
(unaudited)................. 7 $153,341 1 $63,827 164 $ 2 2,353 $24
== ======== === ======= === === ===== ===
<CAPTION>
CLASS C
COMMON STOCK
------------------- ADDITIONAL
SHARES PAR PAID-IN ACCUMULATED
OUTSTANDING VALUE CAPITAL DEFICIT TOTAL
----------- ----- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 1, 1995... -- $-- $ 78,902 $ (10,379) $ 68,544
Issuance of stock upon debt
conversion................ -- -- 9,163 -- 9,165
Contribution and
cancellation of shares.... -- -- -- -- --
Net loss.................... -- -- -- (18,430) (18,430)
--- --- -------- --------- --------
BALANCE, AUGUST 31, 1996..... -- -- 88,065 (28,809) 59,279
Issuance of stock with
senior notes offering..... 225 2 6,998 -- 7,000
Stock options exercised..... -- -- 2,620 -- 2,621
Net loss.................... -- -- -- (48,535) (48,535)
--- --- -------- --------- --------
BALANCE, AUGUST 31, 1997..... 225 2 97,683 (77,344) 20,365
Earnings attributable to
preferred stock........... -- -- -- (8,748) --
Issuance of stock upon debt
conversion................ -- -- -- -- 139,244
Issuance of stock to acquire
the ICS operations........ -- -- 16,097 -- 75,565
Net loss.................... -- -- -- (74,398) (74,398)
--- --- -------- --------- --------
BALANCE, AUGUST 31, 1998..... 225 2 113,780 (160,490) 160,776
Earnings attributable to
preferred stock
(unaudited)............... -- -- -- (9,710) --
Net loss (unaudited)........ -- -- -- (44,614) (44,614)
--- --- -------- --------- --------
BALANCE, FEBRUARY 28, 1999
(unaudited)................. 225 $ 2 $113,780 $(214,814) $116,162
=== === ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 105
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED AUGUST 31, FEBRUARY 28,
-------------------------------- -------------------
1996 1997 1998 1998 1999
-------- --------- --------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................... $(18,430) $ (48,535) $ (74,398) $(34,027) $(44,614)
Adjustments to reconcile net loss to net cash flow
used in operating activities:
Depreciation and amortization................... 8,676 14,505 28,481 10,759 17,997
Noncash portion of extraordinary loss on debt
extinguishment................................ -- -- 5,349 -- --
Noncash interest expense........................ 5,661 15,107 10,950 10,291 691
Noncash interest earned on restricted
investments................................... -- (2,303) (3,466) (1,927) (1,180)
Increase (decrease) in cash from changes in
operating assets and liabilities, net of
effect of business combinations:
Accounts receivable........................... (1,370) (754) (4,003) (1,493) (3,387)
Prepaid expenses, deposits and other assets... (126) (785) (68) 118 (276)
Deferred revenue and customer deposits........ 906 640 1,081 653 411
Accounts payable, accrued expenses and other
liabilities................................. 4,230 6,190 9,806 411 (1,083)
-------- --------- --------- -------- --------
Net cash flows used in operating
activities................................ (453) (15,935) (26,268) (15,215) (31,441)
-------- --------- --------- -------- --------
INVESTING ACTIVITIES:
Purchases of businesses........................... (9,916) (6,717) (43,354) (37,018) --
Acquisition of intangible assets.................. (7,904) (10,112) (7,172) (4,274) (4,552)
Purchases and construction of property and
equipment....................................... (54,217) (61,393) (78,471) (33,626) (52,376)
Purchases of restricted investments............... -- (79,609) (21,785) -- --
Proceeds from maturity of restricted
investments..................................... -- 14,706 29,250 14,625 25,742
-------- --------- --------- -------- --------
Net cash flows used in investing
activities................................ (72,037) (143,125) (121,532) (60,293) (31,186)
-------- --------- --------- -------- --------
FINANCING ACTIVITIES:
Proceeds from convertible notes payable........... 73,438 33,700 -- -- --
Repayments on convertible notes payable........... -- (10,000) -- -- --
Proceeds from senior notes payable................ -- 218,000 200,000 -- --
Financing costs of senior notes payable........... -- (5,738) (6,480) -- --
Proceeds from bank financing, net of transaction
costs........................................... -- -- 119,329 119,852 --
Repayment on bank financing....................... -- -- (125,000) -- --
Proceeds from issuance of common stock............ -- 9,620 -- -- --
Payment on notes payable and long-term
obligations..................................... (1,307) (894) (3,580) (2,107) (1,115)
-------- --------- --------- -------- --------
Net cash flows provided by (used in)
financing activities...................... 72,131 244,688 184,269 117,745 (1,115)
-------- --------- --------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... (359) 85,628 36,469 42,237 (63,742)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...... 2,036 1,677 87,305 87,305 123,774
-------- --------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 1,677 $ 87,305 $ 123,774 $129,542 $ 60,032
======== ========= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(Notes 3 and 9):
Cash paid during the period for interest.......... $ 290 $ 15,059 $ 36,831 $ 15,997 $ 26,492
======== ========= ========= ======== ========
Increase in capital lease obligations............. $ 879 $ 1,630 $ 2,742 $ 1,306 $ --
======== ========= ========= ======== ========
Convertible debt issued for accrued interest...... $ 6,436 $ 16,490 $ 9,640 $ 9,640 $ --
======== ========= ========= ======== ========
Common stock issued for convertible debt.......... $ 9,166 $ -- $ -- $ -- $ --
======== ========= ========= ======== ========
Preferred stock issued for convertible debt....... $ -- $ -- $ 139,244 $ -- $ --
======== ========= ========= ======== ========
Preferred stock issued for purchase of business... $ -- $ -- $ 59,466 $ -- $ --
======== ========= ========= ======== ========
Common stock issued for purchase of business...... $ -- $ -- $ 16,099 $ -- $ --
======== ========= ========= ======== ========
Earnings attributable to preferred stock.......... $ -- $ -- $ 8,748 $ -- $ 9,710
======== ========= ========= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 106
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED AUGUST 31, 1996, 1997 AND 1998 AND THE
SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1999 (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, Georgia, Illinois, Indiana, Texas and Washington,
D.C.
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, 1998, VPC's interest in the Company was 70.13% (see Note 9).
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 periods ended February
28, 1998 and 1999, 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 highly liquid, short-term investments
with maturities of three months or less when purchased.
Restricted Investments -- Restricted investments of the Company are
composed of U.S. Treasury securities restricted for payment of interest on the
Company's Senior Notes. These investments are classified as held to maturity and
are carried at amortized cost.
Property and Equipment -- Property and equipment are stated at cost, which
includes amounts for construction materials, direct labor and overhead, and
capitalized interest. When assets are disposed of, the costs and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Cost of maintenance and repairs is charged
to operations as incurred; significant renewals and betterments are capitalized.
F-7
<PAGE> 107
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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............................. 2 to 4 years
Other....................................................... 5 to 10 years
</TABLE>
Management routinely evaluates its recorded investments for impairment in
accordance with 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," based on projected undiscounted cash flows and other methods
when events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Management 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.............. Initial term of contract
Deferred financing costs.............................. Terms of indebtedness
Other................................................. 1 to 5 years
</TABLE>
Management routinely evaluates its recorded investments in intangible
assets for impairment in accordance with SFAS No. 121 based on projected
undiscounted cash flows and other methods when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable and believes the investments to be recoverable. Amounts recorded as
goodwill have been acquired in the business combinations discussed in Note 3.
Such amounts are generally attributable to market entry or expansion.
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's 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 was deconsolidated from VPC for tax purposes.
Beginning March 1, 1998, as the result of VPC's converting its convertible notes
payable to Series A Preferred, the Company will be included in VPC's
consolidated federal income tax return. Effective April 13, 1998, as the result
of issuing shares of Common Stock and Series B Preferred, 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 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
as cable television programming and telecommunications services are provided to
subscribers. OpTel typically bills customers in advance for monthly cable
television services, which results in the deferral of revenue until those
services are
F-8
<PAGE> 108
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
provided. Installation revenue is recognized in the period installation services
are provided to the extent of direct selling costs. For all periods presented,
installation revenues have not exceeded direct selling costs. The Company
expenses all initial subscriber costs as incurred due to the short-term
subscriber lives associated with MDU service and because such costs do not
constitute additions to property and equipment.
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). Common stock equivalents are
included in the computation if they are dilutive. For the year ended August 31,
1996, the convertible notes payable to stockholder are excluded from the diluted
earnings per share calculation because of their antidilutive effect. For the
years ended August 31, 1997 and 1998, the convertible notes payable to
stockholder; the Series A and the Series B preferred stock; and 90,037 and
123,685 stock options and warrants, respectively, are excluded from the diluted
earnings per share calculation because of their antidilutive effect. As a
result, diluted loss per common share for the years ended August 31, 1996, 1997
and 1998, is considered to be the same as basic.
Derivative Financial Instruments -- Derivative financial instruments are
utilized by the Company to reduce interest rate risk and include interest rate
swaps. The Company does not hold or issue derivative financial instruments for
speculative or trading purposes. Gains and losses resulting from the termination
of derivative financial instruments are recognized over the shorter of the
remaining original contract lives of the derivative financial instruments or the
lives of the related hedged positions or, if the hedged positions are sold or
extinguished, are recognized in the current period as gain or loss.
Acquisitions -- The Company's acquisitions are accounted for using the
purchase method of accounting and 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 due to possible adverse effects of 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 -- 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.
Effective September 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which established standards for reporting and display of
comprehensive income and its components in the financial statements. The Company
has no items of other comprehensive income to report in the periods presented.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
public companies disclose information about
F-9
<PAGE> 109
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
operating segments, products and services, geographic areas and major customers.
The Company will adopt the disclosure requirements in the fiscal year ending
August 31, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes standards for accounting
and reporting for derivative instruments. SFAS No. 133 is effective for fiscal
years beginning after June 15, 1999; however, earlier application is permitted.
Management is currently not planning on early adoption of this statement and has
not completed an evaluation of the impact of the provisions of this statement on
the Company's consolidated financial statements.
Reclassifications -- Certain reclassifications of prior-year amounts have
been made to conform to the current-year presentation.
3. ACQUISITIONS
On December 28, 1994, the Company acquired the stock of the operating
subsidiaries of International Richey Pacific Cablevision, Ltd. ("IRPC"). 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 had
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 was required to
purchase the interests at the end of the fifth year at 150% of the initial
capital contribution. During the periods ended August 31, 1996, 1997 and 1998,
OpTel paid $392, $0 and $753, respectively, to repurchase all of the partnership
obligations, including the appreciation described above (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 for
$15,200 in cash, the assumption of approximately $110 of liabilities and a
deferred payment due to the seller 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 is payable at the
seller'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 that acquired EagleVision assets to a third
party that 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 notes payable and long-term
obligations 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, 1998, the estimated payment due was $6,000 with a net present
value at August 31, 1997 and 1998, of $4,903 and $5,338, 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.
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.
F-10
<PAGE> 110
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $38 million in
cash and the assumption of $0.2 million of liabilities. The purchase price was
allocated $15.5 million to property and equipment, $5.4 million to
rights-of-entry and $17.3 million to goodwill.
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 approximately $83.4 million
and consists of approximately $4.8 million of cash, Series B Preferred with a
liquidation preference of $59.5 million, and 164,272 shares of Common Stock plus
assumed liabilities of $1.6 million and including transaction costs of
approximately $1.4 million. The Series B Preferred earns dividends at an annual
rate of 8%, payable in additional shares of Series B, and is convertible into
Common Stock based upon the liquidation preference plus any cumulative unpaid
dividends at the time of the conversion divided by the share price upon
consummation of an initial public offering. As of March 2, 1999, the Company had
received consents and accepted the transfer of legal title to approximately 90%
of the assets that are the subject of the aggregate acquisition. The Company
expects the resolution of legal title for the balance of the acquisition to be
completed during the balance of fiscal 1999 as ICS meets certain conditions.
Approximately 10% of the total purchase price remains escrowed until ICS meets
these conditions. The Company has included 100% of the assets and operating
results of the ICS operations in its consolidated financial statements since
April 13, 1998, because (i) although the transfer of legal title to the
remaining assets is subject to the receipt of certain third-party consents, the
Company may elect to waive the consent conditions, (ii) under the terms of a
management agreement, during the period that ICS has to secure the necessary
consents, the Company is managing these assets and receives all the revenues
associated with and incurs all the expenses associated with these units and
(iii) the entire purchase price was paid (although a portion of the purchase
price is being held in escrow for the protection of the Company, subject to the
receipt of the necessary consents). 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. At August 31, 1998, the allocation of the purchase
price is
F-11
<PAGE> 111
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded on a preliminary basis subject to third-party consents, as follows and
is subject to adjustment; however, management does not expect the impact of any
adjustments to be material:
<TABLE>
<S> <C>
Accounts receivable......................................... $ 1,333
Prepaid expenses, deposits and other assets................. 249
Property and equipment...................................... 30,000
Identifiable intangible assets (rights-of-entry)............ 9,325
Goodwill.................................................... 42,580
Deferred revenue and customer deposits...................... (842)
Capital lease obligations................................... (793)
-------
Total............................................. $81,852
=======
</TABLE>
The pro forma results presented below have been prepared to illustrate the
effects of the ICS acquisition as if it had occurred on the first day of the
periods presented. 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.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31
---------------------
1997 1998
--------- ---------
<S> <C> <C>
Total revenues.............................................. $ 56,465 $ 75,665
Loss from operations........................................ (33,166) (33,620)
Net loss.................................................... (59,047) (79,913)
Basic and diluted loss per common share of common equity.... (24.60) (33.38)
</TABLE>
The pro forma effect of the acquisition of Phonoscope would have had an
insignificant impact on the consolidated results of operations of the Company
for the years ended 1997 and 1998.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31
------------------- FEBRUARY 28
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Headends............................................ $ 53,088 $ 77,470 $ 82,335
Telephone switches.................................. 9,347 23,474 23,474
Distribution systems and enhancements............... 68,538 113,775 130,245
Computer software and equipment..................... 9,512 16,753 18,551
Other............................................... 8,762 12,813 13,815
Construction in progress............................ 26,177 57,748 85,981
-------- -------- --------
175,424 302,033 354,401
Less accumulated depreciation....................... (14,982) (33,989) (46,112)
-------- -------- --------
$160,442 $268,044 $308,289
======== ======== ========
</TABLE>
Included in property and equipment is $3,069 and $5,532 of equipment
acquired under capital leases at August 31, 1997 and 1998, respectively.
Interest expense of $2,256 and $2,753 was capitalized during 1997 and 1998,
respectively.
F-12
<PAGE> 112
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31
------------------- FEBRUARY 28
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill............................................ $ 53,081 $112,485 $113,052
Licensing fees and rights-of-entry costs............ 30,833 53,030 56,350
Deferred financing costs............................ 5,784 12,264 12,877
Other............................................... 3,243 1,926 1,978
-------- -------- --------
92,941 179,705 184,257
Less accumulated amortization....................... (10,358) (19,335) (25,202)
-------- -------- --------
$ 82,583 $160,370 $159,055
======== ======== ========
</TABLE>
The Company's right-of-entry agreements represent the Company's agreement
to provide cable television and telecommunications service to MDUs and typically
have initial terms of 10 to 15 years. The right-of-entry agreements generally
provide for MDU owners to receive an up-front cash payment and payment of a
portion of revenues over the terms of the agreements.
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consisted of the following:
<TABLE>
<CAPTION>
AUGUST 31
-------------------- FEBRUARY 28
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
13% Senior Notes Due 2005, Series B, net of
unamortized discount of $6,526, $5,651 and
$5,214.......................................... $218,474 $219,349 $219,786
11.5% Senior Notes Due 2008....................... -- 200,000 200,000
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.............................. 280 167 94
Limited partner obligations....................... 714 -- --
Obligations under capital leases, net of amounts
representing interest of $581 and $941 for 1997
and 1998........................................ 2,185 4,424 3,382
Deferred acquisition liabilities.................. 6,920 5,338 5,591
-------- -------- --------
$228,573 $429,278 $428,853
======== ======== ========
</TABLE>
On February 14, 1997, the Company issued $225 million of 13% Senior Notes
Due 2005 ("2005 Notes"). The 2005 Notes require semiannual interest payments due
on August 15 and February 15 of each year until their maturity on February 15,
2005. The 2005 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. In
addition, a transfer by VPC of its interest in OpTel, a transfer by Videotron of
its interest in VPC or an election by VPC to convert its Class B Common into
shares of Common Stock may result in a change of control under the indenture,
which could require the Company to purchase the 2005 Notes. The 2005 Notes are
unsecured.
F-13
<PAGE> 113
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the issuance of the 2005 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 2005 Notes.
Concurrent with the issuance of the 2005 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 2005 Notes. Such amount is reflected as restricted
investments on the accompanying consolidated balance sheets.
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 consisted of a term loan in the
amount of $125 million (which was drawn on December 19, 1997, with an original
maturity of August 2004) bearing interest at LIBOR plus 3.5% and a $25 million
revolving credit commitment. The Senior Facility was secured by a first fixed
and floating lien on substantially all of the assets of the Company and its
subsidiaries. The Senior Facility contained financial maintenance requirements
and certain limitations on the Company's ability to incur indebtedness, incur
capital expenditures and pay dividends.
On July 7, 1998, the Company repaid and terminated the Senior Facility with
proceeds from a private placement of $200 million 11.5% Senior Notes Due 2008
(the "2008 Notes"). In connection with the repayment of the Senior Facility, the
Company was required to pay a prepayment penalty of $1.3 million. Additionally,
the Company wrote off debt issuance costs of $5.4 million related to the Senior
Facility. These amounts are included in extraordinary loss on debt
extinguishment in the accompanying statements of operations. The 2008 Notes
require semiannual interest payments on January 1 and July 1 of each year until
their maturity on July 1, 2008. The 2008 Notes are redeemable at the option of
the Company, generally at a premium, at any time after July 1, 2003, and can be
redeemed in part, also at a premium, earlier upon the occurrence of certain
defined events. Concurrent with the issuance of the 2008 Notes, the Company was
required to deposit in an escrow account $21.8 million in cash that, together
with the proceeds of the investment thereof, will be sufficient to pay when due
the first two interest payments on the 2008 Notes. Subsequent to year-end, the
Company has initiated an offer to exchange the 2008 Notes for registered
securities with substantially identical terms, including interest rate and
maturity (the "Offer to Exchange").
To comply with certain covenants of the Senior Facility and to reduce the
impact of changes in interest rates on the Senior Facility, the Company entered
into interest rate swap agreements with total notional amounts of $75 million in
which the Company had agreed to receive a variable rate equal to LIBOR and pay
fixed rates ranging from 5.96% to 6.00%. The swap agreements were terminated on
July 17, 1998, in exchange for cash payments of $578,000, which was expensed.
Aggregate maturities of the Company's indebtedness are as follows as of
August 31, 1998:
<TABLE>
<S> <C>
Fiscal year ending:
1999...................................................... $ 1,579
2000...................................................... 6,621
2001...................................................... 760
2002...................................................... 228
2003...................................................... 49
Thereafter.................................................. 420,041
--------
Totals............................................ $429,278
========
</TABLE>
F-14
<PAGE> 114
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
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 consolidated financial position of the Company.
On April 9, 1998, a purported class action complaint was filed in the
District Court of Harris County, Texas, on behalf of all cable subscribers in
the United States that have paid late fees to either Phonoscope or the Company.
The action was dismissed without prejudice during the first quarter of fiscal
1999 and the Company believes it will be indemnified by Phonoscope for all its
costs and expenses associated with the defense of the action.
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
Communication Corp. ("Octel"), charging the Company with trademark infringement,
trade name infringement, trademark dilution and unfair competition based on its
use of the name "OpTel" (the "Civil Action") 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 the proceedings in the PTO (if reinstated) or that any such outcome
would not materially adversely affect the Company.
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 $297, $278 and $0
in severance during 1996, 1997 and 1998, respectively, related to such
employment agreements.
The Company leases office space and certain equipment under operating
leases. The leases generally have initial terms of 3 to 20 years. Minimum future
obligations on operating leases at August 31, 1998, consist of the following:
<TABLE>
<S> <C>
Fiscal year ending:
1999...................................................... $ 3,579
2000...................................................... 3,258
2001...................................................... 2,806
2002...................................................... 2,337
2003...................................................... 1,996
Thereafter.................................................. 3,768
-------
Total minimum lease payments...................... $17,744
=======
</TABLE>
F-15
<PAGE> 115
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Rental expense under operating leases for the years ending August 31, 1996,
1997 and 1998, was $2,158, $2,763 and $3,876, respectively. The Company's rental
expense under operating leases includes facility rentals as well as rental of
space for distribution purposes.
8. INCOME TAXES
Income tax expense (benefit) consists of the following for the years ended
August 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Current tax expense................................... $ -- $ -- $ --
Deferred tax expense (benefit)........................ (4,470) (13,213) (25,261)
Change in deferred tax valuation allowance............ 4,470 13,213 25,261
------- -------- --------
Total income tax expense (benefit).......... $ -- $ -- $ --
======= ======== ========
</TABLE>
A reconciliation of income taxes on reported pretax loss at statutory rates
to actual income tax expense (benefit) for the years ended August 31, 1996, 1997
and 1998, is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rates............ $(6,266) (34.0)% $(16,502) (34.0)% $(25,295) (34.0)%
State income taxes, net of federal tax
benefit................................ (1) -- 8 -- -- --
Valuation allowance...................... 4,470 24.0 13,213 27.0 25,261 34.0
Expenses (deductible) not deductible for
tax purposes........................... 1,797 10.0 (842) (2.0) 34 --
Utilization of net operating loss by
parent company in consolidated
return................................. -- -- 4,123 9.0 -- --
------- ----- -------- ----- -------- -----
Total income tax benefit....... $ -- --% $ -- --% $ -- --%
======= ===== ======== ===== ======== =====
</TABLE>
The net deferred tax assets consist of the tax effects of temporary
differences related to the following:
<TABLE>
<CAPTION>
AUGUST 31
-------------------
1997 1998
-------- --------
<S> <C> <C>
Allowance for uncollectible accounts receivable............. $ 381 $ 613
Equipment, furniture and fixtures........................... (10,694) (10,663)
Intangible assets........................................... 421 (246)
Accrued employee compensation............................... 214 505
Net operating loss carryforwards............................ 31,121 56,410
IRPC deferred tax liability................................. (480) (480)
Other....................................................... 59 144
-------- --------
Deferred tax asset before valuation allowance............... 21,022 46,283
Valuation allowance......................................... (21,022) (46,283)
-------- --------
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-16
<PAGE> 116
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are the expiration dates and the approximate net operating
loss carryforwards at August 31, 1998:
<TABLE>
<S> <C>
Expiration dates through:
2010...................................................... $ 1,346
2011...................................................... 11,521
2012...................................................... 26,161
2013...................................................... 47,921
2014...................................................... 78,965
</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 AND RELATED PARTIES
Transactions With VPC -- From December 22, 1994 through March 31, 1995, the
Company borrowed $60,000 from VPC under a Senior Secured Convertible Note
Agreement. The note 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.
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 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 bore
interest at 15%, generally with principal and interest due on demand. Under the
terms of the Convertible Notes, any accrued interest on which there was no
demand for payment as of each August 31 automatically converted to additional
principal payable. On March 1, 1998, VPC 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 upon consummation of an initial public
offering, or during the 90-day period commencing April 30, 1999.
Transactions With CDPQ -- 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.
Immediately prior to the sale to CDPQ, Vanguard exercised an option to purchase
48,937 shares of Class B Common at an exercise price of $53.55 per share,
subject to adjustment, that had been granted to Vanguard in August 1996. The
option exercise resulted in the Company's receiving $2,620 in cash.
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.
F-17
<PAGE> 117
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 that 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. Pursuant to the Registration Rights Agreement,
nine months after the consummation of the IPO 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 Class B Common. In addition, CDPQ has piggyback registration
rights, on three occasions, to include such shares of 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.
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).
Transactions With THI -- The Company has assigned substantially all of its
frequency licenses to THI, an entity owned by an employee of the Company and two
individuals who provide legal counsel to the Company, in exchange for a $1
million secured promissory note with interest at 8% due on February 14, 2007
(the "License Note"). The License Note contains covenants that restrict THI
from, among other things, incurring indebtedness other than to the Company or in
the ordinary course of business and merging or consolidating with another
entity.
The terms of the Company's continued and unencumbered use of the frequency
licenses are subject to a license and services agreement (the "THI Agreement")
pursuant to which THI agreed to provide to the Company all the transmission
capacity it requires or may in the future require, and the Company 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.
The Company received an option from THI to purchase all or, in certain
circumstances, some of the assets of THI at a price equal to the principal
balance on the License Note plus accrued interest at 10% per annum and a
separate option from each stockholder of THI to purchase all of such person's
shares of capital stock of THI at 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.
THI is included in the consolidated financial statements of the Company
based upon the Company's ability to control THI as a result of a combination of
the covenants contained in the License Note and the Company's ability to
exercise its option to purchase the assets or stock of THI. The option agreement
and the License Note are eliminated upon consolidation.
F-18
<PAGE> 118
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions With Other Related Parties -- Videotron is party to an
indenture that limits the aggregate amount of indebtedness that can be incurred
by Videotron and its subsidiaries, including the Company, taken as a whole
(based upon a ratio of total consolidated indebtedness to consolidated operating
cash flow).
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 Common Stock at an exercise price of $53.55 per share, subject to
adjustment, that is presently exercisable and expires on August 31, 1999.
VPC and an affiliate of Vanguard had each agreed to provide consultant,
advisory and management services for $350 per annum (plus travel expenses) per
party. This arrangement terminated in August 1997 with the sale of Vanguard's
interest in the Company.
The Company purchases certain insurance coverage through Videotron,
including directors' and officers' liability insurance. The Company paid an
aggregate of approximately $478,000, $434,000 and $456,000 to Videotron for this
insurance coverage in fiscal 1996, 1997 and 1998, respectively. OpTel provides
certain customer support and billing services to certain affiliates of Videotron
that 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.
Upon consummation of an initial public offering, each Director who is
neither an employee of the Company nor a designee of the Company's significant
stockholders will receive options to purchase shares of Common Stock having an
aggregate value of $150 (or, if such Director is not serving in such capacity
upon consummation of an initial public 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 effective date of the grant.
10. STOCKHOLDERS' EQUITY
The Common Stock, 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 Common Stock is entitled to one vote for
each share of Common Stock 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 Common
Stock.
On February 7, 1997, the Company approved a stock split effected in the
form of a stock dividend. Each share of outstanding Class B Common (the only
class of common stock then outstanding) received 17.3768 additional shares. The
number of authorized shares of Common Stock 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.
The Series A Preferred (see Note 9) is convertible under certain
circumstances and at certain prices at the option of the holder of the shares
into shares of Class B Common upon consummation of an initial public offering,
or during the 90-day period commencing April 30, 1999.
The Series B Preferred (see Note 3) is convertible into Common Stock based
upon the liquidation preference plus any cumulative unpaid dividends at the time
of the conversion divided by the share price upon consummation of an initial
public offering.
F-19
<PAGE> 119
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following the consummation of an initial public offering, all of the
outstanding shares of the Company's Class C Common and Series B Preferred will
be converted to Common Stock.
On June 5, 1998, OpTel filed a registration statement on Form S-1 with the
Securities and Exchange Commission (the "SEC") with respect to a proposed
initial public offering (the "IPO") of $100 million of its Common Stock. No
assurance can be given that the IPO will be consummated or, if consummated, that
the proceeds received by the Company will be the amount currently contemplated.
11. EMPLOYEE BENEFIT PLAN
401(k) Plan -- The OpTel 401(k) Plan (the "401(k) Plan") 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 required to have three
consecutive months of service to be eligible to participate in the 401(k) Plan.
Also, effective January 1, 1998, an employee must have one year of service with
the employer before being eligible to receive employer matching contributions.
The Company's matching contribution is a discretionary amount to be annually
determined by the Board of Directors of the Company. For the periods ended
August 31, 1996, 1997 and 1998, the Company's match of its employees' elective
contributions was $188, $289 and $349, respectively.
12. RESTRICTED INVESTMENTS
Concurrent with the issuance of the 2005 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 and 1998, have an amortized cost basis
of $67,206 and $41,422, respectively; an aggregate fair value of $67,233 and
$41,855, respectively; and gross unrealized holding gains of $27 and $432,
respectively. The contractual maturity of the securities correspond to the
semiannual interest payment dates required under the 2005 Notes through February
15, 2000.
Concurrent with the issuance of the 2008 Notes, the Company was required to
deposit in an escrow account $21.8 million in cash that was subsequently
invested in U.S. Treasury securities. The securities are classified as
held-to-maturity and, at August 31, 1998, have an amortized cost basis of
$21,785, an aggregate fair value of $22,002 and gross unrealized holding gains
of $217. The contractual maturity of the securities correspond to the semiannual
interest payment dates required under the 2008 Notes through July 1, 1999.
13. EMPLOYEE STOCK OPTIONS AND WARRANTS AND STOCK PURCHASE PLAN
During the year ended August 31, 1997, the Company adopted a stock option
and award plan (the "Incentive Stock 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 that 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.
In fiscal 1998, the Company adopted amendments to the Incentive Stock Plan,
certain of which will become effective, subject to stockholder approval, on the
date an initial public offering is consummated (as so amended, the "Plan"). Five
percent of the Common Stock outstanding, on a fully diluted basis, on the date
an initial public offering is consummated, may be issued under the terms of the
Plan.
F-20
<PAGE> 120
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Common Stock on the date of grant and (ii) the
options vest in equal installments on each of the second, third, fourth and
fifth anniversaries of the date of grant. The options issued as of August 31,
1998, 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 241,086 shares of Common Stock to be issued under the Plan. Stock
option activity under the Plan and warrants issued (see Note 9) for the years
ended August 31, 1997 and 1998 and the six months ended February 28, 1999
(unaudited), 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
September 1, 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
Granted................................. 43,657 $74.42 to $85.75 $83.31
Exercised............................... -- -- --
Forfeited............................... (10,009) $85.75 $85.75
-------
Options and warrants outstanding at August
31, 1998 (including 35,127 warrants).... 123,685 $53.55 to $85.75 $77.54
Granted................................. 120,395 $98.00 $98.00
Exercised............................... -- -- --
Forfeited............................... (25,555) $85.75 to $98.00 $91.58
-------
Options and warrants outstanding at
February 28, 1999 (unaudited)........... 218,525 $53.55 to $98.00 $87.17
=======
Options and warrants exercisable at
February 28, 1999 (unaudited)........... 63,166 $53.55 to $98.00 $70.50
Options available for grant at February
28, 1999 (unaudited).................... 57,688
</TABLE>
The weighted average remaining contractual life of the stock options and
warrants outstanding at August 31, 1998, is seven years.
At August 31, 1998, the Company has reserved a total of 88,558 and 35,127
shares of Common Stock for issuance upon the exercise of stock options and stock
warrants, respectively. 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 and 1998, 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 years ended August 31, 1997 and 1998, the difference between
actual net loss and loss per share and net loss and loss per share on a pro
forma 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 and $547 and $.21 per share, respectively.
F-21
<PAGE> 121
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimated weighted average grant date fair value of options and
warrants granted during 1997 and 1998 was $1.10 per share and $31.76 per share,
respectively. For purposes of determining fair value of each option, the Company
used the minimum value method using the following assumptions:
<TABLE>
<CAPTION>
1997 1998
-------------- --------------
<S> <C> <C>
Risk-free interest rate.............................. 6.18% to 6.88% 5.47% to 6.92%
2.5 to 10
Expected life........................................ 3 to 10 years years
</TABLE>
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. The Stock Purchase Plan will
become effective, subject to stockholder approval, on the date an initial public
offering is consummated. One percent of the Common Stock outstanding, on a fully
diluted basis, on the date an initial public offering is consummated, will be
issuable under the terms of the Stock Purchase Plan. As of August 31, 1998, no
stock has been issued under the Stock Purchase Plan.
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, 1997 AUGUST 31, 1998
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents........................ $ 87,305 $ 87,305 $123,774 $123,774
Restricted investments........................... 67,206 67,233 63,207 63,857
Accounts receivable.............................. 4,044 4,044 9,458 9,458
Liabilities:
Accounts payable, accrued expenses and other
liabilities................................... 21,896 21,896 31,842 31,842
Customer deposits and deferred revenue........... 2,978 2,978 5,274 5,274
Convertible notes payable to stockholder......... 129,604 129,605 -- --
Notes payable and long-term obligations.......... 228,573 235,570 429,278 440,367
</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, and certain
notes payable and long-term obligations 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 1997 and 1998 Notes are based on quoted market prices. The
fair value estimates presented herein are based on pertinent information
available to management as of August 31, 1997 and 1998. 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-22
<PAGE> 122
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended August 31, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1997
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER 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
Loss before extraordinary item..................... (6,894) (9,399) (15,375) (16,867)
Extraordinary loss on debt extinguishment.......... -- -- -- --
Net loss........................................... (6,894) (9,399) (15,375) (16,867)
Dividends on preferred stock....................... -- -- -- --
Net loss attributable to common equity............. (6,894) (9,399) (15,375) (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>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $ 12,252 $ 14,639 $ 18,025 $ 20,047
Operating expenses................................. 18,748 20,285 24,656 29,464
Other expense...................................... 9,774 12,112 7,574 10,104
Loss before extraordinary item..................... (16,270) (17,758) (14,205) (19,521)
Extraordinary loss on debt extinguishment.......... -- -- -- (6,644)
Net loss........................................... (16,270) (17,758) (14,205) (26,165)
Dividends on preferred stock....................... -- -- (4,068) (4,680)
Net loss attributable to common equity............. (16,270) (17,758) (18,273) (30,845)
Basic and diluted loss per common share............ (6.31) (6.89) (6.84) (11.24)
Weighted average number of shares outstanding...... 2,578 2,578 2,673 2,743
</TABLE>
F-23
<PAGE> 123
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.
We have audited the accompanying statement of revenues and direct expenses
of the Assets and Liabilities of ICS Communications, LLC acquired by OpTel, Inc.
("OpTel") for the year ended December 31, 1997. This financial statement is the
responsibility of OpTel's management. Our responsibility is to express an
opinion on this financial statement 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 statement presents fairly, in all material
respects, the revenues and direct expenses of the Assets and Liabilities of ICS
Communications, LLC acquired by OpTel, Inc. for the year ended December 31, 1997
in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
May 15, 1998
Dallas, Texas
F-24
<PAGE> 124
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:
Programming, access fees and revenue sharing.............. 8,747,441 1,909,037
Customer support, general and administrative.............. 5,371,634 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)
----------- ----------
EXCESS OF DIRECT EXPENSES OVER REVENUES..................... $(5,662,371) $ (765,799)
=========== ==========
</TABLE>
See notes to financial statements.
F-25
<PAGE> 125
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 statement 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.
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-26
<PAGE> 126
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)
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. 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>
3. 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-27
<PAGE> 127
[OPTEL LOGO]
- -------------------------------------------------------------------------------
[PHOTO OF OPTEL'S HOME WEB PAGE]
The Company continues to rapidly launch central office switched services in its
major markets and has recently commenced offering high speed Internet access.
[PHOTO OF ONE OF THE COMPANY'S SWITCHES]
Telephone traffic is brought to Optel's full featured central office telephone
switches and distributed together with video and Internet traffic over the
Company's proprietary microwave and fiber optic cable networks.
[PHOTO OF A MICROWAVE DISH]
OpTel's advanced microwave and fiber optic cable networks distribute a wide
range of voice, video and Internet access services.
[PHOTO OF AN OPTEL TECHNICIAN]
As part of its commitment to customer service, OpTel offers flexible
installation and service appointments.
[PHOTO OF OPTEL'S CUSTOMER SERVICE CENTER]
OpTel's national customer service center provides 24-hour-a-day,
seven-day-a-week telephone support for the Company's cable, telephone and
Internet customers.
The depicted trademarks and service marks, other than OpTel, are not the
property of OpTel and belong to their respective holders; no endorsement is
implied.
<PAGE> 128
------------------------------------------------------
------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. OPTEL
HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. OPTEL IS
NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS
PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................... 1
Risk Factors............................ 9
Use of Proceeds......................... 23
Dividend Policy......................... 23
Capitalization.......................... 24
Dilution................................ 25
Selected Historical Consolidated
Financial and Operating Data.......... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 29
Business................................ 42
Management.............................. 66
Principal and Selling Stockholders...... 75
Certain Relationships and Related
Transactions.......................... 79
Description of Capital Stock............ 81
Certain Federal Income Tax
Considerations........................ 86
Description of Certain Indebtedness..... 89
Underwriting............................ 90
Certain Market Information.............. 92
Legal Matters........................... 92
Experts................................. 92
Additional Information.................. 92
Glossary................................ A-1
Index to Financial Statements........... F-1
</TABLE>
------------------
Until 1999, all dealers that buy, sell or trade the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
6,640,370 SHARES
OPTEL, INC.
COMMON STOCK
[OPTEL LOGO]
------------
PROSPECTUS
, 1999
------------
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
CIBC WORLD MARKETS
------------------------------------------------------
------------------------------------------------------
<PAGE> 129
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............... $ 35,813
NASD filing fee............................................. $ 10,500
National Market listing fee................................. $ 95,000
Legal fees and expenses..................................... $200,000
Accountant's fees and expenses.............................. $150,000
Printing costs.............................................. $150,000
Miscellaneous............................................... $108,687
--------
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.
During July 1998, the Company issued $200,000,000 principal amount of the
1998 Notes to qualified institutional buyers who purchased the securities in a
private placement pursuant to Rule 144A and/or buyers who purchased the
securities pursuant to Regulation S. The gross proceeds of this private
placement were approximately $194.5 million. In each instance, the offers and
sales were made without any public solicitation; the notes 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
(an affiliate of Salomon Smith Barney Inc.), Goldman, Sachs & Co. and CIBC
Oppenheimer Corp. received customary commissions. All issuances
II-1
<PAGE> 130
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 S promulgated thereunder, as transactions by an issuer not
involving a public offering.
On April 13, 1998, in connection with the acquisition of certain assets of
ICS, the Company issued 821,357.70 shares of 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.
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, immediately prior to CDPQ's purchase of Vanguard's minority
interest in the Company, Vanguard exercised the Vanguard Option and purchased
244,685 shares of the Class B Common at a price of $10.71 per share (aggregate
consideration of $2,620,392). The issuance of the shares of Class B Common
pursuant to Vanguard'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 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 47,031.80 shares of Common Stock at an exercise price of $14.88 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 3,644.30 shares of Common Stock at an
exercise price of $17.15 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
the 1997 Notes and 1,125,000 shares of the Class C Common to qualified
institutional buyers who purchased the securities in a private placement
pursuant to Rule 144A and/or buyers who purchased the securities pursuant to
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 notes 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, fiscal 1998 and fiscal 1999, the Company granted
options to purchase a total of 1,179,266.25 shares of 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.
II-2
<PAGE> 131
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 124,960 shares of Common Stock at an exercise price of $10.71 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.
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
244,685 shares of Class B Common at an exercise price of $10.71 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 exercised.
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.
In addition, on July 26, 1995, VPC purchased from the Company (i) 1,558,260
shares of Class B Common for approximately $16.7 million and (ii) a 15%
convertible note having a principal amount of approximately $8.3 million. On
April 1, 1996, the note was converted into 776,145 shares of Class B Common
(after giving effect to the contribution, in connection with the settlement of
certain disputes between the then principal stockholders, of certain shares
received by VPC as accrued interest on the note). 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 recipient thereof without a
view toward the sale or redistribution 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.(4)
2.2 -- Amendment Number One to the ICS Purchase Agreement, dated
as of March 4, 1998.(4)
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.(4)
2.5 -- Amendment Number Two to the Phonoscope Purchase
Agreement, dated as of August 13, 1997.(4)
</TABLE>
II-3
<PAGE> 132
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Restated Certificate of Incorporation of OpTel, together
with all amendments thereto.(6)
3.1(A) -- Amended and Restated Certificate of Incorporation of
OpTel, together with all amendments thereto to be
effective as of the consummation of the Offering.
3.2 -- Bylaws of OpTel.(1)
3.2(A) -- Amended and Restated Bylaws of OpTel, to be effective as
of the consummation of the Offering.
3.3 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series A Preferred.(4)
3.4 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series B Preferred.(4)
4.1 -- See the Amended and Restated Certificate of Incorporation
and amendments thereto filed as Exhibit 3.1 and the
Amended and Restated Bylaws filed as Exhibit 3.2.
4.2 -- Indenture, dated as of February 14, 1997, between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee and as
Escrow Agent.(1)
4.3 -- Form of 1997 Note (included in Exhibit 4.2).(1)
4.4 -- 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)
4.5 -- Indenture dated as of July 7, 1998 between OpTel and U.S.
Trust Company of Texas, N.A., as Trustee.(5)
4.6 -- Form of 1998 Note (included in Exhibit 4.5).(5)
4.7 -- Escrow Agreement, dated as of July 7, 1998 between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee and
Escrow Agent.(5)
4.8 -- Form of Stock Certificate for the Common Stock.
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 August 15, 1997 by
and among VPC, CDPQ and OpTel.(3)
10.2 -- Stockholders' Agreement dated as of April 9, 1998 among
OpTel, Nomura, MCI, GVL and ICS.(4)
10.3 -- 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)
10.4 -- Registration Rights Agreement, dated as of August 15,
1997, between OpTel and CDPQ.(2)
10.5 -- Registration Rights Agreement dated as of April 9, 1998,
between OpTel, ICS, Nomura and MCI.(4)
10.6 -- Warrant Agreement dated as of September 1, 1996, between
OpTel and James A. Kofalt.(1)
10.7 -- Warrant Agreement, dated as of July 11, 1997, between
OpTel and Rory O. Cole.(2)
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)
</TABLE>
II-4
<PAGE> 133
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.10 -- Restated Incentive Stock Plan of OpTel, dated June 4,
1998, as amended.
10.11 -- Annual Bonus Plan of OpTel.(1)
10.12 -- 1998 Employee Stock Purchase Plan of OpTel.
10.13 -- Employment Agreement between Bertrand Blanchette and
OpTel, dated April 15, 1999.
10.14 -- Employment Agreement between Stephen Dube and OpTel,
dated April 15, 1999.
10.15 -- Employment Agreement between Lynn Zera and OpTel, dated
April 15, 1999.
10.16 -- Employment Agreement between Louis Brunel and OpTel dated
April 15, 1999.
10.17 -- Employment Agreement between Michael Katzenstein and
OpTel dated April 15, 1999.
10.18 -- Separation Agreement dated as of July 11, 1997, between
OpTel and Rory O. Cole.(4)
10.19 -- 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)
10.20 -- 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)
10.21 -- 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 10.20 hereto).(2)
10.22 -- 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 10.20 and 10.21 hereto).(4)
10.23 -- 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)
10.24 -- Interconnection Agreement under Sections 251 and 252 of
the Telecom Act by and between Southwestern Bell
Telephone Company and OpTel (Texas) Telecom, Inc.(2)
10.25 -- Residential Reseller Agreement dated as of May 29, 1998
by and between Teleport Communications Group Inc. and
TVMAX.(7)**
10.26 -- Strategic Alliance Agreement dated as of March 10, 1998
between I(3)S, Inc. and TVMAX.(6)**
10.27 -- EchoStar Satellite Corporation MDU Dealer Agreement,
dated as of January 14, 1999, by and between EchoStar and
TVMAX Telecom, Inc.***
10.28 -- Conversion and Exchange Agreement.
21.1 -- List of subsidiaries of OpTel.(9)
23.1 -- Consent of Kronish Lieb Weiner & Hellman LLP (included in
exhibit 5.1).
23.2 -- Consent of Deloitte & Touche LLP.
</TABLE>
II-5
<PAGE> 134
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
24.1 -- Power of Attorney (included as part of the signature page
of OpTel's registration statement on Form S-1 filed with
the Commission on June 5, 1998).
24.2 -- Power of Attorney.(8)
</TABLE>
- ---------------
(1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Commission on April 10, 1997, and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's 10-K filed with the Commission for
fiscal year ended August 31, 1997, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for
fiscal year ended August 31, 1997, and incorporated herein by reference.
(4) Filed as an exhibit to OpTel's registration statement on Form S-1 filed
with the Commission on June 5, 1998, and incorporated herein by reference.
(5) Filed as an exhibit to Amendment No. 2 to OpTel's registration statement on
Form S-1/A filed with the Commission on August 14, 1998, and incorporated
herein by reference.
(6) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Commission on September 4, 1998, and incorporated herein by
reference.
(7) Filed as an exhibit to Amendment No. 1 to OpTel's registration statement on
Form S-4 filed with the Commission on October 9, 1998, and incorporated
herein by reference.
(8) Filed as an exhibit to Amendment No. 4 to OpTel's registration statement on
Form S-1 filed with the Commission on March 25, 1999.
(9) Filed as an exhibit to Amendment No. 6 to OpTel's registration statement on
Form S-1 filed with the Commission on April 21, 1999.
** The Commission granted the Company's request for confidential treatment of
portions of this document in an order dated October 9, 1998.
*** Certain provisions of this exhibit have been filed separately with the
Commission pursuant to an application for confidential treatment.
(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 Schedule II.
All schedules, other than Schedule II, 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
II-6
<PAGE> 135
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-7
<PAGE> 136
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Amendment No. 7 to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on this 18th day of May, 1999.
OPTEL, INC.
By: /s/ BERTRAND BLANCHETTE
----------------------------------
Bertrand Blanchette
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 7 to
the 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:
* President and Chief Executive May , 1999
- ----------------------------------------------------- Officer
Louis Brunel
Principal Financial and Accounting Officers:
/s/ BERTRAND BLANCHETTE Chief Financial Officer May 18, 1999
- -----------------------------------------------------
Bertrand Blanchette
* Controller May , 1999
- -----------------------------------------------------
Craig Milacek
Directors:
* Chairman of the Board May , 1999
- -----------------------------------------------------
Andre Chagnon
* Vice Chairman of the Board May , 1999
- -----------------------------------------------------
Alain Michel
* Director May , 1999
- -----------------------------------------------------
Louis Brunel
* Director May , 1999
- -----------------------------------------------------
Frederick W. Benn
* Director May , 1999
- -----------------------------------------------------
Christian Chagnon
* Director May , 1999
- -----------------------------------------------------
William O. Hunt
* Director May , 1999
- -----------------------------------------------------
R. Douglas Leonhard
</TABLE>
II-8
<PAGE> 137
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Director May , 1999
- -----------------------------------------------------
Lynn McDonald
* Director May , 1999
- -----------------------------------------------------
Jayne L. Stowell
</TABLE>
*By: /s/ BERTRAND BLANCHETTE
-------------------------------
Bertrand Blanchette
as attorney-in-fact
II-9
<PAGE> 138
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.:
We have audited the financial statements of OpTel, Inc. and subsidiaries (the
"Company") as of August 31, 1997 and 1998, and for each of the three years in
the period ended August 31, 1998 and have issued our report dated October 6,
1998; such financial statements and report are included herein. Our audits also
included the financial statement schedule of OpTel, Inc., listed in Item 14.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
October 6, 1998
S-1
<PAGE> 139
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
DEDUCTIONS,
BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING OF COSTS AND AND END OF
PERIOD EXPENSES RECOVERIES PERIOD
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended August 31, 1996..................... $ 473 $1,376 $(1,307) $ 542
Year ended August 31, 1997..................... 542 1,788 (1,205) 1,125
Year ended August 31, 1998..................... 1,125 2,707 (2,029) 1,803
Six months ended February 28, 1999
(unaudited)................................. 1,803 1,922 (1,366) 2,359
</TABLE>
S-2
<PAGE> 140
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.(4)
2.2 -- Amendment Number One to the ICS Purchase Agreement, dated
as of March 4, 1998.(4)
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.(4)
2.5 -- Amendment Number Two to the Phonoscope Purchase
Agreement, dated as of August 13, 1997.(4)
3.1 -- Restated Certificate of Incorporation of OpTel, together
with all amendments thereto.(6)
3.1(A) -- Amended and Restated Certificate of Incorporation of
OpTel, together with all amendments thereto to be
effective as of the consummation of the Offering.
3.2 -- Bylaws of OpTel.(1)
3.2(A) -- Amended and Restated Bylaws of OpTel, to be effective as
of the consummation of the Offering.
3.3 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series A Preferred.(4)
3.4 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series B Preferred.(4)
4.1 -- See the Amended and Restated Certificate of Incorporation
and amendments thereto filed as Exhibit 3.1 and the
Amended and Restated Bylaws filed as Exhibit 3.2.
4.2 -- Indenture, dated as of February 14, 1997, between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee and as
Escrow Agent.(1)
4.3 -- Form of 1997 Note (included in Exhibit 4.2).(1)
4.4 -- 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)
4.5 -- Indenture dated as of July 7, 1998 between OpTel and U.S.
Trust Company of Texas, N.A., as Trustee.(5)
4.6 -- Form of 1998 Note (included in Exhibit 4.5).(5)
4.7 -- Escrow Agreement, dated as of July 7, 1998 between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee and
Escrow Agent.(5)
4.8 -- Form of Stock Certificate for the Common Stock.
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 August 15, 1997 by
and among VPC, CDPQ and OpTel.(3)
10.2 -- Stockholders' Agreement dated as of April 9, 1998 among
OpTel, Nomura, MCI, GVL and ICS.(4)
</TABLE>
<PAGE> 141
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.3 -- 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)
10.4 -- Registration Rights Agreement, dated as of August 15,
1997, between OpTel and CDPQ.(2)
10.5 -- Registration Rights Agreement dated as of April 9, 1998,
between OpTel, ICS, Nomura and MCI.(4)
10.6 -- Warrant Agreement dated as of September 1, 1996, between
OpTel and James A. Kofalt.(1)
10.7 -- Warrant Agreement, dated as of July 11, 1997, between
OpTel and Rory O. Cole.(2)
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, dated June 4,
1998, as amended.
10.11 -- Annual Bonus Plan of OpTel.(1)
10.12 -- 1998 Employee Stock Purchase Plan of OpTel.
10.13 -- Employment Agreement between Bertrand Blanchette and
OpTel, dated April 15, 1999.
10.14 -- Employment Agreement between Stephen Dube and OpTel,
dated April 15, 1999.
10.15 -- Employment Agreement between Lynn Zera and OpTel, dated
April 15, 1999.
10.16 -- Employment Agreement between Louis Brunel and OpTel dated
April 15, 1999.
10.17 -- Employment Agreement between Michael Katzenstein and
OpTel dated April 15, 1999.
10.18 -- Separation Agreement dated as of July 11, 1997, between
OpTel and Rory O. Cole.(4)
10.19 -- 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)
10.20 -- 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)
10.21 -- 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 10.20 hereto).(2)
10.22 -- 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 10.20 and 10.21 hereto).(4)
10.23 -- 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)
</TABLE>
<PAGE> 142
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.24 -- Interconnection Agreement under Sections 251 and 252 of
the Telecom Act by and between Southwestern Bell
Telephone Company and OpTel (Texas) Telecom, Inc.(2)
10.25 -- Residential Reseller Agreement dated as of May 29, 1998
by and between Teleport Communications Group Inc. and
TVMAX.(7)**
10.26 -- Strategic Alliance Agreement dated as of March 10, 1998
between I(3)S, Inc. and TVMAX.(6)**
10.27 -- EchoStar Satellite Corporation MDU Dealer Agreement,
dated as of January 14, 1999, by and between EchoStar and
TVMAX Telecom, Inc.***
10.28 -- Conversion and Exchange Agreement.
21.1 -- List of subsidiaries of OpTel.(9)
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 (included as part of the signature page
of OpTel's registration statement on Form S-1 filed with
the Commission on June 5, 1998).
24.2 -- Power of Attorney.(8)
</TABLE>
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(1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Commission on April 10, 1997, and incorporated herein by
reference.
(2) Filed as an exhibit to the Company's 10-K filed with the Commission for
fiscal year ended August 31, 1997, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for
fiscal year ended August 31, 1997, and incorporated herein by reference.
(4) Filed as an exhibit to OpTel's registration statement on Form S-1 filed
with the Commission on June 5, 1998, and incorporated herein by reference.
(5) Filed as an exhibit to Amendment No. 2 to OpTel's registration statement on
Form S-1/A filed with the Commission on August 14, 1998, and incorporated
herein by reference.
(6) Filed as an exhibit to OpTel's registration statement on Form S-4 filed
with the Commission on September 4, 1998, and incorporated herein by
reference.
(7) Filed as an exhibit to Amendment No. 1 to OpTel's registration statement on
Form S-4 filed with the Commission on October 9, 1998, and incorporated
herein by reference.
(8) Filed as an exhibit to Amendment No. 4 to OpTel's registration statement on
Form S-1 filed with the Commission on March 25, 1999.
(9) Filed as an exhibit to Amendment No. 6 to OpTel's registration statement on
Form S-1 filed with the Commission on April 21, 1999.
** The Commission granted the Company's request for confidential treatment of
portions of this document in an order dated October 9, 1998.
*** Certain provisions of this exhibit have been filed separately with the
Commission pursuant to an application for confidential treatment.
<PAGE> 1
EXHIBIT 1.1
OpTel, Inc.
[ ] Shares
Class A Common Stock
($0.01 par value per share)
UNDERWRITING AGREEMENT
New York, New York
, 1999
Salomon Smith Barney Inc.
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
CIBC World Markets Corp.
As Representatives of the several Underwriters
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
OpTel, Inc., a Delaware corporation (the "Company"), proposes
to sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), for whom you (the "Representatives") are acting as
representatives, [ ] shares of Class A Common Stock, $0.01 par value per share
(the "Common Stock") of the Company, and the persons named in Schedule II hereto
(the "Selling Stockholders") propose to sell to the several Underwriters [ ]
shares of Common Stock (said shares to be issued and sold by the Company and
shares to be sold by the Selling Stockholders collectively being hereinafter
called the "Underwritten Securities"). The Company also proposes to grant to the
Underwriters an option to purchase up to [ ] additional shares of Common Stock
to cover over-allotments (the "Option Securities"; the Option Securities,
together with the Underwritten Securities, being hereinafter called the
"Securities"). To the extent there are no additional Underwriters listed on
Schedule I other than you, the term Representatives as used herein shall mean
you, as Underwriters, and the terms Representatives and Underwriters shall mean
either the singular or plural as the context requires. In addition, to the
extent that there is not more than one Selling Stockholder named in Schedule II,
the term Selling Stockholder shall mean either the singular or plural. The use
of the neuter in this Agreement shall include the feminine and masculine
wherever appropriate. Certain terms used herein are defined in Section 17
hereof.
<PAGE> 2
-2-
1. Representations and Warranties.
(i) The Company represents and warrants to, and agrees with,
each Underwriter as set forth below in this Section 1.
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "SEC") a registration statement (file number
333-56231) on Form S-1, including a related preliminary prospectus, for
the registration under the Act of the offering and sale of the
Securities. The Company may have filed one or more amendments thereto,
including a related preliminary prospectus, each of which has
previously been furnished to you. The Company will next file with the
SEC either (1) prior to the Effective Date of such registration
statement, a further amendment to such registration statement
(including the form of final prospectus) or (2) after the Effective
Date of such registration statement, a final prospectus in accordance
with Rules 430A and 424(b). In the case of clause (2), the Company has
included in such registration statement, as amended at the Effective
Date, all information (other than Rule 430A Information) required by
the Act and the rules thereunder to be included in such registration
statement and the Prospectus. As filed, such amendment and form of
final prospectus, or such final prospectus, shall contain all Rule 430A
Information, together with all other such required information, and,
except to the extent the Representatives shall agree in writing to a
modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior to
the Execution Time, will be included or made therein.
(b) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined herein)
and on any date on which Option Securities are purchased, if such date
is not the Closing Date (a "settlement date"), the Prospectus (and any
supplements thereto) will, comply in all material respects with the
applicable requirements of the Act and the rules thereunder; on the
Effective Date and at the Execution Time, the Registration Statement
did not or will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and,
on the Effective Date, the Prospectus, if not filed pursuant to Rule
424(b), will not, and on the date of any filing pursuant to Rule 424(b)
and on the Closing Date and any settlement date, the Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representation or
<PAGE> 3
-3-
warranty as to the information contained in or omitted from the
Registration Statement, or the Prospectus (or any supplement thereto)
in reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of any Underwriter through the
Representatives specifically for inclusion in the Registration
Statement or the Prospectus (or any supplement thereto).
(c) Each of the Company and each subsidiary of the Company (a
"Subsidiary"), has been duly incorporated or organized, and each is
validly existing as a corporation or limited partnership, as the case
may be, under the laws of its jurisdiction of incorporation or
organization, with all requisite power and authority to own or lease
its properties and to conduct its business as described in the
Prospectus. Each of the Company and the Subsidiaries (x) has all
necessary authorizations, approvals, orders, licenses and permits of
and from regulatory or governmental officials, bodies and tribunals, to
own or lease its properties and to conduct its businesses as now
conducted as described in the Prospectus and (y) is duly qualified to
do business as a foreign corporation and is in good standing in all
other jurisdictions where the ownership or leasing of its properties or
the conduct of its businesses requires such qualification, except, in
the case of clauses (x) and (y), where the failure to have such
authorizations, approvals, orders, licenses and permits or to be so
qualified could not reasonably be expected to have a material adverse
effect on the business, condition (financial or otherwise), assets,
results of operations or prospects of the Company and the Subsidiaries
taken as a whole (a "Material Adverse Effect").
(d) This Agreement has been duly authorized, executed and
delivered by the Company and (assuming the due authorization, execution
and delivery by parties thereto other than the Company) constitutes the
valid and binding obligations of the Company, enforceable against the
Company in accordance with the terms hereof, subject only to (a)
applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws affecting creditors' rights
and remedies generally and (b) general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law)
(clauses (a) and (b) being referred to herein as the "Enforceability
Limitations").
(e) No consent, authorization, approval, license or order of,
or filing, registration or qualification with, any court or
governmental or regulatory agency or body, domestic or foreign, is
required for the performance by the Company of its obligations under
this Agreement or for the consummation of the transactions contemplated
hereby, except such as have been obtained under the Act and the
Exchange Act and such as may be required by state securities or "blue
sky" laws in connection with the offer and sale of the Securities by
the Underwriters in the manner contemplated herein and in the
Prospectus.
<PAGE> 4
-4-
(f) The issuance of the Securities to be sold by the Company
and the sale and delivery of the Securities, the execution, delivery
and performance by the Company of this Agreement, the consummation by
the Company of the transactions contemplated hereby and as described in
the Prospectus and the compliance by the Company with the terms of the
foregoing do not, and, at the Closing Date, will not conflict with or
constitute or result in a breach or violation by the Company or the
Subsidiaries of (A) any of the terms or provisions of, or constitute a
default (or an event which, with notice or lapse of time or both, would
constitute a default) by any of the Company or the Subsidiaries or give
rise to any right to accelerate the maturity or require the prepayment
of any indebtedness under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the
Company or the Subsidiaries under any contract, indenture, mortgage,
deed of trust, loan agreement, note, lease, license, franchise
agreement, authorization, permit, certificate or other agreement or
document to which any of the Company or the Subsidiaries is a party or
by which any of them may be bound, or to which any of them or any of
their respective assets or businesses is subject (and the Company has
no knowledge of any conflict, breach or violation of such terms or
provisions or of any such default, in any such case, which has occurred
or will so result), (B) the articles or by-laws (each, an
"Organizational Document") of each of the Company and the Subsidiaries
or (C) any law, statute, rule or regulation, or any judgment, decree or
order, in any such case, of any domestic or foreign court or
governmental or regulatory agency or other body having jurisdiction
over the Company or any of the Subsidiaries or any of their respective
properties or assets.
(g) The audited consolidated financial statements (and the
related notes) and schedules of the Company and the Subsidiaries
included in the Prospectus and the Registration Statement present
fairly the consolidated financial position, results of operations and
cash flows of the Company and the Subsidiaries, at the dates and for
the periods to which they relate, and have been prepared in accordance
with generally accepted accounting principles ("GAAP") applied on a
consistent basis, and the unaudited historical consolidated financial
statements (and the related notes) of the Company and the Subsidiaries
included in the Prospectus and the Registration Statement present
fairly the consolidated financial position, results of operations and
cash flows of the Company and the Subsidiaries, at the dates and for
the periods to which they relate, and have been prepared in accordance
with GAAP, subject, in the case of interim financial statements, to
year-end adjustments as may be required by GAAP. To the knowledge of
the Company, Deloitte & Touche LLP, which has examined certain of such
financial statements and schedules as set forth in its report included
in the Prospectus, is an independent public accounting firm with
respect to the Company and the Subsidiaries as required by the Act and
the Exchange Act and the rules and regulations
<PAGE> 5
-5-
of the SEC thereunder (the "Act Regulations") and Rule 101 of the
American Institute of Certified Public Accountants (the "AICPA").
(h) Since the respective dates as of which information is
given in the Prospectus, except as otherwise specifically stated
therein, there has been no (A) significant change in or material
adverse change in the condition (financial or otherwise), assets,
results of operations or prospects of the Company or of the Company and
the Subsidiaries considered as one enterprise, whether or not arising
in the ordinary course of business, (B) transaction entered into by any
of the Company or the Subsidiaries, other than in the ordinary course
of business, that is material to the Company and the Subsidiaries taken
as a whole or (C) dividend or distribution of any kind declared, paid
or made by the Company on its capital stock.
(i) At the Closing Date, the Company will have the authorized
and issued and outstanding capitalization set forth in the Prospectus
under the caption "Capitalization" (subject to the qualifications set
forth therein); the outstanding capital stock of the Company (including
the Securities being sold hereunder by the Selling Stockholders) and
each Subsidiary has been duly authorized and validly issued, is fully
paid and nonassessable and was not issued in violation of any
preemptive or similar rights (whether provided contractually or
pursuant to Organizational Documents); the Securities being sold
hereunder by the Company have been duly and validly authorized, and,
when issued and delivered to and paid for by the Underwriters pursuant
to this Agreement, will be fully paid and nonassessable; the Securities
being sold hereunder are duly listed, and admitted and authorized for
trading, subject to official notice of issuance and evidence of
satisfactory distribution, on the Nasdaq National Market; the
certificates for the Securities are in valid and sufficient form; the
holders of outstanding shares of capital stock of the Company are not
entitled to preemptive or other rights to subscribe for the Securities
or, if entitled to any such rights, have effectively waived such
rights; and, except as set forth in the Prospectus, no options,
warrants or other rights to purchase, agreements or other obligations
to issue, or rights to convert any obligations into or exchange any
securities for, shares of capital stock of or ownership interests in
the Company are outstanding.
(j) All of the outstanding shares of the Subsidiaries are
owned beneficially and of record by the Company or by another
Subsidiary, in each case, free and clear of all liens, encumbrances,
equities or claims of any kind whatsoever or restrictions on
transferability or voting.
(k) None of the Company or any of the Subsidiaries is (A) in
violation of its Organizational Documents, (B) in default in the
performance or observance of any material obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan agreement, note, lease, license, authorization,
<PAGE> 6
-6-
permit, certificate or other agreement or document to which the Company
or any Subsidiary is a party or by which it or any of them may be
bound, or to which any of the assets or businesses of the Company or
any Subsidiary is subject, or (C) in violation of any applicable law,
rule or regulation, or any judgment, order or decree of any domestic or
foreign court with jurisdiction over the Company or any Subsidiary, or
other governmental or regulatory authority with jurisdiction over the
Company or any Subsidiary which, in the case of (B) or (C), could have
a Material Adverse Effect.
(l) Except as described or reflected in the Prospectus
(exclusive of any supplement thereto) and except for matters not
required to be described therein, there is not pending or, to the
knowledge of the Company, threatened, any action, suit, proceeding,
inquiry or investigation to which the Company or any Subsidiary is a
party, or to which the rights of entry or assets of the Company or any
of the Subsidiaries is subject, before, or brought by, any court or
governmental or regulatory agency or body with jurisdiction over the
Company or any Subsidiary.
(m) Each of the Company and the Subsidiaries owns or
possesses, or can acquire on reasonable terms, adequate patents, patent
rights, licenses, trademarks, inventions, service marks, trade names,
copyrights and know-how (including trade secrets and other proprietary
or confidential information, systems or procedures, whether patented or
unpatented) (collectively, "intellectual property") necessary to
conduct the business as it is now or, to its belief, proposed to be
operated by it as described in the Prospectus, except as described in
the Prospectus and except where the failure to own, possess or have the
ability to acquire any such intellectual property could not,
individually or in the aggregate, be reasonably expected to have a
Material Adverse Effect; and, except as disclosed in the Prospectus,
neither the Company nor any of the Subsidiaries has received any notice
of infringement of or conflict with (or knows of any such infringement
of or conflict with) asserted rights of others with respect to any of
such intellectual property which, if such assertion of infringement or
conflict were sustained, would result in any Material Adverse Effect.
(n) Each of the Company and the Subsidiaries has obtained all
consents, approvals, orders, certificates, licenses, permits,
franchises and other authorizations (collectively, the "Licenses") of
and from, and has made all declarations and filings with, all
governmental or regulatory authorities, including, without limitation,
the Federal Communications Commission (the "FCC"), and all courts and
other tribunals necessary to own, lease, license and use its assets and
to conduct its businesses in the manner described in the Prospectus,
except where the failure to obtain such Licenses and make such
declarations and filings would not have a Material Adverse Effect.
Neither the Company nor any of the Subsidiaries has received any notice
of proceedings relating to the revocation or modification of, or denial
of any application for, any
<PAGE> 7
-7-
License which, if the subject of an unfavorable decision, ruling or
finding, would, singly or in the aggregate, have a Material Adverse
Effect; the Company and each of the Subsidiaries, have fulfilled and
performed all of their obligations with respect to all Licenses
possessed by any of them, except where the failure to so fulfill and
perform would not, singly or in the aggregate, have a Material Adverse
Effect; and no event has occurred which allows, or after notice or
lapse of time, or both, would allow, revocation or termination thereof
or result in any other material impairment of the rights of the holder
of any such License, except where such revocation or termination would
not, singly or in the aggregate, have a Material Adverse Effect; and
the Licenses referred to above contain no restrictions on the Company
or any of the Subsidiaries that are not described in the Prospectus,
except where such restrictions would not, singly or in the aggregate,
have a Material Adverse Effect.
(o) There are no legal, governmental or regulatory proceedings
affecting the business of the Company or any Subsidiary, including,
without limitation, before the FCC, actions, suits, inquiries or
investigations which, if applicable, would be required to be described
in the Registration Statement or Prospectus that are not described, nor
any laws, rules, regulations, contracts or other documents which, under
such circumstances, would be required to be described in the
Registration Statement or Prospectus by the Act or by the Act
Regulations that have not been so described.
(p) Each of the Company and the Subsidiaries has filed all
necessary income, franchise and other tax returns due, and has paid any
taxes assessed by the due date for payment thereof, except where such
taxes are being contested in good faith or where the failure to file
and pay such taxes would not have a Material Adverse Effect.
(q) Except as described in the Prospectus (exclusive of any
supplement thereto), none of the Company nor any of the Subsidiaries
has incurred any liability for any prohibited transaction or funding
deficiency or any complete or partial withdrawal liability with respect
to any pension, profit sharing or other plan which is subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
to which the Company or the Subsidiaries makes or ever has made a
contribution and in which any employee of the Company or any such
Subsidiary is or has ever been a participant, which, individually or in
the aggregate, could reasonably be expected to have or result in a
Material Adverse Effect. With respect to such plans, each of the
Company and the Subsidiaries is in compliance in all respects with all
applicable provisions of ERISA, except where the failure to so comply
could not, individually or in the aggregate, reasonably be expected to
have or a result in a Material Adverse Effect.
(r) Except as described in the Prospectus (exclusive of any
supplement thereto) there are no mortgages, charges or security
arrangements nor any consensual encumbrances or other arrangements
which restrict the ability of any Subsidiary (i) to
<PAGE> 8
-8-
pay dividends or make any other distributions on such Subsidiary's
shares or to pay any indebtedness owed to the Company or any other
Subsidiary, (ii) to make any loans or advances to, or investments in,
the Company or any other Subsidiary or (iii) to transfer any of its
property or assets to the Company or any other Subsidiary.
(s) Except as described in the Prospectus (exclusive of any
supplement thereto), to the knowledge of the Company, there are no
defaults under any Right of Entry (as defined in the Prospectus) by any
party thereunder or notices of termination or non-renewal with respect
thereto, except for such defaults or notices as, individually or in the
aggregate, cannot reasonably be expected to have a Material Adverse
Effect.
(t) The market-related data and estimates included in the
Prospectus are based on or derived from independent sources which the
Company believes to be reliable and accurate.
(u) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended, without taking account of any exemption arising out of the
number of holders of the Company's securities.
(v) Except for Securities included by Selling Stockholders in
the Registration Statement and for rights that have been waived or have
failed to be exercised in accordance with the terms thereof, no holders
of securities of the Company have rights to require the registration of
such securities under the Registration Statement.
(w) There are no transfer taxes or other similar fees or
charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the Company
or sale by the Company of the Securities.
(x) The Company has not taken, directly or indirectly (other
than through the actions, if any, of the Underwriters), any action
designed to or which has constituted or which might reasonably be
expected to cause or result in, under the Exchange Act or otherwise,
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(y) Except as disclosed in the Registration Statement and the
Prospectus, the Company (i) does not have any material lending or other
relationship with any bank or lending affiliate of Salomon Smith Barney
Holdings Inc. and (ii) does not intend to use any of the proceeds from
the sale of the Securities hereunder to repay any outstanding debt owed
to any affiliate of Salomon Smith Barney Holdings Inc.
<PAGE> 9
-9-
(z) The Company is in material compliance with the SEC's staff
legal bulletin No. 5 dated October 8, 1997 related to Year 2000
compliance.
Any certificate signed by any two officers of the Company and
delivered to the Representatives or to Cahill Gordon & Reindel, counsel for the
Underwriters ("Counsel for the Underwriters"), in connection with the offering
of the Securities shall be deemed a representation and warranty by the Company,
as to matters covered thereby, to each Underwriter.
(ii) Each Selling Stockholder represents and warrants to, and
agrees with, each Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the
Securities to be sold by such Selling Stockholder hereunder and upon
sale and delivery of, and payment for, such Securities, as provided
herein, such Selling Stockholder will convey to the Underwriters good
and marketable title to such Securities, free and clear of all liens,
encumbrances, equities and claims whatsoever (other than those created
by this Agreement or by the Custody Agreement and Power of Attorney
dated as of the date hereof among each Selling Stockholder, the
Attorney-in-Fact named therein and the Custodian named therein (the
"Custody Agreement")).
(b) Such Selling Stockholder has not taken, directly or
indirectly (other than through the actions, if any, of the
Underwriters), any action designed to or which has constituted or which
might reasonably be expected to cause or result in, under the Exchange
Act or otherwise, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities.
(c) Certificates in negotiable form for such Selling
Stockholder's Securities have been placed in custody, for delivery
pursuant to the terms of this Agreement, under a Custody Agreement and
Power of Attorney duly authorized, executed and delivered by such
Selling Stockholder, in the form heretofore furnished to you (the
"Custody Agreement") with American Stock Transfer & Trust Company, as
Custodian (the "Custodian"); the Securities represented by the
certificates so held in custody for such Selling Stockholder are
subject to the interests hereunder of the Underwriters; the
arrangements for custody and delivery of such certificates, made by
such Selling Stockholder hereunder and under the Custody Agreement, are
not subject to termination by any acts of such Selling Stockholder, or
by operation of law, whether by the death or incapacity of such Selling
Stockholder or the occurrence of any other event; and if any such
death, incapacity or any other such event shall occur before the
delivery of such Securities hereunder, certificates for the Securities
will be delivered by the Custodian in accordance with the terms and
conditions of this Agreement and the Custody Agreement as if such
death, incapacity or other event had not occurred, regardless of
<PAGE> 10
-10-
whether or not the Custodian shall have received notice of such death,
incapacity or other event.
(d) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by such
Selling Stockholder of the transactions contemplated herein, except
such as may have been obtained under the Act and such as may be
required by state securities or "blue sky" laws in connection with the
purchase and distribution of the Securities by the Underwriters in the
manner contemplated herein and in the Prospectus.
(e) Neither the sale of the Securities being sold by such
Selling Stockholder nor the consummation of any other of the
transactions herein contemplated by such Selling Stockholder or the
fulfillment of the terms hereof by such Selling Stockholder will
conflict with, result in a breach or violation of, or constitute a
default under any law or the charter or by-laws or similar
organizational documents of such Selling Stockholder, if such Selling
Stockholder is not an individual, or the terms of any indenture or
other agreement or instrument to which such Selling Stockholder or any
of its subsidiaries is a party or bound, or any judgment, order or
decree applicable to such Selling Stockholder or any of its
subsidiaries of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Stockholder or any of its subsidiaries.
(f) Such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in this Section
1 are not true and correct, is familiar with the Registration Statement
and has no knowledge of any material fact, condition or information not
disclosed in the Prospectus or any supplement thereto which has
adversely affected or may adversely affect the business of the Company
or any of its subsidiaries; and the sale of Securities by such Selling
Stockholder pursuant hereto is not prompted by any information
concerning the Company or any of its subsidiaries which is not set
forth in the Prospectus or any supplement thereto.
(g) In respect of any statements in or omissions from the
Registration Statement or the Prospectus or any supplements thereto
made in reliance upon and in conformity with information furnished in
writing to the Company by any Selling Stockholder specifically for use
in connection with the preparation thereof, such Selling Stockholder
hereby makes the same representations and warranties to each
Underwriter as the Company makes to such Underwriter under paragraph
(i)(b) of this Section.
Any certificate signed by any officer, partner, trustee or
similar person of any Selling Stockholder (or by such Selling Stockholder, if an
individual) and delivered to the Representatives or Counsel for the Underwriters
in connection with the offering of the Secu-
<PAGE> 11
-11-
rities shall be deemed a representation and warranty by such Selling
Stockholder, as to matters covered thereby, to each Underwriter.
2. Purchase and Sale. (a) Subject to the terms and conditions
and in reliance upon the representations and warranties herein set forth, the
Company and the Selling Stockholders agree, severally and not jointly, to sell
to each Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Stockholders, at a purchase price of
$[ ] per share, the amount of the Underwritten Securities set forth opposite
such Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby grants
an option to the several Underwriters to purchase up to [ ] Option Securities at
the same purchase price per share as the Underwriters shall pay for the
Underwritten Securities. Said option may be exercised only to cover
over-allotments in the sale of the Underwritten Securities by the Underwriters.
Said option may be exercised in whole or in part at any time (but not more than
once) on or before the 30th day after the date of the Prospectus upon written or
telegraphic notice by the Representatives to the Company setting forth the
number of shares of the Option Securities as to which the several Underwriters
are exercising the option and the settlement date (the "Option Closing Date").
Delivery of certificates for the shares of Option Securities by the Company, and
payment therefor to the Company, shall be made as provided in Section 3 hereof.
The number of shares of the Option Securities to be purchased by each
Underwriter shall be the same percentage of the total number of shares of the
Option Securities to be purchased by the several Underwriters as such
Underwriter is purchasing of the Underwritten Securities, subject to such
adjustments as you in your absolute discretion shall make to eliminate any
fractional shares.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
[ ], 1999, or at such time on such later date not more than three Business Days
after the foregoing date as the Representatives shall designate, which date and
time may be postponed by agreement among the Representatives, the Company and
the Selling Stockholders or as provided in Section 9 hereof (such date and time
of delivery and payment for the Securities being herein called the "Closing
Date"). Delivery of the Securities shall be made to the Representatives for the
respective accounts of the several Underwriters against payment by the several
Underwriters through the Representatives of the respective aggregate purchase
prices of the Securities being sold by the Company and each of the Selling
Stockholders to or upon the order of the Company and the Selling Stockholders by
wire transfer payable in same-day funds to the accounts specified by the Company
and the Selling Stockholders. Delivery of the Underwritten Securities and the
Option Securities shall
<PAGE> 12
-12-
be made through the facilities of The Depository Trust Company unless the
Representatives shall otherwise instruct.
Each Selling Stockholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the several Underwriters of
the Securities to be purchased by them from such Selling Stockholder and the
respective Underwriters will pay any additional stock transfer taxes involved in
further transfers.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company will deliver
the Option Securities to the Representatives on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Company by wire transfer payable in
same-day funds to the account specified by the Company. If settlement for the
Option Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
The documents required to be delivered by this Section 3 and
by Section 6 shall be delivered at the office of Counsel for the Underwriters at
80 Pine Street, 17th Floor, New York, New York 10005, on the Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements.
(i) The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment to
the Registration Statement or supplement to the Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a
copy for your review prior to filing and will not file any such
proposed amendment or supplement to which you reasonably object.
Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the
Prospectus is otherwise required under Rule 424(b), the Company will
cause the Prospectus, properly completed, and any supplement thereto to
be filed with
<PAGE> 13
-13-
the SEC pursuant to the applicable paragraph of Rule 424(b) within the
time period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will promptly advise
the Representatives (1) when the Registration Statement, if not
effective at the Execution Time, shall have become effective, (2) when
the Prospectus, and any supplement thereto, shall have been filed (if
required) with the SEC pursuant to Rule 424(b) or when any Rule 462(b)
Registration Statement shall have been filed with the SEC, (3) when,
prior to termination of the offering of the Securities, any amendment
to the Registration Statement shall have been filed or become
effective, (4) of any request by the SEC or its staff for any amendment
of the Registration Statement, or any Rule 462(b) Registration
Statement, or for any supplement to the Prospectus or for any
additional information, (5) of the issuance by the SEC of any stop
order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (6)
of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the institution or threatening of any proceeding for
such purpose. The Company will use its best efforts to prevent the
issuance of any such stop order or the suspension of any such
qualification and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the rules thereunder, the Company
promptly will (1) notify the Representatives of any such event; (2)
prepare and file with the SEC, subject to the second sentence of
paragraph (i)(a) of this Section 5, an amendment or supplement which
will correct such statement or omission or effect such compliance; and
(3) supply any supplemented Prospectus to you in such quantities as you
may reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters signed copies of the Registration
Statement (including exhibits thereto) and to each other Underwriter a
copy of the Registration Statement (without exhibits thereto) and, so
long as delivery of a prospectus by an Underwriter or dealer may be
<PAGE> 14
-14-
required by the Act, as many copies of each Preliminary Prospectus and
the Prospectus and any supplement thereto as the Representatives may
reasonably request.
(e) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may designate and will maintain
such qualifications in effect so long as required for the distribution
of the Securities; provided, however, that in no event shall the
Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action that would
subject it to taxation or service of process in suits, in each case
other than as to matters and transactions arising out of the offering
or sale of the Securities, in any jurisdiction where it is not now so
subject.
(f) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., for a period of [180] days following the
Execution Time, offer, sell or contract to sell, or otherwise dispose
of (or enter into any transaction which is designed to, or might
reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person
in privity with the Company or any affiliate of the Company) directly
or indirectly, or announce the offering of, any other shares of Common
Stock or any securities convertible into, or exchangeable for, shares
of Common Stock; provided, however, that (i) the Company may issue and
sell Common Stock pursuant to any employee stock option plan, stock
ownership plan or dividend reinvestment plan of the Company in effect
on the Closing Date, (ii) the Company may issue Common Stock issuable
upon the conversion of securities or the exercise of warrants or
options outstanding at the Execution Time and (iii) the Company may
issue Common Stock (or securities convertible into, or exchangeable
for, shares of Common Stock) as consideration or partial consideration
for acquisitions, whether by stock purchase, merger, purchase of all or
substantially all of the assets of such person or otherwise, provided,
further, that in connection with any issuance or issuance and sale
permitted under clause (iii) of the previous proviso, the Company
agrees (A) to obtain from each person receiving shares of Common Stock
(or securities convertible into, or exchangeable for, shares of Common
Stock) a letter substantially consistent with Exhibit A hereto and (B)
not to grant any rights exercisable prior to the date [180] days after
the date of this Agreement with respect to the registration under the
Act of any shares of Common Stock (or securities convertible into, or
exchangeable for, shares of Common Stock) issued in connection with
such transaction.
(g) The Company will not take, directly or indirectly (other
than through the Underwriters), any action designed to or which has
constituted or which might reasonably be expected to cause or result,
under the Exchange Act or otherwise, in stabi-
<PAGE> 15
-15-
lization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(h) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction
and filing with the SEC of the Registration Statement (including
financial statements and exhibits thereto), each Preliminary
Prospectus, the Prospectus, and each amendment or supplement to any of
them; (ii) the printing (or reproduction) and delivery (including
postage, air freight charges and charges for counting and packaging) of
such copies of the Registration Statement, each Preliminary Prospectus,
the Prospectus, and all amendments or supplements to any of them, as
may, in each case, be reasonably requested for use in connection with
the offering and sale of the Securities; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the
Securities, including any stamp or transfer taxes in connection with
the original issuance and sale of the Securities sold by the Company;
(iv) the printing (or reproduction) and delivery of this Agreement, any
blue sky memorandum and all other agreements or documents printed (or
reproduced) and delivered in connection with the offering of the
Securities; (v) the registration of the Securities under the Exchange
Act and the listing of the Securities on the Nasdaq National Market;
(vi) any registration or qualification of the Securities for offer and
sale under the securities or blue sky laws of the several states
(including filing fees and the reasonable fees and expenses of counsel
for the Underwriters relating to such registration and qualification);
(vii) any filings required to be made with the National Association of
Securities Dealers, Inc. (including filing fees and the reasonable fees
and expenses of counsel for the Underwriters relating to such filings);
(viii) the transportation and other expenses incurred by or on behalf
of Company representatives in connection with presentations to
prospective purchasers of the Securities; (ix) the fees and expenses of
the Company's accountants and the fees and expenses of counsel
(including local and special counsel) for the Company; (x) all other
costs and expenses incident to the performance by the Company of their
obligations hereunder; and (xi) all fees, costs and expenses of the
Selling Stockholders for which the Company is obligated pursuant to the
terms of the applicable agreement granting such Selling Stockholders
registration rights in the Offering.
(ii) Each Selling Stockholder agrees with the several
Underwriters that:
(a) Such Selling Stockholder will not, without the prior
written consent of Salomon Smith Barney Inc., offer, sell, contract to
sell, pledge or otherwise dispose of, or file (or participate in the
filing of) a registration statement with the SEC in respect of, or
establish or increase a put equivalent position or liquidate or
decrease a call equivalent position within the meaning of Section 16 of
the Exchange Act with respect to, any shares of capital stock of the
Company or any securities convertible into or ex-
<PAGE> 16
-16-
ercisable or exchangeable for such capital stock, or publicly announce
an intention to effect any such transaction, for a period of 180 days
after the date of this Agreement, other than shares of Common Stock
disposed of as bona fide gifts approved by Salomon Smith Barney Inc. or
as distributions from a decedent's estate.
(b) Such Selling Stockholder will not take any action designed
to or which has constituted or which might reasonably be expected to
cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(c) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, so long as
delivery of a prospectus relating to the Securities by an underwriter
or dealer may be required under the Act, of (i) any material change in
the Company's condition (financial or otherwise), prospects, earnings,
business or properties, (ii) any change in information in the
Registration Statement or the Prospectus relating to such Selling
Stockholder or (iii) any new material information relating to the
Company or relating to any matter stated in the Prospectus which comes
to the attention of such Selling Stockholder.
6. Conditions to the Obligations of the Underwriters. The
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and the Selling Stockholders made in any certificates delivered
pursuant to the provisions hereof, to the performance by the Company and the
Selling Stockholders of their respective obligations hereunder and to the
following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time on the date of
determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Prospectus,
or any supplement thereto, is required pursuant to Rule 424(b), the
Prospectus, and any such supplement, will be filed in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or threatened.
<PAGE> 17
-17-
(b) The Company shall have furnished to the Representatives
the opinion of Kronish Lieb Weiner & Hellman LLP, counsel for the
Company, dated the Closing Date in form and substance reasonably
satisfactory to the Representatives, to the effect that:
(i) The Company has been duly incorporated and is
validly existing under the laws of the State of Delaware, with
corporate power and authority to own, lease and operate its
assets and properties and conduct its business as described in
the Prospectus and to enter into and perform its obligations
under this Agreement;
(ii) The authorized, and to the knowledge of such
counsel based solely upon a review of the Company's stock
ledger and corporate records and a certificate of the transfer
agent, the issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption
"Capitalization" (subject to the qualifications set forth
therein); the capital stock of the Company conforms in all
material respects to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock (including
the Securities being sold hereunder by the Selling
Stockholders) have been duly and validly authorized and issued
and are fully paid and nonassessable; the Securities being
sold hereunder by the Company have been duly and validly
authorized, and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be fully
paid and nonassessable; the Securities being sold hereunder
are duly listed, and admitted and authorized for trading,
subject to official notice of issuance and evidence of
satisfactory distribution, on the Nasdaq National Market; the
certificates for the Securities are in valid and sufficient
form; the holders of outstanding shares of capital stock of
the Company are not entitled to preemptive or other rights to
subscribe for the Securities or, if entitled to any such
rights, have effectively waived such rights; and, to the
knowledge of such counsel except as set forth in the
Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert
any obligations into or exchange any securities for, shares of
capital stock of or ownership interests in the Company are
outstanding;
(iii) The Registration Statement has become effective
under the Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b);
to the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued,
no proceedings for that purpose have been instituted or
threatened and the Registration State-
<PAGE> 18
-18-
ment and the Prospectus (other than the financial statements
and related notes, the financial statement schedules and other
financial and statistical information contained therein, as to
which such counsel need express no opinion) comply as to form
in all material respects with the applicable requirements of
the Act and the rules thereunder;
(iv) This Agreement has been duly authorized,
executed and delivered by the Company;
(v) No consent, approval, authorization, license,
qualification or order of or filing or registration with, any
court or governmental or regulatory agency or body of the
United States or the State of New York or under the General
Corporation Law of the State of Delaware is required for the
execution and delivery by the Company of this Agreement or for
the issue and sale of the Securities or the consummation by
the Company of any of the transactions contemplated herein,
except (A) such as have been obtained under the Act, (B) such
as may be required under the "blue sky" laws of any
jurisdiction in connection with the purchase and distribution
of the Securities by the Underwriters in the manner
contemplated herein and in the Prospectus (as to which such
counsel need express no opinion), (C) under the Rules and
Regulations of the FCC ("FCC Rules") or under any rules or
regulations of any State regulatory commissions ("State
Rules") responsible for the regulation of
cable/telecommunications services (as to which such counsel
need express no opinion) and (D) such as have been obtained or
made, as the case may be;
(vi) The issuance, sale and delivery of the
Securities, the execution, delivery and performance by the
Company of this Agreement (in each case assuming due
authorization and execution by each party other than the
Company) and the consummation by the Company of the
transactions contemplated hereby and the compliance by the
Company with the terms of the foregoing do not, will not,
conflict with or constitute or result in a breach or violation
by the Company or any of the Subsidiaries of (A) any provision
of the Certificate of Incorporation or By-laws of the Company,
(B) any of the terms or provisions of, or constitute a default
(or an event which, with notice or lapse of time or both,
would constitute a default) by the Company, or give rise to
any right to accelerate the maturity or require the prepayment
of any indebtedness under, or result in the creation or
imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any Subsidiary under any
material agreements or instruments (excluding any licenses or
authorizations granted under the FCC Rules or State Rules, as
to which such counsel need express no opinion) known to such
counsel or (C) any law, statute, rule, or regulation (ex-
<PAGE> 19
-19-
cept for the FCC Rules and State Rules, as to which such
counsel need express no opinion) of the United States or the
State of New York or under the General Corporation Law of the
State of Delaware or any order, decree or judgment known to
such counsel to be applicable to the Company or any
Subsidiary, of any court or governmental or regulatory agency
or body or arbitrator in the United States or the States of
New York or Delaware;
(vii) The statements in the Prospectus under the
headings "Prospectus Summary -- The Offering", "Description of
Capital Stock," and "Certain Relationships and Related
Transactions," insofar as such statements purport to summarize
certain provisions of the Offering, the Company's authorized
and outstanding capital stock and certain agreements to which
the Company is a party, provide a fair summary of such
provisions of such agreements and instruments;
(viii) Neither the Company nor any of the
Subsidiaries is and, after giving effect to the offering and
sale of the Securities and the application of the proceeds
thereof as described in the Prospectus, will be an "investment
company" or a company "controlled by" or required to register
as an investment company as such terms are defined in the
Investment Company Act of 1940, as amended, and the rules and
regulations thereunder;
(ix) The statements in the Prospectus under the
caption "Certain Federal Income Tax Considerations" provide a
fair summary of the matters therein described; and
(x) Except for Securities included by Selling
Stockholders in the Registration Statement and for rights that
have been waived or have failed to be exercised in accordance
with the terms thereof, no holders of securities of the
Company have rights to require the registration of such
securities under the Registration Statement.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives of
the Company, representatives of the independent certified public
accountants of the Company and the Representatives and their
representatives, at which the contents of the Prospectus and the
Registration Statement and related matters were discussed and, although
such counsel has not undertaken to investigate or verify independently,
and do not assume any responsibility for, the accuracy, completeness or
fairness of the statements contained in the Registration Statement
(except as indicated above), on the basis of the foregoing, they have
no reason to believe that at the Effective Date or at the Execution
Time the Registration Statement contained or contains an untrue
statement of a material fact or omitted or omits to state
<PAGE> 20
-20-
a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading or that
the Prospectus as of its date and on the Closing Date included or
includes any untrue statement of a material fact or omitted or omits to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading
(except, in each case, such counsel need express no comment as to the
financial statements and related notes, the financial statement
schedules and other financial and statistical data included therein).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the laws of the State of New York, the general corporate laws of
the State of Delaware or the laws of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion of
other counsel of good standing whom they believe to be reliable and who
are satisfactory to Counsel for the Representatives, including
Goldberg, Godles, Wiener & Wright and (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the
Company and public officials.
All references in this Section 6(b) to the Prospectus shall be
deemed to include any amendment or supplement thereto at the Closing
Date. The opinion of such counsel shall be rendered to the Underwriters
at the request of the Company and shall so state therein.
(c) The Company shall have furnished to the Representatives
the opinion of Michael Katzenstein, Vice President and General Counsel
of the Company, dated the Closing Date, in form and substance
reasonably satisfactory to the Representatives, to the effect that:
(i) The Company has been duly incorporated and each
of the Company and the Subsidiaries is validly existing as a
corporation or limited partnership in good standing under the
laws of the jurisdiction in which it is organized, with full
power and authority to own its properties and conduct its
business as described in the Prospectus, and is duly qualified
to do business as a foreign corporation and is in good
standing under the laws of each jurisdiction which requires
such qualification wherein it owns or leases material
properties or conducts material business, except where the
failure be in good standing or to so qualify would not have a
Material Adverse Effect;
(ii) All the outstanding shares of capital stock of
the Company and each Subsidiary have been duly and validly
authorized and issued and are fully paid and nonassessable,
and all outstanding shares of capital stock of the
Sub-
<PAGE> 21
-21-
sidiaries are owned by the Company either directly or through
other Subsidiaries free and clear of any security interests,
liens or encumbrances;
(iii) The issuance, sale and delivery of the
Securities, the execution, delivery and performance by the
Company of this Agreement (in each case assuming due
authorization and execution by each party other than the
Company) and the consummation by the Company of the
transactions contemplated hereby and the compliance by the
Company with the terms of the foregoing do not, and, at the
Closing Date, will not, conflict with or constitute or result
in a breach or violation by the Company or any of the
Subsidiaries of (A) any provision of the Certificate of
Incorporation or By-laws of the Company or any of the
Subsidiaries, (B) any of the terms or provisions of, or
constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) by the Company or
any of the Subsidiaries, or give rise to any right to
accelerate the maturity or require the prepayment of any
indebtedness under, or result in the creation of imposition of
any lien, charge or encumbrance upon any property or assets of
the Company or any of the Subsidiaries under any material
agreements or instruments known to such counsel or (C) any
order, decree or judgment known to such counsel to be
applicable to the Company or any Subsidiary, of any court or
governmental or regulatory agency or body or arbitrator in the
United States or the States of New York or Delaware;
(iv) The statements in the Prospectus under the
headings "Risk Factors -- Risks Associated with Rights of
Entry", and "Business -- Legal Proceedings" fairly summarize
the legal matters therein described;
(v) To the knowledge of such counsel (no search of
court or administrative records having been made), no material
legal or governmental or regulatory proceedings (including
proceedings by or before the FCC) are pending to which the
Company or any of the Subsidiaries is a party or to which the
business of the Company or any of the Subsidiaries is subject
that is not described or reflected in the Registration
Statement or Prospectus as required, and no such proceedings
have been threatened against the Company or any of the
Subsidiaries or with respect to any of their assets; and there
is no material contract, agreement or other document not
described or referred to in the Registration Statement or
Prospectus;
(vi) To such counsel's knowledge (no search of court
or administrative records having been made), (i) no
application, action, complaint, investigation or proceeding is
pending or directly threatened that is likely to result in the
denial of any pending application for the renewal,
modification or assignment of any of the licenses, special
temporary authorizations, conditional li-
<PAGE> 22
-22-
censes, construction permits and other authorizations issued
by the FCC in favor of the Company and the Subsidiaries
(collectively, "FCC Authorizations") for the conduct of their
business as described in the Prospectus, and (ii) except for
proceedings of general applicability, there are no proceedings
or actions pending that could result in the revocation,
materially adverse modification or suspension of any of the
FCC Authorizations, the issuance of a cease and desist order,
or the imposition of any administrative or judicial sanction,
including but not limited to a monetary forfeiture, except in
each case as disclosed in the Prospectus or such as,
individually or in the aggregate, would not have a Material
Adverse Effect; and
(vii) To such counsel's knowledge, each FCC report,
registration, certification and notice required to be filed at
the FCC and relating to any of the FCC Authorizations or the
Company and the Subsidiaries, including but not limited to
annual Equal Employment Opportunity Reports, has been timely
filed, except as disclosed in the Prospectus or for such
reports the non-filing or failure to timely file of which
individually or in the aggregate would not have a Material
Adverse Effect.
In addition, such counsel shall state that he has no reason to
believe that at the Effective Date or at the Execution Time the
Registration Statement contained or contains an untrue statement of a
material fact or omitted or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading or that the Prospectus as of its
date and on the Closing Date included or includes any untrue statement
of a material fact or omitted or omits to state a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading (except, in
each case, such counsel need express no comment as to the financial
statements and related notes, the financial statement schedules and
other financial and statistical data included therein).
In rendering such opinion, such counsel may rely as to matters
involving the application of laws of any jurisdiction other than the
laws of the State of New York or the laws of the United States, to the
extent he deems proper and specified in such opinion, upon the opinion
of other counsel of good standing whom he believes to be reliable and
who are satisfactory to Counsel for the Underwriters.
All references in this Section 6(c) to the Prospectus shall be
deemed to include any amendment or supplement thereto at the Closing
Date. The opinion of such counsel shall be rendered to the Underwriters
at the request of the Company and shall so state therein.
<PAGE> 23
-23-
(d) The Company shall have furnished to the Underwriters the
opinion of Goldberg, Godles, Wiener & Wright, FCC counsel for the
Company, dated the Closing Date, in form and substance reasonably
satisfactory to the Representatives, to the effect that:
(i) To such counsel's knowledge, the Company and the
Subsidiaries are in compliance in all material respects with
each of the FCC Authorizations for the conduct of their
business as described in the Prospectus and all such FCC
Authorizations represent all FCC Authorizations necessary for
the conduct of the business of the Company and the
Subsidiaries as presently conducted and described in the
Prospectus;
(ii) To such counsel's knowledge, (i) except as set
forth on a schedule to such opinion letter, no application,
action or proceeding is pending for the renewal, modification
or assignment of any of the FCC Authorizations, (ii) no
application, action, complaint, investigation or proceeding is
pending or directly threatened that is likely to result in the
denial of any such application and (iii) except for
proceedings of general applicability, there are no proceedings
or actions pending that are likely to result in the
revocation, materially adverse modification or suspension of
any of the FCC Authorizations, the issuance of a cease and
desist order, or the imposition of any administrative or
judicial sanction, including but not limited to a monetary
forfeiture; and all renewal applications required to be filed
by the FCC's Rules have been filed;
(iii) To such counsel's knowledge, each FCC report,
registration, certification and notice required to be filed at
the FCC and relating to any of the FCC Authorizations or the
Company and the Subsidiaries, including but not limited to
annual Equal Employment Opportunity Reports, has been timely
filed, except for such reports the non-filing of which
individually or in the aggregate would not have a Material
Adverse Effect;
(iv) The execution, delivery and performance by the
Company of its obligations under this Agreement and the
transactions contemplated herein, did not or will not result
in a violation of the Communications Act, the Cable Acts and
the Telecommunications Act (each as defined in the
Registration Statement) or any order, rule or regulation of
the FCC;
(v) No consent, approval, authorization, order or
registration of or with the FCC is required under the
Communications Act, the Cable Acts, the Telecommunications Act
or the rules and regulations of the FCC for the execution and
delivery by the Company of, and the performance by the Company
of its obligations under, this Agreement;
<PAGE> 24
-24-
(vi) Other than matters described in the Prospectus
and except as to any other matters relating to the
multichannel television and telecommunications industries in
general, such counsel does not know of any proceedings
threatened or pending before the FCC against or involving the
properties, businesses or franchises of the Company which
could reasonably be expected to have a Material Adverse
Effect; and
(vii) The statements in the Prospectus under the
captions "Risk Factors -- Regulation", "--Risks Associated
with Telecommunications Strategy", "--Uncertainties Related to
the Availability of Radio Spectrum", "--Foreign Ownership
Restrictions" and "--Risks Associated with Rights of Entry"
and "Business -- Regulation" insofar as such statements
summarize applicable provisions of the Communications Act, the
Cable Acts and the Telecommunications Act and the published
orders, rules and regulations of the FCC promulgated
thereunder are accurate summaries in all material respects of
the provisions purported to be summarized under such captions
in the Prospectus; and the statutes and regulations summarized
in such captions are statutes and regulations enforced or
promulgated by the FCC that are material to the Company's
business as described in the Prospectus.
In rendering such opinion, such counsel may state that it
expresses no opinion with respect to any matters other than those
arising under the Communications Act, the Telecommunications Act and
the Cable Acts and the published rules and regulations promulgated
thereunder by the FCC, and may rely as to all matters of fact relevant
to such opinion on certificates and written statements of officers and
employees of the Company; provided, however, that all such certificates
and statements shall be satisfactory to the Representatives in all
material respects and attached to such counsel's opinion. In addition,
counsel may note that item (v) above is qualified by the requirement to
file certain corporate and loan instruments with the FCC within 30 days
of the Closing Date.
(e) Each Selling Stockholder shall have furnished to the
Representatives the opinion of counsel for such Selling Stockholder, in
each case dated the Closing Date and in form and substance reasonably
satisfactory to the Representatives.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the State of New York or Delaware or the Federal laws of the
United States, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the
Underwriters, and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Selling
Stockholders and public officials. The opinion of such
<PAGE> 25
-25-
counsel shall be rendered to the Underwriters at the request of the
Company and shall so state therein.
(f) The Representatives shall have received from Counsel for
the Underwriters, such opinion or opinions, dated the Closing Date and
addressed to the Representatives, with respect to the issuance and sale
of the Securities, the Registration Statement, the Prospectus (together
with any supplement thereto) and other related matters as the
Representatives may reasonably require, and the Company and each
Selling Stockholder shall have furnished to such counsel such documents
as they reasonably request for the purpose of enabling them to pass
upon such matters. The opinion or opinions of such counsel shall be
rendered to the Underwriters at the request of the Company and shall so
state therein.
(g) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the
Prospectus, any supplements to the Prospectus and this Agreement and
that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date and the Company has complied with
all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing
Date;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse effect
on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set
forth in or contemplated in the Prospectus (exclusive of any
supplement thereto).
<PAGE> 26
-26-
(h) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by an authorized officer,
partner, trustee or similar person of such Selling Stockholder (or by
such Selling Stockholder if any individual), dated the Closing Date, to
the effect that the signer of such certificate have carefully examined
the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that the representations and
warranties of such Selling Stockholder in this Agreement are true and
correct in all material respects on and as of the Closing Date to the
same effect as if made on the Closing Date.
(i) At the Execution Time and at the Closing Date, Deloitte &
Touche LLP shall have furnished to the Representatives a letter or
letters, dated respectively as of the Execution Time and as of the
Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants
within the meaning of the Act and the Exchange Act and the applicable
published rules and regulations thereunder and Rule 101 of the Code of
Professional Conduct of the American Institute of Certified Public
Accountants ("AICPA") and containing statements and information of the
type ordinarily included in accountants' "comfort letters" to
Representatives with respect to financial statements and certain
financial information contained in the Prospectus, in form and
substance satisfactory to Counsel for the Underwriters.
Deloitte & Touche LLP shall have also furnished to the
Representatives a letter stating that the Company's system of internal
accounting controls taken as a whole is sufficient to meet the broad
objectives of internal accounting control insofar as those objectives
pertain to the prevention or detection of errors or irregularities in
amounts that would be material in relation to the financial statements
of the Company and its subsidiaries.
All references in this Section 6(i) to the Registration
Statement shall be deemed to include any amendment or supplement
thereto at the date of the letter.
(j) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change or
decrease specified in the letter or letters referred to in paragraph
(i) of this Section 6 or (ii) any change, or any development involving
a prospective change, in or affecting the condition (financial or
otherwise), earnings, business or properties of the Company and its
subsidiaries taken as a whole, whether or not arising from transactions
in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto)
the effect of which, in
<PAGE> 27
-27-
any case referred to in clause (i) or (ii) above, is, in the sole
judgment of the Representatives, so material and adverse as to make it
impractical or inadvisable to proceed with the offering or delivery of
the Securities as contemplated by the Registration Statement (exclusive
of any amendment thereof) and the Prospectus (exclusive of any
supplement thereto).
(k) The Securities shall have been approved for listing and
admitted and authorized for trading on the Nasdaq National Market, and
satisfactory evidence of such actions shall have been provided to the
Representatives.
(l) At the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A
hereto from each officer and director of the Company and each of the
stockholders listed on Schedule III hereto addressed to the
Representatives.
(m) Prior to or simultaneously with the Closing Date, (i) the
Company shall have effected a 5:1 stock split of the Common Stock; and
(ii) all outstanding shares of Class C Common of the Company shall have
converted into shares of Common Stock.
(n) Prior to or simultaneously with the Closing Date, the
Company, VPC and GVL shall have entered into the Conversion and
Exchange Agreement (as defined in the Prospectus) in form and substance
satisfactory to the Representatives, pursuant to which (i) all the
Series A Preferred Stock will be converted into Class B Common, (ii)
all the Class B Common issuable upon conversion of the Series A
Preferred Stock and all other Class B Common held by VPC and GVL will
be converted into shares of Common Stock. Such Conversion and Exchange
Agreement shall be in full force and effect without waiver of any term
thereof.
(o) Prior to the Closing Date, the Company and the Selling
Stockholders shall have furnished to the Representatives such further
information, certificates and documents as the Representatives may
reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be cancelled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company and
each Selling Stockholder in writing or by telephone or facsimile confirmed in
writing.
<PAGE> 28
-28-
The several obligations of the Underwriters to purchase Option
Securities hereunder are subject to the satisfaction on and as of any Option
Closing Date of the conditions set forth in this Section 6, except that, if any
Option Closing Date is other than the Closing Date, the certificates, opinions
and letters referred to in paragraphs (b) through (k) and paragraphs (m) and (n)
shall be dated the Option Closing Date in question and the opinions called for
shall be revised to reflect the sale of Option Securities.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or any Selling
Stockholder to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally through Salomon Smith Barney Inc. on demand
for all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the proposed
purchase and sale of the Securities. If the Company is required to make any
payments to the Underwriters under this Section 7 because of any Selling
Stockholder's refusal, inability or failure to satisfy any condition to the
obligations of the Underwriters set forth in Section 6, the Selling Stockholders
pro rata in proportion to the percentage of Securities to be sold by each shall
reimburse the Company on demand for all amounts so paid.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter, the directors, officers,
employees and agents of each Underwriter and each person who controls
any Underwriter within the meaning of either the Act or the Exchange
Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the
Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the
registration of the Securities as originally filed or in any amendment
thereof, or in any Preliminary Prospectus or the Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and agrees to reimburse each such indemnified
party, as incurred, for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company
will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in
<PAGE> 29
-29-
conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representatives specifically for
inclusion therein and provided further, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon any such untrue statement
or alleged untrue statement or omission or alleged omission made in the
Preliminary Prospectus which is corrected or contained, as the case may
be, in the Prospectus and the Underwriters through the Representatives
fail to deliver the Prospectus. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Selling Stockholder severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers
who signs the Registration Statement, each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person who
controls the Company or any Underwriter within the meaning of either
the Act or the Exchange Act and each other Selling Stockholder, if any,
to the same extent as the foregoing indemnity from the Company to each
Underwriter, but only with reference to written information furnished
to the Company by or on behalf of such Selling Stockholder specifically
for inclusion in the documents referred to in the foregoing indemnity.
Notwithstanding any other provision herein, the expense reimbursement
and indemnification liability of each Selling Stockholder hereunder
shall be limited to the amount equal to the net proceeds received by
such Selling Stockholder from the public offering of the Common Stock
sold by such Selling Stockholder to the Underwriters. This indemnity
agreement will be in addition to any liability which any Selling
Stockholder may otherwise have.
(c) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of
its officers who signs the Registration Statement, and each person who
controls the Company within the meaning of either the Act or the
Exchange Act and each Selling Stockholder, to the same extent as the
foregoing indemnity to each Underwriter, but only with reference to
written information relating to such Underwriter furnished to the
Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to
any liability which any Underwriter may otherwise have. The Company and
each Selling Stockholder acknowledge that the statements set forth in
the last paragraph of the cover page regarding delivery of the
Securities and the last four paragraphs under the heading
"Underwriting" and the sentences related to concessions and reallowance
under the heading "Underwriting" in any Preliminary Prospectus and the
Prospectus constitute the only information furnished in writing by or
on behalf of the several Underwriters for inclusion in any Preliminary
Prospectus or the Prospectus.
<PAGE> 30
-30-
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party
in writing of the commencement thereof; but the failure so to notify
the indemnifying party (i) will not relieve it from liability under
paragraph (a), (b) or (c) above unless and to the extent it did not
otherwise learn of such action and such failure results in the
forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from
any obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a), (b) or (c) above. The
indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to
represent the indemnified party in any action for which indemnification
is sought (in which case the indemnifying party shall not thereafter be
responsible for the fees and expenses of any separate counsel retained
by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be reasonably satisfactory
to the indemnified party. Notwithstanding the indemnifying party's
election to appoint counsel to represent the indemnified party in an
action, the indemnified party shall have the right to employ one
additional and separate counsel (including one additional and separate
local counsel), and the indemnifying party shall bear the reasonable
fees, costs and expenses of such separate counsel (including local
counsel) if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a
conflict of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those
available to the indemnifying party, (iii) the indemnifying party shall
not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice
of the institution of such action or (iv) the indemnifying party shall
authorize the indemnified party to employ separate counsel at the
expense of the indemnifying party. An indemnifying party will not,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of
which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes
an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a),
(b) or (c) of this Section 8 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, the Company, the Selling
Stockholders and the Underwriters agree to con-
<PAGE> 31
-31-
tribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection
with investigating or defending same) (collectively "Losses") to which
the Company, one or more of the Selling Stockholders and one or more of
the Underwriters may be subject in such proportion as is appropriate to
reflect the relative benefits received by the Company, by the Selling
Stockholders and by the Underwriters from the offering of the
Securities; provided, however, that in no case shall any Underwriter
(except as may be provided in any agreement among underwriters relating
to the offering of the Securities) be responsible for any amount in
excess of the underwriting discount or commission applicable to the
Securities purchased by such Underwriter hereunder. If the allocation
provided by the immediately preceding sentence is unavailable for any
reason, the Company, the Selling Stockholders and the Underwriters
shall contribute in such proportion as is appropriate to reflect not
only such relative benefits but also the relative fault of the Company,
of the Selling Stockholders and of the Underwriters in connection with
the statements or omissions which resulted in such Losses as well as
any other relevant equitable considerations. Benefits received by the
Company and by the Selling Stockholders shall be deemed to be equal to
the total net proceeds from the offering (before deducting expenses)
received by each of them, and benefits received by the Underwriters
shall be deemed to be equal to the total underwriting discounts and
commissions, in each case as set forth on the cover page of the
Prospectus. Relative fault shall be determined by reference to, among
other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information provided by the Company, the Selling
Stockholders on the one hand or the Underwriters on the other, the
intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such untrue statement
or omission. The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution were
determined by pro rata allocation or any other method of allocation
which does not take account of the equitable considerations referred to
above. Notwithstanding the provisions of this paragraph (e), no person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an Underwriter within the
meaning of either the Act or the Exchange Act and each director,
officer, employee and agent of an Underwriter shall have the same
rights to contribution as such Underwriter, and each person who
controls the Company within the meaning of either the Act or the
Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the
same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (e).
<PAGE> 32
-32-
9. Default by an Underwriter. If any one or more Underwriters
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter, the
Selling Stockholders or the Company. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding five Business Days, as the Representatives shall
determine in order that the required changes in the Registration Statement and
the Prospectus or in any other documents or arrangements may be effected.
Nothing contained in this Agreement shall relieve any defaulting Underwriter of
its liability, if any, to the Company, the Selling Stockholders and any
nondefaulting Underwriter for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if prior to
such time (i) trading in the Company's Common Stock shall have been suspended by
the SEC or the Nasdaq National Market or trading in securities generally on the
New York Stock Exchange or the Nasdaq National Market shall have been suspended
or limited or minimum prices shall have been established on either such Exchange
or National Market, (ii) a banking moratorium shall have been declared either by
Federal or New York State authorities or (iii) there shall have occurred any
outbreak or escalation of hostilities, declaration by the United States of a
national emergency or war or other calamity or crisis the effect of which on
financial markets is such as to make it, in the sole judgment of the
Representatives, impractical or inadvisable to proceed with the offering or
delivery of the Securities as contemplated by the Prospectus (exclusive of any
supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Stockholder and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
any Selling Stockholder or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive delivery
of and
<PAGE> 33
-33-
payment for the Securities. The provisions of Sections 7 and 8 hereof shall
survive the termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telefaxed to the Salomon Smith Barney Inc., General
Counsel, Investment Banking Division (fax no.: (212) 816-7912) and confirmed to
the General Counsel, Investment Banking Division at Salomon Smith Barney Inc.,
at 388 Greenwich Street, New York, New York 10013, Attention: General Counsel;
or, if sent to the Company, will be mailed, delivered or telefaxed to OpTel,
Inc., 1111 W. Mockingbird Lane, Dallas, Texas 75247, Attention: Michael
Katzenstein, Vice President, Legal Affairs and General Counsel, with a copy to
Ralph J. Sutcliffe, Esq., at Kronish Lieb Weiner & Hellman LLP, 1114 Avenue of
the Americas, New York, New York 10036-7798; or if sent to any Selling
Stockholder, will be mailed, delivered or telefaxed and confirmed to it at the
address set forth in Schedule II hereto.
13. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. APPLICABLE LAW. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW THEREOF.
15. Counterparts. This Agreement may be executed in one or
more counterparts, each of which will be deemed to be an original, but all such
counterparts will together constitute one and the same instrument.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the SEC promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in The City
of New York.
<PAGE> 34
-34-
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments
thereto and any Rule 462(b) Registration Statement became or become
effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the SEC promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(i)(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(i)(a) above, including exhibits and
financial statements, as amended at the Execution Time (or, if not
effective at the Execution Time, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto or
any Rule 462(b) Registration Statement becomes effective prior to the
Closing Date, shall also mean such registration statement as so amended
or such Rule 462(b) Registration Statement, as the case may be. Such
term shall include any Rule 430A Information deemed to be included
therein at the Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from
the Registration Statement when it becomes effective pursuant to Rule
430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the initial registration statement.
[Signature Pages Follow]
<PAGE> 35
S-1
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company, the several Underwriters and the Selling Stockholders.
Very truly yours,
OpTel, Inc.
By:
----------------------------------------
Name:
Title:
By:
----------------------------------------
Name:
Title:
Attorney-in-Fact for the Selling Stockholders
By:
----------------------------------------
Name: Michael E. Katzenstein
Title: Attorney-in-Fact
<PAGE> 36
S-2
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Smith Barney Inc.
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
CIBC World Markets Corp.
By: Salomon Smith Barney Inc.
By:
------------------------------------
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
<PAGE> 37
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITTEN
UNDERWRITERS SECURITIES TO BE PURCHASED
- ------------ --------------------------
<S> <C>
Salomon Smith Barney Inc.
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
CIBC World Markets Corp.
--------------------------
Total...........................
==========================
</TABLE>
<PAGE> 38
SCHEDULE II
<TABLE>
<CAPTION>
NUMBER OF UNDERWRITTEN
SELLING STOCKHOLDERS: SECURITIES TO BE SOLD
- --------------------- ----------------------
<S> <C>
[name]
[address, fax no.]................................
[name]
[address, fax no.]................................
----------------------
Total...........................
======================
</TABLE>
<PAGE> 39
SCHEDULE III
STOCKHOLDERS FURNISHING LOCK-UP AGREEMENTS
Le Groupe Videotron Ltee
Caisse de depot et placement du Quebec
[others to come]
<PAGE> 40
[FORM OF LOCK-UP AGREEMENT] EXHIBIT A
[LETTERHEAD OF OFFICER, DIRECTOR OR MAJOR STOCKHOLDER OF CORPORATION]
OpTel, Inc.
Public Offering of Common Stock
, 1999
Salomon Smith Barney Inc.
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
CIBC Oppenheimer Corp.
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Underwriting Agreement (the "Underwriting Agreement"), among OpTel,
Inc., a Delaware corporation (the "Company"), the selling stockholders named
therein and each of you as representative[s] of a group of Underwriters named
therein, relating to an underwritten public offering of Class A Common Stock,
$0.01 par value per share (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter
into the Underwriting Agreement, the undersigned will not, without the prior
written consent of Smith Barney Inc., offer, sell, contract to sell, pledge or
otherwise dispose of, or file (or participate in the filing of) a registration
statement with the Securities and Exchange Commission in respect of, or
establish or increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Securities Exchange
Act of 1934, as amended, and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder with respect to, any shares of
capital stock of the Company or any securities convertible into or exercisable
or exchangeable for such capital stock, or publicly announce an intention
<PAGE> 41
-2-
to effect any such transaction, for a period of 180 days after the date of this
Agreement, other than (i) shares of Common Stock disposed of as bona fide gifts
provided the transferee agrees to be bound by the terms hereof, (ii) shares of
Common Stock acquired in the public market after the consummation of the
Offering and (iii) transfers to affiliates of the undersigned provided that such
affiliate transferee agrees to be bound by the terms hereof.
If for any reason the Underwriting Agreement shall be
terminated prior to the Closing Date (as defined in the Underwriting Agreement),
the agreement set forth above shall likewise be terminated.
Yours very truly,
[ ]
By:
-----------------------------------
Name:
Title:
Address:
<PAGE> 1
EXHIBIT 3.1(a)
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
OPTEL, INC.
--------------------
Under Section 245 of the
General Corporation Law
--------------------
The undersigned DOES HEREBY CERTIFY as follows:
I. The name of the Corporation is OPTEL, INC. (the
"Corporation").
II. The date of filing of the Corporation's original
Certificate of Incorporation with the Secretary of State of the State of
Delaware was July 1, 1994. A Restated Certificate of Incorporation of the
Corporation (the "Restated Certificate of Incorporation") was filed with the
Secretary of State of the State of Delaware on December 19, 1994.
III. The Restated Certificate of Incorporation, as heretofore
amended, of the Corporation is amended hereby to increase the total number of
authorized shares of the Corporation by increasing (i) the total number of
shares of the Corporation's Class A Common Stock, par value $.01 per share (the
"Class A Common Stock"), from 8,000,000 shares to 180,000,000 shares, (ii) the
total number of shares of the Corporation's Class B Common Stock, par value $.01
per share (the "Class B Common Stock"), from 6,000,000 shares to 60,000,000
shares, (iii) the total number of shares of the Corporation's Class C Common
Stock, par value $.01 per share (the "Class C Common Stock"), from 300,000 to
3,000,000, and (iv) the total number of shares of the Corporation's Preferred
Stock, par value $.01 per share, from 1,000,000 shares to 10,000,000 shares, as
set forth in the Amended and Restated Certificate of Incorporation, which is
attached hereto as Exhibit A, along with the Certificates of Designation of
Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative
Rights of the Corporation's 9.75% Series A Preferred Stock, par value $.01 per
<PAGE> 2
share, and the Corporation's 8% Series B Preferred Stock, par value $.01 per
share, respectively.
IV. This Amended and Restated Certificate of Incorporation was
duly adopted by the Board of Directors and authorized by written consent of the
Corporation's stockholders pursuant to Sections 228 and 242 of the General
Corporation Law of the State of Delaware and is effective as of __________, 1999
at ___ P.M. Delaware time.
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation of the Corporation has been signed, and the statements made herein
affirmed as true under the penalties of perjury, this ___ day of _____, 1999.
ATTEST:
- ---------------------- -----------------------
Michael E. Katzenstein Louis Brunel
Secretary President
2
<PAGE> 3
EXHIBIT A
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
OPTEL, INC.
a Delaware corporation
ONE: The name of the Corporation is: OpTel, Inc. (the "Corporation").
TWO: The address of the Corporation's registered office in the State of
Delaware shall be 15 East North Street, in the City of Dover, County of Kent,
State of Delaware 19901. The name of the Corporation's registered agent in the
State of Delaware is United Corporate Services, Inc.
THREE: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the Delaware General Corporation Law (the "DGCL").
FOUR: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is two hundred fifty three million
(253,000,000) shares divided into the following classes:
(i) One hundred eighty million (180,000,000) shares of Class A
Common Stock, par value of one cent ($.01) per share (hereinafter referred to as
"Class A Common Stock");
(ii) Sixty million (60,000,000) shares of Class B Common
Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class
B Common Stock");
(iii) Three million (3,000,000) shares of Class C Common
Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class
C Common Stock"); and
(iv) Ten million (10,000,000) shares of Preferred Stock, par
value of one cent ($.01) per share (hereinafter referred to as "Preferred
Stock").
A-1
<PAGE> 4
The Corporation's Class A Common Stock, Class B Common
Stock and Class C Common Stock are referred to hereinafter
collectively as the "Common Stock".
A. Powers and Rights of Holders of Class A Common Stock, Class
B Common Stock and Class C Common Stock.
1. Except as stated in Sections 2 and 3 of this Subpart A of
Article FOUR, the Class A Common Stock, Class B Common Stock and Class C Common
Stock shall be identical in all respects and shall have equal powers,
preferences, rights and privileges.
2. Except as may be otherwise required by law, and subject to
the provisions of any series of Preferred Stock at the time outstanding, the
holders of the Class A Common Stock and the Class B Common Stock issued and
outstanding shall have and possess the exclusive right to notice of
stockholders' meetings and the exclusive voting rights and powers, whether at a
meeting of stockholders or in connection with any action taken by written
consent. Except as otherwise may be required by law, the holders of Class C
Common Stock are not entitled to notice of, or to vote at, stockholders'
meetings or in connection with any action taken by written consent.
3. Each holder of the Class A Common Stock issued and
outstanding shall be entitled to one (1) vote for each share of Class A Common
Stock registered in such holder's name on the books of the Corporation, and each
holder of the Class B Common Stock issued and outstanding shall be entitled to
ten (10) votes for each share of Class B Common Stock registered in such
holder's name on the books of the Corporation. Except as may be otherwise
required by law, the holders of the Class A Common Stock and Class B Common
Stock shall vote together as a single class.
4. Any direct or indirect transfer of issued and outstanding
shares of Class B Common Stock other than to a Permitted Transferee (as defined
herein) shall result in the automatic conversion of the shares of Class B Common
Stock being transferred into a like number of shares of Class A Common Stock. No
purported transfer of shares of Class B Common Stock shall be effective unless
and until the transferor has surrendered to the Corporation, at its office or
agency maintained for that purpose, the certificates representing the shares of
Class B Common Stock to be transferred, which certificates shall be duly
endorsed or accompanied by executed stock powers, with the signatures
appropriately guaranteed. All such certificates shall be accompanied by written
notice of the holder's intention to transfer the shares, including a statement
of the number of shares of Class B Common Stock to be transferred and, if
A-2
<PAGE> 5
applicable, converted and the name or names and address or addresses in which
the certificate or certificates for shares of Class B Common Stock or Class A
Common issuable upon such conversion Stock, as the case may be, shall be issued
and, if required, funds for the payment of any applicable transfer taxes. The
Corporation, as soon as practicable thereafter, will deliver at said office to
the transferee of converted shares of Class B Common Stock, or to any nominee or
designee of such transferee, a certificate or certificates for the number of
full shares of Class A Common Stock issuable upon such conversion and, in the
event that the transferor is transferring less than the aggregate number of
shares represented by the certificates surrendered, a certificate or
certificates for the number of full shares of Class B Common Stock not being
transferred. Shares of Class B Common Stock shall be deemed to have been
converted as of the date of the surrender of the shares for transfer to a
non-Permitted Transferee and conversion as hereinbefore provided, and the person
or persons in whose name Class A Common Stock is issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such Class
A Common Stock on such date. Shares of Class B Common Stock so converted shall
be returned to the status of authorized and unissued shares of Class B Common
Stock. The Corporation shall at all times reserve for issuance a number of
shares of Class A Common Stock (which may include Class A Common Stock held by
the Corporation as treasury stock) which shall be sufficient for issuance upon
conversion of all of the then outstanding Class B Common Stock pursuant to this
Section 4 or otherwise. The Corporation as a condition to the transfer or the
registration of transfer of shares of Class B Common Stock to a purported
Permitted Transferee, may require the furnishing of such affidavits or other
proof as it reasonably deems necessary to establish that such transferee is a
Permitted Transferee. For purposes hereof (1) "Permitted Transferee" shall mean
a Person who acquires shares of Class B Common Stock otherwise than in a
transaction (a) on a securities exchange or public quotation system, whether or
not registered as such under the Securities and Exchange Act of 1934, as amended
(or any successor statute (the "Exchange Act"), (b) effected to or through a
Person acting as a broker or dealer (whether or not registered as such under the
Exchange Act or any foreign system of registration or regulation), (c) pursuant
to a registration statement under the Securities Act of 1933, as amended (or any
successor or similar rule) (the "Securities Act"), or (e) that is (or if it
occurred in the United States, would be) required to be registered under the
Securities Act; (2) "Affiliate " shall mean, with respect to any Person, another
Person directly or indirectly controlling, controlled by, or under direct or
indirect common control with, such Person, provided, however, that no employee
of the Corporation or any of its subsidiaries shall be deemed to be an Affiliate
solely by reason of his or her capacity as an employee, or by reason of any
employment agreement; and (3)
A-3
<PAGE> 6
"Person" shall mean and include an individual, a partnership, a limited
liability company, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof. All
certificates evidencing shares of Class B Common Stock shall be endorsed with a
legend making appropriate reference to the foregoing provisions regarding
automatic conversion.
5. Each holder of Class B Common Stock issued and outstanding
shall be entitled, at such holder's option, to convert shares of Class B Common
Stock registered on the books of the Corporation in such holder's name into a
like number of shares of Class A Common Stock. If VPC Corporation ("VPC") and
its Affiliates shall at any time elect to convert all of the shares of Class B
Common Stock then issued and outstanding and held by them into shares of Class A
Common Stock, whether by transfer pursuant to Section 4 or by conversion
pursuant to this Section 5, all of the other shares of Class B Common Stock
issued and outstanding as of the date of such conversion shall be automatically
converted into shares of Class A Common Stock on a share for share basis and
shall otherwise cease to be outstanding, effective as of the date of such
transfer and/or conversion by VPC and its Affiliates. All Persons registered as
holders of shares of Class B Common Stock on the date of such conversion shall
be treated for all purposes as the record holders of an equal number of shares
of Class A Common Stock on such date. The Corporation, as soon as practicable
thereafter, will deliver to each of the holders of the shares of Class B Common
Stock converted into shares of Class A Common Stock a certificate or
certificates for the Class A Common Stock against receipt from such holder of
the certificate theretofore representing an equal number of shares of Class B
Common Stock. Shares of Class B Common Stock so converted shall be returned to
the status of authorized and unissued shares of Class B Common Stock. Pending
delivery of certificates for shares of Class A Common Stock after such
conversion, certificates for shares of Class B Common Stock so converted shall
be deemed to be certificates for an equal number of shares of Class A Stock.
6. Upon any sale of Common Stock of the Corporation pursuant
to a registration statement under the Securities Act, or any registration of
Common Stock of the Corporation pursuant to the Exchange Act, the shares of
Class C Common Stock automatically will be converted into an equal number of
shares of Class A Common Stock or such other class of common equity securities
of the Corporation that is registered with the Securities and Exchange
Commission or is listed on a national securities exchange or otherwise subject
to registration under the Exchange Act (the "Conversion Shares"), provided the
terms thereof are no less favorable to holders thereof than were the terms of
the shares of Class C Common Stock. The Corporation
A-4
<PAGE> 7
shall at all times reserve for issuance sufficient shares of Class A Common
Stock (which may include Class A Common Stock held by the Corporation as
treasury stock) or such other common equity securities, for issuance upon
conversion of the Class C Common Stock. The Corporation, as soon as practicable
thereafter, will deliver to the holder of the Class C Common Stock converted
into the Conversion Shares a certificate or certificates for the Conversion
Shares against receipt from such holder of the certificate theretofore
representing an equal number of shares of Class C Common Stock. Shares of Class
C Common Stock so converted shall be returned to the status of authorized and
unissued shares of Class C Common Stock.
7. Dividends may be paid to the holders of the Class A Common
Stock, Class B Common Stock and Class C Common Stock, as and when declared by
the Board of Directors, out of any funds of the Corporation legally available
for the payment of such dividends. If and when dividends on the Class A Common
Stock, Class B Common Stock and Class C Common Stock are declared from time to
time by the Board of Directors, whether payable in cash, in property or in
shares of stock of the Corporation, the holders of the Class A Common Stock,
Class B Common Stock and Class C Common Stock shall be entitled to share
equally, on a per share basis, in such dividends. If shares of Class B Common
Stock are paid on Class B Common Stock and shares of Class A Common Stock are
paid on Class A Common Stock and shares of Class C Common Stock are paid on
Class C Common Stock, in an equal amount per share of Class B Common Stock and
Class A Common Stock and Class C Common Stock in proportionate amounts, such
payment will be deemed to be a like dividend or other distribution.
8. Subject to the provisions of any series of Preferred Stock
at the time outstanding, upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the net assets of the Corporation
shall be distributed to the holders of the Class A Common Stock, Class B Common
Stock and Class C Common Stock, on a pro rata basis, based on the number of
shares held by each such holder, without regard to class.
9. If the Corporation shall in any manner split, subdivide,
combine or reclassify any outstanding shares of a class of Common Stock, the
outstanding shares of the other classes of Common Stock shall be proportionately
split, subdivided, combined or reclassified in the same manner and on the same
basis as the outstanding shares of the class of Common Stock that have been
split, subdivided, combined or reclassified, unless a different basis has been
consented to by the holders of a majority of the outstanding shares of the Class
A Common Stock or Class B Common Stock, as applicable, or two-thirds of the
A-5
<PAGE> 8
outstanding shares of Class C Common Stock, to the extent any such class would
be adversely affected by such action.
Subject to the conversion rights of holders of Class C Common
Stock, in the event of any corporate merger, consolidation, purchase or
acquisition of property or stock or other reorganization in which any
consideration is to be received by the holders of Class B Common Stock or the
holders of Class A Common Stock, the holders of Class C Common Stock will
receive the same consideration on a per share basis, except that, if such
consideration shall consist in any part of voting securities (or of options or
warrants to purchase voting securities, or of securities convertible into or
exchangeable for voting securities), (i) the holders of Class B Common Stock may
receive, on a per share basis, voting securities with ten times the number of
votes per share as those voting securities to be received by the holders of
Class A Common Stock (or options or warrants to purchase, or securities
convertible into or exchangeable for voting securities with ten times the number
of votes per share as those voting securities issuable upon the exercise of the
options or warrants, or into which the convertible or exchangeable securities
may be converted or exchanged, received by the holders of Class A Common Stock)
and (ii) the holders of the Class C Common Stock may receive, on a per share
basis, non-voting securities (or options or warrants to purchase non-voting
securities or securities convertible into or exchangeable for non-voting
securities).
B. Preferred Stock. The Board of Directors is authorized,
subject to any limitations prescribed by law, to provide for the issuance of the
shares of Preferred Stock in one or more series, and by filing a certificate
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof. The number of
authorized shares of Preferred Stock may be increased or decreased (but not
below the number of shares thereof then outstanding) by the approval of a
majority of the votes entitled to be cast by the holders of the Common Stock,
without a vote of the holders of the Preferred Stock, or of any series thereof,
unless a vote of any such holders is required pursuant to the certificate or
certificates establishing the series of Preferred Stock.
FIVE: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A-6
<PAGE> 9
A. The business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors. In addition to
the powers and authority expressly conferred upon them by the DGCL or by this
Amended and Restated Certificate of Incorporation or the Bylaws of the
Corporation, the directors are hereby empowered to exercise all such powers and
do all such acts and things as may be exercised or done by the Corporation.
B. The Board of Directors may adopt, amend or repeal
the Bylaws of the Corporation.
C. Election of directors need not be by written
ballot.
SIX: The officers of the Corporation shall be chosen in such a manner,
shall hold their offices for such terms and shall carry out such duties as are
determined solely by the Board of Directors, subject to the right of the Board
of Directors to remove any officer or officers at any time with or without
cause.
SEVEN: No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty by such a director as a director. Notwithstanding the foregoing sentence, a
director shall be liable to the extent provided by applicable law (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
DGCL or (iv) for any transaction from which such director derived an improper
personal benefit. This Article SEVEN is also contained in Article VIII, Section
1 of the Corporation's Bylaws. No amendment to or repeal of this Article SEVEN
shall apply to or have any effect on the liability or alleged liability of any
director of the Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal. If the DGCL is amended
hereafter to further eliminate or limit the personal liability of directors, the
liability of a director of the Corporation shall be limited or eliminated to the
fullest extent permitted by the DGCL, as amended.
EIGHT: A. Right to Indemnification. Each person who was or is made a
party to or is threatened to be made a party to or is involuntarily involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that he or she is or was a
director or officer of the Corporation, or is or was serving (during his or her
tenure as director and/or officer) at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture,
A-7
<PAGE> 10
trust or other enterprise, whether the basis of such Proceeding is an alleged
action or inaction in an official capacity as a director or officer or in any
other capacity while serving as a director or officer, shall be indemnified and
held harmless by the Corporation to the fullest extent authorized by the DGCL
(or other applicable law), as the same exists or may hereafter be amended,
against all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection with
such Proceeding. Such director or officer shall have the right to be paid by the
Corporation for expenses incurred in defending any such Proceeding in advance of
its final disposition; provided, however, if the DGCL (or other applicable law)
requires, the payment of such expenses in advance of the final disposition of
any such Proceeding shall be made only upon receipt by the Corporation of an
undertaking by or on behalf of such director or officer to repay all amounts so
advanced if it should be determined ultimately that he or she is not entitled to
be indemnified under this Article EIGHT or otherwise.
B. Right of Claimant to Bring Suit. If a claim under
paragraph A of this Article EIGHT is not paid in full by the Corporation within
ninety (90) days after a written claim has been received by the Corporation, the
claimant may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim, together with interest thereon, and, if
successful in whole or in part, the claimant shall also be entitled to be paid
the expense of prosecuting such claim, including reasonable attorneys' fees
incurred in connection therewith. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any Proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the Corporation) that the
claimant has not met the standards of conduct which make it permissible under
the DGCL (or other applicable law) for the Corporation to indemnify the claimant
for the amount claimed, but the burden of proving such defense shall be on the
Corporation. Neither the failure of the Corporation (or of its full Board of
Directors, its directors who are not parties to the Proceeding with respect to
which indemnification is claimed, its stockholders, or independent legal
counsel) to have made a determination prior to the commencement of such action
that indemnification of the claimant is proper in the circumstances because he
or she has met the applicable standard of conduct set forth in the DGCL (or
other applicable law), nor an actual determination by any such person or persons
that such claimant has not met such applicable standard of conduct, shall be a
defense to such action or create a presumption that the claimant has not met the
applicable standard of conduct.
A-8
<PAGE> 11
C. Non-Exclusivity of Rights. The rights conferred by
this Article EIGHT shall not be exclusive of any other right which any director,
officer, representative, employee or other agent may have or hereafter acquire
under the DGCL or any other statute, or any provision contained in the
Corporation's Amended and Restated Certificate of Incorporation or Bylaws, or
any agreement, or pursuant to a vote of stockholders or disinterested directors,
or otherwise.
D. Insurance and Trust Fund. In furtherance and not
in limitation of the powers conferred by statute:
(1) the Corporation may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Corporation would
have the power to indemnify him or her against such liability under the
provisions of law; and
(2) the Corporation may create a trust fund,
grant a security interest and/or use other means (including, without limitation,
letters of credit, surety bonds and/or other similar arrangements), as well as
enter into contracts providing indemnification to the fullest extent permitted
by law and including as part thereof provisions with respect to any or all of
the foregoing, to ensure the payment of such amount as may become necessary to
effect indemnification as provided therein, or elsewhere.
E. Indemnification of Employees and Agents of the
Corporation. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification, including the right to
be paid by the Corporation the expenses incurred in defending any Proceeding in
advance of its final disposition, to any employee or agent of the Corporation to
the fullest extent of the provisions of this Article or otherwise with respect
to the indemnification and advancement of expenses of directors and officers of
the Corporation.
F. Amendment. This Article EIGHT is also contained in
Article VIII, Sections 2 through 7, of the Corporation's Bylaws. Any repeal or
modification of this Article EIGHT shall not change the rights of any officer or
director to indemnification with respect to any action or omission occurring
prior to such repeal or modification.
A-9
<PAGE> 12
NINE: The Corporation reserves the right to alter, amend, rescind or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred on stockholders herein are granted subject to this reservation.
A-10
<PAGE> 13
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:
A-11
<PAGE> 14
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 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
A-12
<PAGE> 15
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.
(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
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<PAGE> 16
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.
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<PAGE> 17
(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 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
A-15
<PAGE> 18
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 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
A-16
<PAGE> 19
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
A-17
<PAGE> 20
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.
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;
A-18
<PAGE> 21
(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> 22
(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.
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<PAGE> 23
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.
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,
A-21
<PAGE> 24
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
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<PAGE> 25
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.
"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
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<PAGE> 26
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.
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<PAGE> 27
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 Company, 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
Company or the holders of shares of such series into shares of Class A Common
Stock of the Company (the "Class A Common Stock") at a conversion price equal to
the price at which shares of Class A Common Stock of the Company are first
offered to the public in an initial underwritten public offering by the Company,
having such voting
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<PAGE> 28
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 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
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<PAGE> 29
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.
(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
A-27
<PAGE> 30
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
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<PAGE> 31
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 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.
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<PAGE> 32
(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 by such holder, plus accrued
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<PAGE> 33
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
A-31
<PAGE> 34
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 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
A-32
<PAGE> 35
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-33
<PAGE> 36
(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:
(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.
A-34
<PAGE> 37
(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 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.
A-35
<PAGE> 38
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
A-36
<PAGE> 39
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 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.
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<PAGE> 40
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.
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.
A-38
<PAGE> 41
"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.
A-39
<PAGE> 1
EXHIBIT 3.2(a)
- -------------------------------------------------------------------------------
OPTEL, INC.
AMENDED AND RESTATED BYLAWS
- -------------------------------------------------------------------------------
(Amended and Restated as of _________ ___, 1999)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I OFFICES.........................................................................................1
Section 1. Registered Office.........................................................................1
Section 2. Other Offices.............................................................................1
ARTICLE II MEETINGS OF STOCKHOLDERS........................................................................1
Section 1. Place of Meetings.........................................................................1
Section 2. Annual Meetings...........................................................................1
Section 3. Special Meetings..........................................................................3
Section 4. Notice of Meetings........................................................................3
Section 5. Nomination of Directors...................................................................4
Section 6. Quorum; Adjournment.......................................................................6
Section 7. Proxies and Voting........................................................................6
Section 8. Stock List................................................................................7
Section 9. Inspectors of Election....................................................................7
Section 10. Actions by Stockholders..................................................................7
ARTICLE III BOARD OF DIRECTORS..............................................................................9
Section 1. Duties and Powers.........................................................................9
Section 2. Number and Term of Office.................................................................9
Section 3. Vacancies.................................................................................9
Section 4. Meetings.................................................................................10
Section 5. Quorum...................................................................................10
Section 6. Actions of Board Without a Meeting.......................................................10
Section 7. Meetings by Means of Conference
Telephone................................................................................11
Section 8. Committees...............................................................................11
Section 9. Compensation.............................................................................11
Section 10. Interested Directors....................................................................11
ARTICLE IV OFFICERS.......................................................................................12
Section 1. General..................................................................................12
Section 2. Election; Term of Office.................................................................12
Section 3. Chairman of the Board....................................................................13
Section 4. President................................................................................13
Section 5. Vice President...........................................................................13
Section 6. Secretary................................................................................13
Section 7. Assistant Secretaries....................................................................14
Section 8. Treasurer................................................................................14
Section 9. Assistant Treasurers.....................................................................14
Section 10. Other Officers..........................................................................15
</TABLE>
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<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE V STOCK..........................................................................................15
Section 1. Form of Certificates.....................................................................15
Section 2. Signatures...............................................................................15
Section 3. Lost Certificates........................................................................15
Section 4. Transfers................................................................................15
Section 5. Record Date..............................................................................16
Section 6. Beneficial Owners........................................................................16
Section 7. Voting Securities Owned by the
Corporation..............................................................................16
ARTICLE VI NOTICES........................................................................................17
Section 1. Notices..................................................................................17
Section 2. Waiver of Notice.........................................................................17
ARTICLE VII GENERAL PROVISIONS.............................................................................17
Section 1. Dividends................................................................................17
Section 2. Disbursements............................................................................17
Section 3. Corporation Seal.........................................................................18
ARTICLE VIII DIRECTORS' LIABILITY AND INDEMNIFICATION.......................................................18
Section 1. Directors' Liability.....................................................................18
Section 2. Right to Indemnification.................................................................18
Section 3. Right of Claimant to Bring Suit..........................................................19
Section 4. Non-Exclusivity of Rights................................................................19
Section 5. Insurance and Trust Fund.................................................................20
Section 6. Indemnification of Employees and Agents
of the Corporation.......................................................................20
Section 7. Amendment................................................................................20
ARTICLE IX AMENDMENTS.....................................................................................21
</TABLE>
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<PAGE> 4
BYLAWS
OF
OPTEL, INC.
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
shall be in the City of Dover, County of Kent, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders for the
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of Stockholders shall
be held on such date and at such time as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Any previously scheduled annual meeting of the stockholders may be postponed by
resolution of the Board of Directors upon public announcement made on or prior
to the date previously scheduled for such annual meeting of stockholders.
To be properly brought before an annual meeting, business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder of the Corporation who was
a stockholder of record at the time of giving of the
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<PAGE> 5
notice provided for in this Section 2, who is entitled to vote at the meeting
and who complied with the notice procedures set forth in this Section 2. For
business to be properly brought before an annual meeting by a stockholder, if
such business is related to the election of directors of the Corporation, the
procedures in Section 5 of this Article II must be complied with. If such
business relates to any other matter, the stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed to and received at the
principal executive offices of the Corporation not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
stockholder meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the 10th day following the day on which public announcement
of the date of such meeting is first made. Such stockholder's notice shall set
forth in writing as to each matter the stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting, the reasons for conducting such business at the
annual meeting, and any material interest in such business of such stockholder
and the beneficial owner, if any, on whose behalf the proposal is made; and
(ii) as to the stockholder giving the notice and the beneficial owner, if any,
on whose behalf the proposal is made (A) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (B) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section 2. The chairman of the meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of this Section 2,
and if he or she should so determine, such chairman shall declare to the
meeting that any such business not properly brought before the meeting shall
not be transacted.
For the purposes of this Section 2 and Sections 3 and 5 of this
Article II, "public announcement" shall mean disclosure in a press release
reported by the Dow Jones News Service, Associated Press or comparable national
news service or in a document publicly filed by the Corporation with the
Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition
to the provisions of this Section 2, a stockholder
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<PAGE> 6
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth herein.
Nothing in these Bylaws shall be deemed to affect any rights of stockholders to
request inclusion of proposals in the Corporation's proxy statement pursuant to
Rule 14a-8 under the Exchange Act.
Section 3. Special Meetings. Special meetings of the stockholders may
be called only by the Board of Directors, the Chairman of the Board or the
President. Any previously scheduled special meeting of the stockholders may be
postponed by resolution of the Board of Directors upon public announcement made
on or prior to the date previously scheduled for such special meeting of the
stockholders.
The purpose or purposes of any special meeting of the stockholders
shall be set forth in the notice of meeting, and, except as otherwise required
by law or by the Certificate of Incorporation, no business shall be transacted
at any special meeting of the stockholders other than the items of business
stated in the notice of meeting. The chairman of the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 3, and if he or she should so determine, such chairman shall declare to
the meeting that any such business not properly brought before the meeting
shall not be transacted.
Section 4. Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or as required from time to time by the Delaware General
Corporation Law or the Certificate of Incorporation. If mailed, such notice
shall be directed to each stockholder at his or her address as it appears on
the stock book unless he or she shall have filed with the Secretary of the
Corporation a written request that notices intended for him or her be mailed to
some other address, in which case it shall be mailed or transmitted to the
address designated in such request. Such further notice shall be given as may
be required by law. Except as otherwise expressly provided by statute, no
notice of a meeting of stockholders shall be required to be given to any
stockholder who shall attend such meeting in person or by proxy, or who shall,
in person or by attorney thereunto authorized, waive such notice in writing or
by telegraph, telecopy, cable, radio or wireless either before or after such
meeting. Except where otherwise required by law, notice of any adjourned
meeting of the stockholders of the Corporation shall not be required to be
given.
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<PAGE> 7
Section 5. Nomination of Directors. (a) Only persons who are nominated
in accordance with the procedures set forth in this Section 5 shall be eligible
for election as directors of the Corporation. Nominations of persons for
election to the Board of Directors of the Corporation may be made at any annual
meeting of stockholders by or at the direction of the Board of Directors or by
any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who was a stockholder of record at the time of giving
of the notice provided for in this Section 5 and who complies with the notice
procedures set forth in this Section 5. Any such nomination by a stockholder
shall be made pursuant to timely notice in writing to the Secretary of the
Corporation. To be timely notice for an annual meeting, a stockholder's notice
shall be delivered to the Secretary of the Corporation at the principal
executive offices of the Corporation not less than 60 days nor more than 90
days prior to the first anniversary of the preceding year's annual meeting;
provided, however, that in the event that the date of the annual meeting is
advanced by more than 30 days or delayed by more than 60 days from such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the 90th day prior to such annual meeting and not later than
the close of business on the later of the 60th day prior to such annual meeting
or the 10th day following the day on which public announcement (as defined in
Section 2 of this Article II) of the date of such meeting is first made.
Notwithstanding anything in the foregoing sentence to the contrary, in the
event that the number of directors to be elected to the Board of Directors of
the Corporation is increased and there is no public announcement naming all of
the nominees for director or specifying the size of the increased Board of
Directors made by the Corporation at least 70 days prior to the first
anniversary of the preceding year's annual meeting, a stockholder's notice
required by this Section 5 shall also be considered timely, but only with
respect to nominees for any new positions created by such increase, if it shall
be delivered to the Secretary of the Corporation at the principal executive
offices of the Corporation not later than the close of business on the 10th day
following the day on which such public announcement is first made by the
Corporation. Such stockholder's notice shall set forth in writing (i) as to
each person whom the stockholder proposes to nominate for election or
re-election as a director (A) the name, age, business address and residence
address of such person, (B) the principal occupation or employment of such
person, (C) the number of shares of stock of the Corporation which are
beneficially owned by such person and (D) any other information relating to
such person that is required to be disclosed in connection with the
solicitation of proxies for election of directors, or as otherwise required, in
each case pursuant to Regulation 14A under the Exchange Act (including, without
limitation, such person's written consent to
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<PAGE> 8
being named in a proxy statement as a nominee and to serving as a director if
elected); and (ii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the nomination is made (A) the name and address
of such stockholder, as they appear on the Corporation's books, and of such
beneficial owner and (B) the class and number of shares of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(b) Nominations of persons for election to the Board of Directors of
the Corporation may be made at a special meeting of stockholders at which
directors are to be elected pursuant to the Corporation's notice of meeting (i)
by or at the direction of the Board of Directors or (ii) provided that the
Board of Directors has determined that directors shall be elected at such
special meeting, by any stockholder of the Corporation who is a stockholder of
record at the time of giving of notice provided for in this Section 5, who
shall be entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 5. In the event the Corporation calls a
special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be) for election to such position(s) as specified
in the Corporation's notice of meeting, if the stockholder's notice shall be
delivered to the Secretary of the Corporation at the principal executive
offices of the Corporation not earlier than the 90th day prior to such special
meeting and not later than the close of business on the later of the 60th day
prior to such special meeting or the 10th day following the day on which public
announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
(c) At the request of the Board of Directors, any person nominated by
the Board of Directors for election as a director shall furnish to the
Secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless
nominated in accordance with the procedures set forth in this Section 5. The
chairman of the meeting shall, if the facts warrant, determine and declare to
the meeting that a nomination was not made in accordance with the procedures
prescribed by these Bylaws and in that event the defective nomination shall be
disregarded. In addition to the provisions of this Section 5, a stockholder
shall also comply with all applicable requirements of the Exchange Act and the
rules and regulations thereunder with respect to the matters set forth herein.
Section 6. Quorum; Adjournment. At any meeting of the stockholders,
the holders of a majority of all of the shares of
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<PAGE> 9
the stock entitled to vote at the meeting, present in person or by proxy, shall
constitute a quorum for all purposes, unless or except to the extent that the
presence of a larger number may be required by law or the Certificate of
Incorporation. If a quorum shall fail to attend any meeting, the chairman of
the meeting or the holders of a majority of the shares of stock entitled to
vote who are present, in person or by proxy, may adjourn the meeting to another
place, date, or time without notice other than announcement at the meeting,
until a quorum shall be present or represented.
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than
thirty (30) days after the date for which the meeting was originally noticed,
or if a new record date is fixed for the adjourned meeting, written notice of
the place, date, and time of the adjourned meeting shall be given in conformity
herewith. At any adjourned meeting, any business may be transacted which might
have been transacted at the original meeting.
Section 7. Proxies and Voting. At any meeting of the stockholders,
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing filed in accordance with the procedure established for
the meeting, provided, however, that no proxy shall be valid after three years
from its date unless said proxy provides for a longer period.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or required by law or the
Certificate of Incorporation.
Except as otherwise required by statute, by the Certificate of
Incorporation or these Bylaws, or in electing directors, all matters coming
before any meeting of the stockholders shall be decided by the vote of a
majority of the votes of the stockholders of the Corporation present in person
or by proxy at such meeting and entitled to vote thereat, a quorum being
present. At all elections of directors, the voting may but need not be by
ballot and a plurality of the votes cast thereat shall elect.
Section 8. Stock List. A complete list of stockholders entitled to
vote at any meeting of stockholders, arranged in alphabetical order for each
class of stock and showing the address of each such stockholder and the number
of shares registered in such stockholder's name, shall be open to the
examination of any such stockholder, for any purpose germane to
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<PAGE> 10
the meeting, during ordinary business hours for a period of at least ten (10)
days prior to the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or
if not so specified, at the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the
identity of the stockholders entitled to vote at the meeting and the number of
shares held by each of them.
Section 9. Inspectors of Election. The Corporation shall, in advance
of any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The Corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
chairman of such meeting shall appoint one or more inspectors to act at such
meeting. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his or her
ability. The inspectors shall make a certificate of the result of the vote
taken after the balloting and shall have such other duties as are prescribed by
law. No director or candidate for the office of director shall be appointed as
such inspector. The chairman of the meeting shall fix and announce at the
meeting the date and time of the opening and the closing of the polls for each
matter upon which the stockholders will vote at the meeting.
Section 10. Actions by Stockholders. (a) Unless otherwise provided in
the Certificate of Incorporation, any action required to be taken at any annual
or special meeting of stockholders of the Corporation, or any action which may
be taken at any annual or special meeting of such stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would
be necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing.
(b) Every written consent shall bear the date of signature of each
stockholder who signs the consent and no written consent shall be effective to
take the corporate action referred to therein unless, within 60 days of the
earliest dated consent
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<PAGE> 11
delivered to the Corporation, written consents signed by a sufficient number of
holders to take action are delivered to the Corporation.
(c) The record date for determining stockholders entitled to consent
to corporate action in writing without a meeting shall be fixed by the Board of
Directors. Any stockholder seeking to have the stockholders authorize or take
corporate action by written consent without a meeting shall, by written notice
to the President, request the Board of Directors to fix a record date. Upon
receipt of such a request, the President shall, as promptly as practicable,
call a special meeting of the Board of Directors to be held as promptly as
practicable, but in any event not more than 10 days following the date of
receipt of such a request. At such a meeting, the Board of Directors shall fix
a record date which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than 10 days after the date that the
resolution fixing the record date is adopted by the Board of Directors. If no
record date has been so fixed by Board of Directors, the record date for
determining the stockholders entitled to consent to corporate action in writing
without a meeting, where no prior action by the Board of Directors is required
by the Delaware General Corporation Law, shall be the first date on which a
signed written consent setting forth the action taken or proposed to be taken
is delivered to the Corporation. If no date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by the
Delaware General Corporation Law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be
at the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action.
(d) In the event of the delivery to the Corporation of a written
consent or consents purporting to represent the requisite voting power to
authorize or take corporate action and/or related revocations, the Secretary of
the Corporation shall provide for the safekeeping of such consents and
revocations and shall, as promptly as practicable, engage inspectors for the
purpose of promptly performing a ministerial review of the validity of the
consents and revocations. No action by written consent without a meeting shall
be effective until such inspectors have completed their review, determined that
the requisite number of valid and unrevoked consents has been obtained to
authorize or take the actions specified in the consents and certified such
determination for entry in the records of the Corporation for the purpose of
recording the proceedings of meetings of the stockholders.
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(e) For the purposes of this Section 10, delivery to the Corporation
shall be effected by delivery to its registered office in the State of
Delaware, its principal place of business, or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
ARTICLE III
BOARD OF DIRECTORS
Section 1. Duties and Powers. The business of the Corporation shall be
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as
are not by law or by the Certificate of Incorporation or by these Bylaws
directed or required to be exercised or done by the stockholders.
Section 2. Number and Term of Office. The Board of Directors shall
consist of one (1) or more members. The number of directors shall be fixed and
may be changed from time to time by resolution duly adopted by the Board of
Directors, except as otherwise provided by law or the Certificate of
Incorporation. Except as provided in Section 3 of this Article, directors shall
be elected by the holders of record of a plurality of the votes cast at Annual
Meetings of Stockholders, and each director so elected shall hold office until
the next Annual Meeting and until his or her successor is duly elected and
qualified, or until his or her earlier resignation or removal. Any director may
resign at any time upon written notice to the Corporation. Directors need not
be stockholders.
Section 3. Vacancies. Vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, although less than a quorum, or
by a sole remaining director or by the stockholders entitled to vote at any
Annual or Special Meeting held in accordance with Article II, and the directors
so chosen shall hold office until the next Annual or Special Meeting duly
called for that purpose and until their successors are duly elected and
qualified, or until their earlier resignation or removal.
Section 4. Meetings. The Board of Directors of the Corporation may
hold meetings, both regular and special, either within or without the State of
Delaware. The first meeting of each newly-elected Board of Directors shall be
held immediately following the Annual Meeting of Stockholders and no notice of
such meeting shall be necessary to be given the newly-elected
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directors in order legally to constitute the meeting, provided a quorum shall
be present. Regular meetings of the Board of Directors may be held without
notice at such time and at such place as may from time to time be determined by
the Board of Directors. Special meetings of the Board of Directors may be
called by the Chairman of the Board, the President or a majority of the
directors then in office. Notice thereof stating the place, date and hour of
the meeting shall be given to each director either by mail not less than
forty-eight (48) hours before the date of the meeting, by telephone, facsimile
or telegram on twenty-four (24) hours' notice, or on such shorter notice as the
person or persons calling such meeting may deem necessary or appropriate in the
circumstances. Meetings may be held at any time without notice if all the
directors are present or if all those not present waive such notice in
accordance with Section 2 of Article VI of these Bylaws.
Section 5. Quorum. Except as may be otherwise specifically provided by
law, the Certificate of Incorporation or these Bylaws, at all meetings of the
Board of Directors, a majority of the directors then in office shall constitute
a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present.
Section 6. Actions of Board Without a Meeting. Unless otherwise
provided by the Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors or
of any committee thereof may be taken without a meeting if all members of the
Board of Directors or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board of Directors or committee.
Section 7. Meetings by Means of Conference Telephone. Unless otherwise
provided by the Certificate of Incorporation or these Bylaws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 7 shall
constitute presence in person at such meeting.
Section 8. Committees. The Board of Directors may, by resolution
passed by a majority of the directors then in office,
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designate one or more committees, each committee to consist of one or more of
the directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of any such committee. In the
absence or disqualification of a member of a committee, and in the absence of a
designation by the Board of Directors of an alternate member to replace the
absent or disqualified member, the member or members thereof present at any
meeting and not disqualified from voting, whether or not such members
constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. Any committee, to the extent allowed by law and provided in the Bylaw
or resolution establishing such committee, shall have and may exercise all the
powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers which may require it. Each committee
shall keep regular minutes and report to the Board of Directors when required.
Section 9. Compensation. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
Section 10. Interested Directors. No contract or transaction between
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association or any other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his, her or
their votes are counted for such purpose if (i) the material facts as to his,
her or their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or their committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his, her or their
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<PAGE> 15
relationship or interest and as to the contract or transaction are disclosed or
are known to the stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of the stockholders;
or (iii) the contract or transaction is fair as to the Corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee thereof or the stockholders. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
Section 1. General. The officers of the Corporation shall be appointed
by the Board of Directors and shall consist of a Chairman of the Board (who
must be a director) or a President, or both, a Secretary and a Treasurer (or a
position with the duties and responsibilities of a Treasurer). The Board of
Directors may also appoint one or more vice presidents, assistant secretaries
or assistant treasurers, and such other officers as the Board of Directors, in
its discretion, shall deem necessary or appropriate from time to time. Any
number of offices may be held by the same person, unless the Certificate of
Incorporation or these Bylaws otherwise provide.
Section 2. Election; Term of Office. The Board of Directors at its
first meeting held after each Annual Meeting of Stockholders shall elect a
Chairman of the Board or a President, or both, a Secretary and a Treasurer (or
a position with the duties and responsibilities of a Treasurer), and may also
elect at that meeting or any other meeting, such other officers and agents as
it shall deem necessary or appropriate. Each officer of the Corporation shall
exercise such powers and perform such duties as shall be determined from time
to time by the Board of Directors together with the powers and duties
customarily exercised by such officer; and each officer of the Corporation
shall hold office until such officer's successor is elected and qualified or
until such officer's earlier resignation or removal. Any officer may resign at
any time upon written notice to the Corporation. The Board of Directors may at
any time, with or without cause, by the affirmative vote of a majority of
directors then in office, remove any officer. Any vacancy occurring in any
office of the Corporation shall be filled by the Board of Directors. The
salaries of all officers of the Corporation shall be fixed by the Board of
Directors.
Section 3. Chairman of the Board. The Chairman of the Board, if there
shall be such an officer, shall preside at all meetings of the stockholders and
the Board of Directors and shall
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<PAGE> 16
have such other duties and powers as may be prescribed by the Board of
Directors from time to time.
Section 4. President. The President shall have general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect. The President
shall have and exercise such further powers and duties as may be specifically
delegated to or vested in the President from time to time by these Bylaws or
the Board of Directors. In the absence of the Chairman of the Board or in the
event of his or her inability or refusal to act, or if the Board has not
designated a Chairman, the President shall perform the duties of the Chairman
of the Board, and when so acting, shall have all of the powers and be subject
to all of the restrictions upon the Chairman of the Board.
Section 5. Vice President. At the request of the President, in the
absence of the President or in the event of his or her inability or refusal to
act, the Vice President (or in the event there be more than one vice president,
the vice presidents in the order designated by the directors, or in the absence
of any designation, then in the order of their election) shall perform the
duties of the President, and when so acting, shall have all the powers of and
be subject to all the restrictions upon the President. The vice presidents
shall perform such other duties and have such other powers as the Board of
Directors or the President may from time to time prescribe.
Section 6. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or the President. If the Secretary shall be unable or shall refuse to
cause to be given notice of all meetings of the stockholders and special
meetings of the Board of Directors, and if there be no Assistant Secretary,
then either the Board of Directors or the President may choose another officer
to cause such notice to be given. The Secretary shall have custody of the seal
of the Corporation and the Secretary or any Assistant Secretary, if there be
one, shall have authority to affix the same to any instrument requiring it and
when so affixed, it may be attested by the signature of the Secretary or by the
signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his or her signature. The Secretary shall see that
all books, reports, statements, certificates and other documents
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<PAGE> 17
and records required by law to be kept or filed are properly kept or filed, as
the case may be.
Section 7. Assistant Secretaries. Except as may be otherwise provided
in these Bylaws, Assistant Secretaries, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the President, or the Secretary, and shall have the
authority to perform all functions of the Secretary, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
Secretary.
Section 8. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities, shall keep complete and accurate accounts of
all receipts and disbursements of the Corporation, and shall deposit all monies
and other valuable effects of the Corporation in its name and to its credit in
such banks and other depositories as may be designated from time to time by the
Board of Directors. The Treasurer shall disburse the funds of the Corporation,
taking proper vouchers and receipts for such disbursements, and shall render to
the Board of Directors, at its regular meetings, or when the Board of Directors
so requires, an account of all his or her transactions as Treasurer and of the
financial condition of the Corporation. The Treasurer shall, when and if
required by the Board of Directors, give and file with the Corporation a bond,
in such form and amount and with such surety or sureties as shall be
satisfactory to the Board of Directors, for the faithful performance of his or
her duties as Treasurer. The Treasurer shall have such other powers and perform
such other duties as the Board of Directors or the President shall from time to
time prescribe.
Section 9. Assistant Treasurers. Except as may be otherwise provided
in these Bylaws, Assistant Treasurers, if there be any, shall perform such
duties and have such powers as from time to time may be assigned to them by the
Board of Directors, the President, or the Treasurer, and shall have the
authority to perform all functions of the Treasurer, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
Treasurer. The Assistant Treasurers shall, when and if required by the Board of
Directors, give and file with the Corporation a bond, in such form and amount
and with such surety or sureties as shall be satisfactory to the Board of
Directors for the faithful performance of his or her performance as Assistant
Treasurer.
Section 10. Other Officers. Such other officers as the Board of
Directors may choose shall perform such duties and have such powers as from
time to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any
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<PAGE> 18
other officer of the Corporation the power to choose such other officers and to
prescribe their respective duties and powers.
ARTICLE V
STOCK
Section 1. Form of Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board or the President or a Vice
President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by such holder in the Corporation.
Section 2. Signatures. Where a certificate is countersigned by a
transfer agent other than the Corporation or its employees or a registrar other
than the Corporation or its employees, any other signatures on the certificate
may be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer, transfer agent or registrar at the date of
issue.
Section 3. Lost Certificates. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or such owner's legal representative, to advertise the same in
such manner as the Board of Directors shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable
in the manner prescribed by law and in these Bylaws. Transfers of stock shall
be made on the books of the Corporation only by the person named in the
certificate or by such person's attorney lawfully constituted in writing and
upon the surrender of the certificate therefor, which shall be canceled before
a new certificate shall be issued.
Section 5. Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at
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<PAGE> 19
any meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than
sixty (60) days nor less than ten (10) days before the date of such meeting,
nor more than sixty (60) days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.
Section 7. Voting Securities Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the Chairman of the Board, the President,
any Vice President or the Secretary and any such officer may, in the name of
and on behalf of the Corporation, take all such action as any such officer may
deem advisable to vote in person or by proxy at any meeting of security holders
of any corporation in which the Corporation may own securities and at any such
meeting shall possess and may exercise any and all rights and power incident to
the ownership of such securities and which, as the owner thereof, the
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
ARTICLE VI
NOTICES
Section 1. Notices. Whenever written notice is required by law, the
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at such
person's address as it appears on the records of the Corporation, with postage
thereon prepaid, and such notice shall be deemed to be given at the time when
the same shall be deposited in the United States mail.
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<PAGE> 20
Written notice may also be given personally or by telegram, telex, facsimile or
cable and such notice shall be deemed to be given at the time of receipt
thereof if given personally or at the time of transmission thereof if given by
telegram, telex, facsimile or cable.
Section 2. Waiver of Notice. Whenever any notice is required by law,
the Certificate of Incorporation or these Bylaws to be given to any director,
member or a committee or stockholder, a waiver thereof in writing, signed by
the person or persons entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to notice.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting or by any Committee of the Board of Directors having such authority at
any meeting thereof, and may be paid in cash, in property, in shares of the
capital stock or in any combination thereof. Before payment of any dividend,
there may be set aside out of any funds of the Corporation available for
dividends such sum or sums as the Board of Directors from time to time, in its
absolute discretion deems proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for any proper purpose, and the Board of
Directors may modify or abolish any such reserve.
Section 2. Disbursements. All notes, checks, drafts and orders for the
payment of money issued by the Corporation shall be signed in the name of the
Corporation by such officers or such other persons as the Board of Directors
may from time to time designate.
Section 3. Corporation Seal. The corporate seal, if the Corporation
shall have a corporate seal, shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
ARTICLE VIII
DIRECTORS' LIABILITY AND INDEMNIFICATION
Section 1. Directors' Liability. No director of the Corporation shall
be personally liable to the Corporation or its
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<PAGE> 21
stockholders for monetary damages for any breach of fiduciary duty by such a
director as a director. Notwithstanding the foregoing sentence, a director
shall be liable to the extent provided by applicable law (i) for any breach of
the director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) pursuant to Section 174 of the General
Corporation Law of the State of Delaware, or (iv) for any transaction from
which such director derived an improper personal benefit. No amendment to or
repeal of this Article shall apply to or have any effect on the liability or
alleged liability of any director of the Corporation for or with respect to any
acts or omissions of such director occurring prior to such amendment or repeal.
If the Delaware General Corporation Law is amended hereafter to further
eliminate or limit the personal liability of directors, the liability of a
director of this Corporation shall be limited or eliminated to the fullest
extent permitted by the Delaware General Corporation Law, as amended.
Section 2. Right to Indemnification. Each person who was or is made a
party to or is threatened to be made a party to or is involuntarily involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that he or she is or was
a director or officer of the Corporation, or is or was serving (during his or
her tenure as director and/or officer) at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, whether the basis of
such Proceeding is an alleged action or inaction in an official capacity as a
director or officer or in any other capacity while serving as a director or
officer, shall be indemnified and held harmless by the Corporation to the
fullest extent authorized by the Delaware General Corporation Law (or other
applicable law), as the same exists or may hereafter be amended, against all
expense, liability and loss (including attorneys' fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection with such
Proceeding. Such director or officer shall have the right to be paid by the
Corporation for expenses incurred in defending any such Proceeding in advance
of its final disposition; provided, however, that, if the Delaware General
Corporation Law (or other applicable law) requires, the payment of such
expenses in advance of the final disposition of any such Proceeding shall be
made only upon receipt by the Corporation of an undertaking by or on behalf of
such director or officer to repay all amounts so advanced if it should be
determined ultimately that he or she is not entitled to be indemnified under
this Article or otherwise.
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<PAGE> 22
Section 3. Right of Claimant to Bring Suit. If a claim under Section 2
of this Article is not paid in full by the Corporation within ninety (90) days
after a written claim has been received by the Corporation, the claimant may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim, together with interest thereon, and, if successful in
whole or in part, the claimant shall also be entitled to be paid the expense of
prosecuting such claim, including reasonable attorneys' fees incurred in
connection therewith. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standards of conduct which make it permissible under the Delaware
General Corporation Law (or other applicable law) for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation (or
of its full Board of Directors, its directors who are not parties to the
Proceeding with respect to which indemnification is claimed, its stockholders,
or independent legal counsel) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law (or other applicable law),
nor an actual determination by any such person or persons that such claimant
has not met such applicable standard of conduct, shall be a defense to such
action or create a presumption that the claimant has not met the applicable
standard of conduct.
Section 4. Non-Exclusivity of Rights. The rights conferred by this
Article shall not be exclusive of any other right which any director, officer,
representative, employee or other agent may have or hereafter acquire under the
Delaware General Corporation Law or any other statute, or any provision
contained in the Corporation's Certificate of Incorporation or Bylaws, or any
agreement, or pursuant to a vote of stockholders or disinterested directors, or
otherwise.
Section 5. Insurance and Trust Fund. In furtherance and not in
limitation of the powers conferred by statute:
(1) the Corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against any liability asserted against him and
incurred by him in any such capacity, or arising out of
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<PAGE> 23
his or her status as such, whether or not the Corporation would have the power
to indemnify him against such liability under the provisions of law; and
(2) the Corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar arrangements), as well as enter into
contracts providing indemnification to the fullest extent permitted by law and
including as part thereof provisions with respect to any or all of the
foregoing, to ensure the payment of such amount as may become necessary to
effect indemnification as provided therein, or elsewhere.
Section 6. Indemnification of Employees and Agents of the Corporation.
The Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, including the right to be paid by
the Corporation the expenses incurred in defending any Proceeding in advance of
its final disposition, to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article VIII or otherwise with respect
to the indemnification and advancement of expenses of directors and officers of
the Corporation.
Section 7. Amendment. This Article VIII is also contained in Articles
SEVEN and EIGHT of the Corporation's Certificate of Incorporation, and
accordingly, may be altered, amended or repealed only to the extent and at the
time the comparable Certificate Article is altered, amended or repealed. Any
repeal or modification of this Article VIII shall not change the rights of an
officer or director to indemnification with respect to any action or omission
occurring prior to such repeal or modification.
ARTICLE IX
AMENDMENTS
Except as otherwise specifically stated within an Article to be
altered, amended or repealed, these Bylaws may be altered, amended or repealed
and new Bylaws may be adopted at any meeting of the Board of Directors or of
the stockholders, provided that with respect to a meeting of the stockholders,
notice of the proposed change was given in the notice of such stockholders'
meeting.
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<PAGE> 24
THIS IS TO CERTIFY:
That I am the duly elected, qualified and acting Secretary of OpTel,
Inc. and that the foregoing amended and restated bylaws were adopted as the
bylaws of said corporation effective as of the ___ day of ________, 1999, at a
meeting of the Board of Directors duly held on __________ ___, 1999 by the vote
of the directors entitled to exercise at least a majority of the voting power
of said corporation.
Dated as of _________ ___, 1999.
---------------------------------
Michael E. Katzenstein, Secretary
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<PAGE> 1
EXHIBIT 4.8
<TABLE>
<S> <C> <C>
CLASS A CLASS A
COMMON STOCK COMMON STOCK
BETTER CONNECTED TO THE FUTURE
[OPTEL LOGO]
VIDEO - VOICE - DATA
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE OPTEL, INC. CERTAIN DEFINITIONS
THIS IS TO CERTIFY THAT CUSIP 683817 30 8
is the owner of
FULLY PAID AND NON-ASSESABLE SHARES, PAR VALUE ($.01) PER SHARE, OF CLASS A COMMON STOCK OF
- -------------------------------------------- -------------------------------------------------
- -------------------------------------------- OPTEL, INC. -------------------------------------------------
- -------------------------------------------- -------------------------------------------------
(hereinafter called the "Corporation", transferable on the books of the Corporation by said owner in
person or by this duly authorized attorney. Upon the surrender of this certificate properly endorsed. This
certificate and the shares represented hereby are issued and shall be held subject to the provisions of the
Amended and Restated Certificate of Incorporation of the Corporation as now or hereafter amended, (copies
of which are on file with the Transfer Agent Transferred to which reference is hereby expressly made
and to all of which the holder hereof by acceptance of this certificate hereby assents.
This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dates:
/s/ /s/
[SEAL]
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
</TABLE>
<PAGE> 2
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
----------- -----------
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of survivorship under Uniform Gifts to Minors
and not as tenants in common Act
-------------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OF THE CORPORATION OR
SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS WILL BE FURNISHED BY THE CORPORATION WITHOUT CHARGE,
TO EACH STOCKHOLDER WHO SO REQUESTS UPON APPLICATION TO THE TRANSFER AGENT OR
TO THE SECRETARY OF THE CORPORATION.
For value received________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING
POSTAL ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares
- -------------------------------------------------------------------------
of the capital stock represented by this Certificate, and do hereby irrevocably
constitute and appoint
----------------------------------------------------------
Attorney
- -----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the promises.
Dated
---------------------
X
-------------------------------------------------
NOTICE: The signature to this assignment must
correspond with the name as written upon the
face of the Certificate in every particular
without alteration or enlargement or any change
whatever.
Signature(s) Guaranteed:
- -----------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE
GUARANTEE INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATES AND CREDIT UNIONS WITH MEMBERSHIP
IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM).
PURSUANT TO S.E.C RULE 17Ad-15.
- -----------------------------------------------------------------------
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 5.1
May 19, 1999
OpTel, Inc.
1111 West Mockingbird Lane
Dallas, Texas 75247
Ladies and Gentlemen:
We have acted as counsel to OpTel, Inc., a Delaware corporation (the
"Company"), in connection with its Registration Statement on Form S-1
(File No. 333-56231), filed pursuant to the Securities Act of 1933, as
amended, related to the proposed underwritten public offering (the
"Offering") of up to $128,823,790.00 aggregate value of shares of its Class
A Common Stock, par value $.01 per share (the "Shares"), to be offered to
the public (including Shares that may be so offered pursuant to an
over-allotment option granted to the underwriters). Of the Shares, 390,370
Shares are being offered by certain stockholders of the Company (the
"Selling Stockholders") and the balance is being offered by the Company.
In that connection, we have reviewed the Amended and Restated
Certificate of Incorporation of the Company, its Bylaws, resolutions of
its Board of Directors and such other documents and records as we have
deemed appropriate.
On the basis of such review, and having regard to legal
considerations that we deem relevant, it is our opinion that:
1. The Shares to be offered by the Company pursuant to the Offering
have been duly authorized and, when issued in accordance with the terms
set forth in the Registration Statement, will be validly issued, fully
paid and nonassessable.
2. The Shares to be offered by the Selling Shareholders pursuant to
the Offering have been duly authorized and validly issued and are fully
paid and nonassessable.
3. The statements under the caption "Certain Federal Income Tax
Considerations" in the prospectus relating to the Shares included in the
Registration Statement,
<PAGE> 2
OpTel, Inc.
May 19, 1999
Page 2
insofar as such statements constitute summaries of federal income tax law,
fairly summarize the matters referred to therein.
We are members of the Bar of the State of New York and do not purport
to be experts or give any opinion except as to matters involving the laws
of such state, the general corporation laws of the State of Delaware and
the federal laws of the United States.
We hereby consent to the use of our name under the caption "Legal
Matters" in the prospectus included in the Registration Statement and to
the use of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ KRONISH LIEB WEINER & HELLMAN LLP
<PAGE> 1
EXHIBIT 10.10
OPTEL, INC.
RESTATED INCENTIVE STOCK PLAN
(APPROVED BY THE BOARD ON JUNE 4, 1998 AND AS AMENDED
ON JANUARY 25, 1999 AND MAY____, 1999 AND TO BE EFFECTIVE ON
THE IPO DATE, SUBJECT TO SHAREHOLDER APPROVAL)
I. Purpose
This Restated Incentive Stock Plan (the "Plan") is intended to attract,
retain and provide incentives to senior executives and key employees of the
Corporation, and to thereby increase overall shareholders' value. The Plan
generally provides for the granting of stock, stock options, stock appreciation
rights, restricted shares, performance based awards, other stock-based awards or
any combination of the foregoing to the eligible participants.
II. Definitions
(a) "Award" includes, without limitation, stock options (including
incentive stock options within the meaning of Section 422(b) of the Code), stock
appreciation rights, stock awards, restricted share awards, dividend equivalent
rights, performance based awards or other awards that are valued in whole or in
part by reference to, or are otherwise based on, the Common Stock ("other Common
Stock-based Awards"), all on a stand alone, combination or tandem basis, as
described in or granted under this Plan.
(b) "Award Agreement" means a written agreement setting forth the terms
and conditions of each Award made under this Plan.
(c) "Board" means the Board of Directors of the Corporation.
(d) "Change in Control" means the occurrence of any one of the
following events:
(i) any "person," as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934 (other than Le Groupe
Videotron Ltee, Sojecci Ltee, Sojecci(1995) Ltee, Andre Chagnon and
his spouse and descendants, Caisse de depot et placement du Quebec and
their respective affiliates (collectively, all or any of the above
constitute the "Existing Control Group")), is a "beneficial owner," as
such term is used in Rule 13d- 3 promulgated under that act, of shares
of the Voting Stock of the Company having more total votes in an
election for directors than shares of Voting Stock of which the
Existing Control Group is the beneficial owner and, at the same time,
the Existing Control Group does not have the power, by contract or
otherwise, to elect or designate a majority of the members of the
Board;
1
<PAGE> 2
(ii) the majority of the Board consists of individuals other than
Incumbent Directors, which term means the members of the Board on the
date of this Agreement; provided that any person becoming a director
subsequent to such date whose election or nomination for election was
supported by two-thirds of the directors who then comprised the
Incumbent Directors shall be considered to be an Incumbent Director;
(iii) the Corporation adopts any plan of liquidation providing
for the distribution of all or substantially all of its assets;
(iv) all or substantially all of the assets or business of the
Corporation is disposed of pursuant to a merger, consolidation or other
transaction (unless the shareholders of the Corporation immediately
prior to such merger, consolidation or other transaction beneficially
own, directly or indirectly, in substantially the same proportion as
they owned the Voting Stock of the Corporation, the Voting Stock or
other ownership interests of the entity or entities, if any, that
succeed to the business of the Corporation) and anytime thereafter the
Existing Control Group shall not then have the right to elect or
designate a majority of the members of the Board; or
(v) the Corporation combines with another company and is the
surviving corporation but, immediately after the combination, the
shareholders of the Corporation immediately prior to the combination
hold, directly or indirectly, 50% or less of the Voting Stock of the
combined company (there being excluded from the number of shares held
by such shareholders, but not from the Voting Stock of the combined
company, any shares received by Affiliates of such other company in
exchange for stock of such other company) and anytime thereafter the
Existing Control Group shall not then have the right to elect or
designate a majority of the members of the Board.
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(f) "Committee" means the Compensation Committee of the Board or such
other committee of the Board as may be designated by the Board from time to time
to administer this Plan.
(g) "Common Stock" means the $.01 par value Class A Common Stock of the
Corporation.
(h) "Corporation" means OpTel, Inc., a Delaware corporation.
(i) "Director" means a member of the Board.
(j) "Employee" means an employee of the Corporation or a Subsidiary.
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(k) "Executive" means the Directors, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, Vice Presidents reporting to the
Chief Executive Officer and Chief Operating Officer, City General Managers
reporting directly to the Vice Presidents, Chief Executive Officer or Chief
Operating Officer, and other employees of the Corporation or a Subsidiary
specifically designated by the Committee.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means the value determined by the Committee or
the Board and, if shares of Common Stock are listed on a national securities
exchange or traded on the over-the-counter market, the Fair Market Value shall
be the mean of the highest and lowest trading prices or of the high bid and low
asked prices of shares of Common Stock on such exchange, or on the
over-the-counter market as reported by the NASDAQ system of the National
Quotation Bureau, Inc., as the case may be, on the relevant date, and if there
is no trading or bid or asked price on that day, the mean of the highest and
lowest trading or high bid and low asked prices on the most recent day for which
such prices are available preceding such relevant date; provided that the
Committee and the Board acting reasonably may at any time specify some other
definition of Fair Market Value; provided, further, that the Fair Market Value
of Common Stock on the IPO Date shall be the initial offering price to the
public pursuant to an effective registration statement under the Securities Act
of 1933, as amended.
(n) "IPO Date" means the date on which the Corporation's Common Stock
is first offered to the public pursuant to an effective registration statement
under the Securities Act of 1933, as amended.
(o) "Participant" means an Executive who has been granted an Award
under the Plan.
(p) "Plan Year" means the fiscal year of the Corporation commencing
September 1 and ending August 31.
(q) "Subsidiary" means any corporation or other entity, whether
domestic or foreign, in which the Corporation has or obtains, directly or
indirectly, a proprietary interest of more than 50% by reason of stock ownership
or otherwise.
III. Eligibility
Any Executive selected by the Committee is eligible to receive an Award
pursuant to Section VI hereof.
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IV. Plan Administration
(a) The Plan shall be administered by the Committee. The Committee
shall periodically make determinations with respect to the participation of
Executives in the Plan and, except as otherwise required by law or this Plan,
the terms of Awards granted, including performance objective, vesting or
exercisability schedules, price, restriction, option or performance period,
dividend rights, post-retirement and termination rights, payment alternatives
such as cash, stock, contingent awards or other means of payment consistent with
the purposes of this Plan, and such other terms and conditions as the Committee
deems appropriate which shall be contained in an Award Agreement with respect to
a Participant.
(b) The Committee shall have authority to interpret and construe the
provisions of the Plan and any Award Agreement and make determinations pursuant
to any Plan provision or Award Agreement which shall be final and binding on all
persons. No member of the Committee shall be liable for any action or
determination made in good faith, and the members shall be entitled to
indemnification and reimbursement in the manner provided in the Corporation's
Certificate of Incorporation, as it may be amended from time to time.
(c) The Committee shall have the authority at any time to provide for
the conditions and circumstances under which Awards shall be forfeited. The
Committee shall have the authority to accelerate the vesting of any Award and
the time at which any Award becomes exercisable.
V. Capital Stock Subject to the Provisions of this Plan
(a) The capital stock subject to the provisions of this Plan shall be
shares of authorized but unissued Common Stock and shares of Common Stock held
as treasury stock. Subject to adjustment in accordance with the provisions of
Section X, and subject to Section V(c) below, the maximum number of shares of
Common Stock that shall be available for grants of Awards under this Plan shall
be initially that number of shares of Common Stock that equals 12% of the Common
Stock, on a fully diluted basis, issued or issuable under derivatives securities
outstanding ("Issued and Issuable Common Stock") on the end of the IPO Date. If,
as of January 1 of each year the Plan is in effect, the total number of shares
of Issued and Issuable Common Stock, not including any shares issued under the
Plan, exceed the total number of shares of Issued and Issuable Common Stock as
of January 1 of the preceding year (or, for 1998, as of the IPO Date), the
number of shares available for grants of Awards under this Plan shall equal 12%
of the total number of shares of Issued and Issuable Common Stock at such date,
not including any shares issued under the Plan.
(b) The grant of a restricted share or performance based Award shall be
deemed to be equal to the maximum number of shares which may be issued under the
Award. Awards payable only in cash will not reduce the number of shares
available for Awards granted under the Plan.
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(c) There shall be carried forward and be available for Awards under
the Plan, all of the following: (i) any unused portion of the limit set forth in
paragraph (a) of this Section V; (ii) shares represented by Awards which are
cancelled, forfeited, surrendered, terminated, paid in cash or expire
unexercised; and (iii) the excess amount of variable Awards which become fixed
at less than their maximum limitations.
VI. Awards Under This Plan
As the Committee may determine, the following types of Awards and other
Common Stock-based Awards may be granted under this Plan on a stand alone,
combination or tandem basis:
(a) Stock Option. An Award which provides a right to buy a
specified number of shares of Common Stock at a fixed exercise price
during a specified time. Unless otherwise specifically provided in an
Award Agreement, (i) the exercise price of each share of Common Stock
covered by a stock option shall not be less than the Fair Market Value
of the Common Stock on the date of the grant of such stock option and
(ii) 25% of the shares covered by the stock option shall become
exercisable on the second anniversary of its grant and an additional
25% of such shares shall become exercisable on each of the third,
fourth and fifth anniversary of its grant.
(b) Incentive Stock Option. An Award which may be granted only
to Executives that are employees of the Corporation or a subsidiary in
the form of a stock option which shall comply with the requirements of
Code Section 422 or any successor section as it may be amended from
time to time. The exercise price of any incentive stock option shall
not be less than 100% of the Fair Market Value of the Common Stock on
the date of grant of the incentive stock option Award. Unless otherwise
specifically provided in the Award Agreement, 25% of the shares covered
by the incentive stock option shall become exercisable on the second
anniversary of its grant, and an additional 25% of such shares shall
become exercisable on each of the third, fourth and fifth anniversary
of its grant. An Executive who owns stock representing 10% of the
voting power or value of all classes of stock of the Corporation or a
Subsidiary shall only be granted an incentive stock option (i) with an
exercise price of at least a 110% of the Fair Market Value of the
Common Stock on the date of the grant of such option and (ii) that
expires 5 years from the date of its grant. Subject to adjustment in
accordance with the provisions of Section X, the aggregate number of
shares which may be subject to incentive stock option Awards under this
Plan shall not exceed 12% of the Issued and Issuable Common Stock on
the end of the IPO Date. To the extent that Code Section 422 requires
certain provisions to be set forth in a written plan, said provisions
are incorporated herein by this reference.
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(c) Stock Option in lieu of Compensation Election. A right
given with respect to a year to an Executive to elect to exchange
annual retainers, fees or compensation for stock options.
(d) Stock Appreciation Right. A right which may or may not be
contained in the grant of a stock option or incentive stock option to
receive the excess of the Fair Market Value of a share of Common Stock
on the date the option is surrendered over the option exercise price or
other specified amount contained in the Award Agreement.
(e) Restricted Shares. A transfer of Common Stock to a
Participant subject to forfeiture until such restrictions, terms and
conditions as the Committee may determine are fulfilled.
(f) Dividend Equivalent Right. A right to receive dividends or
their equivalent in value in Common Stock, cash or in a combination of
both with respect to any new or previously existing Award.
(g) Stock Award. An unrestricted transfer of ownership of
Common Stock.
(h) Performance Base Awards. An Award payable after specified
performance goals have been satisfied. 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 hereunder to the same Executive. 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 Executive or of the division,
subsidiary, department or function within the Corporation in which the
Executive 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 Committee. Unless the Award specifies otherwise, including
restrictions in order to satisfy the conditions under Section 162(m) of
the Code, the Committee 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 Committee.
(i) Other Stock-Based Awards. Other Common Stock-based Awards
which are related to or serve a similar function to those Awards set
forth in this Section VI.
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VII. Award Agreements
Each Award under the Plan shall be evidenced by an Award Agreement
setting forth the terms and conditions of the Award. Unless required by the
Committee, a Participant shall not be required to execute the Participant's
Award Agreement.
VIII. Other Terms and Conditions
(a) Assignability. Unless provided to the contrary in any Award, no
Award shall be assignable or transferable except by will, by the laws of descent
and distribution and during the lifetime of a Participant, the Award shall be
exercisable only by such Participant. No Award granted under the Plan shall be
subject to execution, attachment or process.
(b) Termination of Employment or Other Relationship. The Committee
shall determine the disposition of the grant of each Award in the event of the
retirement, disability, death or other termination of a Participant's employment
or other relationship with the Corporation or a Subsidiary.
(c) Rights as a Stockholder. A Participant shall have no rights as a
stockholder with respect to shares covered by an Award until the date the
Participant is the holder of record. No adjustment will be made for dividends or
other rights for which the record date is prior to such date.
(d) No Obligation to Exercise. The grant of an Award shall impose no
obligation upon the Participant to exercise the Award.
(e) Payments by Participants. The Committee may determine that Awards
for which a payment is due from a Participant may be payable: (i) in U.S.
dollars by personal check, bank draft or money order payable to the order of the
Corporation, by money transfers or direct account debits; (ii) through the
delivery or deemed delivery based on attestation to the ownership of shares of
Common Stock with a Fair Market Value equal to the total payment due from the
Participant; (iii) pursuant to a broker-assisted "cashless exercise" program if
established by the Corporation; (iv) by a combination of the methods described
in (i) through (iii) above; or (v) by such other methods as the Committee may
deem appropriate.
(f) Withholding. Except as otherwise provided by the Committee, (i) the
deduction of withholding and any other taxes required by law will be made from
all amounts paid in cash and (ii) in the case of payments of Awards in shares of
Common Stock, the Participant shall be required to pay the amount of any taxes
required to be withheld prior to receipt of such stock, or alternatively, a
number of shares the Fair Market Value of which equals the amount required to be
withheld may be deducted from the payment.
(g) Restrictions on Sale and Exercise. With respect to officers and
directors for purposes of Section 16 of the Exchange Act, and if required to
comply with rules
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promulgated thereunder, (i) no Award providing for exercise, a vesting period, a
restriction period or the attainment of performance standards shall permit
unrestricted ownership of Common Stock by the Participant for at least six
months from the date of grant, and (ii) Common Stock acquired pursuant to this
Plan (other than Common Stock acquired as a result of the granting of a
"derivative security") may not be sold for at least six months after
acquisition.
(h) Maximum Awards. Subject to adjustment in accordance with the
provisions of Section X, the maximum number of shares of Common Stock that may
be issued to any single Participant pursuant to options over the life of this
Plan is 1,000,000. The maximum number of shares of Common Stock that may be
issued, and the maximum amount of cash that may be received by any single
Participant pursuant to a performance based Award in any one year is 50,000 and
$750,000, respectively.
(i) Change in Control. In the event of a Change in Control, all Awards
shall vest, become immediately exercisable and/or cease to be subject to any
risk of forfeiture, as the case may be.
(j) Additional Restrictions. The Committee may include provisions in an
Award Agreement which would limit the right of a Participant with respect to an
Award in the event that the Participant conducts himself in a manner adversely
affecting the Company or engages in other activities proscribed in the Award
Agreement.
IX. Termination, Modification and Amendments
(a) The Plan may from time to time be terminated, modified or amended
by the affirmative vote of the holders of a majority of the outstanding shares
of the capital stock of the Corporation present or represented and entitled to
vote at a duly held stockholders meeting.
(b) The Board may at any time terminate the Plan or from time to time
make such modifications or amendments of the Plan as it may deem advisable;
provided, however, that the Board shall not make any material amendments to the
Plan which require stockholder approval under applicable law, rule or regulation
unless the same shall be approved by the requisite vote of the Corporation's
stockholders.
(c) No termination, modification or amendment of the Plan may adversely
affect the rights conferred by an Award without the consent of the recipient
thereof.
X. Recapitalization
The aggregate number of shares of Common Stock as to which Awards may
be granted to Participants, the number of shares thereof covered by each
outstanding Award, and
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the price per share thereof in each such Award, shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a subdivision or consolidation of shares or other capital
adjustment, or the payment of a stock dividend or other increase or decrease in
such shares, effected without receipt of consideration by the Corporation, or
other change in corporate or capital structure; provided, however, that any
fractional shares resulting from any such adjustment shall be eliminated. The
Committee may also make the foregoing changes and any other changes, including
changes in the classes of securities available, to the extent it is deemed
necessary or desirable to preserve the intended benefits of the Plan for the
Corporation and the Participants in the event of any other reorganization,
recapitalization, merger, consolidation, spin-off, extraordinary dividend or
other distribution or similar transaction.
XI. No Right to Employment
No person shall have any claim or right to be granted an Award, and the
grant of an Award shall not be construed as giving a Participant the right to be
retained in the employ of, or in the other relationship with, the Corporation or
a Subsidiary. Further, the Corporation and each Subsidiary expressly reserve the
right at any time to dismiss a Participant free from any liability, or any claim
under the Plan, except as provided herein or in any Award Agreement issued
hereunder.
XII. Governing Law
To the extent that federal laws do not otherwise control, the Plan
shall be construed in accordance with and governed by the laws of the State of
Texas.
XIII. Savings Clause
This Plan is intended to comply in all aspects with applicable laws and
regulations, including, with respect to those Executives who are officers or
directors for purposes of Section 16 of the Exchange Act, Rule 16b-3 under the
Exchange Act. In case any one more of the provisions of this Plan shall be held
invalid, illegal or unenforceable in any respect under applicable law and
regulation (including Rule 16b-3), the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby
and the invalid, illegal or unenforceable provision shall be deemed null and
void; however, to the extent permissible by law, any provision which could be
deemed null and void shall first be construed, interpreted or revised
retroactively to permit this Plan to be construed in compliance with all
applicable laws (including Rule 16b-3) so as to foster the intent of this Plan.
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XIV. Effective Date and Term
The Plan, as restated, shall become effective upon, and is conditioned
on the occurrence of, the IPO Date, subject to adoption by the Board and the
approval of the Plan by the affirmative vote of the holders of a majority of the
outstanding shares of the capital stock of the Company entitled to vote thereon
within one year following adoption of the Plan by the Board. All Awards granted
prior to such adoption by the Board and approval by the stockholders shall be
subject to such adoption and approval and shall not be exercisable and/or
transferable prior thereto. In the event such adoption and/or approval is not
obtained or there is no IPO Date, the Plan as restated and all Awards granted
thereunder shall be null and void. The Plan shall terminate on the date which is
ten years from the IPO Date. No Award shall be granted after the termination of
the Plan. Unless otherwise provided, by the Committee, options granted prior to
the adoption of this restatement of the Plan shall continue to be subject to the
terms of the Plan prior to this restatement.
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EXHIBIT 10.12
OPTEL INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
(APPROVED BY THE BOARD ON JUNE 4, 1998)
ARTICLE I
PURPOSE AND SCOPE OF THE PLAN
1.1 PURPOSE
The purpose of the OpTel Inc. 1998 Employee Stock Purchase
Plan is to assist employees of OpTel Inc. and its subsidiaries in acquiring a
stock ownership interest in the Company pursuant to a plan which is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code of 1986, as amended.
1.2 DEFINITIONS
Whenever the following terms are used in this Plan, they shall
have the meaning specified below unless the context clearly indicates to the
contrary. The singular pronoun shall include the plural where the context so
indicates.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Committee" shall mean the Stock Purchase Plan Committee of
the Company, which Committee shall administer the Plan as provided in Section
1.3 hereof.
"Common Stock" shall mean the $.01 par value Class A Common
Stock of the Company.
"Company" shall mean OpTel Inc., a Delaware corporation.
"Compensation" shall mean the base salary, overtime, and
commissions paid to an Employee by the Company or a Subsidiary in accordance
with established payroll procedures.
"Eligible Employee" shall mean with respect to an Option
Period an Employee who, at the time of the Offering Date on which such Option
Period commences, (a) is scheduled to work at least 20 hours per week, (b) whose
customary employment is more than five (5) months in a calendar year, and (c)
has been employed with the Company or a Subsidiary for at least six months;
provided, however, with respect to the first Option Period only, the
requirements of clause (c) above shall be waived.
"Employee" shall mean any employee of the Company or a
Subsidiary.
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"Exercise Date" shall mean (i) if the Option Date is January 1
of any given year, June 30 of that same year, and (ii) if the Option Date is
July 1 of any given year, December 31 of that same year; provided, however, the
first Exercise Date shall mean December 31, 1998.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Fair Market Value" means the closing price for the Common
Stock as officially reported on the relevant date (or if there were no sales on
such date, on the next preceding date on which such closing price was recorded)
by the principal national securities exchange on which the Common Stock is
listed or admitted to trading, or if the Common Stock is not listed or admitted
to trading on any such national securities exchanges, the closing price as
furnished by the National Association of Securities Dealers through Nasdaq or a
similar organization if Nasdaq is no longer reporting such information, or, if
the Common Stock is not quoted on Nasdaq, as determined in good faith by
resolution of the Board (whose determination shall be conclusive), based on the
best information available to it; notwithstanding the foregoing, the Fair Market
Value of Common Stock on the IPO Date shall be the initial offering price to the
public pursuant to an effective registration statement under the Securities Act
of 1933, as amended.
"IPO Date" shall mean the date on which the Company's Common
Stock is first offered to the public pursuant to an effective registration
statement under the Securities Act of 1933, as amended.
"Offering Date" shall mean January 1, or July 1, of each year
until termination of the Plan; provided, however, the first Offering Date shall
mean the IPO Date.
"Option Period" shall mean the period beginning on an Offering
Date and ending on the next succeeding Exercise Date.
"Option Price" shall mean the purchase price of a share of
Common Stock hereunder as provided in Section 3.1 hereof.
"Participant" shall mean any Eligible Employee who elects to
participate.
"Plan" shall mean this OpTel Inc. 1998 Employee Stock Purchase
Plan, as the same may be amended from time to time.
"Plan Account" shall mean a bookkeeping account established
and maintained by the Company in the name of a Participant.
"Subsidiary" shall mean any present or future corporation
which (i) is a corporation in an unbroken chain of corporations beginning with
the Company if each of the corporations other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other
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corporations in such chain and (ii) is designated as a participating subsidiary
in the Plan by the Board or the Committee.
1.3 ADMINISTRATION OF PLAN
The Plan shall be administered by the Committee which shall be
composed of not less than three officers of the Company. Each member of the
Committee shall serve for a term commencing on a date specified by the Board and
continuing until he or she dies or resigns or is removed from office by the
Board. The Committee shall have the power to make, amend and repeal rules and
regulations for the interpretation and administration of the Plan consistent
with the qualifications of the plan under Section 423 of the Code, and the
Committee also is authorized to change the Option Periods, Offering Dates and
Exercise Dates under the Plan by providing written notice to all Employees at
least 15 days prior to the Exercise Date following which such changes will take
effect. The Committee may delegate administrative tasks under the Plan to one or
more agents. The Committee's interpretation and decisions in respect to the Plan
shall be final and conclusive.
ARTICLE II
PARTICIPATION
2.1 ELIGIBILITY
An Eligible Employee may participate in an Option Period if
immediately after the applicable Offering Date, such Employee would not be
deemed for the purposes of Section 423(b)(3) of the Code to possess 5% or more
of the total combined voting power or value of all classes of stock of the
Company or any Subsidiary.
2.2 ELECTION TO PARTICIPATE; PAYROLL DEDUCTIONS
An Eligible Employee may participate in the Plan only by means
of payroll deduction. An Eligible Employee may elect to participate in the Plan
during an Option Period by delivering to the Company in the calendar month
preceding the Offering Date on which such Option Period commences a written
payroll deduction authorization on a form prescribed by the Company; provided,
however, that for the Option Period commencing on the IPO Date, an Eligible
Employee may elect to participate in the Plan at any time designated by the
Company on or prior to the IPO Date. Payroll deductions (a) shall be equal to at
least 1%, but not more than 10%, of the Participant's Compensation during the
Option Period; (b) must equal at least five dollars ($5.00) per pay period; and
(c) must be expressed as a whole number percentage, subject to the provisions of
Section 3.2 and 3.3 hereof. Amounts deducted from a Participant's Compensation
pursuant to this Section 2.2 shall be credited to the Participant's Plan
Account.
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2.3 CONTINUED EFFECTIVENESS OF ELECTING TO PARTICIPATE
An election to participate pursuant to Section 2.2, once made,
shall remain in force for subsequent Option Periods until revoked or modified.
Any revocation or modification must be made on a form prescribed by the Company
and submitted to the Company at least eight business days prior to the
subsequent Option Period.
2.4 LEAVE OF ABSENCE
During leaves of absence approved by the Company and meeting
the requirements of Regulation Section 1.421-7(h)(2) under the Code, a
Participant may continue participation in the Plan by making cash payments to
the Company on his or her normal payday equal to his or her authorized payroll
deduction.
ARTICLE III
PURCHASE OF SHARES
3.1 OPTION GRANT; OPTION PRICE
On each Offering Date of an Option Period with respect to
which a Participant elects to participate, subject to Section 3.3, the
Participant will automatically and without any action on his or her part be
granted an option to purchase at the Option Price the number of shares (or part
thereof) of Common Stock which can be purchased with the amount that shall be in
the Participant's Plan Account on the Exercise Date. The Option Price per share
of the Common Stock sold to Participants hereunder shall be 85% of the Fair
Market Value of such share on either the Offering Date or the Exercise Date of
the Option Period, whichever is lower, but in no event shall the Option Price
per share be less than the par value per share of the Common Stock.
3.2 PURCHASE OF SHARES
(a) On each Exercise Date on which he or she is employed, each
Participant will automatically and without any action on his or her part
exercise his or her option to purchase at the Option Price the number of shares
(or part thereof) of Common Stock which can be purchased with the amount in the
Participant's Plan Account; provided, however, that no Participant shall be
permitted to purchase more than 4,000 shares of Common Stock (as adjusted
pursuant to Section 4.2 hereof) pursuant to this Plan during an Option Period.
The balance, if any, remaining in the Participant's Plan Account (after exercise
of his or her option) as of an Exercise Date shall be carried forward to the
next Option Period, unless the Participant has elected to withdraw from the Plan
pursuant to Section 5.1 hereof or to revoke an election to participate pursuant
to Section 2.3 hereto.
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(b) As soon as practicable following each Exercise Date, shares of
Common Stock acquired by each Participant shall be credited to an account in the
Participant's name with a brokerage firm selected by the Committee to hold the
shares in street name.
(c) The balance, if any, remaining in the Participant's Plan Account
after exercise of his or her option on the last Exercise Date under this Plan
shall be refunded to him or her within 21 days after such Exercise Date.
3.3 LIMITATIONS ON PURCHASE
No Employee shall be granted an option under the Plan which
permits his or her rights to purchase Common Stock under the Plan or any other
employee stock purchase plan of the Company or any of its Subsidiaries to accrue
at a rate which exceeds $25,000 (as measured by the Fair Market Value of such
Common Stock at the time the option is granted) for each calendar year such
option is outstanding. For purposes of this Section 3.3, the right to purchase
Common Stock under an option accrues when the option (or any portion thereof)
becomes exercisable, and the right to purchase Common Stock which has accrued
under one option under the Plan may not be carried over to any other option.
3.4 TRANSFERABILITY OF RIGHTS
An option granted under the Plan shall not be transferable and
is exercisable only by the Participant. No option or interest or right therein
or part thereof shall be liable for the debts, contracts or engagements of the
Participant or his or her successors in interest or shall be subject to
disposition by alienation, anticipation, pledge, encumbrance, assignment or any
other means whether such disposition be voluntary or involuntary or by operation
of law by judgment, levy, attachment, garnishment or any other legal or
equitable proceedings (including bankruptcy) and any attempt at disposition
thereof shall be null and void and of no effect.
ARTICLE IV
PROVISIONS RELATING TO COMMON STOCK
4.1 COMMON STOCK AVAILABLE FOR ISSUANCE
There shall be available for issuance under this Plan that
number of shares of Common Stock that equals 1% of the Common Stock outstanding,
on the IPO Date, on a fully diluted basis, issued or issuable under derivative
securities, subject to adjustment in accordance with Section 4.2 hereof. The
Company shall take all appropriate actions to reserve such available shares for
issuance under this Plan.
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4.2 ADJUSTMENT FOR CHANGES IN COMMON STOCK
In the event that adjustments are made in the number of
outstanding shares of Common Stock or the shares are exchanged for a different
class of stock of the Company by reason of stock dividend, stock split or other
subdivision, the Committee shall make appropriate adjustments in (a) the number
and class of shares or other securities that may be reserved for purchase
hereunder and (b) the Option Price.
4.3 MERGER, ACQUISITION OR LIQUIDATION
In the event of the merger or consolidation of the Company
into another corporation, the acquisition by another corporation of all or
substantially all of the Company's assets or 80% or more of the Company's then
outstanding voting stock or the liquidation or dissolution of the Company, the
date of exercise with respect to outstanding options shall be the business day
immediately preceding the effective date of such merger, consolidation,
acquisition, liquidation or dissolution unless the Committee administering the
Plan shall, in its sole discretion, provide for the assumption or substitution
of such options in a manner complying with Section 424(a) of the Code.
4.4 INSUFFICIENT SHARES
If the aggregate funds available for the purchase of Common
Stock on any Exercise Date would cause an issuance of shares in excess of the
number provided for in Section 4.1 hereof, (a) the Committee shall
proportionately reduce the number of shares that would otherwise be purchased by
each Participant in order to eliminate such excess, and (b) the Plan shall
automatically terminate immediately after such Exercise Date.
4.5 RIGHTS AS STOCKHOLDERS
With respect to shares of Common Stock subject to an option, a
Participant shall not be deemed to be a stockholder and shall not have any of
the rights or privileges of a stockholder. A Participant shall have the rights
and privileges of a stockholder when, but not until, the account in the
Participant's name with the brokerage firm selected by the Committee has been
credited following the exercise of his or her option.
ARTICLE V
TERMINATION OF PARTICIPATION
5.1 CESSATION OF CONTRIBUTIONS; VOLUNTARY WITHDRAWAL
(a) A Participant may cease payroll deductions during an Option Period
by delivering written notice of such cessation to the Company. Upon any such
cessation, such Participant may
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elect either to withdraw from the Plan pursuant to subsection (b) below or to
have amounts credited to his or her Plan Account held in the Plan for the
purchase of Common Stock pursuant to Section 3.2. A Participant who ceases
contributions to the Plan during any Option Period shall not be permitted to
resume contributions to the Plan during such Option Period.
(b) A Participant may withdraw from the Plan at any time by written
notice to the Company at least eight business days prior to the close of
business on an Exercise Date. Within 21 days after the notice of withdrawal is
delivered, the Company shall refund the entire amount, if any, in a
Participant's Plan Account to him or her, and thereupon, the Participant's
payroll deduction authorization, his or her interest in the Plan and his or her
option under the Plan shall terminate. Any Eligible Employee who withdraws from
the Plan may again become a Participant in accordance with Section 2.2 hereof.
5.2 TERMINATION OF ELIGIBILITY
(a) A Participant whose employment with the Company or a Subsidiary
terminates due to disability or retirement may elect by written notice to the
Company either to
(i) withdraw the entire amount, if any, in his or her Plan
Account, in which event such amount shall be refunded to the Participant by the
Company within 21 days of the notice, or
(ii) have the amount used to purchase shares of Common Stock
pursuant to Section 3.2 hereof on the next succeeding Exercise Date.
(b) If a Participant's employment with the Company or a Subsidiary
terminates for any reason other than retirement or disability, the amount in
such Participant's Plan Account will be refunded to the Participant or his or
her designated beneficiary or estate within 21 days of his or her termination of
employment.
(c) Upon payment by the Company to the Participant or his or her
beneficiary or estate or the remaining balance, if any, in Participant's Plan
Account, the Participant's interest in the Plan and the Participant's option
under the Plan shall terminate.
ARTICLE VI
GENERAL PROVISIONS
6.1 CONDITION OF EMPLOYMENT
Neither the creation of the Plan nor an Employee's
participation therein shall be deemed to create any right of continued
employment or in any way affect the right of the Company or a Subsidiary to
terminate an Employee at any time with or without cause.
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6.2 AMENDMENT OF THE PLAN
The Board may amend, suspend or terminate the Plan at any time
and from time to time; provided, however, that without approval of the Company's
stockholders given within 12 months before or after action by the Board, the
Board may not amend the Plan to increase the maximum number of shares subject to
the Plan or change the designation or class of Eligible Employees; provided,
further, however, that no amendment to the Plan may modify any option granted
prior to the time of the amendment which modification might reasonably be
expected to adversely affect the rights of any Participant, without the prior
written consent of such Participant.
Upon termination of the Plan, the balance in each
Participant's Plan Account shall be refunded within 21 days of such termination.
6.3 USE OF FUNDS; NO INTEREST PAID
All funds withheld or received by the Company for purchase of
Common Stock hereunder will be included in the general funds of the Company free
of any trust or other restriction and may be used for any corporate purpose. No
interest will be paid to any Participant or credited under the Plan.
6.4 CONDITION; TERM; APPROVAL BY STOCKHOLDERS
The effectiveness of the Plan is entirely conditioned upon the
occurrence of the IPO Date. No option may be granted during any period of
suspension of the Plan nor after termination of the Plan. If the Plan shall not
have received written stockholder approval prior to the first meeting following
the adoption of the Plan by the Board, the Plan will be submitted for the
approval of the Company's stockholders at such first meeting. Options may be
granted prior to such stockholder approval; provided, however, that such options
shall not be exercisable prior to the time when the Plan is approved by the
stockholders; provided further that if such approval has not been obtained by
December 31, 1998, all options previously granted under the Plan shall thereupon
be canceled and become null and void.
6.5 EFFECT UPON OTHER PLANS
The adoption of the Plan shall not affect any other
compensation or incentive plans in effect for the Company or any Subsidiary.
Nothing in this Plan shall be construed to limit the right of the Company or any
Subsidiary (a) to establish any other forms of incentives or compensation for
employees of the Company or any Subsidiary or (b) to grant or assume options
otherwise than under this Plan in connection with any proper corporate purpose,
including, but not by way of limitation, the grant or assumption of options in
connection with the acquisition, by
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purchase, lease, merger, consolidation or otherwise, of the business, stock or
assets of any corporation, firm or association.
6.6 CONFORMITY TO SECURITIES LAWS
Notwithstanding any other provision of this Plan, this Plan
and the participation in this Plan by any individual who is then subject to
Section 16 of the Exchange Act shall be subject to any additional limitations
set forth in any applicable exemptive rule under Section 16 of the Exchange Act
(including any amendment to Rule 16b-3 of the Exchange Act) that are
requirements for the application of such exemptive rule. To the extent permitted
by applicable law, the Plan shall be deemed amended to the extent necessary to
conform to such applicable exemptive rule.
6.7 GOVERNING LAW
The Plan and all rights and obligations thereunder shall be
construed and enforced in accordance with the laws of the State of Texas.
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EXHIBIT 10.13
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by
and between OPTEL, INC., a Delaware corporation (the "Company"), and BERTRAND
BLANCHETTE ("Executive").
W I T N E S S E T H :
WHEREAS, Executive is currently employed by the Company as Chief Financial
Officer of the Company; and
WHEREAS, the Company desires to continue to employ Executive and Executive
has agreed to such continuation, subject to the terms of this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the Company and Executive (individually a "Party" and together
the "Parties") agree as follows:
1. Definitions.
As used in this Agreement, unless the context otherwise requires:
(a) "Affiliate" of a Person shall mean a Person that directly or
indirectly controls, is controlled by, or is under common control with the
Person specified.
(b) "Aggregate Life Insurance Benefits" shall have the meaning set
forth in Section 9(a)(ii).
(c) "Average Annual Bonus" shall mean the average of the two most
recent annual bonuses (not including any payments from long-term incentive
programs) received by or due to Executive for completed fiscal years immediately
prior to the termination of the Term of Employment.
(d) "Base Salary" shall mean the salary provided for in Section 4.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Cause" shall mean:
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(i) Executive's conviction of a crime involving moral
turpitude (excluding offenses such as driving while intoxicated); or
(ii) Executive's (A) commission of a fraud upon the Company or
(B) material breach of this Agreement (including by wilfully failing or
neglecting to perform Executive's duties hereunder), which breach, if curable,
is not substantially cured within 10 days after written notice to Executive
specifying the nature of the breach.
(g) A "Change in Control" shall mean the occurrence of any one of the
following events:
(i) Any "person," as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934 (other than Executive, Le Groupe
Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse
and descendants, Caisse de depot et placement du Quebec, and their respective
Affiliates (collectively, all or any of Le Groupe Videotron Ltee, Sojecci Ltee,
Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de
depot et placement du Quebec, and their respective Affiliates constitute the
"Existing Control Group")), is a "beneficial owner," as such term is used in
Rule 13d-3 promulgated under that act, of shares of the Voting Stock of the
Company having more total votes in an election for directors than shares of
Voting Stock of which the Existing Control Group is the beneficial owner and, at
the same time, the Existing Control Group does not have the power, by contract
or otherwise, to elect or designate a majority of the members of the Board;
(ii) the majority of the members of the Board consists of
individuals other than Incumbent Directors, which term means the members of the
Board on the date of this Agreement; provided that any individual becoming a
director subsequent to such date whose election or nomination for election as a
director was supported by two-thirds of the directors who were Incumbent
Directors at the time of such election or nomination shall be an Incumbent
Director;
(iii) the Company adopts any plan of liquidation providing for
the distribution of all or substantially all of its assets;
(iv) all or substantially all of the assets or business of the
Company are disposed of pursuant to a merger, consolidation or other transaction
(unless the shareholders of the Company immediately prior to such merger,
consolidation or other transaction beneficially own, directly or indirectly, in
substantially the same proportion as they owned the Voting Stock of the Company,
the Voting Stock or other ownership interests of the Person or Persons, if any,
that succeed to the business of the Company) and at any time thereafter the
Existing Control Group does not have the power, by contract or otherwise, to
elect or designate a majority of the members of the Board; or
(v) the Company combines with another Person and is the
surviving corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination hold, directly or
indirectly, not more than 50% of the Voting Stock of the surviving corporation
(there being excluded from the number of shares held by such
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shareholders, but not from the Voting Stock of the surviving corporation, any
shares received by Affiliates of such other Person in exchange for stock of such
other Person) and at any time thereafter the Existing Control Group does not
have the power, by contract or otherwise, to elect or designate a majority of
the members of the Board.
(h) "Confidential Information" shall mean all information that is not
known or available to the public concerning the business of the Company or any
Subsidiary relating to its products, product development, trade secrets,
customers, suppliers, finances, and business plans and strategies. For this
purpose, information known or available generally within the trade or industry
of the Company or any Subsidiary shall be deemed to be known or available to the
public. Confidential Information shall include information that is, or becomes,
known to the public as a result of a breach by Executive of the provisions of
Section 13.
(i) "Constructive Termination Without Cause" shall mean a termination
of the Term of Employment by written notice given by Executive within 60 days
following the occurrence, without Executive's prior written consent, of one or
more of the following events (except in consequence of a prior termination):
(i) a reduction in or elimination of (A) Executive's then
current Base Salary, or (B) Executive's opportunity for any long-term incentive
award for which he is eligible under Section 6 or the termination or material
reduction of any material employee benefit or perquisite enjoyed by him
including the bonus provided for under Section 5; provided, however, that in the
case of clause (B), only if the reduction or elimination is greater than that
applied to other executives of the Company of the same class or level as
Executive;
(ii) the failure to elect or reelect Executive to the position
specified in Section 3(a), or Executive's removal, without Cause, from such
position, or a material diminution in Executive's duties, authority or
responsibility as described in Section 3(a), or the assignment to Executive of
duties which are materially inconsistent with such duties or which materially
impair Executive's ability to function in such position, and, in the case of any
such assignment, the failure of the Company to cure such inconsistency or
impairment within 15 days after its receipt of notice thereof from Executive;
(iii) the failure to continue Executive's participation in any
incentive compensation plan for which Executive is eligible unless executives of
the same class or level as Executive also cease to participate in such plan or a
plan providing a substantially similar opportunity is substituted; or
(iv) the relocation of the Company's principal office outside
the area comprised by Dallas and Tarrant Counties, Texas, having dimensions of
approximately 58 miles by 29 miles and commonly referred to as the Dallas-Fort
Worth Metroplex.
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(j) "Disability" shall mean Executive's inability, due to physical or
mental incapacity, to substantially perform Executive's duties and
responsibilities under this Agreement for a period of 180 consecutive days or
for 180 days in a 365-day period.
(k) "MDU Business" shall mean the delivery of video and
telecommunications services to residential multiple dwelling units.
(l) "Minimum Severance Period" shall have the meaning set forth in
Section 9(d)(vi)(A), subject to modification as provided in Section 9(e) in the
event of a Change in Control.
(m) "Non-Extension Event" shall mean any termination of the Term of
Employment resulting from an election by the Company not to renew the Term of
Employment.
(n) "Person" shall mean an individual, firm, corporation, trust, joint
venture, partnership, limited liability company, association, unincorporated
organization or other entity or any governmental body or subdivision, agency,
commission or authority thereof.
(o) "Stock" shall mean the Common Stock of the Company.
(p) "Subsidiary" shall mean any Person of which the Company owns,
directly or indirectly, more than 50% of the Voting Stock or, in the case of a
Person other than a corporation, more than 50% of the equity interest.
(q) "Term of Employment" shall mean the period or periods specified in
Section 2.
(r) "Voting Stock" shall mean capital stock of any class or classes
having general voting power under ordinary circumstances, in the absence of
contingencies, to elect a majority of the directors of a corporation.
2. Term of Employment.
The Company hereby employs Executive, and Executive hereby accepts such
employment, for the Term of Employment commencing April 15, 1999 and ending at
the close of business on April 15, 2001, subject to earlier termination of the
Term of Employment in accordance with the terms of this Agreement. The Term of
Employment shall be automatically renewed from year to year unless either the
Company or Executive provides the other with written notice of non-renewal at
least 30 days prior to the date on which the Term of Employment would otherwise
expire.
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3. Position, Duties and Responsibilities.
(a) During the Term of Employment, Executive shall be employed as Chief
Financial Officer of the Company. In that capacity Executive shall have the
duties, authority and responsibilities normally associated with such position
and shall report to the Chief Executive Officer of the Company. Executive shall,
at the request of the Board or the Chief Executive Officer of the Company, also
serve as an officer and/or director of one or more Subsidiaries without
additional compensation.
(b) During the Term of Employment Executive shall devote his full
attention and expend his best efforts, energies and skills on a full-time basis
to the business of the Company and its Subsidiaries.
(c) Executive's services to the Company will be rendered primarily at
the Company's principal office. Executive acknowledges, however, that
Executive's services may require extensive travel.
(d) Nothing herein shall preclude Executive from (i) serving as a
director of one or more other corporations not engaged in competition with the
Company or of one or more trade associations and/or charitable organizations,
subject in each case to prior approval by the Chief Executive Officer of the
Company, (ii) engaging in charitable activities and community affairs, (iii)
managing Executive's personal investments and affairs and those of Executive's
family, and (iv) engaging in other business transactions, provided that such
activities individually and in the aggregate do not reflect adversely on
Executive's personal or business reputation or the Company or its business and
do not interfere with the proper performance of Executive's duties and
responsibilities to the Company and its Subsidiaries.
4. Base Salary.
Executive shall receive Base Salary from the Company at the annual rate
of $210,000, payable in accordance with the regular payroll practices of the
Company, but in no event less frequently than monthly. Executive's Base Salary
shall be subject to review by the Company on an annual basis but shall not be
decreased.
5. Annual Bonus.
Executive shall be entitled to be considered for receipt of an annual
bonus, the calculation of which is to be determined in accordance with an
incentive plan established and administered by the Board which includes a
"target" bonus for Executive for each bonus period, as such plan may be modified
by the Board from time to time.
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6. Long-Term Incentive Programs.
Executive shall be eligible to participate in any long-term incentive
programs of the Company on the same basis as other senior executives of the
Company.
7. Employee Benefit Programs and Vacation.
(a) During the Term of Employment Executive shall be entitled to
participate in all employee pension and welfare benefit plans and programs made
available to the Company's senior executives generally, as such plans or
programs may be in effect from time to time.
(b) Executive shall be entitled to four weeks of vacation per year.
8. Reimbursement of Business and Other Expenses and Perquisites.
(a) Executive is authorized to incur reasonable business expenses in
carrying out his duties and responsibilities under this Agreement, and the
Company shall promptly reimburse Executive for all such expenses, all subject to
and in accordance with the Company's policies and procedures as adopted and in
effect from time to time and applicable to its senior executives of comparable
status.
(b) To assist Executive in the performance of his duties and
responsibilities under this Agreement, the Company shall provide to Executive an
allowance for the use of an automobile in accordance with the Company's policies
applicable generally to the Company's senior executives of comparable class or
status; provided, however, that, if Executive currently uses a leased automobile
provided by the Company, then in lieu of such allowance the Company may continue
to provide Executive with the use of such leased automobile for the remaining
initial term of the applicable lease.
(c) Executive shall be eligible to receive all perquisites made
generally available by the Company to its senior executives of comparable class
or status.
(d) Executive shall be reimbursed for cost of air travel (economy
class) for up to two round trip tickets between Dallas and Canada for Executive
and his immediate family during each calendar year covered by this Agreement. In
addition, the event of a death of Executive's or Executive's wife's immediately
family, the Company will reimburse Executive for the costs of round trip travel
(economy class) for Executive and Executive's immediately family between Dallas
and Canada.
(e) Executive shall be reimbursed for all reasonable expenses
associated with the preparation of his and his spouse's United States and
Canadian income tax returns for tax years that end during the Term of
Employment.
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(f) During the Term of Employment, Executive shall be reimbursed for
the cost of private school tuition for Executive's children.
(g) The Company will contribute on Executive's behalf 5% of Executive's
base salary to the pension fund of Executive's choice. Payments to the fund will
be made bi-weekly during the Term of Employment.
(h) The Company will reimburse Executive for the reasonable costs of
English classes taken by Executive and members of his immediate family during
the Term of Employment.
9. Termination of Term of Employment.
(a) Termination Due to Death. The Term of Employment shall terminate
upon Executive's death. In the event of such termination due to Executive's
death, Executive's estate or Executive's beneficiaries, as the case may be,
shall be entitled to:
(i) the proceeds payable in the event of Executive's death
under the group life insurance policy maintained by the Company for the benefit
of its senior executive employees and others;
(ii) an amount, payable promptly in a lump sum, equal to the
excess, if any, of (A) Base Salary for the unexpired portion of the Term of
Employment remaining as of the time immediately prior to Executive's death, over
(B) the aggregate amount of life insurance proceeds payable to Executive's
estate or beneficiaries pursuant to clause (i) of this Section 9(a) or pursuant
to any other policy on Executive's life for which premiums are paid by the
Company or any of its Affiliates (the "Aggregate Life Insurance Benefits");
(iii) if the date of Executive's death coincides with the last
day of a bonus period, a bonus for such bonus period in accordance with the
terms of the applicable incentive plan; otherwise, a bonus for the bonus period
in which Executive's death occurs, determined pro rata with respect to
Executive's target bonus for such bonus period based on the number of completed
months of Executive's employment by the Company during such bonus period;
(iv) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which Executive's death occurs;
(v) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8; and
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(vi) any other or additional benefits provided for in
accordance with applicable plans and programs of the Company.
(b) Termination Due to Disability. The Term of Employment may be
terminated by the Company by written notice to Executive in the case of
Executive's Disability. In the event of such termination due to Disability,
Executive shall be entitled to:
(i) an amount, payable promptly in a lump sum, equal to the
excess, if any, of (A) Base Salary for the unexpired portion of the Term of
Employment remaining as of the time immediately prior to such termination, over
(B) the amount of any disability benefits provided to Executive by the Company
or under any disability insurance paid for, or for which premiums paid by
Executive were reimbursed, by the Company;
(ii) if such termination coincides with the last day of a
bonus period, a bonus for such bonus period in accordance with the terms of the
applicable incentive plan; otherwise, a bonus for the bonus period in which such
termination occurs, determined pro rata with respect to Executive's target bonus
for such bonus period based on the number of completed months of Executive's
employment by the Company during such bonus period,
(iii) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which such termination occurs;
(iv) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8; and
(v) any other or additional benefits provided for in
accordance with applicable plans and programs of the Company.
(c) Termination by the Company for Cause. In the event the Company
terminates the Term of Employment for Cause, Executive shall be entitled to:
(i) Base Salary through the date of such termination;
(ii) any bonus earned (but not yet paid) for any bonus period
prior to the bonus period in which such termination occurs;
(iii) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8; and
(iv) any other or additional benefits provided for in
accordance with applicable plans or programs of the Company.
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(d) Termination Without Cause or Constructive Termination Without
Cause. In the event the Term of Employment is terminated by the Company without
Cause, other than due to Executive's Disability or death, or in the event the
Term of Employment is terminated due to a Constructive Termination Without
Cause, Executive shall be entitled to:
(i) Base Salary through the date of such termination;
(ii) if the date of such termination coincides with the last
day of a bonus period, a bonus for such bonus period in accordance with the
terms of the applicable incentive plan; otherwise, a bonus for the bonus period
in which such termination occurs, determined pro rata with respect to
Executive's target bonus for such bonus period based on the number of completed
months of Executive's employment by the Company during such bonus period;
(iii) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which such termination occurs;
(iv) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8;
(v) any other or additional benefits provided for in
accordance with applicable plans and programs of the Company; and
(vi) to elect, within 30 days after such termination, either
(x) to cease being an employee of the Company and receive the lump-sum payment
described in section 9(d)(vi)(A) or (y) to remain an employee of the Company for
the period described in Section 9(d)(vi)(B). After Executive makes such
election, the following provisions shall apply:
(A) In the event Executive makes the election
provided in clause (x) of Section 9(d)(vi), then, subject to
the requirements of Section 9(j), the Company shall pay to
Executive in a lump sum: (1) an amount equal to Base Salary
for the period (the "Minimum Severance Period") that is the
longer of 12 months or the unexpired portion of the Term of
Employment remaining as of the time immediately prior to such
termination, plus (2) an amount equal to Average Annual Bonus
pro-rata for the Minimum Severance Period.
(B) In the event Executive makes the election
provided in clause (y) of Section 9(d)(vi), then, subject to
the requirements of Section 9(j), Executive will remain an
employee of the Company (but without any title) until the end
of the Minimum Severance Period, and the Company shall pay to
Executive Base Salary for such period plus Average Annual
Bonus pro-rata for such period; provided, however, that
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(1) if Executive dies during such period,
Executive's payments pursuant to this Section
9(d)(vi)(B) shall cease, and Executive's estate or
beneficiaries, as the case may be, will be entitled
to receive the Aggregate Life Insurance Benefits plus
a lump sum amount (which shall be paid by the Company
promptly after Executive's death) equal to the
excess, if any, of (x) the balance of the payments of
Base Salary and Average Annual Bonus that Executive
would have been entitled to receive pursuant to this
Section 9(d)(vi)(B) had Executive remained on the
Company's payroll until the end of such period over
(y) the amount of the Aggregate Life Insurance
Benefits; and
(2) if Executive accepts substantially
full-time employment with any other Person during
such period or notifies the Company in writing of
Executive's intention to terminate his employment
during such period, Executive will cease to be an
employee of the Company effective upon the earlier of
the effective date of such termination as specified
by Executive in such notice or the commencement of
such employment, and the Company shall promptly pay
to Executive a lump sum equal to the balance of the
payments of Base Salary and Average Annual Bonus that
Executive would have been entitled to receive
pursuant to this Section 9(d)(vi)(B) had Executive
remained on the Company's payroll until the end of
such period.
(C) In the event Executive makes the election
provided in clause (y) of Section 9(d)(vi), then during the
period Executive remains on the payroll of the Company,
Executive will continue to be eligible to receive the medical
and life insurance benefits which all other employees of the
Company are then entitled to receive, as such benefits may be
amended, changed or eliminated from time to time. Executive
shall not be entitled to any other perquisite or benefit
provided by the Company to its senior executives or employees
generally or otherwise specifically provided for in this
Agreement and shall not be entitled to any additional awards
or grants under any long-term incentive plan. In the event
Executive makes the election provided in clause (y) of Section
9(d)(vi), Executive will continue to be an employee of the
Company for purposes of any stock option and restricted shares
agreements until such time as Executive leaves the payroll of
the Company.
(e) Acceleration of Entitlements in Connection with a Change in Control
or Termination. Upon a Change in Control (regardless of whether Executive
continues in employment by the Company or the termination of the Term of
Employment for any reason whatsoever) Executive shall become immediately
entitled to exercise in full any stock option to acquire Stock during the
remainder of the term of such option. Without limitation of the preceding
sentence, upon the termination of the Term of Employment (including upon a Non-
Extension Event or Disability or death) otherwise than for Cause, Executive
shall become
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immediately entitled to exercise in full any stock option to acquire Stock
during the remainder of the term of such option, to the extent such option would
otherwise have vested or become exercisable within 12 months after such
termination of the Term of Employment but, unless a Change in Control shall have
occurred, all such options that have not previously expired shall automatically
expire on the date that is 12 months after such termination of the Term of
Employment. If, in connection with a Change in Control or within 12 months after
a Change in Control, the Term of Employment is terminated without Cause, other
than due to Disability or death, or due to a Constructive Termination Without
Cause, then, without limitation of the payments, benefits and elections provided
in Section 9(d) and the first sentence of this Section 9(e), upon such Change in
Control or such later termination, all amounts, entitlements and benefits
awarded to Executive or to which Executive is otherwise entitled under any
grant, plan or program of the Company but which are not yet vested shall become
fully vested except to the extent such vesting would be inconsistent with the
terms of the relevant plan. Without limitation of the benefits to Executive
pursuant to the preceding sentence or any of the other provisions of this
Agreement, if, in connection with a Change in Control or within 12 months after
a Change in Control, the Term of Employment is terminated due to a Constructive
Termination Without Cause or by the Company without Cause (other than due to
Disability or death), then, (A) the "Minimum Severance Period" for purposes of
Section 9(d) shall be not less than 24 months and (B) upon such Change in
Control (or such later termination) all amounts, entitlements and benefits
awarded to Executive or to which Executive is otherwise entitled under any
grant, plan or program of the Company but which are not yet vested shall become
fully vested except to the extent such vesting would be inconsistent with the
terms of the relevant plan. In connection with the occurrence of a Change in
Control, Executive and the Company agree to negotiate in good faith payment
arrangements and covenant changes (without reducing the total amount payable
pursuant to this Section 9(e)) designed to preserve to the Company the
deductibility for federal income tax purposes of, and eliminate any excise tax
imposed by Section 4999 of the Code payable in respect of, amounts paid or
benefits inuring to Executive pursuant to this Section 9(e).
(f) Voluntary Termination. A termination of the Term of Employment by
Executive on his own initiative, other than a termination due to death or
Disability or a Constructive Termination without Cause, shall be treated as a
Termination for Cause, and, accordingly, Executive shall have only the
entitlements provided in Section 9(c).
(g) Termination Because of Non-Renewal. In the event of a Non-
Extension Event, Executive shall be entitled to:
(i) Base Salary through the date of expiration of the Term of
Employment; (ii) if the expiration of the Term of Employment coincides with the
last day of a bonus period, a bonus for such bonus period in accordance with the
terms of the applicable incentive plan; otherwise, a bonus for the bonus period
in which the Term of Employment expires, determined pro rata with respect to
Executive's target bonus for such bonus
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period based on the number of completed months of Executive's employment by the
Company during such bonus period;
(iii) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which the Term of Employment
expires;
(iv) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8;
(v) any other or additional benefits provided for in
accordance with applicable plans and programs of the Company; and
(vi) to elect within 30 days after such termination, either
(x) to cease being an employee of the Company and receive the lump-sum payment
described in section 9(g)(vi)(A) or (y) to remain an employee of the Company for
the period described in Section 9(g)(vi)(B). After Executive makes such
election, the following provisions shall apply:
(A) In the event Executive makes the election
provided in clause (x) of Section 9(g)(vi), subject to the
requirements of Section 9(j), the Company shall pay to
Executive in a lump sum: (1) an amount equal to Base Salary
for a period of 12 months (or 24 months, if a Change in
Control has occurred during the Term of Employment and the
Term of Employment has not been renewed at least once after
the Change in Control), plus (2) an amount equal to Average
Annual Bonus pro-rata for the same period.
(B) In the event Executive makes the election
provided in clause (y) of Section 9(g)(vi), subject to the
requirements of Section 9(j), Executive will remain an
employee of the Company (but without any title) for the period
of 12 months following the expiration of the Term of
Employment (or 24 months, if a Change in Control has occurred
during the Term of Employment and the Term of Employment has
not been renewed at least once after the Change in Control),
and the Company shall pay to Executive Base Salary for such
period plus Average Annual Bonus pro-rata for such period;
provided, however, that
(1) if Executive dies during such period,
Executive's payments pursuant to this Section
9(g)(vi)(B) shall cease, and Executive's estate or
beneficiaries, as the case may be, will be entitled
to receive the Aggregate Life Insurance Benefits,
plus a lump sum amount (which shall be paid by the
Company promptly after Executive's death) equal to
the excess, if any, of (x) the balance of the
payments of Base Salary and Average Annual Bonus that
Executive would have been entitled to receive
pursuant to this Section 9(g)(vi)(B) had Executive
remained on the Company's payroll until
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the end of such period over (y) the amount of the
Aggregate Life Insurance Benefits; and
(2) if Executive accepts substantially
full-time employment with any other Person during
such period or notifies the Company in writing of
Executive's intention to terminate Executive's
employment during such period, Executive will cease
to be an employee of the Company, effective upon the
earlier of the effective date of such termination as
specified by Executive in such notice or the
commencement of such employment, and the Company
shall promptly pay to Executive a lump sum equal to
the balance of the payments of Base Salary and
Average Annual Bonus that Executive would have been
entitled to receive pursuant to this Section
9(g)(vi)(B) had Executive remained on the Company's
payroll until the end of such period.
(C) In the event Executive makes an election provided in
clause (y) of Section 9(g)(vi), then during the period Executive
remains on the payroll of the Company, Executive will continue to be
eligible to receive the medical and life insurance benefits all other
employees of the Company are then entitled to receive, as amended,
changed or eliminated, from time to time. Executive shall not be
entitled to any other perquisite or benefit provided by the Company to
its senior executives generally or otherwise specifically provided for
in this Agreement and shall not be entitled to any additional awards or
grants under any long-term incentive plan. In the event of an election
pursuant to clause (y) of Section 9(d)(vi), Executive will continue to
be an employee of the Company for purposes of any stock option and
restricted shares agreements until such time as Executive leaves the
payroll of the Company.
(h) No Mitigation; No Offset. In the event of any termination of the
Term of Employment under this Section 9, Executive shall be under no obligation
to seek other employment and there shall be no offset against amounts due
Executive under this Agreement on account of any remuneration attributable to
any subsequent employment obtained by Executive except as specifically provided
in this Section 9.
(i) Nature of Payments. Any amounts due under this Section 9 are in the
nature of severance payments considered to be reasonable by the Company and are
not in the nature of a penalty.
(j) General Release. In partial consideration for, and as a condition
of, the Company's obligation to make the payments described in Sections 9(d)(vi)
and 9(g)(vi), Executive shall execute and deliver to the Company a release of
all claims Executive shall then have against the Company, its Affiliates and
their related Persons arising out of or in connection with Executive's
employment or termination of employment, including, but not limited to, a
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release of all claims of discrimination. The Company will deliver such release
to Executive at or about the time it delivers or receives the notice of
termination, and Executive shall execute and deliver such release to the Company
within 21 days thereafter, except that in case of expiration of the Term of
Employment following a Non-Extension Event, the release will be delivered to
Executive upon such expiration and shall be executed and delivered by Executive
within 21 days after such expiration. If Executive fails to execute and deliver
such release to the Company within such 21-day period, or if Executive revokes
Executive's consent to such release as provided for therein, Executive will not
be eligible to receive any further payments from the Company pursuant to Section
9(d)(vi) or 9(g)(vi).
(k) Other Severance. In the event the Company's written severance pay
policy applicable to Executive provides for greater severance pay and benefits
than are provided for in Section 9(d) or 9(g), Executive may elect to receive
termination pay and benefits under the terms and conditions of such policy in
lieu of the payments and benefits under Section 9(d) or 9(g). It is understood
by the Parties that Executive shall not be entitled to both the payments and
benefits under the severance pay policy and those available under Section 9(d)
or 9(g). Notwithstanding the foregoing, in addition to being entitled to the
greater of the payments and benefits under the severance pay policy and under
Section 9(d) or 9(g), as applicable, Executive shall be entitled to professional
outplacement services (including office space and secretarial services), at a
cost not exceeding 10% of Executive's annual Base Salary, in accordance with the
Company's policies regarding outplacement services; provided, however, that
payments pursuant to this sentence shall be made only for actual outplacement
services, and Executive shall not have the option to elect to receive all or
part of the maximum allowances therefor in lieu of outplacement services.
(l) Relocation. Notwithstanding the provisions of Section 9(k), in the
event Executive becomes entitled to payments and benefits under Section 9(b),
9(d) or 9(g), Executive shall also be entitled to receive from the Company
relocation assistance payments, consisting of payment or reimbursement of:
(i) costs incurred in the sale of Executive's primary
residence in the Dallas area, including sales commissions not to exceed local
custom, and all other normal closing costs in connection with such sale and, in
the event the gross proceeds from the sale of Executive's primary residence are
less than the contract purchase price paid by Executive on his purchase of such
residence, the Company will reimburse Executive for the difference less amounts
payable to Executive pursuant to the preceding clause of this paragraph (i);
(ii) all reasonable moving expenses to another location in the
United States or Canada, including packing, transport, temporary storage and
unpacking (including the cost of moving one vehicle), all through movers or
moving agents designated or approved by the Company;
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(iii) reasonable costs (not exceeding costs of economy air
fare and appropriate lodging) of one house-hunting trip for Executive and
spouse; and
(iv) a tax "gross-up" for all sums paid to Executive pursuant
to clauses (i) through (iv) of this paragraph (l) that are includable in
Executive's taxable income for U.S. Federal Income Tax purposes (i.e., an amount
which, after the payment of the U.S. Federal, state and local income taxes to
which Executive is subject on the payments made to or for Executive's benefit
pursuant to this paragraph (l), calculated at the maximum rate applicable to
individuals, irrespective of the actual tax payments made by Executive, will be
equal to the costs for which reimbursement is to be provided pursuant to clauses
(i) through (iii) of this paragraph (l));
provided, however, that payments pursuant to this paragraph (l) shall be made
only for actual expenses in connection with Executive's relocation outside the
Dallas area, and Executive shall not have the option to elect to receive all or
part of the maximum allowances therefor in lieu of relocation expenses; and
provided, further, that such payments shall only be available in respect of
relocation that occurs within (x) nine months after the end of the Term of
Employment and (y) February 28, 2002.
10. Indemnification.
(a) The Company agrees that if Executive is made a party, or is
threatened to be made a party, to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact that Executive is or was a director, officer or employee of the Company or
is or was serving at the request of the Company as a director, officer, member,
employee or agent of another Person, including service with respect to employee
benefit plans, whether or not the basis of such Proceeding is Executive's
alleged action in an official capacity while serving as a director, officer,
member, employee or agent, Executive shall be indemnified and held harmless by
the Company to the fullest extent permitted or authorized by the Company's
certificate of incorporation or bylaws or, if greater, by the laws of the State
of Delaware, against all cost, expense, liability and loss (including, without
limitation, attorney's fees, judgments, fines, ERISA excise taxes (other than
such as may be imposed with respect to compensation received by Executive) or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by Executive in connection therewith, and such indemnification shall
continue as to Executive even if Executive has ceased to be a director, member,
employee or agent of the Company or other Person and shall inure to the benefit
of Executive's heirs, executors and administrators. The Company shall advance to
Executive to the extent permitted by law all reasonable costs and expenses
incurred by him in connection with a Proceeding within 20 days after receipt by
the Company of a written request, with appropriate documentation, for such
advance. Such request shall include an undertaking by Executive to repay the
amount of such advance if it shall ultimately be determined that Executive is
not entitled to be indemnified against such costs and expenses.
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(b) The Company agrees to continue and maintain a directors' and
officers' liability insurance policy covering Executive to the extent the
Company provides such coverage for its other executive officers.
(c) Promptly after receipt by Executive of notice of any claim or the
commencement of any action or proceeding with respect to which Executive is
entitled to indemnity hereunder, Executive shall notify the Company in writing
of such claim or the commencement of such action or proceeding, and the Company
shall (i) assume the defense of such action or proceeding, (ii) employ counsel
reasonably satisfactory to Executive and (iii) pay the reasonable fees and
expenses of such counsel. Notwithstanding the preceding sentence, Executive
shall be entitled to employ counsel separate from counsel for the Company and
from any other party in such action if Company counsel reasonably determines
that a conflict of interest exists which makes representation by counsel chosen
by the Company not advisable. In such event, the reasonable fees and
disbursements of such separate counsel for Executive shall be paid by the
Company to the extent permitted by law.
(d) After the Term of Employment, (i) at the request of the Company,
Executive shall cooperate with and assist the Company (to the extent that such
activities do not unreasonably interfere with the performance of Executive's
other business activities or employment) to prepare for or defend against any
action, suit, proceeding or claim brought or threatened to be brought against
the Company or to prepare for or institute any action, suit, proceeding or claim
to be brought or threatened to be brought against a third party arising out of
or based upon any matter or thing whatsoever arising out of or which may be
related to matters as to which Executive has or acquires knowledge or
information by reason of his employment by the Company or any of its
Subsidiaries, and (ii) upon the request of Executive, the Company shall
reimburse Executive for all reasonable travel, legal and other out-of-pocket
expenses that may be incurred by Executive related to assisting the Company, at
its request, to prepare for or defend against any such action, suit, proceeding
or claim brought or threatened to be brought against the Company or to prepare
for or institute any action, suit, proceeding or claim to be brought or
threatened to be brought against a third party and in providing evidence,
producing documents or otherwise participating in any such action, suit,
proceeding or claim.
11. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement, the existence of
this Agreement shall not prohibit or restrict Executive's entitlement to full
participation in the employee benefit and other plans or programs in which
senior executives of the Company are eligible to participate.
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12. Confidentiality.
Executive acknowledges that Executive is bound by that certain
nondisclosure agreement executed by Executive upon the commencement of his
employment with the Company and that the terms thereof shall not be modified or
affected by this Agreement.
13. Non-Competition.
(a) During the Term of Employment and (unless the Term of Employment
expires following a Non-Extension Event or is terminated by the Company without
Cause or voluntarily by Employee due to a Constructive Termination Without
Cause) for a period of nine months thereafter, Executive shall not, directly or
indirectly, except when acting on behalf of the Company, whether as an employee,
consultant, partner, principal, agent, distributor, representative, stockholder
or otherwise, plan, develop, conduct or otherwise engage in the MDU Business in
any metropolitan area world-wide in which the Company or any Subsidiary then
conducts or is actively planning to conduct the MDU Business (except that he may
be a stockholder holding not more than a 1% common stock interest in a Person
whose shares are publicly traded and which engages in the MDU Business in any
such area). Notwithstanding the foregoing, Executive shall be free at any time
following the Term of Employment to accept employment with or provide other
services to any Person whose business includes the MDU Business but only if (i)
the MDU Business is not the principal or predominant business of such Person and
(ii) the services of Executive do not principally or predominantly relate to the
MDU Business. By way of example only, if the Term of Employment were to end on
the date of this Agreement, Executive would be free to be employed by a typical
incumbent local exchange or long distance carrier or by a typical franchised
cable operator for so long as Executive's services did not principally or
predominantly relate to the provision of video and telecommunications services
to residential multiple dwelling units in the markets in which the Company now
operates or is actively planning to operate.
(b) During the Term of Employment and for a period of 12 months
thereafter, Executive shall not, directly or indirectly, (i) solicit any
customer of the Company or any Subsidiary to do business with any Person that
engages in the MDU Business or (ii) solicit any Person, other than his
secretary/administrative assistant, who is employed by the Company or any
Subsidiary or who was employed by the Company or any Subsidiary within 12 months
of such solicitation to (A) terminate his or her employment with the Company or
any Subsidiary, (B) accept employment with anyone other than the Company or any
Subsidiary or (C) in any manner interfere with the business of the Company or
any Subsidiary.
(c) Executive acknowledges that the Company has no adequate remedy at
law and would be irreparably harmed if Executive breaches or threatens to breach
any of the provisions of Section 12 or Section 13(a) or 13(b), and therefore
Executive agrees that the Company or any Subsidiary, as the case may be, shall
be entitled to temporary or permanent
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mandatory or injunctive relief to terminate or forestall any breach or
threatened breach of any of those provisions and to specific performance of the
terms of each of those provisions, without the need to demonstrate irreparable
injury or post bond or other security. Executive further agrees that he shall
not, in any proceeding seeking injunctive or other equitable relief to enforce
the provisions of Section 12 or Section 13(a) or 13(b), raise the defense that
the Company or any Subsidiary has an adequate remedy at law. Nothing in this
Section 13(c) shall be construed to prohibit the Company or any Subsidiary from
pursuing any other rights or remedies available to it at law or in equity or
which may be otherwise available to it.
(d) If it is determined that any of the provisions of this Section 13,
or any part thereof, is unenforceable because of the duration or geographical
scope of such provision, it is the intention of the Parties that the duration or
scope of such provision, as the case may be, shall be reduced so that such
provision becomes enforceable and, in its reduced form, such provision shall
then be enforceable and shall be enforced.
14. Intellectual Property.
Any processes, inventions, ideas, know-how and other similar data
created or developed by Executive while employed by the Company which relate to
the business then conducted by the Company or any of its Subsidiaries shall be
the Company's exclusive and absolute property, and Executive hereby assigns to
the Company, now and hereafter, all of his right, title and interest to any and
all of the same. Any work in connection with the services rendered by Executive
hereunder shall be considered "work made for hire" under the Copyright Law of
1976 or any successor law, and the Company shall be the owner of such work as if
the Company were the author of such work.
15. Documents; Conduct; References.
(a) Executive hereby expressly covenants and agrees that, following
termination of the Term of Employment for any reason, or any time, upon the
Company's request, Executive will promptly return to the Company all property of
the Company and its Subsidiaries in his or her possession or control (whether
maintained at his or her office, home or elsewhere), including, without
limitation, all copies of all management studies, business or strategic plans,
budgets, notebooks and other printed, typed electronically stored or written
materials, documents, diaries, disks, calendars and data of or relating to the
Company or its Subsidiaries or their respective personnel or affairs.
(b) Executive hereby expressly covenants and agrees that Executive will
not at any time, during or after the Term of Employment, publicly denigrate,
ridicule or intentionally criticize the Company or any of its Subsidiaries or
any of their respective products or services, properties, employees, officers or
directors, including, without limitation, by way of news interviews or the
expression of personal view, opinions or judgments to the news media.
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(c) The Company hereby expressly covenants and agrees that the Company
will not at any time, during or after the Term of Employment, publicly
denigrate, ridicule or intentionally criticize Executive, including, without
limitation, by way of news interviews or the expression of personal views,
opinions or judgments to the news media.
(d) The Company hereby expressly covenants and agrees that, following
the Term of Employment, the Company will, unless otherwise requested by
Executive in any instance or required by law, provide to any prospective
employer seeking information regarding Executive's employment with the Company a
neutral reference in accordance with the general policies of the Company
applicable to requests for employment references.
16. Acknowledgment of Representation by Counsel.
The Parties acknowledge that they have been represented by counsel or
knowingly waive their right to be represented by counsel with regard to this
Agreement and the subject matter hereof. Each Party agrees and acknowledges that
he or it has not relied upon any tax advice, legal counsel or business advice
provided by the other Party.
17. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors, heirs (in the case of Executive) and
assigns. No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company, except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the surviving corporation, or the sale or liquidation of all
or substantially all of the assets of the Company, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee assumes the liabilities, obligations and
duties of the Company, as contained in this Agreement, either contractually or
by operation of law. The Company further agrees that, in the event of a sale of
assets or liquidation as described in the preceding sentence, it shall take
whatever action it legally can in order to cause such assignee or transferee to
expressly assume the liabilities, obligations and duties of the Company
hereunder. No rights or obligations of Executive under this Agreement may be
assigned or transferred by Executive other than Executive's rights to
compensation and benefits.
18. Entire Agreement.
Except as herein otherwise expressly provided, this Agreement contains
the entire understanding and agreement between the Parties concerning the
subject matter hereof and supersedes all prior agreements, understandings,
discussions, negotiations and undertakings, whether written or oral, between the
Parties with respect thereto, including any agreement between Executive and any
Affiliate of the Company dated prior to the date hereof.
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19. Amendment or Waiver.
No provision in this Agreement may be amended unless such amendment is
agreed to in writing and signed by Executive and an authorized officer of the
Company. No waiver by either Party of any breach by the other Party of any
condition or provision contained in this Agreement to be performed by such other
Party shall be deemed a waiver of a similar or dissimilar condition or provision
at the same or any prior or subsequent time. Any waiver must be in writing and
signed by Executive or an authorized officer of the Company, as the case may be.
20. Severability.
In the event that any provision or portion of any provision of this
Agreement shall be determined to be invalid or unenforceable for any reason, in
whole or in part, the remaining provisions and portions remaining of any
provisions of this Agreement shall be unaffected thereby and shall remain in
full force and effect to the fullest extent permitted by law.
21. Beneficiaries/References.
Executive shall be entitled to select (and change, to the extent
permitted under any applicable law) a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death by
giving the Company written notice thereof. In the event of Executive's death or
a judicial determination of Executive's incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
22. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and interpreted in
accordance with the laws of the State of Texas without reference to principles
of conflict of laws.
23. Resolution of Disputes.
Any disputes arising under or in connection with this Agreement shall
be resolved by binding arbitration before a single arbitrator, to be held in
Dallas, Texas, in accordance with the rules and procedures of the American
Arbitration Association. Judgment upon the award rendered by the arbitrator
shall be final and subject to appeal only to the extent permitted by law. Each
Party shall bear its or his own expenses incurred in connection with any
arbitration. Anything to the contrary notwithstanding, each Party has the right
to proceed with a court action for injunctive relief or relief from violations
of law not within the jurisdiction of an arbitrator.
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24. Notices.
Any notice required or permitted hereunder to be given to a Party shall
be effective only if given in writing and shall be deemed to have been given
when delivered personally or sent by certified or registered mail, postage
prepaid, return receipt requested or by Federal Express or other similar
service, duly addressed to the Party concerned at the address indicated below or
to such changed address as such Party may hereafter specify by notice to the
other Party:
If to the Company:
OpTel, Inc.
1111 W. Mockingbird Lane, #1000
Dallas, Texas 75247
Attention: General Counsel
If to Executive:
702 Essex Court
Southlake, TX 76092
25. Headings.
The captions or headings of the sections contained in this Agreement
are for convenience only and shall not be deemed to control or affect the
meaning or construction of any provision of this Agreement.
26. Execution of Agreement and Further Actions.
This Agreement may be executed in several counterpart copies each of
which shall constitute an original and the same instrument notwithstanding that
both Parties are not signatories to the same counterpart. The Parties agree to
execute such other documents and to take such other action as may from time to
time be necessary or appropriate to carry out the intent of this Agreement,
provided that the same are not inconsistent with the provisions hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
OPTEL, INC.
By:
-------------------------
----------------------------
BERTRAND BLANCHETTE
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EXHIBIT 10.14
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by and
between OPTEL, INC., a Delaware corporation (the "Company"), and STEPHEN R.
DUBE ("Executive").
W I T N E S S E T H:
WHEREAS, Executive is currently employed by the Company as Chief
Operating Officer of the Company; and
WHEREAS, the Company desires to continue to employ Executive and
Executive has agreed to such continuation, subject to the terms of this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the Company and Executive (individually a "Party"
and together the "Parties") agree as follows:
1. Definitions.
As used in this Agreement, unless the context otherwise requires:
(a) "Affiliate" of a Person shall mean a Person that directly or
indirectly controls, is controlled by, or is under common control with the
Person specified.
(b) "Aggregate Life Insurance Benefits" shall have the meaning set
forth in Section 9(a)(ii).
(c) "Average Annual Bonus" shall mean the average of the two most
recent annual bonuses (not including any payments from long-term incentive
programs) received by or due to Executive for completed fiscal years
immediately prior to the termination of the Term of Employment.
(d) "Base Salary" shall mean the salary provided for in Section 4.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Cause" shall mean:
<PAGE> 2
(i) Executive's conviction of a crime involving moral turpitude
(excluding offenses such as driving while intoxicated); or
(ii) Executive's (A) commission of a fraud upon the Company or
(B) material breach of this Agreement (including by wilfully failing or
neglecting to perform Executive's duties hereunder), which breach, if curable,
is not substantially cured within 10 days after written notice to Executive
specifying the nature of the breach.
(g) A "Change in Control" shall mean the occurrence of any one of
the following events:
(i) Any "person," as such term is used in Sections 3(a)(9) and
13(d) of the Securities Exchange Act of 1934 (other than Executive, Le Groupe
Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse
and descendants, Caisse de depot et placement du Quebec, and their respective
Affiliates (collectively, all or any of Le Groupe Videotron Ltee, Sojecci Ltee,
Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de
depot et placement du Quebec, and their respective Affiliates constitute the
"Existing Control Group")), is a "beneficial owner," as such term is used in
Rule 13d-3 promulgated under that act, of shares of the Voting Stock of the
Company having more total votes in an election for directors than shares of
Voting Stock of which the Existing Control Group is the beneficial owner and,
at the same time, the Existing Control Group does not have the power, by
contract or otherwise, to elect or designate a majority of the members of the
Board;
(ii) the majority of the members of the Board consists of
individuals other than Incumbent Directors, which term means the members of the
Board on the date of this Agreement; provided that any individual becoming a
director subsequent to such date whose election or nomination for election as a
director was supported by two-thirds of the directors who were Incumbent
Directors at the time of such election or nomination shall be an Incumbent
Director;
(iii) the Company adopts any plan of liquidation providing for
the distribution of all or substantially all of its assets;
(iv) all or substantially all of the assets or business of the
Company are disposed of pursuant to a merger, consolidation or other
transaction (unless the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting Stock
of the Company, the Voting Stock or other ownership interests of the Person or
Persons, if any, that succeed to the business of the Company) and at any time
thereafter the Existing Control Group does not have the power, by contract or
otherwise, to elect or designate a majority of the members of the Board; or
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(v) the Company combines with another Person and is the
surviving corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination hold, directly or
indirectly, not more than 50% of the Voting Stock of the surviving corporation
(there being excluded from the number of shares held by such shareholders, but
not from the Voting Stock of the surviving corporation, any shares received by
Affiliates of such other Person in exchange for stock of such other Person) and
at any time thereafter the Existing Control Group does not have the power, by
contract or otherwise, to elect or designate a majority of the members of the
Board.
(h) "Confidential Information" shall mean all information that is
not known or available to the public concerning the business of the Company or
any Subsidiary relating to its products, product development, trade secrets,
customers, suppliers, finances, and business plans and strategies. For this
purpose, information known or available generally within the trade or industry
of the Company or any Subsidiary shall be deemed to be known or available to
the public. Confidential Information shall include information that is, or
becomes, known to the public as a result of a breach by Executive of the
provisions of Section 13.
(i) "Constructive Termination Without Cause" shall mean a
termination of the Term of Employment by written notice given by Executive
within 60 days following the occurrence, without Executive's prior written
consent, of one or more of the following events (except in consequence of a
prior termination):
(i) a reduction in or elimination of (A) Executive's then
current Base Salary, or (B) Executive's opportunity for any long-term incentive
award for which he is eligible under Section 6 or the termination or material
reduction of any material employee benefit or perquisite enjoyed by him
including the annual bonus provided for under Section 5; provided, however,
that in the case of clause (B), only if the reduction or elimination is greater
than that applied to other executives of the Company of the same class or level
as Executive;
(ii) the failure to elect or reelect Executive to the position
specified in Section 3(a), or Executive's removal, without Cause, from such
position, or a material diminution in Executive's duties, authority or
responsibility as described in Section 3(a), or the assignment to Executive of
duties which are materially inconsistent with such duties or which materially
impair Executive's ability to function in such position, and, in the case of
any such assignment, the failure of the Company to cure such inconsistency or
impairment within 15 days after its receipt of notice thereof from Executive;
(iii) the failure to continue Executive's participation in any
incentive compensation plan for which Executive is eligible unless executives
of the same class or level as Executive also cease to participate in such plan
or a plan providing a substantially similar opportunity is substituted; or
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(iv) the relocation of the Company's principal office outside
the area comprised by Dallas and Tarrant Counties, Texas, having dimensions of
approximately 58 miles by 29 miles and commonly referred to as the Dallas-Fort
Worth Metroplex.
(j) "Disability" shall mean Executive's inability, due to physical
or mental incapacity, to substantially perform Executive's duties and
responsibilities under this Agreement for a period of 180 consecutive days or
for 180 days in a 365-day period.
(k) "MDU Business" shall mean the delivery of video and
telecommunications services to residential multiple dwelling units.
(l) "Minimum Severance Period" shall have the meaning set forth in
Section 9(d)(vi)(A), subject to modification as provided in Section 9(e) in the
event of a Change in Control.
(m) "Non-Extension Event" shall mean any termination of the Term of
Employment resulting from an election by the Company not to renew the Term of
Employment.
(n) "Person" shall mean an individual, firm, corporation, trust,
joint venture, partnership, limited liability company, association,
unincorporated organization or other entity or any governmental body or
subdivision, agency, commission or authority thereof.
(o) "Stock" shall mean the Common Stock of the Company.
(p) "Subsidiary" shall mean any Person of which the Company owns,
directly or indirectly, more than 50% of the Voting Stock or, in the case of a
Person other than a corporation, more than 50% of the equity interest.
(q) "Term of Employment" shall mean the period or periods specified
in Section 2.
(r) "Voting Stock" shall mean capital stock of any class or classes
having general voting power under ordinary circumstances, in the absence of
contingencies, to elect a majority of the directors of a corporation.
2. Term of Employment.
The Company hereby employs Executive, and Executive hereby accepts
such employment, for the Term of Employment commencing April 15, 1999 and
ending at the close of business on April 15, 2001, subject to earlier
termination of the Term of Employment in accordance with the terms of this
Agreement. The Term of Employment shall be automatically renewed from year to
year unless either the Company or Executive provides the other with
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written notice of non-renewal at least 30 days prior to the date on which the
Term of Employment would otherwise expire.
3. Position, Duties and Responsibilities.
(a) During the Term of Employment, Executive shall be employed as
Chief Operating Officer of the Company. In that capacity Executive shall have
the duties, authority and responsibilities normally associated with such
position and shall report to the Chief Executive Officer of the Company.
Executive shall, at the request of the Board or the Chief Executive Officer of
the Company, also serve as an officer and/or director of one or more
Subsidiaries without additional compensation.
(b) During the Term of Employment Executive shall devote his full
attention and expend his best efforts, energies and skills on a full-time basis
to the business of the Company and its Subsidiaries.
(c) Executive's services to the Company will be rendered primarily
at the Company's principal office. Executive acknowledges, however, that
Executive's services may require extensive travel.
(d) Nothing herein shall preclude Executive from (i) serving as a
director of one or more other corporations not engaged in competition with the
Company or of one or more trade associations and/or charitable organizations,
subject in each case to prior approval by the Chief Executive Officer of the
Company, (ii) engaging in charitable activities and community affairs, (iii)
managing Executive's personal investments and affairs and those of his family,
and (iv) engaging in other business transactions, provided that such activities
individually and in the aggregate do not reflect adversely on Executive's
personal or business reputation or the Company or its business and do not
interfere with the proper performance of Executive's duties and
responsibilities to the Company and its Subsidiaries.
4. Base Salary.
Executive shall receive Base Salary from the Company at the annual
rate of $245,000, payable in accordance with the regular payroll practices of
the Company, but in no event less frequently than monthly. Executive's Base
Salary shall be subject to review by the Company on an annual basis but shall
not be decreased.
5. Annual Bonus.
Executive shall be entitled to be considered for receipt of an
annual bonus, the calculation of which is to be determined in accordance with
an incentive plan established and
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administered by the Board which includes a "target" bonus for Executive for
each bonus period, as such plan may be modified by the Board from time to time.
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6. Long-Term Incentive Programs.
Executive shall be eligible to participate in any long-term
incentive programs of the Company on the same basis as other senior executives
of the Company.
7. Employee Benefit Programs and Vacation.
(a) During the Term of Employment Executive shall be entitled to
participate in all employee pension and welfare benefit plans and programs made
available to the Company's senior executives generally, as such plans or
programs may be in effect from time to time.
(b) Executive shall be entitled to four weeks of vacation per year.
8. Reimbursement of Business and Other Expenses and Perquisites.
(a) Executive is authorized to incur reasonable business expenses
in carrying out his duties and responsibilities under this Agreement, and the
Company shall promptly reimburse Executive for all such expenses, all subject
to and in accordance with the Company's policies and procedures as adopted and
in effect from time to time and applicable to its senior executives of
comparable status.
(b) To assist Executive in the performance of his duties and
responsibilities under this Agreement, the Company shall provide to Executive
an allowance for the use of an automobile in accordance with the Company's
policies applicable generally to the Company's senior executives of comparable
class or status; provided, however, that, if Executive currently uses a leased
automobile provided by the Company, then in lieu of such allowance the Company
shall continue to provide Executive with the use of such leased automobile for
the remaining initial term of the applicable lease.
(c) Executive shall be eligible to receive all perquisites made
generally available by the Company to its senior executives of comparable class
or status.
(d) Executive shall be reimbursed for the cost of air travel
(economy class) for up to four round trip tickets between Dallas and Canada for
Executive and his immediate family during each calendar year covered by this
Agreement.
(e) Executive shall be reimbursed for 50% of all reasonable costs
associated with his spouse's attendance at a university program of her choice
in the greater Dallas area.
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(f) Executive shall be reimbursed for all reasonable expenses
associated with the preparation of his and his spouse's U.S. and Canadian
income tax returns for tax years ending during the Term of Employment.
9. Termination of Term of Employment.
(a) Termination Due to Death. The Term of Employment shall
terminate upon Executive's death. In the event of such termination due to
Executive's death, Executive's estate or Executive's beneficiaries, as the case
may be, shall be entitled to:
(i) the proceeds payable in the event of Executive's death
under the group life insurance policy maintained by the Company for the benefit
of its senior executive employees and others;
(ii) an amount, payable promptly in a lump sum, equal to the
excess, if any, of (A) Base Salary for the unexpired portion of the Term of
Employment remaining as of the time immediately prior to Executive's death,
over (B) the aggregate amount of life insurance proceeds payable to Executive's
estate or beneficiaries pursuant to clause (i) of this Section 9(a) or pursuant
to any other policy on Executive's life for which premiums are paid by the
Company or any of its Affiliates (the "Aggregate Life Insurance Benefits");
(iii) if the date of Executive's death coincides with the last
day of a bonus period, a bonus for such bonus period in accordance with the
terms of the applicable incentive plan; otherwise, a bonus for the bonus period
in which Executive's death occurs, determined pro rata with respect to
Executive's target bonus for such bonus period based on the number of completed
months of Executive's employment by the Company during such bonus period;
(iv) the balance of any bonus earned (but not yet paid) for any
bonus period prior to the bonus period in which Executive's death occurs;
(v) any amounts earned, accrued or owing but not yet paid under
Section 6, 7 or 8; and
(vi) any other or additional benefits provided for in
accordance with applicable plans and programs of the Company.
(b) Termination Due to Disability. The Term of Employment may be
terminated by the Company by written notice to Executive in the case of
Executive's Disability. In the event of such termination due to Disability,
Executive shall be entitled to:
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(i) an amount, payable promptly in a lump sum, equal to the
excess, if any, of (A) Base Salary for the unexpired portion of the Term of
Employment remaining as of the time immediately prior to such termination, over
(B) the amount of any disability benefits provided to Executive by the Company
or under any disability insurance paid for, or for which premiums paid by
Executive were reimbursed, by the Company;
(ii) if such termination coincides with the last day of a bonus
period, a bonus for such bonus period in accordance with the terms of the
applicable incentive plan; otherwise, a bonus for the bonus period in which
such termination occurs, determined pro rata with respect to Executive's target
bonus for such bonus period based on the number of completed months of
Executive's employment by the Company during such bonus period,
(iii) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which such termination occurs;
(iv) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8; and
(v) any other or additional benefits provided for in accordance
with applicable plans and programs of the Company.
(c) Termination by the Company for Cause. In the event the Company
terminates the Term of Employment for Cause, Executive shall be entitled to:
(i) Base Salary through the date of such termination;
(ii) any bonus earned (but not yet paid) for any bonus period
prior to the bonus period in which such termination occurs;
(iii) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8; and
(iv) any other or additional benefits provided for in
accordance with applicable plans or programs of the Company.
(d) Termination Without Cause or Constructive Termination Without
Cause. In the event the Term of Employment is terminated by the Company without
Cause, other than due to Executive's Disability or death, or in the event the
Term of Employment is terminated due to a Constructive Termination Without
Cause, Executive shall be entitled to:
(i) Base Salary through the date of such termination;
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(ii) if the date of such termination coincides with the last
day of a bonus period, a bonus for such bonus period in accordance with the
terms of the applicable incentive plan; otherwise, a bonus for the bonus period
in which such termination occurs, determined pro rata with respect to
Executive's target bonus for such bonus period based on the number of completed
months of Executive's employment by the Company during such bonus period;
(iii) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which such termination occurs;
(iv) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8;
(v) any other or additional benefits provided for in accordance
with applicable plans and programs of the Company; and
(vi) to elect, within 30 days after such termination, either
(x) to cease being an employee of the Company and receive the lump-sum payment
described in section 9(d)(vi)(A) or (y) to remain an employee of the Company
for the period described in Section 9(d)(vi)(B). After Executive makes such
election, the following provisions shall apply:
(A) In the event Executive makes the election provided in
clause (x) of Section 9(d)(vi), then, subject to the requirements of
Section 9(j), the Company shall pay to Executive in a lump sum: (1) an
amount equal to Base Salary for the period (the "Minimum Severance
Period") that is the longer of 12 months or the unexpired portion of
the Term of Employment remaining as of the time immediately prior to
such termination, plus (2) an amount equal to Average Annual Bonus
pro-rata for the Minimum Severance Period.
(B) In the event Executive makes the election provided in
clause (y) of Section 9(d)(vi), then, subject to the requirements of
Section 9(j), Executive will remain an employee of the Company (but
without any title) until the end of the Minimum Severance Period, and
the Company shall pay to Executive Base Salary for such period plus
Average Annual Bonus pro-rata for such period; provided, however, that
(1) if Executive dies during such period, Executive's
payments pursuant to this Section 9(d)(vi)(B) shall cease, and
Executive's estate or beneficiaries, as the case may be, will be
entitled to receive the Aggregate Life Insurance Benefits, plus a
lump sum amount (which shall be paid by the Company promptly after
Executive's death) equal to the excess, if any, of (x) the balance
of the payments of Base Salary and Average Annual
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Bonus that Executive would have been entitled to receive pursuant
to this Section 9(d)(vi)(B) had Executive remained on the Company's
payroll until the end of such period over (y) the amount of the
Aggregate Life Insurance Benefits; and
(2) if Executive accepts substantially full-time
employment with any other Person during such period or notifies the
Company in writing of Executive's intention to terminate his
employment during such period, Executive will cease to be an
employee of the Company effective upon the earlier of the effective
date of such termination as specified by Executive in such notice
or the commencement of such employment, and the Company shall
promptly pay to Executive a lump sum equal to the balance of the
payments of Base Salary and Average Annual Bonus that Executive
would have been entitled to receive pursuant to this Section
9(d)(vi)(B) had Executive remained on the Company's payroll until
the end of such period.
(C) In the event Executive makes the election provided in
clause (y) of Section 9(d)(vi), then during the period Executive
remains on the payroll of the Company, Executive will continue to be
eligible to receive the medical and life insurance benefits which all
other employees of the Company are then entitled to receive, as such
benefits may be amended, changed or eliminated from time to time.
Executive shall not be entitled to any other perquisite or benefit
provided by the Company to its senior executives or employees
generally or otherwise specifically provided for in this Agreement and
shall not be entitled to any additional awards or grants under any
long-term incentive plan. In the event Executive makes the election
provided in clause (y) of Section 9(d)(vi), Executive will continue to
be an employee of the Company for purposes of any stock option and
restricted shares agreements until such time as Executive leaves the
payroll of the Company.
(e) Acceleration of Entitlements in Connection with a Change in
Control or Termination. Upon a Change in Control (regardless of whether
Executive continues in employment by the Company or the termination of the Term
of Employment for any reason whatsoever) Executive shall become immediately
entitled to exercise in full any stock option to acquire Stock during the
remainder of the term of such option. Without limitation of the preceding
sentence, upon the termination of the Term of Employment (including upon a
Non-Extension Event or Disability or death) otherwise than for Cause, Executive
shall become immediately entitled to exercise in full any stock option to
acquire Stock during the remainder of the term of such option, to the extent
such option would otherwise have vested or become exercisable within 12 months
after such termination of the Term of Employment but, unless a Change in
Control shall have occurred, all such options that have not previously expired
shall
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automatically expire on the date that is 12 months after such termination of
the Term of Employment. If, in connection with a Change in Control or within 12
months after a Change in Control, the Term of Employment is terminated without
Cause, other than due to Disability or death, or due to a Constructive
Termination Without Cause, then, without limitation of the payments, benefits
and elections provided in Section 9(d) and the first sentence of this Section
9(e), upon such Change in Control or such later termination, all amounts,
entitlements and benefits awarded to Executive or to which Executive is
otherwise entitled under any grant, plan or program of the Company but which
are not yet vested shall become fully vested except to the extent such vesting
would be inconsistent with the terms of the relevant plan. Without limitation
of the benefits to Executive pursuant to the preceding sentence or any of the
other provisions of this Agreement, if, in connection with a Change in Control
or within 12 months after a Change in Control, the Term of Employment is
terminated due to a Constructive Termination Without Cause or by the Company
without Cause (other than due to Disability or death), then, (A) the "Minimum
Severance Period" for purposes of Section 9(d) shall be not less than 24 months
and (B) upon such Change in Control (or such later termination) all amounts,
entitlements and benefits awarded to Executive or to which Executive is
otherwise entitled under any grant, plan or program of the Company but which
are not yet vested shall become fully vested except to the extent such vesting
would be inconsistent with the terms of the relevant plan. In connection with
the occurrence of a Change in Control, Executive and the Company agree to
negotiate in good faith payment arrangements and covenant changes (without
reducing the total amount payable pursuant to this Section 9(e)) designed to
preserve to the Company the deductibility for federal income tax purposes of,
and eliminate any excise tax imposed by Section 4999 of the Code payable in
respect of, amounts paid or benefits inuring to Executive pursuant to this
Section 9(e).
(f) Voluntary Termination. A termination of the Term of Employment
by Executive on his own initiative, other than a termination due to death or
Disability or a Constructive Termination without Cause, shall be treated as a
Termination for Cause, and, accordingly, Executive shall have only the
entitlements provided in Section 9(c).
(g) Termination Because of Non-Renewal. In the event of a Non-
Extension Event, Executive shall be entitled to:
(i) Base Salary through the date of expiration of the Term of
Employment;
(ii) if the expiration of the Term of Employment coincides with
the last day of a bonus period, a bonus for such bonus period in accordance
with the terms of the applicable incentive plan; otherwise, a bonus for the
bonus period in which the Term of Employment expires, determined pro rata with
respect to Executive's target bonus for such bonus period based on the number
of completed months of Executive's employment by the Company during such bonus
period;
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(iii) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which the Term of Employment
expires;
(iv) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8;
(v) any other or additional benefits provided for in accordance
with applicable plans and programs of the Company; and
(vi) to elect within 30 days after such termination, either (x)
to cease being an employee of the Company and receive the lump-sum payment
described in section 9(g)(vi)(A) or (y) to remain an employee of the Company
for the period described in Section 9(g)(vi)(B). After Executive makes such
election, the following provisions shall apply:
(A) In the event Executive makes the election provided in
clause (x) of Section 9(g)(vi), subject to the requirements of
Section 9(j), the Company shall pay to Executive in a lump sum: (1)
an amount equal to Base Salary for a period of 12 months (or 24
months, if a Change in Control has occurred during the Term of
Employment and the Term of Employment has not been renewed at least
once after the Change in Control), plus (2) an amount equal to
Average Annual Bonus pro-rata for the same period.
(B) In the event Executive makes the election provided in
clause (y) of Section 9(g)(vi), subject to the requirements of
Section 9(j), Executive will remain an employee of the Company (but
without any title) for the period of 12 months following the
expiration of the Term of Employment (or 24 months, if a Change in
Control has occurred during the Term of Employment and the Term of
Employment has not been renewed at least once after the Change in
Control), and the Company shall pay to Executive Base Salary for
such period plus Average Annual Bonus pro-rata for such period;
provided, however, that
(1) if Executive dies during such period, Executive's
payments pursuant to this Section 9(g)(vi)(B) shall cease, and
Executive's estate or beneficiaries, as the case may be, will
be entitled to receive the Aggregate Life Insurance Benefits,
plus a lump sum amount (which shall be paid by the Company
promptly after Executive's death) equal to the excess, if any,
of (x) the balance of the payments of Base Salary and Average
Annual Bonus that Executive would have been entitled to receive
pursuant to this Section 9(g)(vi)(B) had Executive remained on
the Company's payroll until the end of such period over (y) the
amount of the Aggregate Life Insurance Benefits; and
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(2) if Executive accepts substantially full-time
employment with any other Person during such period or notifies
the Company in writing of Executive's intention to terminate
Executive's employment during such period, Executive will cease
to be an employee of the Company, effective upon the earlier of
the effective date of such termination as specified by
Executive in such notice or the commencement of such
employment, and the Company shall promptly pay to Executive a
lump sum equal to the balance of the payments of Base Salary
and Average Annual Bonus that Executive would have been
entitled to receive pursuant to this Section 9(g)(vi)(B) had
Executive remained on the Company's payroll until the end of
such period.
(C) In the event Executive makes an election provided in
clause (y) of Section 9(g)(vi), then during the period Executive
remains on the payroll of the Company, Executive will continue to
be eligible to receive the medical and life insurance benefits all
other employees of the Company are then entitled to receive, as
amended, changed or eliminated, from time to time. Executive shall
not be entitled to any other perquisite or benefit provided by the
Company to its senior executives generally or otherwise
specifically provided for in this Agreement and shall not be
entitled to any additional awards or grants under any long-term
incentive plan. In the event of an election pursuant to clause (y)
of Section 9(d)(vi), Executive will continue to be an employee of
the Company for purposes of any stock option and restricted shares
agreements until such time as Executive leaves the payroll of the
Company.
(h) No Mitigation; No Offset. In the event of any termination of
the Term of Employment under this Section 9, Executive shall be under no
obligation to seek other employment and there shall be no offset against
amounts due Executive under this Agreement on account of any remuneration
attributable to any subsequent employment obtained by Executive except as
specifically provided in this Section 9.
(i) Nature of Payments. Any amounts due under this Section 9 are in
the nature of severance payments considered to be reasonable by the Company and
are not in the nature of a penalty.
(j) General Release. In partial consideration for, and as a
condition of, the Company's obligation to make the payments described in
Sections 9(d)(vi) and 9(g)(vi), Executive shall execute and deliver to the
Company a release of all claims Executive shall then have against the Company,
its Affiliates and their related Persons arising out of or in connection with
Executive's employment or termination of employment, including, but not limited
to, a release of all claims of discrimination. The Company will deliver such
release to Executive at or about the time it delivers or receives the notice of
termination, and Executive shall execute and
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deliver such release to the Company within 21 days thereafter, except that in
case of expiration of the Term of Employment following a Non-Extension Event,
the release will be delivered to Executive upon such expiration and shall be
executed and delivered by Executive within 21 days after such expiration. If
Executive fails to execute and deliver such release to the Company within such
21-day period, or if Executive revokes Executive's consent to such release as
provided for therein, Executive will not be eligible to receive any further
payments from the Company pursuant to Section 9(d)(vi) or 9(g)(vi).
(k) Other Severance. In the event the Company's written severance
pay policy applicable to Executive provides for greater severance pay and
benefits than are provided for in Section 9(d) or 9(g), Executive may elect to
receive termination pay and benefits under the terms and conditions of such
policy in lieu of the payments and benefits under Section 9(d) or 9(g). It is
understood by the Parties that Executive shall not be entitled to both the
payments and benefits under the severance pay policy and those available under
Section 9(d) or 9(g). Notwithstanding the foregoing, in addition to being
entitled to the greater of the payments and benefits under the severance pay
policy and under Section 9(d) or 9(g), as applicable, Executive shall be
entitled to professional outplacement services (including office space and
secretarial services), at a cost not exceeding 10% of Executive's annual Base
Salary, in accordance with the Company's policies regarding outplacement
services; provided, however, that payments pursuant to this sentence shall be
made only for actual outplacement services, and Executive shall not have the
option to elect to receive all or part of the maximum allowances therefor in
lieu of outplacement services.
(l) Relocation. Notwithstanding the provisions of Section 9(k), in
the event Executive becomes entitled to payments and benefits under Section
9(b), 9(d) or 9(g), Executive shall also be entitled to receive from the
Company relocation assistance payments, consisting of payment or reimbursement
of:
(i) costs incurred in the sale of Executive's primary residence
in the Dallas area, including sales commissions not to exceed local custom, and
all other normal closing costs in connection with such sale; provided that, at
Executive's election, Executive may, in lieu of Executive himself selling such
primary residence to a third party, sell the residence to the Company or its
designee at fair market value as determined immediately below. Fair market
value shall be deemed to be the average of two bona fide appraisals prepared at
the time of the proposed sale by two accredited appraisers selected by
Executive. In the event the fair market value, as determined above, is less
than the actual contract purchase price paid by Executive for the purchase of
said residence, then the Company will reimburse Executive for the difference
between such purchase and sales prices;
(ii) all reasonable moving expenses to another location in the
United States or Canada, including packing, transport, temporary storage and
unpacking
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(including the cost of moving one vehicle), all through movers or moving agents
designated or approved by the Company;
(iii) reasonable costs (not exceeding costs of economy air fare
and appropriate lodging) of one house hunting trip for Executive and spouse;
and
(iv) a tax "gross-up" for all sums paid to Executive pursuant
to clauses (i) through (iv) of this paragraph (l) that are includable in
Executive's taxable income for U.S. Federal Income Tax purposes (i.e., an
amount which, after the payment of the U.S. Federal, state and local income
taxes to which Executive is subject on the payments made to or for Executive's
benefit pursuant to this paragraph (l), calculated at the maximum rate
applicable to individuals, irrespective of the actual tax payments made by
Executive, will be equal to the costs for which reimbursement is to be provided
pursuant to clauses (i) through (iii) of this paragraph (l));
provided, however, that payments pursuant to this paragraph (l) shall be made
only for actual expenses in connection with Executive's relocation outside the
Dallas area, and Executive shall not have the option to elect to receive all or
part of the maximum allowances therefor in lieu of relocation expenses; and
provided, further, that such payments shall only be available in respect of
relocation that occurs at or prior to nine months after the end of the Term of
Employment.
10. Indemnification.
(a) The Company agrees that if Executive is made a party, or is
threatened to be made a party, to any action, suit or proceeding, whether
civil, criminal, administrative or investigative (a "Proceeding"), by reason of
the fact that Executive is or was a director, officer or employee of the
Company or is or was serving at the request of the Company as a director,
officer, member, employee or agent of another Person, including service with
respect to employee benefit plans, whether or not the basis of such Proceeding
is Executive's alleged action in an official capacity while serving as a
director, officer, member, employee or agent, Executive shall be indemnified
and held harmless by the Company to the fullest extent permitted or authorized
by the Company's certificate of incorporation or bylaws or, if greater, by the
laws of the State of Delaware, against all cost, expense, liability and loss
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes (other than such as may be imposed with respect to compensation received
by Executive) or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by Executive in connection therewith, and such
indemnification shall continue as to Executive even if Executive has ceased to
be a director, member, employee or agent of the Company or other Person and
shall inure to the benefit of Executive's heirs, executors and administrators.
The Company shall advance to Executive to the extent permitted by law all
reasonable costs and expenses incurred by him in connection with a Proceeding
within 20 days after receipt by the Company of a written request, with
appropriate documentation, for such advance. Such request shall include an
undertaking by
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Executive to repay the amount of such advance if it shall ultimately be
determined that Executive is not entitled to be indemnified against such costs
and expenses.
(b) The Company agrees to continue and maintain a directors' and
officers' liability insurance policy covering Executive to the extent the
Company provides such coverage for its other executive officers.
(c) Promptly after receipt by Executive of notice of any claim or
the commencement of any action or proceeding with respect to which Executive is
entitled to indemnity hereunder, Executive shall notify the Company in writing
of such claim or the commencement of such action or proceeding, and the Company
shall (i) assume the defense of such action or proceeding, (ii) employ counsel
reasonably satisfactory to Executive and (iii) pay the reasonable fees and
expenses of such counsel. Notwithstanding the preceding sentence, Executive
shall be entitled to employ counsel separate from counsel for the Company and
from any other party in such action if Company counsel reasonably determines
that a conflict of interest exists which makes representation by counsel chosen
by the Company not advisable. In such event, the reasonable fees and
disbursements of such separate counsel for Executive shall be paid by the
Company to the extent permitted by law.
(d) After the Term of Employment, (i) at the request of the
Company, Executive shall cooperate with and assist the Company (to the extent
that such activities do not unreasonably interfere with the performance of
Executive's other business activities or employment) to prepare for or defend
against any action, suit, proceeding or claim brought or threatened to be
brought against the Company or to prepare for or institute any action, suit,
proceeding or claim to be brought or threatened to be brought against a third
party arising out of or based upon any matter or thing whatsoever arising out
of or which may be related to matters as to which Executive has or acquires
knowledge or information by reason of his employment by the Company or any of
its Subsidiaries, and (ii) upon the request of Executive, the Company shall
reimburse Executive for all reasonable travel, legal and other out-of-pocket
expenses that may be incurred by Executive related to assisting the Company, at
its request, to prepare for or defend against any such action, suit, proceeding
or claim brought or threatened to be brought against the Company or to prepare
for or institute any action, suit, proceeding or claim to be brought or
threatened to be brought against a third party and in providing evidence,
producing documents or otherwise participating in any such action, suit,
proceeding or claim.
11. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement, the existence
of this Agreement shall not prohibit or restrict Executive's entitlement to
full participation in the employee benefit and other plans or programs in which
senior executives of the Company are eligible to participate.
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12. Confidentiality.
Executive acknowledges that Executive is bound by that certain
nondisclosure agreement executed by Executive upon the commencement of his
employment with the Company and that the terms thereof shall not be modified or
affected by this Agreement.
13. Non-Competition.
(a) During the Term of Employment and (unless the Term of
Employment expires following a Non-Extension Event or is terminated by the
Company without Cause or voluntarily by Employee due to a Constructive
Termination Without Cause) for a period of nine months thereafter, Executive
shall not, directly or indirectly, except when acting on behalf of the Company,
whether as an employee, consultant, partner, principal, agent, distributor,
representative, stockholder or otherwise, plan, develop, conduct or otherwise
engage in the MDU Business in any metropolitan area world-wide in which the
Company or any Subsidiary then conducts or is actively planning to conduct the
MDU Business (except that he may be a stockholder holding not more than a 1%
common stock interest in a Person whose shares are publicly traded and which
engages in the MDU Business in any such area). Notwithstanding the foregoing,
Executive shall be free at any time following the Term of Employment to accept
employment with or provide other services to any Person whose business includes
the MDU Business but only if (i) the MDU Business is not the principal or
predominant business of such Person and (ii) the services of Executive do not
principally or predominantly relate to the MDU Business. By way of example
only, if the Term of Employment were to end on the date of this Agreement,
Executive would be free to be employed by a typical incumbent local exchange or
long distance carrier or by a typical franchised cable operator for so long as
Executive's services did not principally or predominantly relate to the
provision of video and telecommunications services to residential multiple
dwelling units in the markets in which the Company now operates or is actively
planning to operate.
(b) During the Term of Employment and for a period of 12 months
thereafter, Executive shall not, directly or indirectly, (i) solicit any
customer of the Company or any Subsidiary to do business with any Person that
engages in the MDU Business or (ii) solicit any Person, other than his
secretary/administrative assistant, who is employed by the Company or any
Subsidiary or who was employed by the Company or any Subsidiary within 12
months of such solicitation to (A) terminate his or her employment with the
Company or any Subsidiary, (B) accept employment with anyone other than the
Company or any Subsidiary or (C) in any manner interfere with the business of
the Company or any Subsidiary.
(c) Executive acknowledges that the Company has no adequate remedy
at law and would be irreparably harmed if Executive breaches or threatens to
breach any of the provisions of Section 12 or Section 13(a) or 13(b), and
therefore Executive agrees that the Company or any Subsidiary, as the case may
be, shall be entitled to temporary or permanent
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mandatory or injunctive relief to terminate or forestall any breach or
threatened breach of any of those provisions and to specific performance of the
terms of each of those provisions, without the need to demonstrate irreparable
injury or post bond or other security. Executive further agrees that he shall
not, in any proceeding seeking injunctive or other equitable relief to enforce
the provisions of Section 12 or Section 13(a) or 13(b), raise the defense that
the Company or any Subsidiary has an adequate remedy at law. Nothing in this
Section 13(c) shall be construed to prohibit the Company or any Subsidiary from
pursuing any other rights or remedies available to it at law or in equity or
which may be otherwise available to it.
(d) If it is determined that any of the provisions of this Section
13, or any part thereof, is unenforceable because of the duration or
geographical scope of such provision, it is the intention of the Parties that
the duration or scope of such provision, as the case may be, shall be reduced
so that such provision becomes enforceable and, in its reduced form, such
provision shall then be enforceable and shall be enforced.
14. Intellectual Property.
Any processes, inventions, ideas, know-how and other similar data
created or developed by Executive while employed by the Company which relate to
the business then conducted by the Company or any of its Subsidiaries shall be
the Company's exclusive and absolute property, and Executive hereby assigns to
the Company, now and hereafter, all of his right, title and interest to any and
all of the same. Any work in connection with the services rendered by Executive
hereunder shall be considered "work made for hire" under the Copyright Law of
1976 or any successor law, and the Company shall be the owner of such work as
if the Company were the author of such work.
15. Documents; Conduct; References.
(a) Executive hereby expressly covenants and agrees that,
following termination of the Term of Employment for any reason, or any time,
upon the Company's request, Executive will promptly return to the Company all
property of the Company and its Subsidiaries in his or her possession or
control (whether maintained at his or her office, home or elsewhere),
including, without limitation, all copies of all management studies, business
or strategic plans, budgets, notebooks and other printed, typed electronically
stored or written materials, documents, diaries, disks, calendars and data of
or relating to the Company or its Subsidiaries or their respective personnel or
affairs.
(b) Executive hereby expressly covenants and agrees that Executive
will not at any time, during or after the Term of Employment, denigrate,
ridicule or intentionally criticize the Company or any of its Subsidiaries or
any of their respective products or services, properties, employees, officers
or directors, including, without limitation, by way of news interviews or the
expression of personal view, opinions or judgments to the news media.
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(c) The Company hereby expressly covenants and agrees that the
Company will not at any time, during or after the Term of Employment, publicly
denigrate, ridicule or intentionally criticize Executive, including, without
limitation, by way of news interviews or the expression of personal views,
opinions or judgments to the news media.
(d) The Company hereby expressly covenants and agrees that,
following the Term of Employment, the Company will, unless otherwise requested
by Executive in any instance or required by law, provide to any prospective
employer seeking information regarding Executive's employment with the Company
a neutral reference in accordance with the general policies of the Company
applicable to requests for employment references.
16. Acknowledgment of Representation by Counsel.
The Parties acknowledge that they have been represented by counsel
or knowingly waive their right to be represented by counsel with regard to this
Agreement and the subject matter hereof. Each Party agrees and acknowledges
that he or it has not relied upon any tax advice, legal counsel or business
advice provided by the other Party.
17. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit of
the Parties and their respective successors, heirs (in the case of Executive)
and assigns. No rights or obligations of the Company under this Agreement may
be assigned or transferred by the Company, except that such rights or
obligations may be assigned or transferred pursuant to a merger or
consolidation in which the Company is not the surviving corporation, or the
sale or liquidation of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or by operation of law. The Company
further agrees that, in the event of a sale of assets or liquidation as
described in the preceding sentence, it shall take whatever action it legally
can in order to cause such assignee or transferee to expressly assume the
liabilities, obligations and duties of the Company hereunder. No rights or
obligations of Executive under this Agreement may be assigned or transferred by
Executive other than Executive's rights to compensation and benefits.
18. Entire Agreement.
Except as herein otherwise expressly provided, this Agreement
contains the entire understanding and agreement between the Parties concerning
the subject matter hereof and supersedes all prior agreements, understandings,
discussions, negotiations and undertakings, whether written or oral, between
the Parties with respect thereto, including any agreement between Executive and
any Affiliate of the Company dated prior to the date hereof.
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19. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by Executive and an authorized
officer of the Company. No waiver by either Party of any breach by the other
Party of any condition or provision contained in this Agreement to be performed
by such other Party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same or any prior or subsequent time. Any waiver
must be in writing and signed by Executive or an authorized officer of the
Company, as the case may be.
20. Severability.
In the event that any provision or portion of any provision of
this Agreement shall be determined to be invalid or unenforceable for any
reason, in whole or in part, the remaining provisions and portions remaining of
any provisions of this Agreement shall be unaffected thereby and shall remain
in full force and effect to the fullest extent permitted by law.
21. Beneficiaries/References.
Executive shall be entitled to select (and change, to the extent
permitted under any applicable law) a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death by
giving the Company written notice thereof. In the event of Executive's death or
a judicial determination of Executive's incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
22. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and interpreted
in accordance with the laws of the State of Texas without reference to
principles of conflict of laws.
23. Resolution of Disputes.
Any disputes arising under or in connection with this Agreement
shall be resolved by binding arbitration before a single arbitrator, to be held
in Dallas, Texas, in accordance with the rules and procedures of the American
Arbitration Association. Judgment upon the award rendered by the arbitrator
shall be final and subject to appeal only to the extent permitted by law. Each
Party shall bear its or his own expenses incurred in connection with any
arbitration. Anything to the contrary notwithstanding, each Party has the right
to proceed with a court action for injunctive relief or relief from violations
of law not within the jurisdiction of an arbitrator.
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24. Notices.
Any notice required or permitted hereunder to be given to a Party
shall be effective only if given in writing and shall be deemed to have been
given when delivered personally or sent by certified or registered mail,
postage prepaid, return receipt requested or by Federal Express or other
similar service, duly addressed to the Party concerned at the address indicated
below or to such changed address as such Party may hereafter specify by notice
to the other Party:
If to the Company:
OpTel, Inc.
1111 W. Mockingbird Lane, #1000
Dallas, Texas 75247
Attention: General Counsel
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If to Executive:
4730 Chapel Hill Road
Dallas, TX 75214
25. Headings.
The captions or headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
26. Execution of Agreement and Further Actions.
This Agreement may be executed in several counterpart copies each
of which shall constitute an original and the same instrument notwithstanding
that both Parties are not signatories to the same counterpart. The Parties
agree to execute such other documents and to take such other action as may from
time to time be necessary or appropriate to carry out the intent of this
Agreement, provided that the same are not inconsistent with the provisions
hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement
as of the date first written above.
OPTEL, INC.
By:
--------------------------------------
-----------------------------------------
STEPHEN R. DUBE
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EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by and
between OPTEL, INC., a Delaware corporation (the "Company"), and LYNN R. ZERA
("Executive").
W I T N E S S E T H :
WHEREAS, Executive is currently employed by the Company as Vice
President Human Resources of the Company; and
WHEREAS, the Company desires to continue to employ Executive and
Executive has agreed to such continuation, subject to the terms of this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the Company and Executive (individually a "Party"
and together the "Parties") agree as follows:
1. Definitions.
As used in this Agreement, unless the context otherwise requires:
(a) "Affiliate" of a Person shall mean a Person that directly or
indirectly controls, is controlled by, or is under common control with the
Person specified.
(b) "Aggregate Life Insurance Benefits" shall have the meaning set
forth in Section 9(a)(ii).
(c) "Average Annual Bonus" shall mean the average of the two most
recent annual bonuses (not including any payments from long-term incentive
programs) received by or due to Executive for completed fiscal years immediately
prior to the termination of the Term of Employment.
(d) "Base Salary" shall mean the salary provided for in Section 4.
(e) "Board" shall mean the Board of Directors of the Company.
(f) "Cause" shall mean:
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(i) Executive's conviction of a crime involving moral
turpitude (excluding offenses such as driving while intoxicated); or
(ii) Executive's (A) commission of a fraud upon the Company
or (B) material breach of this Agreement (including by wilfully failing or
neglecting to perform Executive's duties hereunder), which breach, if curable,
is not substantially cured within 10 days after written notice to Executive
specifying the nature of the breach.
(g) A "Change in Control" shall mean the occurrence of any one of
the following events:
(i) Any "person," as such term is used in Sections 3(a)(9)
and 13(d) of the Securities Exchange Act of 1934 (other than Executive, Le
Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his
spouse and descendants, Caisse de depot et placement du Quebec, and their
respective Affiliates (collectively, all or any of Le Groupe Videotron Ltee,
Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants,
Caisse de depot et placement du Quebec, and their respective Affiliates
constitute the "Existing Control Group")), is a "beneficial owner," as such term
is used in Rule 13d-3 promulgated under that act, of shares of the Voting Stock
of the Company having more total votes in an election for directors than shares
of Voting Stock of which the Existing Control Group is the beneficial owner and,
at the same time, the Existing Control Group does not have the power, by
contract or otherwise, to elect or designate a majority of the members of the
Board;
(ii) the majority of the members of the Board consists of
individuals other than Incumbent Directors, which term means the members of the
Board on the date of this Agreement; provided that any individual becoming a
director subsequent to such date whose election or nomination for election as a
director was supported by two-thirds of the directors who were Incumbent
Directors at the time of such election or nomination shall be an Incumbent
Director;
(iii) the Company adopts any plan of liquidation providing
for the distribution of all or substantially all of its assets;
(iv) all or substantially all of the assets or business of
the Company are disposed of pursuant to a merger, consolidation or other
transaction (unless the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting Stock
of the Company, the Voting Stock or other ownership interests of the Person or
Persons, if any, that succeed to the business of the Company) and at any time
thereafter the Existing Control Group does not have the power, by contract or
otherwise, to elect or designate a majority of the members of the Board; or
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(v) the Company combines with another Person and is the
surviving corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination hold, directly or
indirectly, not more than 50% of the Voting Stock of the surviving corporation
(there being excluded from the number of shares held by such shareholders, but
not from the Voting Stock of the surviving corporation, any shares received by
Affiliates of such other Person in exchange for stock of such other Person) and
at any time thereafter the Existing Control Group does not have the power, by
contract or otherwise, to elect or designate a majority of the members of the
Board.
(h) "Confidential Information" shall mean all information that is
not known or available to the public concerning the business of the Company or
any Subsidiary relating to its products, product development, trade secrets,
customers, suppliers, finances, and business plans and strategies. For this
purpose, information known or available generally within the trade or industry
of the Company or any Subsidiary shall be deemed to be known or available to the
public. Confidential Information shall include information that is, or becomes,
known to the public as a result of a breach by Executive of the provisions of
Section 13.
(i) "Constructive Termination Without Cause" shall mean a
termination of the Term of Employment by written notice given by Executive
within 60 days following the occurrence, without Executive's prior written
consent, of one or more of the following events (except in consequence of a
prior termination):
(i) a reduction in or elimination of (A) Executive's then
current Base Salary, or (B) Executive's opportunity for any long-term incentive
award for which she is eligible under Section 6 or the termination or material
reduction of any material employee benefit or perquisite enjoyed by her
including the bonus provided for under Section 5; provided, however, that in the
case of clause (B), only if the reduction or elimination is greater than that
applied to other executives of the Company of the same class or level as
Executive;
(ii) the failure to elect or reelect Executive to the
position specified in Section 3(a), or Executive's removal, without Cause, from
such position, or a material diminution in Executive's duties, authority or
responsibilities as described in Section 3(a), or the assignment to Executive of
duties which are materially inconsistent with such duties or which materially
impair Executive's ability to function in such position, and, in the case of any
such assignment, the failure of the Company to cure such inconsistency or
impairment within 15 days after its receipt of notice thereof from Executive;
(iii) the failure to continue Executive's participation in
any incentive compensation plan for which Executive is eligible unless
executives of the same class or level as Executive also cease to participate in
such plan or a plan providing a substantially similar opportunity is
substituted; or
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(iv) the relocation of the Company's principal office outside
the area comprised by Dallas and Tarrant Counties, Texas, having dimensions of
approximately 58 miles by 29 miles and commonly referred to as the Dallas-Fort
Worth Metroplex.
(j) "Disability" shall mean Executive's inability, due to physical
or mental incapacity, to substantially perform Executive's duties and
responsibilities under this Agreement for a period of 180 consecutive days or
for 180 days in a 365-day period.
(k) "MDU Business" shall mean the delivery of video and
telecommunications services to residential multiple dwelling units.
(l) "Minimum Severance Period" shall have the meaning set forth in
Section 9(d)(vi)(A), subject to modification as provided in Section 9(e) in the
event of a Change in Control.
(m) "Non-Extension Event" shall mean any termination of the Term
of Employment resulting from an election by the Company not to renew the Term of
Employment.
(n) "Person" shall mean an individual, firm, corporation, trust,
joint venture, partnership, limited liability company, association,
unincorporated organization or other entity or any governmental body or
subdivision, agency, commission or authority thereof.
(o) "Stock" shall mean the Common Stock of the Company.
(p) "Subsidiary" shall mean any Person of which the Company owns,
directly or indirectly, more than 50% of the Voting Stock or, in the case of a
Person other than a corporation, more than 50% of the equity interest.
(q) "Term of Employment" shall mean the period or periods
specified in Section 2.
(r) "Voting Stock" shall mean capital stock of any class or
classes having general voting power under ordinary circumstances, in the absence
of contingencies, to elect a majority of the directors of a corporation.
2. Term of Employment.
The Company hereby employs Executive, and Executive hereby accepts
such employment, for the Term of Employment commencing April 15, 1999 and ending
at the close of business on April 15, 2001, subject to earlier termination of
the Term of Employment in accordance with the terms of this Agreement. The Term
of Employment shall be automatically renewed from year to year unless either the
Company or Executive provides the other with
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written notice of non-renewal at least 30 days prior to the date on which the
Term of Employment would otherwise expire.
3. Position, Duties and Responsibilities.
(a) During the Term of Employment, Executive shall be employed as
Vice President Human Resources of the Company. In that capacity Executive shall
have the duties, authority and responsibilities normally associated with such
position and shall report to the Chief Executive Officer of the Company.
Executive shall, at the request of the Board or the Chief Executive Officer of
the Company, also serve as an officer and/or director of one or more
Subsidiaries without additional compensation.
(b) During the Term of Employment Executive shall devote his full
attention and expend his best efforts, energies and skills on a full-time basis
to the business of the Company and its Subsidiaries.
(c) Executive's services to the Company will be rendered primarily
at the Company's principal office. Executive acknowledges, however, that
Executive's services may require extensive travel.
(d) Nothing herein shall preclude Executive from (i) serving as a
director of one or more other corporations not engaged in competition with the
Company or of one or more trade associations and/or charitable organizations,
subject in each case to prior approval by the Chief Executive Officer of the
Company, (ii) engaging in charitable activities and community affairs, (iii)
managing Executive's personal investments and affairs and those of her family,
and (iv) engaging in other business transactions, provided that such activities
individually and in the aggregate do not reflect adversely on Executive's
personal or business reputation or the Company or its business and do not
interfere with the proper performance of Executive's duties and responsibilities
to the Company and its Subsidiaries.
4. Base Salary.
Executive shall receive Base Salary from the Company at the annual
rate of $138,000, payable in accordance with the regular payroll practices of
the Company, but in no event less frequently than monthly. Executive's Base
Salary shall be subject to review by the Company on an annual basis but shall
not be decreased.
5. Annual Bonus.
Executive shall be entitled to be considered for receipt of an
annual bonus, the calculation of which is to be determined in accordance with an
incentive plan established and administered by the Board which includes a
"target" bonus for Executive for each bonus period, as such plan may be modified
by the Board from time to time.
6. Long-Term Incentive Programs.
Executive shall be eligible to participate in any long-term
incentive programs of the Company on the same basis as other senior executives
of the Company.
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7. Employee Benefit Programs and Vacation.
(a) During the Term of Employment Executive shall be entitled to
participate in all employee pension and welfare benefit plans and programs made
available to the Company's senior executives generally, as such plans or
programs may be in effect from time to time.
(b) Executive shall be entitled to four weeks of vacation per
year.
8. Reimbursement of Business and Other Expenses and Perquisites.
(a) Executive is authorized to incur reasonable business expenses
in carrying out his duties and responsibilities under this Agreement, and the
Company shall promptly reimburse Executive for all such expenses, all subject to
and in accordance with the Company's policies and procedures as adopted and in
effect from time to time and applicable to its senior executives of comparable
status.
(b) To assist Executive in the performance of his duties and
responsibilities under this Agreement, the Company shall provide to Executive an
allowance for the use of an automobile in accordance with the Company's policies
applicable generally to the Company's senior executives of comparable class or
status; provided, however, that, if Executive currently uses a leased automobile
provided by the Company, then in lieu of such allowance the Company may continue
to provide Executive with the use of such leased automobile for the remaining
initial term of the applicable lease.
(c) Executive shall be eligible to receive all perquisites made
generally available by the Company to its senior executives of comparable class
or status.
9. Termination of Term of Employment.
(a) Termination Due to Death. The Term of Employment shall
terminate upon Executive's death. In the event of such termination due to
Executive's death, Executive's estate or Executive's beneficiaries, as the case
may be, shall be entitled to:
(i) the proceeds payable in the event of Executive's death
under the group life insurance policy maintained by the Company for the benefit
of its senior executive employees and others;
(ii) an amount, payable promptly in a lump sum, equal to the
excess, if any, of (A) Base Salary for the unexpired portion of the Term of
Employment remaining as of the time immediately prior to Executive's death, over
(B) the aggregate amount of life insurance proceeds payable to Executive's
estate or beneficiaries pursuant to clause (i) of
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this Section 9(a) or pursuant to any other policy on Executive's life for which
premiums are paid by the Company or any of its Affiliates (the "Aggregate Life
Insurance Benefits");
(iii) if the date of Executive's death coincides with the
last day of a bonus period, a bonus for such bonus period in accordance with the
terms of the applicable incentive plan; otherwise, a bonus for the bonus period
in which Executive's death occurs, determined pro rata with respect to
Executive's target bonus for such bonus period based on the number of completed
months of Executive's employment by the Company during such bonus period;
(iv) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which Executive's death occurs;
(v) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8; and
(vi) any other or additional benefits provided for in
accordance with applicable plans and programs of the Company.
(b) Termination Due to Disability. The Term of Employment may be
terminated by the Company by written notice to Executive in the case of
Executive's Disability. In the event of such termination due to Disability,
Executive shall be entitled to:
(i) an amount, payable promptly in a lump sum, equal to the
excess, if any, of (A) Base Salary for the unexpired portion of the Term of
Employment remaining as of the time immediately prior to such termination, over
(B) the amount of any disability benefits provided to Executive by the Company
or under any disability insurance paid for, or for which premiums paid by
Executive were reimbursed, by the Company;
(ii) if such termination coincides with the last day of a
bonus period, a bonus for such bonus period in accordance with the terms of the
applicable incentive plan; otherwise, a bonus for the bonus period in which such
termination occurs, determined pro rata with respect to Executive's target bonus
for such bonus period based on the number of completed months of Executive's
employment by the Company during such bonus period,
(iii) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which such termination occurs;
(iv) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8; and
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(v) any other or additional benefits provided for in
accordance with applicable plans and programs of the Company.
(c) Termination by the Company for Cause. In the event the Company
terminates the Term of Employment for Cause, Executive shall be entitled to:
(i) Base Salary through the date of such termination;
(ii) any bonus earned (but not yet paid) for any bonus period
prior to the bonus period in which such termination occurs;
(iii) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8; and
(iv) any other or additional benefits provided for in
accordance with applicable plans or programs of the Company.
(d) Termination Without Cause or Constructive Termination Without
Cause. In the event the Term of Employment is terminated by the Company without
Cause, other than due to Executive's Disability or death, or in the event the
Term of Employment is terminated due to a Constructive Termination Without
Cause, Executive shall be entitled to:
(i) Base Salary through the date of such termination;
(ii) if the date of such termination coincides with the last
day of a bonus period, a bonus for such bonus period in accordance with the
terms of the applicable incentive plan; otherwise, a bonus for the bonus period
in which such termination occurs, determined pro rata with respect to
Executive's target bonus for such bonus period based on the number of completed
months of Executive's employment by the Company during such bonus period;
(iii) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which such termination occurs;
(iv) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8;
(v) any other or additional benefits provided for in
accordance with applicable plans and programs of the Company; and
(vi) to elect, within 30 days after such termination, either
(x) to cease being an employee of the Company and receive the lump-sum payment
described in
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section 9(d)(vi)(A) or (y) to remain an employee of the Company for the period
described in Section 9(d)(vi)(B). After Executive makes such election, the
following provisions shall apply:
(A) In the event Executive makes the election provided in
clause (x) of Section 9(d)(vi), then, subject to the requirements of
Section 9(j), the Company shall pay to Executive in a lump sum: (1) an
amount equal to Base Salary for the period (the "Minimum Severance
Period") that is the longer of 12 months or the unexpired portion of
the Term of Employment remaining as of the time immediately prior to
such termination, plus (2) an amount equal to Average Annual Bonus
pro-rata for the Minimum Severance Period.
(B) In the event Executive makes the election provided in
clause (y) of Section 9(d)(vi), then, subject to the requirements of
Section 9(j), Executive will remain an employee of the Company (but
without any title) until the end of the Minimum Severance Period, and
the Company shall pay to Executive Base Salary for such period plus
Average Annual Bonus pro-rata for such period; provided, however, that
(1) if Executive dies during such period, Executive's
payments pursuant to this Section 9(d)(vi)(B) shall cease, and
Executive's estate or beneficiaries, as the case may be, will
be entitled to receive the Aggregate Life Insurance Benefits
plus a lump sum amount (which shall be paid by the Company
promptly after Executive's death) equal to the excess, if any,
of (x) the balance of the payments of Base Salary and Average
Annual Bonus that Executive would have been entitled to
receive pursuant to this Section 9(d)(vi)(B) had Executive
remained on the Company's payroll until the end of such period
over (y) the amount of the Aggregate Life Insurance Benefits;
and
(2) if Executive accepts substantially full-time
employment with any other Person during such period or
notifies the Company in writing of Executive's intention to
terminate his employment during such period, Executive will
cease to be an employee of the Company effective upon the
earlier of the effective date of such termination as specified
by Executive in such notice or the commencement of such
employment, and the Company shall promptly pay to Executive a
lump sum equal to the balance of the payments of Base Salary
and Average Annual Bonus that Executive would have been
entitled to receive pursuant to this Section 9(d)(vi)(B) had
Executive remained on the Company's payroll until the end of
such period.
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(C) In the event Executive makes the election provided in
clause (y) of Section 9(d)(vi), then during the period Executive
remains on the payroll of the Company, Executive will continue to be
eligible to receive the medical and life insurance benefits which all
other employees of the Company are then entitled to receive, as such
benefits may be amended, changed or eliminated from time to time.
Executive shall not be entitled to any other perquisite or benefit
provided by the Company to its senior executives or employees generally
or otherwise specifically provided for in this Agreement and shall not
be entitled to any additional awards or grants under any long-term
incentive plan. In the event Executive makes the election provided in
clause (y) of Section 9(d)(vi), Executive will continue to be an
employee of the Company for purposes of any stock option and restricted
shares agreements until such time as Executive leaves the payroll of
the Company.
(e) Acceleration of Entitlements in Connection with a Change in
Control or Termination. Upon a Change in Control (regardless of whether
Executive continues in employment by the Company or the termination of the Term
of Employment for any reason whatsoever) Executive shall become immediately
entitled to exercise in full any stock option to acquire Stock during the
remainder of the term of such option. Without limitation of the preceding
sentence, upon the termination of the Term of Employment (including upon a Non-
Extension Event or Disability or death) otherwise than for Cause, Executive
shall become immediately entitled to exercise in full any stock option to
acquire Stock during the remainder of the term of such option, to the extent
such option would otherwise have vested or become exercisable within 12 months
after such termination of the Term of Employment but, unless a Change in Control
shall have occurred, all such options that have not previously expired shall
automatically expire on the date that is 12 months after such termination of the
Term of Employment. If, in connection with a Change in Control or within 12
months after a Change in Control, the Term of Employment is terminated without
Cause, other than due to Disability or death, or due to a Constructive
Termination Without Cause, then, without limitation of the payments, benefits
and elections provided in Section 9(d) and the first sentence of this Section
9(e), upon such Change in Control or such later termination, all amounts,
entitlements and benefits awarded to Executive or to which Executive is
otherwise entitled under any grant, plan or program of the Company but which are
not yet vested shall become fully vested except to the extent such vesting would
be inconsistent with the terms of the relevant plan. Without limitation of the
benefits to Executive pursuant to the preceding sentence or any of the other
provisions of this Agreement, if, in connection with a Change in Control or
within 12 months after a Change in Control, the Term of Employment is terminated
due to a Constructive Termination Without Cause or by the Company without Cause
(other than due to Disability or death), then, (A) the "Minimum Severance
Period" for purposes of Section 9(d) shall be not less than 24 months and (B)
upon such Change in Control (or such later termination) all amounts,
entitlements and benefits awarded to Executive or to which Executive is
otherwise entitled under any grant, plan or program of the Company but which are
not yet vested shall become fully vested except to the
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extent such vesting would be inconsistent with the terms of the relevant plan.
In connection with the occurrence of a Change in Control, Executive and the
Company agree to negotiate in good faith payment arrangements and covenant
changes (without reducing the total amount payable pursuant to this Section
9(e)) designed to preserve to the Company the deductibility for federal income
tax purposes of, and eliminate any excise tax imposed by Section 4999 of the
Code payable in respect of, amounts paid or benefits inuring to Executive
pursuant to this Section 9(e).
(f) Voluntary Termination. A termination of the Term of Employment
by Executive on his own initiative, other than a termination due to death or
Disability or a Constructive Termination without Cause, shall be treated as a
Termination for Cause, and, accordingly, Executive shall have only the
entitlements provided in Section 9(c).
(g) Termination Because of Non-Renewal. In the event of a Non-
Extension Event, Executive shall be entitled to:
(i) Base Salary through the date of expiration of the Term of
Employment;
(ii) if the expiration of the Term of Employment coincides
with the last day of a bonus period, a bonus for such bonus period in accordance
with the terms of the applicable incentive plan; otherwise, a bonus for the
bonus period in which the Term of Employment expires, determined pro rata with
respect to Executive's target bonus for such bonus period based on the number of
completed months of Executive's employment by the Company during such bonus
period;
(iii) the balance of any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which the Term of Employment
expires;
(iv) any amounts earned, accrued or owing but not yet paid
under Section 6, 7 or 8;
(v) any other or additional benefits provided for in
accordance with applicable plans and programs of the Company; and
(vi) to elect within 30 days after such termination, either
(x) to cease being an employee of the Company and receive the lump-sum payment
described in section 9(g)(vi)(A) or (y) to remain an employee of the Company for
the period described in Section 9(g)(vi)(B). After Executive makes such
election, the following provisions shall apply:
(A) In the event Executive makes the election provided in
clause (x) of Section 9(g)(vi), subject to the requirements of Section
9(j), the Company shall pay to Executive in a lump sum: (1) an amount
equal to Base
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<PAGE> 12
Salary for a period of 12 months (or 24 months, if a Change in Control
has occurred during the Term of Employment and the Term of Employment
has not been renewed at least once after the Change in Control), plus
(2) an amount equal to Average Annual Bonus pro-rata for the same
period.
(B) In the event Executive makes the election provided in
clause (y) of Section 9(g)(vi), subject to the requirements of Section
9(j), Executive will remain an employee of the Company (but without any
title) for the period of 12 months following the expiration of the Term
of Employment (or 24 months, if a Change in Control has occurred during
the Term of Employment and the Term of Employment has not been renewed
at least once after the Change in Control), and the Company shall pay
to Executive Base Salary for such period plus Average Annual Bonus
pro-rata for such period; provided, however, that
(1) if Executive dies during such period, Executive's
payments pursuant to this Section 9(g)(vi)(B) shall cease, and
Executive's estate or beneficiaries, as the case may be, will be
entitled to receive the Aggregate Life Insurance Benefits, plus a
lump sum amount (which shall be paid by the Company promptly
after Executive's death) equal to the excess, if any, of (x) the
balance of the payments of Base Salary and Average Annual Bonus
that Executive would have been entitled to receive pursuant to
this Section 9(g)(vi)(B) had Executive remained on the Company's
payroll until the end of such period over (y) the amount of the
Aggregate Life Insurance Benefits; and
(2) if Executive accepts substantially full-time employment
with any other Person during such period or notifies the Company
in writing of Executive's intention to terminate Executive's
employment during such period, Executive will cease to be an
employee of the Company, effective upon the earlier of the
effective date of such termination as specified by Executive in
such notice or the commencement of such employment, and the
Company shall promptly pay to Executive a lump sum equal to the
balance of the payments of Base Salary and Average Annual Bonus
that Executive would have been entitled to receive pursuant to
this Section 9(g)(vi)(B) had Executive remained on the Company's
payroll until the end of such period.
(C) In the event Executive makes an election provided in
clause (y) of Section 9(g)(vi), then during the period Executive
remains on the payroll of the Company, Executive will continue to be
eligible to receive the medical and life insurance benefits all other
employees of the Company are then entitled to receive, as amended,
changed or eliminated, from time to time. Executive shall
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<PAGE> 13
not be entitled to any other perquisite or benefit provided by the
Company to its senior executives generally or otherwise specifically
provided for in this Agreement and shall not be entitled to any
additional awards or grants under any long-term incentive plan. In the
event of an election pursuant to clause (y) of Section 9(d)(vi),
Executive will continue to be an employee of the Company for purposes
of any stock option and restricted shares agreements until such time as
Executive leaves the payroll of the Company.
(h) No Mitigation; No Offset. In the event of any termination of
the Term of Employment under this Section 9, Executive shall be under no
obligation to seek other employment and there shall be no offset against amounts
due Executive under this Agreement on account of any remuneration attributable
to any subsequent employment obtained by Executive except as specifically
provided in this Section 9.
(i) Nature of Payments. Any amounts due under this Section 9 are
in the nature of severance payments considered to be reasonable by the Company
and are not in the nature of a penalty.
(j) General Release. In partial consideration for, and as a
condition of, the Company's obligation to make the payments described in
Sections 9(d)(vi) and 9(g)(vi), Executive shall execute and deliver to the
Company a release of all claims Executive shall then have against the Company,
its Affiliates and their related Persons arising out of or in connection with
Executive's employment or termination of employment, including, but not limited
to, a release of all claims of discrimination. The Company will deliver such
release to Executive at or about the time it delivers or receives the notice of
termination, and Executive shall execute and deliver such release to the Company
within 21 days thereafter, except that in case of expiration of the Term of
Employment following a Non-Extension Event, the release will be delivered to
Executive upon such expiration and shall be executed and delivered by Executive
within 21 days after such expiration. If Executive fails to execute and deliver
such release to the Company within such 21-day period, or if Executive revokes
Executive's consent to such release as provided for therein, Executive will not
be eligible to receive any further payments from the Company pursuant to Section
9(d)(vi) or 9(g)(vi).
(k) Other Severance. In the event the Company's written severance
pay policy applicable to Executive provides for greater severance pay and
benefits than are provided for in Section 9(d) or 9(g), Executive may elect to
receive termination pay and benefits under the terms and conditions of such
policy in lieu of the payments and benefits under Section 9(d) or 9(g). It is
understood by the Parties that Executive shall not be entitled to both the
payments and benefits under the severance pay policy and those available under
Section 9(d) or 9(g). Notwithstanding the foregoing, in addition to being
entitled to the greater of the payments and benefits under the severance pay
policy and under Section 9(d) or 9(g), as applicable, Executive shall be
entitled to professional outplacement services (including office space and
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<PAGE> 14
secretarial services), at a cost not exceeding 10% of Executive's annual Base
Salary, in accordance with the Company's policies regarding outplacement
services; provided, however, that payments pursuant to this sentence shall be
made only for actual outplacement services, and Executive shall not have the
option to elect to receive all or part of the maximum allowances therefor in
lieu of outplacement services.
10. Indemnification.
(a) The Company agrees that if Executive is made a party, or is
threatened to be made a party, to any action, suit or proceeding, whether civil,
criminal, administrative or investigative (a "Proceeding"), by reason of the
fact that Executive is or was a director, officer or employee of the Company or
is or was serving at the request of the Company as a director, officer, member,
employee or agent of another Person, including service with respect to employee
benefit plans, whether or not the basis of such Proceeding is Executive's
alleged action in an official capacity while serving as a director, officer,
member, employee or agent, Executive shall be indemnified and held harmless by
the Company to the fullest extent permitted or authorized by the Company's
certificate of incorporation or bylaws or, if greater, by the laws of the State
of Delaware, against all cost, expense, liability and loss (including, without
limitation, attorney's fees, judgments, fines, ERISA excise taxes (other than
such as may be imposed with respect to compensation received by Executive) or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by Executive in connection therewith, and such indemnification shall
continue as to Executive even if Executive has ceased to be a director, member,
employee or agent of the Company or other Person and shall inure to the benefit
of Executive's heirs, executors and administrators. The Company shall advance to
Executive to the extent permitted by law all reasonable costs and expenses
incurred by him in connection with a Proceeding within 20 days after receipt by
the Company of a written request, with appropriate documentation, for such
advance. Such request shall include an undertaking by Executive to repay the
amount of such advance if it shall ultimately be determined that Executive is
not entitled to be indemnified against such costs and expenses.
(b) The Company agrees to continue and maintain a directors' and
officers' liability insurance policy covering Executive to the extent the
Company provides such coverage for its other executive officers.
(c) Promptly after receipt by Executive of notice of any claim or
the commencement of any action or proceeding with respect to which Executive is
entitled to indemnity hereunder, Executive shall notify the Company in writing
of such claim or the commencement of such action or proceeding, and the Company
shall (i) assume the defense of such action or proceeding, (ii) employ counsel
reasonably satisfactory to Executive and (iii) pay the reasonable fees and
expenses of such counsel. Notwithstanding the preceding sentence, Executive
shall be entitled to employ counsel separate from counsel for the Company and
from any other party in such action if Company counsel reasonably determines
that a conflict of
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<PAGE> 15
interest exists which makes representation by counsel chosen by the Company not
advisable. In such event, the reasonable fees and disbursements of such separate
counsel for Executive shall be paid by the Company to the extent permitted by
law.
(d) After the Term of Employment, (i) at the request of the
Company, Executive shall cooperate with and assist the Company (to the extent
that such activities do not unreasonably interfere with the performance of
Executive's other business activities or employment) to prepare for or defend
against any action, suit, proceeding or claim brought or threatened to be
brought against the Company or to prepare for or institute any action, suit,
proceeding or claim to be brought or threatened to be brought against a third
party arising out of or based upon any matter or thing whatsoever arising out of
or which may be related to matters as to which Executive has or acquires
knowledge or information by reason of his employment by the Company or any of
its Subsidiaries, and (ii) upon the request of Executive, the Company shall
reimburse Executive for all reasonable travel, legal and other out-of-pocket
expenses that may be incurred by Executive related to assisting the Company, at
its request, to prepare for or defend against any such action, suit, proceeding
or claim brought or threatened to be brought against the Company or to prepare
for or institute any action, suit, proceeding or claim to be brought or
threatened to be brought against a third party and in providing evidence,
producing documents or otherwise participating in any such action, suit,
proceeding or claim.
11. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement, the existence
of this Agreement shall not prohibit or restrict Executive's entitlement to full
participation in the employee benefit and other plans or programs in which
senior executives of the Company are eligible to participate.
12. Confidentiality.
Executive acknowledges that Executive is bound by that certain
nondisclosure agreement executed by Executive upon the commencement of his
employment with the Company and that the terms thereof shall not be modified or
affected by this Agreement.
13. Non-Competition.
(a) During the Term of Employment and (unless the Term of
Employment expires following a Non-Extension Event or is terminated by the
Company without Cause or voluntarily by Employee due to a Constructive
Termination Without Cause) for a period of nine months thereafter, Executive
shall not, directly or indirectly, except when acting on behalf of the Company,
whether as an employee, consultant, partner, principal, agent, distributor,
representative, stockholder or otherwise, plan, develop, conduct or otherwise
engage in the MDU Business in any metropolitan area world-wide in which the
Company or any
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<PAGE> 16
Subsidiary then conducts or is actively planning to conduct the MDU Business
(except that he may be a stockholder holding not more than a 1% common stock
interest in a Person whose shares are publicly traded and which engages in the
MDU Business in any such area). Notwithstanding the foregoing, Executive shall
be free at any time following the Term of Employment to accept employment with
or provide other services to any Person whose business includes the MDU Business
but only if (i) the MDU Business is not the principal or predominant business of
such Person and (ii) the services of Executive do not principally or
predominantly relate to the MDU Business. By way of example only, if the Term of
Employment were to end on the date of this Agreement, Executive would be free to
be employed by a typical incumbent local exchange or long distance carrier or by
a typical franchised cable operator for so long as Executive's services did not
principally or predominantly relate to the provision of video and
telecommunications services to residential multiple dwelling units in the
markets in which the Company now operates or is actively planning to operate.
(b) During the Term of Employment and for a period of 12 months
thereafter, Executive shall not, directly or indirectly, (i) solicit any
customer of the Company or any Subsidiary to do business with any Person that
engages in the MDU Business or (ii) solicit any Person, other than his
secretary/administrative assistant, who is employed by the Company or any
Subsidiary or who was employed by the Company or any Subsidiary within 12 months
of such solicitation to (A) terminate his or her employment with the Company or
any Subsidiary, (B) accept employment with anyone other than the Company or any
Subsidiary or (C) in any manner interfere with the business of the Company or
any Subsidiary.
(c) Executive acknowledges that the Company has no adequate remedy
at law and would be irreparably harmed if Executive breaches or threatens to
breach any of the provisions of Section 12 or Section 13(a) or 13(b), and
therefore Executive agrees that the Company or any Subsidiary, as the case may
be, shall be entitled to temporary or permanent mandatory or injunctive relief
to terminate or forestall any breach or threatened breach of any of those
provisions and to specific performance of the terms of each of those provisions,
without the need to demonstrate irreparable injury or post bond or other
security. Executive further agrees that he shall not, in any proceeding seeking
injunctive or other equitable relief to enforce the provisions of Section 12 or
Section 13(a) or 13(b), raise the defense that the Company or any Subsidiary has
an adequate remedy at law. Nothing in this Section 13(c) shall be construed to
prohibit the Company or any Subsidiary from pursuing any other rights or
remedies available to it at law or in equity or which may be otherwise available
to it.
(d) If it is determined that any of the provisions of this Section
13, or any part thereof, is unenforceable because of the duration or
geographical scope of such provision, it is the intention of the Parties that
the duration or scope of such provision, as the case may be, shall be reduced so
that such provision becomes enforceable and, in its reduced form, such provision
shall then be enforceable and shall be enforced.
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14. Intellectual Property.
Any processes, inventions, ideas, know-how and other similar data
created or developed by Executive while employed by the Company which relate to
the business then conducted by the Company or any of its Subsidiaries shall be
the Company's exclusive and absolute property, and Executive hereby assigns to
the Company, now and hereafter, all of his right, title and interest to any and
all of the same. Any work in connection with the services rendered by Executive
hereunder shall be considered "work made for hire" under the Copyright Law of
1976 or any successor law, and the Company shall be the owner of such work as if
the Company were the author of such work.
15. Documents; Conduct; References.
(a) Executive hereby expressly covenants and agrees that,
following termination of the Term of Employment for any reason, or any time,
upon the Company's request, Executive will promptly return to the Company all
property of the Company and its Subsidiaries in his or her possession or control
(whether maintained at his or her office, home or elsewhere), including, without
limitation, all copies of all management studies, business or strategic plans,
budgets, notebooks and other printed, typed electronically stored or written
materials, documents, diaries, disks, calendars and data of or relating to the
Company or its Subsidiaries or their respective personnel or affairs.
(b) Executive hereby expressly covenants and agrees that Executive
will not at any time, during or after the Term of Employment, publicly
denigrate, ridicule or intentionally criticize the Company or any of its
Subsidiaries or any of their respective products or services, properties,
employees, officers or directors, including, without limitation, by way of news
interviews or the expression of personal view, opinions or judgments to the news
media.
(c) The Company hereby expressly covenants and agrees that the
Company will not at any time, during or after the Term of Employment, publicly
denigrate, ridicule or intentionally criticize Executive, including, without
limitation, by way of news interviews or the expression of personal views,
opinions or judgments to the news media.
(d) The Company hereby expressly covenants and agrees that,
following the Term of Employment, the Company will, unless otherwise requested
by Executive in any instance or required by law, provide to any prospective
employer seeking information regarding Executive's employment with the Company a
neutral reference in accordance with the general policies of the Company
applicable to requests for employment references.
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16. Acknowledgment of Representation by Counsel.
The Parties acknowledge that they have been represented by counsel
or knowingly waive their right to be represented by counsel with regard to this
Agreement and the subject matter hereof. Each Party agrees and acknowledges that
he or it has not relied upon any tax advice, legal counsel or business advice
provided by the other Party.
17. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the benefit of
the Parties and their respective successors, heirs (in the case of Executive)
and assigns. No rights or obligations of the Company under this Agreement may be
assigned or transferred by the Company, except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the surviving corporation, or the sale or liquidation of all
or substantially all of the assets of the Company, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company and such assignee or transferee assumes the liabilities, obligations and
duties of the Company, as contained in this Agreement, either contractually or
by operation of law. The Company further agrees that, in the event of a sale of
assets or liquidation as described in the preceding sentence, it shall take
whatever action it legally can in order to cause such assignee or transferee to
expressly assume the liabilities, obligations and duties of the Company
hereunder. No rights or obligations of Executive under this Agreement may be
assigned or transferred by Executive other than Executive's rights to
compensation and benefits.
18. Entire Agreement.
Except as herein otherwise expressly provided, this Agreement
contains the entire understanding and agreement between the Parties concerning
the subject matter hereof and supersedes all prior agreements, understandings,
discussions, negotiations and undertakings, whether written or oral, between the
Parties with respect thereto, including any agreement between Executive and any
Affiliate of the Company dated prior to the date hereof.
19. Amendment or Waiver.
No provision in this Agreement may be amended unless such
amendment is agreed to in writing and signed by Executive and an authorized
officer of the Company. No waiver by either Party of any breach by the other
Party of any condition or provision contained in this Agreement to be performed
by such other Party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same or any prior or subsequent time. Any waiver
must be in writing and signed by Executive or an authorized officer of the
Company, as the case may be.
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20. Severability.
In the event that any provision or portion of any provision of
this Agreement shall be determined to be invalid or unenforceable for any
reason, in whole or in part, the remaining provisions and portions remaining of
any provisions of this Agreement shall be unaffected thereby and shall remain in
full force and effect to the fullest extent permitted by law.
21. Beneficiaries/References.
Executive shall be entitled to select (and change, to the extent
permitted under any applicable law) a beneficiary or beneficiaries to receive
any compensation or benefit payable hereunder following Executive's death by
giving the Company written notice thereof. In the event of Executive's death or
a judicial determination of Executive's incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
22. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and interpreted
in accordance with the laws of the State of Texas without reference to
principles of conflict of laws.
23. Resolution of Disputes.
Any disputes arising under or in connection with this Agreement
shall be resolved by binding arbitration before a single arbitrator, to be held
in Dallas, Texas, in accordance with the rules and procedures of the American
Arbitration Association. Judgment upon the award rendered by the arbitrator
shall be final and subject to appeal only to the extent permitted by law. Each
Party shall bear its or his own expenses incurred in connection with any
arbitration. Anything to the contrary notwithstanding, each Party has the right
to proceed with a court action for injunctive relief or relief from violations
of law not within the jurisdiction of an arbitrator.
24. Notices.
Any notice required or permitted hereunder to be given to a Party
shall be effective only if given in writing and shall be deemed to have been
given when delivered personally or sent by certified or registered mail, postage
prepaid, return receipt requested or by Federal Express or other similar
service, duly addressed to the Party concerned at the address indicated below or
to such changed address as such Party may hereafter specify by notice to the
other Party:
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If to the Company:
OpTel, Inc.
1111 W. Mockingbird Lane, #1000
Dallas, Texas 75247
Attention: General Counsel
If to Executive:
440 Sheffield Drive
Richardson, TX 75081
25. Headings.
The captions or headings of the sections contained in this
Agreement are for convenience only and shall not be deemed to control or affect
the meaning or construction of any provision of this Agreement.
26. Execution of Agreement and Further Actions.
This Agreement may be executed in several counterpart copies each
of which shall constitute an original and the same instrument notwithstanding
that both Parties are not signatories to the same counterpart. The Parties agree
to execute such other documents and to take such other action as may from time
to time be necessary or appropriate to carry out the intent of this Agreement,
provided that the same are not inconsistent with the provisions hereof.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first written above.
OPTEL, INC.
By:
-------------------------
----------------------------
LYNN R. ZERA
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EXHIBIT 10.16
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by
and between OPTEL, INC., a Delaware corporation (the "Company"), and LOUIS
BRUNEL ("Executive").
W I T N E S S E T H:
WHEREAS, Executive is currently employed by the Company as
President and Chief Executive Officer of the Company; and
WHEREAS, the Company desires to continue to employ Executive
and Executive has agreed to such continuation, subject to the terms of this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants contained herein, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
1. Definitions.
As used in this Agreement, unless the context otherwise
requires:
(a) "Affiliate" of a Person shall mean a Person that
directly or indirectly controls, is controlled by, or is under common control
with the Person specified.
(b) "Average Annual Bonus" shall mean the average of
the two most recent annual bonuses (not including any payments from long-term
incentive programs) received by or due to Executive for completed fiscal years
immediately prior to the termination of the Term of Employment.
(c) "Base Salary" shall mean the salary provided for
in Section 4.
(d) "Board" shall mean the Board of Directors of the
Company.
(e) "Cause" shall mean:
(i) Executive's conviction of a crime
involving moral turpitude (excluding offenses such as driving while
intoxicated); or
<PAGE> 2
(ii) Executive's (A) commission of a fraud
upon the Company or (B) material breach of this Agreement (including by wilfully
failing or neglecting to perform Executive's duties hereunder), which breach, if
curable, is not substantially cured within 10 days after written notice to
Executive specifying the nature of the breach.
(f) A "Change in Control" shall mean the occurrence
of any one of the following events:
(i) Any "person," as such term is used in
Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (other than
Executive, Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre
Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec,
and their respective Affiliates (collectively, all or any of Le Groupe Videotron
Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and
descendants, Caisse de depot et placement du Quebec, and their respective
Affiliates constitute the "Existing Control Group")), is a "beneficial owner,"
as such term is used in Rule 13d-3 promulgated under that act, of shares of the
Voting Stock of the Company having more total votes in an election for directors
than shares of Voting Stock of which the Existing Control Group is the
beneficial owner and, at the same time, the Existing Control Group does not have
the power, by contract or otherwise, to elect or designate a majority of the
members of the Board;
(ii) the majority of the members of the
Board consists of individuals other than Incumbent Directors, which term means
the members of the Board on the date of this Agreement; provided that any
individual becoming a director subsequent to such date whose election or
nomination for election as a director was supported by two-thirds of the
directors who were Incumbent Directors at the time of such election or
nomination shall be an Incumbent Director;
(iii) the Company adopts any plan of
liquidation providing for the distribution of all or substantially all of its
assets;
(iv) all or substantially all of the assets
or business of the Company are disposed of pursuant to a merger, consolidation
or other transaction (unless the shareholders of the Company immediately prior
to such merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting Stock
of the Company, the Voting Stock or other ownership interests of the Person or
Persons, if any, that succeed to the business of the Company) and at any time
thereafter the Existing Control Group does not have the power, by contract or
otherwise, to elect or designate a majority of the members of the Board; or
(v) the Company combines with another Person
and is the surviving corporation but, immediately after the combination, the
shareholders of the Company
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immediately prior to the combination hold, directly or indirectly, not more than
50% of the Voting Stock of the surviving corporation (there being excluded from
the number of shares held by such shareholders, but not from the Voting Stock of
the surviving corporation, any shares received by Affiliates of such other
Person in exchange for stock of such other Person) and at any time thereafter
the Existing Control Group does not have the power, by contract or otherwise, to
elect or designate a majority of the members of the Board.
(g) "Confidential Information" shall mean all
information that is not known or available to the public concerning the business
of the Company or any Subsidiary relating to its products, product development,
trade secrets, customers, suppliers, finances, and business plans and
strategies. For this purpose, information known or available generally within
the trade or industry of the Company or any Subsidiary shall be deemed to be
known or available to the public. Confidential Information shall include
information that is, or becomes, known to the public as a result of a breach by
Executive of the provisions of Section 13.
(h) "Constructive Termination Without Cause" shall
mean a termination of the Term of Employment by written notice given by
Executive within 90 days following the occurrence, without Executive's prior
written consent, of one or more of the following events (except in consequence
of a prior termination):
(i) a reduction in or elimination of (A)
Executive's then current Base Salary, (B) Executive's bonus target under Section
5, or (C) Executive's opportunity for any long-term incentive award for which he
is eligible under Section 6 or the termination or material reduction of any
material employee benefit or perquisite enjoyed by Executive;
(ii) the failure to elect or reelect
Executive as President and Chief Executive Officer of the Company or his
removal, without Cause, from such position, or a material diminution in
Executive's duties as President and Chief Executive Officer of the Company, as
described in Section 3(a), or the assignment to Executive of duties which are
materially inconsistent with such duties or which materially impair Executive's
ability to function as President and Chief Executive Officer of the Company and,
in the case of any such assignment, the failure of the Company to cure such
inconsistency or impairment within 15 days after its receipt of notice thereof
from Executive;
(iii) the failure to continue Executive's
participation in any incentive compensation plan for which he is eligible unless
a plan providing a substantially similar opportunity is substituted;
(iv) the relocation of the Company's
principal office, or Executive's own office location as assigned to him by the
Company, which would result in a significant increase in the time required for
Executive to travel once weekly to and from Montreal and would therefore make it
impractical for Executive to do so; or
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(v) the failure of the Company to obtain the
confirmation in writing by any successor of the Company or any assignee of all
or substantially all of the Company's assets of such successor or assignee's
obligation to perform this Agreement at or within 45 days after the merger,
consolidation, sale or similar transaction resulting in such succession or
assignment, provided that Executive may not treat such failure as a Constructive
Termination Without Cause unless such failure is not cured within 10 days of
receipt of notice thereof by such successor or assignee from Executive.
(i) "Disability shall mean Executive's inability, due
to physical or mental incapacity, to substantially perform his duties and
responsibilities under this Agreement for a period of 180 consecutive days or
for 180 days in a 365-day period.
(j) "MDU Business" shall mean the delivery of video
and telecommunications services to residential multiple dwelling units.
(k) "Non-Extension Event" shall mean any termination
of the Term of Employment resulting from an election by the Company not to
extend the Term of Employment.
(l) "Person" shall mean an individual, firm,
corporation, trust, joint venture, partnership, limited liability company,
association, unincorporated organization or other entity or any governmental
body or subdivision, agency, commission or authority thereof.
(m) "Stock" shall mean the Common Stock of the
Company.
(n) "Subsidiary" shall mean any Person of which the
Company owns, directly or indirectly, more than 50% of the Voting Stock or, in
the case of a Person other than a corporation, more than 50% of the equity
interest.
(o) "Term of Employment" shall mean the period or
periods specified in Section 2.
(p) "Voting Stock" shall mean capital stock of any
class or classes having general voting power under ordinary circumstances, in
the absence of contingencies, to elect a majority of the directors of a
corporation.
2. Term of Employment.
The Company hereby employs Executive, and Executive
hereby accepts such employment, for the Term of Employment commencing April 15,
1999 and ending at the close of business on October 31, 2000, subject to earlier
termination of the Term of Employment in accordance with the terms of this
Agreement. The Term of Employment shall be automatically renewed from year to
year unless either the Company or Executive provides the
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other with written notice of non-renewal at least 90 days prior to the date on
which the Term of Employment would otherwise expire.
3. Position, Duties and Responsibilities.
(a) During the Term of Employment, Executive shall be
employed as President and Chief Executive Officer of the Company and shall be
responsible, subject to the control of the Board, for the establishment and
implementation of corporate policy and general management of the Company. In
that capacity Executive shall have the duties and responsibilities normally
associated with the positions of President and Chief Executive Officer. It is
the intention of the Parties that Executive serve as a member of the Board
during the Term of Employment. In carrying out his duties under this Agreement,
Executive shall report to, and be subject to the supervision of, the Board.
Executive shall, at the request of the Board, also serve as an officer and/or
director of one or more Subsidiaries without additional compensation.
(b) During the Term of Employment Executive shall
devote his full attention and expend his best efforts, energies and skills on a
full-time basis to the business of the Company and its Subsidiaries.
(c) Nothing herein shall preclude Executive from (i)
serving as a director of one or more other corporations not engaged in
competition with the Company or of one or more trade associations and/or
charitable organizations, subject in each case to prior notice to the Board,
(ii) engaging in charitable activities and community affairs, (iii) managing his
personal investments and affairs, and (iv) being involved in other business
transactions, provided that such activities individually and in the aggregate do
not materially interfere with the proper performance of his duties and
responsibilities as the Company's President and Chief Executive Officer.
4. Base Salary.
Executive shall receive a Base Salary from the
Company at the annual rate of $350,000, payable in accordance with the regular
payroll practices of the Company, but in no event less frequently than monthly.
Executive's Base Salary shall be subject to review by the Board on an annual
basis but shall not be decreased.
5. Annual Bonus.
Executive shall be entitled to be considered for
receipt of an annual bonus, the calculation of which is to be determined in
accordance with an incentive plan established and administered by the Board, as
such plan may be modified by the Board from time to time, which includes a
"target" bonus for Executive for each annual bonus period in an amount equal to
at least 45% of Executive's Base Salary.
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6. Long-Term Incentive Programs.
Executive shall be eligible to participate in any
long-term incentive programs of the Company on the same basis as other senior
executives of the Company.
7. Employee Benefit Programs and Vacation.
(a) During the Term of Employment, Executive shall be
entitled to participate in all employee pension and welfare benefit plans and
programs made available to the Company's senior executives generally, as such
plans or programs may be in effect from time to time.
(b) Executive shall be entitled to one month paid
vacation per year.
8. Reimbursement of Business and Other Expenses; Certain
Perquisites.
(a) Executive is authorized to incur reasonable
business expenses in carrying out his duties and responsibilities under this
Agreement, and the Company shall promptly reimburse Executive for all such
expenses, all subject to and in accordance with the Company's policies and
procedures as adopted and in effect from time to time and applicable to its
senior executives of comparable status.
(b) To assist Executive in the performance of his
duties and responsibilities under this Agreement, the Company shall provide to
Executive an allowance for the use of an automobile having an initial purchase
value of not more than $60,000 and all expenses of registration, insurance,
operation and maintenance of such automobile; provided, however, that for the
remaining initial term of the existing lease the Company may continue to provide
Executive with the use of the leased automobile currently provided to Executive.
(c) The Company shall maintain at Company's expense
in Las Colinas, Texas (or another location reasonably proximate to the Company's
principal office) a corporate apartment for Executive's use, provided, that the
maximum net rental obligation of the Company pursuant to the provisions of this
Section 8(c) shall not exceed $2,500 per month (subject to appropriate cost of
living increases). Said apartment shall be reasonably satisfactory to Executive.
(d) The Company shall reimburse Executive for his
reasonable expenses incurred in connection with his travel once weekly to and
from Montreal.
(e) Executive shall be eligible to receive all
perquisites made generally available by the Company to its senior executives.
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(f) It is the intention of the Company that the
Executive shall be kept whole in respect of U. S. Federal income taxes on the
allowances, reimbursements, expenses and perquisites referred to in Sections
8(b), (c) and (d) above (the "Allowances"). Accordingly, the Company shall pay
Executive a tax "gross-up" with respect to all such Allowances that are
includable in Executive's taxable income for U.S. Federal Income Tax purposes
(i.e., an incremental amount equal to the net U.S. Federal, state and local
income taxes to which Executive is subject on the sum of the Allowances and the
incremental amount, calculated at the maximum rates applicable to individuals,
irrespective of the actual tax payments made by Executive).
9. Termination of Term of Employment.
(a) Termination Due to Death. The Term of Employment
shall terminate upon Executive's death. In the event of such termination due to
Executive's death, his estate or his beneficiaries, as the case may be, shall be
entitled to:
(i) the proceeds payable in the event of
Executive's death under the group life insurance policy maintained by the
Company for the benefit of its senior executive employees and others and any
other life insurance policy maintained by the Company or any of its Affiliates
for the benefit of Executive;
(ii) an amount, payable promptly in a lump
sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion
of the Term of Employment remaining as of the time immediately prior to
Executive's death, over (B) the amount of life insurance proceeds payable
pursuant to clause (i) of this Section 9(a);
(iii) if the date of Executive's death
coincides with the last day of a bonus period, a bonus for such bonus period in
accordance with the terms of the applicable incentive plan; otherwise, a bonus
for the bonus period in which Executive's death occurs, determined pro rata with
respect to Executive's target bonus for such period based on the number of
completed months of Executive's employment by the Company during such bonus
period;
(iv) the balance of any bonus earned (but
not yet paid) for any bonus period prior to the bonus period in which
Executive's death occurs;
(v) any amounts earned, accrued or owing but
not yet paid under Section 6, 7 or 8; and
(vi) any other or additional benefits
provided for in accordance with applicable plans and programs of the Company.
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(b) Termination Due to Disability. The Term of
Employment may be terminated by the Company by written notice to Executive in
the event of Executive's Disability. In the event of such termination due to
Disability, Executive shall be entitled to:
(i) an amount, payable promptly in a lump
sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion
of the Term of Employment remaining as of the time immediately prior to such
termination, over (B) the amount of any disability benefits provided to
Executive by the Company or under any disability insurance paid for, or for
which premiums paid by Executive were reimbursed, by the Company;
(ii) if such termination coincides with the
last day of a bonus period, a bonus for such bonus period in accordance with the
terms of the applicable incentive plan; otherwise, a bonus for the bonus period
in which such termination occurs, determined pro rata with respect to
Executive's target bonus for such bonus period based on the number of completed
months of Executive's employment by the Company during such bonus period;
(iii) the balance of any bonus earned (but
not yet paid) for any bonus period prior to the bonus period in which such
termination occurs;
(iv) any amounts earned, accrued or owing
but not yet paid under Section 6, 7 or 8; and
(v) any other or additional benefits
provided for in accordance with applicable plans and programs of the Company.
(c) Termination by the Company for Cause. In the
event the Company terminates the Term of Employment for Cause, Executive shall
be entitled to:
(i) Base Salary through the date of such
termination;
(ii) any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which such termination occurs;
(iii) any amounts earned, accrued or owing
but not yet paid under Section 6, 7 or 8; and
(iv) any other or additional benefits
provided for in accordance with applicable plans or programs of the Company.
(d) Termination Without Cause or Constructive
Termination Without Cause. In the event the Term of Employment is terminated by
the Company without Cause,
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other than due to Executive's Disability or death, or in the event the Term of
Employment is terminated due to a Constructive Termination Without Cause,
Executive shall be entitled to:
(i) Base Salary through the date of such
termination;
(ii) if the date of such termination
coincides with the last day of a bonus period, a bonus for such bonus period in
accordance with the terms of the applicable incentive plan; otherwise, a bonus
for the bonus period in which such termination occurs, determined pro rata with
respect to Executive's target bonus for such bonus period based on the number of
completed months of Executive's employment by the Company during such bonus
period;
(iii) the balance of any bonus earned (but
not yet paid) for any bonus period prior to the bonus period in which such
termination occurs;
(iv) any amounts earned, accrued or owing
but not yet paid under Section 6, 7 or 8;
(v) any other or additional benefits
provided for in accordance with applicable plans and programs of the Company;
and
(vi) to elect, within 30 days after such
termination, either (x) to cease being an employee of the Company and receive
the lump-sum payment described in section 9(d)(vi)(A) or (y) to remain an
employee of the Company for the period described in Section 9(d)(vi)(B). After
Executive makes such election, the following provisions shall apply:
(A) In the event Executive makes the
election provided in clause (x) of Section 9(d)(vi), then,
subject to the requirements of Section 9(k), the Company shall
pay to Executive in a lump sum: (1) an amount equal to Base
Salary for the period (the "Minimum Severance Period") that is
the longer of 24 months or the unexpired portion of the Term
of Employment remaining as of the time immediately prior to
such termination, plus (2) an amount equal to Average Annual
Bonus pro-rata for the Minimum Severance Period.
(B) In the event Executive makes the
election provided in clause (y) of Section 9(d)(vi), then,
subject to the requirements of Section 9(k), Executive will
remain an employee of the Company (but without any title)
until the end of the Minimum Severance Period, and the Company
shall pay to Executive Base Salary for such period plus
Average Annual Bonus pro-rata for such period; provided,
however, that
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(1) if Executive dies during such period,
Executive's payments pursuant to this Section
9(d)(vi)(B) shall cease, and Executive's estate or
beneficiaries, as the case may be, will be entitled
to receive the proceeds, if any, of the group life
insurance maintained by the Company for the benefit
of its senior executive employees and others, plus a
lump sum amount (which shall be paid by the Company
promptly after Executive's death) equal to the
excess, if any, of (x) the balance of the payments of
Base Salary and Average Annual Bonus that Executive
would have been entitled to receive pursuant to this
Section 9(d)(vi)(B) had Executive remained on the
Company's payroll until the end of such period over
(y) the amount of such life insurance proceeds; and
(2) if Executive accepts substantially
full-time employment with any other Person during
such period or notifies the Company in writing of his
intention to terminate his employment during such
period, Executive will cease to be an employee of the
Company effective upon the earlier of the effective
date of such termination as specified by Executive in
such notice or the commencement of such employment,
and the Company shall promptly pay to Executive a
lump sum equal to the balance of the payments of Base
Salary and Average Annual Bonus that Executive would
have been entitled to receive pursuant to this
Section 9(d)(vi)(B) had he remained on the Company's
payroll until the end of such period.
(C) In the event Executive makes the election
provided in clause (y) of Section 9(d)(vi), then during the
period he remains on the payroll of the Company, Executive
will continue to be eligible to receive the same medical and
life insurance benefits which all other employees of the
Company are then entitled to receive, as such benefits may be
amended, changed or eliminated from time to time. Executive
shall not be entitled to any other perquisite or benefit
provided by the Company to its senior executives or employees
generally or otherwise specifically provided for in this
Agreement and shall not be entitled to any additional awards
or grants under any long-term incentive plan. In the event
Executive makes the election provided in clause (y) of Section
9(d)(vi), Executive will continue to be an employee of the
Company for purposes of any stock option and restricted shares
agreements until such time as he leaves the payroll of the
Company.
(e) Acceleration of Entitlements in Connection with a
Change in Control or Termination. Upon a Change in Control (regardless of
whether Executive continues in employment by the Company or the termination of
the Term of Employment for any reason whatsoever) or the termination of the Term
of Employment (including upon a Non-Extension
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Event or Disability or death) otherwise than for Cause, Executive shall become
immediately entitled to exercise in full any stock option to acquire Stock
during the remainder of the term of such option, which, unless a Change in
Control shall have occurred or such option shall previously have expired, shall
automatically expire on the date that is 12 months after such termination of the
Term of Employment. If, in connection with a Change in Control or within 12
months after a Change in Control, the Term of Employment is terminated without
Cause, other than due to Disability or death, or due to a Constructive
Termination Without Cause, then, without limitation of the payments, benefits
and elections provided in Section 9(d) and the immediately preceding sentence,
upon such Change in Control or such later termination, all amounts, entitlements
and benefits awarded to Executive or to which Executive is otherwise entitled
under any grant, plan or program of the Company but which are not yet vested
shall become fully vested except to the extent such vesting would be
inconsistent with the terms of the relevant plan. In connection with the
occurrence of a Change in Control, Executive and the Company agree to negotiate
in good faith payment arrangements and covenant changes (without reducing the
total amount payable pursuant to this Section 9(e)) designed to preserve to the
Company the deductibility for U.S. Federal income tax purposes of, and avoid any
liability for payment of excise tax ("Excise Tax"), if any, that might be
imposed by Section 4999 of the U.S. Internal Revenue Code of 1986, as amended
(the "Code"), in respect of, amounts paid or benefits inuring to Executive
pursuant to this Section 9(e).
(f) Voluntary Termination. A termination of the Term
of Employment by Executive on his own initiative, other than a termination due
to death or Disability or a Constructive Termination without Cause, shall be
treated as a Termination for Cause, and, accordingly, Executive shall have only
the entitlements provided in Section 9(c).
(g) Termination Because of Non-Renewal. In the event
of a Non- Extension Event, Executive shall be entitled to:
(i) Base Salary through the date of
expiration of the Term of Employment;
(ii) if the expiration of the Term of
Employment coincides with the last day of a bonus period, a bonus for such bonus
period in accordance with the terms of the applicable incentive plan; otherwise,
a bonus for the bonus period in which the Term of Employment expires, determined
pro rata with respect to Executive's target bonus for such bonus period based on
the number of completed months of Executive's employment by the Company during
such bonus period;
(iii) the balance of any bonus earned (but
not yet paid) for any bonus period prior to the bonus period in which the Term
of Employment expires;
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(iv) any amounts earned, accrued or owing
but not yet paid under Section 6, 7 or 8;
(v) any other or additional benefits
provided for in accordance with applicable plans and programs of the Company;
and
(vi) to elect within 30 days after such
termination, either (x) to cease being an employee of the Company and receive
the lump-sum payment described in section 9(g)(vi)(A) or (y) to remain an
employee of the Company for the period described in Section 9(g)(vi)(B). After
Executive makes such election, the following provisions shall apply:
(A) In the event Executive makes the
election provided in clause (x) of Section 9(g)(vi),
subject to the requirements of Section 9(k), the
Company shall pay to Executive in a lump sum: (1) an
amount equal to Base Salary for 24 months, plus (2)
an amount equal to Average Annual Bonus pro-rata for
the same period.
(B) In the event Executive makes the
election provided in clause (y) of Section 9(g)(vi),
subject to the requirements of Section 9(k),
Executive will remain an employee of the Company (but
without any title) for the period of 24 months
following the expiration of the Term of Employment,
and the Company shall pay to Executive Base Salary
for such period plus Average Annual Bonus pro-rata
for such period; provided, however, that
(1) if Executive dies during such period,
his payments pursuant to this Section
9(g)(vi)(B) shall cease, and Executive's
estate or beneficiaries, as the case may be,
will be entitled to receive the proceeds, if
any, of the group life insurance maintained
by the Company for the benefit of its senior
executive employees and others, plus a lump
sum amount (which shall be paid by the
Company promptly after Executive's death)
equal to the excess, if any, of (x) the
balance of the payments of Base Salary and
Average Annual Bonus that Executive would
have been entitled to receive pursuant to
this Section 9(g)(vi)(B) had Executive
remained on the Company's payroll until the
end of such period over (y) the amount of
such life insurance proceeds; and
(2) if Executive accepts substantially
full-time employment with any other Person
during such period or notifies the Company
in writing of his intention to terminate his
employment during such period, Executive
will cease to be an employee of the Company,
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effective upon the earlier of the effective
date of such termination as specified by
Executive in such notice or the commencement
of such employment, and the Company shall
promptly pay to Executive a lump sum equal
to the balance of the payments of Base
Salary and Average Annual Bonus that
Executive would have been entitled to
receive pursuant to this Section 9(g)(vi)(B)
had Executive remained on the Company's
payroll until the end of such period.
(C) In the event Executive makes an election
provided in clause (y) of Section 9(g)(vi), then
during the period he remains on the payroll of the
Company, Executive will continue to be eligible to
receive the medical and life insurance benefits all
other employees of the Company are then entitled
to receive, as amended, changed or eliminated, from
time to time. Executive shall not be entitled to any
other perquisite or benefit provided by the Company
to its senior executives generally or otherwise
specifically provided for in this Agreement and shall
not be entitled to any additional awards or grants
under any long-term incentive plan. In the event of
an election pursuant to clause (y) of Section
9(d)(vi), Executive will continue to be an employee
of the Company for purposes of any stock option and
restricted shares agreements until such time as he
leaves the payroll of the Company.
(h) Limitation In Connection with a Change in
Control. In the event that the termination of the Term of Employment and the
aggregate of all payments or benefits made or provided to the Executive under
this Section 9 and under all other plans and programs of the Company (the
"Aggregate Payment") is determined to constitute a Parachute Payment, as such
term is defined in Section 280G(b)(2) of the Code, the Company shall pay to
Executive, prior to the time any Excise tax is payable with respect to such
Aggregate Payment, an additional amount which, after the imposition of all
income and Excise Tax thereon, is equal to the Excise Tax on the Aggregate
Payment. The determination of whether the Aggregate Payment constitutes a
Parachute Payment and, if so, the amount to be paid to the Executive and the
time of payment pursuant to this Section 9(h) shall be made by an independent
auditor (the "Auditor") jointly selected by the Company and the Executive and
paid by the Company. The Auditor shall be a nationally recognized United States
public accounting firm which has not, during the two years preceding the date of
its selection, acted in any way on behalf of the Company or any Subsidiary or
Affiliate thereof. If the Executive and the Company cannot agree on the firm to
serve as the Auditor, then the Executive and the Company shall each select one
accounting firm and those two firms shall jointly select the accounting firm to
serve as the Auditor.
(i) No Mitigation; No Offset. In the event of any
termination of the Term of Employment under this Section 9, Executive shall be
under no obligation to seek other
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employment and there shall be no offset against amounts due Executive under this
Agreement on account of any remuneration attributable to any subsequent
employment obtained by Executive, except as specifically provided in this
Section 9.
(j) Nature of Payments. Any amounts due under this
Section 9 are in the nature of severance payments considered to be reasonable by
the Company and are not in the nature of a penalty.
(k) General Release. In partial consideration for,
and as a condition of, the Company's obligation to make the payments described
in Sections 9(d)(vi) and 9(g)(vi), Executive shall execute and deliver to the
Company a release of all claims he shall then have against the Company, its
Affiliates and their related Persons arising out of or in connection with his
employment or termination of employment, including, but not limited to, a
release of all claims of discrimination. The Company will deliver such release
to Executive at or about the time it delivers or receives the notice of
termination and Executive shall execute and deliver such release to the Company
within 21 days thereafter, except that in case of expiration of the Term of
Employment following a Non-Extension Event, the release will be delivered to
Executive upon such expiration and shall be executed and delivered by Executive
within 21 days after such expiration. If Executive fails to execute and deliver
such release to the Company within such 21-day period, or if Executive revokes
his consent to such release as provided for therein, he will not be eligible to
receive any further payments from the Company pursuant to Section 9(d)(vi) or
9(g)(vi).
(l) Alternative Benefits; Outplacement Services. In
the event the Company's written severance pay policy applicable to Executive
provides for greater severance pay and benefits than are provided for in Section
9(d) or 9(g), Executive may elect to receive termination pay and benefits under
the terms and conditions of such policy in lieu of the payments and benefits
under Section 9(d) or 9(g). It is understood by the Parties that Executive shall
not be entitled to both the payments and benefits under the severance pay policy
and those available under Section 9(d) or 9(g). Notwithstanding the foregoing,
in addition to being entitled to the greater of the payments and benefits under
the severance pay policy and under Section 9(d) or 9(g), as applicable,
Executive shall be entitled to professional outplacement services (including
office space and secretarial services), at a cost not exceeding [10% of
Executive's annual Base Salary]; provided, however, that payments pursuant to
this sentence shall be made only for actual outplacement services and relocation
expense reimbursements, and Executive shall not have the option to elect to
receive all or part of the maximum allowances therefor in lieu of outplacement
services.
(m) Relocation Expenses. Notwithstanding the
provisions of Section 9(k), in the event Executive becomes entitled to payments
and benefits under Section 9(b), 9(d) or 9(g), Executive shall also be entitled
to receive from the Company relocation assistance payments, consisting of
payment or reimbursement of:
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(i) costs incurred in the sale of
Executive's primary residence in the Dallas area, including sales commissions
not to exceed local custom, and all other normal closing costs in connection
with such sale;
(ii) all reasonable moving expenses to
another location in the United States or Canada, including packing, transport,
temporary storage and unpacking (including the cost of moving one vehicle), all
through movers or moving agents designated or approved by the Company;
(iii) reasonable costs (not exceeding costs
of economy air fare and appropriate lodging) of one house hunting trip for
Executive and spouse; and
(iv) a tax "gross-up" for all sums paid to
Executive pursuant to clauses (i) through (iv) of this paragraph (m) that are
includable in Executive's taxable income for U.S. Federal income tax purposes
(i.e., an incremental amount equal to the net U.S. Federal, state and local
income taxes to which Executive is subject on the sum of the payments made to or
for Executive's benefit pursuant to this paragraph (m) and the incremental
amount, calculated at the maximum rates applicable to individuals, irrespective
of the actual tax payments made by Executive);
provided, however, that payments pursuant to this paragraph (m) shall be made
only for actual expenses in connection with Executive's relocation outside the
Dallas area, and Executive shall not have the option to elect to receive all or
part of the maximum allowances therefor in lieu of relocation expenses; and
provided, further, that such payments shall only be available in respect of
relocation that occurs within (x) nine months after the end of the Term of
Employment and (y) five years after the date Executive commenced employment with
the Company.
10. Indemnification.
(a) The Company agrees that if Executive is made a
party, or is threatened to be made a party, to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that he is or was a director, officer or employee of the
Company or is or was serving at the request of the Company as a director,
officer, member, employee or agent of another Person, including service with
respect to employee benefit plans, whether or not the basis of such Proceeding
is Executive's alleged action in an official capacity while serving as a
director, officer, member, employee or agent, Executive shall be indemnified and
held harmless by the Company to the fullest extent permitted or authorized by
the Company's certificate of incorporation or bylaws or, if greater, by the laws
of the State of Delaware, against all cost, expense, liability and loss
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes (other than such as may be imposed with respect to compensation received
by Executive) or penalties and amounts paid or to be paid in
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settlement) reasonably incurred or suffered by Executive in connection
therewith, and such indemnification shall continue as to Executive even if he
has ceased to be a director, member, employee or agent of the Company or other
Person and shall inure to the benefit of Executive's heirs, executors and
administrators. The Company shall advance to Executive to the extent permitted
by law all reasonable costs and expenses incurred by him in connection with a
Proceeding within 20 days after receipt by the Company of a written request,
with appropriate documentation, for such advance. Such request shall include an
undertaking by Executive to repay the amount of such advance if it shall
ultimately be determined that he is not entitled to be indemnified against such
costs and expenses.
(b) The Company agrees to continue and maintain a
directors' and officers' liability insurance policy covering Executive to the
extent the Company provides such coverage for its other executive officers.
(c) Promptly after receipt by Executive of notice of
any claim or the commencement of any action or proceeding with respect to which
Executive is entitled to indemnity hereunder, Executive shall notify the Company
in writing of such claim or the commencement of such action or proceeding, and
the Company shall (i) assume the defense of such action or proceeding, (ii)
employ counsel reasonably satisfactory to Executive and (iii) pay the reasonable
fees and expenses of such counsel. Notwithstanding the preceding sentence,
Executive shall be entitled to employ counsel separate from counsel for the
Company and from any other party in such action if Company counsel reasonably
determines that a conflict of interest exists which makes representation by
counsel chosen by the Company not advisable. In such event, the reasonable fees
and disbursements of such separate counsel for Executive shall be paid by the
Company to the extent permitted by law.
(d) After the Term of Employment (i) at the request
of the Company, Executive shall cooperate with and assist the Company (to the
extent that such activities do not unreasonably interfere with the performance
of Executive's other business activities or employment) to prepare for or defend
against any action, suit, proceeding or claim brought or threatened to be
brought against the Company or to prepare for or institute any action, suit,
proceeding or claim to be brought or threatened to be brought against a third
party arising out of or based upon any matter or thing whatsoever arising out of
or which may be related to matters as to which Executive has or acquires
knowledge or information by reason of his employment by the Company or any of
its Subsidiaries, and (ii) upon request by Executive, the Company shall
reimburse Executive for all reasonable travel, legal and other out-of-pocket
expenses that may be incurred by Executive related to assisting the Company, at
its request, to prepare for or defend against any such action, suit, proceeding
or claim brought or threatened to be brought against the Company or to prepare
for or institute any action, suit, proceeding or claim to be brought or
threatened to be brought against a third party and in providing evidence,
producing documents or otherwise participating in any such action, suit,
proceeding or claim.
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11. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement,
the existence of this Agreement shall not prohibit or restrict Executive's
entitlement to full participation in the employee benefit and other plans or
programs in which senior executives of the Company are eligible to participate.
12. Confidentiality.
Executive shall not, without the prior written
consent of the Company and without limitation as to time, divulge, disclose or
make accessible to any other Person any Confidential Information except (a) in
the course of carrying out his duties under this Agreement or (b) when required
to do so by any court of law, by any governmental agency having supervisory
authority over the business of the Company or by any administrative or
legislative body (including a committee thereof) with apparent jurisdiction to
order him to divulge, disclose or make accessible such information, provided
that Executive shall as promptly as practicable notify Company of the action of
such court, agency or other body which requires Executive to make such
disclosure so that Company will have the opportunity, if available, to take
appropriate action to prevent such disclosure and knowledge of the scope and
extent of such disclosure.
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13. Non-Competition.
(a) During the Term of Employment and (unless the
Term of Employment expires following a Non-Extension Event or is terminated by
the Company without Cause or voluntarily by Employee due to a Constructive
Termination Without Cause) for a period of nine months thereafter, Executive
shall not, directly or indirectly, except when acting on behalf of the Company,
whether as an employee, consultant, partner, principal, agent, distributor,
representative, stockholder or otherwise, plan, develop, conduct or otherwise
engage in the MDU Business in any metropolitan area world-wide in which the
Company or any Subsidiary then conducts or is actively planning to conduct the
MDU Business (except that he may be a stockholder holding not more than a 1%
common stock interest in a Person whose shares are publicly traded and which
engages in the MDU Business in any such area). Notwithstanding the foregoing,
Executive shall be free at any time following the Term of Employment to accept
employment with or provide other services to any Person whose business includes
the MDU Business but only if (i) the MDU Business is not the principal or
predominant business of such Person and (ii) the services of Executive do not
principally or predominantly relate to the MDU Business. By way of example only,
if the Term of Employment were to end on the date of this Agreement, Executive
would be free to be employed by a typical incumbent local exchange or long
distance carrier or by a typical franchised cable operator for so long as
Executive's services did not principally or predominantly relate to the
provision of video and telecommunications services to residential multiple
dwelling units in the markets in which the Company now operates or is actively
planning to operate.
(b) During the Term of Employment and for a period of
12 months thereafter, Executive shall not, directly or indirectly, (i) solicit
any customer of the Company or any Subsidiary to do business with any Person
that engages in the MDU Business or (ii) solicit any Person, other than his
secretary/administrative assistant, who is employed by the Company or any
Subsidiary or who was employed by the Company or any Subsidiary within 12 months
of such solicitation to (A) terminate his or her employment with the Company or
any Subsidiary, (B) accept employment with anyone other than the Company or any
Subsidiary or (C) in any manner interfere with the business of the Company or
any Subsidiary.
(c) Executive acknowledges that the Company has no
adequate remedy at law and would be irreparably harmed if Executive breaches or
threatens to breach any of the provisions of Section 12 or Section 13(a) or
13(b), and therefore Executive agrees that the Company or any Subsidiary, as the
case may be, shall be entitled to temporary or permanent mandatory or injunctive
relief to terminate or forestall any breach or threatened breach of any of those
provisions and to specific performance of the terms of each of such provisions,
without the need to demonstrate irreparable injury or post bond or other
security. Executive further agrees that he shall not, in any proceeding seeking
injunctive or other equitable relief to enforce the provisions of Section 12 or
Section 13(a) or 13(b), raise the defense that the Company or any Subsidiary has
an adequate remedy at law. Nothing in this Section 13(c) shall be construed to
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prohibit the Company or any Subsidiary from pursuing any other rights or
remedies available to it at law or in equity or which may be otherwise available
to it.
(d) If it is determined that any of the provisions of
this Section 13, or any part thereof, is unenforceable because of the duration
or geographical scope of such provision, it is the intention of the Parties that
the duration or scope of such provision, as the case may be, shall be reduced so
that such provision becomes enforceable and, in its reduced form, such provision
shall then be enforceable and shall be enforced.
14. Intellectual Property.
Any processes, inventions, ideas, know-how and other
similar data created or developed by Executive while employed by the Company
which relate to the business then conducted by the Company or any of its
Subsidiaries shall be the Company's exclusive and absolute property, and
Executive hereby assigns to the Company, now and hereafter, all of his right,
title and interest to any and all of the same. Any work in connection with the
services rendered by Executive hereunder shall be considered "work made for
hire" under the Copyright Law of 1976 or any successor law, and the Company
shall be the owner of such work as if the Company were the author of such work.
15. Documents; Conduct; References.
Executive hereby expressly covenants and agrees that:
(a) Following termination of the Term of Employment
for any reason, or any time, upon the Company's request, Executive will promptly
return to the Company all property of the Company and its Subsidiaries in his or
her possession or control (whether maintained at his or her office, home or
elsewhere), including, without limitation, all copies of all management studies,
business or strategic plans, budgets, notebooks and other printed, typed
electronically stored or written materials, documents, diaries, disks, calendars
and data of or relating to the Company or its Subsidiaries or their respective
personnel or affairs.
(b) Executive hereby expressly covenants and agrees
that Executive will not at any time, during or after the Term of Employment,
denigrate, ridicule or intentionally criticize the Company or any of its
Subsidiaries or any of their respective products or services, properties,
employees, officers or directors, including, without limitation, by way of news
interviews or the expression of personal view, opinions or judgments to the news
media.
(c) The Company hereby expressly covenants and agrees
that the Company will not at any time, during or after the Term of Employment,
publicly denigrate, ridicule or intentionally criticize Executive, including,
without limitation, by way of news interviews or the expression of personal
views, opinions or judgments to the news media.
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(d) The Company hereby expressly covenants and agrees
that, following the Term of Employment, the Company will, unless otherwise
requested by Executive in any instance or required by law, provide to any
prospective employer seeking information regarding Executive's employment with
the Company a neutral reference in accordance with the general policies of the
Company applicable to requests for employment references.
16. Acknowledgment of Representation by Counsel.
The Parties acknowledge that they have been
represented by counsel or knowingly waive their right to be represented by
counsel with regard to this Agreement and the subject matter hereof. Each Party
agrees and acknowledges that he or it has not relied upon any tax advice, legal
counsel or business advice provided by the other Party.
17. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the
benefit of the Parties and their respective successors, heirs (in the case of
Executive) and assigns. No rights or obligations of the Company under this
Agreement may be assigned or transferred by the Company, except that such rights
or obligations may be assigned or transferred pursuant to a merger or
consolidation in which the Company is not the surviving corporation, or the sale
or liquidation of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or by operation of law. The Company further
agrees that, in the event of a sale of assets or liquidation as described in the
preceding sentence, it shall take whatever action it legally can in order to
cause such assignee or transferee to expressly assume the liabilities,
obligations and duties of the Company hereunder. No rights or obligations of
Executive under this Agreement may be assigned or transferred by Executive other
than his rights to compensation and benefits.
18. Entire Agreement.
Except as herein otherwise expressly provided, this
Agreement contains the entire understanding and agreement between the Parties
concerning the subject matter hereof and supersedes all prior agreements,
understandings, discussions, negotiations and undertakings, whether written or
oral, between the Parties with respect thereto, including any agreement between
Executive and any Affiliate of the Company.
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19. Amendment or Waiver.
No provision in this Agreement may be amended unless
such amendment is agreed to in writing and signed by Executive and an authorized
officer of the Company. No waiver by either Party of any breach by the other
Party of any condition or provision contained in this Agreement to be performed
by such other Party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same or any prior or subsequent time. Any waiver
must be in writing and signed by Executive or an authorized officer of the
Company, as the case may be.
20. Severability.
In the event that any provision or portion of any
provision of this Agreement shall be determined to be invalid or unenforceable
for any reason, in whole or in part, the remaining provisions and portions
remaining of any provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by law.
21. Beneficiaries/References.
Executive shall be entitled to select (and change, to
the extent permitted under any applicable law) a beneficiary or beneficiaries to
receive any compensation or benefit payable hereunder following Executive's
death by giving the Company written notice thereof. In the event of Executive's
death or a judicial determination of his incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
22. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of Texas without reference
to principles of conflict of laws.
23. Resolution of Disputes.
Any disputes arising under or in connection with this
Agreement shall be resolved by binding arbitration before a single arbitrator,
to be held in Dallas, Texas, in accordance with the rules and procedures of the
American Arbitration Association. Judgment upon the award rendered by the
arbitrator shall be final and subject to appeal only to the extent permitted by
law. Each Party shall bear its or his own expenses incurred in connection with
any arbitration. Anything to the contrary notwithstanding, each Party has the
right to proceed with a court action for injunctive relief or relief from
violations of law not within the jurisdiction of an arbitrator.
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24. Notices.
Any notice required or permitted hereunder to be
given to a Party shall be effective only if given in writing and shall be deemed
to have been given when delivered personally or sent by certified or registered
mail, postage prepaid, return receipt requested or by Federal Express or other
similar service, duly addressed to the Party concerned at the address indicated
below or to such changed address as such Party may hereafter specify by notice
to the other Party:
If to the Company:
OpTel, Inc.
1111 W. Mockingbird Lane, #1000
Dallas, Texas 75247
Attention: General Counsel
If to Executive:
Mr. Louis Brunel
1111 W. Mockingbird Lane, #1000
Dallas, Texas 75247
in either case, with a copy to:
Le Groupe Videotron Ltee
300 Avenue Viger East
Montreal, Quebec
Canada H2X 3W4
Attention: Secretary
25. Headings.
The captions or headings of the sections contained in
this Agreement are for convenience only and shall not be deemed to control or
affect the meaning or construction of any provision of this Agreement.
26. Execution of Agreement and Further Actions.
This Agreement may be executed in several counterpart
copies each of which shall constitute an original and the same instrument
notwithstanding that both Parties are not signatories to the same counterpart.
The Parties agree to execute such other documents and to take such other action
as may from time to time be necessary or appropriate to carry out the intent of
this Agreement, provided that the same are not inconsistent with the provisions
hereof.
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IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
OPTEL, INC.
By:
------------------------------
Name:
Title:
---------------------------------
Louis Brunel
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EXHIBIT 10.17
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by
and between OPTEL, INC., a Delaware corporation (the "Company"), and MICHAEL E.
KATZENSTEIN ("Executive").
W I T N E S S E T H :
WHEREAS, Executive is currently employed by the Company as
Vice President, General Counsel and Secretary of the Company; and
WHEREAS, the Company desires to continue to employ Executive
and Executive has agreed to such continuation, subject to the terms of this
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants contained herein, the Company and Executive (individually a
"Party" and together the "Parties") agree as follows:
1. Definitions.
As used in this Agreement, unless the context otherwise
requires:
(a) "Affiliate" of a Person shall mean a Person that
directly or indirectly controls, is controlled by, or is under common control
with the Person specified.
(b) "Aggregate Life Insurance Benefits" shall have
the meaning set forth in Section 9(a)(ii).
(c) "Average Annual Bonus" shall mean the average of
the two most recent annual bonuses (not including any payments from long-term
incentive programs) received by or due to Executive for completed fiscal years
immediately prior to the termination of the Term of Employment.
(d) "Base Salary" shall mean the salary provided for
in Section 4.
(e) "Board" shall mean the Board of Directors of the
Company.
(f) "Cause" shall mean:
<PAGE> 2
(i) Executive's conviction of a crime
involving moral turpitude (excluding offenses such as driving while
intoxicated); or
(ii) Executive's (A) commission of a fraud
upon the Company or (B) material breach of this Agreement (including by wilfully
failing or neglecting to perform Executive's duties hereunder), which breach, if
curable, is not substantially cured within 10 days after written notice to
Executive specifying the nature of the breach.
(g) A "Change in Control" shall mean the occurrence
of any one of the following events:
(i) Any "person," as such term is used in
Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (other than
Executive, Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre
Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec,
and their respective Affiliates (collectively, all or any of Le Groupe Videotron
Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and
descendants, Caisse de depot et placement du Quebec, and their respective
Affiliates constitute the "Existing Control Group")), is a "beneficial owner,"
as such term is used in Rule 13d-3 promulgated under that act, of shares of the
Voting Stock of the Company having more total votes in an election for directors
than shares of Voting Stock of which the Existing Control Group is the
beneficial owner and, at the same time, the Existing Control Group does not have
the power, by contract or otherwise, to elect or designate a majority of the
members of the Board;
(ii) the majority of the members of the
Board consists of individuals other than Incumbent Directors, which term means
the members of the Board on the date of this Agreement; provided that any
individual becoming a director subsequent to such date whose election or
nomination for election as a director was supported by two-thirds of the
directors who were Incumbent Directors at the time of such election or
nomination shall be an Incumbent Director;
(iii) the Company adopts any plan of
liquidation providing for the distribution of all or substantially all of its
assets;
(iv) all or substantially all of the assets
or business of the Company are disposed of pursuant to a merger, consolidation
or other transaction (unless the shareholders of the Company immediately prior
to such merger, consolidation or other transaction beneficially own, directly or
indirectly, in substantially the same proportion as they owned the Voting Stock
of the Company, the Voting Stock or other ownership interests of the Person or
Persons, if any, that succeed to the business of the Company) and at any time
thereafter the Existing Control Group does not have the power, by contract or
otherwise, to elect or designate a majority of the members of the Board; or
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(v) the Company combines with another Person
and is the surviving corporation but, immediately after the combination, the
shareholders of the Company immediately prior to the combination hold, directly
or indirectly, not more than 50% of the Voting Stock of the surviving
corporation (there being excluded from the number of shares held by such
shareholders, but not from the Voting Stock of the surviving corporation, any
shares received by Affiliates of such other Person in exchange for stock of such
other Person) and at any time thereafter the Existing Control Group does not
have the power, by contract or otherwise, to elect or designate a majority of
the members of the Board.
(h) "Confidential Information" shall mean all
information that is not known or available to the public concerning the business
of the Company or any Subsidiary relating to its products, product development,
trade secrets, customers, suppliers, finances, and business plans and
strategies. For this purpose, information known or available generally within
the trade or industry of the Company or any Subsidiary shall be deemed to be
known or available to the public. Confidential Information shall include
information that is, or becomes, known to the public as a result of a breach by
Executive of the provisions of Section 13.
(i) "Constructive Termination Without Cause" shall
mean a termination of the Term of Employment by written notice given by
Executive within 60 days following the occurrence, without Executive's prior
written consent, of one or more of the following events (except in consequence
of a prior termination):
(i) a reduction in or elimination of (A)
Executive's then current Base Salary, or (B) Executive's opportunity for any
long-term incentive award for which he is eligible under Section 6 or the
termination or material reduction of any material employee benefit or perquisite
enjoyed by him including the bonus provided for under Section 5; provided,
however, that in the case of clause (B), only if the reduction or elimination is
greater than that applied to other executives of the Company of the same class
or level as Executive;
(ii) the failure to elect or reelect
Executive to the position specified in Section 3(a), or Executive's removal,
without Cause, from such position, or a material diminution in Executive's
duties, authority or responsibilities as described in Section 3(a), or the
assignment to Executive of duties which are materially inconsistent with such
duties or which materially impair Executive's ability to function in such
position, and, in the case of any such assignment, the failure of the Company to
cure such inconsistency or impairment within 15 days after its receipt of notice
thereof from Executive;
(iii) the failure to continue Executive's
participation in any incentive compensation plan for which Executive is eligible
unless executives of the same class or level as Executive also cease to
participate in such plan or a plan providing a substantially similar opportunity
is substituted; or
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(iv) the relocation of the Company's
principal office outside the area comprised by Dallas and Tarrant Counties,
Texas, having dimensions of approximately 58 miles by 29 miles and commonly
referred to as the Dallas-Fort Worth Metroplex.
(j) "Disability" shall mean Executive's inability,
due to physical or mental incapacity, to substantially perform Executive's
duties and responsibilities under this Agreement for a period of 180 consecutive
days or for 180 days in a 365-day period.
(k) "MDU Business" shall mean the delivery of video
and telecommunications services to residential multiple dwelling units.
(l) "Minimum Severance Period" shall have the meaning
set forth in Section 9(d)(vi)(A), subject to modification as provided in Section
9(e) in the event of a Change in Control.
(m) "Non-Extension Event" shall mean any termination
of the Term of Employment resulting from an election by the Company not to renew
the Term of Employment.
(n) "Person" shall mean an individual, firm,
corporation, trust, joint venture, partnership, limited liability company,
association, unincorporated organization or other entity or any governmental
body or subdivision, agency, commission or authority thereof.
(o) "Stock" shall mean the Common Stock of the
Company.
(p) "Subsidiary" shall mean any Person of which the
Company owns, directly or indirectly, more than 50% of the Voting Stock or, in
the case of a Person other than a corporation, more than 50% of the equity
interest.
(q) "Term of Employment" shall mean the period or
periods specified in Section 2.
(r) "Voting Stock" shall mean capital stock of any
class or classes having general voting power under ordinary circumstances, in
the absence of contingencies, to elect a majority of the directors of a
corporation.
2. Term of Employment.
The Company hereby employs Executive, and Executive
hereby accepts such employment, for the Term of Employment commencing April 15,
1999 and ending at the close of business on April 15, 2001, subject to earlier
termination of the Term of Employment in accordance with the terms of this
Agreement. The Term of Employment shall be automatically renewed from year to
year unless either the Company or Executive provides the other with
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written notice of non-renewal at least 30 days prior to the date on which the
Term of Employment would otherwise expire.
3. Position, Duties and Responsibilities.
(a) During the Term of Employment, Executive shall be
employed as Vice President, General Counsel and Secretary of the Company. In
that capacity Executive shall have the duties, authority and responsibilities
normally associated with such position and shall report to the Chief Executive
Officer of the Company. Executive shall, at the request of the Board or the
Chief Executive Officer of the Company, also serve as an officer and/or director
of one or more Subsidiaries without additional compensation.
(b) During the Term of Employment Executive shall
devote his full attention and expend his best efforts, energies and skills on a
full-time basis to the business of the Company and its Subsidiaries.
(c) Executive's services to the Company will be
rendered primarily at the Company's principal office. Executive acknowledges,
however, that Executive's services may require extensive travel.
(d) Nothing herein shall preclude Executive from (i)
serving as a director of one or more other corporations not engaged in
competition with the Company or of one or more trade associations and/or
charitable organizations, subject in each case to prior approval by the Chief
Executive Officer of the Company, (ii) engaging in charitable activities and
community affairs, (iii) managing Executive's personal investments and affairs
and those of his family, (iv) engaging in other business transactions, provided
that such activities individually and in the aggregate do not reflect adversely
on Executive's personal or business reputation or the Company or its business
and do not interfere with the proper performance of Executive's duties and
responsibilities to the Company and its Subsidiaries.
4. Base Salary.
Executive shall receive Base Salary from the Company
at the annual rate of $235,000, payable in accordance with the regular payroll
practices of the Company, but in no event less frequently than monthly.
Executive's Base Salary shall be subject to review by the Company on an annual
basis but shall not be decreased.
5. Annual Bonus.
Executive shall be entitled to be considered for
receipt of an annual bonus, the calculation of which is to be determined in
accordance with an incentive plan established and administered by the Board
which includes a "target" bonus for Executive for each bonus period, as such
plan may be modified by the Board from time to time.
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6. Long-Term Incentive Programs.
Executive shall be eligible to participate in any
long-term incentive programs of the Company on the same basis as other senior
executives of the Company.
7. Employee Benefit Programs and Vacation.
(a) During the Term of Employment Executive shall be
entitled to participate in all employee pension and welfare benefit plans and
programs made available to the Company's senior executives generally, as such
plans or programs may be in effect from time to time.
(b) Executive shall be entitled to four weeks of
vacation per year.
8. Reimbursement of Business and Other Expenses and
Perquisites.
(a) Executive is authorized to incur reasonable
business expenses in carrying out his duties and responsibilities under this
Agreement, and the Company shall promptly reimburse Executive for all such
expenses, all subject to and in accordance with the Company's policies and
procedures as adopted and in effect from time to time and applicable to its
senior executives of comparable status.
(b) To assist Executive in the performance of his
duties and responsibilities under this Agreement, the Company shall provide to
Executive an allowance for the use of an automobile in accordance with the
Company's policies applicable generally to the Company's senior executives of
comparable class or status; provided, however, that, if Executive currently uses
a leased automobile provided by the Company, then in lieu of such allowance the
Company shall continue to provide Executive with the use of such leased
automobile (including insurance and maintenance) for the remaining initial term
of the applicable lease.
(c) Executive shall be eligible to receive all
perquisites made generally available by the Company to its senior executives of
comparable class or status.
9. Termination of Term of Employment.
(a) Termination Due to Death. The Term of Employment
shall terminate upon Executive's death. In the event of such termination due to
Executive's death, Executive's estate or Executive's beneficiaries, as the case
may be, shall be entitled to:
(i) the proceeds payable in the event of
Executive's death under the group life insurance policy maintained by the
Company for the benefit of its senior executive employees and others;
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(ii) an amount, payable promptly in a lump
sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion
of the Term of Employment remaining as of the time immediately prior to
Executive's death, over (B) the aggregate amount of life insurance proceeds
payable to Executive's estate or beneficiaries pursuant to clause (i) of this
Section 9(a) or pursuant to any other policy on Executive's life for which
premiums are paid by the Company or any of its Affiliates (the "Aggregate Life
Insurance Benefits");
(iii) if the date of Executive's death
coincides with the last day of a bonus period, a bonus for such bonus period in
accordance with the terms of the applicable incentive plan; otherwise, a bonus
for the bonus period in which Executive's death occurs, determined pro rata with
respect to Executive's target bonus for such bonus period based on the number of
completed months of Executive's employment by the Company during such bonus
period;
(iv) the balance of any bonus earned (but
not yet paid) for any bonus period prior to the bonus period in which
Executive's death occurs;
(v) any amounts earned, accrued or owing but
not yet paid under Section 6, 7 or 8; and
(vi) any other or additional benefits
provided for in accordance with applicable plans and programs of the Company.
(b) Termination Due to Disability. The Term of
Employment may be terminated by the Company by written notice to Executive in
the case of Executive's Disability. In the event of such termination due to
Disability, Executive shall be entitled to:
(i) an amount, payable promptly in a lump
sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion
of the Term of Employment remaining as of the time immediately prior to such
termination, over (B) the amount of any disability benefits provided to
Executive by the Company or under any disability insurance paid for, or for
which premiums paid by Executive were reimbursed, by the Company;
(ii) if such termination coincides with the
last day of a bonus period, a bonus for such bonus period in accordance with the
terms of the applicable incentive plan; otherwise, a bonus for the bonus period
in which such termination occurs, determined pro rata with respect to
Executive's target bonus for such bonus period based on the number of completed
months of Executive's employment by the Company during such bonus period,
(iii) the balance of any bonus earned (but
not yet paid) for any bonus period prior to the bonus period in which such
termination occurs;
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(iv) any amounts earned, accrued or owing
but not yet paid under Section 6, 7 or 8; and
(v) any other or additional benefits
provided for in accordance with applicable plans and programs of the Company.
(c) Termination by the Company for Cause. In the
event the Company terminates the Term of Employment for Cause, Executive shall
be entitled to:
(i) Base Salary through the date of such
termination;
(ii) any bonus earned (but not yet paid) for
any bonus period prior to the bonus period in which such termination occurs;
(iii) any amounts earned, accrued or owing
but not yet paid under Section 6, 7 or 8; and
(iv) any other or additional benefits
provided for in accordance with applicable plans or programs of the Company.
(d) Termination Without Cause or Constructive
Termination Without Cause. In the event the Term of Employment is terminated by
the Company without Cause, other than due to Executive's Disability or death, or
in the event the Term of Employment is terminated due to a Constructive
Termination Without Cause, Executive shall be entitled to:
(i) Base Salary through the date of such
termination;
(ii) if the date of such termination
coincides with the last day of a bonus period, a bonus for such bonus period in
accordance with the terms of the applicable incentive plan; otherwise, a bonus
for the bonus period in which such termination occurs, determined pro rata with
respect to Executive's target bonus for such bonus period based on the number of
completed months of Executive's employment by the Company during such bonus
period;
(iii) the balance of any bonus earned (but
not yet paid) for any bonus period prior to the bonus period in which such
termination occurs;
(iv) any amounts earned, accrued or owing
but not yet paid under Section 6, 7 or 8;
(v) any other or additional benefits
provided for in accordance with applicable plans and programs of the Company;
and
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(vi) to elect, within 30 days after such
termination, either (x) to cease being an employee of the Company and receive
the lump-sum payment described in section 9(d)(vi)(A) or (y) to remain an
employee of the Company for the period described in Section 9(d)(vi)(B). After
Executive makes such election, the following provisions shall apply:
(A) In the event Executive makes the
election provided in clause (x) of Section 9(d)(vi), then,
subject to the requirements of Section 9(j), the Company shall
pay to Executive in a lump sum: (1) an amount equal to Base
Salary for the period (the "Minimum Severance Period") that is
the longer of 12 months or the unexpired portion of the Term
of Employment remaining as of the time immediately prior to
such termination, plus (2) an amount equal to Average Annual
Bonus pro-rata for the Minimum Severance Period.
(B) In the event Executive makes the
election provided in clause (y) of Section 9(d)(vi), then,
subject to the requirements of Section 9(j), Executive will
remain an employee of the Company (but without any title)
until the end of the Minimum Severance Period, and the Company
shall pay to Executive Base Salary for such period plus
Average Annual Bonus pro-rata for such period; provided,
however, that
(1) if Executive dies during such period,
Executive's payments pursuant to this Section
9(d)(vi)(B) shall cease, and Executive's estate or
beneficiaries, as the case may be, will be entitled
to receive the Aggregate Life Insurance Benefits plus
a lump sum amount (which shall be paid by the Company
promptly after Executive's death) equal to the
excess, if any, of (x) the balance of the payments of
Base Salary and Average Annual Bonus that Executive
would have been entitled to receive pursuant to this
Section 9(d)(vi)(B) had Executive remained on the
Company's payroll until the end of such period over
(y) the amount of the Aggregate Life Insurance
Benefits; and
(2) if Executive accepts substantially
full-time employment with any other Person during
such period or notifies the Company in writing of
Executive's intention to terminate his employment
during such period, Executive will cease to be an
employee of the Company effective upon the earlier of
the effective date of such termination as specified
by Executive in such notice or the commencement of
such employment, and the Company shall promptly pay
to Executive a lump sum equal to the balance of the
payments of Base Salary and Average Annual Bonus that
Executive would have been entitled to receive
pursuant to this Section 9(d)(vi)(B) had Executive
remained on the Company's payroll until the end of
such period.
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(C) In the event Executive makes the
election provided in clause (y) of Section 9(d)(vi), then
during the period Executive remains on the payroll of the
Company, Executive will continue to be eligible to receive the
medical and life insurance benefits which all other employees
of the Company are then entitled to receive, as such benefits
may be amended, changed or eliminated from time to time.
Executive shall not be entitled to any other perquisite or
benefit provided by the Company to its senior executives or
employees generally or otherwise specifically provided for in
this Agreement and shall not be entitled to any additional
awards or grants under any long-term incentive plan. In the
event Executive makes the election provided in clause (y) of
Section 9(d)(vi), Executive will continue to be an employee of
the Company for purposes of any stock option and restricted
shares agreements until such time as Executive leaves the
payroll of the Company.
(e) Acceleration of Entitlements in Connection with a
Change in Control or Termination. Upon a Change in Control (regardless of
whether Executive continues in employment by the Company or the termination of
the Term of Employment for any reason whatsoever) Executive shall become
immediately entitled to exercise in full any stock option to acquire Stock
during the remainder of the term of such option. Without limitation of the
preceding sentence, upon the termination of the Term of Employment (including
upon a Non- Extension Event or Disability or death) otherwise than for Cause,
Executive shall become immediately entitled to exercise in full any stock option
to acquire Stock during the remainder of the term of such option, to the extent
such option would otherwise have vested or become exercisable within 12 months
after such termination of the Term of Employment but, unless a Change in Control
shall have occurred, all such options that have not previously expired shall
automatically expire on the date that is 12 months after such termination of the
Term of Employment. If, in connection with a Change in Control or within 12
months after a Change in Control, the Term of Employment is terminated without
Cause, other than due to Disability or death, or due to a Constructive
Termination Without Cause, then, without limitation of the payments, benefits
and elections provided in Section 9(d) and the first sentence of this Section
9(e), upon such Change in Control or such later termination, all amounts,
entitlements and benefits awarded to Executive or to which Executive is
otherwise entitled under any grant, plan or program of the Company but which are
not yet vested shall become fully vested except to the extent such vesting would
be inconsistent with the terms of the relevant plan. Without limitation of the
benefits to Executive pursuant to the preceding sentence or any of the other
provisions of this Agreement, if, in connection with a Change in Control or
within 12 months after a Change in Control, the Term of Employment is terminated
due to a Constructive Termination Without Cause or by the Company without Cause
(other than due to Disability or death), then, (A) the "Minimum Severance
Period" for purposes of Section 9(d) shall be not less than 24 months and (B)
upon such Change in Control (or such later termination) all amounts,
entitlements and benefits awarded to Executive or to which Executive is
otherwise entitled under any grant, plan or program of the Company but which are
not yet vested shall become fully vested except to the
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extent such vesting would be inconsistent with the terms of the relevant plan.
In connection with the occurrence of a Change in Control, Executive and the
Company agree to negotiate in good faith payment arrangements and covenant
changes (without reducing the total amount payable pursuant to this Section
9(e)) designed to preserve to the Company the deductibility for federal income
tax purposes of, and eliminate any excise tax imposed by Section 4999 of the
Code payable in respect of, amounts paid or benefits inuring to Executive
pursuant to this Section 9(e).
(f) Voluntary Termination. A termination of the Term
of Employment by Executive on his own initiative, other than a termination due
to death or Disability or a Constructive Termination without Cause, shall be
treated as a Termination for Cause, and, accordingly, Executive shall have only
the entitlements provided in Section 9(c).
(g) Termination Because of Non-Renewal. In the event
of a Non- Extension Event, Executive shall be entitled to:
(i) Base Salary through the date of
expiration of the Term of Employment;
(ii) if the expiration of the Term of
Employment coincides with the last day of a bonus period, a bonus for such bonus
period in accordance with the terms of the applicable incentive plan; otherwise,
a bonus for the bonus period in which the Term of Employment expires, determined
pro rata with respect to Executive's target bonus for such bonus period based on
the number of completed months of Executive's employment by the Company during
such bonus period;
(iii) the balance of any bonus earned (but
not yet paid) for any bonus period prior to the bonus period in which the Term
of Employment expires;
(iv) any amounts earned, accrued or owing
but not yet paid under Section 6, 7 or 8;
(v) any other or additional benefits
provided for in accordance with applicable plans and programs of the Company;
and
(vi) to elect within 30 days after such
termination, either (x) to cease being an employee of the Company and receive
the lump-sum payment described in section 9(g)(vi)(A) or (y) to remain an
employee of the Company for the period described in Section 9(g)(vi)(B). After
Executive makes such election, the following provisions shall apply:
(A) In the event Executive makes the
election provided in clause (x) of Section 9(g)(vi), subject
to the requirements of Section 9(j), the Company shall pay to
Executive in a lump sum: (1) an amount equal to Base
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Salary for a period of 12 months (or 24 months, if a Change in
Control has occurred during the Term of Employment and the
Term of Employment has not been renewed at least once after
the Change in Control), plus (2) an amount equal to Average
Annual Bonus pro-rata for the same period.
(B) In the event Executive makes the
election provided in clause (y) of Section 9(g)(vi), subject
to the requirements of Section 9(j), Executive will remain an
employee of the Company (but without any title) for the period
of 12 months following the expiration of the Term of
Employment (or 24 months, if a Change in Control has occurred
during the Term of Employment and the Term of Employment has
not been renewed at least once after the Change in Control),
and the Company shall pay to Executive Base Salary for such
period plus Average Annual Bonus pro-rata for such period;
provided, however, that
(1) if Executive dies during such period,
Executive's payments pursuant to this Section
9(g)(vi)(B) shall cease, and Executive's estate or
beneficiaries, as the case may be, will be entitled
to receive the Aggregate Life Insurance Benefits,
plus a lump sum amount (which shall be paid by the
Company promptly after Executive's death) equal to
the excess, if any, of (x) the balance of the
payments of Base Salary and Average Annual Bonus that
Executive would have been entitled to receive
pursuant to this Section 9(g)(vi)(B) had Executive
remained on the Company's payroll until the end of
such period over (y) the amount of the Aggregate Life
Insurance Benefits; and
(2) if Executive accepts substantially
full-time employment with any other Person during
such period or notifies the Company in writing of
Executive's intention to terminate Executive's
employment during such period, Executive will cease
to be an employee of the Company, effective upon the
earlier of the effective date of such termination as
specified by Executive in such notice or the
commencement of such employment, and the Company
shall promptly pay to Executive a lump sum equal to
the balance of the payments of Base Salary and
Average Annual Bonus that Executive would have been
entitled to receive pursuant to this Section
9(g)(vi)(B) had Executive remained on the Company's
payroll until the end of such period.
(C) In the event Executive makes an election
provided in clause (y) of Section 9(g)(vi), then during the
period Executive remains on the payroll of the Company,
Executive will continue to be eligible to receive the medical
and life insurance benefits all other employees of the Company
are then entitled to receive, as amended, changed or
eliminated, from time to time. Executive shall
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not be entitled to any other perquisite or benefit provided by
the Company to its senior executives generally or otherwise
specifically provided for in this Agreement and shall not be
entitled to any additional awards or grants under any
long-term incentive plan. In the event of an election pursuant
to clause (y) of Section 9(d)(vi), Executive will continue to
be an employee of the Company for purposes of any stock option
and restricted shares agreements until such time as Executive
leaves the payroll of the Company.
(h) No Mitigation; No Offset. In the event of any
termination of the Term of Employment under this Section 9, Executive shall be
under no obligation to seek other employment and there shall be no offset
against amounts due Executive under this Agreement on account of any
remuneration attributable to any subsequent employment obtained by Executive
except as specifically provided in this Section 9.
(i) Nature of Payments. Any amounts due under this
Section 9 are in the nature of severance payments considered to be reasonable by
the Company and are not in the nature of a penalty.
(j) General Release. In partial consideration for,
and as a condition of, the Company's obligation to make the payments described
in Sections 9(d)(vi) and 9(g)(vi), Executive shall execute and deliver to the
Company a release of all claims Executive shall then have against the Company,
its Affiliates and their related Persons arising out of or in connection with
Executive's employment or termination of employment, including, but not limited
to, a release of all claims of discrimination. The Company will deliver such
release to Executive at or about the time it delivers or receives the notice of
termination, and Executive shall execute and deliver such release to the Company
within 21 days thereafter, except that in case of expiration of the Term of
Employment following a Non-Extension Event, the release will be delivered to
Executive upon such expiration and shall be executed and delivered by Executive
within 21 days after such expiration. If Executive fails to execute and deliver
such release to the Company within such 21-day period, or if Executive revokes
Executive's consent to such release as provided for therein, Executive will not
be eligible to receive any further payments from the Company pursuant to Section
9(d)(vi) or 9(g)(vi).
(k) Other Severance. In the event the Company's
written severance pay policy applicable to Executive provides for greater
severance pay and benefits than are provided for in Section 9(d) or 9(g),
Executive may elect to receive termination pay and benefits under the terms and
conditions of such policy in lieu of the payments and benefits under Section
9(d) or 9(g). It is understood by the Parties that Executive shall not be
entitled to both the payments and benefits under the severance pay policy and
those available under Section 9(d) or 9(g). Notwithstanding the foregoing, in
addition to being entitled to the greater of the payments and benefits under the
severance pay policy and under Section 9(d) or 9(g), as applicable, Executive
shall be entitled to professional outplacement services (including office space
and
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secretarial services), at a cost not exceeding 10% of Executive's annual Base
Salary, in accordance with the Company's policies regarding outplacement
services; provided, however, that payments pursuant to this sentence shall be
made only for actual outplacement services, and Executive shall not have the
option to elect to receive all or part of the maximum allowances therefor in
lieu of outplacement services.
(l) Relocation. Notwithstanding the provisions of
Section 9(k), in the event Executive becomes entitled to payments and benefits
under Section 9(b), 9(d) or 9(g), Executive shall also be entitled to receive
from the Company relocation assistance payments, consisting of payment or
reimbursement of:
(i) costs incurred in the sale of
Executive's primary residence in the Dallas area, including sales commissions
not to exceed local custom, and all other normal closing costs in connection
with such sale;
(ii) all reasonable moving expenses to
another location in the United States or Canada, including packing, transport,
temporary storage and unpacking (including the cost of moving one vehicle), all
through movers or moving agents designated or approved by the Company;
(iii) reasonable costs (not exceeding costs
of economy air fare and appropriate lodging) of one house-hunting trip for
Executive and spouse; and
(iv) a tax "gross-up" for all sums paid to
Executive pursuant to clauses (i) through (iv) of this paragraph (l) that are
includable in Executive's taxable income for U.S. Federal Income Tax purposes
(i.e., an amount which, after the payment of the U.S. Federal, state and local
income taxes to which Executive is subject on the payments made to or for
Executive's benefit pursuant to this paragraph (l), calculated at the maximum
rate applicable to individuals, irrespective of the actual tax payments made by
Executive, will be equal to the costs for which reimbursement is to be provided
pursuant to clauses (i) through (iii) of this paragraph (l));
provided, however, that payments pursuant to this paragraph (l) shall be made
only for actual expenses in connection with Executive's relocation outside the
Dallas area, and Executive shall not have the option to elect to receive all or
part of the maximum allowances therefor in lieu of relocation expenses; and
provided, further, that such payments shall only be available in respect of
relocation that occurs within (x) nine months after the end of the Term of
Employment and (y) February 28, 2002.
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10. Indemnification.
(a) The Company agrees that if Executive is made a
party, or is threatened to be made a party, to any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "Proceeding"), by
reason of the fact that Executive is or was a director, officer or employee of
the Company or is or was serving at the request of the Company as a director,
officer, member, employee or agent of another Person, including service with
respect to employee benefit plans, whether or not the basis of such Proceeding
is Executive's alleged action in an official capacity while serving as a
director, officer, member, employee or agent, Executive shall be indemnified and
held harmless by the Company to the fullest extent permitted or authorized by
the Company's certificate of incorporation or bylaws or, if greater, by the laws
of the State of Delaware, against all cost, expense, liability and loss
(including, without limitation, attorney's fees, judgments, fines, ERISA excise
taxes (other than such as may be imposed with respect to compensation received
by Executive) or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by Executive in connection therewith, and such
indemnification shall continue as to Executive even if Executive has ceased to
be a director, member, employee or agent of the Company or other Person and
shall inure to the benefit of Executive's heirs, executors and administrators.
The Company shall advance to Executive to the extent permitted by law all
reasonable costs and expenses incurred by him in connection with a Proceeding
within 20 days after receipt by the Company of a written request, with
appropriate documentation, for such advance. Such request shall include an
undertaking by Executive to repay the amount of such advance if it shall
ultimately be determined that Executive is not entitled to be indemnified
against such costs and expenses.
(b) The Company agrees to continue and maintain a
directors' and officers' liability insurance policy covering Executive to the
extent the Company provides such coverage for its other executive officers.
(c) Promptly after receipt by Executive of notice of
any claim or the commencement of any action or proceeding with respect to which
Executive is entitled to indemnity hereunder, Executive shall notify the Company
in writing of such claim or the commencement of such action or proceeding, and
the Company shall (i) assume the defense of such action or proceeding, (ii)
employ counsel reasonably satisfactory to Executive and (iii) pay the reasonable
fees and expenses of such counsel. Notwithstanding the preceding sentence,
Executive shall be entitled to employ counsel separate from counsel for the
Company and from any other party in such action if Company counsel reasonably
determines that a conflict of interest exists which makes representation by
counsel chosen by the Company not advisable. In such event, the reasonable fees
and disbursements of such separate counsel for Executive shall be paid by the
Company to the extent permitted by law.
(d) After the Term of Employment, (i) at the request
of the Company, Executive shall cooperate with and assist the Company (to the
extent that such activities do not
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unreasonably interfere with the performance of Executive's other business
activities or employment) to prepare for or defend against any action, suit,
proceeding or claim brought or threatened to be brought against the Company or
to prepare for or institute any action, suit, proceeding or claim to be brought
or threatened to be brought against a third party arising out of or based upon
any matter or thing whatsoever arising out of or which may be related to matters
as to which Executive has or acquires knowledge or information by reason of his
employment by the Company or any of its Subsidiaries, and (ii) upon the request
of Executive, the Company shall reimburse Executive for all reasonable travel,
legal and other out-of-pocket expenses that may be incurred by Executive related
to assisting the Company, at its request, to prepare for or defend against any
such action, suit, proceeding or claim brought or threatened to be brought
against the Company or to prepare for or institute any action, suit, proceeding
or claim to be brought or threatened to be brought against a third party and in
providing evidence, producing documents or otherwise participating in any such
action, suit, proceeding or claim.
11. Effect of Agreement on Other Benefits.
Except as specifically provided in this Agreement,
the existence of this Agreement shall not prohibit or restrict Executive's
entitlement to full participation in the employee benefit and other plans or
programs in which senior executives of the Company are eligible to participate.
12. Confidentiality.
Executive acknowledges that Executive is bound by
that certain nondisclosure agreement executed by Executive upon the commencement
of his employment with the Company and that the terms thereof shall not be
modified or affected by this Agreement.
13. Non-Competition.
(a) During the Term of Employment and (unless the
Term of Employment expires following a Non-Extension Event or is terminated by
the Company without Cause or voluntarily by Employee due to a Constructive
Termination Without Cause) for a period of nine months thereafter, Executive
shall not, directly or indirectly, except when acting on behalf of the Company,
whether as an employee, consultant, partner, principal, agent, distributor,
representative, stockholder or otherwise, plan, develop, conduct or otherwise
engage in the MDU Business in any metropolitan area world-wide in which the
Company or any Subsidiary then conducts or is actively planning to conduct the
MDU Business (except that he may be a stockholder holding not more than a 1%
common stock interest in a Person whose shares are publicly traded and which
engages in the MDU Business in any such area). Notwithstanding the foregoing,
Executive shall be free at any time following the Term of Employment to accept
employment with or provide other services to any Person whose business includes
the MDU Business but only if (i) the MDU Business is not the principal or
predominant
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business of such Person and (ii) the services of Executive do not principally or
predominantly relate to the MDU Business. By way of example only, if the Term of
Employment were to end on the date of this Agreement, Executive would be free to
be employed by a typical incumbent local exchange or long distance carrier or by
a typical franchised cable operator for so long as Executive's services did not
principally or predominantly relate to the provision of video and
telecommunications services to residential multiple dwelling units in the
markets in which the Company now operates or is actively planning to operate.
(b) During the Term of Employment and for a period of
12 months thereafter, Executive shall not, directly or indirectly, (i) solicit
any customer of the Company or any Subsidiary to do business with any Person
that engages in the MDU Business or (ii) solicit any Person, other than his
secretary/administrative assistant, who is employed by the Company or any
Subsidiary or who was employed by the Company or any Subsidiary within 12 months
of such solicitation to (A) terminate his or her employment with the Company or
any Subsidiary, (B) accept employment with anyone other than the Company or any
Subsidiary or (C) in any manner interfere with the business of the Company or
any Subsidiary.
(c) Executive acknowledges that the Company has no
adequate remedy at law and would be irreparably harmed if Executive breaches or
threatens to breach any of the provisions of Section 12 or Section 13(a) or
13(b), and therefore Executive agrees that the Company or any Subsidiary, as the
case may be, shall be entitled to temporary or permanent mandatory or injunctive
relief to terminate or forestall any breach or threatened breach of any of those
provisions and to specific performance of the terms of each of those provisions,
without the need to demonstrate irreparable injury or post bond or other
security. Executive further agrees that he shall not, in any proceeding seeking
injunctive or other equitable relief to enforce the provisions of Section 12 or
Section 13(a) or 13(b), raise the defense that the Company or any Subsidiary has
an adequate remedy at law. Nothing in this Section 13(c) shall be construed to
prohibit the Company or any Subsidiary from pursuing any other rights or
remedies available to it at law or in equity or which may be otherwise available
to it.
(d) If it is determined that any of the provisions of
this Section 13, or any part thereof, is unenforceable because of the duration
or geographical scope of such provision, it is the intention of the Parties that
the duration or scope of such provision, as the case may be, shall be reduced so
that such provision becomes enforceable and, in its reduced form, such provision
shall then be enforceable and shall be enforced.
14. Intellectual Property.
Any processes, inventions, ideas, know-how and other
similar data created or developed by Executive while employed by the Company
which relate to the business then conducted by the Company or any of its
Subsidiaries shall be the Company's exclusive and absolute property, and
Executive hereby assigns to the Company, now and hereafter, all of his
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right, title and interest to any and all of the same. Any work in connection
with the services rendered by Executive hereunder shall be considered "work made
for hire" under the Copyright Law of 1976 or any successor law, and the Company
shall be the owner of such work as if the Company were the author of such work.
15. Documents; Conduct; References.
(a) Executive hereby expressly covenants and agrees
that, following termination of the Term of Employment for any reason, or any
time, upon the Company's request, Executive will promptly return to the Company
all property of the Company and its Subsidiaries in his or her possession or
control (whether maintained at his or her office, home or elsewhere), including,
without limitation, all copies of all management studies, business or strategic
plans, budgets, notebooks and other printed, typed electronically stored or
written materials, documents, diaries, disks, calendars and data of or relating
to the Company or its Subsidiaries or their respective personnel or affairs.
(b) Executive hereby expressly covenants and agrees
that Executive will not at any time, during or after the Term of Employment,
publicly denigrate, ridicule or intentionally criticize the Company or any of
its Subsidiaries or any of their respective products or services, properties,
employees, officers or directors, including, without limitation, by way of news
interviews or the expression of personal view, opinions or judgments to the news
media.
(c) The Company hereby expressly covenants and agrees
that the Company will not at any time, during or after the Term of Employment,
publicly denigrate, ridicule or intentionally criticize Executive, including,
without limitation, by way of news interviews or the expression of personal
views, opinions or judgments to the news media.
(d) The Company hereby expressly covenants and agrees
that, following the Term of Employment, the Company will, unless otherwise
requested by Executive in any instance or required by law, provide to any
prospective employer seeking information regarding Executive's employment with
the Company a neutral reference in accordance with the general policies of the
Company applicable to requests for employment references.
16. Acknowledgment of Representation by Counsel.
The Parties acknowledge that they have been
represented by counsel or knowingly waive their right to be represented by
counsel with regard to this Agreement and the subject matter hereof. Each Party
agrees and acknowledges that he or it has not relied upon any tax advice, legal
counsel or business advice provided by the other Party.
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17. Assignability; Binding Nature.
This Agreement shall be binding upon and inure to the
benefit of the Parties and their respective successors, heirs (in the case of
Executive) and assigns. No rights or obligations of the Company under this
Agreement may be assigned or transferred by the Company, except that such rights
or obligations may be assigned or transferred pursuant to a merger or
consolidation in which the Company is not the surviving corporation, or the sale
or liquidation of all or substantially all of the assets of the Company,
provided that the assignee or transferee is the successor to all or
substantially all of the assets of the Company and such assignee or transferee
assumes the liabilities, obligations and duties of the Company, as contained in
this Agreement, either contractually or by operation of law. The Company further
agrees that, in the event of a sale of assets or liquidation as described in the
preceding sentence, it shall take whatever action it legally can in order to
cause such assignee or transferee to expressly assume the liabilities,
obligations and duties of the Company hereunder. No rights or obligations of
Executive under this Agreement may be assigned or transferred by Executive other
than Executive's rights to compensation and benefits.
18. Entire Agreement.
Except as herein otherwise expressly provided, this
Agreement contains the entire understanding and agreement between the Parties
concerning the subject matter hereof and supersedes all prior agreements,
understandings, discussions, negotiations and undertakings, whether written or
oral, between the Parties with respect thereto, including any agreement between
Executive and any Affiliate of the Company dated prior to the date hereof.
19. Amendment or Waiver.
No provision in this Agreement may be amended unless
such amendment is agreed to in writing and signed by Executive and an authorized
officer of the Company. No waiver by either Party of any breach by the other
Party of any condition or provision contained in this Agreement to be performed
by such other Party shall be deemed a waiver of a similar or dissimilar
condition or provision at the same or any prior or subsequent time. Any waiver
must be in writing and signed by Executive or an authorized officer of the
Company, as the case may be.
20. Severability.
In the event that any provision or portion of any
provision of this Agreement shall be determined to be invalid or unenforceable
for any reason, in whole or in part, the remaining provisions and portions
remaining of any provisions of this Agreement shall be unaffected thereby and
shall remain in full force and effect to the fullest extent permitted by law.
19
<PAGE> 20
21. Beneficiaries/References.
Executive shall be entitled to select (and change, to
the extent permitted under any applicable law) a beneficiary or beneficiaries to
receive any compensation or benefit payable hereunder following Executive's
death by giving the Company written notice thereof. In the event of Executive's
death or a judicial determination of Executive's incompetence, reference in this
Agreement to Executive shall be deemed, where appropriate, to refer to his
beneficiary, estate or other legal representative.
22. Governing Law/Jurisdiction.
This Agreement shall be governed by and construed and
interpreted in accordance with the laws of the State of Texas without reference
to principles of conflict of laws.
23. Resolution of Disputes.
Any disputes arising under or in connection with this
Agreement shall be resolved by binding arbitration before a single arbitrator,
to be held in Dallas, Texas, in accordance with the rules and procedures of the
American Arbitration Association. Judgment upon the award rendered by the
arbitrator shall be final and subject to appeal only to the extent permitted by
law. Each Party shall bear its or his own expenses incurred in connection with
any arbitration. Anything to the contrary notwithstanding, each Party has the
right to proceed with a court action for injunctive relief or relief from
violations of law not within the jurisdiction of an arbitrator.
24. Notices.
Any notice required or permitted hereunder to be
given to a Party shall be effective only if given in writing and shall be deemed
to have been given when delivered personally or sent by certified or registered
mail, postage prepaid, return receipt requested or by Federal Express or other
similar service, duly addressed to the Party concerned at the address indicated
below or to such changed address as such Party may hereafter specify by notice
to the other Party:
If to the Company:
OpTel, Inc.
1111 W. Mockingbird Lane, #1000
Dallas, Texas 75247
Attention: Chief Executive Officer
20
<PAGE> 21
If to Executive:
4352 Potomac Avenue
Dallas, TX 75205
25. Headings.
The captions or headings of the sections contained in
this Agreement are for convenience only and shall not be deemed to control or
affect the meaning or construction of any provision of this Agreement.
26. Execution of Agreement and Further Actions.
This Agreement may be executed in several counterpart
copies each of which shall constitute an original and the same instrument
notwithstanding that both Parties are not signatories to the same counterpart.
The Parties agree to execute such other documents and to take such other action
as may from time to time be necessary or appropriate to carry out the intent of
this Agreement, provided that the same are not inconsistent with the provisions
hereof.
IN WITNESS WHEREOF, the undersigned have executed this
Agreement as of the date first written above.
OPTEL, INC.
By:
-------------------------
----------------------------
MICHAEL E. KATZENSTEIN
21
<PAGE> 1
EXHIBIT 10.27
ECHOSTAR SATELLITE CORPORATION
MDU DEALER AGREEMENT
This MDU Dealer Agreement ("Agreement") is effective as of the 14th
day of January 1999, by and between EchoStar Satellite Corporation having a
principal place of business at 5701 S. Santa Fe Drive, Littleton, Colorado
80120; Attn: General Counsel ("EchoStar"), and TVMAX Telecommunications, Inc.,
d/b/a OpTel, having a principal place of business at 1111 West Mockingbird Lane,
10th Floor, Dallas, Texas 75247; Attn: Vice President-Marketing ("MDU Dealer").
INTRODUCTION
A. EchoStar is engaged, among other things, in the business of
providing digital direct broadcast satellite (DBS) services through the DISH
Network, a DBS service owned and operated by EchoStar and its Affiliates in the
United States.
B. MDU Dealer, acting as an independent contractor, desires to become
authorized on a non-exclusive basis (an "Authorized MDU Dealer"), to market,
promote, and solicit orders for certain DISH Network video and audio programming
provided by EchoStar ("Programming") to MDU Buildings through the use of a
common antenna system installed and maintained by MDU Dealer (an "MDU System").
C. EchoStar desires to appoint MDU Dealer as an Authorized MDU Dealer
in accordance with and subject to the terms and conditions of this Agreement.
AGREEMENT
1. DEFINITIONS In addition to the capitalized terms defined elsewhere in
this Agreement, the following definitions shall apply to this Agreement:
1.1 "Affiliate" means any person or entity directly or indirectly
controlling, controlled by or under common control with another person or
entity.
1.2 "Commissionable Programming" means the Programming packages set
forth in Exhibit A hereto, which EchoStar may change at any time in its sole
discretion as provided in Section 3.1 below upon notice to MDU Dealer. Under no
circumstances shall Commissionable Programming include pay-per-view or event
broadcasts.
1.3 "Commissions" means the Residual Commissions, together with any
Additional Commissions, as such terms are defined in Sections 5.1 and 5.2.
1.4 "DISH DBS Receiver" means an MPEG-2 DVB compliant satellite
receiver and related components packaged therewith, to be utilized for the
reception of Programming delivered to such system via satellite transponders
owned and operated by EchoStar or its Affiliates, which is sold directly to MDU
Dealer by EchoStar under the "EchoStar" brand name.
1.5 "EFT" means the electronic transfer of funds by a financial
institution to an account designated by EchoStar.
1.6 "MDU Building" means a building located in the Territory
subdivided into two or more individual single family residential dwelling units,
which consists solely of apartment complexes, condominiums, townhomes,
residential dormitories, gated private residential communities, and private
single family residential buildings. If MDU Dealer desires that EchoStar
classify a building as an MDU Building prior to beginning work on such building
as provided hereunder, EchoStar agrees to use commercially reasonable efforts to
provide a classification for the building upon receipt from MDU Dealer of a
signed statement listing and verifying to EchoStar all relevant details
concerning the building, including a description of how the building is used,
whether common areas exist in the building, whether the general public is able
to enter the building, etc. Notwithstanding anything to the contrary in this
Section 1.6, MDU Dealer may not provide Programming to any building or portion
of a building that: (i) is a common area, reception area, waiting area, or lobby
accessible to more than one family (and their invited guests); (ii) charges an
admission or other fee to enter; (iii) is accessible to members of the general
public; (iv) is a commercial business or establishment, including without
limitation a restaurant or bar; (v) is a hospital, hotel, motel, or other
similar temporary lodging; (vi) is a prison, halfway house, mental institution,
or other secured treatment or correctional facility; or (vii) is a private
office or other room used to conduct business on a regular basis. MDU Dealer
acknowledges that if the means of use or operation of an MDU Building change, it
may no longer qualify as an MDU Building.
1.7 "Qualifying Subscriber" means a resident of an MDU Building who
uses a DISH DBS Receiver that EchoStar verifies has been obtained from MDU
Dealer. A Qualifying Subscriber shall not include any person who would otherwise
qualify, but who: (a) uses a DISH DBS Receiver not obtained by the person from
MDU Dealer; (b) no longer meets the definition of Qualifying Subscriber; or (c)
EchoStar declines to activate or deactivates because EchoStar determines the
person: (i) is or has been repeatedly or severely abusive or threatening to the
business operations or reputation of EchoStar or its Affiliates or to any of its
or their employees, agents, or representatives, or (ii) is or has been convicted
of piracy or other fraud related to television programming.
1.8 "Subscriber Account" means the account set up and maintained by
EchoStar for a Qualifying Subscriber who obtained a DISH DBS Receiver from MDU
Dealer and for whom Commissionable Programming has been activated by EchoStar
and which account is being paid by MDU Dealer under this Agreement and remains
active and in good standing.
<PAGE> 2
1.9 "Territory" consists of the geographic boundaries of the
continental United States.
2. GENERAL
2.1 APPOINTMENT. EchoStar appoints MDU Dealer as a non-exclusive
authorized representative to promote and solicit orders for the Programming
listed in Exhibit A, which is attached hereto and incorporated by reference
herein, subject to all of the terms and conditions of this Agreement. MDU
Dealer's authorization herein is limited to the solicitation of orders from, and
the promotion of Programming to, Qualifying Subscribers at MDU Buildings unless
EchoStar, in its sole discretion, specifically agrees in writing to permit MDU
Dealer to solicit orders from, or promote Programming to, others.
2.2 TERRITORY. MDU Dealer is only authorized, and shall limit its
actions, to the promotion in the Territory of, and solicitation of orders in the
Territory for, Programming in the packages (or a-la-carte for the Programming
shown in Exhibit A as available on an a-la-carte basis), and at the prices
shown in Exhibit A.
2.3. ACCEPTANCE. MDU Dealer accepts its appointment as an Authorized
MDU Dealer. MDU Dealer understands that it may hold itself out to the public as
an Authorized MDU Dealer of EchoStar only after fulfilling, and for so long as
it continues to fulfill, all of the requirements in this Agreement, and only
during the Term of this Agreement.
2.4 PROPERTY CONVERSION; NON-EXCLUSIVITY. Provided that no event of
default as described in Section 9.3 below has occurred, if MDU Dealer is
considering converting any then current Qualifying Subscribers at any MDU
Building or portion thereof from the Programming then being provided by EchoStar
to substantially similar programming (in terms of both content and method of
delivery) provided by a third party, then MDU Dealer agrees that it will provide
EchoStar with written notice thereof at least ninety (90) days prior to any such
conversion. If requested by EchoStar, during such ninety (90) day period (the
"Discussion Period") MDU Dealer will discuss with EchoStar the reasons that
caused MDU Dealer to consider converting such Qualifying Subscribers to
programming to be provided by a third party (including pricing information if
price is mentioned as a reason), unless MDU Dealer is prohibited from doing so
under the terms of a confidentiality agreement with the third party. MDU Dealer
shall refrain from so converting those Qualifying Subscribers during the
Discussion Period (provided no event of default by EchoStar has occurred under
this Agreement and is then continuing). However, notwithstanding any discussions
that the parties may have during the Discussion Period, MDU Dealer shall not be
precluded from so converting such Qualifying Subscribers at any time following
the expiration of the Discussion Period, nor shall either party be obligated to
amend this Agreement or waive any right hereunder. Notwithstanding the preceding
sentence or any other provision of this Agreement to the contrary, the parties
agree that nothing in this Agreement is intended to confer, nor shall it be
construed as conferring, any exclusive territory or any other exclusive rights
to MDU Dealer or any exclusive rights to EchoStar.
2.5 PURCHASE OF DISH DBS RECEIVERS BY MDU DEALER FROM ECHOSTAR.
2.5.1 DISH DBS RECEIVER. (MATERIAL DENOTED *** HAS BEEN
SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR
CONFIDENTIALITY). No more than twice in any calendar year, MDU Dealer may
deliver to EchoStar a written notice requesting that EchoStar conduct a review
of its DISH DBS Receiver pricing. If the cost to EchoStar for the model 2700 (or
if the model 2700 is no longer manufactured, the price of its successor model)
has changed more than five percent (5%) since the last price review (or since
execution of this Agreement, if no prior price reviews have been conducted),
EchoStar will notify MDU Dealer of the change in cost within 30 days of receipt
of the price review request from MDU Dealer, and 30 days following notice of
price change from EchoStar the price to MDU Dealers for DISH DBS Receivers shall
be adjusted to reflect the percentage amount of such change (the "Current
Price", which shall be equal to the Initial Price prior to any price review).
For example, if EchoStar determines in a price review that its costs for the
model 2700 decreased 15%, the Price of the model 2700 to MDU Dealer would
decrease 15%. If model 2700 is not available, EchoStar may, in its discretion,
substitute another DISH DBS Receiver with equal or better functionality for
the Current Price. Other models of DISH DBS Receivers may be purchased from time
to time at prices agreed to by the parties (an "Agreed Price"). EchoStar agrees
that a subscriber that acquires a DISH DBS Receiver from MDU Dealer may use such
receiver to receive EchoStar programming even after such subscriber is no longer
a resident of an MDU Building being served by MDU Dealer; provided that such use
shall be subject to EchoStar's then applicable standard terms and conditions for
service and MDU Dealer shall no longer have any rights or obligations with
respect to that subscriber, including without limitation right to any
commissions.
2.5.2 ORDERING RECEIVERS. When MDU Dealer orders any DISH DBS
Receivers from EchoStar, MDU Dealer shall order such products by written
purchase order ("Purchase Order") issued during the term of this Agreement. MDU
Dealer acknowledges that it is not eligible to purchase subsidized DISH DBS
Receivers, and agrees to pay the Current Price or Agreed Price (as applicable)
for each DISH DBS Receiver ordered. A Purchase Order shall be a binding
commitment by MDU Dealer. Purchase Orders of MDU Dealer shall state only the:
(i) identity of goods; (ii) quantity of goods; (iii) purchase price of goods;
and (iv) requested ship date of goods. Any additional terms stated in a Purchase
Order shall not be binding upon EchoStar unless expressly agreed to in writing
by EchoStar. In the event of any conflict between the terms of a Purchase Order
and the terms of this Agreement, the terms of this Agreement shall prevail. MDU
Dealer agrees to purchase DISH DBS Receivers exclusively from EchoStar during
the term of this Agreement. EchoStar agrees to receive Purchase Orders by
facsimile, mail or express delivery service. Within two business days of
EchoStar's receipt of MDU Dealer's Purchase Order, EchoStar shall use
commercially reasonable efforts to send MDU Dealer written confirmation (by
facsimile) of its receipt of MDU Dealer's Purchase Order and EchoStar's
acceptance or rejection of that order. Any failure to confirm a Purchase Order
shall not be deemed acceptance by EchoStar. If EchoStar rejects a Purchase
Order, EchoStar shall notify MDU Dealer and that Purchase Order shall be
canceled. MDU Dealer shall have the option of resubmitting another Purchase
Order to purchase those number of receivers that EchoStar has available or to
purchase a substitute model (to the extent available), in which case MDU Dealer
agrees to pay the Agreed Price of the substitute model. EchoStar agrees to use
commercially reasonable
<PAGE> 3
efforts to ship DISH DBS Receivers ordered by MDU dealer to the shipping address
indicated by MDU Dealer on the Purchase Order on the same day as EchoStar
accepts MDU dealer's Purchase Order if the acceptance is completed before 10:30
a.m., MST, otherwise to ship them the following business day. Under no
circumstance shall EchoStar be liable for any reasonable delay in shipment.
EchoStar will ship all Receivers using a delivery service offering delivery of
not greater than five days. Unless there is a change in credit as provided
below, MDU Dealer agrees to pay EchoStar for all DISH DBS Receivers ordered and
received by MDU Dealer, including shipping costs and all applicable taxes,
within thirty days following MDU Dealer's receipt of the invoice therefor.
(MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO
AN APPLICATION FOR CONFIDENTIALITY). In the event that EchoStar reasonably
determines there is a material adverse negative change to MDU Dealer's credit
worthiness, then EchoStar may require that MDU Dealer pay for ordered DISH DBS
Receivers in advance of shipment or make reasonable arrangements to provide
security to assure payment to EchoStar. Each DISH DBS Receiver ordered shall be
covered by Echosphere Corporation's ("Echosphere's") standard limited warranty.
Echosphere may change the warranty it offers at any time, but the warranty on
new DISH DBS Receivers at any given time shall not be different than the
standard Echosphere warranty offered Dish Network customers who purchase the
same model receiver (provided no additional payment is made for an alternate
warranty) and who have no obligation to purchase programming or other goods or
services in connection with the receiver. All other warranties are hereby
expressly disclaimed.
2.6 INSTALLATION AND MAINTENANCE OF MDU SYSTEMS. MDU Dealer shall, at
its sole cost throughout the term of this agreement: (i) sell, lease or rent
DISH DBS Receivers and MDU System equipment to Qualifying Subscribers at such
prices as MDU Dealer shall determine; (ii) offer to install and, if such offer
is accepted, actually install in a timely manner, all DISH DBS Receivers and MDU
System equipment which MDU Dealer sells, leases or rents to any Qualifying
Subscriber; (iii) offer to maintain and, if such offer is accepted, actually
maintain all DISH DBS Receivers and MDU System equipment that MDU Dealer sells,
leases, or rents to any Qualifying Subscriber; (iv) provide and maintain in good
working order and repair all facilities, vehicles, tools, and equipment
necessary for performing its obligations pursuant to this Agreement; (v)
provide, in a commercially reasonable manner, customer service to all qualifying
Subscribers related to the lease, sale, installation and maintenance of the DISH
DBS Receivers and MDU System equipment; and (vi) secure and maintain from MDU
Building owners and operators, and from any applicable federal, state, and local
government entities and agencies, all authority (including the right to enter
into the MDU Building, if required by law) necessary to carry out the foregoing.
MDU Dealer agrees that at any MDU Building where MDU Dealer is offering the
Programming pursuant to this Agreement, MDU Dealer shall convert one of MDU
Dealer's existing basic or expanded basic tier channels (to be selected jointly
by the parties from those available channels as reasonably determined by MDU
Dealer) from being provided by MDU Dealer's existing transport method to being
provided by EchoStar so that EchoStar will be able to promote its Programming
over MDU Dealer's basic or expanded basic tier by advertising inserts in
EchoStar's Programming. MDU Dealer shall not be obligated to convert a channel
as described in the preceding sentence if no conversion of any available channel
(as reasonably determined by MDU Dealer) can be made without resulting in the
violation of any programming, transport or other agreement to which MDU Dealer
is bound or would result in any additional cost to MDU Dealer not paid by
EchoStar. MDU Dealer shall have the right at any time and from time to time in
its reasonable discretion to change such channel being converted to another
channel jointly agreed to by the parties. Any fees MDU Dealer collects from
Qualifying Subscribers which are related to the purchase, lease, or rental of
DISH DBS Receivers or the installation or maintenance of the DISH DBS Receivers
or the MDU systems, shall be the sole property of MDU Dealer. In selling,
installing, and maintaining DISH DBS Receivers and/or other MDU System equipment
related to distribution of the Programming, MDU Dealer shall: (a) comply with
all applicable EchoStar manufacturers' policies; and (b) ensure that such MDU
System design and installation complies with industry standard digital video
distribution technical specifications. MDU Dealer shall be solely responsible
for the installation and maintenance of all equipment necessary to allow
Qualifying Subscribers to receive Programming. MDU Dealer shall not sell, lease
or otherwise distribute DISH DBS Receivers except to Qualifying Subscribers at
MDU Buildings. MDU Dealer agrees that it will distribute, to each person to whom
it sells, leases, or delivers a DISH DBS Receiver: (i) the User and Installation
Guide included in the DISH DBS receiver purchased from EchoStar; and (ii) a
written statement that all questions, concerns, difficulties, and problems with
DISH DBS Receivers and programming should be directed to MDU Dealer and not to
EchoStar.
3. PROGRAMMING
3.1 PROGRAMMING. EchoStar, in its sole discretion, shall determine
the Programming for which MDU Dealer may solicit orders, as set forth in Exhibit
A. EchoStar may expand, reduce or otherwise modify Exhibit A and the content of
any packages at any time and from time to time in its sole discretion; provided
that any such modification or reduction must be consistent with a modification
or reduction then being made to the programming being provided to other EchoStar
customers at MDU Buildings receiving similar programming packages. Any changes
shall be effective (and Exhibit A shall be deemed modified) on the date
designated by EchoStar by written notice to MDU Dealer. EchoStar agrees that
when it is able to do so it will use commercially reasonable efforts to provide
MDU Dealer with at least 45 days prior written notice of any changes to any
Programming packages or channel lineups.
3.2 CHANGES. If at any time or for any reason EchoStar changes the
content of any programming package, MDU Dealer's authority to solicit orders for
the prior Programming package shall cease immediately upon notice from EchoStar.
3.3 MDU PROGRAMMING ONLY. With respect to Qualifying Subscribers, MDU
Dealer shall not solicit orders for Programming except for Programming which is
specifically designated and authorized by EchoStar for reception at MDU
Buildings. MDU Dealer shall not be entitled to any commission for Programming
which has been ordered for any location other than a MDU Building, and shall
immediately pay EchoStar the dollar amount of all Programming ordered in
violation of this Section at the then applicable rate. MDU Dealer or Qualifying
Subscribers may order any one or more separate Programming or Programming
packages set forth on Exhibit A, as same may be amended.
<PAGE> 4
3.4 ADDITIONAL RESTRICTIONS AND OBLIGATIONS OF MDU DEALER. MDU Dealer
shall not resell, retransmit, or rebroadcast any Programming except as
specifically contemplated under this Agreement. MDU Dealer shall further ensure
that no MDU Building owner or operator engages directly or indirectly in: (a)
the reselling of Programming; (b) the retransmission or rebroadcast of
Programming, except as contemplated by this Agreement; or (c) modifying, adding
to, or deleting from any of the Programming.
3.5 DEACTIVATION. EchoStar, shall deactivate the DISH DBS Receiver of
any Subscriber Account (a "Deactivation") at MDU Dealer's written instruction
(or e-mail or other electronic message if received by EchoStar). EchoStar shall
not otherwise deactivate a receiver or discontinue or refuse to provide ordered
Programming to any Qualifying Subscriber except in the event of a default as
described in Section 9.3 below or in the event a Qualifying Subscriber no longer
meets the definition of a Qualifying Subscriber set forth in Section 1.7 above.
MDU Dealer understands and acknowledges that a Deactivation will disable the
reception of all programming received through the DISH DBS Receiver, including
EchoStar Programming, and MDU Dealer hereby forever waives and releases EchoStar
from any and all claims related to, or arising out of a Deactivation, including
but not limited to claims relating to the loss of revenue from programming or
the sale, rental or lease of a DISH DBS Receiver.
4. PRICES AND PAYMENT.
4.1 RETAIL PRICES; CHANGE. EchoStar, in its sole discretion, shall
determine the retail prices for Programming. MDU Dealer will only solicit orders
for Programming at the retail prices set by EchoStar from time to time. The
initial retail prices for the Programming are as set forth in Exhibit A.
EchoStar may increase, decrease or otherwise modify those prices from time to
time in its sole discretion; provided that any such modification must be
consistent with a modification made to the Programming pricing for all other
EchoStar customers at residential locations receiving identical programming
packages. Any price changes shall be effective (and Exhibit A shall be deemed
modified) on the date designated by EchoStar by written notice to MDU Dealer,
which date shall in no event be less than 60 days from the date of MDU Dealer's
receipt of such notice.
4.2 DETERMINATION OF PRICE; PAYMENT AND BILLING. The prices for
Programming set forth on Exhibit A reflect the price per Subscriber Account for
MDU Buildings. (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY.) Charges for all
recurring Programming will commence on the activation date. (MATERIAL DENOTED
*** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR
CONFIDENTIALITY.) Payment not received when due shall accrue interest at the
rate of 1.5% per month until paid, and MDU Dealer agrees to pay all interest
charges due and payable by MDU Dealer hereunder. (MATERIAL DENOTED *** HAS BEEN
SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR
CONFIDENTIALITY.) Throughout the term and any renewal term of this Agreement and
for two years thereafter, each party hereto agrees to maintain accurate books
and records associated with its operations pertaining to the Programming,
Qualifying Subscribers, Subscriber Accounts and DISH DBS Receivers. Each party
agrees that it will account periodically to the other upon request and provide
the other with the necessary information from its books and records to allow the
other party to audit and confirm the accuracy of the information being provided
by each party. Either party at its own expense, upon providing the other with at
least 15 days prior written notice of its desire to do so, may audit the books
and records of the other party relating to Qualifying Subscribers, Subscriber
Accounts, the Programming and the DISH DBS Receivers. Any such audit shall be
conducted during the other party's normal business hours at its principal
business office.
5. COMMISSIONS.
5.1 RESIDUAL COMMISSIONS.
5.1.1 CALCULATION.
(MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE
COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY)
5.1.2 PAYMENT TERMS. Subject to the terms and conditions of
this Agreement (including the exhibits attached hereto), commencing upon
activation of a Subscriber Account and for every month thereafter in which the
Subscriber Account receives Commissionable Programming, MDU Dealer shall be
entitled to a Residual Commission.
5.2 ADDITIONAL COMMISSIONS. MDU Dealer shall be eligible to
participate in, and receive payments ("Additional Commissions") under, such
promotions or incentive programs as EchoStar may institute in its sole
discretion from time to time. MDU Dealer acknowledges and agrees that: (i) under
no circumstances shall EchoStar have at any time any obligation to offer
Additional Commissions to MDU Dealer, or if Additional Commissions are offered,
to permit MDU Dealer to be eligible to receive them; (ii) EchoStar may, in its
sole discretion, add, discontinue, substitute, modify, or otherwise alter any or
all of the terms of any promotion or incentive program involving the payment of
Additional Commissions; and (iii) if EchoStar offers any Additional Commissions,
MDU Dealer shall only be eligible to receive the Additional Commissions if it
meets all of the applicable qualification criteria and other terms and
conditions as EchoStar may establish in its sole discretion.
<PAGE> 5
5.3 TERMINATION OF COMMISSIONS. In addition to any other rights and remedies
available, If MDU Dealer defaults on the payment to EchoStar of Programming
charges for any Qualifying Subscribers, and if EchoStar subsequently terminates
this Agreement as a result of such payment default pursuant to the provisions of
Section 9.3 and ceases to provide all Programming pursuant to this Agreement,
MDU Dealer shall not be entitled to any Commissions on such Qualifying
Subscribers with respect to any Programming changes not paid to EchoStar by MDU
Dealer prior to collection efforts by EchoStar which would otherwise be due to
MDU Dealer. EchoStar shall have no liability to MDU Dealer as a result of such
termination. Upon cure of the breach or default, all amounts suspended shall be
credited to MDU Dealer's account.
5.4 OFFSETS. Neither party may set off or take offsets against any amount
owed to the other party hereunder, except for Commissions specifically provided
for under this Agreement.
5.5 SOLE COMPENSATION. MDU Dealer acknowledges and agrees that the
Commissions payable pursuant to this Agreement constitute the sole commissions
or fees payable by EchoStar to MDU Dealer for MDU Dealer's role in soliciting
orders for Programming or for any other audio, video, or other programming
provided by EchoStar or any of its Affiliates pursuant to this Agreement.
5.6 NO ADMISSION. No acceptance of payment from MDU Dealer under this
Agreement, whether in full or in part, shall be deemed to operate as EchoStar's
acceptance or admission that MDU Dealer has complied with any provision of this
Agreement.
6. USE OF INDEPENDENT CONTRACTORS: PROGRAMMING ORDERS.
6.1 If MDU Dealer uses independent contractors, sub-agents, or other persons
or entities not employed by MDU Dealer to perform activities contemplated
hereunder, MDU Dealer shall be responsible for the acts and omissions of such
persons under this Agreement to the same extent it is responsible for the acts
and omissions of its own employees.
6.2 MDU Dealer shall not sell Programming under any circumstances. All sales
of Programming are transactions directly between EchoStar and Qualifying
Subscribers. MDU Dealer also agrees that it shall not charge subscribers more
than the then applicable retail price (i.e., the prices specified in Section 4.1
above, as such prices may be modified as provided in Section 4.1) for any
Programming.
6.3 MDU Dealer shall forward to EchoStar all orders for Programming in the
manner prescribed herein. EchoStar shall accept all such orders for Qualifying
Subscribers and activate the ordered Programming in accordance with, and subject
to, the terms and conditions of this Agreement. MDU Dealer shall use reasonably
commercial efforts to ensure that all residents of any MDU Building served by
MDU Dealer shall contact MDU Dealer and not EchoStar (a) to initiate, add,
delete or cancel receipt of any Programming except EchoStar pay-per-view, (b)
for any maintenance or service of, or problems or concerns with, their DISH DBS
Receiver or other portion of any MDU System equipment, and (c) for any questions
concerning reception, rates, billing or collection. To order Programming, MDU
Dealer shall complete and send a complete and accurate "DBS Service Request
Form" in the form of the attached Exhibit D (which exhibit may be changed by
EchoStar from time to time upon notice to MDU Dealer, but shall always include
the name, address, and telephone number of each requested subscriber) to
EchoStar, Attn: EchoStar Commercial Activations, by facsimile (Fax No.:
800/454-0843, or as otherwise specified by EchoStar from time to time), mail or
express delivery service. EchoStar will input all subscriber information and
will use commercially reasonable efforts to set up Subscriber Accounts for
Qualifying Subscribers for which satisfactory DBS Service Request Forms are
received by EchoStar: (i) before 12:00 noon, Mountain Time, by the close of
business on the day of receipt, and (ii) after noon MST, by the close of
business on the next business day. EchoStar Commercial Activation's hours of
operation are currently 7:00 a.m. to 7:00 p.m., Mountain Time, Monday through
Friday (except during holidays). At the time MDU Dealer installs a DISH DBS
Receiver at a Qualifying Subscriber's residence, MDU Dealer's technician shall
telephone EchoStar's call center to request activation of Programming.
EchoStar's call center is currently open to receive such requests 24 hours per
day, 7 days per week (excluding standard holidays). EchoStar's call center shall
use commercially reasonable efforts to activate Programming and authorize the
Qualifying Subscriber's assigned "Smart Card" while the MDU Dealer technician is
present at the Qualifying Subscriber's residence (i.e., within 30 minutes after
MDU Dealer's technician's call) so that the MDU Dealer technician can confirm
proper installation and activation. MDU Dealer shall also send all instructions
to add, delete, cancel or otherwise modify any Programming for an existing
Qualifying Subscriber to EchoStar Commercial Activations, which instructions
EchoStar shall use commercially reasonable efforts to effect within one business
day of receipt of MDU Dealer's instructions. See Exhibit C attached hereto for
EchoStar's current procedures pertaining to Programming orders, activation,
modification and cancellation. MDU Dealer agrees to promptly notify EchoStar in
writing of any change, with respect to DISH DBS Receivers, in the name, address,
or telephone number of the Qualifying Subscriber receiving Programming through
such receiver.
6.4 MDU Dealer shall cooperate reasonably when requested by EchoStar to
notify Qualifying Subscribers of information pertaining to the Programming;
provided however, that MDU Dealer shall be solely liable for the failure to
follow any such request.
7. TRADEMARK LICENSE AGREEMENT. MDU Dealer shall sign the Trademark License
Agreement, in the form attached as Exhibit E hereto, which agreement is hereby
incorporated by reference in its entirety.
8. CONDUCT OF BUSINESS.
8.1 SIGNAL THEFT MDU Dealer shall not directly or indirectly: (i) engage in
any signal theft, piracy or similar activities; (ii) alter any DISH DBS
Receivers or "Smart Cards", MDU Systems, or any other equipment compatible with
programming delivered by EchoStar or any of its Affiliates to be capable of
signal theft (or for any other reason without the express written consent of
EchoStar);
<PAGE> 6
(iii) sell any equipment altered to permit signal theft or other piracy; or (iv)
aid any others in engaging in any of the above described activities. MDU Dealer
shall immediately notify EchoStar if it becomes aware of any such activity.
8.2 HARDWARE EXPORT RESTRICTIONS. MDU Dealer agrees that it will not
engage directly or indirectly in the export or sale outside of the Territory, of
DISH DBS Receivers or Programming in whole or in part.
9. TERM, DISPUTE RESOLUTION AND TERMINATION.
9.1 TERM. This Agreement shall commence on the date of execution by
both parties and shall continue until December 31, 2001 (the "Term") unless and
until terminated by either party in accordance with the terms and conditions of
this Agreement. The Term of this Agreement shall automatically renew for
additional terms of one (1) year each unless either party provides the other
with written notice at least twelve (12) months prior to the expiration of the
Term or renewal term, as the case may be, or its desire for this Agreement not
to renew. Notwithstanding the expiration of the Term or any renewal Term, for a
period of twelve (12) months following the expiration of this Agreement (i.e.,
the expiration of the Term or any renewal term, as the case may be) EchoStar
shall continue to offer Programming and DISH DBS Receivers pursuant to this
Agreement for all MDU Buildings being served by MDU Dealer on the date of
expiration of this Agreement, including activation of new Qualifying Subscribers
at such MDU Buildings and modifications and cancellations of service.
Notwithstanding anything to the contrary in this Agreement, at any time after
December 31, 2001 during any renewal Term, either party may terminate this
Agreement upon 120 days prior written notice to the other party.
9.2 EXPEDITED DISPUTE RESOLUTION. The parties agree that it is not in
either party's best interest to engage in expensive and protracted litigation to
resolve any dispute between the parties hereto. Accordingly, in the event of any
dispute between the parties that has been or reasonably could be the subject of
a notice of default under Section 9.3 Of this Agreement, each party, upon the
written request of the other party (a "Resolution Request"), agrees to appoint a
designated officer or other senior representative whose task it will be to meet
with the representative of the other party on an expedited basis for the purpose
of resolving the relevant dispute or controversy or to negotiate for an
adjustment to any provision of this agreement which both parties agree would
fairly and appropriately resolve such dispute or controversy. Such
representatives will attempt in good faith to meet in person at EchoStar's
principal place of business in Littleton, Colorado or at another location if
mutually agreeable (unless both parties agree instead to conduct their meeting
via telephone) within ten (10) business days of the date of the Resolution
Request. If a party refuses to meet or fails to attend a meeting with the other
during such ten (10) business day period, such party may not thereafter prevent
the other party (by this Section 9.2) from terminating the Agreement pursuant to
Section 9.3 or, until the parties actually meet or such party is genuinely
available to meet, seek to terminate the Agreement pursuant to Section 9.3. The
parties' representatives will discuss the dispute and negotiate in good faith in
an effort to resolve the dispute or renegotiate the applicable provision of this
Agreement without the necessity of any formal proceeding relating thereto;
provided, neither party shall be obligated by this paragraph to waive a default
by the other party or otherwise compromise any right that it may have. Nothing
contained in this section 9.2 shall prevent either party from notifying the
other at any time of an alleged default pursuant to the provisions of this
Agreement. Any notice of default sent by a party pursuant to Section 9.3 of this
Agreement shall automatically constitute a Resolution Request for purposes of
this Section 9.2 and shall obligate each party to attempt in good faith to meet
as described above. However, once a Resolution Request has been received by a
party, neither party may thereafter terminate this Agreement pursuant to Section
9.3 or commence proceedings for the judicial or arbitrational resolution of a
dispute or controversy that has been or reasonably could be the subject of a
notice of default under Section 9.3 until either or both of the designated
representatives, following such meeting, conclude in good faith that an amicable
resolution through continued negotiation of the matter at issue is not likely to
occur. To the extent any dispute relates to the payment of money to a party, the
other party agrees to pay all amounts not legitimately in dispute within the
time required by this Agreement.
9.3 TERMINATION BY EITHER PARTY UPON DEFAULT. This Agreement may be
terminated by a party (the "Affected Party"), upon the occurrence of any of the
following with respect to the other party (the "Other Party"): (i) the Other
Party commits a payment default which is not cured within ten (1O) business days
of receipt of written notice from the Affected Party; or (ii) the Other Party
defaults on any obligation or breaches any representation, warranty or covenant
in this Agreement or the Trademark License Agreement (regardless of whether
breach or default of such obligation, representation, warranty or covenant is
designated as giving rise to a termination right), and such default or breach,
if curable, is not cured within thirty (30) days of receipt of written notice
from the Affected Party. Notwithstanding the foregoing, in the event of a
payment default notification made pursuant to item (i) in the sentence above, if
the Other party furnishes to the Affected Party all payment amounts which it in
good faith believes it owes the Affected Party, together with details and
documentation establishing the Other Party's contention that the remaining
amount claimed by the Affected Party is not in fact due and owing, then the cure
period shall be extended an additional 16 days. The parties agree that all
obligations, representations, warranties and covenants contained in this
Agreement, whether or not specifically designated as such, are material to the
agreement of the parties to enter into and continue this Agreement.
9.4 ADDITIONAL TERMINATION. This Agreement may be terminated by a
party (the "Affected Party"), upon the occurrence of any of the following with
respect to the other party (the "Other Party"): (i) the Other Party shall become
insolvent, shall admit in writing its inability to pay its debts when due, shall
make a transfer in fraud of its creditors, or all or substantially all of its
assets or its interest in this Agreement are levied on by execution or other
legal process, (ii) the Other Party shall file a petition under any section or
chapter of the U.S. Bankruptcy Code, as amended, or under any similar federal or
state law or statute, or shall be adjudged bankrupt or insolvent in proceedings
filed against it, or a receiver or trustee shall be appointed for all or
substantially all of its assets and such receivership or bankruptcy shall not be
dismissed within sixty (60) days from the appointment of the receiver or
trustee; (iii) the Other Party or any officer, director, or principal of the
Other Party is convicted in a court of competent jurisdiction of any offenses
substantially related to the specific business the subject of this Agreement;
(iv) the Trademark License Agreement terminates for any reason; or (v) the Other
Party intentionally falsifies any records or reports required hereunder. This
Agreement may be terminated by EchoStar if MDU Dealer, for more than twenty (20)
consecutive days following written notice from EchoStar, fails to maintain
operations as a going business.
<PAGE> 7
Further, in the event of an occurrence by MDU Dealer described in clause (ii)
above and until such occurrence is cured or the Agreement is terminated,
EchoStar shall have the right to condition any further EchoStar performance
under this Agreement on MDU Dealer providing EchoStar with a security deposit in
good funds, in an amount equal to the average net Programming charges due by MDU
Dealer for the prior six months, to be used to pay any delinquent Programming
charges due by MDU Dealer hereunder, payment in advance for all DISH DBS Systems
or other equipment ordered, payment in full of all outstanding invoices, and
such other reasonable security under the circumstances.
9.5 TERMINATION OF AGREEMENT. MDU Dealer agrees that if this
Agreement terminates for any reason, then MDU Dealer shall:
9.5.1 immediately discontinue the marketing, promotion, and
solicitation of orders for Programming, and immediately cease to represent
and/or imply to any person or entity that MDU Dealer is an Authorized MDU Dealer
for EchoStar;
9.5.2 immediately discontinue all use of the trademarks
associated or included in any way whatsoever with the Programming, including,
without limitation, DISH. Moreover, the Trademark License Agreement shall also
terminate;
9.5.3 deliver to EchoStar, or destroy, at EchoStar's option all
tangible things of every kind in the possession or control of MDU Dealer that
bear any of the trademarks;
9.5.4 upon request by EchoStar, certify in writing to EchoStar
that such delivery or destruction has taken place;
9.5.5 cease to be authorized to purchase DISH DBS Receivers from
EchoStar or any Affiliate of EchoStar;
9.5.6 pay all sums due EchoStar; and
9.5.7 cease all communication with any subscriber of
Programming relating to DISH DBS Receivers or Programming (except for any
communications relating to the termination of the Programming, billing or
collection of any sums due in respect of the Programming or the DISH DBS
Receivers, responding to customer inquiries or disputes, return of leased or
financed (or other disposition or transfer of) DISH DBS Receivers or other
equipment, or MDU Dealer's own products or services).
10. INDEPENDENT CONTRACTOR. The relationship of the parties hereto is that of
independent contractors. Each party shall conduct its business as an independent
contractor, and all persons employed by a party in the conduct of its business
shall be that party's employees only, and not employees or agents of the other
party. Each party represents that it is not dependent on the other for a major
part of its business. It is further understood and agreed that each party has no
right or authority to make any representation, promise or agreement on behalf of
the other except for such representations, promises, or agreements as the other
shall specifically, in writing, authorize. Any such inconsistent or additional
warranty or representation made by a party shall constitute a breach of, and
serve as grounds for termination of this Agreement pursuant to Section 9.3.
11. LIMITATION OF LIABILITY. The provisions of this Section 11 shall survive
termination or expiration of this Agreement indefinitely. IN NO EVENT SHALL
EITHER PARTY OR ANY AFFILIATE OF EITHER PARTY BE LIABLE FOR ANY EXEMPLARY,
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES TO THE OTHER (INCLUDING WITHOUT
LIMITATION, ANY PAYMENT FOR LOST BUSINESS, FUTURE PROFITS, LOSS OF GOODWILL,
REIMBURSEMENT FOR EXPENDITURES OR INVESTMENTS MADE OR COMMITMENTS ENTERED INTO,
CREATION OF CLIENTELE, ADVERTISING COSTS, TERMINATION OF EMPLOYEES OR EMPLOYEES
SALARIES, OVERHEAD OR FACILITIES INCURRED OR ACQUIRED BASED UPON THE BUSINESS
DERIVED OR ANTICIPATED UNDER THIS AGREEMENT), WHETHER FORESEEABLE OR NOT, CLAIMS
UNDER DEALER TERMINATION, PROTECTION, NON-RENEWAL OR SIMILAR LAWS, FOR ANY CAUSE
WHATSOEVER WHETHER OR NOT CAUSED BY THE OTHER PARTY'S NEGLIGENCE. IN NO EVENT
SHALL ANY PROJECTIONS OR FORECASTS BY EITHER PARTY BE BINDING AS COMMITMENTS OR
PROMISES BY SUCH PARTY. THE FOREGOING LIMITATIONS OF LIABILITY CONTAINED IN THIS
SECTION SHALL NOT APPLY TO A PARTY'S BREACH OF THE COVENANTS SET FORTH IN
SECTION 13 REGARDING CONFIDENTIALITY OR A BREACH OF THE TRADEMARK LICENSE
AGREEMENT ATTACHED HERETO AS EXHIBIT E. Each party agrees that in the event of
termination of this Agreement for any reason, no amounts spent in its
fulfillment or other consequential damages will be recoverable from the other
party or any of its Affiliates.
12. INDEMNIFICATION. The provisions of this Section 12 shall survive termination
or expiration of this Agreement indefinitely.
12.1 BY ECHOSTAR. EchoStar shall indemnify, defend and hold MDU Dealer and
its Affiliates, and its and their respective officers, directors, employees,
agents and shareholders, and its and their respective assigns, heirs, successors
and legal representatives harmless from and against, any and all costs, losses,
liabilities, damages, lawsuits, judgments, claims, actions, penalties, fines and
expenses (including, without limitation, interest, penalties, reasonable
attorneys' fees and all monies paid in the investigation, defense or settlement
of any or all of the foregoing) ("Claims"), that arise out of, or are incurred
in connection with: (i) EchoStar's failure of performance under this Agreement
and any direct or indirect results thereof; (ii) the breach of any of EchoStar's
representations or warranties herein; (iii) all purchases, contracts, debts
and/or obligations made by EchoStar; (iv) the failure of EchoStar to comply
with, or any violation of, any applicable laws, statute, ordinance, governmental
administrative order, rule or regulation; (v) the failure of EchoStar to comply
with any provision of this Agreement; (vi) the failure of EchoStar to collect
adequate taxes and remit same to EchoStar as required herein; and (vii) any
claim brought by EchoStar's employees or agents for compensation and/or damages
arising out of the expiration or termination of this Agreement.
<PAGE> 8
12.2 BY MDU DEALER. MDU Dealer shall indemnify, defend and hold
EchoStar and its Affiliates, and its and their respective officers, directors,
employees, agents and shareholders, and its and their respective assigns, heirs,
successors and legal representatives harmless from and against, any and all
Claims that arise out of, or are incurred in connection with: (i) MDU Dealer's
failure of performance under this Agreement and any direct or indirect results
thereof; (ii) MDU Dealer's unlawful acts or omissions (or those of any of MDU
Dealer's employees or agents, whether or not such acts are within the scope of
employment of such employees or agents) relating to the sale, marketing,
advertisement, promotion or distribution of Programming and DISH DBS Receivers
and equipment; (iii) the breach of any of MDU Dealers representations or
warranties herein; (iv) the failure of MDU Dealer to comply with, or any
violation of, any applicable laws, statute, ordinance, governmental
administrative order, rule or regulation; (v) the failure of MDU Dealer to
comply with any provision of this Agreement; (vi) the failure of MDU Dealer to
collect adequate taxes and remit same to EchoStar as required herein; (vii) any
claim brought by MDU Dealer's employees or agents for compensation and/or
damages arising out of the expiration or termination of this Agreement; (viii)
any claim of pirating infringement or imitation of the logos, trademarks or
service marks of programming providers by MDU Dealer or any party for which it
is responsible; (ix) any Deactivation; (x) billing (including the collection
and payment of any applicable taxes), customer service and support, or failure
to adequately provide same; (xi) the installation, operation or maintenance of
an MDU System or DISH DBS System, or failure to adequately provide same; and
(xii) MDU Dealer's failure to comply in whole or in part with any applicable
federal state or local consumer leasing or financing laws. MDU Dealer shall
further (i.e., expanding rather than limiting the provisions of the preceding
sentence) indemnify, defend and hold EchoStar and its Affiliates, and its and
their respective officers, directors, employees, agents and shareholders, and
its and their respective assigns, heirs, successors and legal representatives
harmless from and against, any and all Claims by MDU Dealer customers only
(including without limitation Qualifying Subscribers, MDU Building owners,
operators, and residents, and all persons and entities solicited as potential
customers by MDU Dealer) that arise out of, or are incurred in connection with:
(i) MDU Dealer's performance or failure of performance under this Agreement and
any direct or indirect results thereof; (ii) MDU Dealer's actual or alleged
acts or omissions (or those of any of MDU Dealer's employees or agents, whether
or not such acts are within the scope of employment of such employees or
agents) relating to the sale, marketing, advertisement, promotion or
distribution of Programming and DISH DBS Receivers and equipment; and (iii) the
failure of MDU Dealer to comply with, or any actual or alleged violation of,
any applicable laws, statute, ordinance, governmental administrative order,
rule or regulation. The provisions of this section 12 shall survive termination
or expiration of this Agreement indefinitely.
13. CONFIDENTIALITY.
13.1 GENERAL. At all times during the term of this Agreement and for
a period of three (3) years thereafter, each party and its employees will
maintain, in confidence, the terms and provisions of this Agreement, as well as
all customer or subscriber lists, marketing information and reports, forecasts,
business plans, data, summaries, reports or information of all kinds, whether
oral or written, acquired, devised or developed in any manner from the other
party's personnel or files, or as a direct or indirect result of such party's
actions or performance under this Agreement, and each party represents that it
has not and will not reveal the same to any persons not employed by such party,
except: (i) at the written direction of the other party; (ii) to the extent
necessary to comply with law, the valid order of a court of competent
jurisdiction or the valid order or requirement of a governmental agency or any
successor agency thereto, in which event such party shall notify the other of
the information in advance, prior to making any disclosure, and shall afford the
other party reasonable opportunity to seek confidential treatment of such
information; (iii) as part of its normal reporting or review procedure to its
parent or otherwise affiliated companies, their auditors and attorneys, provided
such affiliates, auditors and attorneys agree to be bound by the provisions of
this paragraph; or (iv) to the extent necessary to permit the performance of
obligations under this Agreement.
13.2 SUBSCRIBER INFORMATION. All subscribers who subscribe to
Programming services shall be deemed customers of EchoStar for purposes relating
to the Programming and DISH DBS Receivers, and shall be deemed customers of MDU
Dealer for other purposes. MDU Dealer acknowledges and agrees that the names,
addresses and related information of such subscribers ("Subscriber Information")
are as between MDU Dealer and EchoStar, but only to the extent such information
relates to the delivery of Programming and DISH DBS Receivers, proprietary to
EchoStar, and shall be treated with the highest degree of confidentiality by MDU
Dealer. MDU Dealer shall under no circumstance directly or indirectly reveal any
Subscriber Information relating specifically to the delivery of Programming and
DISH DBS Receivers to any third party for any reason without the express prior
written consent of EchoStar, which EchoStar may withhold in its sole and
absolute discretion; provided however, that nothing shall prohibit MDU Dealer
from otherwise utilizing its own customer lists and business information for any
purpose.
13.3 REMEDIES. Each party agrees that a breach of these obligations
of confidentiality will result in the substantial likelihood of irreparable harm
and injury to the other party for which monetary damages alone would be an
inadequate remedy, and which damages are difficult to accurately measure.
Accordingly, each party agrees that the other shall have the right, in addition
to any other remedies available, to obtain immediate injunctive relief as well
as other equitable relief allowed by the federal and state courts. The foregoing
remedy of injunctive relief is agreed to without prejudice to the other party's
right to exercise any other rights and remedies it may have, including without
limitation, the right to terminate this Agreement and seek damages or other
legal or equitable relief. The foregoing confidentiality obligations will
survive termination of this Agreement.
14. MISCELLANEOUS.
14.1 WAIVER. The failure of any party to insist upon strict
performance of any provision of this Agreement shall not be construed as a
waiver of any subsequent breach of the same or similar nature. All rights and
remedies reserved to either party shall be cumulative and shall not be in
limitation of any other right or remedy which such party may have at law or in
equity.
<PAGE> 9
14.2 ATTORNEY FEES. In the event of any suit or action to enforce or
interpret this Agreement or any provision thereof, the prevailing party shall be
entitled to recover its costs, expenses and reasonable attorney fees, both at
trial and on appeal, in addition to all other sums allowed by law.
14.3 SUCCESSOR INTERESTS; ASSIGNMENT. This Agreement is binding upon
the heirs, legal representatives, successors and assigns of EchoStar and MDU
Dealer. Either party may assign this Agreement to an Affiliate in whole or in
part at any time without the consent of the other, provided however that the
assigning party remains liable for all of its obligations under this Agreement.
Other than as provided above, this Agreement shall not be assigned by either
party without the prior written consent of the other party. For purposes of this
subsection, an "Affiliate" shall include, without limitation, any person or
entity succeeding to substantially all of the assets of a party by way of asset
purchase, merger, consolidation or otherwise; provided, however, without
EchoStar's prior written consent, an "Affiliate" may not include any entity
engaged in the direct broadcast satellite (DBS) business.
14.4 CHOICE OF LAW AND EXCLUSIVE JURISDICTION.
14.4.1 The relationship between the parties including all
disputes and claims, whether arising in contract, tort, or under statute, shall
be governed by and construed in accordance with the laws of the State of
Colorado without giving any effect to its conflict of law provisions.
14.4.2 Any and all disputes arising out of, or in connection
with, the interpretation, performance or the nonperformance of this Agreement or
any and all disputes arising out of, or in connection with, transactions in any
way related to this Agreement and/or the relationship between the parties
(including but not limited to the termination of this Agreement or the
relationship and either party's rights thereunder or disputes under rights
granted pursuant to statutes or common law, including those in the state in
which MDU Dealer is located) shall be litigated solely and exclusively before a
state or federal court situated in the State of Colorado. The parties consent to
the in personam jurisdiction of said court for the purposes of any such
litigation, and waive, fully and completely, any right to dismiss and/or
transfer any action pursuant to 28 U.S.C.S. 1404 or 1406 (or any successor
statute).
14.5 SEVERABILITY. The parties agree that each provision of this
Agreement shall be construed as separable and divisible from every other
provision and that the enforceability of any one provision shall not limit the
enforceability, in whole or in part, of any other provision hereof. In the event
that a court of competent jurisdiction determines that any term or provision
herein, or the application thereof to any person, entity, or circumstance, shall
to any extent be invalid or unenforceable, the remaining terms and provisions of
this Agreement shall not be affected thereby, and shall be interpreted as if the
invalid term or provision were not a part hereof.
14.6 ENTIRE AGREEMENT. This Agreement sets forth the entire, final
and complete understanding between the parties hereto relevant to the subject
matter of this Agreement, and it supersedes and replaces all previous
understandings or agreements, written, oral, or implied, relevant to the subject
matter of this Agreement made or existing before the date of this Agreement.
Except as expressly provided by this Agreement, no waiver or modification of any
of the terms or conditions of this Agreement shall be effective unless in
writing and signed by both parties.
14.7 COMPLIANCE WITH LAW. The parties shall comply with, and agree
that this Agreement is subject to, all applicable federal, state, and local
laws, rules and regulations, and all amendments thereto, now enacted or
hereafter promulgated in force during the term of this Agreement.
14.8 FORCE MAJEURE. Notwithstanding anything to the contrary in this
Agreement, neither party shall be liable to the other (nor shall an event of
default hereunder be deemed to exist) for failure to fulfill its obligations
hereunder if such failure is caused by or arises out of an act of force majeure
including acts of God, war, riot, natural disaster, technical failure beyond
such party's reasonable control (including the failure of all or part of the
communications satellite, or transponders on which the programming is delivered
to Qualifying Subscribers, or of the related uplinking or other equipment, or
failure of the signal from a programmer supplying EchoStar with the
Programming), or any other reason beyond the reasonable control of such party.
This subsection shall not apply to an obligation by either party for the payment
of money.
14.9 REMEDIES CUMULATIVE. It is agreed that the rights and remedies
herein provided in case of default or breach by a party of this Agreement are
cumulative and shall not affect in any manner any other remedies that the other
party may have by reason of such default or breach by such party. The exercise
of any right or remedy herein provided shall be without prejudice to the right
to exercise any other right or remedy provided herein, at law, or in equity.
14.10 GENERAL PROVISIONS. The terms and conditions attached as
exhibits hereto are fully incorporated into and made a part of this Agreement.
14.11 NOTICES. Any notice required or permitted to be delivered
hereunder shall be in writing and shall be deemed to be delivered (i) upon first
attempted delivery (whether actually received or not) when postmarked by the
U.S. Postal Service, postage prepaid, registered or certified mail, return
receipt requested, or (ii) when delivered by courier or express mail where
evidence of delivery is retained, addressed to the parties at their respective
mailing addresses set forth in the first paragraph of this Agreement, or at such
other address as they have at least ten days theretofore specified by written
notice delivered in accordance herewith.
14.12 YEAR 2000 COMPLIANCE. Each party shall use commercially
reasonable efforts to ensure that: (i) the services and products used to perform
its obligations hereunder, are or will be year 2000 compliant, and (ii) any
failure of the services or products to properly operate during and after the
calendar year 2000 A.D. relating to date data which represents or references
different centuries
<PAGE> 10
or more than one century will be corrected, repaired, or replaced (at such
party's option), notwithstanding anything to the contrary in Sections 2.5.2 and
2.6, as soon as possible after detection at such party's sole cost.
14.13 SURVIVAL. All provisions of this Agreement shall survive
termination for a time which is reasonable under the circumstances, regardless
of whether or not such provision is explicitly stated to survive.
14.14 NO PARTNERSHIP. Nothing herein contained shall be construed to
create any partnership or joint venture between the parties.
By signing below, MDU Dealer hereby indicates its acceptance of the
terms of, and agreement to, this Agreement.
Approved by:
ECHOSTAR SATELLITE CORPORATION TVMAX TELECOMMUNICATIONS, INC.
By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
--------------------------------- -------------------------------
Title: Executive Vice President Title: President & CEO
------------------------------ ----------------------------
Date: January 14, 1999 Date: January 13, 1999
------------------------------- -----------------------------
<PAGE> 11
EXHIBIT A
DISH NETWORK
PROGRAMMING PACKAGES
ECHOSTAR I AND II
<TABLE>
<CAPTION>
AMERICA'S TOP 40
----------------------------------------------------------
$19.99 PER MONTH
$220.00 PER YEAR
==========================================================
<S> <C>
A&E History Channel (The)
America's Voice Home & Garden TV
Angel One Home Shopping Network
Cartoon Network (The) Learning Channel (The)
CNBC Lifetime
CNN MTV
Comedy Central Nashville Network (The)
Country Music Television Nickelodeon (East)
Court TV Nickelodeon (West)
C-SPAN Nick at Nite (East)
C-SPAN2 Nick at Nite (West)
Discovery Channel Nick at Nite's TV Land
Disney Channel (East) QVC
Disney Channel (West) Sci-Fi Channel
E! Entertainment TBN
ESPN TBS
ESPN2 TNT
ESPNEWS Travel Channel (The)
EWTN USA Network
Food Network VH1
FOX Family Channel Weather Channel (The)
Headline News
----------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
AMERICA'S TOP 100 CD
$28.99 PER MONTH
$320.00 PER YEAR
- --------------------------------------------------------------------------------
AMERICA'S TOP 40
PLUS
<TABLE>
<S> <C> <C>
AMC WGN Country Currents CD
Animal Planet ZDTV Easy Instrumentals CD
BBC America (1) FOX/SportsChannel Regional Network Eurostyle CD
Black Entertainment Television (BET) Fiesta Mexicana CD
Bravo Hot Hits CD
Classic Sports CD Channels Jazz Traditions CD
CNNFN/CNNI 70s Songbook CD Jukebox Gold CD
CBS Eye on People Adult Alternative CD Kidtunes CD
F/X Adult Contemporary CD Latin Styles CD
Galavision Adult Favorites CD LDS Radio Network CD
Game Show Network Americana CD Light Classical CD
Independent Film Channel Big Band Era CD Modern Rock Alternative CD
M2 Blues CD New Age CD
MSNBC Classic Rock CD New Country CD
Noggin (Available January 1999) Concert Classics CD Non-Stop Hip Hop CD
Romance Classics Contemporary Christian CD Power Rock CD
Toon Disney Contemporary Instrumentals CD Reggae CD
Turner Classic Movies Contemporary Jazz CD Urban Beat CD
Univision Country Classics CD
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
DISH NETWORK
PROGRAMMING PACKAGES
ECHOSTAR I AND II
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
DISH PIX PACKAGE PPV
$15.00 PER MONTH
NO ANNUAL AVAILABLE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
A package of 10 channels - NO A LA CARTE AVAILABLE DISH on Demand Prices beginning at $2.99
Choose from services available in AT 40, AT 100 CD or Superstations (excluding 12 Channels
Disney Channel, Toon Disney, Regional Sports Networks, MTV, M2, Nickelodeon,
VH1, Nick At Nite's TV Land, FX, Romance Classics, IFC, Galavision, Univision,
BBC America and ZDTV, Outdoor Channel)
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL SERVICES SPANISH LANGUAGE PACKAGE
A LA CARTE $4.99 PER MONTH
$59.88 PER YEAR
- ------------------------------------------------------------------------------------------------------------------------------------
RAI: $ 9.99 per month or $119.88 per year Includes the following 3 services:
Fox Sports Americas
ANTENNA: $14.99 per month or $179.88 per year Telemundo
HTV
- ------------------------------------------------------------------------------------------------------------------------------------
COMBINATION SUPERSTATION/BROADCAST NETWORKS PREMIUM SERVICES
- ------------------------------------------------------------------------------------------------------------------------------------
Choose Any One: $4.99 per month or $59.88 per year Choose One Premium Pkg: $10.99 per month or
$121.00 per year
Choose Any Two: $7.99 per month or $95.88 per year Choose Two Premium Pkgs: $19.99 per month or
$220.00 per year
Choose All Three: $9.99 per month or $119.88 per year Choose Three Premium Pkgs: $27.99 per month or
$308.00 per year
Choose Four Premium Pkgs: $34.99 per month or
$385.00 per year
PACKAGES AVAILABLE
PREMIUM PACKAGES AVAILABLE
DISHNETS EAST Package
ABC, CBS, NBC, FOX o HBO Package (6 channels)
PBS - National Network Includes 5 channels of HBO plus HBO Family
DISHNETS WEST Package o Showtime Package (8 channels)
ABC, CBS, NBC, FOX* Includes 3 channels of Showtime plus Showtime
PBS - National Network Extreme, 2 channels of TMC, FLIX and Sundance
Channel
*The West Coast FOX feed available September 1, 1998. o MultiChannel Cinemax (3 channels)
Includes 3 channels of Cinemax
SuperStation Package o Encore/STARZ! (4 channels)
KTLA, KWGN, WPIX, WSBK, WWOR Includes 1 channel of Encore, 2 channels of
Starz! and 1 channel of Encore Westerns
- ------------------------------------------------------------------------------------------------------------------------------------
DISH NETS LOCAL BROADCAST NETWORKS PACKAGES ADDITIONAL SERVICES
$4.99 PER MONTH EACH A LA CARTE
- ------------------------------------------------------------------------------------------------------------------------------------
LOS ANGELES NEW YORK Disney Channel: $9.99 per month
DMA DMA (Both East and West)
ABC - KABC ABC - WABC The Golf Channel: $4.99 per month or
$59.88 per year
CBS - KCBS CBS - WCBS
NBC - KNBC NBC - WNBC Outdoor Channel: $1.99 month or
$23.88 per year
FOX - KTTV FOX - WNYW
PBS - National PBS - National DISH CD: $4.99 per month or
$59.88 per year
- --------------------------------------------------------------------------------
ADULT SERVICES Single Broadcast Networks: $1.50 each
A LA CARTE
- --------------------------------------------------------------------------------
MultiSport Package: $4.99 per month or
Playboy: $12.99 per month (must subscribe to AT 100 CD) $59.88 per year
Adult Vision: $5.99 per 90 minute block
TeN $14.95 per month
$164.45 per year
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
All prices, packages and programming subject to change
without notice. Updated 12/14/98
<PAGE> 13
DISH NETWORK
ECHOSTAR III
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
LOCAL NETWORK PACKAGES
$4.99 PER MONTH EACH INTERNATIONAL SERVICES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ATLANTA BOSTON TV5 (French): $ 9.99 per month
DMA DMA $119.88 PER YEAR
ABC - WSB ABV - WCVB RTPi (Portuguese) $ 4.00 per month
CBS - WGNX CBS - WBZ (must subscribe to AT40 or AT 100) $ 48.00 per year
FOX - WAGA FOX - WFXT
NBC - WXIA NBC - WHDH TV Japan (Japanese) $ 25.00 per month
PBS - NATIONAL PBS - NATIONAL $300.00 per year
TV Polonia (Polish) $ 14.99 per month*
(must also subscribe to 2 Polskie $179.88 per year*
Radio Services)
ART (Arabic) $ 19.99 per month
- ----------------------------------------------------------------------- ART Movies (Arabic) $239.88 per year
CHICAGO DALLAS LBC (Arabic from Lebanon)
DMA DMA (these three services sold only
as a package/no a la carte available)
ABC - WLS ABC - WFAA
CBS - WBBM CBS - KTVT ZEE TV (Hindi) $ 14.99 per month
FOX - WFLD FOX - KDFW $ 179.88 per year
NBC - WMAQ NBC - KXAS
PBS - NATIONAL PBS - NATIONAL TV Asia (Hindi/English/Gujarati) $ 14.99 per month
$179.88 per year
ZEE TV and TV Asia Package $ 24.99 per month
$299.88 per year
- -----------------------------------------------------------------------------------------------------------------------------------
MIAMI NEW YORK INTERNATIONAL RADIO SERVICES
DMA DMA -----------------------------------------------------------
RFI: $ 1.00 per month
ABC - WPLG ABC - WABC (Radio France Internationale) $12.00 per year
CBS - WFOR CBS - WCBS
FOX - WSVN FOX - WNYW Polskie Radio Program 1 $ 4.99 month*
NBC - WTVJ NBC - WNBC Polskie Radio Program 3 $59.88 per year*
PBS - NATIONAL PBS - NATIONAL (must subscribe to the 2 Polskie
Radio and I TVPolonia video services)
Radio Maria Italy (Italian) $ 5.00 per month
$55.00 per year
Radio Maria Poland (Polish) $ 5.00 per month
$55.00 per year
Radio Maria Spanish $ 5.00 per month
$55.00 per year
- -----------------------------------------------------------------------------------------------------------------------------------
PITTSBURGH WASHINGTON, D.C. A LA CARTE
DMA DMA ------------------------------------------------------------
NASA Channel Free Access
ABC - WTAE ABC - WJLA
CBS - KDKA CBS - WUSA Bloomberg $ 1.50 per month
NBC - WPXI FOX - WTTG $18.00 per year
FOX - WPGH NBC - WRC
PBS - National PBS - NATIONAL -----------------------------------------------------------
PPV
-----------------------------------------------------------
Dish on Demand Prices beginning at $2.99
5 Channels
*Must subscribe to 1 TVPolonia video and 2 Polskie Radio Services
All prices, packages and programming subject to change without notice. Updated 12/14/98
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 14
DISH NETWORK
ECHOSTAR IV
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INTERNATIONAL SERVICES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DENVER PHOENIX TV Japan (Japanese) $ 25.00 per month
DMA DMA $300.00 per year
ABC - KMGH ABC - KNXV ART (Arabic) $ 19.99 per month
CBS - KCNC CBS - KPHO ART Movies (Arabic) $239.88 per year
NBC - KUSA NBC - KPNX LBC (Arabic from Lebanon)
FOX - KDVR FOX - KSAZ (these three services sold only
PBS - NATIONAL PBS - NATIONAL as a package/no a la carte
available)
- --------------------------------------------------------------------------------
ZEE TV (Hindi) $ 14.99 per month
SALT LAKE CITY SAN FRANCISCO $ 179.88 per year
DMA DMA TV Asia (Hindi/English/Gujarati) $ 14.99 per month
ABC - KTVX ABC - KGO $ 179.88 per year
CBS - KUTV CBS - KPIX ZEE TV and TV Asia Package $ 24.99 per month
NBC - KSL NBC - KRON $ 299.88 per year
FOX - KSTU FOX - KTVU
PBS - NATIONAL PBS - NATIONAL
- ------------------------------------------------------------------------------------------------------------------------------------
PPV A LA CARTE
- ------------------------------------------------------------------------------------------------------------------------------------
DISH on Demand Prices beginning at $2.99 Bloomberg $1.50 per month
5 Channels $ 18.00 per year
- ------------------------------------------------------------------------------------------------------------------------------------
All prices, packages and programming subject to change without notice. Updated 12/14/98
</TABLE>
<PAGE> 15
EXHIBIT B
BILLING AND PAYMENT TERMS AND CONDITIONS
The following are EchoStar's current billing and payment terms and conditions,
and (except for payment terms) are subject to change. In the event of a conflict
between this Exhibit B and the agreement to which this Exhibit B is attached,
the agreement shall control.
ORDERING EQUIPMENT
<TABLE>
<CAPTION>
Event Responsibility
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1. OpTel faxes purchase order for hardware to EchoStar Commercial Services OpTel
2. EchoStar Commercial Services accepts or rejects purchase order:
-Orders accepted before 10:30 AM Mountain time ordinarily shipped same day EchoStar
-Orders accepted after 10:30 AM Mountain time ordinarily shipped next business day
3. Receivers purchased in this manner or from one of the Echosphere Regional offices OpTel/EchoStar
will be eligible for 20% programming commissions (subject to the terms of the agreement).
**(MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR
CONFIDENTIALITY)
OpTel/EchoStar
</TABLE>
PROGRAM BILLING
<TABLE>
<CAPTION>
Event Responsibility
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1. All billing of programming will be as set forth in this Agreement EchoStar
BILLING CYCLE FLOW CHART (CALENDAR DATES ARE HYPOTHETICAL AND FOR ILLUSTRATION ONLY):
Account Activated on: date activation requested June 8, 1998
First Bill Sent: approx. activation date [June and July service)
First Bill Due: (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION
First Bill Delinquent: PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY)
First Bill Late
Second Bill Sent: July 16, 1998 [August service)
(MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION
Soft Disconnect*: PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY)
Second Bill Due:
Hard Disconnect*:
FEES AND DISCLOSURES: (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION
FOR CONFIDENTIALITY)
Transaction Fee $5.00 Sidegrades or downgrades of service; PPV movie purchase done by
CSR (non-impulse)
Additional Outlet Fee $4.99 Programming charge for additional receivers.
PPV Disclosures Dish-on-Demand PPV is NON-REFUNDABLE; Channel locks should be set up
to prevent accidental purchase; Phone line must be connected.
</TABLE>
<PAGE> 16
INVOICE INFORMATION AND FORMAT: (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED
WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY)
PAYMENT TERMS
BILLING OF NOT-RECURRING PROGRAMMING: (MATERIAL DENOTED *** HAS BEEN SEPARATELY
FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY)
<PAGE> 17
EXHIBIT C
PROGRAMMING ORDERS AND ACTIVATION
The following are EchoStar's current procedures for programming orders and
activation, and are subject to change. In the event of a conflict between this
Exhibit B and the agreement to which this Exhibit B is attached, the agreement
shall control. All time limits represent intended limits and are not to be
interpreted as a guarantee.
OpTel/EchoStar Order Entry Process
Expected Flow Process
<TABLE>
<CAPTION>
NEW CUSTOMER
Event Responsibility
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
1. OpTel Call Center accepts new order from resident OpTel
2. OpTel Call Center schedules order for installation OpTel
3. Work order is fulfilled by technician OpTel
4. Technician installs set top equipment and calls EchoStar for authorization OpTel/EchoStar
5. Authorization signal is sent and records are updated with EchoStar EchoStar
6. Technician confirms installation and activation of programming and
closes work order through dispatch center OpTel
7. Billing begins for new customer effective upon activation OpTel
8. OpTel is invoiced for customer subscription EchoStar
MOVES, ADDS, CHANGES
Event Responsibility
- ------------------------------------------------------------------------------------------------------------------
1. OpTel Call Center accepts change of service request from customer OpTel
2. OpTel Call Center commits 48-hour completion of order to customer OpTel
3. OpTel Call Center codes order as "office only" with special campaign code and "future
billing" codes to generate automatic billing OpTel
4. Report is generated nightly selecting codes used for EchoStar changes OpTel
5. Report is faxed to EchoStar with authorization request within 24 hours of order OpTel
6. Authorization signal is sent within 24 hours from receipt of OpTel report and
records are updated with EchoStar EchoStar
7. OpTel is invoiced for customer subscription EchoStar
DISCONNECTS
Event Responsibility
- ------------------------------------------------------------------------------------------------------------------
1. OpTel Call Center accepts disconnect request OpTel
2. OpTel Call Center schedules disconnect of service and set top recovery OpTel
3. Work order is fulfilled by technician OpTel
4. Technician disconnects set top and calls EchoStar for de-authorization OpTel/EchoStar
5. Authorization signal is terminated and records are updated with EchoStar EchoStar
6. Technician closes work order through dispatch center OpTel
7. Billing terminates for customer OpTel
8. OpTel is no longer billed for customer subscriber EchoStar
</TABLE>
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Today's Date: Your company Dealer Rec
------- xxxxxxxxxxxxxx
Est. Final Activation Date: #
------
OpTel - DISH Network
DBS Service Request Form
Exhibit D to MDU Dealer Agreement
1. PLEASE CHECK THE COMMERCIAL PROPERTY TYPE THAT APPLIES:
Hotel Hospital Condo MHP Other Bulk Nun Retirement Home
-------- --------- --------- ---------- --------------------------
===========================================================================================================================
2. DBS SYSTEM TYPE: L-Band: Transport: L-Band/Tranport
---------------------- ----------------- -----------------------------
AGENT CODE:
--------- --------- ---------
3. PROPERTY INFORMATION: 4. BILLING INFORMATION:
PROPERTY NAME: COMPANY NAME
- -------------------------------------------------- --------------------------------------------------
ADDRESS MAILING ADDRESS
- -------------------------------------------------- --------------------------------------------------
- -------------------------------------------------- --------------------------------------------------
CITY STATE CITY STATE
- -------------------------------------------------- --------------------------------------------------
ZIP CODE ZIP CODE
- -------------------------------------------------- --------------------------------------------------
TELEPHONE NUMBER: TELEPHONE NUMBER:
- -------------------------------------------------- --------------------------------------------------
GENERAL CONTACT: FAX NUMBER:
- -------------------------------------------------- --------------------------------------------------
BILLING CONTACT:
--------------------------------------------------
TOTAL NUM. OF UNITS @ SITE: TECHNICAL CONTACT:
- -------------------------------------------------- --------------------------------------------------
MARKETING CONTACT:
--------------------------------------------------
5. IF L-BAND - NUMBER OF BOXES NEEDED: 6. TOTAL NUMBER OF RECEIVERS
Total Number of Services Requested:
--------------------------------------------------
n/a (# of boxes X $200.00) (taken from the attached Activation Form)
- -------------------------------------------------- Multiply this # by the figure in Schedule A of the
7. TOTAL DUE: (from #4 & #5 above) Attachment to the Affiliate Agreement.
$ X $7.00 X 12 = #VALUE!
- -------------------------------------------------- ---------------------------------------------------
SERVICE DSR RECEIVER NO. DSR SMART CARD NO
(include e or w) Example: R009912345 (11 digits) S0000123456 (11 digits)
- ---------------- ------------------------------- -----------------------
- --------------- ------------------------------------ -------------------------------------------
- --------------- ------------------------------------ -------------------------------------------
- --------------- ------------------------------------ -------------------------------------------
- --------------- ------------------------------------ -------------------------------------------
- --------------- ------------------------------------ -------------------------------------------
- --------------- ------------------------------------ -------------------------------------------
- --------------- ------------------------------------ -------------------------------------------
- --------------- ------------------------------------ -------------------------------------------
- --------------- ------------------------------------ -------------------------------------------
- --------------- ------------------------------------ -------------------------------------------
OpTel
- -----------------------------------------------------------------
Signature
- -----------------------------------------------------------------
Type Name and Title
- -----------------------------------------------------------------
</TABLE>
Page 1 of _______
ECHO FAX: 800-906-4826
Voice: 800-454-0843
<PAGE> 19
EXHIBIT E
TRADEMARK LICENSE AGREEMENT
THIS TRADEMARK LICENSE AGREEMENT (the "Agreement") is effective
as of the ____________ day of ___________________________, 1999, by and between
EchoStar Satellite Corporation having a principal place of business at 5701
S. Santa Fe Drive, Littleton, Colorado 80120 ("EchoStar"), and TVMAX
Telecommunications, Inc., d/b/a OpTel, having a principal place of business at
1111 West Mockingbird Lane, 10th Floor, Dallas, Texas 75247, Attn: Vice
President - Marketing ("Licensee").
A. ESC conducts business in worldwide locations as, among other
things, a provider of direct broadcast satellite-delivered, multi-channel,
digital audio and video services ("Programming") to commercial subscribers;
and
B. Licensee conducts business as, among other things, an MDU Dealer
of satellite television products and services to commercial subscribers;
and
C. Licensee desires to be permitted to use the EchoStar trademarks,
service marks and trade names set forth in Exhibit A hereto, as amended
from time to time in ESC's sole discretion (the "Trademarks") as ESC, in
its sole discretion, may authorize, from time to time, under a
non-exclusive license, to promote and solicit orders for DISH Network
Programming.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. ESC hereby grants to Licensee a non-exclusive, non-transferable,
revocable license (the "License") to use the Trademarks and such other
trademarks as ESC may from time to time expressly in writing permit
Licensee to use during the term of this Agreement, and no other term or
license whatsoever, in its local advertising and promotional materials and
at its business locations. Licensee shall have no right to use the logos,
service marks or trademarks of any programming providers, other than the
logos, service marks and trademarks of programming providers that are
contained in the advertising and promotional material provided to Licensee
by ESC. No such materials shall indicate that any agreement of agency,
partnership, joint venture, franchise or of exclusive or non-exclusive
distributor exists between Licensee and ESC, unless ESC and Licensee enter
into a separate written agreement permitting Licensee to do so.
Notwithstanding the above, Licensee shall provide to ESC, at least fifteen
(15) days prior to first use, an example of any advertising or promotional
materials in which Licensee intends to use any Trademarks, and any such
other trademarks, which use has not, within the past twelve months, been
approved by ESC in substantially the form intended for use. ESC may reject
and prohibit Licensee from using such materials if ESC believes that MDU
Dealer's intended use would violate any agreement to which ESC is bound
concerning the Trademarks or if ESC believes that MDU Dealer's intended use
could tend to damage, disparage, diminish or otherwise injure any of the
Trademarks or ESC or ESC's image or goodwill. ESC shall notify MDU Dealer
in writing of its approval or disapproval of any proposed advertising or
promotional materials or other use of any Trademark within ten (10) days
from its receipt of same, failing which (evidenced by the passage of one
business day following receipt by ESC of notice from MDU Dealer of such
failure) ESC shall be deemed to have approved of MDU Dealer's intended use.
If Licensee is required to, but fails to provide ESC with proposed
advertising or promotional materials at least fifteen (15) days prior to
first use, ESC shall have just cause to immediately terminate the License
by providing written notice to Licensee to that effect. This Agreement is
not intended, nor shall it be construed, as creating any agreement of
agency, partnership, joint venture, franchise or of exclusive or
non-exclusive distributor, or as creating any obligation on the part of ESC
to enter into any such agreement with Licensee. Further, this Agreement is
not intended, nor shall it be construed, as providing any rights to
Licensee to purchase or sell products or programming manufactured and/or
distributed by ESC. Licensee expressly recognizes and agrees that any
goodwill now existing or hereafter created through any sales by Licensee of
products or programming manufactured and/or distributed by ESC, shall inure
to ESC's sole benefit. This License shall be effective until terminated by
either party in accordance with the terms of this Agreement, or until
termination of the MDU Dealer Agreement between ESC and Licensee.
2. The License granted by ESC is granted to Licensee only. Licensee
has no authority to transfer or grant any sublicense to any other entity or
individual (except for any subsidiary or affiliated entity through which
MDU Dealer, in accordance with Section 6.1 of the MDU Dealer Agreement, may
provide programming to an MDU Building (as defined in the MDU Dealer
Agreement), which entity shall also be bound by the restrictions, terms and
conditions contained herein) for any reason, and if Licensee does so, such
action shall terminate the License granted herein, at ESC's option, at any
time thereafter. Licensee shall immediately cease using Trademarks upon
termination or expiration of this Agreement for any reason. Upon expiration
or termination of this Agreement, at ESC's option Licensee shall
immediately destroy or deliver to ESC any and all advertising and
promotional materials in Licensee's possession with Trademarks on them. If
ESC requests destruction of advertising and promotional materials, Licensee
shall promptly execute an affidavit representing at a minimum that such
materials were destroyed, and the date and means of destruction.
3. Licensee expressly recognizes and acknowledges that the License,
as well as any past use of the Trademarks in any manner whatsoever by
Licensee (including but not limited to use on signs, business cards, or in
advertisements), shall not confer upon Licensee any proprietary rights or
interest to any Trademarks including, but not limited to any existing or
future goodwill in the Trademarks. All goodwill in the Trademarks shall
inure to ESC's sole benefit. Further, Licensee waives any and all past,
present, or future claims it has or might have to the Trademarks, and
acknowledges that as between ESC and Licensee, ESC has the exclusive rights
to own and use the Trademarks, and that ESC retains full ownership of the
Trademarks notwithstanding the License granted herein. While Licensee has
no right or authority to do so, in the event that Licensee has previously,
or in the future reserves, files, or registers any of the Trademarks of
ESC, Licensee agrees to notify ESC immediately, and immediately upon
request of ESC, to assign any and all interest to ESC that is obtained
through the reservation, filing, or registration of the Trademarks in the
U.S. or any foreign jurisdiction, and hereby acknowledges that any such
reservation, filing, or registration of the Trademarks, whenever occurring,
shall be on behalf of and for the sole benefit of ESC, and Licensee waives
all claims or rights to any compensation whatsoever therefor. Licensee's
obligations in this paragraph shall survive the expiration or termination
of this Agreement.
4. Nothing in this Agreement shall be construed to bar ESC from
protecting its right to the exclusive use of its Trademarks against
infringement thereof by any party or parties, including Licensee, either
during the term of this Agreement or following any expiration or
termination
<PAGE> 20
EXHIBIT E
TRADEMARK LICENSE AGREEMENT
THIS TRADEMARK LICENSE AGREEMENT (the "Agreement") is
effective as of the _______ day of _____________________, 1999, by and between
EchoStar Satellite Corporation having a principal place of business at 5701 S.
Santa Fe Drive, Littleton, Colorado 80120 ("EchoStar"), and TVMAX
Telecommunications, Inc., d/b/a OpTel, having a principal place of business at
1111 West Mockingbird Lane, Dallas, Texas 75247, Attn: Vice President -
Marketing ("Licensee").
A. ESC conducts business in worldwide locations as, among other
things, a provider of direct broadcast satellite-delivered, multi-channel,
digital audio and video services ("Programming") to commercial subscribers; and
B. Licensee conducts business as, among other things, an MDU Dealer of
satellite television products and services to commercial subscribers; and
C. Licensee desires to be permitted to use the EchoStar trademarks,
service marks and trade names set forth in Exhibit A hereto, as amended from
time to time in ESC's sole discretion (the "Trademarks") as ESC, in its sole
discretion, may authorize, from time to time, under a non-exclusive license, to
promote and solicit orders for DISH Network Programming.
Now, THEREFORE, the parties hereto hereby agree as follows:
1. ESC hereby grants to Licensee a non-exclusive, non-transferable,
revocable license (the "License") to use the Trademarks and such other
trademarks as ESC may from time to time expressly in writing permit Licensee to
use during the term of this Agreement, and no other term or license whatsoever,
in its local advertising and promotional materials and at its business
locations. Licensee shall have no right to use the logos, service marks or
trademarks of any programming providers, other than the logos, service marks and
trademarks of programming providers that are contained in the advertising and
promotional material provided to Licensee by ESC. No such materials shall
indicate that any agreement of agency, partnership, joint venture, franchise or
of exclusive or non-exclusive distributor exists between Licensee and ESC,
unless ESC and Licensee enter into a separate written agreement permitting
Licensee to do so. Notwithstanding the above, Licensee shall provide to ESC, at
least fifteen (15) days prior to first use, an example of any advertising or
promotional materials in which Licensee intends to use any Trademarks, and any
such other trademarks, which use has not, within the past twelve months, been
approved by ESC in substantially the form intended for use. ESC may reject and
prohibit Licensee from using such materials if ESC believes that MDU Dealer's
intended use would violate any agreement to which ESC is bound concerning the
Trademarks or if ESC believes that MDU Dealers intended use could tend to
damage, disparage, diminish or otherwise injure any of the Trademarks or ESC or
ESC's image or goodwill. ESC shall notify MDU Dealer in writing of its approval
or disapproval of any proposed advertising or promotional materials or other use
of any Trademark within ten (10) days from its receipt of same, failing which
(evidenced by the passage of one business day following receipt by ESC of notice
from MDU Dealer of such failure) ESC shall be deemed to have approved of MDU
Dealer's intended use. If Licensee is required to, but fails to provide ESC with
proposed advertising or promotional materials at least fifteen (15) days prior
to first use, ESC shall have just cause to immediately terminate the License by
providing written notice to Licensee to that effect. This Agreement is not
intended, nor shall it be construed, as creating any agreement of agency,
partnership, joint venture, franchise or of exclusive or non-exclusive
distributor, or as creating any obligation on the part of ESC to enter into any
such agreement with Licensee. Further, this Agreement is not intended, nor shall
it be construed, as providing any rights to Licensee to purchase or sell
products or programming manufactured and/or distributed by ESC. Licensee
expressly recognizes and agrees that any goodwill now existing or hereafter
created through any sales by Licensee of products or programming manufactured
and/or distributed by ESC, shall inure to ESC's sole benefit. This License shall
be effective until terminated by either party in accordance with the terms of
this Agreement, or until termination of the MDU Dealer Agreement between ESC and
Licensee.
2. The License granted by ESC is granted to Licensee only. Licensee
has no authority to transfer or grant any sublicense to any other entity or
individual (except for any subsidiary or affiliated entity through which MDU
Dealer, in accordance with Section 6.1 of the MDU Dealer Agreement, may provide
programming to an MDU Building (as defined in the MDU Dealer Agreement), which
entity shall also be bound by the restrictions, terms and conditions contained
herein) for any reason, and if Licensee does so, such action shall terminate the
License granted herein, at ESC's option, at any time thereafter. Licensee shall
immediately cease using Trademarks upon termination or expiration of this
Agreement for any reason. Upon expiration or termination of this Agreement, at
ESC's option Licensee shall immediately destroy or deliver to ESC any and all
advertising and promotional materials in Licensee's possession with Trademarks
on them. If ESC requests destruction of advertising and promotional materials,
Licensee shall promptly execute an affidavit representing at a minimum that
such materials were destroyed, and the date and means of destruction.
3. Licensee expressly recognizes and acknowledges that the License, as
well as any past use of the Trademarks in any manner whatsoever by Licensee
(including but not limited to use on signs, business cards, or in
advertisements), shall not confer upon Licensee any proprietary rights or
interest to any Trademarks including, but not limited to any existing or future
goodwill in the Trademarks. All goodwill in the Trademarks shall inure to ESC's
sole benefit. Further, Licensee waives any and all past, present, or future
claims it has or might have to the Trademarks, and acknowledges that as between
ESC and Licensee, ESC has the exclusive rights to own and use the Trademarks,
and that ESC retains full ownership of the Trademarks notwithstanding the
License granted herein. While Licensee has no right or authority to do so, in
the event that Licensee has previously, or in the future reserves, files, or
registers any of the Trademarks of ESC, Licensee agrees to notify ESC
immediately, and immediately upon request of ESC, to assign any and all interest
to ESC that is obtained through the reservation, filing, or registration of the
Trademarks in the U.S. or any foreign jurisdiction, and hereby acknowledges that
any such reservation, filing, or registration of the Trademarks, whenever
occurring, shall be on behalf of and for the sole benefit of ESC, and Licensee
waives all claims or rights to any compensation whatsoever therefor. Licensee's
obligations in this paragraph shall survive the expiration or termination of
this Agreement.
4. Nothing in this Agreement shall be construed to bar ESC from
protecting its right to the exclusive use of its Trademarks against infringement
therefore by any party or parties, including Licensee, either during the term of
this Agreement or following any expiration or termination
<PAGE> 21
of Licensee's right to use the Trademarks pursuant to this Agreement. Licensee
will promptly and fully advise ESC of any use of any mark that may appear to
infringe the Trademarks. Licensee will also fully cooperate with ESC in defense
and protection of the Trademarks, at ESC's expense. Similarly, nothing in this
Agreement shall be construed to require that ESC take any action to protect the
Trademarks in any instance, and ESC shall not be liable to Licensee in any
manner whatsoever for failure to take any such action.
5. This Agreement shall continue for a period of time equal to the
term of the MDU Dealer Agreement between ESC and Licensee, unless terminated
earlier for a reason provided herein.
6. Any and all disputes, claims or actions that may arise under or out
of this Agreement shall be governed, interpreted and enforced in accordance with
the laws of the State of Colorado, and shall otherwise be resolved in accordance
with the provisions set forth in Section 14.4 of the MDU Dealer Agreement
between ESC and Licensee, to which this Trademark License Agreement is attached.
7. This Agreement may be executed in two or more counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
their duly authorized representatives as of the day and year first above
written.
ECHOSTAR SATELLITE CORPORATION TVMAX TELECOMMUNICATIONS, INC.
By: [ILLEGIBLE] By: [ILLEGIBLE]
---------------------------------- -------------------------------------
Title: Executive Vice President Title: President & CEO
------------------------------- ----------------------------------
<PAGE> 22
EXHIBIT A TO TRADEMARK LICENSE AGREEMENT
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[DISH
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<PAGE> 1
EXHIBIT 10.28
VPC CORPORATION
300 VIGER AVENUE EAST
MONTREAL, QUEBEC H2X 3W4
CANADA
LE GROUPE VIDEOTRON LTEE
300 VIGER AVENUE EAST
MONTREAL, QUEBEC H2X 3W4
CANADA
May 18, 1999
OpTel, Inc.
1111 West Mockingbird Lane
Dallas, Texas 75247
Ladies and Gentlemen:
This letter (this "Agreement") shall confirm the agreement of the
undersigned as follows:
1. On or before the earlier to occur of August 29, 1999 or the 90th day
following the consummation of an initial public offering by OpTel, Inc. (the
"Company"), VPC Corporation ("VPC") shall convert (i) all of its shares of Class
B Common Stock, par value $.01 per share (the "Class B Common"), of the Company
into shares of the Company's Class A Common Stock, par value $.01 per share (the
"Class A Common"), on a share for share basis and (ii) all of its shares of the
9.75% Series A Preferred Stock, par value $.01 per share (the "Series A
Preferred"), of the Company into shares of Class B Common Stock and, immediately
thereafter, VPC shall exchange VPC's shares of Class B Common for shares of the
Class A Common, on a share for share basis. Notwithstanding the foregoing, VPC
shall only be obligated to convert its shares of Class B Common and Series A
Preferred into Class A Common if the initial public offering of the Class A
Common, on substantially the same terms as are described in the Company's
Registration Statement on Form S-1 (SEC File No. 333-56231), is consummated.
2. VPC and Le Groupe Videotron Ltee ("GVL") jointly and severally shall
indemnify, defend and hold the Company harmless from and against any and all
losses, liabilities, obligations, damages, claims, deficiencies, costs and
expenses based upon, attributable to or resulting from or arising out of or
relating to any failure by VPC to satisfy its obligations under this Agreement.
3. VPC agrees that due to the unique subject matter of this Agreement,
monetary damages will be insufficient to compensate the Company in the event of
VPC's failure to satisfy
<PAGE> 2
its obligations under this Agreement. Accordingly, VPC agrees that the Company
shall be entitled (without prejudice to any other right or remedy to which it
may be entitled) to an appropriate decree of specific performance, or an
injunction restraining any violation of this Agreement or other equitable
remedies to enforce this Agreement (without establishing the likelihood of
irreparable injury or posting bond or other security), and VPC waives in any
action or proceeding brought to enforce this Agreement the defense that there
exists an adequate remedy at law.
4. EACH PARTY HERETO IRREVOCABLY CONSENTS AND AGREES THAT ANY LEGAL
ACTION, SUIT OR PROCEEDING AGAINST IT WITH RESPECT TO ITS OBLIGATIONS OR
LIABILITIES UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL
BE BROUGHT BY SUCH PARTY ONLY IN THE COURTS OF THE STATE OF DELAWARE SITTING IN
THE COUNTY OF KENT, STATE OF DELAWARE OR, IN THE EVENT (BUT ONLY IN THE EVENT)
SUCH COURT DOES NOT HAVE JURISDICTION OVER SUCH ACTION, SUIT OR PROCEEDING, IN
THE UNITED STATES DISTRICT COURT SITTING IN COUNTY OF KENT, STATE OF DELAWARE,
AND EACH PARTY HERETO HEREBY IRREVOCABLY ACCEPTS AND SUBMITS TO THE JURISDICTION
OF EACH OF THE AFORESAID COURTS IN PERSONAM, WITH RESPECT TO ANY SUCH ACTION,
SUIT OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, CLAIMS FOR INTERIM RELIEF,
COUNTERCLAIMS, ACTIONS WITH MULTIPLE DEFENDANTS AND ACTIONS IN WHICH SUCH PARTY
IS IMPLIED). EACH PARTY IRREVOCABLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A JURY
TRIAL IN ANY LEGAL ACTION, SUIT OR PROCEEDING WITH RESPECT TO, OR ARISING OUT OF
OR IN CONNECTION WITH THIS AGREEMENT.
5. GVL AND VPC CONSENT TO THE SERVICE OF PROCESS UPON EACH OF THEM IN
CONNECTION WITH ANY PROCEEDING INSTITUTED UNDER THIS AGREEMENT BY TELECOPY OR BY
CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID, WHICH SERVICE OF PROCESS WILL BE
DEEMED DELIVERED, IF SENT BY TELECOPY, UPON CONFIRMATION OF RECEIPT BY THE
ADDRESSEE, OR IF SENT BY MAIL, THREE DAYS AFTER THE DATE OF MAILING, TO THE
PARTIES AT THE FOLLOWING ADDRESSES:
TO VPC CORPORATION AT:
VPC CORPORATION
300 VIGER AVENUE EAST
MONTREAL, QUEBEC H2X 3W4
CANADA
TELECOPY: (514) 985-8515
<PAGE> 3
TO LE GROUPE VIDEOTRON LTEE AT:
LE GROUPE VIDEOTRON LTEE
300 VIGER AVENUE EAST
MONTREAL, QUEBEC H2X 3W4
CANADA
TELECOPY: (514) 985-8515
6. THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED BY THE LAWS OF THE
STATE OF DELAWARE WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS.
Sincerely yours,
VPC Corporation
By: /s/ JAYNE L. STOWELL
---------------------------
Name: Jayne L. Stowell
Title: Director
Le Groupe Videotron Ltee
By: /s/ ALAIN MICHEL
---------------------------
Name: Alain Michel
Title: Director
ACCEPTED AND AGREED
this 18th day of May, 1999
OpTel, Inc.
By: /s/ MICHAEL E. KATZENSTEIN
-----------------------------
Name: Michael E. Katzenstein
Title: Vice President, Legal
Affairs, General Counsel
and Secretary
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 7 to the Registration Statement No.
333-56231 of OpTel, Inc. on Form S-1 of our reports dated October 6, 1998, on
the financial statements and financial statement schedule of OpTel, Inc. and to
the use of our report dated May 15, 1998 on the financial statement of the
Assets and Liabilities of ICS Communications, LLC acquired by OpTel, Inc. for
the year ended December 31, 1997, appearing in the Prospectus or elsewhere in
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
May 18, 1999
Dallas, Texas
