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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14D-9
Solicitation/Recommendation Statement under Section 14(d)(4)
of the Securities Exchange Act of 1934
Telocity Delaware, Inc.
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(Name of Subject Company)
Telocity Delaware, Inc.
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(Name of Person Filing Statement)
Common Stock, par value $0.001 per share
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(Title of Class of Securities)
87971D
(CUSIP Number of Class of Securities)
Scott Martin
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Executive Vice President,
Chief Administrative Officer and Corporate Secretary
Telocity Delaware, Inc.
10355 North DeAnza Blvd.
Cupertino, California 95014
(408) 863-6600
(Name, address, and telephone numbers of person authorized to receive notices
and communications on behalf of the persons filing statement)
With Copies to
Diane Holt Frankle, Esq.
Gray Cary Ware & Friedenrich LLP
400 Hamilton Avenue
Palo Alto, California 94301-1825
(650) 833-2000
[X] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
Preliminary communication filed as part of this Schedule.
1. Transcript of teleconference, dated December 22, 2000, concerning the
proposed agreement between Hughes Electronics Corporation and Telocity Delaware,
Inc.
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Moderator: Lynne Farris
December 21, 2000
9:00 am CT
Operator: Welcome to today's announcement by Telocity. This call is being
recorded.
We will now turn the call over to Ms. Lynne Farris, Director of Investor
Relations. Please go ahead.
Lynne Farris: Thank you operator. Good morning ladies and gentlemen and welcome
to our conference call. With us today to discuss today's announcement are
Telocity's President and CEO, Patti Hart and Chief Financial Officer, Ned
Hayes. We will host a Q&A session at the end of the call.
Please note that various remarks that we make on this call about our future
plans and prospects constitute forward-looking statements for purposes of
the Safe Harbor provisions under the Private Securities Litigation Reform
Act.
Actual results may differ materially from those indicated by these
forward-looking statements due to various risks and uncertainties,
including those identified in the company's registration statement on Form
S1, current Form 10Q and other filings with the Securities and Exchange
Commission.
I now turn the call over to Patti Hart.
Patti Hart: Thanks, Lynne, and god morning everyone. Thanks for joining us. I
hope you all had a chance this morning to read our press release and enjoy
the exciting news that we're celebrating here at Telocity.
Today we are proud to announce that Hughes Electronics Corporation has
signed a definitive agreement to acquire all of the outstanding shares of
Telocity in a cash transaction valued at approximately $180 million.
This is an exciting and logical step forward for Telocity as we continue
our mission to become the leading provider of lifestyle enhancing broadband
services for the home.
Through this partnership we will be able to further build on our strength.
With the resources and stability to drive the business forward, we are
being given the extraordinary opportunity to realize our potential.
We will integrate our broadband delivery capabilities with DirecTV, a
subsidiary of Hughes. Together we can create a "whole house" entertainment
and information experience for existing and future customers all across the
nation.
DirecTV has successfully built a business that serves nearly 10 million
customers. We believe the integration of our services at Telocity can
provide a more comprehensive experience for those customers.
In addition to a significant marketing alliance, this transaction creates a
highly complimentary partnership in many other ways. As we integrate our
product offering, further extend our
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geographic reach and scope of services, and leverage our install base to
achieve higher revenues, reduce customer churn and reduce customer
acquisition costs.
In short, Telocity will be able to reach a significantly larger audience
while having the resources to implement our strategy of demonstrating to
consumers how broadband services can greatly enhance their lives. Our home
gateway, the portal to the home, will continue to be a key component of our
service delivery platform.
Value added services such as the "connect and protect" home networking
packages we launched in October, will continue to distinguish our services
from competitors and will encourage more consumers to seek the DirecTV and
Telocity whole home solution.
Following necessary government approval, Hughes will integrate the
broadband delivery capabilities of Telocity with DirecTV to create the
first nationwide portfolio of consumer entertainment and information
services, including both wired and wireless broadband Internet access and
digital multi-channel television.
The unique attributes of Telocity, including our nationwide land- based
delivery system, our employees, our proprietary gateway and our end- to-end
customer care, are attractive assets for DirecTV and Hughes.
Integrating Telocity with DirecTV significantly leverages our ability to
deliver broadband to and throughout the home.
Together we will be able to provide a comprehensive suite of services that
will challenge the competition and enhance our customers' lives. And we're
joining an excellent team.
Hughes is a visionary company and joining such a prestigious organization
marks the beginning of a new chapter for our company. We are proud we will
become part of the Hughes team and believe that by working together, we
will be strongly positioned to emerge as leaders in the exploding broadband
market.
I would now like to turn the call over to Ned Hayes, Telocity's Chief
Financial Officer, for his comments. Ned?
Ned Hayes: Thanks, Patti, and good morning everyone. Before I begin, let me
remind you that there are risks associated with forward-looking projections
and actual results may vary materially from those described.
For a detailed outline of the risks associated with the following
forward-looking commentary, we ask that you refer to our current Form 10Q,
our Form S1 Registration Statement and other filings we have made with the
Securities and Exchange Commission.
As Patti stated earlier, we are very pleased with this transaction which
will enable Telocity to expand its leadership position in the residential
broadband market.
We are in the formative years of a broadband market that has projected
value of nearly $12 billion over the next five years. And by bundling the
capabilities of Telocity and DirecTV Hughes, consumers will enjoy the
combined capabilities of high-quality digital satellite entertainment with
high-speed Internet access through a single portal into residential homes.
Under the terms of this transaction, each Telocity shareholder will receive
$2.15 in cash for each share held or a total purchase price of
approximately $180 million.
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The boards of both companies have approved this transaction. We expect the
transaction, which is subject to the normal approval of government
regulators, to close late first quarter 2001 or early second quarter.
The company has sufficient funding to operate well into Q1 2001. To
alleviate any concerns over interim funding requirements, Hughes has agreed
to advance up to $20 million to Telocity prior to completion of the tender
offer.
Many of you are probably wondering whether this was the best we could do
for our shareholders and we believe the answer is an unequivocal yes. It
has not escaped anyone's notice that the current market conditions have
been and are expected to remain very uncertain, at least into the near
future.
Capital markets have been and continue to be largely inaccessible to
emerging telecommunications, DSL and/or broadband companies such as
Telocity. And many of them have experienced dramatic deterioration
recently.
We believe that this sector will remain under some pressure over the
short and intermediate term. Yet under very difficult market conditions,
we were able to align ourselves with an extremely strong partner.
And we were able to secure what we believe is a very favorable valuation
premium based upon yesterday's closing price as well as the average trading
prices over the last 5 days and the last 20 trading days.
Based upon recent trading, we secured a 22% premium on the last 20 days of
trading average, a 38% premium on the last 5 days trading average, and a
53% premium based upon yesterday's closing price.
We believe this is a very reasonable deal and we are very happy to have the
opportunity to join a company like Hughes DirecTV which has the resources
and the capital to carry the business forward.
This transaction represents the convergence of broadband and entertainment
in a way that no other entity offers in the marketplace.
When we took the company public in March, we acknowledged at the time that
we would need additional funding to continue to go forward. Almost from the
IPO, we proactively embarked on an exhaustive search for additional funding
knowing that it takes time.
And like most everyone we had no way of predicting today's market and so
here we stand. We now have an opportunity to move to a new plateau to bring
a new and unique portfolio of products and services to a broader market.
We also believe that in this transaction we have been able to balance the
interests of all our constituencies, first and foremost, our shareholders,
but our employees, our customers and our vendors as well.
In summary, we are extremely proud of our team's accomplishments to- date.
Since we took the company public we have been able to meet or exceed just
about every one of our performance metrics.
Unlike many other companies in this phase and in the broader market, we
have not had to restate revenues, pre-warn on earnings or announce cutbacks
or other forms of restructuring. We have consistently met our subscriber
and revenue targets, even under the most challenging of market conditions.
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We very much look forward to our alliance with Hughes and we believe that
this transaction has been the best possible outcome for our company, for
our shareholders and for our mutual futures.
With that, I will turn the call back over to Patti.
Patti Hart: Thanks, Ned. And thanks everyone for joining us and we would like to
open it up now to take your questions please.
Operator: Thank you, Ms. Hart. Today's question and answer session will be
conducted electronically. If you would like to ask a question, you may
signal by pressing the star or asterisk key followed by the number 1 on
your touch-tone telephone.
We will proceed in the order that you signal us and we'll take as many
questions as time permits. Once again to ask a question, press star 1.
And we'll first hear from Thomas Watts of Merrill Lynch.
Thomas Watts: Hi, good morning Patti and Ned.
Patti Hart: Hi Tom.
Thomas Watts: You'd mentioned in closing, it was expected around the end of Q1?
Patti Hart: That's right.
Ned Hayes: End of Q1 or beginning of Q2.
Thomas Watts: Okay and I know that your prior funding, that's when we were
thinking that you were about funded through. Is there any interim funding
arrangements from Hughes?
And do you plan on accelerating or maintaining the same pace over the
period between now and closing?
Ned Hayes: Tom, as I described, Hughes has been kind enough to advance us $20
million in interim financing. It takes the form of a convertible soft debt
structure...
Thomas Watts: Okay.
Ned Hayes: ... to the extent that we need that financing, we have access to
that in the interim period between now and the close of the tender.
It will be up to the management teams, both ours and DirecTV Hughes, to
determine how is it that we're going to move forward in terms of how we
invest our cash, especially in the first and second quarter.
We believe there are a number of synergies that can be leveraged right off
the bat, especially along the lines of sales and marketing and customer
service support.
But it will be up to us to determine as a combined management team how we
go forward into the marketplace, especially leveraging the embedded
subscriber base that DirecTV has across their nine million subscribers.
Thomas Watts: Okay and can you give us any more color in terms of integration of
operations after the closing in terms of, say customer service, network
management, etc.?
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Patti Hart: Yeah, sure Tom. Certainly as we have been spending our time with
the folks at DirecTV Hughes, we see some terrific synergies there. I think
there is going to be a balance that we'll work through in our January,
February planning process between rapid integration and making sure that
we're managing the customer facing points.
And so, you know, I would say that we have identified synergies. I think
that we're not in as much of a rush to gain the synergies as we are to say
let's make sure we have stable customer platforms independent of one
another and then let's find some synergistic opportunities.
But there certainly are some in the customer care areas, we get some
consolidation of our operations. There are certainly some in sales and
marketing.
We think we can gain significant efficiencies by, you know, target
marketing those in their customer base today that are DSL capable. Also
leveraging their retail arm as they've been very successful, using that as
a distribution channel.
So, you know, obviously we collectively have identified some synergies
because it wasn't just about funding. It really is about moving to a new
plateau as Ned indicated and doing that in a way that's efficient for our
shareholders.
Thomas Watts: Okay, thanks very much.
Ned Hayes: Thanks Tom.
Operator: And we'll take our next question from Ty Carmichael of CS First
Boston.
Ty Carmichael: Good morning. I was hoping that you might be able to walk
through the subscriber economics you're currently realizing in terms of
monthly revenues, cash flow margin, churn and subscriber acquisition costs.
Ned Hayes: Sure. The 2001 guidance that we have for key Telocity metrics are:
net broadband subscriber additions will probably be in the 150 to 200,000
range - that's net additions, a churn rate somewhere 1.1 and 1.5% per month
and ((inaudible)) approximately in the high 40's, probably 48, 49 dollars,
total revenue probably in the 50 to 60 million-dollar range.
Patti Hart: As a stand-alone business...
Ned Hayes: ... as a Telocity business unit within the Hughes family.
Ty Carmichael: And what's the cost that you incur to get a new subscriber?
Ned Hayes: If you take a look at the ((inaudible)) costs as we are now
understanding nomenclature within the DirecTV Hughes dictionary, 2001 will
be somewhere between $350 and $400. That breakout comes out: advertising
and bounties $130 to $180, gateway costs $220.
And then going forward we think that we'll be able to continue to get
synergistic savings there declining with scale and technology probably into
the range of $330 to $380 as a range for 2002.
Ty Carmichael: Okay. And lastly, is NBC still actively involved in Velocity or
is that relationship continuing on as you become part of DirecTV? And if
it is, what are the expectations from that relationship?
Patti Hart: Sure. Our relationship with NBCi, NBC and the GE family is obviously
multi-faceted. So we have an investor relationship, as they're an investor
in us. You know, that in this particular case, they will be treated like
all other investors.
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We also have an advertising agreement with NBCi and NBC. We expect not only
to honor that but we have renegotiated terms acceptable to both parties
that will continue that advertising relationship.
And then the third thing we have with them is an operating agreement for
joint products and services. And while this transaction really is the
beginning, I think, of our definition of what our future products and
services will be, you know, we at Telocity have been delighted with the
cooperation and support frankly over the last year of the work with NBC and
NBCi.
And with our new DirecTV Hughes friends, we are in active discussions with
NBC and NBCi to understand the role that they'll play in the future and how
that can benefit both parties.
Ty Carmichael: Okay thank you.
Ned Hayes: Thank you.
Operator: As a reminder, if you would like to ask a question, please signal by
pressing star 1. And we'll next turn to Brian Long of Chesapeake Partners.
Brian Long: Hi. I was wondering if you could go through the regulatory
approvals. I guess I'm a little confused as to why the transaction will
take so long to close given that it's a tender offer.
Ned Hayes: It's probably a two-step merger process that we think over the
course of 90 days, that's a perfectly reasonable time period for a
transaction like this to close with the regulatory approvals, with the two-
step process that we've got.
And we think that, you know, that a late Q1, early Q2 timeframe is pretty
normal for a transaction like this.
Bryan Long: Do you need any FCC approvals?
Patti Hart: Yeah, we don't expect that we will.
Bryan Long: Okay and if I could also just ask two other quick questions. Who are
the bankers on the transaction?
And did you seek just other partners other than Hughes or was this just a
sort of a one-on-one negotiating type of transaction?
Patti Hart: Yeah, the bankers representing Telocity were, at the beginning of
our transaction, DLJ. At the end of our transaction, CS First Boston, so we
went through a merger with them at the same time.
So we were delighted with the work that they did. They were supportive,
they were aggressive. We've been involved with them for some time.
We did a comprehensive look at the marketplace. We talked to a number of
potential partners. We found this situation very attractive because of the
synergies between the management teams, number one.
Number two, very synergistic strategies on very focused on the whole home
solution, focused on home networking and pushing entertainment and
communications concept beyond one device, multiple devices.
And so we were looking for a partner that shared that vision. And these
folks, they don't just share it, they live it every day and that was
incredibly compelling for us as a company.
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So we did look broadly in the marketplace and we early in our process had
chosen them as a perfect partner. It took them a little bit longer to
choose us, I guess.
But we think it's a terrific synergistic match of products, services and
the management team.
Bryan Long: Thank you and congratulations.
Patti Hart: Thank you.
Operator: And again, one final reminder, it is star 1 if you would like to ask a
question. And we'll pause for just one moment.
And we do have a question from Michael Emerald of Longfellow Investments.
Michael Emerald: Why is the tender going to begin by February 1 and not, say in
the next 5 or 10 business days?
Patti Hart: Yeah, a number of reasons for that. First of all, as opposed to
focusing on the steps in the process, we were focused on the time of the
entire transaction. So that was first. And we believe that a 90 to 100- day
close on a transaction of this nature is appropriate.
So then when you kind of peel it back, you know, there are some potential
approvals in the process, number 1. Number 2, it is the holiday season so
we bought ourselves some time just to cover ourselves from that
perspective.
And so we're quite comfortable. This really allows from Telocity's
perspective - and you'll hear from the Hughes and DirecTV folks on their
call following this.
But from our perspective it was very important to us at Telocity that we be
able to put together a transaction that not only met our funding needs, but
allowed us to enter into an agreement with someone who had respect for the
need for our independence to continue the accelerated growth at a time when
we need to be focused on accelerated growth as a stand-alone company, not
just transition issues.
And I think the folks at Hughes and DirecTV do respect that and encourage
that. And so we tried to strike a balance between our financial needs, the
needs that we have to grow the company but not put the company in a risk
situation. We think this does that.
Michael Emerald: You said you don't need Federal Communication Commission
approval. What other approvals do you need?
Ned Hayes: We're filing with both the FTC and the DOJ ((inaudible)). Then it'll
be up to the two agencies to figure out which one has jurisdiction and
we'll pursue whichever one they decide upon.
Michael Emerald: Okay. So the 90 to 100 days, it sounds like, you're saying that
that closing is in line with when you'd like to integrate the two
businesses? Because the FTC and the DOJ, they won't take anything near that
long if it's a tender offer.
Patti Hart: Right. The answer to your question is yes.
Michael Emerald: Okay. Thank you.
Ned Hayes: Thank you.
Patti Hart: Thank you.
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Operator: And we'll take our next question from Abi Galdin of Morgan
Stanley/Dean Witter.
Abi Galdin: Hi. This is Abi Galdin calling from Morgan Stanley/Dean Witter. A
couple of questions, one is can we get an idea as to the number of
subscribers that you have that you'll be transitioning over to the Hughes
family once the transaction is completed?
And second relates to bundling of broadband services along with video, as
to how that would be structured given that (HNS) is about to launch its
two-way DirecPC service ((inaudible)) via satellite. How will Telocity's
offering fit into that bundle?
Patti Hart: Yeah, I'll take the second one which is more in the product and
services. You know, actually the DirecPC product line is something we find
very attractive at Telocity.
We see the Telocity product and the DirecPC product as incredibly
complimentary. Telocity really provides more of a retail-looking ISP
capability that includes customer management and the home gateway and last
mile access through DSL.
Whereas the DirecPC product offers a satellite-based access for areas where
DSL is not available, along with a number of unique kind of webcasting
services.
So what we see in a combination of this is the opportunity for us to be in
the marketplace and really provide broadband Internet access anywhere
whether and not be restricted in our ability to grow for the Hughes DirecTV
family based on the limits of DSL availability.
So we think this is a terrific way to build a customer base that is
complimentary as opposed to being restricted in our growth.
Do you want to take his first question, Ned?
Ned Hayes: Yeah, with regard to the subscribers, we ended the third quarter
with 23,500 revenue-generating subscribers. The consensus estimates that we
have provided comfort for in the past for Q4 is in the 40,000 to 41,000
range for subscribers.
Abi Galdin: And following on that, does that include the subscribers that would
have been transitioned for (Flash Comm)?
Patti Hart: Very few. We are in the process, just beginning the process of
transferring those customers. So to the extent we are in the process of
marketing to and selling those customers, we would count a (Flash Comm)
customer that went through that process the same as we would if we took a
DSL customer from an ((inaudible)) or somebody else.
So the answer to that is there will be some, there will not be a
significant amount of (Flash Comm) customers.
Ned Hayes: Yeah, by no means does it include the entire bulk of numbers that
have been referenced in the press of 13 or 18,000.
Abi Galdin: Okay. One other question in relation to DSL, on your Web site you
have like, you said that you have the ability to offer DSL services in
about 125 to 150 markets nationally?
How much does that translate into number of households in the US? You know,
if you could hazard a guess?
Patti Hart: Yeah, it's in 40% of US households.
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Abi Galdin: Okay. That is great, thanks.
Patti Hart: Thank you.
Ned Hayes: Thank you.
Operator: And from Unterberg Towbin, we'll now hear from William Kied.
Patti Hart: William.
Operator: Mr. Kied or Mr. Kied, your line is open.
Hearing no response, we'll move on to Brad Wilson of Lehman Brothers.
Brad Wilson: Yeah, thanks. Real quickly, can you talk about the different
channels you use to go after customers, on how the focus of those channels
may change with this relationship?
Also what sort of impact this may have on, you know, existing DSL partners
you're using like ((inaudible))?
Patti Hart: Sure. As far as the channels we use - again this was one of the
things that we found very attractive in our brand new big brother, or
however you want to refer to them - in that Telocity really embraces a
broad set of distribution channels, primarily focused on a direct marketing
channel using mail and advertising and outbound calling and what have you,
in a traditional sense of telecommunications service.
We have also embraced affinity partners and are doing some testing in
retail but really have not been as aggressive in retail. We are working
through our telecommuter program and test modes but have not grown in an
accelerated fashion in the corporate market as well.
So we see the channels, the success in the channels being very
complimentary. Where ours is very focused on direct sales, interacting
directly with the customers and theirs being very complimentary to that.
So we don't really see it changing, we just see it expanding. So we'll take
and leverage what we're doing and add to it the great works at DirecTV have
done.
Ned Hayes: With regard to the DSL partners, we will continue to have a vision
whereby we have national coverage across the ((inaudible)) and the
((inaudible)).
We still maintain our vision of having at least two providers in each of
our territories so that we can have some friendly competition on price but
perhaps even more importantly on performance and execution in terms of
provisioning DSL capabilities for us.
We believe that this extraordinary partnership brings a financial backing
that we have that will put to rest any fears that any of these DSL carriers
might have in terms of our financial viability and our ability to pay.
Oh, by the way, we are current with all of them as we speak today so just
wanted to make sure that was on the record.
Brad Wilson: Thanks. That's what I was looking for.
Ned Hayes: Great.
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Operator: And as one final reminder, if you do have a question, please press
star 1 now. And we'll now hear from John Paulson of Paulson Partners.
(Nicolai Pachenk): Yeah, this is (Nicolai Pachenk) for John Paulson. I had a
question. In the agreement, is there any business conditions in terms of
the performance of Telocity? Is the merger subject to any conditions?
Patti Hart: It is. I think, it has what I would consider to be standard,
material, adverse effects kind of language. But there's, you know, given
the situation that is obvious in our business today with a very short
runway of cash and a marketplace that is vulnerable at best, there's less
reference to performance relative to growth and financial performance and
what have you, in the contract.
(Nicolai Pachenk): So would missing analysts' estimates constitute a material
adverse change?
Ned Hayes: No.
Patti Hart: No it would not.
(Nicolai Pachenk): Thank you.
Patti Hart: ... although we don't plan to - miss those.
Operator: And we have time for just one more question. That's Adam Simon of
Goldman Sachs.
Adam Simon: Thanks a lot. Can you talk about your funding requirements on
stand-alone basis in 2001 and then on an accumulative basis until you are
planning to turn cash flow positive? Thanks.
Ned Hayes: I'll try and characterize that for you in terms of EBITDA. I think
if we take a look at the EBITDA of losses for 2000, we're probably in the
100 to 130-million dollar loss for that particular period. And then
likewise for the second period of 2002, probably a similar amount.
So that would effectively get us to EBITDA break-even over the course of
the next two to three years. Cap Ex for 2001, probably in the 40 to 55
million-dollar range, depending upon the numbers of subscribers that we've
got.
As you may know, the lion's share of our Cap Ex is deployed just-in- time
into the home through our gateways. We have left the central office
((inaudible)) capital investment on the backs of the ((inaudible)) partners
that we partner with, ours is a just-in-time capital deployment.
The gateway takes about 20 days to assemble to our manufacturer, Wellex.
That's pretty much in parallel with the 20 to 25 day provisioning cycle
time that we've got to be able to bring the customers up.
So we believe that from an extranded capital, we're having to guess where
and if you need to put equipment, we've left that problem to somebody else.
We quite like our efficient capital deployment mechanism and we think it's
a very efficient mechanism.
Adam Simon: Fair enough. So on a 10-to-1 basis, you were looking at EBITDA
positive in '03, did you say?
Ned Hayes: I believe so given the synergistic business case that we will be
working together with the Hughes ...
Patti Hart: ..on a stand-alone basis.
Ned Hayes: Oh, on a stand-alone? Oh, well, as a business unit within the Hughes
family.
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Adam Simon: Okay. Fair enough, that's fine.
Operator: And is that everything, Mr. Simon?
Adam Simon: Yes, thank you very much. Very good.
Operator: That does conclude our question and answer session. I'll now return
the conference to Ms. Hart for any closing comments.
Patti Hart: All right, thank you. And thanks to all of you for joining us. This
is a day of celebration for us at Telocity.
We see now the future more clearly than we have before, with not just a
terrific partner from a financial perspective, but a terrific partner from
a strategic perspective and a visionary perspective that we can learn from
and grow with and count on.
We would encourage you to participate in the call following this that the
Hughes Direct TV folks will host to hear the other end of the bookend, I
guess, the other side of the bookend.
And again we thank you for your calls. And thanks very much for your
support.
Operator: And that does conclude today's conference call. Thank you one and
all for joining us. And thank you for using Premiere Conferencing.
END
