AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OPTEL, INC.
(Exact name of registrant as specified in its charter)
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Delaware 4841 95-4495524
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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)
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Louis Brunel, President and Chief Executive Officer
OpTel, Inc.
1111 W. Mockingbird Lane
Dallas, Texas 75247
(214) 634-3800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copies to:
Ralph J. Sutcliffe, Esq. Michael E. Katzenstein, Esq.
Kronish, Lieb, Weiner & Hellman LLP OpTel, Inc.
1114 Avenue of the Americas 1111 W. Mockingbird Lane
New York, New York 10036-7798 Dallas, Texas 75247
(212) 479-6000 (214) 634-3800
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Approximate date of commencement of proposed sale to public: As soon as practicable after the effective
date of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
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Proposed
Proposed Maximum
Title of Securities Amount to be Maximum Aggregate Amount of
to be Registered Registered Offering Price(1) Offering Price Registration Fee
- ---------------------------------------------------------------------------------------------------
13% Senior Notes Due
2005, Series B ......... $225,000,000 100% $225,000,000 $68,182
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(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date or dates as the Commission,
acting pursuant to said Section 8(a), may determine.
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OPTEL, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS IN
PART I OF FORM S-4
Registration Statement Item Number and Caption Caption or Location In Prospectus
------------------------------------------------------- ----------------------------------------------------
1 Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus ............. Outside Front Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus ......................................... Inside Front Cover Page; Outside Back Cover Page
3 Risk Factors, Ratio of Earnings to Fixed Charges,
and Other Information .............................. Prospectus Summary; Risk Factors; Selected
Consolidated Financial and Operating Data
4 Terms of the Transaction ........................... Prospectus Summary; Risk Factors; The Exchange Offer;
Description of the Notes; Plan of Distribution; Certain
Federal Income Tax Consequences
5 Pro Forma Financial Information .................... *
6 Material Contacts with the Company Being Acquired .. *
7 Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters ...... *
8 Interests of Named Experts and Counsel ............. Legal Matters; Independent Auditors
9 Disclosure of Commission Position on Indemnification
for Securities Act Liabilities .....................
10 Information With Respect to S-3 Registrants ........ *
11 Incorporation of Certain Information by Reference .. *
12 Information With Respect to S-2 or S-3
Registrants ........................................ *
13 Incorporation of Certain Information by Reference .. *
14 Information With Respect to Registrants Other Than
S-3 or S-2 Registrants ............................. Prospectus Summary; Risk Factors; Capitalization;
Selected Financial and Other Operating Data; Management's
Discussion and Analysis of Financial Condition and Results
of Operations; Business; Description of the Notes
15 Information With Respect to S-3 Companies .......... *
16 Information With Respect to S-2 or S-3 Companies ... *
17 Information With Respect to Companies Other Than S-2
or S-3 Companies ................................... *
18 Information if Proxies, Consents or Authorizations
Are to be Solicited ................................ *
19 Information if Proxies, Consents or Authorizations
Are Not to be Solicited, or in an Exchange Offer ... Management; Principal Stockholders; Certain Transactions
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* Omitted because item is inapplicable or answer is in the negative.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to the registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED APRIL 10, 1997
PROSPECTUS
OFFER TO EXCHANGE
13% SENIOR NOTES DUE 2005, SERIES B
FOR ANY AND ALL OUTSTANDING 13% SENIOR NOTES DUE 2005
OF
OPTEL, INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON [30 DAYS FROM NOTICE], 1997, UNLESS EXTENDED
OpTel, Inc., a Delaware corporation (the "Issuer") hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal (which together constitute the "Exchange
Offer"), to exchange $1,000 principal amount of 13% Senior Notes Due 2005,
Series B of the Issuer (the "New Notes") for each $1,000 principal amount of
the issued and outstanding 13% Senior Notes Due 2005 of the Issuer (the "Old
Notes", and, collectively with the New Notes, the "Notes"). As of the date of
this Prospectus, $225,000,000 principal amount of the Old Notes were
outstanding. The terms of the New Notes are substantially identical in all
material respects (including interest rate and maturity) to the Old Notes
except for certain transfer restrictions and registration rights relating to
the Old Notes.
The Exchange Offer is being made to satisfy certain obligations of the
Issuer under the Registration Agreement, dated as of February 14, 1997, among
the Issuer and the other signatories thereto (the "Registration Agreement").
Upon consummation of the Exchange Offer, holders of Old Notes that were not
prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration
Agreement covering such Old Notes not tendered and such Old Notes will
continue to be subject to the restrictions on transfer contained in the
legend thereon. If the Exchange Offer is not consummated, or a shelf
registration statement is not filed or is not declared effective or, after
either this registration statement or the shelf registration statement has
been declared effective, such registration statement thereafter ceases to be
effective or usable (subject to certain exceptions) in connection with
resales of Old Notes or New Notes in accordance with and during the periods
specified in the Registration Agreement, additional interest will accrue and
be payable on the Notes until so declared effective or consummated. See
"Exchange Offer; Registration Rights."
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Issuer believes that the New Notes issued pursuant
to the Exchange Offer in exchange for the Old Notes may be offered for
resale, resold and otherwise transferred by holders thereof (other than any
holder which is an "affiliate" of the Issuer within the meaning of Rule 405
under the Securities Act of 1933, as amended (the "Securities Act") without
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that the New Notes are acquired in the ordinary
course of the holders' business, the holders have no arrangement with any
person to participate in the distribution of the New Notes and neither the
holder nor any other person is engaging in or intends to engage in a
distribution of the New Notes. Each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of the New Notes received in
exchange for the Old Notes where such New Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Issuer has agreed that, starting on the Exchange Date (as
defined) and ending on the close of business on the earlier of the first
anniversary of the Exchange Date or the date upon which all such New Notes
have been sold by such participating broker-dealer, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture (as defined). For a more complete
description of the terms of the New Notes, see "Description of the Notes."
There will be no cash proceeds to the Issuer from the Exchange Offer. The New
Notes will be senior unsecured obligations of the Issuer, ranking pari passu
in right of payment with all present and future senior unsecured obligations
of the Issuer and will rank senior to all present and future subordinated
indebtedness of the Issuer. The Issuer is a holding company that derives all
of its operating income and cash flow from its subsidiaries and claims in
respect of the New Notes will be effectively subordinated to all existing and
future indebtedness and liabilities of such subsidiaries. As of February 28,
1997, the total indebtedness and other liabilities of subsidiaries of the
Issuer (excluding any indebtedness owed to the Issuer) were $27.3 million and
the Issuer's subsidiaries are expected to incur substantial additional
indebtedness in the future. See "Capitalization" and "Description of the
Notes - Ranking."
The Old Notes were originally issued and sold on February 14, 1997 (the
"Offering") in a transaction exempt from registration under the Securities
Act in reliance upon the exemptions provided by Rule 144A and by Section 4(2)
of the Securities Act. Accordingly, the Old Notes may not be reoffered,
resold or otherwise pledged, hypothecated or transferred in the United States
unless so registered or unless an exemption from the registration
requirements of the Securities Act and applicable state securities laws is
available.
The Issuer has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer and
to the best of the Issuer's information and belief, each person participating
in the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. The Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1997, unless extended (the
"Expiration Date"), provided that the Exchange Offer shall not be extended
beyond 60 days from the date of this Prospectus. The date of acceptance for
exchange of the Old Notes for the New Notes (the "Exchange Date") will be the
first business day following the Expiration Date. Old Notes tendered pursuant
to the Exchange Offer may be withdrawn at any time prior to the Expiration
Date; otherwise such tenders are irrevocable.
Prior to this Exchange Offer, there has been no public market for the
Notes. The Old Notes have traded on the PORTAL Market. If a market for the
New Notes should develop, the New Notes could trade at a discount from their
principal amount. The Issuer does not currently intend to list the New Notes
on any securities exchange or to seek approval for quotation through any
automated quotation system. There can be no assurance that an active public
market for the New Notes will develop.
See "Risk Factors" beginning on page 14 for a description of certain
factors that should be considered by participants in the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Financial Statements and the notes thereto,
appearing elsewhere in this Prospectus. As used in this Prospectus, the terms
the "Company" or "OpTel" mean OpTel, Inc. and its subsidiaries, except where
the context otherwise requires. References to fiscal years throughout this
Offering Memorandum are to the Company's fiscal years which end on August 31
of each calendar year. This Prospectus contains certain "forward-looking
statements" concerning the Company's operations, economic performance and
financial condition, which are subject to inherent uncertainties and risks,
including those identified under "Risk Factors." Actual results could
materially differ from those anticipated in this Prospectus.
THE COMPANY
OVERVIEW
OpTel is the largest provider of private cable television services to
residents of multiple dwelling unit developments ("MDUs") in the United
States and is expanding the telecommunications services it offers to MDU
residents. The Company provides cable television and, where currently
offered, telecommunications services to MDU residents principally under
long-term contracts ("Rights of Entry") with owners of MDUs. The Company's
Rights of Entry are generally for a term of ten to fifteen years (five years
for Rights of Entry with condominium associations). The weighted average
unexpired term of the Company's cable television Rights of Entry was
approximately seven years as of February 28, 1997. The Company currently
provides cable television services in the metropolitan areas of Houston,
Dallas-Fort Worth, San Diego, Phoenix, Chicago, Denver, San Francisco, Los
Angeles, Miami-Ft. Lauderdale, Tampa and Austin. The Company also provides
telecommunications services in Houston, Dallas-Fort Worth, Austin, Denver and
Miami-Ft. Lauderdale. As of February 28, 1997, the Company had 125,090 cable
television subscribers and 4,791 telecommunications subscribers with 6,039
telephone lines.
For regulatory purposes, the Company is considered to be a private cable
television operator in most of the markets it serves. Private cable
television operators deliver services to consumers without hard-wire
crossings of public rights of way. Consequently, private cable television
operators are not required to obtain cable television franchises and are
subject to significantly less regulatory oversight than are traditional
franchise cable television operators. As a result, they have significant
latitude in terms of system coverage, pricing and customized delivery of
services to selected properties. The Company has no universal service
obligations and generally does not incur capital costs to build its networks
until it has entered into Rights of Entry from which it reasonably expects to
build an appropriate customer base.
The Company offers a full range of multichannel video programming
(including basic and premium services) which the Company believes is
competitive in both content and pricing with the programming packages offered
by its major competitors. The Company currently provides its
telecommunications services as a shared tenant services ("STS") operator
through private branch exchange ("PBX") switches. The Company offers
customers access to services comparable in scope and price to those provided
by the incumbent local exchange carrier ("LEC") and long distance carrier.
The Company's telecommunications strategy includes replacing its PBX switches
with networked central office switches. See "Business -- Network Architecture
- -- Telecommunications Architecture."
The Company invests in networks because it believes that networks provide
the optimal mechanism for delivering bundled cable television and
telecommunications services. The Company's networks use technologies that are
capable of bi-directional transmission. The Company provides its video
programming to MDUs through 18-Gigahertz microwave ("18GHz") and fiber optic
networks and non-networked Satellite Master Antenna Television ("SMATV")
3
systems. As of February 28, 1997, approximately 130,000 of the 239,801 units
passed for cable television are served by the Company's networks. These
networks generally provide up to 72 channels of video programming. The
Company intends to convert substantially all of its SMATV systems to 18GHz or
fiber optic networks by the end of fiscal 1999. The Company's networks will
also facilitate delivery of voice signal from each MDU to the central office
switches to be deployed by the Company in its markets. The Company intends to
license additional spectrum, which it currently anticipates principally will
be in the 23-Gigahertz ("23GHz") band, which it will use to provide
bi-directional voice transmission.
OpTel was incorporated in the State of Delaware in July 1994, as the
successor to a Delaware corporation that was founded in April 1993. The
Company's principal offices are located at 1111 W. Mockingbird Lane, Dallas,
Texas 75247, and its telephone number is (214) 634-3800.
MARKETS
MDUs comprise a wide variety of high density residential complexes,
including high- and low-rise apartment buildings, condominiums, cooperatives,
townhouses and mobile home communities. According to 1990 U.S. Census Bureau
data, there are more than 13.2 million MDU units in MDUs with greater than 10
MDU units in the United States, of which approximately 4.0 million are within
the Company's existing geographic markets. The Company estimates that
approximately 2.5 million of the MDU units within its existing markets are
within MDUs which meet the Company's preference for MDUs of 150 or more
units. The Company selected its current markets based upon their growth
characteristics, competitive conditions, MDU concentrations, topographical
and climatic conditions, favorable demographics and, to a lesser extent,
favorable regulatory environments. See "Business -- Markets."
OpTel operated in the following geographic markets as of February 28,
1996:
Units Under
Estimated Contract Units Passed Tele-
Number of Units Under Cable for Tele- for Tele- communica-
MDU Units Contract for Units Passed Television communica- communica- tions
Market in Market(1) Cable(2) for Cable(3) Subscribers tions(2)(4) tions(3) Lines
------------- ------------ -------------- -------------- ------------- ------------- -------------- ------------
Houston 305,961 80,267 79,199 29,492 6,816 6,654 2,122
Dallas-
Fort Worth 366,646 44,233 34,385 17,173 11,421 5,026 1,720
Chicago 333,442 23,117 21,765 11,378 400 -- --
Phoenix 143,674 22,987 21,856 9,884 -- -- --
San Diego 295,375 22,960 21,628 14,853 1,486 768 299
San
Francisco 202,698 22,886 22,643 16,196 243 -- --
Denver 97,056 18,867 15,804 8,876 2,975 877 214
Los Angeles 270,006 13,921 8,531 6,095 1,791 -- --
Miami-Ft.
Lauderdale 275,202 12,849 10,559 9,142 1,241 91 62
Tampa 151,724 2,777 2,777 1,435 -- -- --
Austin 63,811 654 654 566 1,000 1,000 1,622
------------ -------------- -------------- ------------- ------------- -------------- ------------
2,505,595 265,518 239,801 125,090 27,373 14,416 6,039
============ ============== ============== ============= ============= ============== ============
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(1) Represents units in MDUs with greater than 150 units. For rental units,
market data has been estimated by REIS Reports, Inc. For the Tampa and
Miami-Ft. Lauderdale markets, the rental unit data has been adjusted
based on Company estimates to include condominium units.
(2) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into
Rights of Entry for the provision of cable television services and
telecommunication services, respectively, but which the Company has not
yet passed and which the Company expects to pass within the next five
years.
(3) Units passed represents the number of units with respect to which the
Company has connected and activated its cable television and
telecommunication systems, respectively. The Company anticipates passing
approximately 15,800 and 8,700 additional units currently under contract
for cable television and units currently under contract for
telecommunications, respectively, by the end of calendar 1997.
(4) At this time substantially all units under contract for
telecommunications are also units under contract for cable television.
4
The Company has recently entered into Rights of Entry with respect to
approximately 5,500 units in the Las Vegas market, has begun construction of
certain of these units and is considering further expansion in this market.
STRATEGY
The Company intends to grow its business and increase its market
concentration by attracting MDUs currently served by other operators,
providing services to newly-constructed MDUs and, as appropriate, acquiring
existing private cable operators and entering new markets. See "-- Recent
Developments: Proposed Phonoscope Acquisition." A critical aspect of the
Company's growth strategy is the development of strategic relationships with
owners of portfolios of MDUs. These relationships encourage the MDU owner to
promote and sell the Company's cable television and telecommunications
services to MDU residents. Many Rights of Entry provide incentives to the MDU
owner, including payment on Rights of Entry execution and long-term revenue
sharing. In addition, the Company believes that its ability to deliver
special services tailored to MDU owners and residents enhances the MDU owners
marketing of unit rentals and sales.
The Company's customer marketing strategy is to offer a complete package
of cable television and telecommunications services backed by a high level of
customer service. The Company believes that, given a comparable level of
product offerings, MDU residents prefer the simplicity and pricing benefits
of dealing with one supplier for all of their cable television and
telecommunications services. The Company also believes that prompt response
to service requests and customer inquiries is important to MDU residents. The
Company affords customers the opportunity to subscribe for Company services
at the time the unit lease is signed and believes that this added convenience
is important to its marketing efforts. The Company also plans to supplement
its cable television and telecommunications services by providing customers
with access to additional services, including Internet access, intrusion
alarm, utility monitoring, and PCS, cellular and paging services.
The Company is expanding the telecommunications component of its business
both by increasing the number of MDUs to which it provides telecommunications
services and by expanding the number of services offered. As part of its
ongoing telecommunications roll out and coincident with the conversion of its
SMATV systems to networks, the Company intends to replace its PBX switches
located at MDUs with networked central office switches. Subject to receipt of
regulatory approvals, the Company intends to deploy its first central office
switch in the Houston market by mid-1997 and to have installed central office
switches in substantially all of its markets by the end of calendar 1999. See
"Business -- Business Strategy."
PRINCIPAL STOCKHOLDER AND MANAGEMENT
The Company has benefited and expects to continue to benefit from the
management and technical expertise of its principal stockholder, Le Groupe
Videotron Ltee ("GVL"), Canada's third largest cable television company which
holds, indirectly, 76.1% of the outstanding Common Stock of OpTel. Key
members of the Company's management team gained experience in developing and
operating cable television and combined cable television/telecommunications
businesses while serving as executives of GVL or its affiliates in Canada and
the United Kingdom. From inception, OpTel's owners have invested over $200
million in the Company in the form of equity and subordinated convertible
notes.
5
COMPETITIVE STRENGTHS
The Company has certain strengths that position it well to compete in its
markets, including the following:
Strong Relationships with MDU Owners. The Company believes that its
formation of strategic relationships with MDU owners is the key to its
potential long-term success. Under its long-term Rights of Entry with MDU
owners, the Company is effectively the exclusive multichannel television
operator in the covered MDUs and, where Rights of Entry extend to
telecommunications services, the only wire-line alternative to the LEC for
telecommunications services in those MDUs. By providing services that are
attractive to MDU residents, the Company endeavors to enhance the rental
performance of the MDUs that it serves. The Rights of Entry provide MDU
owners with financial incentives to work closely with the Company to promote
its products and services. The Company believes that its maintenance and
development of strategic relationships with MDU owners will help the Company
to maintain a preferred competitive position even if the exclusivity of the
Rights of Entry becomes limited by future developments. See "Risk Factors --
Risks Associated with Rights of Entry" and "Business -- Regulation."
Established Presence in Favorable Markets. The Company focuses on major
markets with favorable characteristics and is a leading provider of private
cable television services to residents of MDUs in substantially all of its
markets. The Company is expanding the telecommunications services it offers
to MDU residents. As of February 28, 1997, the Company had 265,518 units
under contract for cable television and 27,373 units under contract for
telecommunications. See "Business -- Markets."
Ability to Offer Bundled Services. The Company's ability to offer bundled
cable television and telecommunications services affords a number of
potential benefits to MDU residents and owners, enhancing the Company's
competitive position. MDU residents and owners benefit from the simplicity of
dealing with a single service provider. Management believes that the Company
typically offers a superior, or at least comparable, range of products and
level of customer service than its competitors at a lower total price. The
Company also believes that bundling services results in better collection
experience versus non-bundled services. The Company plans to offer MDU
residents access to additional bundled services, including Internet access,
intrusion alarm, utility monitoring, and PCS, cellular and paging services.
The Company intends to introduce integrated billing of its bundled services
in fiscal 1998.
Network Design Advantages. Private cable systems utilizing 18GHz
technology do not require the large networks of coaxial or fiber optic cable
and amplifiers that are utilized by traditional hard-wire cable television
operators or the installation of a headend facility at each MDU as is
required for SMATV systems. Thus, private cable television operators using
18GHz technology are able to provide services at lower per unit capital and
maintenance costs than franchise cable or SMATV operators. The Company can
deliver as many as 72 channels of programming in uncompressed analog format
over its networks which, in most of the Company's markets, exceeds the number
of channels offered by other multichannel television service providers.
Additional capacity, if required, can be provided through the application of
available digital compression technology. The point-to-point nature of the
networks enables the Company to customize the programming to be delivered to
any MDU based on the demographics of the MDU's residents. The Company's
networks will also facilitate delivery of voice signal from each MDU to the
central office switches to be deployed by the Company in each of its markets.
The Company intends to license additional spectrum, which it currently
anticipates will principally be in the 23GHz band, to provide bi-directional
voice transmission.
6
Focus on Customer Service. The Company seeks to attain excellence in
customer service in all aspects of its operations. The Company is upgrading
its networks and support systems to ensure reliable, high quality delivery of
a range of cable television and telecommunications services and expanding its
offerings to encompass a broad range of value-added telecommunications
services. The Company has a national customer service center staffed with
knowledgeable representatives to address the needs of customers
24-hours-a-day, seven-days-a-week. The Company has established direct lines
to facilitate rapid response to calls initiated by MDU owners and managers.
The Company has also established stringent staff training procedures,
including its Operational Excellence continuous improvement program, and
internal customer service standards, which management believes meet, and in
many respects exceed, those established by the National Cable Television
Association.
Minimal Regulation of Cable Television Operations. In most of its markets,
the Company is not subject to most of the regulations applicable to a typical
franchise cable television operator. Consequently, the Company has
significantly greater flexibility in determining its target markets and
customizing its programming offerings. Specifically, by contrast to franchise
cable television operators, as a private cable television operator, the
Company (i) does not face regulatory constraints on the geographic areas in
which it may offer video services, (ii) does not pay franchise and Federal
Communications Commission ("FCC") subscriber fees, (iii) is not obligated to
pass every resident in a given area, (iv) is not subject to rate regulation,
and (v) is not subject to "must carry" and local government access
obligations. Even in those markets where the Company is a franchise cable
television operator, the Company is not subject to rate regulation or the
obligation to provide universal service. In addition, 18GHz licenses are
available to the Company in all of its markets without any significant
regulatory restrictions. See "Business -- Regulation."
RECENT DEVELOPMENTS: PROPOSED PHONOSCOPE ACQUISITION
The Company has entered into a Summary of Terms (the "Letter of Intent")
relating to its proposed acquisition (the "Phonoscope Acquisition") of the
residential portion of the franchise cable television system business of
Phonoscope, Ltd. and the capital stock of three affiliated companies
(collectively "Phonoscope"). The purchase price for Phonoscope would be
approximately $34.6 million, subject to certain adjustments (including a
dollar for dollar downward adjustment for the value of any liabilities
assumed), payable in cash at closing. The Letter of Intent is not binding,
and negotiations are continuing. There can be no assurance that the
Phonoscope Acquisition will be consummated on the terms contemplated by the
Letter of Intent or otherwise. The Exchange Offer is not conditioned on the
consummation of the Phonoscope Acquisition. See "Risk Factors -- Consummation
of the Phonoscope Acquisition."
Phonoscope, which operates in the greater Houston metropolitan area, provides
its services over a fiber optic and coaxial cable distribution system. The
Company expects to use its existing franchise with the City of Houston to serve
Phonoscope subscribers within the City of Houston, and, where required to serve
acquired Rights of Entry, will seek assignment of the appropriate municipal
franchises. Based on information made available to the Company, the Company
believes that (i) as of November 30, 1996, Phonoscope had Rights of Entry or
subscriber agreements covering approximately 59,000 units (principally at MDUs,
but including certain single family units within the footprint of its network)
and approximately 27,000 subscribers; (ii) the weighted average unexpired term
of the Rights of Entry held by Phonoscope was approximately five years as of
November 30, 1996; and (iii) for the eleven month period ended November 30,
1996, Phonoscope revenues were approximately $8.6 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Proposed Phonoscope Acquisition" and "Business -- Markets."
7
THE EXCHANGE OFFER
Securities Offered .......... Up to $225,000,000 principal amount of 13%
Senior Notes Due 2005, Series B of the Issuer.
The terms of the New Notes and the Old Notes
are substantially identical in all material
respects, except for certain transfer
restrictions and registration rights relating
to the Old Notes which will not apply to the
New Notes. See "Description of the Notes."
The Exchange Offer ......... The Issuer is offering to exchange $1,000
principal amount of New Notes for each $1,000
principal amount of Old Notes. See "The
Exchange Offer" for a description of the
procedures for tendering Old Notes. The
Exchange Offer satisfies the registration
obligations of the Issuer under the
Registration Agreement. Upon consummation of
the Exchange Offer, holders of Old Notes that
were not prohibited from participating in the
Exchange Offer and did not tender their Old
Notes will not have any registration rights
under the Registration Agreement with respect
to such non-tendered Old Notes and,
accordingly, such Old Notes will continue to be
subject to the restrictions on transfer
contained in the legend thereon.
Tenders, Expiration Date;
Withdrawal ................ The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1997, or such
later date and time to which it is extended,
provided that the Exchange Offer shall not be
extended beyond 60 days from the date of this
Prospectus. Tenders of Old Notes pursuant to
the Exchange Offer may be withdrawn and
retendered at any time prior to the Expiration
Date. Any Old Notes not accepted for exchange
for any reason will be returned without expense
to the tendering holder as promptly as
practicable after the expiration or termination
of the Exchange Offer.
Federal Income Tax
Considerations ............ The Exchange Offer will not result in any
income, gain or loss to the holders of Notes or
the Issuer for federal income tax purposes. See
"Certain Federal Income Tax Considerations."
Use of Proceeds ............ There will be no proceeds to the Issuer from
the exchange of the New Notes for the Old Notes
pursuant to the Exchange Offer.
Exchange Agent ............. U.S. Trust Company of Texas, N.A., the Trustee
under the Indenture, is serving as exchange
agent (the "Exchange Agent") in connection with
the Exchange Offer.
8
CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES PURSUANT TO THE
EXCHANGE OFFER
Generally, holders of Old Notes (other than any holder who is an
"affiliate" of the Issuer within the meaning of Rule 405 under the Securities
Act) who exchange their Old Notes for New Notes pursuant to the Exchange
Offer may offer their New Notes for resale, resell their New Notes, and
otherwise transfer their New Notes without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided such New
Notes are acquired in the ordinary course of the holders' business, such
holders have no arrangement with any person to participate in a distribution
of such New Notes and neither the holder nor any other person is engaging in
or intends to engage in a distribution of such New Notes. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of its New Notes.
See "Plan of Distribution." To comply with the securities laws of certain
jurisdictions, it may be necessary to qualify for sale or register the New
Notes prior to offering or selling such New Notes. The Issuer is required,
under the Registration Agreement, to register the New Notes in any
jurisdiction requested by the holders, subject to certain limitations. Upon
consummation of the Exchange Offer, holders that were not prohibited from
participating in the Exchange Offer and did not tender their Old Notes will
not have any registration rights under the Registration Agreement with
respect to such non-tendered Old Notes and, accordingly, such Old Notes will
continue to be subject to the restrictions on transfer contained in the
legend thereon. In general, the Old Notes may not be offered or sold (except
in private transactions), unless registered under the Securities Act and
applicable state securities laws. See "The Exchange Offer -- Consequences of
Failure to Exchange."
SUMMARY DESCRIPTION OF THE NOTES
Securities Offered ....... Up to $225,000,000 principal amount of 13%
Senior Notes due 2005, Series B of the Issuer.
The terms of the New Notes and the Old Notes
are substantially identical in all material
respects, except for certain transfer
restrictions and registration rights relating
to the Old Notes which will not apply to the
New Notes. See "Description of the Notes."
Maturity ................. February 15, 2005.
Interest Payment Dates ... Each February 15 and August 15, commencing on
August 15, 1997.
Escrow Proceeds .......... At the closing of the Offering, the Issuer
deposited with an escrow agent (the "Escrow
Agent") $79.6 million; which, together with the
proceeds from the investment thereof, will be
sufficient to pay when due the first six
interest payments on the Notes, with any
balance to be retained by the Issuer. See
"Description of the Notes -- Disbursement of
Funds; Escrow Account."
9
Ranking .................. The Notes rank pari passu in right of payment
with all present and future senior unsecured
obligations of the Issuer and rank senior in
right of payment to all present and future
subordinated indebtedness of the Issuer. The
Notes are effectively subordinated to all
existing and future indebtedness and
liabilities of the Issuer's subsidiaries. As of
February 28, 1997, the total indebtedness and
other liabilities of the Issuer's subsidiaries
(excluding any indebtedness owed to the Issuer)
were $27.3 million and such subsidiaries are
expected to incur substantial additional
indebtedness in the future
Sinking Fund ............. None.
Optional Redemption ...... On or after February 15, 2002, the Notes will
be redeemable at the option of the Issuer, in
whole or in part at any time, at the redemption
prices set forth herein, plus accrued and
unpaid interest, if any, to the date of
redemption. In addition, in the event, prior to
February 15, 2000, of one or more Equity
Offerings (as defined) and/or sales of Common
Stock (as defined) of the Issuer to one or more
Strategic Equity Investors (as defined) for
gross proceeds of $100.0 million or more in
aggregate, the Issuer may redeem up to 35% of
the initially issued aggregate principal amount
of Notes at a redemption price of 113% of the
principal amount, together with accrued and
unpaid interest thereon to the date of
redemption, provided that at least $145.0
million aggregate principal amount of Notes are
outstanding following such redemption. See
"Description of the Notes -- Redemption."
Change of Control ........ Upon the occurrence of a Change of Control
(as defined), each holder of Notes will have
the right to require the Issuer to make an
offer to purchase all or any part of such
holder's Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest, if
any, through the date of purchase. The Issuer
may not have sufficient funds or the financial
resources necessary to satisfy its obligations
to repurchase the Notes and other debt that may
become repayable upon a Change of Control. See
"Description of the Notes -- Certain Covenants
-- Change of Control."
Certain Covenants ........ The indenture governing the Notes (the
"Indenture") contains covenants relating to,
among other things, the following matters: (i)
incurrence of additional indebtedness; (ii)
restricted payments; (iii) limitations on
liens; (iv) disposition of proceeds of asset
sales; (v) dividend and other payment
restrictions affecting subsidiaries; (vi)
mergers, consolidation or sales of assets; and
(vii) limitations on transactions with
affiliates. See "Description of the Notes --
Certain Covenants."
For additional information concerning the Notes and the definitions of
certain capitalized terms used above, see "Description of the Notes."
10
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data presented below as of and for the
periods ended December 31, 1993 and 1994 and August 31, 1995 and 1996 have
been derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by Deloitte & Touche LLP,
independent auditors. The summary financial data presented below as of and
for the six month periods ended February 29, 1996 and February 28, 1997 have
been derived from unaudited consolidated financial statements of the Company.
In the opinion of management, the unaudited consolidated financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, which consist only of normal recurring adjustments,
necessary for the fair presentation of the Company's financial position and
results of operation for these periods. In 1995, the Company changed its
fiscal year end to August 31 to match that of its majority stockholder. As a
result of the change in fiscal year and the Company's history of growth
through acquisitions the Company's historical financial results are not
directly comparable from period to period, nor are they indicative of future
results of operations in many respects. The following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and the Consolidated
Financial Statements of the Company and the notes thereto, appearing
elsewhere in this Prospectus.
Period from
April 20,
1993 (date Eight Month
of inception) Year Ended Period Six Month Six Month
to December December Ended Year Ended Period Ended Period Ended
31, 31, August 31, August 31, February 29, February 28,
-------------- ------------ ------------- ------------ ------------- --------------
1993 1994 1995 1996 1996 1997
-------------- ------------ ------------- ------------ ------------- --------------
(in thousands except per share data)
Statement of Operations
Data:
Revenues:
Cable television ......... $ 12 $ 240 $ 8,782 $ 25,893 $11,570 $ 17,208
Telecommunications ....... -- 202 788 1,712 718 1,414
-------------- ------------ ------------- ------------ ------------- --------------
Total revenues ........ 12 442 9,570 27,605 12,288 18,622
-------------- ------------ ------------- ------------ ------------- --------------
Operating Expenses:
Cost of services ......... 6 470 4,557 11,868 5,266 8,702
Customer support, general
and administrative .... 304 7,733 8,235 17,319 7,499 12,267
Depreciation and
amortization .......... 8 117 2,420 8,676 3,804 5,820
Nonrecurring
reorganization costs(1) -- -- 3,820 2,318 826 --
-------------- ------------ ------------- ------------ ------------- --------------
Total operating
expenses ............ 318 8,320 19,032 40,181 17,395 26,789
-------------- ------------ ------------- ------------ ------------- --------------
Loss from operations ....... (306) (7,878) (9,462) (12,576) (5,107) (8,167)
Interest expense on
Convertible Notes due
to stockholder (2) ....... -- -- (919) (5,342) (1,890) (6,907)
Other interest expense, net (1) (66) (249) (512) (245) (1,218)
-------------- ------------ ------------- ------------ ------------- --------------
Loss before income taxes ... (307) (7,944) (10,630) (18,430) (7,242) (16,292)
Income tax benefits (3) .... -- -- 469 -- -- --
-------------- ------------ ------------- ------------ ------------- --------------
Net loss ................... $(307) $ (7,944) $(10,161) $(18,430) $(7,242) $(16,292)
============== ============ ============= ============ ============= ==============
Loss per share(4) .......... $ (6.89) $ (8.30) $ (3.37) $ (7.01)
============= ============ ============= ==============
Cash dividends declared .... -- -- -- -- -- --
Financial Data:
EBITDA(5) .................. $(298) $ (7,761) $ (3,222) $ (1,582) $ (477) $ (2,347)
Capital expenditures(6) .... 517 9,278 22,170 62,121 23,122 24,925
Acquisition of private cable
businesses ............... -- 1,298 49,974 9,916 5,793 2,500
Deficiency of earnings to
fixed charges(7) ......... 307 7,944 10,630 20,280 7,876 17,276
11
As of
February 28, 1997
---------------------
(In thousands
except per share data)
Balance Sheet Data:
Cash and cash equivalents (excluding Escrow Account) $135,015
Escrow Account(8) .................................. 79,804
Property, plant and equipment, net ................. 122,041
Intangible assets .................................. 75,471
Total assets ....................................... 417,681
13% Senior Notes Due 2005 .......................... 218,036
Convertible Notes due to stockholder(9) ............ 121,006
Total liabilities .................................. 367,693
Stockholders' equity ............................... 49,988
Book value per share ............................... 19.76
As of As of
August 31, February 28,
---------------------- -------------
1995 1996 1997
--------- --------- -------------
Operating Data:(10)
Cable Television:
Units under contract(11) ............... 173,324 241,496 265,518
Units passed(12) ....................... 170,336 225,433 239,801
Basic subscribers ...................... 75,944 114,163 125,090
Basic penetration(13) .................. 44.6% 50.6% 52.2%
Premium units .......................... 39,753 60,641 74,441
Pay-to-basic ratio(14) ................. 52.3% 53.1% 59.5%
Average monthly cable revenue per
subscriber(15) ...................... $ 22.84 $ 24.29 $ 24.02
Telecommunications:
Units under contract(11) ............... 10,322 20,945 27,373
Units passed(12) ....................... 9,116 12,364 14,416
Subscribers ............................ 2,207 4,080 4,791
Lines(16) .............................. 2,650 5,166 6,039
Penetration(17) ........................ 24.2% 33.0% 33.2%
Average monthly telecommunications
revenue per subscriber(15) .......... -- $ 59.08 $ 53.16
- ------
(1) During the eight month period ended August 31, 1995 and fiscal 1996, the
Company relocated its corporate headquarters, began relocating its
customer services centers and completed several acquisitions. As a
result of these actions, significant nonrecurring reorganization costs
were incurred primarily relating to severance costs of former employees
at the previous locations and relocation and recruiting costs of
employees at the new location.
(2) Interest expense on Convertible Notes due to stockholder, is reported
net of interest capitalized in property, plant and equipment. In
connection with the Offering, the stockholder, VPC Corporation ("VPC"),
agreed to subordinate the Convertible Notes to the prior payment of the
Notes under certain circumstances. See "Certain Transactions --
Convertible Notes."
(3) The Company has not had taxable income for the periods reported. The
Company reported an income tax benefit in the eight months ended August
31, 1995 due to the reduction of a deferred tax liability established as
the result of an acquisition. See note 8 of notes to the Consolidated
Financial Statements.
(4) Loss per share information is not presented for the periods the Company
was organized as a partnership.
12
(5) EBITDA represents earnings before interest expense, income tax benefits,
depreciation, amortization and nonrecurring reorganization costs. EBITDA
is not intended to represent cash flow from operations and should not be
considered as an alternative to net loss as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity. The Company believes that EBITDA is a standard measure
commonly reported and widely used by analysts, investors and other
interested parties in the cable television and telecommunications
industries. Accordingly, this information has been disclosed herein to
permit a more complete comparative analysis of the Company's operating
performance relative to other companies in the industry.
(6) Capital expenditures include expenditures on property, plant and
equipment together with intangible assets.
(7) For the purposes of calculating the deficiency of earnings to fixed
charges, (i) earnings consist of loss before income taxes plus fixed
charges and (ii) fixed charges consist of interest expense on all debt,
amortization of deferred financing costs and the portion of operating
lease rental expense that is representative of the interest factor
(deemed to be one third of minimum operating lease rental). On a pro
forma basis, after giving effect to the Offering (excluding interest
earned on the Escrow Account), the deficiency of earnings to fixed
charges for the periods ended August 31, 1996 and February 28, 1997
would have been $49.5 million (including $7.2 million in respect of
Convertible Notes) and $31.9 million (including $7.9 million in respect
of Convertible Notes), respectively.
(8) Of the net proceeds of the Offering, $79.6 million was deposited in the
Escrow Account to fund the first six interest payments due in respect of
the Notes. See "Description of the Notes -- Disbursement of Funds;
Escrow Account."
(9) The Convertible Notes mature six months following the maturity or
indefeasible payment in full of the Notes and are subordinated in right
of payment to the Notes under certain circumstances. See "Certain
Transactions."
(10) Information with respect to the periods ended December 31, 1993 and 1994
is not meaningful and not presented.
(11) Units under contract represent the number of units currently passed and
additional units with respect to which the Company has entered into
Rights of Entry for the provision of cable television and
telecommunications services, respectively, but which the Company has not
yet passed and which the Company expects to pass within the next five
years. At this time substantially all units under contract for
telecommunications are also under contract for cable television. The
Company anticipates passing approximately 15,800 and 8,700 additional
units currently under contract for cable television and units currently
under contract for telecommunications, respectively, by the end of
calendar 1997.
(12) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications
systems, respectively. The difference between units under contract and
units passed represents units for which Rights of Entry have been
entered into, but which are not yet connected and activated for cable
television and telecommunications services, respectively.
(13) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(14) Pay-to-basic ratio is calculated by dividing the total number of premium
units subscribed for by the total number of basic subscribers.
(15) Represents revenues per average monthly subscriber for the fiscal
periods ended as of the date shown. Information with respect to the
telecommunications business for the period ended August 31, 1995 is not
available.
(16) Lines represent the number of telephone lines currently being provided
to telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line.
(17) Penetration is calculated by dividing the total number of
telecommunications subscribers at such date by the total number of units
passed.
13
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered in evaluating the Company and its
business in connection with the Exchange Offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Agreement with respect to such non-tendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Notes may not be offered
or sold, unless registered under the Securities Act and applicable state
securities laws, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Issuer does not intend to register the Old Notes under the Securities Act.
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Issuer believes that the New Notes issued pursuant
to the Exchange Offer in exchange for the Old Notes may be offered for
resale, resold or otherwise transferred by holders (other than any holder
that is an "affiliate" of the Issuer within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that the New Notes are
acquired in the ordinary course of the holders' business, the holders have no
arrangement with any person to participate in the distribution of the New
Notes and neither the holder nor any other person is engaging in or intends
to engage in a distribution of the New Notes. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale
of the New Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of the New Notes received
in exchange for the Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Issuer has agreed that, starting on the Exchange Date (as
defined) and ending on the close of business on the earlier of the first
anniversary of the Exchange Date or the date upon which all such New Notes
have been sold by such participating broker-dealer, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution." The New Notes may not be offered or sold
unless they have been registered or qualified for sale under applicable state
securities laws or an exemption from registration or qualification is
available and is complied with. The Registration Agreement requires the
Issuer to register or qualify the New Notes for resale in any state (if
required) as may be requested by their holders, subject to certain
limitations.
LACK OF PUBLIC MARKET
Prior to this Exchange Offer, there has been no public market for the Old
Notes. If a market for the New Notes should develop, the New Notes may trade
at a discount from their principal amount, depending upon prevailing interest
rates, the market for similar securities and other factors including general
economic conditions and the financial condition of the Company. The Issuer
does not currently intend to apply for a listing or quotation of the New
Notes on any securities exchange or to seek approval for quotation through
any automated quotation system. No assurance can be given as to the liquidity
of the trading market for the New Notes.
The liquidity of, and trading market for, the New Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
14
NEGATIVE CASH FLOW AND CONTINUING NET LOSSES
The Company has incurred substantial losses since it commenced operations
in 1993, primarily attributable to entering into Rights of Entry, the
development and expansion of its networks and the integration of
acquisitions. The Company reported net losses of approximately $0.3 million,
$7.9 million, $10.2 million, $18.4 million and $16.3 million for the nine
months ended December 31, 1993, year ended December 31, 1994, eight months
ended August 31, 1995, year ended August 31, 1996 and six months ended
February 28, 1997 respectively. In addition, the Company has reported
negative EBITDA of approximately $0.3 million, $7.8 million, $3.2 million,
$1.6 million and $2.3 million respectively, for such periods. The Company
expects to incur continuing net losses as it incurs substantial additional
costs in introducing its telecommunications services and expanding its
private cable television services. There can be no assurance that it will be
able to achieve or sustain profitability or positive cash flow.
EFFECT OF SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
Following the Offering, the Company became highly leveraged. The Company
expects to incur substantial additional indebtedness as described under
"-- Future Capital Needs." At February 28, 1997, the Company had total
consolidated indebtedness of approximately $348.3 million (including
approximately $121.0 million of Convertible Notes which are subordinated in
right of payment to the Notes under certain circumstances, as described under
"Certain Transactions") and stockholders' equity of approximately $50.0
million. After giving pro forma effect to the Offering (excluding interest
earned on the Escrow Account), the Company's earnings would have been
insufficient to cover its fixed charges by approximately $49.5 million
(including approximately $7.2 million in respect of the 15% convertible Notes
due to VPC (the "Convertible Notes") for the year ended August 31, 1996 and
$31.9 million (including approximately $7.9 million in respect of Convertible
Notes) for the six month period ended February 28, 1997. See "Capitalization"
and "Selected Consolidated Financial and Operating Data."
The Company's ability to make scheduled payments of principal of, or to
pay interest on, or to refinance, its indebtedness (including the Notes)
depends upon the success of its business strategies and its future
performance, which to a significant extent are subject to general economic,
financial, competitive, regulatory and other factors beyond its control.
There can be no assurance that the Company will be able to generate the
substantial increases in cash flow from operations that will be necessary to
service its indebtedness. In the absence of such operating results, the
Company could face substantial liquidity problems and might be required to
raise additional financing through the issuance of debt or equity securities.
Further, the Company expects that it will need to refinance the Notes at
their maturity. There can be no assurance that the Company will be successful
in raising such financing when required, or that the terms of any such
financing will be attractive. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including the following: (i) the
Company will have significant cash interest expense and principal repayment
obligations with respect to outstanding indebtedness, including the Notes;
(ii) the Company's degree of leverage and related debt service obligations
may make it more vulnerable than some of its competitors to the effects of an
economic downturn or other adverse developments in its business; and (iii)
the Company's ability to obtain additional financing for working capital,
capital expenditures, technology investments, acquisitions, general corporate
purposes or other purposes could be impaired.
The instruments governing the Company's indebtedness will impose
restrictions on the operations and activities of the Company and may contain
financial maintenance requirements. The ability of the Company to comply with
any of the foregoing restrictions and covenants will be dependent on the
future performance of the Company, which will be subject to prevailing
economic conditions and other factors including factors beyond the Company's
control, such as interest rate fluctuations, regulatory changes and changes
in technology and the level of competition.
15
HOLDING COMPANY STRUCTURE AND NEED TO ACCESS SUBSIDIARIES' CASH FLOW
The Issuer is a holding company with limited assets that conducts all of
its operations through its subsidiaries. The Issuer derives substantially all
of its revenue from the operations of its subsidiaries. The Notes are
effectively subordinated to the indebtedness and other liabilities and
commitments of the Issuer's subsidiaries. The ability of the Issuer's
creditors, including the holders of the Notes, to participate in the assets
of any of the Issuer's subsidiaries upon any liquidation or bankruptcy of any
such subsidiary will be subject to the prior claims of the subsidiary's
creditors, including trade creditors. As of February 28, 1997, the claims of
holders of Notes are effectively subordinated to approximately $27.3 million
of indebtedness (excluding any indebtedness owed to the Issuer) and other
liabilities of the Issuer's subsidiaries. However, the Issuer's subsidiaries
are expected to incur substantial additional indebtedness as described under
"-- Future Capital Needs." In addition, the ability of the Issuer's
creditors, including the holders of Notes, to participate in distributions of
assets of the Issuer's subsidiaries will be limited to the extent that the
outstanding shares of any of its subsidiaries are either pledged to secure
other creditors of the Issuer or are not owned by the Issuer.
The Notes are obligations solely of the Issuer. The ability of the Issuer
to pay interest on the Notes or to repay the Notes at maturity or otherwise
will be dependent upon the cash flows of its subsidiaries and the payment of
funds by those subsidiaries to the Issuer in the form of repayment of loans,
dividends, management fees or otherwise. The Issuer's subsidiaries have no
obligation, contingent or other, to pay amounts due pursuant to the Notes or
to make funds available therefor, whether in the form of loans, dividends or
other distributions. Accordingly, the Issuer's ability to repay the Notes at
maturity or otherwise may be dependent upon the Issuer's ability to refinance
the Notes, which will depend, in large part, upon factors beyond the control
of the Company. The agreements governing future indebtedness of the Issuer's
subsidiaries may contain covenants prohibiting subsidiaries from distributing
or advancing funds to the Issuer under certain circumstances, including to
fund interest payments in respect of the Notes.
The Company's future indebtedness may be expected to be secured, which
could have material consequences to investors in the Notes, which are
unsecured. Such security may include substantially all of the fixed assets of
the Company and all of the capital stock of the Issuer's subsidiaries. The
value of a substantial portion of the Company's fixed assets is derived from
the employment of such assets in a cable television and telecommunications
business. These assets are highly specialized and, taken individually, can be
expected to have limited marketability. Consequently, in the event of a
realization by the Company's secured creditors on the collateral securing the
Company's secured debt, creditors would likely seek to sell the business as a
going concern through a sale of pledged capital stock of subsidiaries, either
in its entirety, or by franchise or other business unit, in order to maximize
the proceeds realized. The price obtained upon any such sale could be
adversely affected by the necessity of obtaining approval of the sale from
the applicable regulatory authorities and compliance with other applicable
governmental regulations.
FUTURE CAPITAL NEEDS
The Company will require substantial capital on a continuing basis to
finance cable television and telecommunications network expansion related to
subscriber and market growth, to upgrade existing facilities to desired
technical and signal quality standards and to finance any acquisitions of
other operators. The Company expects to fund additional capital requirements
through internally generated funds and debt and/or equity financing. The
Issuer's stockholders have no commitment to fund any future capital
requirements of the Company and, prior to the earlier of an initial public
offering or July 31, 1999, the Issuer's voting stockholders have agreed among
themselves to fund all investments in the Issuer in the form of "Deeply
Subordinated Shareholders Loans (as defined under "Description of the Notes
- -- Certain Definitions") rather than equity. There can be no assurance that
the Company will be successful in producing sufficient cash flow and raising
sufficient debt and/or equity capital when required or on terms that it will
consider acceptable. In addition, the Company's future capital requirements
will depend upon a number of factors, including the Company's success
16
in entering into new Rights of Entry, the extent of its telecommunications
roll out, the size and timing of any acquisitions, marketing expenses,
staffing levels and customer growth, as well as other factors that are not
within the Company's control, such as competitive conditions, changes in
technology, government regulation and capital costs. Failure to raise
sufficient funds may require the Company to delay or abandon some of its
future expansion or expenditures, which may have a material adverse effect on
its growth and its ability to compete in the cable television and
telecommunications industry or on its ability to meet its obligations in
respect of its indebtedness, including the Notes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and "Business."
RISK ASSOCIATED WITH TELECOMMUNICATIONS STRATEGY
The Company is currently introducing telecommunications services to MDUs
served by its existing networks. The Company believes that a successful
introduction of its telecommunications services is important to its long-term
growth. Its success will be dependent upon, among other things, the Company's
ability to assess markets, design and install telecommunications networks,
including switches, and obtain any required government authorizations and
permits, all in a timely manner, at reasonable costs and on satisfactory
terms and conditions, and the willingness of MDU residents to accept a new
provider of telecommunications services. There can be no assurance that the
Company will be able to successfully introduce its telecommunications
services in a timely manner in accordance with its strategic objectives, but
it expects to spend capital to acquire and construct the necessary
telecommunications infrastructure. Specific risks associated with the
Company's telecommunications strategy include:
Switch Installation and Network Reconfiguration; Lack of Redundant
Switches. An essential element of the Company's telecommunications strategy
is the provision of switched local exchange service. The Company is in the
process of ordering central office switches which it intends to install and
test in early 1997. In connection with the implementation of central office
switches, the Company will be reconfiguring its microwave networks so that
they can deliver bi-directional transmissions. The Company intends to use
certain components of its existing infrastructure to deliver bi-directional
transmission utilizing frequencies, principally in the 23GHz band. While the
Company believes this frequency and other required frequencies are available
for license on the paths that will be required, the Company has not yet
commenced frequency coordination and there can be no assurance as to
availability. Moreover, although the Company believes that it can implement
its telecommunications plan using these frequencies and that equipment will
be readily available from several sources for such purposes, the Company has
not yet concluded field trials. There can be no assurance, that the
installation of the required switches and the reconfiguration of the network
will be completed on time or that, during the testing of the switches and the
reconfigured networks, the Company will not experience technological problems
that cannot be resolved. The failure of the Company to successfully
reconfigure its microwave networks and to have its switches operational on a
timely basis could have a material adverse effect upon the Company's ability
to expand its telecommunications services. In addition, the Company intends
to initially install only one switch in each market. As a result, a switch
failure may have a material adverse effect on the Company's ability to
provide telecommunications services in the affected market. The Company
intends to enter into contracts with other telecommunications service
providers to provide backup capabilities in the event of a switch failure.
However, there can be no assurance that the Company will be able to
successfully negotiate such agreements or that such agreements will be
available on favorable terms.
Interconnection Agreements. As part of its telecommunications
configuration, the Company may transport telephone traffic across municipal
boundaries or LATAs which may require that Company to have multiple
interconnection agreements. The Company is currently negotiating agreements
for the interconnection of its networks with the network of the incumbent LEC
in certain of the metropolitan areas the Company serves. There can be no
assurance that the Company will successfully negotiate these agreements for
interconnection with the LEC or that it will be able to do so on favorable
terms.
17
The failure to negotiate the interconnection agreements could have a material
adverse effect upon the Company's ability to expand its telecommunication
services. Currently, the Company provides local telephone service as an STS
provider. STS providers generally use the LEC's facilities (although in many
states competitive local exchange carriers ("CLECs") can now supply STS
operators with facilities) to provide local telephone service, subject to
state regulation. If LECs were no longer required to provide tariffed
services to STS providers or if STS-type service classifications were to be
eliminated, the Company's telephone operations would be materially adversely
affected.
Products and Services. The Company expects to continue to enhance its
systems in order to offer its customers switched local exchange and enhanced
products and services in all of its networks as quickly as practicable and as
permitted by applicable regulations. The Company believes its ability to
offer, market and sell these additional products and services will be
important to the Company's ability to meet its long-term strategic growth
objectives but is dependent on the Company's ability to obtain needed
capital, favorable regulatory developments and the acceptance of such
products and services by the Company's customers. No assurance can be given
that the Company will be able to obtain such capital or that such
developments or acceptance will occur.
CONSUMMATION OF THE PHONOSCOPE ACQUISITION
The Company has signed a Letter of Intent relating to the acquisition of
the private cable television assets of Phonoscope by the Company. The Letter
of Intent is not binding, and negotiations are continuing. The significant
conditions to closing the Phonoscope Acquisition are expected to include (i)
receipt of municipal consents and approvals, principally in respect of
franchise transfers or changes of control; (ii) receipt of third party
consents to the assignment of various contracts, including Rights of Entry,
and (iii) expiration or earlier termination of the waiting period under
applicable antitrust law. There can be no assurance that the Company will be
able to successfully negotiate and enter into definitive and binding
agreements for the Phonoscope Acquisition, or that if such definitive
agreements are entered into, the Phonoscope Acquisition will be completed on
the terms contemplated by the Letter of Intent or otherwise. The terms of the
Letter of Intent provide for the acquisition by the Company of certain (but
not all) of the purchased assets if certain consents are not obtained. There
can be no assurance that there will not be material changes in the
information presented herein with respect to Phonoscope and that the
Phonoscope Acquisition will nevertheless be consummated or that there will
not be sigificant changes in the terms of the Phonoscope Acquisition. The
Exchange Offer is not conditioned upon the consummation of the Phonoscope
Acquisition on the terms described herein or otherwise. See "Prospectus
Summary -- Recent Developments: Proposed Phonoscope Acquisition,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview" and "-- Proposed Phonoscope Acquisition."
RISKS ASSOCIATED WITH RIGHTS OF ENTRY
The Company's business depends upon its ability to enter into and exploit
favorable new long-term Rights of Entry for demographically attractive MDUs
and to exploit and renew its existing Rights of Entry. Its success in doing
so may be affected by a number of factors, including (i) the extent of
competition in the provision of multichannel television and
telecommunications services (see "Business -- Competition"), (ii) its ability
to identify suitable MDUs and contract with their owners, (iii) the
continuing demographic attractiveness of the markets in which the Company has
chosen to focus its business, (iv) high occupancy rates in the MDUs to which
it provides services, (v) its ability to maintain superior levels of customer
service, (vi) the absence of material adverse regulatory developments (see
"Business -- Regulation"), and (vii) the enforceability of the material terms
of its Rights of Entry, including exclusivity provisions.
The Company's Rights of Entry generally provide that the Company will have
the exclusive right to provide residents within the applicable MDU with
multichannel television services and, where
18
Rights of Entry extend to telecommunications services, subject to the legal
right of residents to utilize the services of the incumbent LEC and certain
other carriers, wire-line telecommunications services. While the Company
believes that these exclusivity provisions are now generally enforceable
under applicable law, current trends at the state and federal level suggest
that the future enforceability of these provisions may be uncertain. Certain
states in which the Company operates, including Illinois and Florida (for
condominiums only), and Nevada, where the Company intends to commence
operations, and the cities of Scottsdale and Glendale, Arizona and
Lewisville, Texas (where the Company operates) have adopted "mandatory
access" laws that provide that no resident of an MDU may be denied access to
programming provided by incumbent franchise cable systems, regardless of any
rights granted by an MDU owner to another multichannel television operator.
Texas has adopted a "mandatory access" law for certified telecommunications
service providers. In addition, the FCC has initiated a review of the rights
of various multichannel television service providers to obtain access to MDUs
and other private property. While the constitutionality of present "mandatory
access" laws is uncertain, there can be no assurance that such laws will not
be adopted elsewhere or on bases which may be upheld as constitutional. While
the Company does not consider the exclusivity provisions in its Rights of
Entry to be essential to its future success, there can be no assurance that
legislative, regulatory or judicial actions which challenge the
enforceability of these provisions will not have a material adverse effect on
the Company's business. Broad mandatory access would likely increase the
Company's capital costs associated with new Rights of Entry if overbuilding
were required. It should also be noted that in a number of instances Rights
of Entry are subordinate by their terms to indebtedness secured by the MDU,
with the effect that enforcement of the security interest or default under
the indebtedness could result in termination of the Rights of Entry.
Bankruptcy of an MDU owner could also result in rejection of the Rights of
Entry as an "executory contract."
AVAILABILITY OF TRANSMISSION SITES
The Company's microwave network expansion plans require the Company to
lease or otherwise obtain permission to install equipment at rooftop and
tower transmission sites in substantially all of its markets. The
availability of these sites is subject to market conditions and may be
subject to zoning and other municipal restrictions. The Company believes that
as additional wireless video and telecommunications providers emerge,
competition for such transmission sites will continue to increase. There can
be no assurance that the necessary sites will be available or that the terms
upon which access to such sites may be obtained will be acceptable.
RAPID TECHNOLOGICAL CHANGES AND UNCERTAIN MARKET DEVELOPMENT
The multichannel television and telecommunications industry is subject to
rapid and significant changes in technology and frequent service innovations.
The effect on the business of the Company of future technological changes,
such as changes relating to emerging transmission technologies, cannot be
predicted. The Company believes that its future success will depend on its
ability, as to which no assurance can be given, to enhance its existing
systems or implement new systems to respond to new technologies and to
develop and introduce in a timely fashion new products and services on a
competitive basis.
The markets in which the Company competes are constantly evolving. The
convergence of traditional telecommunications services and multichannel
television services is a recent trend in the industries within which the
Company competes. As part of this trend, many telecommunications and cable
television operators are attempting to integrate network components. For
example, video distribution equipment is being considered for voice and data
telecommunications and vice versa. The convergence of these traditional
services towards integrated multimedia services presents both opportunity and
material risk to companies such as OpTel. The Company will face enhanced
competition from competitors with much greater financial, technical,
marketing and other resources. Many of these competitors may offer packages
of services that are more extensive than the services
19
which the Company plans to offer. See "Business -- Competition." There can be
no assurance that the Company will be able to predict accurately the
direction of this evolving market or be able to respond effectively to the
highly competitive environment.
MANAGEMENT OF GROWTH AND DEPENDANCE ON QUALIFIED PERSONNEL
The Company has undertaken a rapid expansion of its networks and services.
This growth has increased the operating complexity of the Company as well as
the level of responsibility for both existing and new management personnel.
The Company's ability to manage its expansion effectively will require it to
continue to implement and improve its operational and financial systems and
to expand, train and manage its employee base and attract and retain highly
skilled and qualified personnel. The Company's inability to effectively
manage its growth and attract and retain qualified personnel could have a
material adverse effect on its business.
COMPETITION
The multichannel television and telecommunications industries are highly
competitive. The Company presently competes with companies that specialize in
the provision of multichannel television or telecommunication services and,
increasingly, with companies that offer bundled multichannel television and
telecommunications services. Many of these competitors are larger companies
with greater access to capital, technology and other competitive resources.
The Company's private cable television service competes with traditional
franchise cable television operators as well as wireless cable television
operators, other private cable television operators, direct broadcast
satellite ("DBS") operators, stand-alone satellite service providers and, to
a lesser extent, off-air broadcasters. The Company's telecommunications
services compete with other STS providers, LECs, CLECs and competitive access
providers ("CAPs") and will compete with long distance telephone companies
and franchise cable television operators as they begin to enter the local
telephone business. The Company's long distance service competes with
established interexchange carriers and resellers. In addition, recent
telecommunications offerings, including PCS, and future offerings may
increase competition in the telecommunications industry. Recent and future
legislative, regulatory and technological developments will likely result in
additional competition, as telecommunications companies enter the cable
television market and as franchise cable television operators and
interexchange carriers begin to enter the local telephone market. See "--
Regulation." Similarly, mergers, joint ventures and alliances among
franchise, wireless or private cable television operators and Regional Bell
Operating Companies ("RBOCs") may result in providers capable of offering
bundled cable television and telecommunications services in direct
competition with the Company.
The Company competes with multichannel television operators and
telecommunications service providers to obtain Rights of Entry and to enroll
subscribers. In most markets serviced by the Company, franchise cable
television operators now offer revenue sharing and access fee arrangements to
MDU owners. There can be no assurance that these payments will not increase
in the future as competition increases for access to the higher quality MDUs.
Another basis of competition is the breadth of programming and range of
services offered. Although the Company as a matter of course investigates new
sources of programming and technologies that may increase its range of
services, other larger and more diversified competitors may attract the
targeted MDUs based on their increased menu of services. Consequently, the
Company may be compelled to reduce its prices and improve its range of
services under its existing Rights of Entry which generally require the
Company to remain competitive with the market in general. At present, the
Company believes that its existing Rights of Entry give it a competitive
advantage within its present markets; however, these advantages may
deteriorate with changes in regulations, the types of competitors and with
technological advances. See "-- Risks Associated with Rights of Entry." There
can be no assurance that the Company will be able to compete successfully
with existing competitors or new entrants in the market for such services.
See "Business -- Competition."
20
Competition may also be enhanced by technological developments that allow
competitors of the Company to bypass property owners altogether and market
their services directly to the tenants of MDUs. Although the Company's Rights
of Entry prohibit tenants from installing receiving equipment on the exterior
of the building, these provisions are not always enforced. The Rights of
Entry do not prevent a resident from using cellular telephone service, for
example, offered by another provider. While the Company believes that the
exclusivity provisions of its Rights of Entry provide it with competitive
advantages, such advantages may be significantly diminished by technological
and other developments beyond the control of the Company. Such developments
may impact the Company's strategies and may require it to expend funds beyond
the levels currently contemplated.
DEPENDENCE UPON PROGRAM MATERIAL
The Company has fixed-term contracts with various program suppliers. The
average term of such contracts is four years and such contracts are typically
renewed upon expiration. If the contracts were terminated or not renewed, the
Company would be required to seek program material from other sources, which
could place the Company at a competitive disadvantage. Although federal law
and FCC regulations require that vertically integrated franchise cable
television system operators and cable television programmers sell programming
to other video distributors, such as the Company, on fair and
non-discriminatory terms, the Company has been denied certain popular sports
programming by certain providers who claim that the programming is not
required to be licensed to the Company. These denials have, and any such
denials in the future could, adversely impact the Company's activities in the
affected markets. There can be no assurance that the equal program access
laws and regulations will not be invalidated or repealed, in which case
programmers could charge the Company higher prices than those charged other
multichannel television operators or make their programs unavailable to the
Company. In addition, one aspect of the equal program access laws -- the
prohibition on the sale of exclusive distribution rights by certain
programmers -- is scheduled to expire on October 5, 2002, unless the FCC
finds, during a proceeding to be conducted in 2001, that the prohibition
continues to be necessary to promote competition in the multichannel
television market. See "Business -- Regulation."
REGULATION
The cable television and telecommunications industries are subject to
extensive regulation at the federal, state and local levels. Additionally,
many aspects of regulation at the federal, state and local levels currently
are subject to judicial review or are the subject of administrative or
legislative proposals to modify, repeal, or adopt new laws and administrative
regulations and policies, the results of which the Company is unable to
predict. The United States Congress and the FCC have in the past, and may in
the future, adopt new laws, regulations and policies regarding a wide variety
of matters, including rulemakings arising as a result of the
Telecommunications Act of 1996 (the "Telecommunications Act"), that could,
directly or indirectly, affect the operation of the Company's business. The
business prospects of the Company could be materially adversely affected (i)
by the application of current FCC rules or policies in a manner leading to
the denial of applications by the Company for FCC licenses or a change in the
regulatory status of the Company's private cable television and
telecommunications operations, (ii) by the adoption of new laws, policies or
regulations, (iii) by changes in existing laws, policies or regulations,
including changes to their interpretations or applications, that modify the
present regulatory environment or (iv) by the failure of certain rules or
policies to change in the manner anticipated by the Company. See "Business --
Regulation."
Among other things, the FCC has initiated a review of the rights of
various multichannel television service providers to obtain access to MDUs
and other private property. One possibility raised by the FCC is the
establishment of a federal MDU mandatory access requirement, which would
require property owners to open their MDUs to any service provider. In
another proceeding, the FCC is contemplating an order preempting state, local
and private restrictions on over-the-air reception antennas placed on rental
properties or properties not within the exclusive control of the
21
viewer. Although it is open to question whether the FCC has statutory and
constitutional authority to compel mandatory access or preempt private
restrictions on antennas located on property owned or controlled by others,
there can be no assurance that it will not attempt to do so. Any such action
would tend to undermine the exclusivity provisions of the Company's Rights of
Entry with MDU owners. See "-- Risks Associated with Rights of Entry."
States also have, in some cases, enacted various forms of MDU access
statutes that inhibit the Company's ability to obtain exclusive Rights of
Entry from MDU owners. Some of these state laws require MDU owners to provide
franchise cable television operators with access to their MDUs. The Company
currently operates in two such states, Florida (where the mandatory access
requirement applies only to condominiums) and Illinois. The Company also
intends to commence operations in Nevada, which has a mandatory access law.
In addition, Virginia, where the Company does not currently operate,
prohibits private cable television operators from entering into revenue
sharing or up front incentive payment arrangements with MDU owners. There can
be no assurance that future laws or regulations will not restrict the ability
of the Company to offer revenue sharing or access payments, limit MDU owners
from receiving revenue sharing, or prohibit MDU owners from entering into
exclusive access agreements, any of which could have a material adverse
effect on the Company's business. See "Business -- Sales, Marketing and
Customer Service" and "-- Regulation."
The majority of states currently permit STS services with relatively few
regulatory barriers. However, several states require certification and place
some conditions or restraints on the provision of STS services. Additionally,
STS providers must comply with the conditions of service set forth in the
LEC's tariffs under which STS providers receive service. There can be no
assurance that the regulatory environment will continue to be favorable for
STS providers or that regulatory changes will not slow or stop the Company's
planned migration from an STS provider into a CLEC. Although the current
regulatory environment enables competition for local exchange services, there
is no assurance that the Company will be able to compete successfully against
established providers and new entrants in that marketplace. In addition,
various state and federal laws and regulations limit the Company's ability to
enforce exclusivity provisions of Rights of Entry so as to exclude other
telecommunications providers from an MDU.
The Company uses a substantial number of point-to-point microwave paths,
using frequencies in the 18GHz range, in its network architecture. In
addition, the Company intends to license frequencies, principally in the
23GHz range, in the future. These paths are licensed by the FCC. There can be
no assurance that the Company will be able to acquire a license for the
microwave paths that it seeks in the future, or that changes in the FCC's
regulations will not limit the Company's ability to use the 18GHz, 23GHz and
other desirable frequencies for the distribution of its services or otherwise
impair the Company's microwave licenses. In addition, state and local zoning
and land use laws may impede the efficient deployment of the Company's
microwave antennas.
CONTROL OF LICENSES BY UNAFFILIATED COMPANY
To permit the Company to use its frequency licenses to provide "common
carrier" telecommunications services in the event that the Company should
desire to do so in the future, the Company has assigned substantially all of
its frequency licenses to Transmissions Holding, Inc. ("THI"), a Delaware
corporation controlled by United States citizens. THI is not an affiliate of
the Company. The ownership of these licenses by THI is subject to a number of
risks, including the risk that acts or omissions of THI or its stockholders
could result in the revocation of such licenses or the unavailability of such
licenses to the Company and the risk that THI may be subject to bankruptcy or
similar proceedings which could result in the rejection or termination of the
arrangements between THI and the Company with respect to the use of such
licenses. While THI and its stockholders have made various affirmative and
negative covenants intended to limit the risk to the Company, there can be no
assurance that such covenants will not be violated or will be adequate to
protect the Company. See "Certain Transactions -- License Holding Company."
22
USE OF THE NAME OPTEL
The Company is engaged in an administrative proceeding before the United
States Patent and Trademark Office ("PTO") relative to registration of the
"OpTel" trademark. The PTO found the Company's application to be allowable;
however, a proceeding in the PTO was commenced by a third party claiming that
the Company's trademark is confusingly similar to the mark used by that party
in a related field and claiming that the Company's application has procedural
deficiencies. The PTO proceeding is related solely to the Company's right to
register the mark and does not have a direct bearing on the Company's
continued use of the OpTel trademark. The PTO proceeding is in its relatively
early stages and the Company is vigorously pursuing its right to register the
OpTel trademark. However, there can be no assurance as to the outcome of the
PTO proceeding. In addition, there can be no assurance that a third party
will not commence an infringement action against the Company under applicable
federal or state law. Although the Company does not believe that its use of
the name "OpTel" infringes on the trademark rights of any other person, there
can be no assurance as to the outcome of any future infringement action or
that any such outcome would not materially adversely affect the Company.
CONTROL BY GVL
VPC, an indirect wholly-owned subsidiary of GVL, owns 1,923,977 shares of
the Issuer's Class B Common Stock, $.01 par value (the "Class B Common"),
representing 83.5% of the voting rights of the Issuer. Accordingly, VPC can
and will continue to be able to elect a majority of the Board of Directors of
the Issuer and to control the vote on matters submitted to the vote of the
Issuer's stockholders. The interests of GVL as a beneficial owner of an
equity interest in the Issuer may differ in material respects from those of
the holders of the Notes, and there can be no assurance that actions taken by
GVL or on its behalf will not materially adversely affect the holders of the
Notes.
In addition to its investment in the Issuer, GVL, through other
subsidiaries, currently holds interests in wireless cable systems in a number
of U.S. markets including San Francisco and San Diego, California and Tampa,
Florida. These subsidiaries employ multipoint multichannel distribution
systems, SMATV systems or hard wire franchise cable television systems. In
November 1995, GVL entered into an agreement for the sale of all such
interests to an unrelated third party. In November 1996, the prospective
purchaser terminated the agreement. GVL is now seeking damages as a result of
such termination or, in the alternative, contesting the termination. Under an
agreement with Vanguard Communications, L.P. ("Vanguard"), one of the
Issuer's minority stockholders, GVL and its affiliates are generally barred
from competing with the Company; however, GVL's wireless cable business is
excluded from the restriction. Affiliates of GVL may continue to hold and
develop these interests and, in doing so, may compete with the Company in
markets where their services overlap.
GVL is party to debt instruments which limit the amount of indebtedness
which can be incurred by GVL and its subsidiaries, including the Company.
There can be no assurance that GVL will not restrain the Company's growth or
limit the indebtedness incurred by the Company so as to ensure GVL's
compliance with the terms of its debt instruments.
The principal shareholders of GVL entered into an amended and restated
shareholders agreement, dated as of May 10, 1995 (the "GVL Shareholders'
Agreement"), pursuant to which they have agreed they shall not allow the
Issuer to take certain actions without the consent of Caisse de dep|f.t et
placement du Quebec ("Caisse"), including the incurrence of additional
indebtedness or any acquisition or merger, each outside the normal course of
business, or the issuance of additional capital stock of the Issuer, and
that, for so long as GVL controls the Issuer, Caisse will be allowed to
select one of GVL's nominees to the Board of Directors of the Issuer and to
have one representative on the Audit Committee of the Issuer, subject to any
prior commitments made by GVL to other stockholders of the Issuer and certain
other conditions. See "Principal Stockholders -- GVL Shareholders'
Agreement."
A transfer by VPC of the Class B Common or a transfer by GVL of its
interest in VPC, may result in a "Change of Control" under the Indenture,
which could require the Issuer to offer to
23
purchase the Notes. There can be no assurance that the Issuer would have the
financial resources to meet this obligation. Neither VPC nor GVL is under any
obligation to prevent a "Change of Control." The occurrence of a "Change of
Control" could have a material adverse effect on the Company, including the
loss of GVL's strategic involvement with the Company.
POTENTIAL 911, E-911 AND INTRUSION ALARM LIABILITY
The Company delivers local exchange service, including access to emergency
("911") services, to MDU residents through switches installed by the Company
at each property. Mechanical or electrical defects, power failures or
catastrophic events may temporarily disrupt operation of the Company's
switch, preventing, delaying or impeding access to 911 service. In many
jurisdictions, telecommunications carriers are required to implement services
which permits a 911 operator to immediately identify the location of the
caller ("E-911 service"). To provide E-911 service at an MDU, the
telecommunications service provider or its agent must maintain a database
with certain information relating to the MDU residents. The failure of the
Company or its agent to maintain such database in a timely and accurate
manner could prevent, delay or impede the operation of E-911 service. In
addition, because of the configuration of the Company's telecommunications
networks, the Company's telecommunications traffic may cross more than one
E-911 jurisdiction. This will require the Company to coordinate among these
various jurisdictions. There can be no assurance that the Company will not be
liable for damage to property or personal injuries that may directly or
indirectly result from any failure of 911 or E-911 service to operate
properly. Moreover, the Company may provide 911, E-911 or operator services
by contracting such services from other carriers in its markets. The
providers of these services will generally require the Company to indemnify
them for any losses or liability incurred in connection with such services
except for those caused exclusively by the gross negligence or malfeasance of
the carrier.
The Company currently provides all its intrusion alarm monitoring through
subcontractors. There can be no assurance that the Company will not be liable
for any property damage or personal injuries that may result from intrusion
alarm malfunctions or from a subcontractor's failure to appropriately monitor
the intrusion alarm systems under contract.
BANKRUPTCY RISKS RELATED TO ESCROW ACCOUNT
The right of the Trustee (as defined) under the Indenture and the Escrow
Agreement (as defined) to foreclose upon and sell Collateral (as defined)
upon the occurrence of an Event of Default (as defined) on the Notes is
likely to be significantly impaired by applicable bankruptcy law if a
bankruptcy or reorganization case were to be commenced by or against the
Company or one or more of its subsidiaries. Under applicable bankruptcy law,
secured creditors such as the holders of the Notes are prohibited from
foreclosing upon or disposing of a debtor's property without prior bankruptcy
court approval. See "Description of the Notes -- Disbursement of Funds;
Escrow Account."
24
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were originally issued and sold on February 14, 1997 in
reliance upon the exemptions from registration under Rule 144A and Section
4(2) of the Securities Act. Pursuant to the Registration Agreement, the
Company agreed to register with the Commission a series of notes with
substantially identical terms as the Old Notes, to be offered in exchange for
the Old Notes. The purpose of the Exchange Offer is to satisfy the Company's
obligations under the Registration Agreement. Upon consummation of the
Exchange Offer, holders that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any
registration rights under the Registration Agreement with respect to such
non-tendered Old Notes and, accordingly, such Old Notes will continue to be
subject to the restrictions on transfer contained in the legend thereon.
TERMS OF THE EXCHANGE
The Company offers to exchange, subject to the conditions set forth in
this Prospectus and in the Letter of Transmittal accompanying this
Prospectus, the same principal amount of New Notes for the Old Notes tendered
for exchange. The terms of the New Notes are substantially identical to the
Old Notes in all material respects (including interest rate and maturity),
except that (i) the New Notes will not be subject to the restrictions on
transfer (other than with respect to holders who are affiliates) and (ii) the
Registration Agreement covenants regarding registration and the related
Liquidated Damages (other than those that have accrued and were not paid)
with respect to Registration Defaults will have been deemed satisfied. The
New Notes will evidence the same debt as the Old Notes and will be entitled
to the same benefits of the Indenture. See "Description of the Notes." The
Exchange Offer is not conditioned upon any minimum aggregate principal amount
of Old Notes being tendered for exchange.
The Company believes that New Notes tendered in exchange for Old Notes may
be offered for resale, resold and otherwise transferred by any holder (other
than any holder which is an "affiliate" of the Company within the meaning of
Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that the
New Notes are acquired in the ordinary course of the holder's business, the
holder has no arrangement or understanding with any person to participate in
the distribution of the New Notes and neither the holder nor any other person
is engaging in or intends to engage in a distribution of the New Notes. Any
holder who tenders in the Exchange Offer for the purpose of participating in
a public distribution of the New Notes must comply with registration and
prospectus delivery requirements of the Securities Act in connection with the
distribution. Each broker-dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes.
Tendering holders of the Old Notes will not be required to pay brokerage
commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the Exchange Offer.
EXPIRATION DATE; TERMINATION; AMENDMENT
The Exchange Offer will expire on the Expiration Date. The term
"Expiration Date" means 5:00 p.m., New York City time, on __________, 1997,
or such later date and time, if any, to which it is extended by the Company,
provided that the Expiration Date shall not be extended beyond 60 days from
the date of this Prospectus. In connection with the Exchange Offer, the
Company will comply with all applicable requirements of the federal
securities laws, including, but not limited to, Rule 14e-1 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
25
The Exchange Date will be the first business day following the Expiration
Date. The Company expressly reserves the right to (i) terminate the Exchange
Offer and not accept for exchange any Old Notes if either of the events set
forth under "--Conditions to the Exchange Offer" shall have occurred and
shall not have been waived by the Company and (ii) amend the terms of the
Exchange Offer in any manner which, in its good faith judgment, is
advantageous to the holders of the Old Notes, whether before or after any
tender of the Old Notes. Unless the Company terminates the Exchange Offer
prior to 5:00 p.m., New York City time, on the Expiration Date, the Company
will exchange the New Notes for the Old Notes on the Exchange Date.
PROCEDURES FOR TENDERING OLD NOTES
The Exchange Offer is subject to the terms and conditions set forth in
this Prospectus and the Letter of Transmittal.
Old Notes may be tendered by properly completing and signing the Letter of
Transmittal and delivering the Letter of Transmittal to the Exchange Agent at
its address set forth in this Prospectus on or prior to the Expiration Date,
together with (i) the certificate or certificates, if any, representing the
Old Notes being tendered and any required signature guarantees, (ii) a timely
confirmation of a book-entry transfer (a "Book- Entry Confirmation") of the
Old Notes, if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "Book-Entry Transfer Facility" or
"Depositary") pursuant to the procedure for book-entry transfer described
below, or (iii) the completion of the procedures for guaranteed delivery set
forth below. See "--Guaranteed Delivery Procedures."
If the New Notes (and any untendered Old Notes) are to be issued in the
name of the registered holder and the registered holder has signed the Letter
of Transmittal, the holder's signature need not be guaranteed. In any other
case, the tendered Old Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Exchange Agent and duly
executed by the registered holder and the signature on the endorsement or
instrument of transfer must be guaranteed by a commercial bank or trust
company located or having an office or correspondent in the United States, or
by a member firm of a national securities exchange or of the NASD (an
"Eligible Institution"). If the New Notes and/or Old Notes not exchanged are
to be delivered to an address other than that of the registered holder
appearing on the register for the Old Notes, the signature on the Letter of
Transmittal must be guaranteed by an Eligible Institution.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER
INSURANCE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE
EXPIRATION DATE. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
COMPANY.
A tender will be deemed to have been received as of the date when the
tendering holder's properly completed and duly signed Letter of Transmittal,
the Old Notes or a Book-Entry Confirmation and all other required documents
are received by the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance for exchange of any tender of Old Notes will be
determined by the Company in its sold discretion, which determination will be
final and binding. The Company reserves the right to reject any or all
tenders not in proper form or the acceptance for exchange of which may, in
the opinion of the Company's counsel, be unlawful. The Company also reserves
the right to waive any of the conditions of the Exchange Offer or any defect,
withdrawal, rejection of tender or irregularity in the tender of any Old
Notes. Neither the Company, the Exchange Agent nor any other person will be
under any duty to give notification of any defects, withdrawals, rejections
or irregularities or incur any liability for failure to give any such
notification.
26
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer:
The holder tendering Old Notes exchanges, assigns and transfers the Old
Notes to the Company and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
assigned, transferred and exchanged. The holder represents and warrants to
the Company and the Exchange Agent that (i) it has full power and authority
to tender, exchange, assign and transfer the Old Notes and to acquire the New
Notes in exchange for the Old Notes, (ii) when the Old Notes are accepted for
exchange, the Company will acquire good and unencumbered title to the Old
Notes, free and clear of all liens, restrictions, charges and encumbrances
and not subject to any adverse claim, (iii) it will, upon request, execute
and deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes and (iv) acceptance of any tendered Old Notes by the Company and the
issuance of New Notes in exchange therefor will constitute performance in
full by the Company of its obligations under the Registration Rights
Agreement and the Company will have no further obligations or liabilities
thereunder to such holders (except with respect to accrued and unpaid
Liquidated Damages, if any). All authority conferred by the holder will
survive the death or incapacity of the holder and every obligation of the
holder will be binding upon the heirs, legal representatives, successors
assigns, executors and administrators of the holder.
Each holder will also certify that it (i) is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or that, if
it is an "affiliate," it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable, (ii) is
acquiring the New Notes offered in the ordinary course of its business and
(iii) has no arrangement with any person to participate in the distribution
of the New Notes.
WITHDRAWAL RIGHTS
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date.
To be effective, a written notice of withdrawal must be timely received by
the Exchange Agent at its address set forth in this Prospectus by mail,
courier, telegraphic, telex or facsimile transmission. Any notice of
withdrawal must specify the person named in the Letter of Transmittal as
having tendered Old Notes to be withdrawn, the certificate numbers of the Old
Notes to be withdrawn, the principal amount of the Old Notes to be withdrawn,
a statement that the holder is withdrawing its election to tender the Old
Notes for exchange, and the name of the registered holder of the Old Notes,
and must be signed by the holder in the same manner as the original signature
on the Letter of Transmittal (including any required signature guarantees) or
be accompanied by evidence satisfactory to the Exchange Agent that the person
withdrawing the tender has succeeded to the beneficial ownership of the Old
Notes being withdrawn. The Exchange Agent will return the properly withdrawn
Old Notes promptly following receipt of notice of withdrawal. If the Old
Notes have been tendered pursuant to a book-entry transfer, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of the Book-Entry Transfer Facility. All questions
as to the validity of notices of withdrawals, including time of receipt, will
be determined by the Company, and such determination will be final and
binding on all parties. Any Old Notes which have been tendered for exchange
but which are not exchanged will be returned to the holder thereof without
cost to the holder (or, in the case of Old Notes tendered by book-entry
transfer by crediting an account maintained with the Book-Entry Transfer
Facility for the Old Notes) as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Old Notes may be retendered at any time on or prior to the Expiration Date.
Any Old Notes so withdrawn and not retendered will not be exchanged for New
Notes under the Exchange Offer.
27
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
acceptance for exchange of the Old Notes validly tendered and not withdrawn
and issuance of the New Notes will be made on the Exchange Date. For the
purposes of the Exchange Offer, the Company shall be deemed to have accepted
for exchange validly tendered Old Notes when, as and if the Company has given
oral or written notice thereof to the Exchange Agent.
The Exchange Agent will act as agent for the tendering holders of the Old
Notes for the purpose of causing the Old Notes to be assigned, transferred
and exchanged for the New Notes. Upon the terms and subject to the conditions
of the Exchange Offer, delivery of the New Notes in exchange for the Old
Notes will be made by the Exchange Agent promptly after acceptance for
exchange of the tendered Old Notes by the Company. Tendered Old Notes not
accepted for exchange by the Company will be returned without expense to the
tendering holders (or, in the case of Old Notes tendered by book-entry
transfer, crediting an account maintained with the Depositary) promptly
following the Expiration Date, or, if the Company terminates the Exchange
Offer prior to the Expiration Date, promptly after the Exchange Offer is
terminated.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account at the Book-Entry Transfer
Facility for purposes of the Exchange Offer within two business days after
the date of this Prospectus, and any financial institution that is a
participant in the Book-Entry Transfer Facility's systems may make book-entry
delivery of the Old Notes by causing the Book-Entry Transfer Facility to
transfer the Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility in accordance with the Book-Entry Transfer Facility's
procedure for transfer. The Letter of Transmittal with any required signature
guarantees and any other required documents must be received by the Exchange
Agent on or prior to the Expiration Date for any book-entry transfers.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other documents required hereby to the Exchange Agent
prior to the Expiration Date, must tender their Old Notes and follow the
guaranteed delivery procedures. Pursuant to such procedures: (i) such tender
must be made by or through an Eligible Institution; (ii) prior to the
Expiration Date, the Exchange Agent must have received from the Eligible
Institution a properly completed and duly executed notice of guaranteed
delivery (a "Notice of Guaranteed Delivery") (by facsimile transmission, mail
or hand delivery), setting forth the name and address of the holder of the
Old Notes, the certificate number or numbers of such Old Notes and the
principal amount of Old Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within five business days after the Expiration
Date, the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Old Notes (or a confirmation of electronic
delivery or book-entry delivery into the Exchange Agent's account at the
Depositary) and any of the required documents will be deposited by the
Eligible Institution with the Exchange Agent; and (iii) such properly
completed and executed Letter of Transmittal (or facsimile thereof), as well
as all other documents required by the Letter of Transmittal and the
certificate(s) representing all tendered Old Notes in proper form for
transfer (or a confirmation of electronic mail delivery or book-entry
delivery into the Exchange Agent's account at the Depositary), must be
received by the Exchange Agent within five business days after the Expiration
Date. Any holder of Old Notes who wishes to tender its Old Notes pursuant to
the guaranteed delivery procedures described above must ensure that the
Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m.,
New York City time, on the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
will not be required to issue New Notes in exchange for any properly tendered
Old Notes not previously accepted and may
28
terminate the Exchange Offer (by oral or written notice to the holders and by
timely public announcement communicated, unless otherwise required by
applicable law or regulation, by making a release to the Dow Jones News
Service), or, at its option, modify or otherwise amend the Exchange Offer, if
any of the following events occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange offer, or assessing or seeking
any damages as a result thereof, or (ii) resulting in a material delay in
the ability of the Company to accept for exchange or exchange some or all
of the Old Notes pursuant to the Exchange Offer, or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agent or court, domestic or foreign, that in the sole judgment of the
Company might directly or indirectly result in any of the consequences
referred to in clause (i) or (ii) above or, in the sole judgment of the
Company, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which are greater than those
described in the interpretation of the Commission referred to on the cover
page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or
(b) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company, taken as a whole, that, in the sole judgment of
the Company is or may be adverse to the Company, or the Company shall have
become aware of facts that, in the sole judgment of the Company, have or
may have adverse significance with respect to the value of the Old Notes
or the New Notes; which, in the sole judgment of the Company in any case,
and regardless of the circumstances (including any action by the Company)
giving rise to any such condition, makes it unlawful to proceed with the
Exchange Offer and/or with such acceptance for exchange or with such
exchange.
The Company expressly reserves the right to terminate the Exchange Offer
and not accept for exchange any Old Notes upon the occurrence of any of the
foregoing conditions (which represent all of the material conditions to the
acceptance by the Company of properly tendered Old Notes). In addition, the
Company may amend the Exchange Offer at any time prior to the Expiration Date
if any of the conditions set forth above occur. Moreover, regardless of
whether any of such conditions has occurred, the Company may amend the
Exchange Offer in any manner which, in its good faith judgment, is
advantageous to holders of the Old Notes.
These conditions are for the sole benefit of the Company and may be waived
by the Company, in whole or in part, in its sole discretion; provided,
however, that in the event that the Company waives any of such conditions
that is material to the Exchange Offer on a date (the "Waiver Date") that is
fewer than five business days prior to the Expiration Date, the Company will
extend the Exchange Offer to five business days from the Waiver Date. Any
determination made by the Company that any of these conditions has occurred
will be final and binding on all holders of the Notes, absent manifest error.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act").
29
EXCHANGE AGENT
U.S. Trust of Texas, N.A., the Trustee under the Indenture, has been
appointed as the Exchange Agent for the Exchange Offer. All executed Letters
of Transmittal, questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should
be directed to the Exchange Agent as follows:
If by Mail: U.S. Trust Company of Texas, N.A.
P.O. Box 841
Cooper Station
New York, NY 10276-0841
If by Hand: U.S. Trust Company of Texas, N.A.
111 Broadway
Lower Level
New York, NY 10006-1906
If by Overnight Courier: U.S. Trust Company of Texas, N.A.
770 Broadway
13th Floor - Corporate Trust Operations
New York, NY 10003-9598
Confirm by Telephone: 1-800-225-2398 Bondholder Inquiry
or
212-420-6668 Tony Nista
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
SOLICITATION OF TENDERS; EXPENSES
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others for soliciting acceptances of the Exchange Offer.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those
contained in this Prospectus and the Letter of Transmittal. If given or made,
such information or representations should not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any
exchange made thereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of the Company since
the respective dates as of which information is given herein. The Exchange
Offer is not being made to (nor will tenders be accepted from or on behalf
of) holders of Old Notes in any jurisdiction in which the making of the
Exchange Offer or the acceptance thereof would not be in compliance with the
laws of such jurisdiction. The company may, however, at the reasonable
request of any holder, take such action as it may deem necessary to make the
Exchange Offer in any such jurisdiction and extend the Exchange Offer to
holders of Old Notes in such jurisdiction.
TRANSFER TAXES
Holders who tender their Old Notes in exchange for New Notes will not be
obligated to pay any transfer taxes in connection therewith, except that
holders who instruct the Company to register New Notes in the name of, or
request that Old Notes not tendered or not accepted in the Exchange Offer be
returned to, a person other than the registered tendering holder will be
responsible for the payment of any applicable transfer taxes thereon.
30
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Agreement with respect to such non-tendered Old Notes and, accordingly such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. In general, the Old Notes may not be offered
or sold, unless registered under the Securities Act and the applicable state
securities laws, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not intend to register the Old Notes under the Securities Act.
Based on interpretations by the staff of the Commission, New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders (other than any holder
that is an "affiliate" of the Company within the meaning of rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act provided that the New Notes are
acquired in the ordinary course of the holders' business, the holders have no
arrangement with any person to participate in the distribution of the New
Notes and neither the holder nor any other person is engaging in or intends
to engage in a distribution of the New Notes. If any holder has any
arrangement or understanding with respect to the distribution of the New
Notes to be acquired pursuant to the Exchange Offer, the holder (i) could not
rely on the applicable interpretations of the staff of the Commission and
(ii) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transactions. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of the New Notes.
See "Plan of Distribution." In addition, to comply with the securities laws
of certain jurisdictions, if applicable, the New Notes may not be offered or
sold unless they have been registered or qualified for sale in such
jurisdiction or an exemption from registration or qualification is available
and is complied with. The Company has agreed under the Registration Agreement
to register or qualify the New Notes for resale in any jurisdictions
requested by any holder, subject to certain limitations.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on
what action to take.
Upon consummation of the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Agreement with respect to such non-tendered Old Notes and, accordingly, such
Old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer and
to the best of the Company's information and belief, each person
participating in the Exchange Offer is acquiring the New Notes in its
ordinary course of business and has no arrangement or understanding with any
person to participate in the distribution of the New Notes to be received in
the Exchange Offer. The Company will make each person participating in the
Exchange Offer aware (through this Prospectus or otherwise) that any holder
using the Exchange Offer to participate in a distribution of New Notes to be
acquired in the registered Exchange Offer (i) may not rely on the staff
position enunciated in Morgan Stanley and Co. Inc. (avail. June 5, 1991) and
Exxon Capital Holding Corp. (avail. May 13, 1988) or similar letters and (ii)
must comply with registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.
31
ACCOUNTING TREATMENT
The New Notes will be recorded at the same aggregate carrying value as the
Old Notes, approximately $218.0 million, as reflected in the Company's
accounting records on the Exchange Date. Accordingly, no gain or loss for
accounting purposes will be recognized by the Company. The expenses of the
Exchange Offer will be amortized over the term of the New Notes.
32
USE OF PROCEEDS
There will be no proceeds to the Company from the Exchange Offer.
CAPITALIZATION
The following table sets forth, on an unaudited basis, the capitalization
of the Company as of February 28, 1997. This table should be read in
connection with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements of the
Company and the notes thereto, appearing elsewhere in this Prospectus.
February
28, 1997
--------------
(in thousands)
Cash and cash equivalents (excluding Escrow Account) ........................ $ 135,015
Escrow Account(1) ........................................................... 79,804
--------------
Total ..................................................................... $ 214,819
==============
Indebtedness:
13% Senior Notes Due 2005(2) ........................................... $218,036(2)
Convertible Notes due to stockholder(3) ................................ 121,006
Notes payable and long-term liabilities ................................ 2,579
Deferred acquisition liabilities ....................................... 6,716
--------------
Subtotal .......................................................... 348,337
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized; none
issued and outstanding ............................................... --
Class A common stock, $.01 par value; 8,000,000 shares authorized; none
issued and outstanding ............................................... --
Class B common stock, $.01 par value; 6,000,000 shares
authorized; 2,304,561 issued and outstanding(4) ...................... 23
Class C common stock, $.01 par value (the "Non-Voting Common"); 300,000
shares authorized; 225,000 issued and outstanding, as adjusted(5)(2) . 2
Additional paid in capital ............................................. 95,064
Accumulated deficit .................................................... (45,101)
--------------
Subtotal .......................................................... 49,988
--------------
Total capitalization ......................................... $ 398,325
==============
- ------
(1) Of the net proceeds of the Offering, $79.6 million was used to purchase
U.S. government securities pledged to secure the Notes and held in escrow
for payment of the first six interest payments on the Notes. See
"Description of the Notes -- Disbursement of Funds; Escrow Account."
(2) Reflects $7.0 million allocated to the shares of Non-Voting Common issued
in connection with the Offering which constitutes original issue
discount.
(3) In connection with the Offering, VPC agreed (i) to extend the maturity of
the Convertible Notes until six months following the maturity or
indefeasible payment in full of the Notes and (ii) to subordinate the
Convertible Notes in right of payment to the Notes under certain
circumstances. See "Certain Transactions -- Convertible Notes."
(4) Each share of Class B Common is convertible into one share of Class A
Common. The rights of the holders of the Class A Common and Class B
Common are identical except that holders of Class A Common are entitled
to one vote for each issued and outstanding share and holders of Class B
Common are entitled to 10 votes for each issued and outstanding share.
The Class B Common shares may only be held by VPC, Vanguard and their
respective affiliates. As used herein, the term "Common Stock" refers
collectively to the Class A Common, Class B Common and Non-Voting Common.
(5) Each share of Non-Voting Common will automatically convert into the Class
A Common or any other class of common stock of the Issuer that is
registered with the SEC or is listed on a national securities exchange or
authorized for quotation on Nasdaq or otherwise subject to registration
under the Exchange Act, provided the terms thereof are no less favorable
to holders than were the Shares. See "Description of Capital Stock." The
rights of the holders of the Class A Common, Class B Common and the
Non-Voting Common are identical except as to voting rights. Holders of
Non-Voting Common are not entitled to notice of, or to vote at, any
meeting of the stockholders or action taken by written consent, except as
required by Delaware law.
33
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data presented below as of and for the
periods ended December 31, 1993 and 1994 and August 31, 1995 and 1996 have
been derived from the consolidated financial statements of the Company, which
consolidated financial statements have been audited by Deloitte & Touche LLP,
independent auditors. The selected financial data presented below as of and
for the six month periods ended Fenruary 29, 1996 and February 28, 1997 have
been derived from unaudited consolidated financial statements of the Company.
In the opinion of management, the unaudited consolidated financial statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, which consist only of normal recurring adjustments,
necessary for the fair presentation of the Company's financial position and
results of operation for these periods. In 1995, the Company changed its
fiscal year end to August 31 to match that of its majority stockholder. As a
result of the change in fiscal year and the Company's history of growth
through acquisitions the Company's historical financial results are not
directly comparable from period to period, nor are they indicative of future
results of operations in many respects. The following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and the Consolidated
Financial Statements of the Company and the notes thereto, appearing
elsewhere in this Prospectus.
Period from
April 20,
1993 (date Eight Month Six Month Six Month
of inception) Year Ended Period Period Period
to December December Ended Year Ended Ended Ended
31, 31, August 31, August 31, February 29, February 28,
-------------- ------------ ------------- ------------ ------------- --------------
1993 1994 1995 1996 1996 1997
-------------- ------------ ------------- ------------ ------------- --------------
(in thousands except per share data)
Statement of Operations Data:
Revenues:
Cable television ............ $ 12 $ 240 $ 8,782 $ 25,893 $11,570 $ 17,208
Telecommunications .......... -- 202 788 1,712 718 1,414
-------------- ------------ ------------- ------------ ------------- --------------
Total revenues ........... 12 442 9,570 27,605 12,288 18,622
-------------- ------------ ------------- ------------ ------------- --------------
Operating Expenses:
Cost of services ............ 6 470 4,557 11,868 5,266 8,702
Customer support, general and
administrative ........... 304 7,733 8,235 17,319 7,499 12,267
Depreciation and amortization . 8 117 2,420 8,676 3,804 5,820
Nonrecurring reorganization
costs(1) ................. -- -- 3,820 2,318 826 --
-------------- ------------ ------------- ------------ ------------- --------------
Total operating expenses . 318 8,320 19,032 40,181 17,395 26,789
-------------- ------------ ------------- ------------ ------------- --------------
Loss from operations .......... (306) (7,878) (9,462) (12,576) (5,107) (8,167)
Interest expense on
Convertible Notes due
to stockholder (2) .......... -- -- (919) (5,342) (1,890) (6,907)
Other interest expense, net ... (1) (66) (249) (512) (245) (1,218)
-------------- ------------ ------------- ------------ ------------- --------------
Loss before income taxes ...... (307) (7,944) (10,630) (18,430) (7,242) (16,292)
Income tax benefits (3) ....... -- -- 469 -- -- --
-------------- ------------ ------------- ------------ ------------- --------------
Net loss ...................... $ (307) $ (7,944) $(10,161) $(18,430) $(7,242) $(16,292)
============== ============ ============= ============ ============= ==============
Loss per share(4) ............. $ (6.89) $ (8.30) $ (3.37) $ (7.01)
============= ============ ============= ==============
Cash dividend declared ........ -- -- -- -- -- --
Financial Data:
EBITDA(5) ..................... $ (298) $ (7,761) $ (3,222) $ (1,582) $ (477) $ (2,347)
Capital expenditures(6) ....... 517 9,278 22,170 62,121 23,122 24,925
Acquisition of private cable
businesses .................. -- 1,298 49,974 9,916 5,793 2,500
Deficiency of earnings to fixed
charges(7) .................. 307 7,944 10,630 20,280 7,876 17,276
34
As of As of As of
December 31, August 31, February 28,
------------------- ---------------------- -------------
1993 1994 1995 1996 1997
------ --------- --------- --------- -------------
(in thousands except per share data)
Balance Sheet Data:
Cash and cash equivalents
(excluding Escrow Account) . $ 41 $ 5,019 $ 2,036 $ 1,677 $135,015
Escrow Account .............. -- -- -- -- 79,804
Property, plant and
equipment, net ............. 509 11,379 48,060 103,800 122,041
Intangible assets ........... -- 16,189 55,443 65,876 75,471
Total assets ................ 588 33,820 108,072 175,978 417,681
13% Senior Notes Due 2005 ... -- -- -- -- 218,036
Convertible Notes due to
stockholder(8) ............. -- 15,000 17,950 89,414 121,006
Total liabilities ........... 206 31,007 39,527 116,698 367,693
Stockholders' equity ........ 382 2,813 68,545 59,280 49,988
Book value per share(4) ..... 31.89 25.72 19.76
As of As of
August 31, February 28,
---------------------- -------------
1995 1996 1997
--------- --------- -------------
Operating Data:(9)
Cable Television:
Units under contract(10) .................... 173,324 241,496 265,518
Units passed(11) ............................ 170,336 225,433 239,801
Basic subscribers ........................... 75,944 114,163 125,090
Basic penetration(12) ....................... 44.6% 50.6% 52.2%
Premium units ............................... 39,753 60,641 74,441
Pay-to-basic ratio(13) ...................... 52.3% 53.1% 59.5%
Average monthly cable revenue per
subscriber(14) ........................... $ 22.84 $ 24.29 $ 24.02
Telecommunications:
Units under contract(10) .................... 10,322 20,945 27,373
Units passed(11) ............................ 9,116 12,364 14,416
Subscribers ................................. 2,207 4,080 4,791
Lines(15) ................................... 2,650 5,166 6,039
Penetration(16) ............................. 24.2% 33.0% 33.2%
Average monthly telecommunications revenue
per subscriber(14) ....................... -- $ 59.08 $ 53.16
- ------
(1) During the eight month period ended August 31, 1995 and fiscal 1996, the
Company relocated its corporate headquarters, began relocating its
customer services centers and completed several acquisitions. As a
result of these actions, significant nonrecurring reorganization costs
were incurred primarily relating to severance costs of former employees
at the previous locations and relocation and recruiting costs of
employees at the new location.
(2) Interest expense on Convertible Notes due to stockholder, is reported
net of interest capitalized in property, plant and equipment. In
connection with the Offering, the stockholder, VPC, agreed to
subordinate the Convertible Notes to the prior payment of the Notes
under certain circumstances. See "Certain Transactions -- Convertible
Notes."
(3) The Company has not had taxable income for the periods reported. The
Company reported an income tax benefit in the eight months ended August
31, 1995 due to the reduction of a deferred tax liability established as
the result of an acquisition. See note 8 of notes to the Consolidated
Financial Statements.
(4) Loss per share and book value per share information is not presented for
the periods the Company was organized as a partnership.
(5) EBITDA represents earnings before interest expense, income tax benefits,
depreciation, amortization and nonrecurring reorganization costs. EBITDA
is not intended to represent cash flow from operations and should not be
considered as an alternative to net loss as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity. The Company believes that EBITDA is a standard measure
commonly reported and widely used by analysts, investors and other
interested parties in the cable television and telecommunications
industries. Accordingly, this information has been disclosed herein to
permit a more complete comparative analysis of the Company's operating
performance relative to other companies in the industry.
35
(6) Capital expenditures include expenditures on property, plant and
equipment together with intangible assets.
(7) For the purposes of calculating the deficiency of earnings to fixed
charges, (i) earnings consist of loss before income taxes plus fixed
charges and (ii) fixed charges consist of interest expense on all debt,
amortization of deferred financing costs and the portion of operating
lease rental expense that is representative of the interest factor
(deemed to be one third of minimum operating lease rental). On a pro
forma basis, after giving effect to the Offering (excluding interest on
the Escrow Account), the deficiency of earnings to fixed charges for the
periods ended August 31, 1996 and February 28, 1997 would have been
$49.5 million (including $7.2 million in respect of Convertible Notes)
and $31.9 million (including $7.9 million in respect of Convertible
Notes), respectively.
(8) The Convertible Notes mature six months following the maturity or
indefeasible payment in full of the Notes and are subordinated in right
of payment to the Notes under certain circumstances. See "Certain
Transactions -- Convertible Notes."
(9) Information with respect to the periods ended December 31, 1993 and 1994
is not meaningful and not presented.
(10) Units under contract represent the number of units currently passed and
additional units with respect to which the Company has entered into
Rights of Entry for the provision of cable television and
telecommunications services, respectively, but which the Company has not
yet passed and which the Company expects to pass within the next five
years. At this time substantially all units under contract for
telecommunications are also under contract for cable television. The
Company anticipates passing approximately 15,800 and 8,700 additional
units currently under contract for cable television and units currently
under contract for telecommunications, respectively, by the end of
calendar 1997.
(11) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications
systems, respectively. The difference between units under contract and
units passed represents units for which Rights of Entry have been
entered into, but which are not yet connected and activated for cable
television and telecommunications services, respectively.
(12) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(13) Pay-to-basic ratio is calculated by dividing the total number of premium
units subscribed for by the total number of basic subscribers.
(14) Represents revenues per average monthly subscriber for the fiscal
periods ended as of the date shown. Information with respect to the
telecommunications business for the period ended August 31, 1995 is not
available.
(15) Lines represent the number of telephone lines currently being provided
to telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line.
(16) Penetration is calculated by dividing the total number of
telecommunications subscribers at such date by the total number of units
passed.
36
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Set forth below is a discussion of the financial condition and results of
operations of the Company for the six month periods ended February 29, 1996
and February 28, 1997 and for the year ended December 31, 1994, for the eight
month period ended August 31, 1995 and for the fiscal year ended August 31,
1996. This discussion should be read in conjunction with the Consolidated
Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
OVERVIEW
The Company was founded in April 1993 to build, acquire and operate
private cable television systems. Since inception, the Company has
experienced substantial growth. This growth has been achieved through
acquisitions of other operators, many of which were SMATV systems, and the
negotiation by the Company of new Rights of Entry. Since inception, the
number of units under contract for cable television increased to 265,518 at
February 28, 1997. Of such increase, approximately 193,000 units were
attributable to acquisitions. In general, the conduct of the acquired
operations prior to acquisition was materially different than following
acquisition. Substantially all of the SMATV systems acquired by the Company
are being converted to 18GHz or fiber optic networks, a process which is
expected to be substantially complete by the end of fiscal 1999. Currently
the Company's networks provide cable television services to over 130,000
units representing approximately 54% of the units passed for cable
television. In addition, the Company is rolling out telecommunications
offerings in its markets and expects to offer telecommunications services in
substantially all of its markets by the end of calendar 1999. In 1995, the
Company changed its fiscal year end to August 31 to match that of its
majority stockholder. As a result, the Company's historical financial results
are not directly comparable from period to period, nor are they indicative of
future results of operations in many respects. All of the Company's
acquisitions have been accounted for by the purchase method of accounting.
Through February 28, 1997, the Company had invested approximately $209
million primarily in its cable television and telecommunications systems. The
Company's revenues have grown from $0.4 million for the year ended December
31, 1994 to $27.6 million for fiscal 1996 and from $12.3 million to $18.6
million for the six month periods ended February 29, 1996 and February 28,
1997, respectively. Results of operations for fiscal 1996 include negative
EBITDA of $(1.6) million as compared with $(3.2) million for the eight month
period ended August 31, 1995. EBITDA represents earnings before interest
expense, income tax benefits, depreciation, amortization and nonrecurring
reorganization costs.
The Company earns substantially all of its cable television revenues from
monthly customer fees for basic, premium and ancillary services.
Substantially all of its telecommunications revenues are earned from monthly
fees for line rental and toll usage.
While pursuing its investment and development strategy, the Company
incurred and continues to incur substantial up-front operating expenses for
sales (including obtaining Rights of Entry), customer operations,
administration and maintenance of facilities, general and administrative
expenses and depreciation and amortization in order to solicit and service
customers in advance of generating significant revenues. As a result of these
factors, the Company has generated operating losses of $12.6 million, $9.5
million and $7.9 million for fiscal 1996, the eight months ended August 31,
1995 and the year ended December 31, 1994, respectively, as its cable
television and telecommunications customer base has grown. In general,
negative EBITDA has decreased substantially over this period. The Company
reported negative EBITDA of $(1.6) million, $(3.2) million and $(7.8) million
for fiscal 1996, the eight months ended August 31, 1995 and the year ended
December 31, 1994, respectively. The Company expects that the significant
expenses to be incurred as it implements its telecommunications roll out
strategy will adversely effect EBITDA for a significant period of time. See
"Business--Network Architecture--Telecommunication Architecture". Once the
buildout of the telecommunications networks and conversion of SMATV systems
is completed, the Company expects
37
that the incremental costs associated with the addition of new customers in
its existing markets will be principally limited to sales and marketing and,
therefore, that its EBITDA will improve significantly. There can be no
assurance that the Company will generate positive EBITDA in the future.
The principal operating factors affecting the Company's future results of
operations are expected to include (i) changes in the number of MDUs under
Rights of Entry, (ii) penetration rates for its services, (iii) the terms of
its arrangements with MDU owners, including revenue sharing, (iv) the prices
that it charges its subscribers, (v) normal operating expenses, which in the
cable television business comprise principally programming expenses and in
the telecommunications business comprise principally fees paid to long
distance carriers, the cost of trunking services and other LEC charges, as
well as, in each case, billing and collection costs, technical service and
maintenance expenses and customer support services, and (vi) capital
expenditures as the Company implements its telecommunication roll out
strategy and completes its conversion of SMATV systems. The Company's results
of operations may also be impacted by future acquisitions. The Company has
typically acquired businesses that are private companies owned by
entrepreneurs and without the same regulatory compliance practices and
internal accounting controls and procedures of the Company. Accordingly, the
Company frequently is required to take remedial actions, which may include
the expenditure of funds and may take extensive time to implement. In
general, the Company factors the costs associated with these matters into the
terms of its acquisitions, including, where practicable through
indemnification rights. However, there can be no assurance that the Company's
results of operations or liquidity would not be affected by these or other
matters arising from past or future acquisitions.
The Company anticipates that it will continue to have higher churn than is
typical of a franchise cable television operator due to the frequent turnover
of MDU units. This churn generally does not result in a reduction in overall
penetration rates since the outgoing subscriber is often quickly replaced by
a new tenant in his or her unit. This may result in average installation
revenue per subscriber that is higher than for a franchise cable television
operator. Although this may also require higher installation expenses per
subscriber, because of the layout of MDUs and the Company's ability to obtain
"permission to enter" from the MDU owner, installations can often be
completed when the subscriber is not home, limiting the expense of
installation. Accordingly, the Company does not believe that churn is as
significant an operating statistic as would be the case for franchise cable
television operators. The Company's cable television churn for fiscal 1996
was 67.4%. Despite this level of cable television churn, the Company's basic
cable television penetration rate increased from 44.6% at August 31, 1995 to
50.6% at August 31, 1996. Churn as calculated, is the number of basic cable
television subscribers disconnected during the relevant period divided by the
average number of basic cable television subscribers during such period.
PROPOSED PHONOSCOPE ACQUISITION
The Company has entered into a Letter of Intent relating to its proposed
acquisition of the residential portion of the franchise cable television
system business of Phonoscope. The Letter of Intent is not binding, and
negotiations are continuing. Based on information made available to the
Company, the Company believes that, as of November 30, 1996, Phonoscope had
Rights of Entry or subscriber agreements covering approximately 59,000 units of
which approximately 87% were in MDUs and that for the eleven month period ended
November 30, 1996, Phonoscope revenues were approximately $8.6 million.
As provided for in the Letter of Intent, the proposed purchase price for
Phonoscope would be approximately $34.6 million, subject to certain
adjustments (including a dollar for dollar reduction for the value of any
liabilities assumed), payable in cash at closing. At closing, a portion of
the purchase price (which has yet to be agreed) would be placed in escrow to
cover indemnity claims and post closing purchase price adjustments. In
addition, Phonoscope and certain of its affiliates are expected to enter into
non-compete agreements with respect to the residential portion of
Phonoscope's franchise cable system business. The Phonoscope Acquisition would
be financed with the proceeds
38
of the Offering or, if proceeds are required for the Company's operations before
the Phonoscope Acquisition is consummated, with other sources (which may include
Deeply Subordinated Shareholders Loans (as defined). There is no financing
condition to the consummation of the Phonoscope Acquisition.
There can be no assurance that there will not be significant changes in
the information presented herein with respect to Phonoscope and that the
Phonoscope Acquisition will nevertheless be consummated. There can be no
assurance that the Phonoscope Acquisition will be consummated on the terms
contemplated by the Letter of Intent or otherwise. The Exchange Offer is not
conditioned on the consummation of the Phonoscope Acquisition. See "Risk
Factors -- Consummation of the Phonoscope Acquisition."
The Company believes that the consummation of the Phonoscope Acquisition
will allow the Company (i) to expand its subscriber base; (ii) cross sell the
Company's telecommunications services at MDUs currently served by Phonoscope;
and (iii) achieve operating efficiencies and improved field service in the
Houston market. The Company intends to offer telecommunications services to
MDUs served by the Phonoscope network in a manner consistent with its overall
telecommunications roll out plan.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information derived from the Company's Consolidated Statements of Operations,
included elsewhere in this Prospectus, expressed as a percentage of total
revenues. Information with respect to the period ended December 31, 1994 is
not included herein because the percentages do not convey meaningful
information.
Eight Month Six Month Six Month
Period Ended Year Ended Period Ended Period Ended
August 31, August 31, February 29, February 28,
1995 1996 1996 1997
-------------- ------------ ------------- --------------
Statement of Operations Data:
Revenues:
Cable television ............... 91.8% 93.8% 94.2% 92.4%
Telecommunications ............. 8.2 6.2 5.8 7.6
-------------- ------------ ------------- --------------
Total revenues ................ 100.0% 100.0% 100.0% 100.0%
-------------- ------------ ------------- --------------
Operating Expenses:
Cost of services .................. 47.6 43.0 42.9 46.7
Customer support, general and
administrative ................. 86.1 62.8 61.0 65.9
Depreciation and amortization ..... 25.3 31.4 31.0 31.3
Nonrecurring reorganization costs . 39.9 8.4 6.7 --
-------------- ------------ ------------- --------------
Total operating expenses ..... 198.9 145.6 141.6 143.9
-------------- ------------ ------------- --------------
Loss from operations .............. (98.9) (45.6) (41.6) (43.9)
Interest expense on Convertible
Notes due to stockholder ..... (9.6) (19.4) (15.3) (37.1)
Other interest expense, net .... (2.6) (1.8) (2.0) (6.5)
-------------- ------------ ------------- --------------
Loss before income taxes .......... (111.1) (66.8) (58.9) (87.5)
Income tax benefit ................ 4.9 -- -- --
-------------- ------------ ------------- --------------
Net loss ....................... (106.2)% (66.8)% (58.9)% (87.5)%
============== ============ ============= ==============
Other Data:
EBITDA ............................ (33.7)% (5.7)% (3.9)% (12.6)%
============== ============ ============= ==============
39
SIX MONTH PERIOD ENDED FEBRUARY 28, 1997 COMPARED WITH SIX MONTH PERIOD ENDED
FEBRUARY 29, 1996
Operating information for the six month period ended February 28, 1997
included the following:
o Cable television subscribers grew to 125,090 at February 28, 1997,
an increase of 10% from 114,163 at August 31, 1996.
o Telecommunications subscribers grew to 4,791 at February 28, 1997,
an increase of 17% from 4,080 at August 31, 1996.
o The Company's market presence in San Francisco was strengthened by
the acquisition of a private cable business with approximately 4,300
cable television subscribers.
Revenues. Revenues were $18.6 million for the six month period ended
February 28, 1997, an increase of $6.3 million or 51% over revenues of $12.3
million for the six month period ended February 29, 1996. Of the revenues
generated in the six month period ended February 28, 1997, 92.4% and 7.6%
represented revenues from cable television and telecommunications,
respectively, compared to 94.2% and 5.8%, respectively, for the six month
period ended February 29, 1996.
Cable television revenues were $17.2 million for the six month period
ended February 28, 1997, an increase of $5.6 million, or 48%, over cable
television revenues of $11.6 million for the six month period ended February
29, 1996. The growth in cable television revenues was principally
attributable to an increase in the average number of cable television
subscribers, which accounted for approximately $5.4 million of the increase.
Telecommunications revenues were $1.4 million for the six month period
ended February 28, 1997, an increase of $0.7 million, or 100%, over the six
month period ended February 29, 1996. This growth was largely due to an
increase in the average number of telecommunications customers.
Operating Expenses and Margins. Operating expenses (excluding depreciation
and amortization and nonrecurring reorganization costs) were $21.0 million
for the six month period ended February 28, 1997, an increase of $8.2
million, or 64%, over operating expenses of $12.8 million for the six month
period ended February 29, 1996. As a percentage of revenues, operating
expenses increased to 112.6% for the six month period ended February 28, 1997
from 103.9% for the six month period ended February 29, 1996 as a result of
the expansion of the Company's operations.
Cost of services were $8.7 million for the six month period ended February
28, 1997, an increase of $3.4 million, or 64%, from $5.3 million for the six
month period ended February 29, 1996. These expenses represent variable costs
of the Company, including programming, interconnection costs and revenue
sharing with property owners, and these increases in costs were primarily
attributable to the growth in the number of cable television subscribers and
telecommunications lines. Gross margins, which represent total revenues less
cost of services, decreased from 57.1% for the six month period ended
February 29, 1996 to 53.3% for the six month period ended February 28, 1997.
The decrease in gross margins is partly attributable to an increase in
programming fees resulting from expanded channel line ups as properties are
converted to the 18GHz or fiber networks in advance of price increases to
customers and increased premium channel penetration, which have lower gross
margins. Gross margins also decreased as a result of higher revenue sharing
payments to property owners due to new properties being added to the
Company's systems with revenue sharing arrangements.
Customer support, general and administrative expenses were $12.3 million
for the six month period ended February 28, 1997, an increase of $4.8
million, or 64%, over customer support, general and administrative expenses
of $7.5 million for the six month period ended February 29, 1996. The
increase in customer support, general and administrative expenses was largely
due to an increase in personnel associated with the expansion of the
Company's operations, the telecommunications roll out and the rapid growth in
the size of the cable television and telecommunications networks and the
number of subscribers.
40
Depreciation and Amortization. Depreciation and amortization expenses were
$5.8 million for the six month period ended February 28, 1997, an increase of
$2.0 million, or 53%, over depreciation and amortization expenses of $3.8
million for the six month period ended February 29, 1996. This increase was
due primarily to increased depreciation expenses associated with capital
expenditures for the continuing construction of the Company's cable
television and telecommunications networks.
Nonrecurring reorganization costs. Nonrecurring reorganization costs of
$0.8 million were incurred for the six month period ended February 29, 1996.
These costs represent the costs of assimilating the acquisitions made by the
Company and include severance, relocation and recruitment costs. Since the
Company has substantially completed the reorganization of its operations and
plans only to make acquisitions on a limited basis for strategic purposes in
the future, these costs are not expected to be significant in future periods.
Loss from Operations and EBITDA. For the reasons discussed above, loss
from operations was $8.2 million for the six month period ended February 28,
1997, an increase of $3.1 million, or 61%, over loss from operations of $5.1
million for the six month period ended February 29, 1996. Negative EBITDA
increased to $(2.4) million for the six month period ended February 28, 1997
from $(0.5) million for the six month period ended February 29, 1996. The
increase in negative EBITDA is the result of higher programming fees and
revenue sharing, and the expansion of the Company's operations in
anticipation of the roll out of telecommunications services. Negative EBITDA
represented (12.6)% of total revenues for the six month period ended February
28, 1997 compared to (3.9)% of total revenues for the six month period ended
February 29, 1996.
Interest and Income Taxes. Total net interest expense was $8.1 million for
the six month period ended February 28, 1997, an increase of $6.0 million
over total net interest expense of $2.1 million for the six month period
ended February 29, 1996. This increase was primarily attributable to
additional loans from the stockholder and to a lesser extent the issuance on
February 14, 1997 of $225 million of 13% Senior Notes Due 2005 to finance the
Company's ongoing investment in its networks.
The Company recorded no income tax expense for the six month period ended
February 28, 1997. The Company has significant tax loss carryforwards which
can be carried forward for up to fifteen years and does not anticipate paying
any income taxes for the next several years. Deferred tax assets are fully
reserved as realization is uncertain.
YEAR ENDED AUGUST 31, 1996 COMPARED WITH EIGHT MONTHS ENDED AUGUST 31, 1995
Operating information for fiscal 1996 included the following:
o Cable television subscribers grew to 114,163 at August 31, 1996, an
increase of 50% from 75,944 at August 31, 1995.
o Telecommunications subscribers grew to 4,080 at August 31, 1996, an
increase of 85% from 2,207 at August 31, 1995.
o New markets in San Francisco and Tampa were entered through
acquisition of properties from other GVL subsidiaries, acquiring
approximately 12,000 and 1,500 cable television subscribers,
respectively.
o Completed the acquisition of a private cable business in Dallas with
approximately 5,000 cable television subscribers to strengthen the
Company's presence in that market.
Revenues. Revenues were $27.6 million for fiscal 1996, an increase of
$18.0 million or 188% over revenues of $9.6 million for the eight months
ended August 31, 1995. Of the revenues generated in fiscal 1996, 93.8% and
6.2% represented revenues from cable television and telecommunications,
respectively, compared to 91.8% and 8.2%, respectively, for the eight months
ended August 31, 1995.
Cable television revenues were $25.9 million for fiscal 1996, an increase
of $17.1 million, or 194%, over cable television revenues of $8.8 million for
the eight months ended August 31, 1995. The growth in cable television
revenues was attributable in part to an increase in the average
41
number of cable television subscribers, which accounted for approximately
$15.6 million of the increase. Cable television revenues also grew in part
from an increase in the retail price of the Company's cable television
services which accounted for approximately $1.5 million of the increase.
Telecommunications revenues were $1.7 million for fiscal 1996, an increase
of $0.9 million or 113%, over the eight months ended August 31, 1995. This
growth was largely due to an increase in the average number of
telecommunications subscribers.
Operating Expenses and Margins. Operating expenses (excluding depreciation
and amortization and nonrecurring reorganization costs) were $29.2 million
for fiscal 1996, an increase of $16.4 million, or 128%, over operating
expenses of $12.8 million for the eight months ended August 31, 1995. As a
percentage of revenues, operating expenses decreased to 105.8% for fiscal
1996 from 133.7% for the eight months ended August 31, 1995.
Cost of services were $11.9 million for fiscal 1996, an increase of $7.3
million, or 159%, from $4.6 million for the eight months ended August 31,
1995. These expenses represent variable costs of the Company, including
programming, interconnection costs and revenue sharing with property owners,
and these increases in costs were primarily attributable to the growth in the
number of cable television subscribers and telecommunications lines. Gross
margins increased from 52.4% for the eight months ended August 31, 1995 to
57.0% for fiscal 1996.
Customer support, general and administrative expenses were $17.3 million
for fiscal 1996, an increase of $9.1 million, or 111%, over customer support,
general and administrative expenses of $8.2 million for the eight months
ended August 31, 1995. The increase in customer support, general and
administrative expenses was largely due to an increase in personnel
associated with the expansion of the Company's operations and the rapid
growth in the size of the cable television and telecommunications networks
and the number of subscribers.
Depreciation and Amortization. Depreciation and amortization expenses were
$8.7 million for fiscal 1996, an increase of $6.3 million, or 263%, over
depreciation and amortization expenses of $2.4 million for the eight months
ended August 31, 1995. This increase was due primarily to increased
depreciation expenses associated with acquisitions and capital expenditures
for the continuing construction of the Company's cable television and
telecommunications networks.
Nonrecurring reorganization costs. Nonrecurring reorganization costs were
$2.3 million for fiscal 1996 and $3.8 million for the eight months ended
August 31, 1995. These costs represent the costs of assimilating the
acquisitions made by the Company and include severance, relocation and
recruitment costs. Since the Company has substantially completed the
reorganization of its operations and plans only to make acquisitions on a
limited basis for strategic purposes in the future, these costs are not
expected to be significant in future periods.
Loss from Operations and EBITDA. For the reasons discussed above, loss
from operations was $12.6 million for fiscal 1996, an increase of $3.1
million, or 33%, over loss from operations of $9.5 million for the eight
months ended August 31, 1995. Negative EBITDA increased to $(1.6) million for
fiscal 1996. The improvement in negative EBITDA represents an increase of
$1.6 million over negative EBITDA of $(3.2) million for the eight months
ended August 31, 1995. Negative EBITDA represented (5.7)% of total revenues
for fiscal 1996 compared to (33.7)% of total revenues for the eight months
ended August 31, 1995.
Interest and Income Taxes. Total net interest expense was $5.9 million for
fiscal 1996, an increase of $4.7 million over total net interest expense of
$1.2 million for the eight months ended August 31, 1995. This increase was
attributable to additional loans from the stockholder to finance the
Company's ongoing investment in its networks.
The Company recorded no income tax expense for fiscal 1996. The Company
recorded an income tax benefit of $0.5 million for the eight months ended
August 31, 1995 which was the result of the reduction of a deferred tax
liability due to increased tax losses being available. The Company has
significant tax loss carryforwards which can be carried forward for up to
fifteen years and does not anticipate paying any income taxes for the next
several years. Deferred tax assets are fully reserved as realization is
uncertain.
42
EIGHT MONTHS ENDED AUGUST 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Operating information for the eight months ended August 31, 1995 included the
following:
o Cable television subscribers grew to 75,944 at August 31, 1995.
o Telecommunications subscribers grew to 2,207 at August 31, 1995.
o Acquisitions were completed in Houston, Chicago, Denver, Miami and
Dallas. These acquisitions generated approximately 119,300 units
passed for cable television and 48,400 cable television subscribers
at the date of acquisition.
o GVL acquired the controlling interest in OpTel.
o Corporate headquarters were transferred from Los Angeles to Dallas
and a new management team was recruited with experience in the
development and operation of the cable television and
telecommunications companies owned or affiliated with GVL.
Revenues. Revenues were $9.6 million for the eight months ended August 31,
1995, an increase of $9.2 million over revenues of $0.4 million for the year
ended December 31, 1994. Of the revenues generated in the eight months ended
August 31, 1995, 91.8% and 8.2% represented revenues from cable television
and telecommunications, respectively, compared to 54.3% and 45.7%,
respectively, for the year ended December 31, 1994.
Cable television revenues were $8.8 million for the eight months ended
August 31, 1995, an increase of $8.6 million over cable television revenues
of $0.2 million for the year ended December 31, 1994. The growth in cable
television revenues was primarily attributable to an increase in the average
number of cable television subscribers.
Telecommunications revenues were $0.8 million for the eight months ended
August 31, 1995, an increase of $0.6 million over the year ended December 31,
1994. This growth was primarily due to an increase in the average number of
telecommunications subscribers.
Operating Expenses and Margins. Operating expenses (excluding depreciation
and amortization and nonrecurring reorganization costs) were $12.8 million
for the eight months ended August 31, 1995, an increase of $4.6 million, or
56%, over operating expenses of $8.2 million for the year ended December 31,
1994. As a percentage of revenues, operating expenses were 133.7% for the
eight months ended August 31, 1995.
Cost of services were $4.6 million for the eight months ended August 31,
1995, an increase of $4.1 million from $0.5 million for the year ended
December 31, 1994. These expenses represent variable costs of the Company,
including programming, interconnection costs and revenue sharing property
owners and their increase was primarily attributable to the growth in the
number of cable television subscribers and telecommunications lines. Gross
margins increased from negative (6.3)% for the year ended December 31, 1994
to 52.4% for the eight months ended August 31, 1995.
Customer support, general and administrative expenses were $8.2 million
for the eight months ended August 31, 1995, an increase of $0.5 million, or
6%, over customer support, general and administrative expenses of $7.7
million for the year ended December 31, 1994. The increase in customer
support, general and administrative expenses was largely due to an increase
in personnel associated with the expansion of the Company's operations
generated primarily by the acquisition of private cable companies in five
markets and the rapid growth in the size of the Company's cable television
and telecommunications networks and the number of subscribers.
Depreciation and Amortization. Depreciation and amortization expenses were
$2.4 million for the eight months ended August 31, 1995, an increase of $2.3
million over depreciation and amortization expenses of $0.1 million for the
year ended December 31, 1994. This increase was due primarily to increased
depreciation expenses associated with acquisitions and capital expenditures
for the continuing construction of the Company's cable television and
telecommunications networks.
43
Nonrecurring reorganization costs. Nonrecurring reorganization costs were
$3.8 million for the eight month period ended August 31, 1995. These costs
represent the costs of assimilating the acquisitions made by the Company and
include severance, relocation and recruitment costs.
Loss from Operations and EBITDA. For the reasons discussed above, loss
from operations was $9.5 million for the eight months ended August 31, 1995,
an increase of $1.6 million, or 20%, over loss from operations of $7.9
million for the year ended December 31, 1994. Negative EBITDA increased to
$(3.2) million for the eight months ended August 31, 1995. The improvement in
negative EBITDA represents an increase of $4.6 million over negative EBITDA
of $(7.8) million for the year ended December 31, 1994. Negative EBITDA
represented (33.7)% of total revenues for the eight months ended August 31,
1995.
Interest and Income Taxes. Total net interest expense was $1.2 million for
the eight months ended August 31, 1995, an increase of $1.2 million over
total net interest expense of $0.1 million for the year ended December 31,
1994. This increase was attributable to loans from the stockholder to finance
the acquisitions and investments in the Company's networks.
The Company recorded an income tax benefit of $0.5 million for the eight
months ended August 31, 1995 which was the result of the reduction of a
deferred tax liability no longer required due to increased tax losses being
available. No income tax expense was recorded for the year ended December 31,
1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated net losses since its inception, resulting in an
accumulated deficit of $45.1 million as of February 28, 1997. During the past
year, the Company has required external funds to finance capital expenditures
associated with the completion of acquisitions in strategic markets,
expansion of its networks and operating activities. Net cash used in
acquisitions was $2.5 million in the six month period ended February 28,
1997, $9.9 million in fiscal 1996, $50.0 million in the eight months ended
August 31, 1995 and $1.3 million in the year ended December 31, 1994. Net
cash used in building the Company's cable television and telecommunications
networks and related business activities was $24.9 million in the six month
period ended February 28, 1997, $62.1 million in fiscal 1996, $22.2 million
in the eight months ended August 31, 1995 and $9.3 million in the year ended
December 31, 1994.
Since inception, the Company has relied primarily on investments from its
principal stockholder in the form of equity and Convertible Notes to fund its
expenditures. The Company received funding from its principal stockholder of
$23.7 million in the six month period ended February 28, 1997, $73.4 million
during fiscal 1996, $79.5 million during the eight months ended August 31,
1995 and $25.4 million during the year ended December 31, 1994. None of the
Company's stockholders or affiliates are under any contractual obligation to
provide additional financing to the Company. In connection with the Offering,
VPC agreed (i) to extend the maturity of the Convertible Notes until six
months following the maturity or indefeasible payment in full of the Notes
and (ii) to subordinate the Convertible Notes in right of payment to the
Notes under certain circumstances. See "Certain Transactions -- Convertible
Notes."
The Company's future results of operations will be materially impacted by
its ability to finance its planned business strategies. The Company
anticipates that it will require approximately $250 million in capital
expenditures in fiscal 1997 and fiscal 1998 of which approximately $24.9
million had been expended as of February 28, 1997. The key elements of the
Company's business strategies requiring financing include the roll out of its
telecommunications networks including central office switches, the conversion
of SMATV systems to networks, the connection of additional properties to the
networks and the implementation of addressable interdiction devices in
substantially all of the MDUs served. The Company believes that the net
proceeds from the Offering (excluding the $79.6 million of U.S. Government
Securities held in escrow that will be used to fund the first six interest
payments on the Notes) available for use by the Company of $130.2 million
will be sufficient to finance the Company's
44
capital requirements through January 1998. If the Company consummates the
Phonoscope Acquisition, it will defer other network expansion. As a result,
whether or not the Phonoscope Acquisition is consummated, the Company
believes that it will have sufficient funds to finance the Company's capital
requirements through January 1998. The foregoing estimates are based on
certain assumptions, including the timing of the signing of Rights of Entry,
the conversion of MDUs currently served by SMATV systems to the networks and
the telecommunications roll out, each of which may vary significantly from
the Company's plan. After utilizing the net proceeds of the Offering, the
Company expects to fund its capital requirements through the end of fiscal
1998 through a combination of cash available from operations, bank or vendor
financing or other available debt or equity financings. As of the date
hereof, the Company has no agreement or agreement in principle with any bank,
vendor or other person to provide any such debt or equity financing. There
can be no assurance that the Company will be successful in obtaining any
necessary financing on reasonable terms or at all. See "Risk Factors --
Future Capital Needs."
The Company benefits from the fact that it does not require a substantial
capital investment in its cable television and telecommunications networks in
advance of connecting subscribers to its networks since a significant
proportion of the costs comprises the internal wiring and the erection of
microwave transmitting and receiving equipment specific to the MDU. Of the
$250 million in capital expenditures budgeted through fiscal 1998,
approximately $180 million is related to specific MDUs. These expenditures
are, to a large extent, discretionary and will only be incurred when new
properties are brought into service or when existing properties serviced by
SMATV systems are connected to the networks. When a new Right of Entry is
signed it takes approximately four months of construction work to activate
signal at the property. Once the property is activated, penetration rates
increase rapidly. The balance of the budgeted capital expenditures, totaling
approximately $70 million, is for infrastructure assets not related to
specific MDUs. These assets include central office switches, cable television
headends, computer hardware and software and capitalized construction costs.
The Company can to some degree control the timing of the infrastructure
capital expenditures by controlling the timing of the telecommunications roll
out and the expansion of its networks.
Following fiscal 1998, the Company expects to continue to require
significant capital investment and additional financing. Such additional
financing may be obtained through additional equity or debt financing,
including senior bank credit facilities at one or more subsidiaries of the
Company and further securities offerings. See "Risk Factors -- Holding
Company Structure and Need to Access Subsidiaries Cash Flow." To the extent
that the Company determines to pursue further acquisitions or negative cash
flow from operations continues, substantial additional funds may be required.
To the extent that these or any other funds are not obtained on a timely
basis, it may be necessary for the Company to delay the implementation of
portions of its networks and to delay pursuit of its telecommunications
strategy. There can be no assurance that the Company will be successful in
obtaining the requisite debt and/or equity financing on reasonable terms or
at all.
In order to accelerate the achievement of the Company's strategic goals,
the Company has from time to time held, and continues to hold, preliminary
discussions relating to possible acquisitions by the Company and possible
investments in the Company by strategic investors. Other than the non-binding
Letter of Intent with respect to the Phonoscope Acquisition, no agreement has
been reached for any material acquisition by or strategic investment in the
Company. See "Business-- Business Strategy."
45
IMPACT OF NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", which is effective for fiscal years beginning after
December 15, 1995, requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. SFAS No. 121 also requires that
long-lived assets and certain identifiable intangibles to be disposed of be
reported at the lower of carrying amount or fair value less cost to sell. The
Company adopted SFAS No. 121 effective September 1, 1996, and the impact of
such adoption is expected to be insignificant to its financial condition and
results of operations.
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," issued by the Financial Accounting
Standards Board, which is effective for fiscal years beginning after December
15, 1995, requires that an employer's financial statements include certain
disclosures about stock-based employee compensation arrangements regardless
of the method used to account for them. The Company will measure compensation
costs using Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and will therefore include pro forma disclosures in the
notes to the financial statements for all awards granted after December 31,
1994. The Company will disclose the pro forma net income and pro forma
earnings per share as if the fair value based accounting methods in SFAS No.
123 had been used to account for stock-based compensation cost in future
financial statement presentations.
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings Per Share," is effective for earnings per share calculations and
disclosures for periods ending after December 15, 1997, including interim
periods, and requires restatement of all prior period earnings per share data
that is presented. SFAS No. 128 supersedes Accounting Principles Board Opinion
No. 15, "Earnings Per Share," and provides reporting standards for calculating
"Basic" and "Diluted" earnings per share. Management does not believe the impact
of the adoption of SFAS No. 128 will have a meterial impact on its earnings per
share computations.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations to date. However, there can be no assurance that
the Company's business will not be adversely affected by inflation in the
future.
46
BUSINESS
OVERVIEW
OpTel is the largest provider of private cable television services to
residents of MDUs in the United States and is expanding the
telecommunications services it offers to MDU residents. The Company provides
cable television and, where currently offered, telecommunications services to
MDU residents principally under long-term Rights of Entry with owners of
MDUs. The Company's Rights of Entry are generally for a term of ten to
fifteen years (five years for Rights of Entry with condominium associations).
The weighted average unexpired term of the Company's cable television Rights
of Entry was approximately seven years as of February 28, 1997 (assuming the
Company's exercise of available renewal options). The Company currently
provides cable television services in the metropolitan areas of Houston,
Dallas-Fort Worth, San Diego, Phoenix, Chicago, Denver, San Francisco, Los
Angeles, Miami-Ft. Lauderdale, Tampa and Austin. The Company also provides
telecommunications services in Houston, Dallas-Fort Worth, Austin, Denver and
Miami-Ft. Lauderdale. As of February 28, 1997, the Company had 125,090 cable
television subscribers and 4,791 telecommunications subscribers with 6,039
telephone lines.
For regulatory purposes, the Company is considered to be a private cable
television operator in most of the markets it serves. Private cable
television operators deliver services to consumers without hard-wire
crossings of public rights of way. Consequently, private cable television
operators are not required to obtain cable television franchises and are
subject to significantly less regulatory oversight than are traditional
franchise cable television operators. As a result, they have significant
latitude in terms of system coverage, pricing and customized delivery of
services to selected properties. The Company has no universal service
obligation and generally does not incur capital costs to build its networks
until it has entered into Rights of Entry from which it reasonably expects to
build an appropriate customer base.
The Company offers a full range of multichannel video programming to the
MDUs it serves (including basic and premium services) which the Company
believes is competitive in both content and pricing with the programming
packages offered by its major competitors. The Company currently provides its
telecommunications services as an STS operator through PBX switches. The
Company offers customers access to services comparable in scope and price to
those provided by the incumbent LEC and long distance carrier. The Company's
telecommunications strategy includes replacing its PBX switches with
networked central office switches. See "Network Architecture --
Telecommunications Architecture."
The Company invests in networks because it believes that networks provide
the optimal mechanism for delivering bundled cable television and
telecommunications services. The Company's networks use technologies that are
capable of bi-directional transmission. The Company provides its video
programming to MDUs through 18GHz and fiber optic networks and non-networked
SMATV systems. As of February 28, 1997, approximately 130,000 of the 239,801
units passed for cable television are served by the Company's networks. These
networks generally provide up to 72 channels of video programming. The
Company intends to convert substantially all of its SMATV systems to 18GHz or
fiber optic networks by the end of fiscal 1999. The Company's networks will
also facilitate delivery of voice signal from each MDU to the central office
switches to be deployed by the Company in its markets. The Company intends to
license additional spectrum, which it currently anticipates will principally
be in the 23GHz band, which it will use to provide bi-directional voice
transmission.
GVL, Canada's third largest cable television company, holds a 76.1% equity
interest in OpTel through VPC, its indirect wholly-owned subsidiary. The
Company has benefited and expects, in the future, to continue to benefit from
the management and technical expertise of GVL. Key members of the Company's
management team gained experience in building out and operating cable
television networks and combined cable television/telecommunications networks
while working for GVL or its affiliates in Canada and the United Kingdom.
From inception, OpTel's owners have invested over $200 million in the Company
in the form of equity and Convertible Notes.
47
OpTel was incorporated in the State of Delaware in July 1994, as the
successor to a Delaware corporation that was founded in April 1993. The
Company's principal offices are located at 1111 W. Mockingbird Lane, Dallas,
Texas 75247, and its telephone number is (214) 634-3800.
INDUSTRY
The private cable television industry has undergone significant changes
and consolidation in recent years as a result of changes in cable television
and telecommunications laws and regulations.
Until February 1991, the primary technology available to private cable
television operators was SMATV, whereby the operator received and processed
satellite signals directly at an MDU or other private property with an
on-site headend facility consisting of receivers, processors and modulators,
and distributed the programming to individual units through an internal
hard-wire system in the building. SMATV operators spread the relatively high
fixed costs of operations (headend equipment, management, customer service,
billing, installation and maintenance) over a small subscriber base
(frequently the residents of a single MDU). This high cost structure reduced
the incentives for SMATV operators to invest in technology and overhead,
resulting in inferior channel capacity (usually 20 to 40 channels) and a
lesser resource commitment to customer service, which produced lower
penetration rates. In February 1991, regulatory changes made 18GHz
technology, which had been in use for more than 25 years in commercial and
military applications, available for use by private cable television
operators for the point-to-point delivery of video programming services.
Private cable systems utilizing 18GHz technology do not require the large
networks of coaxial or fiber optic cable and amplifiers that are utilized by
traditional hard-wire cable television operators or the installation of a
headend facility at each MDU as is required for SMATV systems. Thus, private
cable television operators using 18GHz technology are able to provide
services at lower per unit capital and maintenance costs than franchise cable
or SMATV operators. In addition, private cable television operators are not
subject to the regulatory constraints of a typical franchise cable television
operator. Specifically, as a private cable television operator, the Company
(i) does not face regulatory constraints on the geographic areas in which it
may offer video services, (ii) does not pay franchise and FCC subscriber
fees, (iii) is not obligated to pass every resident in a given area, (iv) is
not subject to rate regulation, and (v) is not subject to "must carry" and
local government access obligations.
The present structure of the U.S. telecommunications market resulted
largely from the break-up of the "Bell System" in 1984 which created two
distinct telecommunications industries: local exchange and interexchange or
"long distance". The long distance industry was immediately opened to direct
competition; however, until recently, the local exchange industry has been
virtually closed to competition. Efforts to open the local exchange market to
competition began in the late 1980's on a state by state basis when CAPs
began offering dedicated private line transmission and access services which
account for less than 10% of the local exchange market. In the summer of
1995, several states began opening their markets to local exchange
competition. In February 1996, the Telecommunications Act was signed into
law. The Telecommunications Act provides a framework by which all states must
allow competition for local exchange services. Specifically, the
Telecommunications Act (i) requires the incumbent LEC to (a) allow
competitors to interconnect to the LEC's network at any technically feasible
point and (b) allow competitors access to components of the LECs network
selectively and (ii) establishes a framework for reciprocal compensation
between the LEC and a CLEC for use of each other's network. See "--
Regulation -- Telecommunications Regulation."
According to 1990 U.S. Census Bureau data, there are more than 13.2
million MDU units in MDUs with greater than 10 MDU units in the United
States, of which approximately 4.0 million are within the Company's existing
geographic markets. The Company estimates that approximately 2.5 million of
the MDU units within its existing markets are within MDUs which meet the
Company's preference for MDUs of 150 or more units. Industry sources estimate
that in 1995 the total revenues for cable television in the United States
were $25 billion and total revenues from telecommunications services in the
United States were $168 billion, of which approximately $96 billion
represented revenues from local exchange services.
48
BUSINESS STRATEGY
The Company's goal is to distinguish itself from its competitors by
becoming a leading provider of a comprehensive set of both cable television
and telecommunications services to MDUs. The key components of the Company's
strategy to achieve this objective are:
Maintain Long-Term Relationships with MDU Owners. The Company believes
that the strategic relationships it forms with MDU owners are the key to the
Company's long-term success. By providing services that are attractive to MDU
residents, the Company endeavors to enhance the rental performance of the
MDUs that it serves. The Rights of Entry provide MDU owners with financial
incentives to work closely with the Company to promote its products and
services. The Company believes that its strategic relationships with MDU
owners will enable the Company to maintain its preferred competitive position
even if the exclusivity of the Rights of Entry becomes limited by future
developments. See "-- Regulation."
Increase Market Share in Existing Markets. In order to increase its market
share, the Company markets its services to owners of national, regional and
local portfolios of MDUs who own MDUs within the Company's existing (or
future) markets and to owners of individual MDUs located within the coverage
of the Company's existing networks. In addition, from time to time the
Company considers acquiring private cable television systems within its
markets. See "Prospectus Summary -- Recent Developments: Proposed Phonoscope
Acquisition."
Increase Penetration at MDUs. Upon executing Rights of Entry, the Company
aggressively markets its services to actual and potential subscribers within
the MDU in order to increase penetration rates for basic and ancillary
services. The Company believes that its best opportunity for a sale arises
when a tenant first signs a lease and takes occupancy in an MDU. The Company
therefore enlists on-site property managers and leasing agents to market its
services. The Company believes that its presence at the leasing office and
its sponsorship by the MDU owner assist it significantly in its marketing
efforts.
Expand Coverage of Company Networks. Upon entering into Rights of Entry
for an MDU, the Company seeks to link the MDU to the Company's 18GHz or, in
Houston, fiber optic networks. Private cable systems utilizing 18GHz
technology do not require the large networks of coaxial or fiber optic cable
and amplifiers that are utilized by traditional hard-wire cable television
operators or the installation of a headend facility at each MDU as is
required for SMATV systems. Thus, private cable television operators using
18GHz technology are able to provide services at lower per unit capital and
maintenance costs than franchise cable or SMATV operators. The Company can
deliver as many as 72 channels of programming in uncompressed analog format
over its networks which, in most of the Company's markets, exceeds the number
of channels offered by other multichannel television service providers.
Additional capacity, if required, can be provided through the application of
available digital compression technology. The point-to-point nature of the
networks enables the Company to customize the programming to be delivered to
any MDU based on the demographics of the MDU's residents. The Company's
networks will also facilitate delivery of voice signal from each MDU to the
central office switches to be deployed by the Company in its markets. The
Company intends to license additional spectrum, which it anticipates will
principally be in the 23GHz band, to provide bi-directional voice
transmission.
Roll out Telecommunications Services. The Company currently provides
telecommunications services in Houston, Dallas-Fort Worth, Austin, Denver and
Miami-Ft. Lauderdale. The Company is expanding the telecommunications
component of its business both by increasing the number of MDUs to which it
provides telecommunications services and by expanding the number of services
offered. As part of its ongoing telecommunications roll out and coincident
with the conversion of its SMATV systems to its networks, the Company intends
to replace its PBX switches located at the MDUs with networked central office
switches. Subject to receipt of regulatory approvals, the Company intends to
deploy its first central office switch in the Houston market by mid-1997 and
to have installed central office switches in substantially all of its markets
by the end of calendar 1999.
49
Bundle and Differentiate Product Offering. The Company offers MDU owners
and residents bundled cable television and telecommunications services. MDU
residents and owners benefit from the simplicity of dealing with a single
service provider. Management believes that the Company typically offers a
superior, or at least comparable, range of products and level of customer
service than its competitors at a lower total price. The Company also
believes that bundling services results in better collection experience
versus non-bundled services. The Company plans to offer MDU residents access
to additional bundled services, including Internet access, intrusion alarm,
utility monitoring, and PCS, cellular and paging services. The Company also
intends to introduce integrated billing of its bundled services in fiscal
1998.
Provide Superior Customer Service. The Company is committed to providing
excellent customer service to MDU owners and subscribers in the home, in the
field and on the telephone. The Company believes the most effective means of
attracting and retaining MDU owners and residents is by providing high
quality subscriber service, including: a 24-hours-a-day, seven-days-a-week
customer call center; direct lines to facilitate rapid response to calls
initiated by MDU owners and managers; flexible, seven-day-a-week installation
and service appointments; 80% of installations completed within three
business days of receiving the initial installation request (often within 24
hours) and service calls generally made the same day the subscriber indicates
a service problem. In addition, the Company has established stringent staff
training procedures, including its Operational Excellence continuous
improvement program, and internal customer service standards, which
management believes meet, and in many respects exceed, those established by
the National Cable Television Association.
MARKETS
The Company selected its current markets based upon their growth
characteristics, competitive conditions, MDU concentrations, topographical
and climatic conditions, favorable demographics and, to a lesser extent,
favorable regulatory environments. The Company's strategy has been to enter
markets either through the acquisition of a private cable television operator
serving the target market or by entering into Rights of Entry with a major
MDU owner in the market. The Company has entered substantially all of its
markets through acquisitions. Upon acquisition of an operator, the Company
historically has begun the process of upgrading the acquired systems by
converting MDUs from SMATV technology to the Company's 18GHz or, in Houston,
fiber optic networks, adding additional programming and improving customer
service. In addition, the Company has been able to achieve cost efficiencies
by consolidating acquired operations into its existing organization. As
acquired operations generally have not offered telecommunications services,
the Company is in the process of adding such services to its acquired
systems.
As of February 28, 1997, the Company operated in the following geographic
markets:
Units
Under Units
Estimated Contract Passed Tele-
Number of Units Under Cable for Tele- for Tele- communi-
MDU Units Date of Contract for Units Passed Television communi- communi- cations
Market in Market(1) Entry Cable(2) for Cable(3) Subscribers cations(2)(4) cations(3) Lines
------------------ ------------ --------- -------------- -------------- ----------- ------------- ----------- ----------
Houston .......... 305,961 1/95 80,267 79,199 29,492 6,816 6,654 2,122
Dallas-Fort Worth 366,646 9/94 44,233 34,385 17,173 11,421 5,026 1,720
Chicago .......... 333,442 8/95 23,117 21,765 11,378 400 -- --
Phoenix .......... 143,674 12/94 22,987 21,856 9,884 -- -- --
San Diego ........ 295,375 12/94 22,960 21,628 14,853 1,486 768 299
San Francisco .... 202,698 8/96 22,886 22,643 16,196 243 -- --
Denver ........... 97,056 7/95 18,867 15,804 8,876 2,975 877 214
Los Angeles ...... 270,006 5/94 13,921 8,531 6,095 1,791 -- --
Miami-Ft.
Lauderdale ...... 275,202 6/95 12,849 10,559 9,142 1,241 91 62
Tampa ............ 151,724 8/96 2,777 2,777 1,435 -- -- --
Austin ........... 63,811 7/94 654 654 566 1,000 1,000 1,622
------------ -------------- -------------- ------------- ----------- ----------- ----------
2,505,595 265,518 239,801 125,090 27,373 14,416 6,039
============ ============== ============== ============= =========== =========== ==========
50
- ------
(1) Represents units in MDUs with greater than 150 units. For rental units,
market data has been estimated by REIS Reports, Inc. For the Tampa and
Miami-Ft. Lauderdale markets, the rental unit data has been adjusted
based on Company estimates to include condominium units.
(2) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into
Rights of Entry for the provision of cable television services and
telecommunication services, respectively, but not yet passed and which
the Company expects to pass within the next five years.
(3) Units passed represents the number of units with respect to which the
Company has connected and activated its cable television and
telecommunication systems, respectively. The Company anticipates passing
approximately 15,800 and 8,700 additional units currently under contract
for cable television and units currently under contract for
telecommunications, respectively, by the end of calendar 1997.
(4) At this time substantially all units under contract for
telecommunications are also units under contract for cable television.
The Company has recently entered into Rights of Entry with respect to
approximately 5,500 units in the Las Vegas market, has begun consturction of
certain of these units and is considering further expansion in this market.
HOUSTON
The Company entered the Houston market in January 1995 through an
acquisition. The Houston market includes the Company's operations in
Bryan/College Station. The Company has a cable franchise for the Houston
market and utilizes a fiber optic/coaxial cable network to service
approximately 82% of its units passed for cable television with the remainder
serviced via SMATV systems. As of February 28, 1997, the Company had 79,199
units passed for cable television and had 29,492 cable subscribers for a
penetration rate of 37.2%. The penetration rate is low when compared to the
overall cable television penetration rate for the Houston market of 53% as
reported in the TV & Cable Factbook No. 63 (the "Factbook"). The Company
believes that this low penetration is largely the result of the particular
attributes of certain MDUs for which Rights of Entry were acquired. The
Company believes that as new Rights of Entry are signed and activated, and as
the remaining SMATV systems are converted to the fiber optic/coaxial cable
network thereby improving the picture quality and channel line up, the
penetration rate will increase. In addition, the Company intends to utilize
customized channel line ups combined with an entry level package to increase
penetration rates. The Houston market generates one of the Company's highest
revenue per cable subscriber figures. As of February 28, 1997, the Company
had 6,654 telecommunications units passed and had 1,672 telecommunications
subscribers for a penetration rate of 25.1%. The Company intends to install
its first central office switch in the Houston market in the second half of
fiscal 1997.
Phonoscope, which operates in the greater Houston metropolitan area, provides
its services over a fiber optic and coaxial cable distribution system. If the
Phonoscope Acquisition is consummated, the Company expects to use its existing
franchise with the City of Houston to serve Phonoscope subscribers within the
City of Houston, and, where required to serve acquired Rights of Entry, will
seek assignment of the appropriate municipal franchises. Phonoscope provides
cable television services principally under Rights of Entry in competition with
traditional franchise cable television operators, and aside from these franchise
cable television operators is second only to the Company in number of MDUs
served in the greater Houston area. Based on information made available to the
Company, the Company believes that, as of November 30, 1996, (i) Phonoscope had
Rights of Entry or subscriber agreements covering approximately 59,000 units
(principally at MDUs, but including certain single family units within the
footprint of its network) and approximately 27,000 subscribers and (ii) the
weighted average unexpired term of the Rights of Entry held by Phonoscope was
approximately 5 years.
Phonoscope's network and the Company's existing Houston network are in
close proximity with each other, but do not overlap in any material respect.
Following the consummation of the Phonoscope Acquisition, the Company intends
to expand the acquired fiber optic network and, over time, interconnect the
acquired network with the Company's existing Houston network. There are no
material technical obstacles to the interconnection of the networks. The
Company expects to enter into a construction agreement with Phonoscope for
post-closing construction work on the network purchased by the Company. The
aggregate compensation payable to Phonoscope with respect to such
construction agreements is expected to be approximately $1.8 million.
51
The Company believes that the consummation of the Phonoscope Acquisition will
allow the Company (i) to expand its subscriber base; (ii) cross sell the
Company's telecommunications services at MDUs currently served by Phonoscope;
and (iii) achieve operating efficiencies and improved field service in the
Houston market. The Company intends to offer telecommunications services to MDUs
served by the Phonoscope network in a manner consistent with its overall
telecommunications roll out plan. Although the Company believes the Phonoscope
Acquisition will be consummated, there can be no assurance that the Phonoscope
Acquisition will be consummated on the terms contemplated herein or otherwise.
The Exchange Offer is not conditioned on the consummation of the Phonoscope
Acquisition. See "Risk Factors -- Consummation of the Phonoscope Acquisition."
DALLAS-FORT WORTH
The Company entered the Dallas-Fort Worth market in September 1994 by
entering into Rights of Entry with a significant property owner. Since that
date the Company has increased its market share by acquisition and by
entering into additional Rights of Entry. The Company's corporate
headquarters and centralized customer service center for all of its markets
is located in Dallas-Fort Worth. The Company utilizes 18GHz networks to
service approximately 32% of its units passed for cable television in the
Dallas-Fort Worth market with the remainder serviced via SMATV systems. As of
February 28, 1997, the Company had 34,385 units passed for cable television
and had 17,173 cable subscribers for a penetration rate of 49.9%. This
penetration rate is comparable to the overall cable television penetration
rate for the Dallas-Fort Worth market of 49% as reported in the Factbook. As
of February 28, 1997, the Company had 5,026 units passed for
telecommunications and had 1,372 telecommunications subscribers for a
penetration rate of 27.3%. The Company intends to install a central office
switch in the Dallas-Fort Worth market by early fiscal 1998.
CHICAGO
The Company entered the Chicago market in August 1995 through an acquisition.
In the Chicago market, the Company currently services substantially all of its
units passed for cable television via SMATV systems. The Company intends to
convert substantially all of these SMATV systems to 18GHz networks by the end of
fiscal 1999. As of February 28, 1997, the Company had 21,765 units passed for
cable television and had 11,378 cable subscribers for a penetration rate of
52.3%. Despite the use of SMATV systems, this penetration rate is comparable to
the overall cable television penetration rate for the Chicago market of 56% as
reported in the Factbook and the revenue per subscriber is the highest in the
Company. The Company believes that this is the result of the quality
demographics of the MDUs served. The Company intends to commence
telecommunications service offerings and install a central office switch in the
Chicago market by the end of fiscal 1999. The Company has recently consummated
an acquisition of a private cable operator in the Chicago market having
approximately 5,600 units passed for cable television and 5,000 cable television
subscribers.
PHOENIX
The Company entered the Phoenix market in December 1994 through an
acquisition. Since that date the Company has increased its market share by
entering into additional Rights of Entry. The Company utilizes 18GHz networks
to service approximately 42% of its units passed for cable television in the
Phoenix market with the remainder serviced via SMATV systems. As of February
28, 1997, the Company had 21,856 units passed for cable television and had
9,884 cable subscribers for a penetration rate of 45.2%. This penetration
rate is low when compared to the overall cable television penetration rate
for the Phoenix market of 54% as reported in the Factbook. The Company
believes that the low penetration rate is largely the result of the limited
channel line ups offered by the acquired operator and that as the remaining
SMATV systems are converted to 18GHz networks
52
thereby improving the picture quality and channel line up, the penetration
rate will increase. The Company intends to commence telecommunications
service offerings and install a central office switch in the Phoenix market
by the end of fiscal 1998.
SAN DIEGO
The Company entered the San Diego market in December 1994 through an
acquisition. The San Diego market includes parts of Orange County, San
Bernadino County, Riverside County and North County. Since that date the
Company has increased its market share by entering into additional Rights of
Entry. The Company utilizes 18GHz networks to service approximately 72% of
its units passed for cable television in the San Diego market with the
remainder serviced via SMATV systems. As of February 28, 1997, the Company
had 21,628 units passed for cable television in the San Diego market and had
14,853 cable subscribers for a penetration rate of 68.7%. This penetration
rate is low when compared to the overall cable television penetration rate
for the San Diego market of 79% as reported in the Factbook. The Company
believes that the low penetration rate is largely the result of the limited
channel line ups offered by the acquired operator and that as SMATV systems
are converted to 18GHz networks thereby improving the picture quality and
channel line up, the penetration rate will increase. As of February 28, 1997,
the Company had 768 units passed for telecommunications and had 247
telecommunications subscribers for a penetration rate of 32.2%. The Company
intends to install a central office switch in the San Diego market by the end
of fiscal 1998.
SAN FRANCISCO
The Company entered the San Francisco market in August 1996 through an
acquisition and completed another acquisition in November 1996. In the San
Francisco market, the Company currently services all of its units passed for
cable television via SMATV systems. The Company intends to convert
substantially all of these SMATV systems to 18GHz networks by the end of
fiscal 1999. As of February 28, 1997, the Company had 22,643 units passed for
cable television and had 16,196 cable subscribers for a penetration rate of
71.5%. This penetration rate is comparable to the overall cable television
penetration rate for the San Francisco market of 68% as reported in the
Factbook. Approximately 41% of the units passed for cable television
represent subscribers served via bulk sales agreements and, as a result, the
revenue per subscriber is relatively low. The Company believes that as new
Rights of Entry are signed and activated and as the SMATV systems are
converted to 18GHz networks revenue per subscriber will increase. The Company
intends to commence telecommunications service offerings and install a
central office switch in the San Francisco market by the end of fiscal 1999.
DENVER
The Company entered the Denver market in July 1995 through an acquisition.
Since that date the Company has increased its market share by entering into
additional Rights of Entry. The Company utilizes 18GHz networks to service
approximately 68% of its units passed for cable television in the Denver
market with the remainder serviced via SMATV systems. As of February 28,
1997, the Company had 15,804 units passed for cable television and had 8,876
cable subscribers for a penetration rate of 56.2%. This penetration rate is
comparable to the overall cable television penetration rate for the Denver
market of 58% as reported in the Factbook. As of February 28, 1997, the
Company had 877 units passed for telecommunications and had 143
telecommunications subscribers for a penetration rate of 16.3%. The Company
intends to install a central office switch in the Denver market by the end of
fiscal 1998.
LOS ANGELES
The Company entered the Los Angeles market in May 1994 by entering into
certain Rights of Entry. Since that date the Company has increased its market
share by entering into additional Rights of Entry. The Company utilizes 18GHz
networks to service approximately 71% of its units passed for cable
television in the Los Angeles market with the remainder serviced via SMATV
systems. As of February 28, 1997, the Company had 8,531 units passed for
cable television and had 6,095 cable subscribers for a penetration rate of
71.4%. This penetration rate is high compared to the overall
53
cable television penetration rate for the Los Angeles market of 60% as
reported in the Factbook. The Company believes that this is the result of the
quality demographics of the MDUs served. The Company will determine the
timing of its offering of telecommunications services and the installation of
a central office switch based on its success in entering into a sufficient
number of Rights of Entry in the Los Angeles Market. The Company may install
a single switch to serve both the Los Angeles and San Diego markets. The
Company has recently entered into a letter of intent to acquire certain
Rights of Entry in the Los Angeles Market.
MIAMI-FT. LAUDERDALE
The Company entered the Miami-Ft. Lauderdale market in June 1995 through
an acquisition. Since that date the Company has increased its market share by
entering into additional Rights of Entry. The Company utilizes 18GHz networks
to service approximately 76% of its units passed for cable television in the
Miami-Ft. Lauderdale market, with the remainder serviced via SMATV systems.
As of February 28, 1997, the Company had 10,559 units passed for cable
television and had 9,142 cable subscribers for a penetration rate of 86.6%.
This penetration rate is high compared to the overall cable television
penetration rate for the Miami-Ft. Lauderdale market of 66% as reported in
the Factbook due to the high proportion of units served under bulk sales
agreements. The Company began telecommunications operations in the Miami-Ft.
Lauderdale market in November 1996 and intends to install a central office
switch in this market by the end of fiscal 1998.
TAMPA
The Company entered the Tampa market in August 1996 through an
acquisition. The Company currently services all of its units passed for cable
television in the Tampa market via either SMATV or coaxial cable systems. The
Company intends to convert substantially all of these systems to 18GHz
networks by the end of fiscal 1999. As of February 28, 1997, the Company had
2,777 units passed for cable television and had 1.435 cable subscribers for a
penetration rate of 51.7%. This penetration rate is low when compared to the
overall cable television penetration rate for the Tampa market of 69% as
reported in the Factbook. The Company believes that this is primarily because
approximately 1,200 of the units passed for cable television are situated
within mobile home parks where penetration rates are typically low. The
Company will determine the timing of its offering of telecommunications
services and the installation of a central office switch based on its success
in entering into a sufficient number of Rights of Entry in the Tampa market.
AUSTIN
The Company entered the Austin market in July 1994 by entering into
certain Rights of Entry. Since that date the Company has increased its market
share by entering into additional Rights of Entry. The Company currently
services all of its units passed for cable television in the Austin market
via SMATV systems. As of February 28, 1997, the Company had 654 units passed
for cable television and had 566 cable subscribers for a penetration rate of
86.5%. As of February 28, 1997, the Company had 1,000 units passed for
telecommunications and had 1,312 telecommunications subscribers for a
penetration rate of 131.2%. The penetration rate is greater than 100% due to
one property which is a college residence which has more than one tenant in
each unit with separate telephone lines. If this property were excluded, the
penetration rate would be 58.8%. The Company will determine the timing of the
installation of a central office switch based on its success in entering into
a sufficient number of Rights of Entry in the Austin market.
54
NETWORK ARCHITECTURE
The Company's networks use technologies that are capable of bi-directional
transmission. MDU residents receive service through internal wiring to
conventional wall-mounted cable outlets and telephone jacks.
The diagram below depicts the Company's network architecture for a typical
18GHz cable television network as it might be enhanced to support
telecommunications services:
[PICTURE OF NETWORK ARCHITECTURE]
CABLE TELEVISION ARCHITECTURE
An integral part of the Company's strategy is to link properties to master
headends through microwave and fiber optic networks, to the maximum extent
practicable. In substantially all markets except Houston, the Company
transports video programming to MDUs in one of two ways: (i) by transmitting
video programming from a master earth station and headend to the MDU using
point-to-point microwave conveyance, generally in the 18GHz frequency range;
or (ii) by receiving video programming at a self-contained SMATV headend
located at the MDU. In Houston, video programming reaches a majority of the
MDUs served by the Company through a fiber optic network that the Company
operates pursuant to a franchise from the City of Houston. In certain limited
geographic areas, video programming reaches MDUs through a combination of
coaxial cable and microwave transmission.
18GHz microwave conveyance requires the operator to install small
microwave dishes at each MDU. These dishes receive video programming from a
centrally located master headend which must be within the line of sight of
the receiving dish. The FCC licenses paths between two points at specific
frequency ranges. The video programming may, within limits, be retransmitted
at repeater sites. To insure a high quality picture, the Company generally
limits the number of repeater sites. For the same reason, the Company
generally limits the radius of each microwave link to between three and eight
miles, depending on topographic and climatic conditions.
55
The Company intends to convert substantially all of its SMATV systems to
18GHz or fiber optic networks by the end of fiscal 1999. As of February 28,
1997, the Company had 35 18GHz networks and one fiber optic network in
service in 11 metropolitan areas and, on average, 54% of the units passed by
the Company were served by such networks.
Within the MDUs it serves the Company distributes video programming via
conventional coaxial cable. In markets where it offers Pay-Per-View channels,
the Company uses a combination of traps (electronic filtering devices) and
addressable decoder-converter boxes. Where it does not offer Pay-Per-View,
the Company uses traps.
The Company has recently completed field testing interdiction devices and
has begun deploying them in several of its current systems. Interdiction
devices will permit the Company to activate and deactivate services or
specific channels by remote command from its central office. When
implemented, these devices will afford quicker activation and disconnection,
eliminate or significantly reduce the need for traps and for
decoder-converter boxes in the home, eliminate or significantly reduce
service calls and provide better picture quality. The Company believes that
these devices will also result in better collection experience, higher levels
of penetration and premium service buy-in and greater customer satisfaction.
The Company's network design is digital-capable and many of its components
are hybrid digital-analog. This will facilitate upgrading to digital
compression when economical and required by the marketplace. As well, it will
permit integration of video, voice and data into a single signal.
TELECOMMUNICATIONS ARCHITECTURE
In metropolitan areas where the Company currently offers
telecommunications services, the Company uses conventional twisted copper
wire pairs to distribute telephone services within an MDU. A PBX switch is
installed at the MDU and local traffic from the MDU is transported via leased
trunk lines to the LEC central office. From the LEC's central office, local
calls are routed through the LEC's network. Long distance traffic is routed
via leased trunk lines from the PBX switch to the Company's chosen long
distance carrier (currently AT&T). The state regulations for STS operators
under which the Company's PBX-based services are provided generally prohibit
the aggregation of local telephone traffic between noncontiguous MDUs, and in
certain states there are limits or prohibitions on resale of intrastate long
distance and local service at a profit. The Company intends to seek
certification as a CLEC in each of the states in which it operates. See "--
Regulation."
The Company plans to interconnect MDUs to an owned or leased central
office switch using its owned fiber optic network and microwave networks and
the network facilities of other service providers. The Company plans to offer
a high level of reliability by building redundant routes and providing for
redundant switches where appropriate. The Company intends to interconnect its
central office switch to several long distance carriers' points-of-presence
and to the public switched telephone network via the LEC's network. The
Company envisions using automatic route selection to connect its subscribers
to the most price advantageous long distance provider at any time.
The Company's planned telecommunications network architecture includes a
national network operations center which will monitor the telecommunications
switches and networks in each market. The Company further plans to have its
network operations center receive backup monitoring from GVL's planned
network operations center once the two centers are in operation.
The implementation of the Company's telecommunications roll out plans will
depend in some measure on the speed and manner in which states implement (i)
the liberalized competition provisions of the Telecommunications Act and (ii)
the establishment of the interconnection and tariff requirements that the
Telecommunications Act imposes on the incumbent LEC.
56
The Company intends to contract for other ancillary elements of service
from the incumbent LEC in each market or from other available carriers. These
ancillary services include (i) operator service, (ii) directory listings,
(iii) emergency 911 service, and (iv) conveyance where the Company does not
have a network.
The Company intends to modify its existing networks (currently used to
provide video programming) to accommodate two-way digital telecommunications
traffic. The Company intends to use its existing network configuration if
feasible and to supplement its microwave plant if necessary, including
through the use of other available radio spectrum for telecommunications
services. The Company currently intends to use 23GHz as its principal
frequency to carry telecommunications traffic to and from MDUs from hubs and
6 and 11 Gigahertz as its principal frequencies to carry traffic from hubs to
central office switches. However, other than in Dallas, the Company has not
yet commenced frequency coordination and there can be no assurance that the
Company will be able to obtain licenses for these frequencies on the paths it
desires.
The Company has selected this frequency because it believes that 23GHz has
been used successfully to carry other forms of telecommunications traffic.
The Company believes that using 23GHz will enable it to utilize proven
equipment manufactured by several vendors. The Company intends to transmit
and receive 23GHz signals generally using its existing 18GHz dishes and will
be conducting field trials in the near future. The Company may also examine
the use of other available frequencies licensed by the FCC for use in
telecommunications services, the availability of which cannot be assured. See
"Risk Factors -- Risks associated with Telecommunications Strategy."
It is also possible that the Company will augment its microwave networks
in many markets with fiber optic links between microwave hubs and from hubs
to its central switch locations. Particular network architecture in any
market will be dependent on, among other factors, bandwith requirements and
equipment costs, which are not yet determinable.
The Company will use its networks to aggregate MDU long distance and local
traffic at its or its selected partners' telecommunications switch. From
there, traffic will be delivered to the point of presence of the connecting
carrier either through the Company's microwave or fiber networks, or where
appropriate, other available means of transport, including those of the
interconnecting carriers.
NETWORK SERVICES
CABLE TELEVISION SERVICES
The Company seeks to offer its subscribers a full range of popular cable
television programming at competitive prices. The Company's 18GHz networks
are capable of delivering up to 72 channels of programming to each MDU. In
addition, the programming selections available at an MDU can be tailored to
the demographics of each MDU and, unlike franchise cable television operators
which may be required to carry all local broadcast channels and public access
channels, the Company can utilize all of its available channels to provide
popular programming.
The Company offers various programming packages to its cable television
subscribers. The Company's basic programming package offered to MDUs served
by its 18GHz and fiber optic networks typically includes 60 to 72 channels
and is generally priced below the rate charged by the incumbent franchise
cable television operator for a comparable package. The Company also offers
premium television services and regional sports channels. These often feature
uninterrupted, full-length motion pictures, sporting events, concerts and
other entertainment programming. Premium services are offered individually or
in discounted packages with basic or other services. Certain of the Company's
systems are capable of offering movies, sporting events, concerts and other
special events on a Pay-Per-View basis.
57
The following table lists, as of February 28, 1997, the programming
line-up on one of the Company's Phoenix networks which is typical of the
programming line-up available on the Company's networks (except that
Pay-Per-View services are not offered in all of the Company's markets).
2 PREVUE GUIDE 31 COURT TV 55 E! ENTERTAINMENT TV
3 KTVK (IND) 32 INTERNATIONAL CHANNEL 56 TURNER CLASSIC MOVIES
4 KNXV (ABC) 33 THE WEATHER CHANNEL 57 BRAVO
5 KPHO (CBS) 34 ESPN 58 BET
6 KPAZ (TBN) 35 ESPN 2 59 HOME & GARDEN
7 KTVW (UNIVISION) 36 ARIZONA SPORTS TELEVISION
8 KAET (PBS) NETWORK 60 FXM
9 KUPN (IND) 37 THE GOLF CHANNEL 61 THE DISCOVERY
10 KSAZ (FOX) 38 TNT CHANNEL
11 KASW (IND) 39 WGN/CHICAGO 62 THE LEARNING CHANNEL
12 KPNX (NBC) 40 WTBS/ATLANTA 63 THE HISTORY CHANNEL
13 PROPERTY INFORMATION 41 WWOR/NEW YORK 64 NOSTALGIA CHANNEL
14 HBO* 42 MTV 65 TV FOOD NETWORK
15 HBO 2* 43 VH-1 66 GALAVISION
16 HBO 3* 44 THE NASHVILLE 67 PAY-PER-VIEW
17 CINEMAX* NETWORK (REQUEST 1)
18 CINEMAX 2* 45 COUNTRY MUSIC 68 PAY-PER-VIEW
19 QVC TELEVISION (REQUEST 4)
20 ADVERTISING CHANNEL 46 USA 95 PAY-PER-VIEW
21 SHOWTIME* 47 TV LAND (REQUEST 2)
22 SHOWTIME 2* 48 NICKELODEON 96 PAY-PER-VIEW (VC 1)
23 THE MOVIE CHANNEL* 49 LIFETIME 97 PAY-PER-VIEW
24 THE DISNEY CHANNEL* 50 A&E (ACTION PPV)
25 ENCORE* 51 THE FAMILY CHANNEL 98 ADULT PAY-PER-VIEW
26 CNN 52 COMEDY CENTRAL (ADAM & EVE)
28 CNBC 53 SCI-FI CHANNEL 99 ADULT PAY-PER-VIEW
29 C-SPAN 54 CARTOON NETWORK (SPICE)
30 C-SPAN 2
- ------
* Premium Service
The Company purchases copyrighted programming from program suppliers,
pursuant to private, negotiated multi-year license agreements. The average
term of such contracts is four years and such contracts are typically renewed
upon expiration. Generally, the Company pays its programming suppliers a
fixed monthly fee per subscriber, subject to volume discounts and reduced
rates for MDUs where the Company's services are supplied via bulk sale
agreements. The Company is not subject to any material minimum subscriber
requirements under its programming license agreements.
The video programming broadcast on local television broadcast stations is
subject to compulsory copyright license requirements from the copyright
owners. The Company is required to obtain retransmission consents from
off-air broadcasters but has had little difficulty in obtaining
retransmission consent agreements. Non-broadcast programming, often referred
to as cable programming, is not subject to the compulsory copyright license.
However, federal regulations prohibit (i) cable television operators,
satellite cable programming vendors in which a cable television operator has
an attributable interest and satellite broadcast programming vendors from
charging unfair, unreasonable or discriminatory prices for programming and
(ii) most exclusive dealing arrangements whereby cable systems have procured
programming that is unavailable to their competition. See "-- Regulation."
Although the Company has generally been able to obtain the programming it
requires, the Company has been denied certain programming in limited markets
by certain providers who claim that the programming is not required to be
licensed to the Company. These denials have, and any future denials could
have, a material adverse impact on the Company's activities in the affected
market. In addition, the prohibition on exclusive distribution arrangements
is scheduled to expire on October 5, 2002, unless the FCC finds, during a
proceeding to be conducted in 2001, that the prohibition continues to be
necessary.
The Company plans to take advantage of several industry developments which
it believes will enable it to stay competitive with franchise cable
television operators.
Interdiction. The Company has recently completed field testing
interdiction devices and has begun deploying them in several of its current
systems. With interdiction devices, basic service, Pay-Per-View and premium
channel services can be activated at a subscriber's residence without a
service call. Without such devices, each time a customer requests activation
or adds a premium channel, a service representative must visit the customer's
residence to activate the service or channel.
58
Compression. The Company's network design is digital-capable and many of
its components are hybrid digital-analog. The Company currently utilizes
digital compression to provide telecommunication services, however, the
Company does not currently compress its video programming. The Company
intends to implement digital compression of its video programming when
economical and required by the marketplace.
Pay-Per-View. Pay-Per-View service allows subscribers to select
programming, consisting primarily of professional boxing matches, movies,
concerts and certain special sporting events, for a separate charge per
event. The Company anticipates adding Pay-Per-View services to additional
networks over the next few years. It is anticipated that Pay-Per-View
subscriptions will increase in the future as additional exclusive events
become available for distribution.
Advertising. In recent years, there has been an increase in advertising
direct to cable television subscribers. Previously, advertising was generally
provided by program suppliers, who sell national advertising time which then
is included in the video programming they deliver to operators. However,
cable networks have begun placing advertisements on channels dedicated
exclusively to advertising, as well as in "avails," i.e. time (typically two
minutes each hour) set aside by program suppliers for local advertisement
insertions. Use of advertising "avails" requires automatic "spot insertion"
equipment, which is readily available today at a minimal capital cost. The
Company is currently selling advertising time on its Houston and Miami-Ft.
Lauderdale systems, and management anticipates the Company will offer
advertising on its other systems at a later date. Management does not expect
the revenue generated by the sale of advertising on its networks to be
material.
TELECOMMUNICATIONS SERVICES
The Company currently provides its telecommunications services as an STS
operator through PBX switches. The Company offers customers access to
services provided by regulated telecommunications companies, such as local,
long distance, international and "800" telephone services and telephone
calling cards. The Company's basic telephone service package includes voice
mail, three-way calling and call forwarding. The Company typically provides
services at rates which are competitive with or lower than those which
customers could otherwise obtain from the LEC.
The Company currently provides telecommunications services in Houston,
Dallas-Fort Worth, Austin, Denver and Miami-Ft. Lauderdale. The Company is
expanding the telecommunications component of its business both by increasing
the number of MDUs to which it provides telecommunications services and by
expanding the number of services offered. As part of its ongoing
telecommunications roll out, the Company intends to replace its PBX switches
located at the MDUs with networked central office switches. The Company
intends to deploy its first central office switch in the Houston market by
mid-1997 and to have installed central office switches in substantially all
of its markets by the end of calendar 1999.
Commencing in the first half of fiscal 1998, the Company intends to offer
high speed Internet access services to MDU residents then receiving the
Company's telecommunications services in markets where the Company delivers
telecommunication services using the Company's central office switches. The
Company also intends to introduce various mobile telecommunications
offerings, including paging, cellular and PCS, over the next several years.
The Company believes that the offering of these services will not require the
Company to incur significant capital or operating costs. The Company plans to
explore the possibility of providing additional network-based services to the
residents, owners and managers of the MDUs it serves. These may include
utility management and intrusion alarm signal transmission.
STRATEGIC RELATIONSHIPS WITH MDU OWNERS
A critical aspect of the Company's growth strategy is the development of
strategic relationships with owners of MDU portfolios. These relationships
encourage the MDU owner to promote and sell the Company's cable television
and telecommunications services to MDU residents.
59
The Company solicits and negotiates Rights of Entry with owners of
national, regional and local portfolios of MDUs, as well as with institutions
such as hospitals, universities and hotels. The Company's Rights of Entry
typically have original terms of ten to fifteen years (five years for Rights
of Entry with condominium associations). The weighted average unexpired term
of the Company's cable television Rights of Entry was approximately seven
years as of February 28, 1997 (assuming the Company's exercise of available
renewal options).
Many Rights of Entry provide MDU owners with financial incentives to work
closely with the Company to promote its products and services. Financial
incentives include revenue sharing and payment of up-front inducements to MDU
owners. In addition, the Company believes that the delivery of special
services tailored to MDU owners and residents provides marketing advantages
to the MDU owner in leasing its units. The Rights of Entry acquired by the
Company through its various acquisitions (which represent approximately 74%
of the Company's Rights of Entry as of February 28, 1997) have not always
contained all of the foregoing terms and provisions.
The long-term Rights of Entry negotiated with MDU owners effectively make
the Company the exclusive multichannel television provider, leaving MDU
residents with the option of receiving multichannel television from the
Company or receiving off-air programming from local broadcasters. Rights of
Entry covering telecommunications services effectively make the Company the
only wire-line alternative to the LEC for telecommunications services. The
Company believes that the development of strategic relationships with MDU
owners will enable the Company to maintain its preferred competitive position
even if the exclusivity of the Rights of Entry becomes limited by future
developments. However, statutory limitations on exclusivity could adversely
effect the Company's ability to form new strategic relationships with MDU
owners and associations and could increase the capital costs associated
therewith. See "Risk Factors -- Risks Associated with Rights of Entry."
SALES, MARKETING AND CUSTOMER SERVICE
Consistent with its business strategy, the Company's marketing goals are
to (i) increase market share in existing markets by entering into additional
Rights of Entry, (ii) increase penetration at each MDU served by the Company,
and (iii) market additional services, such as premium cable services,
Pay-Per-View, Internet access, intrusion alarm, utility monitoring and PCS,
cellular and paging services, to its subscribers. The Company focuses its
marketing efforts on large MDUs located in clusters within its markets and
then attempts to obtain Rights of Entry for additional MDUs within the
coverage of its existing networks.
The Company tailors its marketing efforts to two different constituencies:
(i) owners of MDUs who may enter into Rights of Entry and (ii) actual and
potential cable television and telecommunications subscribers at MDUs for
which the Company has entered into Rights of Entry. Each constituency is
served by separate sales and marketing teams that promote the Company's
advantages over its competitors in the marketplace.
To market to owners of MDUs, the Company maintains a full-time
professional sales force which as of February 28, 1997 included 37 sales
representatives. Many of the Company's sales representatives have previous
experience in commercial real estate sales and leasing. Sales personnel
receive incentive compensation in the form of commissions, the level of which
is determined by the size of the MDU, the term of the Rights of Entry and the
expected revenue per subscriber.
Marketing to MDU owners is conducted primarily by (i) using established
relationships with property developers, owners and management companies, (ii)
direct mail campaigns to owners and apartment managers, (iii) door-to-door
canvassing within the coverage of the Company's existing networks, and (iv)
attendance at and participation in trade shows, conventions and seminars
targeted to the MDU industry. The Company recently has commenced additional
marketing activities including compiling a detailed database of potential
clients and sales efforts.
60
When marketing to MDUs, the Company emphasizes its advantages over
competing multichannel television services including:
New Revenue Source for MDU Owner. An MDU owner who enters into Rights of
Entry with the Company often receives a percentage of the revenue generated
by the MDU. The percentage generally ranges between 6 and 10 percent of such
revenue based on penetration. The Company sometimes advances all or part of
the revenue participation at the time the Rights of Entry is executed and, in
the case of MDUs with strategic significance, may from time to time pay
up-front "key-money" in lieu of or in addition to the revenue participation.
Property Enhancements. The Company often installs a package of
telecommunications and security enhancements at the MDUs it serves, at a
nominal cost or at no cost to the MDU owner. For example, the Company can
install a monitoring camera at the main entrance that permits MDU residents
to identify guests by tuning his or her television set to the building's
security channel. In addition, the Company often provides a dedicated
information channel that permits the building's management to send messages
to the MDU residents over the private cable television system. At current
prices, these enhancements are relatively inexpensive for the Company to
provide and can be important to MDU owners and property managers concerned
with security and emergency communications.
New Marketing Tool and Amenity to Rent Apartments. The principal concern
of an MDU owner is to rent apartments. The Company's services and property
enhancements can serve as an important marketing tool for prospective tenants
because such services are generally provided at a lower price than those
charged by the franchise cable television operator and the incumbent LEC and
long distance carriers. The Company works with on-site managers to emphasize
the benefits of the Company's services and the added value and convenience
provided by the Company.
Once an MDU owner executes Rights of Entry, the Company aggressively
markets its services to actual and potential subscribers within the MDU in
order to increase penetration rates for basic and additional services. The
Company believes that its best opportunity for a sale arises when a
subscriber first signs a lease and takes occupancy in an MDU. The Company has
therefore developed orientation and incentive programs for on-site property
managers and leasing agents, with the objective of enlisting them as the
Company's subscriber sales force. In addition, the Company markets to MDU
residents through (i) direct mail campaigns, (ii) special promotions and
sign-up parties, (iii) establishment of a physical presence at a building
(e.g., by setting up a small booth) and (iv) distribution of point-of-sale
marketing materials. The Company stresses the following themes when marketing
its services to MDU tenants:
Simplicity and Convenience. In general, a subscriber can order any of the
Company's services through the MDU's leasing agent at the time of lease
signing. In addition, in certain of its markets, the Company is able to
provide one stop shopping for both cable television and telecommunications
services.
Superior Channel Capacity and Customized Programming. The number of
channels provided by the Company at an MDU generally equals or exceeds that
of the local franchise operator in that market. In addition, the programming
selections available at an MDU can be tailored to the demographics of the MDU
and, unlike franchise cable television operators which may be required to
carry all local broadcast channels and public access channels, the Company
can utilize all of its available channels to provide popular programming.
Lower Price. The Company offers a competitive channel line-up (often
including Pay-Per View and premium services) at prices that are generally
below those charged by the local franchise cable television operator.
Better Service and Picture Quality. The Company seeks to distinguish
itself by providing better and more convenient service to its customers. The
Company also emphasizes the generally better picture quality and reliability
of its microwave delivery system.
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The Company is committed to providing excellent customer service to MDU
owners and subscribers in the home, in the field and on the telephone. The
Company believes the most effective means of attracting and retaining MDU
owners and subscribers is by providing high quality subscriber service,
including: (i) 24-hour-a-day, seven-day-a-week subscriber telephone support;
(ii) direct lines to facilitate rapid response to calls initiated by MDU
owners and managers; (iii) computerized tracking of all incoming calls to
minimize waiting times; (iv) service calls generally made the same day the
subscriber indicates a service problem; (v) flexible, seven-day-a-week
installation and service appointments; (vi) follow-up calls and on-site
inspections to verify subscriber satisfaction; and (vii) 80% of installations
completed within 3 business days of receiving the initial installation
request, often within 24 hours. The Company also uses focus groups and
subscriber surveys to monitor subscriber satisfaction.
The Company has developed operational excellence standards for virtually
every aspect of the Company's interaction with MDU owners and subscribers.
The Company's standards of subscriber service and satisfaction meet or exceed
the published standards of the National Cable Television Association. The
Company's Operational Excellence Director reports directly to the Chief
Operating Officer and has the authority to cross organizational boundaries to
achieve results.
COMPETITION
The multichannel television and telecommunications industries are highly
competitive. The Company presently competes with companies that specialize in
the provision of multichannel television or telecommunication services and,
increasingly, with companies that offer bundled multichannel television and
telecommunications services. Many of these competitors are larger companies
with greater access to capital, technology and other competitive resources.
The Company's private cable television service competes with traditional
franchise cable television operators as well as wireless cable television
operators, other private cable television operators, DBS, stand-alone
satellite service providers and, to a lesser extent, off-air broadcasters.
The Company's local telephone service competes with other STS operators, the
incumbent LEC, CLECs and CAPs. In addition, future telecommunications
offerings, including PCS, may increase competition in the telecommunications
industry. Recent and future legislative, regulatory and technological
developments will likely result in additional competition, as
telecommunications companies enter the cable television market and as
franchise cable television operators and interexchange carriers begin to
enter the local telephone market. See "-- Regulation." Similarly, mergers,
joint ventures and alliances among franchise, wireless or private cable
television operators and RBOCs may result in providers capable of offering
bundled cable television and telecommunications services in direct
competition with the Company.
The Company competes with multichannel television operators and
telecommunications service providers to obtain Rights of Entry and to enroll
subscribers. In most markets serviced by the Company, franchise cable
television operators now offer revenue sharing and access fee arrangements to
MDU owners. There can be no assurance that these payments will not increase
in the future as competition increases for access to the higher quality MDUs.
Another basis of competition is the breadth of programming and range of
services offered. Although the Company as a matter of course investigates new
sources of programming and technologies that may increase its range of
services, other larger and more diversified competitors may attract the
targeted MDUs based on their increased menu of services. Consequently, the
Company may be compelled to reduce its prices and improve its range of
services under its existing Rights of Entry which generally require the
Company to remain competitive with the market in general. At present, the
Company believes that its existing Rights of Entry give it a competitive
advantage within its present markets; however, these advantages may
deteriorate with changes in regulations, the types of competitors and with
technological advances. See "Risk Factors -- Risks Associated with Rights of
Entry."
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Certain of the Company's current and potential competitors are described
below.
Traditional Franchise Cable Systems. The Company's major competition for
Rights of Entry and subscribers in each market comes from the traditional
franchise cable television operator. The Company competes with such operators
by (i) focusing exclusively on MDUs, (ii) sharing profits with MDU owners,
(iii) offering customized programming, and (iv) charging lower rates to
subscribers.
Multipoint Multichannel Distribution Systems. MMDS systems are similar to
the Company's 18GHz networks in that they use microwave transmitting and
receiving equipment. MMDS differs from 18GHz in that (i) it "broadcasts" its
video programming direct to individual subscribers and not to an MDU's
receiver and (ii) its systems transmit in an omni-directional manner, while
18GHz systems are point-to-point. As a result, MMDS wireless cable can
provide service to all households within a wireless operator's
"line-of-sight." The 2.5GHz spectrum utilized by MMDS wireless cable was
initially allocated by the FCC to applicants other than MMDS operators within
a given market, with 20 of the available channels generally allocated to
educational institutions. As a result, MMDS wireless operators have had
difficulty acquiring or leasing the critical mass of channels required to
offer a diverse programming lineup. Moreover, absent digital compression
technology, channel capacity is limited to 33 analog channels.
Local Multipoint Distribution Service. The FCC has recently issued rules
reallocating the 28GHz band to create a new video programming delivery
service referred to as local multipoint distribution service ("LMDS"). The
FCC also has issued a license for the New York City market for one operator
that is developing a system to utilize the 28GHz frequency for pay
television. As currently proposed, LMDS would provide a single licensee up to
1000 MHz of spectrum for the distribution of programming in each prescribed
geographic area. LMDS systems, like MMDS, will use point-to-multipoint
microwave distribution for wireless cable services. Unlike MMDS, however,
LMDS systems, using the proposed allocation in the 28 GHz band will be able
to provide channel capacity equal or greater to that of most cable systems,
including the Company's. In addition, LMDS systems that would allow
subscriber-to-hub transmissions to facilitate the provision of interactive
services and telecommunications have been proposed. However, due to the
experimental nature of the technology and the capital costs of building a
system, LMDS licensing and system construction in the Company's markets are
not expected by the Company to occur in the near term.
SMATV Systems. The largest number of private cable companies are operators
of SMATV systems. Like the Company, these systems offer a multichannel
television service pursuant to rights of entry with MDU owners. Where the
Company has introduced or will introduce 18GHz systems, the Company competes
with SMATV systems on the basis of (i) larger channel offerings (typically
SMATV offers 20 to 40 channels), (ii) the quality of its video programming
delivery, (iii) customer service, and (iv) the perceived high price of SMATV
relative to the programming package provided. The Company may acquire
additional SMATV operations with a view to converting them, where feasible,
to 18GHz technology, adding channels and upgrading customer and field
service.
Direct Broadcast Satellite. DBS systems involve the transmission of
encoded video programming direct from a satellite to the home user without
any intermediate processing or retransmission by a terrestrial operator.
Although prices have been decreasing, DBS service typically requires the
purchase of equipment and installation fees which are a significant cost to
the subscriber. In addition, subscribers generally pay a monthly programming
fee to receive DBS service. Some of these fees are lower than those charged
by the Company before consideration of the equipment costs.
DBS systems generally offer a significantly larger number of channels and
broader programming line-up than offered by the Company. However, the Company
believes that it can effectively compete with DBS systems in the MDU
marketplace for the following reasons. First, DBS line-of-sight problems are
significant (unless an entire MDU is connected to the service) because a DBS
antenna must be pointed in the right direction to receive video programming
from the satellite. Perhaps more important, other than in so-called "white
areas" of the country (generally rural locations without either cable
television service or good reception of over-the-air broadcast programming),
DBS operators are presently not permitted to retransmit network or local
broadcasting programming. Certain DBS operators have announced "MDU programs"
which generally consist of either (i) paying commissions to a local satellite
dish dealer who has, at its own expense, overbuilt an MDU or (ii) billing MDU
owners for the service on a bulk basis. The Company's Rights of Entry
currently prohibit an MDU owner from allowing a DBS system to be installed at
the MDU.
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There is considerable debate in the cable industry as to the ultimate
market share that DBS systems will achieve and there can be no assurance as
to the Company's ability to compete with DBS. The Company has been involved
in discussions with several DBS providers regarding the possibility of
distributing DBS programming on the Company's cable television networks. No
assurance can be given as to the outcome of any such discussions.
Telephone Companies. The Telecommunications Act repealed the
telecommunications-cable television cross-ownership restriction, which
prohibited telecommunications companies from providing video programming
directly to subscribers in their telecommunications service areas. Several of
the RBOCs have acquired MMDS or other private cable television operators in
an effort to begin providing cable television services and several other LECs
have indicated their intent to enter the cable television market. Similarly,
the Telecommunications Act will in all likelihood result in a significant
increase in the number of companies, including CLECs, long distance carriers
and wireless telephone operators, offering local telephone service.
Many of the Company's telecommunications services compete directly with
services offered by the incumbent LECs which currently dominate their local
telecommunications markets. These companies all have long-standing
relationships with their subscribers and have financial, personnel and
technical resources substantially greater than the Company. The Company
expects to compete in this market by (i) establishing strategic relationships
with MDU owners so as to allow the Company to market effectively to MDU
residents, (ii) providing value added, enhanced services to MDU residents,
(iii) bundling its telecommunications and cable television services, (iv)
providing a high level of customer service and responsiveness, and (v)
competitively pricing its products.
Wireless Telecommunications. The Company's telecommunications services
will also compete with current and future wireless telecommunications
offerings, including those of cellular and PCS providers. Wireless
telecommunications can be sold to MDU residents without violating the
Company's Rights of Entry since wireless telecommunications do not require
the use of the Company's network or the MDUs internal wiring. The Company
intends to offer all or certain of these services, on a resale basis,
directly to its subscribers and to bundle wireless communications with the
Company's other offerings.
Video Stores. Retail stores rent video cassette recorders ("VCRs") and/or
video tapes, and are a major participant in the entertainment video program
delivery industry. Videocassette rentals do not compete with cable television
operators' news, information, education and public affairs programming.
Although management does not believe that video rentals and sales have a
material competitive impact on the basic services provided by franchise,
private or wireless cable systems, the availability of movies and other
programming on videocassette has a competitive impact on the penetration
rates for the Company's premium channels and Pay-Per-View programming. The
Pay-Per-View window (i.e., the time period after which a theatrical film is
released in the Pay-Per-View market) is generally later than the
corresponding home video window. Management believes that until this
Pay-Per-View window is shortened to coincide with or precede the home video
window, any rise in Pay-Per-View penetration rates would be unlikely to come
for studio produced feature films. Rather, it would more likely come from
sporting events, concerts and cable-exclusive movies not released through
theaters.
Off-Air Local Broadcasts. Off-air local broadcasts (e.g., ABC, NBC, CBS,
Fox and PBS affiliates and independent local stations) provide a free
programming alternative to the public. This programming generally offers MDU
residents less variety and does not include the specialized entertainment and
news programming available only on cable television. Customers who choose it
over cable television usually do so on the basis of cost. The Company
currently retransmits off-air local broadcasts to its private cable
television subscribers, but its ability to do so in the future is generally
dependent upon receipt of retransmission consents. See "-- Regulation."
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REGULATION
The multichannel television and telecommunication industries are subject
to extensive regulation at the federal, state and local levels. The following
summary does not purport to describe all present and proposed federal, state
and local regulations and legislation relating to the multichannel television
and telecommunications industry. Legislative and regulatory proposals under
consideration from time to time by Congress and various federal agencies, as
well as state and local franchise requirements, have in the past, and may in
the future, materially affect the Company and the multichannel television and
telecommunications industries. Additionally, many aspects of regulation at
the federal, state and local levels currently are subject to judicial review
or are the subject of administrative or legislative proposals to modify,
repeal or adopt new laws and administrative regulations and policies. Neither
the outcome of these proceedings nor their impact on the Company can be
predicted at this time. The Company believes that it is in compliance in all
material respects with all federal, state and local regulations applicable to
it. In some instances, the Company has acquired businesses that do not comply
with all regulations applicable to them and it undertakes to remediate such
matters as soon as practicable and in a manner that does not materially
adversely impact it. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview."
Telecommunications Act of 1996
On February 8, 1996, the President signed into law the Telecommunications
Act which amended the Communications Act of 1934 (the "Communications Act").
The Telecommunications Act has altered, and will continue to alter, federal,
state and local laws and regulations regarding telecommunications providers
and services. The law is intended, in part, to promote substantial
competition in the marketplace for local telephone service and in the
delivery of video and other services. Although the Company believes that
certain provisions of the Telecommunications Act will help the Company
compete with LECs, it is premature to predict the effect of the
Telecommunications Act on the multichannel television and telecommunications
industries in general or the Company in particular. In large part, the impact
of the Telecommunications Act will depend upon the outcome of various FCC
rule making proceedings to interpret and implement the Telecommunications
Act, including the FCC's first report and order regarding the interconnection
obligations of telecommunications carriers, which currently is under review
by the United States Court of Appeals for the Eighth Circuit.
Regulation of Cable Television
Certain of the Company's networks are, for regulatory purposes, deemed to
be "Cable Systems". To constitute a Cable System, a multichannel television
system must use hard-wire or fiber optic cable that makes a tangible physical
crossing or use of a public right-of-way. As a result, all Cable Systems are
required to obtain a local franchise and are subject to state and local
regulation as well as federal Cable System regulation. The Company's 18GHz
networks and SMATV systems are not considered Cable Systems and thus are not
subject to local franchising requirements and are free from most Cable System
regulation. The Company's Houston, Texas system, a portion of its Fort Worth,
Texas system and certain other small systems are regulated as Cable Systems.
However, the Company's Houston, Fort Worth and other small franchise cable
television systems are exempt from federal rate regulation and the universal
service obligation, even though they are Cable Systems, because they are
subject to "effective competition" as discussed in greater detail below.
Set forth below is a discussion of the principal laws and regulations
governing the Company's private and franchise cable television operations.
Federal "Cable System" Regulation
The Communications Act, as amended, governs the regulation of Cable
Systems. The regulations imposed on Cable Systems include requirements to (i)
obtain a local franchise (which may require the franchisee to pay franchise
fees to local governments of up to 5% of yearly gross
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revenues), (ii) delete certain programs from cablecasts, (iii) comply with
customer service standards, (iv) retransmit certain broadcast television
programming, (v) in most circumstances, conform subscriber service and
equipment rates to applicable federal regulations, (vi) comply with federal
rate regulations, (vii) comply with FCC equal employment opportunity ("EEO")
rules and policies, (viii) make available channels for leased-access
programmers at rates that are to be calculated on a formula established by
the FCC, and (ix) offer customer service to all buildings passed by its
network.
Copyright Licensing. Cable Systems and private cable television systems,
are entitled to federal compulsory copyright licensing privileges. In order
to obtain a compulsory copyright, such systems must make semi-annual payments
to a copyright royalty pool administered by the Library of Congress. A
compulsory copyright provides a blanket license to retransmit the programming
carried on television broadcast stations. Non-broadcast programming, often
referred to as cable channel programming, is not subject to the compulsory
copyright license. The Company purchases this copyrighted programming from
program suppliers (e.g., ESPN), which in turn obtain rights to the
programming directly from the program copyright owner pursuant to a private
negotiated agreement. Bills have been introduced in Congress over the past
several years that would eliminate or modify the cable compulsory license.
The need to negotiate with the copyright owners for each program carried on
each broadcast station in the channel lineup could increase the cost of
carrying broadcast signals or could impair the Company's ability to obtain
programming.
Must-Carry and Retransmission Consent. The Communications Act grants local
television stations the right to elect to either force local Cable Systems to
"carry" the television station free of charge (a "must carry" right) or to
prohibit Cable Systems and private cable television systems from carrying the
local television station (a "retransmission consent" right). Under the
must-carry rules, a Cable System, subject to certain restrictions, generally
must carry, upon request by the station and depending on the number of usable
activated channels on the system, all commercial television stations with
adequate signals that are licensed to the same market as the Cable System.
Under the retransmission consent rules, Cable Systems and private cable
television systems are precluded from carrying commercial broadcast stations
that choose not to exercise their must-carry rights, all "distant" commercial
broadcast stations (except for "superstations", i.e., commercial
satellite-delivered independent stations such as WTBS), commercial radio
stations and certain low-powered television stations, without obtaining those
stations' explicit written consent for the retransmission of their
programming. Retransmission consent agreements do not obviate the need to
obtain a copyright license for the programming carried on the broadcaster's
signal. However, Cable Systems and private cable television systems may
obtain a compulsory copyright license for broadcast programming as described
above. To date, the "must carry/retransmission consent" regulations have not
had a significant impact on either the operations or profitability of the
Company. The Company has had little difficulty obtaining retransmission
consent agreements with local broadcasters. Nonetheless, there can be no
assurance that broadcasters, in some circumstances, will not withhold
retransmission consent, require excessive compensation for that consent or
impose onerous conditions thereon.
Recent changes in federal law and regulation will likely affect the
conduct of the Company's private and franchise cable television business.
Changes in the Definition of a "Cable System." Formerly, to avoid being
classified as a Cable System, private cable television systems were limited
to linking with hard wire only commonly owned or managed MDUs without
crossing a public right-of-way. The Telecommunications Act amended the
definition of Cable System such that systems which make no use of public
streets or public rights-of-way no longer are deemed to be Cable Systems,
regardless of the type or ownership of properties served by the system. Thus,
for example, the Company's private cable television systems now may serve
mobile home parks and private communities without a local franchise and free
of most federal Cable System regulations.
Elimination of the Telco-Cable Cross-Ownership Restriction. The
Telecommunications Act repealed the telecommunications-cable television
cross-ownership restriction, which prohibited telecommunications companies
from providing multichannel television directly to subscribers in their
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telecommunications service areas. Telecommunications companies now have
several options for entering and competing in the multichannel television
marketplace. Telecommunications companies now may: (i) provide video
programming to subscribers through radio communications under Title III of
the Communications Act; (ii) provide transmission of video programming on a
common carrier basis under Title II of the Communications Act (i.e., provide
a common carrier video platform); (iii) provide video programming as a Cable
System under Title VI of the Communications Act (franchise cable); or (iv)
provide video programming by means of an "open video system." Open video
systems are not required to comply with the full panoply of federal Cable
System regulation, but they are subject to certain additional programming
selection limitations. These changes likely will increase the level of
competition in the multichannel programming market.
Effective Competition. A Cable System subject to "effective competition"
is exempt from rate regulation. At present, the Company believes that all of
its Cable Systems are subject to "effective competition." Prior to the
enactment of the Telecommunications Act, Cable Systems were deemed to be
subject to "effective competition" if either: (1) fewer than 30% of the
households in the franchise area subscribe to the service of the Cable
System; (2) the area is served by at least two unaffiliated multichannel
television operators, both of which are able to provide service to at least
50% of the households in the franchise area, and the number of households
actually subscribing to all but the largest multichannel television operator
exceeds 15%; or (3) the local franchising authority itself offers
multichannel television to at least 50% of the households in the franchise
area. The Telecommunications Act expanded the definition of "effective
competition" to include situations in which a LEC or its affiliate offers
multichannel television directly to subscribers by any means (other than
direct-to-home satellite services) in the franchise area. It is expected that
this change will provide franchise cable television operators with increased
pricing flexibility as LECs begin to provide multichannel television
services. No assurance can be given that the Company does not, or will not in
the future, constitute "effective competition" to any franchise cable
television operator with which it competes.
Cable Rate Regulation. Rates for basic cable service on Cable Systems not
subject to effective competition are regulated by local franchising
authorities. Rates for upper tier or "cable programming services" on such
systems are regulated by the FCC. The Telecommunications Act eliminates cable
programming service tier rate regulation effective March 31, 1999, for all
Cable System operators.
Rate Relief for Small Cable Operators. The Telecommunications Act
deregulated the rates charged for cable programming services in any Cable
System operated by a "small cable operator" that serves 50,000 or fewer
subscribers. The law defines a "small cable operator" as one which, in the
aggregate, serves fewer than one percent of all subscribers in the United
States and which is not affiliated with any entity with gross annual revenues
in excess of $250 million. This provision may provide increased pricing
flexibility for certain of the Company's competitors who qualify as "small
cable operators."
The Uniform Rate Requirement. Prior to enactment of the Telecommunications
Act, the Communications Act generally provided that a Cable System should
have a rate structure for the provision of cable service that is uniform
throughout its geographic area. The Telecommunications Act provides that this
requirement is applicable only where "effective competition" is absent.
Further the Telecommunications Act exempts non-predatory bulk discounts
offered to MDUs from the uniform rate requirement. Consequently, the
franchise cable television operators with which the Company competes now have
increased pricing flexibility with respect to MDU bulk discounts.
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
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arrangements pursuant to which Cable Systems obtain the exclusive right to
distribute the subject programming within their franchise areas. Such
exclusive distribution arrangements have been found to inhibit the ability of
new entrants to compete in the multichannel television market. The
prohibition on exclusive contracts, however, is scheduled to expire on
October 5, 2002 unless the FCC determines, during a proceeding that is to be
conducted in 2001, that the prohibition continues to be necessary to promote
competition in the multichannel television market. The Telecommunications Act
amended the program access provisions by adding that the provisions shall
also apply to common carriers and their affiliates. Thus, telecommunications
companies entering the market will find it more difficult to limit their
competitors access to programming.
The FCC is in the process of implementing these statutory changes. There
can be no assurance that the FCC will not promulgate implementing regulations
that will further expand the ability of franchise cable television operators
or others to compete with the Company.
In addition, the FCC has initiated a review of the rights of various
multichannel television service providers to obtain access to MDUs and other
private property. The FCC has indicated that it seeks to ensure a level
competitive playing field in the emerging multichannel television market. One
possibility raised by the FCC is the establishment of a federal mandatory
access requirement, which would require property owners to open their
property to any number of service providers. In another proceeding, the FCC
is contemplating an order preempting state, local and private restrictions on
over-the-air reception antennas placed on rental properties or properties not
within the exclusive control of the viewer. Although it is open to question
whether the FCC has statutory and constitutional authority to compel
mandatory access or preempt private restrictions on antennas located on
property owned or controlled by others, there can be no assurance that it
will not attempt to do so. Either such action would tend to undermine the
exclusivity provisions of the Company's Rights of Entry with MDU owners.
State and Local "Cable System" Regulation
Because Cable Systems use public rights-of-way, they are subject to state
and local regulation, typically imposed through the franchising process.
State and/or local officials often are involved in the franchisee selection,
system design and construction, safety, consumer relations, billing, and
community-related programming and services among other matters. Cable Systems
generally are operated pursuant to nonexclusive franchises, permits, or
licenses granted by a municipality or other state or local government entity.
Franchises generally are granted for fixed terms and in many cases are
terminable if the franchise operator fails to comply with material provisions
of the franchise. Franchising authorities are immune from monetary damage
awards arising out of regulation of Cable Systems or decisions made on
franchise grants, renewals, transfers and amendments.
Cable franchises typically contain provisions governing fees to be paid to
the franchising authority, length of the franchise term, renewal, sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public rights-of-way and
types of cable services provided.
Although federal law contains certain procedural safeguards to protect
incumbent Cable Systems from arbitrary denials of franchise renewal, the
renewal of a cable franchise cannot be assured unless the franchisee has met
certain statutory standards. Moreover, even if a franchise is renewed, a
franchising authority may impose new requirements, such as the upgrading of
facilities and equipment or higher franchise fees. At least two states,
Massachusetts and Connecticut, have adopted legislation subjecting Cable
Systems to regulation by a centralized state government agency. There can be
no assurance that other states will not similarly adopt state level
regulation.
The Company's Houston cable television franchise and its other limited
cable television franchises are subject to state and local franchise laws.
Moreover, although 18GHz private cable systems are not subject to local
franchise laws, state and local property tax and environmental laws are
applicable to the Company's business. For example, the Company has to comply
with local zoning laws and applicable covenants, conditions and restrictions
when installing its antennae and other microwave equipment.
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In addition, although regulation in each state differs in some respects, a
number of states require that, in exchange for just compensation (typically
set by statute or regulation to be as low as $1.00), the owners of rental
apartments (and, in some instances, the owners of condominiums and
manufactured housing parks) must allow the local franchise cable television
operator to have access to the property to install its equipment and provide
cable service to residents of the MDU. Such state laws effectively eliminate
the ability of the property owner to enter into exclusive Rights of Entry. To
the best of the Company's knowledge, the states which have enacted cable
mandatory access statutes in some form are: Connecticut, Delaware, Illinois,
Kansas, Maine, Minnesota, Nevada, New Jersey, New York, Pennsylvania, Rhode
Island and Wisconsin. The District of Columbia and the cities of Scottsdale
and Glendale, Arizona, and Lewisville, Texas also have adopted municipal
ordinances requiring mandatory access, however, the Company believes that the
enforceability of such ordinances is doubtful under existing judicial
precedent. Florida currently has a condominium mandatory access statute, but
the validity of that statute has been called into question because an
identical provision of Florida law that applied to rental properties has been
held to be unconstitutional. Virginia's statute on its face permits property
owners to exclude whomever they wish as long as the owner accepts no
compensation from whomever is permitted to serve the property. The
constitutionality of these statutes has been and is being challenged in
various states.
The Company does not operate in any mandatory access state other than
Florida (with respect to condominiums) and Illinois. The Company has recently
entered into Rights of Entry in Nevada which is also a mandatory access
state. When operating in Illinois, the Company generally enters into bulk
sales agreements with MDU owners, whereby the MDU owner agrees to purchase
cable television, at a discount, for each unit in the MDU and provides the
service to the MDU resident as one of the amenities included in their rent.
The Company's business in Illinois to date has not been affected adversely by
the mandatory access right of the franchise operators.
Individual cities and counties also have the authority to enact cable
mandatory access ordinances. To the Company's knowledge, other than as noted
above, there are no cities or counties in its markets which have such
ordinances.
18GHz and Private Cable Regulation
In February of 1991, the FCC made 18GHz frequencies available for the
point-to-point delivery of multichannel television. The FCC exercises
jurisdiction over 18GHz microwave and other transport technologies using the
radio frequency spectrum pursuant to Title III of the Communications Act,
which vests authority in the FCC to regulate radio transmissions and to issue
licenses for radio stations. The scope, content, and meaning of existing
laws, rules and regulations governing 18GHz technology are subject to
legislative, judicial and administrative changes.
The Company's 18GHz networks must comply with the FCC's licensing
procedures and rules governing a licensee's operations. Application to use
18GHz microwave "paths" and frequencies is made to the FCC and is subject to
certain technical requirements and eligibility qualifications. After 18GHz
paths are licensed to an applicant, the facilities must be constructed and
fully operational within 18 months of the grant. The facilities must be built
in strict accordance with the terms of the granted application. Most of the
Company's licenses are valid for a period of five years from the grant date,
however, new licenses are valid for ten years from the date of grant, after
which the licensee must apply to the FCC for license renewal. License renewal
is not an automatic right, although it is routinely granted if the licensee
is in substantial compliance with the FCC rules.
Licensing procedures include (i) obtaining an engineering report
confirming that the proposed path does not interfere with existing paths and
(ii) filing FCC Form 402 which includes a statement of eligibility and use, a
system diagram and a statement regarding compliance with the frequency
coordination requirement. The entire licensing procedure requires
approximately 120 days.
The Company does not "own" the paths and frequencies granted by the FCC.
Rather, the Company is merely licensed or permitted to "use" the frequencies.
Moreover, the rights granted to the Company to use 18GHz frequencies are not
to the complete exclusion of other potential licensees.
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First, the Company's rights only extend to the 18GHz paths identified in its
application as connecting the various points in its video distribution
system. Other 18GHz microwave users are permitted to file applications and
serve the same buildings as the Company (in so far as the 18GHz licensing is
concerned), but they may not interfere with an incumbent user's licensed
microwave paths. Second, the Company has no right to the airspace over which
the programming is transmitted. Obstructions could be constructed in the
line-of-sight of the microwave paths, precluding connection of the satellite
earth station with the various reception points to be served. The 18GHz band
also is authorized for use by other kinds of users, including non-video,
point-to-point microwave, mobile communications and satellite down-link
transmissions. Although sharing these frequencies is technically feasible, it
is possible that the Company will be unable to obtain licenses for these
frequencies on the paths it desires, or that it will be able to use only a
portion of the frequencies at certain locations because of pre-existing
users.
Private cable television operators are also subject to certain other
federal regulations. First, private cable television operators are entitled
to the compulsory copyright license described above. Second, private cable
television operators benefit from the federal laws and regulations that
require certain programming providers to make cable programming available to
all multichannel video programming distributors on fair, reasonable and
nondiscriminatory terms. Third, as noted above, private cable television
operators are required to obtain retransmission consent from local
broadcasters in order to retransmit their signals. Finally, private cable
television systems are required to comply with the FCC's EEO rules and
policies. The FCC's EEO rules and policies require multichannel television
operators to establish and disseminate an EEO program that includes the use
of recruiting sources that serve minorities and women, and to evaluate its
hiring and promotion practices in comparison to the local labor pool. In
addition, the FCC requires systems with six or more full time employees to
file an annual EEO report detailing the system's EEO performance.
With the exception of local zoning laws and regulations, state and local
authorities generally have no jurisdiction over private cable television
operators.
23GHz Microwave Regulation
The Company anticipates that in the future it will use 23GHz microwave
frequencies, which are available for both private or common carrier
communications, to provide bi-directional telecommunications services. The
application and licensing procedures for authorizations to use the 23GHz
frequencies are substantially the same as those applicable at 18GHz. Although
the Company expects that 23GHz frequencies will be available on its current
paths and to meet its future needs, the Company has not commenced frequency
coordination and there can be no assurance that the Company will be able to
obtain licenses for these frequencies on the paths it desires.
Telecommunications Regulation
The Telecommunications services provided by the Company are subject to
regulation by federal, state and local government agencies. The Company
currently provides its telecommunications services as an STS operator through
PBX switches. As the Company implements its telecommunications strategy,
which includes replacing its PBX switches with networked central office
switches, the Company will increasingly become regulated as a CLEC. The FCC
has jurisdiction over interstate services, and state regulatory commissions
exercise jurisdiction over intrastate services. Additionally, local
authorities may regulate limited aspects of the Company's business, such as
the use of public rights-of-way.
Shared Tenant Services
The Company currently offers telecommunications services as an STS
operator to subscribers in Houston, Dallas-Ft. Worth, Austin, Denver and
Miami-Ft. Lauderdale. The Company offers STS services to residents of MDUs
using conventional twisted copper wire pairs to distribute telephone services
within an MDU. A PBX switch is installed at the MDU and traffic from the MDU
is transported via leased trunk lines to the LEC central office. From the
LEC's central office, local calls
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are routed through the LEC's network and long distance traffic is routed to
the Company's chosen long distance carrier (currently AT&T). By providing MDU
tenants with interconnection in this manner, the STS provider (rather than
the tenant) subscribes to local exchange service from the telecommunications
company, then "resells" service to the MDU tenant.
The resale of STS is subject to the terms and conditions in the tariffs of
the telecommunications company whose services it resells and to regulation by
the states in which the Company resells such services. Historically,
virtually all such telecommunications company tariffs flatly prohibited
resale of local exchange service. However, in recent years several state
legislatures and Public Utility Commissions ("PUCs") have determined that
resale of local exchange service is in the public interest and have directed
telecommunications companies within their jurisdictions to allow for resale
of local exchange service, opening the way for STS operations. In some
states, PUCs have issued detailed regulations governing the provision of STS
and other resale services. In other jurisdictions where no formal
requirements have been adopted, most telecommunications companies have
nonetheless modified their tariffs to provide for resale of local exchange
services.
Although resale of local exchange service is now permitted in most states,
the precise terms and conditions under which such resale services may be
provided varies from state to state, and from LEC to LEC, and may include
significant restrictions and limitations. These include: (i) a requirement to
be certified by the state PUC; (ii) restrictions with respect to the location
and ownership of MDUs to which STS service may be provided and the crossing
of public rights-of-way by STS operator facilities; (iii) regulations
allowing telecommunications companies to apply different local service rate
structures (e.g., measured use vs. flat rate) to STS providers and other
subscribers, in some cases lessening or even eliminating efficiencies which
might otherwise be realized through the use of the LECs' trunking facilities;
(iv) regulations providing for LEC access or rights-of-way to directly
service individual customers within an MDU; and (v) in certain states, limits
or prohibitions on resale of intrastate long distance and local service at a
profit.
Of the six states in which the Company operates, none have adopted
regulations governing the provision of STS services. The California PUC has
however adopted informal STS "guidelines." In addition, Florida requires
providers of STS services to be certified to resell local exchange services.
The Company has applied for such certification. Other than the California
"guidelines" and Florida's certification requirement, the Company may provide
STS services in each of these six states, subject only to individual
telecommunications company tariff provisions. The tariffs of all major LECs
serving these jurisdictions provide for resale of local exchange service
pursuant to varying terms and conditions. Provision of STS service in these
states in the future will be subject to any regulations that ultimately may
be adopted by state authorities, and to changes in telephone company tariffs.
Competitive Local Exchange Carrier Regulation
Recent and impending changes in federal law and regulation likely will
affect the conduct of the Company's telecommunication service business. The
FCC historically has left the regulation of the intrastate aspects of local
exchange service to the states. It has, however, exercised its jurisdiction
over interstate matters and jurisdictionally mixed matters respecting local
telephone service. The Telecommunications Act expands the FCC's authority to
regulate local exchange service and there can be no assurance that the FCC
will not exercise this authority aggressively.
State regulation of local exchange service traditionally has favored the
incumbent monopoly LECs (principally the RBOCs and GTE). The state laws have,
with the exception of STS, generally prohibited competition in the local
exchange. The Telecommunications Act expressly preempts such prohibitions.
The Telecommunication Act declares that no state or local laws or regulations
may prohibit or have the effect of prohibiting the ability of any entity to
provide any interstate or intrastate telecommunications service. States may,
however, impose "competitively neutral" requirements regarding universal
service, public safety and welfare, service quality and consumer protection.
Local authorities may also require reasonable, competitively neutral
compensation for use of the public rights-of-way.
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As a result of these changes, the Company anticipates that it will, in the
future, increasingly compete in the telecommunications market as a CLEC. For
purposes of the Telecommunications Act, CLECs are subject to all requirements
applicable to LECs. However, certain additional obligations imposed on
incumbent LECs are not applicable to CLECs. Although the Company does not
believe that the regulatory burdens applicable to CLECs will have a material
effect on its business, no assurance can be given at this time regarding the
extent or impact of such regulation.
The Telecommunications Act requires LECs and CLECs to provide
interconnection to their networks as well as wholesale rates to resellers of
services so that others may compete in the local exchange markets. In
addition, LECs and CLECs must provide competing carriers with access to
poles, conduits, and rights-of-way and, to the extent feasible, number
portability (the ability of a customer switching service providers to retain
his or her telephone number).
Federal, state and local authorities will share responsibility for
regulating the terms and conditions under which CLECs may enter the local
exchange markets. For example, the FCC recently issued a series of guidelines
that will provide the basis for interconnection agreements between CLECs and
the facilities of the incumbent LECs. Among other things, the
Telecommunications Act and the FCC's first implementing order require the
following:
Interconnection. Each telecommunications carrier is now required to
interconnect directly or indirectly with the facilities and equipment of
other telecommunications carriers. Incumbent LECs are further required to
provide interconnection, which is of a quality at least equal to that
provided by the incumbent LEC to itself or its affiliates, to any requesting
carrier at any technically feasible point in the incumbent LEC's network, on
rates, terms and conditions that are just, reasonable and nondiscriminatory.
The Telecommunications Act contemplates that interconnection agreements will
be negotiated by the parties and submitted to state regulatory authorities
for approval. In addition, state authorities may become involved, at the
request of either party, if negotiations fail. If the state regulator refuses
to act, the FCC may act on the matter.
Resale. LECs and CLECs are prohibited from imposing unreasonable or
discriminatory conditions or limitations on the resale of their
telecommunications services.
Number Portability. LECs and CLECs are required to provide, to the extent
technically feasible, number portability that will allow customers switching
among and between service providers to retain their telephone number.
Dialing Parity. LECs and CLECs are required to provide dialing parity to
competing providers of local exchange service and toll service, and to permit
all such providers to have nondiscriminatory access to telephone numbers,
operator services, directory assistance, and directory listing, with no
unreasonable delay. Dialing parity means an equal number of digits is
required for access to all providers.
Access to Rights-of-Way. LECs and CLECs are required to afford access to
the poles, ducts, conduits, and rights-of-way to competing carriers of
telecommunications services on rates, terms, and conditions that are not
unreasonable or unreasonably discriminatory.
Reciprocal Compensation. LECs and CLECs are required to establish
reciprocal compensation arrangements with other carriers for the transport
and termination of traffic.
Unbundled Access. In addition to the above, incumbent LECs are required to
provide, to any requesting carrier, nondiscriminatory access to network
elements on an unbundled basis at any technically feasible point in the
incumbent LECs network on rates, terms and conditions that are just,
reasonable and nondiscriminatory.
Universal Service. All telecommunications carriers are required to
contribute to a universal service fund to be established by the FCC.
Utility Companies. Finally, the Telecommunications Act provided that
registered utility holding companies may provide telecommunications services
(including cable television) notwithstanding the
72
Public Utility Holding Company Act. Utilities must establish separate
subsidiaries and must apply to the FCC for operating authority. It is
anticipated that large utility holding companies will become significant
competitors both to cable television and other telecommunications companies.
The FCC and various state PUCs are in the process of defining the precise
contours of these requirements which will govern local exchange service in
the future. Although the Telecommunications Act sets forth certain standards,
it also authorizes the states to adopt additional regulations provided that
such regulations do not conflict with the federal standards. It is unclear at
this time how the states will respond to the new federal legislation, and
what additional regulations they may adopt. In addition, several parties have
sought reconsideration of the FCC's first implementing order and a number of
parties have petitioned for review of the order in several federal courts of
appeal. Those petitions have been consolidated before the United States Court
of Appeals for the Eighth Circuit, which on October 15, 1996, stayed
substantial portions of the FCC's order pending judicial review. It is not
possible for the Company to predict the outcome of these proceedings.
Nonetheless, at this time it is clear that an increasing number of service
providers will be seeking to compete as CLECs in the local exchange markets
and that state and federal regulations will, to some extent, allow for such
market entry. Although jurisdictional lines of authority and basic
implementation issues are being determined by the FCC and the federal courts
in accordance with the statutory provisions outlined above, several states
already have begun the process of opening the local exchange market to
competition.
Most states require companies seeking to compete in intrastate
telecommunications services to be certified to provide such services. These
certifications generally require a showing that the carrier has the
financial, managerial and technical resources to offer the proposed services
consistent with the public interest. State regulation of telecommunications
services may impose upon the Company additional regulatory burdens, including
quality of service obligations and universal service contributions.
Long Distance Resale Regulation
Non-dominant interexchange carriers, such as the Company, are subject to
limited federal regulation. Nonetheless, carriers are required by statute to
offer their services under rates, terms and conditions that are just,
reasonable and not unreasonably discriminatory, and to file tariffs for their
international and interexchange services. The Telecommunications Act grants
the FCC explicit authority to forbear from regulating any telecommunications
service provider if the agency determines that it would be in the public
interest to do so. Pursuant to this authority, the FCC previously determined
that it would forbear from requiring that non-dominant interexchange carriers
file tariffs for their domestic services. The U.S. Court of Appeals for the
District of Columbia Circuit, however, has stayed that decision pending court
review.
As a non-dominant carrier, the Company is permitted to make tariff filings
on a single day's notice and without cost support to justify specific rates.
The FCC generally does not exercise direct oversight over cost justification
and the level of charges for service of non-dominant carriers, although it
has the statutory power to do so. The FCC has jurisdiction to act upon
complaints brought by third parties, or on the FCC's own motion, against a
carrier for failure to comply with its statutory obligations.
Foreign Ownership Restrictions
Section 301(b) of the Communications Act prohibits foreign controlled
companies from holding common carrier radio licenses. To allow the Company to
provide common carrier telecommunications services using its networks, in the
event that the Company decides it desires to provide such services, the Company
has agreed to assign substantially all of its frequency licenses to THI, an
entity controlled by United States citizens. To establish the terms of the
Company's continued and unencumbered use of the Assigned Licenses, the Company
has entered into a license and services agreement pursuant to which THI has
agreed to provide to the Company all the transmission capacity it requires or
may in the future require and the Company has granted THI a non-exclusive
73
license to use all of the Company's facilities and related equipment, such as
microwave transmitting and receiving equipment, required to provide
transmission capacity. The Company has also obtained an option to acquire the
assets or equity of THI, subject to FCC approval. See "Certain Transactions
- -- License Holding Company."
EMPLOYEES
As of February 28, 1997, the Company employed a total of 452 full-time
employees. The Company believes that its continued success will depend in
large part on its ability to attract and retain highly skilled and qualified
personnel. The Company has nondisclosure agreements with all of its senior
executive officers. The Company also regularly uses the services of contract
technicians for the installation and maintenance of its networks. None of the
Company's employees are currently represented by a collective bargaining
agreement. The Company believes that its relationships with its employees are
good.
PROPERTIES
The Company's national call center and its executive, administrative and
sales offices are located in Dallas, Texas. The premises lease has a ten year
term expiring November 30, 2005, and, as of February 28, 1997, requires
monthly rental payments of approximately $50,000. The Company, by exercising
an option, can lease additional space at its current location at comparable
rates. The Company leases additional space in the cities in which it operates
for its regional offices and warehouse operations.
The Company is negotiating for the purchase of a building proximate to its
executive offices. The Company intends to relocate certain administrative
functions to the new facility and to install a central office switch in the
building.
The Company owns substantially all of the cable television and
telecommunications equipment essential to its operations. The Company's major
fixed assets are cable television headends, microwave transmitters, SMATV
receivers, PBX switches and fiber optic cable. Such properties do not lend
themselves to description by character and location of principal units.
Substantially all of this equipment (other than fiber optic cable laid under
public rights of way) resides on or under the MDUs served by the Company or
in leased facilities in various locations throughout the metropolitan areas
served by the Company.
LEGAL PROCEEDINGS
The Company is not a party to any pending material legal proceedings
except for those arising in the ordinary course of business. The Company does
not believe that these will have a material adverse impact on the Company's
financial condition or results of operations. See "Risk Factors -- Use of the
Name OpTel" regarding an administrative proceeding before the PTO contesting
the Company's right to register the name OpTel.
74
MANAGEMENT
The following table sets forth certain information regarding the directors
and executive officers of OpTel at February 28, 1997:
Directors Age Position with OpTel
- --------------------------- ------- ---------------------------------------------------
Claude Chagnon ............ 42 Chairman of the Board and Director
Louis Brunel .............. 55 Director; President and Chief Executive Officer
Christian Chagnon ......... 41 Director
Pierre Collins ............ 40 Director
Barry Porter .............. 39 Director
Gary Winnick .............. 49 Director
Executive Officers Age Position with OpTel
- --------------------------- ------- --------------------------------------------------
Louis Brunel .............. 55 President, Chief Executive Officer and Director
Rory O. Cole .............. 37 Chief Operating Officer
Bertrand Blanchette ....... 39 Chief Financial Officer
Vinod Batra ............... 53 Vice President Engineering and Construction
Stephen Dube .............. 41 Vice President Acquisitions and Strategic
Planning
Michael E. Katzenstein .... 37 Vice President Legal Affairs and General
Counsel
Missy Orr-Ryan ............ 42 Vice President Marketing and Customer
Operations
William Shepherd .......... 44 Vice President New Business and Product Development
Lynn Zera ................. 49 Vice President Human Resources
Randy Hughes .............. 42 Vice President Eastern Region
William O'Neil ............ 41 Vice President Western Region
Thomas Watson ............. 41 Vice President Information Services
John Czapko ............... 56 Vice President Sales
Claude Chagnon has served as a Director since August 1996. Since October
1996, he has served as President and Chief Operating Officer of GVL. From
January 1994 to October 1996, Mr. Chagnon was Vice Chairman of GVL. Prior to
1994, Mr. Chagnon has held various positions at GVL and its subsidiaries
including, from May 1988 to January 1994, President of Videotron Ltee, a
Canadian cable television company and wholly-owned subsidiary of GVL. Mr.
Chagnon also serves as a Director of GVL, Tele-Metropole Inc., a Canadian
broadcaster and subsidiary of GVL, and Provigo Inc., a Canadian food
retailer.
Louis Brunel has served as a Director since March 1995 and as President and
Chief Executive Officer since April 1996. Since 1988, Mr. Brunel has held
various positions at GVL and its subsidiaries, including, immediately prior
to joining OpTel, Director, Chief Executive Officer and Group Managing
Director of Videotron Holdings Plc ("VHP"), a UK cable
television/telecommunications company and recently divested subsidiary of
GVL. While at VHP, Mr. Brunel was responsible for launching VHP's cable
television/telecommunications business. From 1988 to 1990, he served as Vice
President-Corporate Development of GVL. In addition, he served as President
of Videotron International Ltee ("VIL"), from September 1994 through December
1996.
Christian Chagnon has served as a Director since March 1997 and as Senior
Vice President Strategic Planning and Technology of GVL since September 1993.
Prior to August 1994, Mr. Chagnon was also President of Videotron Services
Informatiques Ltee. Mr. Chagnon also serves as a Director of GVL.
Pierre Collins has served as a Director since December 1995. Mr. Collins is
also the President of Capital Communications CDPQ Inc. ("CDPQ"), a
wholly-owned subsidiary of Caisse. From October 1994 to November 1995, Mr.
Collins was Executive Vice President of CF Telecom Inc. a Canadian
75
telecommunications company. From March 1994 to October 1994, he was Vice
President of Telesysteme Enterprise Ltee. Prior to February 1994, Mr. Collins
was Executive Vice President and General Manager of Optinet
Telecommunications Inc. Mr. Collins also serves as a Director of GVL. Mr.
Collins serves on the board of Teleglobe Inc., a company which is publicly
traded in Canada, and on the board of several private companies.
Stephen Dube served as Vice President Acquisitions and Strategic Planning for
OpTel since July 1995 and as a Vice President of VIL since May 1995. From
July 1995 to March 1997, Mr. Dube served as a Director of Optel. From January
1992 to April 1995, Mr. Dube was Senior Vice President of Laurentian
Financial Inc., a financial services company. From June 1986 to January 1992,
he was Vice President of Alexis Nihon Group, a real estate and venture
capital company.
Barry Porter has served as a Director since July 1994. Since December 1993,
Mr Porter has served as a Managing Director of Pacific Capital Group, Inc.,
an affiliate of Vanguard Communications, Inc., the general partner of
Vanguard. Prior to that, Mr. Porter was Senior Managing Director at Bear,
Stearns & Co. Inc. in the investment banking group. In addition, Mr. Porter
serves as a Director of Vanguard, Campuslink Communications Systems, Inc.,
Dycam Inc. and Styles on Video, Inc.
Gary Winnick has served as a Director since March 1994. Mr Winnick serves as
the Chairman of Pacific Capital Group, Inc. He is a Director of Veritas
Holdings GmbH and Campuslink Communications Systems, Inc. Mr. Winnick serves
on the Board of Directors of the United States Holocaust Museum and the Simon
Wiesenthal Center for Humanitarian Studies, and also serves on the Board of
Trustees of Tufts University, the International Board of Governors of Hillel
and the Board of Directors of the Sherry-Netherland, Inc.
Rory O. Cole was appointed Chief Operating Officer in March 1995. From
September 1994 to March 1995, Mr. Cole was Vice President New Market
Development of VIL. From September 1990 to September 1994, he was Chief
Financial Officer of VHP. From February 1990 to August 1990, he was Corporate
Controller of VHP. Prior to this, Mr. Cole held various management positions
with Cox Cable, Time Warner and Ernst & Young.
Bertrand Blanchette was appointed Chief Financial Officer in September 1996.
From September 1995 to December 1996, Mr. Blanchette served as Chief
Financial Officer of VHP. From June 1994 to December 1995, he was Vice
President Control of GVL. From October 1986 to June 1994, Mr. Blanchette was
Vice President Finance of Heroux, Inc., a public manufacturer of airplane
parts.
Vinod Batra was appointed Vice President Engineering and Construction in June
1996. From March 1995 to June 1996, he was President of and a Senior
Consultant at Advanced Communication Consultants, a provider of consulting
services relating to business and technical issues for clients in the cable
television and telecommunications industries. From August 1986 to March 1995,
Mr. Batra was President of American Communication Consultants. Mr. Batra also
formerly served as Chairman and CEO of American Communication Consultants.
Michael E. Katzenstein was appointed Vice President Legal Affairs, General
Counsel and Secretary in November 1995. Prior to joining OpTel, Mr.
Katzenstein was a partner (and, prior to January 1993, an associate) at
Kronish, Lieb, Weiner and Hellman LLP. Mr. Katzenstein received his J.D. from
Boston University School of Law in 1985.
Missy Orr-Ryan was appointed Vice President Customer Operations in September
1995 and was given the additional title of Vice President Marketing in August
1996. From September 1991 to August 1995, she was General Manager of Times
Mirror Cable Television, Inc. From June 1988 to September 1991, Ms. Orr-Ryan
was Director of Corporate Marketing for Times Mirror Cable Television, Inc.
William Shepherd was appointed Vice President New Business and Product
Development in June 1996. From September 1994 to December 1995, Mr. Shepherd
was Vice President Sales and Marketing of Great Lakes Telecommunications
Corporation ("Great Lakes"). From December 1995 to February 1996, Mr.
Shepherd was Chief Operating Officer of Great Lakes. Great Lakes filed for
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Chapter 11 Bankruptcy in April, 1996. From January 1992 to September 1994,
Mr. Shepherd was President of Continental Communications Corporation, a
provider of communications consulting and international transmission resale.
From June 1990 to January 1992, Mr. Shepherd was President of North American
Telecommunications Corp., a Texas based long distance telephone company.
Lynn Zera was appointed Vice President Human Resources in November 1995. From
July 1994 to October 1995 Ms. Zera was Executive Director of Keystone
Consulting. From July 1993 to July 1994, she was Executive Director of Human
Resources of Intellicall, Inc., a telecommunications company. From March 1978
to January 1993, she held various management and marketing positions with
Oryx Energy, a company involved with the production and exploration of oil
and gas.
Randy Hughes was appointed Vice President Eastern Region in September 1995.
From May 1994 to September 1995, he was District General Manager of Charter
Communications, a cable television Company. From March 1993 to May 1994, Mr.
Hughes was Regional Operation Manager of McDonald Investments and, from
September 1988 to March 1993, he was District Manager of United Video
Cablevision, both cable television companies.
William O'Neil was appointed Vice President Western Region in February 1995.
From January 1990 to January 1995, he was Director of Operations of Cable
London, Plc a cable television and telecommunications company.
Thomas Watson was appointed Vice President Information Services in September
1996. From January 1992 to September 1996, Mr. Watson held various positions
at GTE Telephone Operations, a local exchange carrier, including, Group
Product Manager, Group Manager Engineering and Senior Program Manager. From
June 1990 to January 1992, he was Group Engineer Manager for GTE Government
Systems Corporation, a software developer.
John Czapko was appointed Vice President Sales in March 1997. From September
1993 to February 1997, Mr. Czapko was Director of Indirect Distribution of
Metrocel Cellular Telephone Company ("Metrocel"). From June 1991 to September
1993, he was Director of Direct Distribution of Metrocel. Prior to that, Mr.
Czapko was Director of Spectrum Management of Primeco Personal Communications
where he helped develop and launch their new wireless PCS networks.
BOARD OF DIRECTORS
Number and Term of Office. All of the Issuer's directors have been elected
by VPC and Vanguard pursuant to a Stockholders' Agreement, dated as of
December 22, 1994, between VPC, Vanguard, Vanguard Communications, Inc., the
general partner of Vanguard (the "General Partner"), and the Issuer, as
amended to date (the "Stockholders' Agreement"). Pursuant to the
Stockholders' Agreement, the Board of Directors ("Board") shall consist of at
least seven members which shall be designated as follows: (i) for so long as
Vanguard's owns at least 30% of the outstanding Common Stock, VPC shall
designate at least four nominees and Vanguard shall designate three nominees
(the "Vanguard Nominees") and (ii) for so long as Vanguard's owns at least
10% of the outstanding Common Stock, VPC shall designate at least five
nominees and Vanguard shall designate two nominees. For so long as Pacific
Capital Group, Inc. ("Pacific"), an affiliate of the General Partner, has an
economic interest in Vanguard, Pacific shall be entitled to designate the
Vanguard Nominees. In addition the Stockholders' Agreement provides that no
action of the Board shall be taken without the affirmative vote or consent of
at least two of VPC's nominees. Messrs. Chagnon, Brunel, Collins and Dube
were appointed by VPC and Messrs. Porter and Winnick were appointed by
Vanguard. Mr. Collins was appointed as the nominee of Caisse pursuant to the
GVL Shareholders' Agreement. There is currently one vacancy on the Board.
Powers of the Directors. The directors may exercise all of the powers
which may be exercised by the Issuer and which are not by law, the
Certificate of Incorporation, or the Bylaws reserved or required to be
performed by Stockholders. A majority of the directors then in office shall
constitute a quorum and an act of a majority of the directors present at a
meeting at which there is a quorum shall be an act of the Board with respect
to any matter, provided, however, that no action of the Board shall be taken
without the affirmative vote or consent of at least two of the members
nominated by VPC.
77
Committees. The Board may delegate any of its powers and authority to one
or more committees. Each committee shall consist of one or more of the
directors of the Issuer. The Board may designate one or more directors as
alternate members of any committee to replace any absent or disqualified
member at any meeting of any such committee.
The Stockholders' Agreement, provides for an Executive Committee but none
has been formed to date. To the extent permitted by law, the Executive
Committee has all of the powers and may exercise all of the authority of the
Board in the management of the business and affairs of the Issuer.
The Board has an Audit Committee and a Compensation Committee. The
functions of the Audit Committee include recommending to the Board the
retention of independent public accountants, reviewing the scope of the
annual audit undertaken by the independent public accountants and the
progress and results of their work and reviewing the financial statements of
the Company and its internal accounting and auditing procedures. The Audit
Committee is composed of Messrs. Claude Chagnon, Collins and Porter. The
functions of the Compensation Committee are to supervise the Company's
compensation policies, administer the employee incentive plans, review
officers' salaries and bonuses, approve significant changes in employee
benefits and consider other matters referred to it by the Board. The
Compensation Committee is composed of Messrs. Claude Chagnon, Collins, Brunel
and Winnick.
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
awarded to or paid to the Company's Chief Executive Officer and the four most
highly compensated executive officers for the fiscal year ended August 31,
1996 and the eight months ended August 31, 1995. None of the named executive
officers were employed by the Company prior to December 31, 1994.
SUMMARY COMPENSATION TABLE
Annual Compensation
-----------------------------------------------
Name and Principal Year/Period Salary Bonus Other Annual All Other
Position(1) Compensation Compensation(2)
Louis Brunel 1996 $ 35,095(3) $ -- $ -- $ --
President and Chief 1995 $ -- $ -- $ -- $ --
Executive Officer
Rory Cole 1996 $175,000 $36,500 $ 19,394(9) $4,750
Chief Operating Officer 1995 $102,980(4) $ -- $ 22,405(10) $ --
Michael Katzenstein 1996 $135,346(5) $40,000(8) $103,756(11) $3,334
Vice President Legal 1995 $ -- $ -- $ -- $ --
Affairs and General Counsel
Julian Riches 1996 $130,000 $ -- $ 21,450(12) $ --
Treasurer 1995 $ 36,006(6) $ -- $ 33,099(13) $ --
William O'Neil 1996 $120,000 $12,000 $ 7,056(14) $4,620
Vice President Western 1995 $ 69,230(7) $ -- $ 13,757(15) $ --
Region
Harry Nicholls(16) 1996 $150,000 $18,750 $ 21,461(17) $4,500
Vice President Marketing 1995 $ 71,875 $ -- $ 34,994(18) $ --
- ------
(1) Mr. Bertrand Blanchette commenced employment with the Company as Chief
Financial Officer in September 1996. During the period September 1996
through December 1996, Mr. Blanchette continued to act as Chief
Financial Officer of Videotron Holdings Plc. ("VHP"), a subsidiary of
GVL which was divested in December 1996. During such period, Mr.
Blanchette's salary was paid by VHP and a portion of such salary was
allocated to the Company. Mr. Blanchette commenced full-time employment
with the Company effective January 1, 1997, at an annual salary of
$150,000. During the fiscal year ended August 31, 1996, Mr. Dube was
paid primarily by GVL. Beginning June 1, 1996, a portion of Mr. Dube's
salary was allocated to the Company. Effective January 1, 1997, Mr. Dube
accepted the position of Vice President Acquisitions and Strategic
Planning on a full-time basis at an annual salary of $145,000.
78
(2) Represents 401(k) matching funds.
(3) During the fiscal year ended August 31, 1996, Mr. Brunel was paid
primarily by GVL. Beginning June 1, 1996, a portion of Mr. Brunel's
salary was allocated to the Company. Effective November 1, 1996, Mr.
Brunel accepted the position of President and Chief Executive Officer on
a full-time basis at an annual salary of $275,000.
(4) Mr. Cole commenced employment with the Company in February 1995, at an
annual salary of $175,000.
(5) Mr. Katzenstein commenced employment with the Company in November 1995,
at an annual salary of $170,000.
(6) Mr. Riches commenced employment with the Company in April 1995, at an
annual salary of $130,000.
(7) Mr. O'Neil commenced employment with the Company in February 1995, at an
annual salary of $120,000.
(8) Represents a signing bonus paid to Mr. Katzenstein.
(9) $10,076 represents an automobile allowance, $8,313 represents tax
reimbursements resulting from relocation and the remainder represents
relocation payments.
(10) The entire amount represents relocation payments.
(11) $93,706 represents relocation payments and the remainder represents a
Company automobile.
(12) $11,550 represents tax reimbursements resulting from relocation, $6,000
represents an automobile allowance and the remainder represents
relocation payments.
(13) $31,600 represents relocation payments and the remainder represents an
automobile allowance.
(14) $6,000 represents an automobile allowance and the remainder represents
tax reimbursements resulting from relocation.
(15) The entire amount represents relocation payments.
(16) Mr. Nicholls is no longer employed by the Company.
(17) $11,640 represents tax reimbursements resulting from relocation, $6,000
represents an automobile allowance and the remainder represents
relocation payments.
(18) $32,494 represents relocation payments and the remainder represents an
automobile allowance.
COMPENSATION OF DIRECTORS
None of the Directors of the Company are compensated for their service as
directors of the Company. However, all directors are reimbursed for actual
out-of-pocket expenses incurred by them in connection with their attending
meetings of the Board or any committees of the Board.
EMPLOYMENT AGREEMENTS
Louis Brunel is employed as President and Chief Executive Officer of the
Company pursuant to an at will employment agreement. Under the employment
agreement, Mr. Brunel currently receives an annual base salary of $275,000, a
Company automobile and a housing allowance. In addition, Mr. Brunel is
entitled to participate in the Company's Incentive Stock Plan, Bonus Plan (as
defined) and Performance Plan (as defined). If Mr. Brunel's employment is
terminated by the Company for other than cause, Mr. Brunel will receive a
severance payment equal to two year's base salary.
Rory Cole is employed as Chief Operating Officer of the Company pursuant
to an at will employment agreement. Under the employment agreement, Mr. Cole
currently receives a base salary of $185,000 and a Company automobile. In
addition, Mr. Cole is entitled to participate in the Company's Incentive
Stock Plan, Bonus Plan and Performance Plan. If Mr. Cole's employment is
terminated for any reason, Mr. Cole will receive a severance payment equal to
one year's base salary.
Michael Katzenstein is employed as Vice President Legal Affairs, General
Counsel and Secretary of the Company pursuant to an employment agreement
expiring in November 1998. Under the employment agreement, Mr. Katzenstein
currently receives an annual base salary of $170,000 and a Company
automobile. Mr. Katzenstein received a signing bonus of $40,000 in 1996. In
addition, Mr. Katzenstein is entitled to participate in the Company's
Incentive Stock Plan, Bonus Plan and Performance Plan.
Julian Riches is employed as Treasurer of the Company pursuant to an
employment agreement expiring May 1998. Under the employment agreement, Mr.
Riches currently receives an annual base salary of $130,000 and an automobile
allowance. In addition, Mr. Riches is entitled to participate in the
Company's Incentive Stock Plan and Bonus Plan. If Mr. Riches' employment is
terminated by the Company for other than cause, Mr. Riches will receive a
severance payment equal to one year's base salary and reimbursement of
expenses relating to his relocation to the United Kingdom.
79
INCENTIVE STOCK PLAN
In fiscal 1997, the Company adopted an Incentive Stock Plan (the "Plan"),
pursuant to which options to acquire a maximum of 95,137 shares of Class A
Common may be granted to certain executives of the Company. The Plan
authorizes the Board to issue incentive stock options, as defined in Section
422A(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and
stock options which do not conform to the requirements of that Code section.
The Board has discretionary authority to determine the types of options to be
granted, the persons to whom options shall be granted, the number of shares
to be subject to each option granted and the terms of the stock option
agreements. Unless otherwise specifically provided in the option agreement,
(i) the exercise price of an option will not be less than the fair market
value, as determined by the Board, of the Class A Common on the date of the
grant and (ii) the options will vest in equal installments on each of the
second, third, fourth and fifth anniversaries of the date of grant. In the
event of a "change of control," all options shall vest and become immediately
exercisable. The exercise price may be paid in cash, certified or bank check,
through the delivery of shares of Class A Common pursuant to a
broker-assisted "cashless exercise" program if established by the Company or
by such other method as the Committee may deem appropriate.
Subject to certain exceptions, during the period of 45 days after the
termination of an executive's employment with the Company, the Company shall
have the right to purchase all, but not less than all, of the shares of Class
A Common acquired by such executive pursuant to the exercise of options
issued under the Plan at the fair market value of such shares as of the date
on which such executive's employment was terminated (the "Call") and the
executive shall have the right to sell to the Company all, but not less than
all, of the shares of Class A Common acquired by such executive pursuant to
the exercise of options issued under the Plan at the fair market value of
such shares as of the date on which such executive's employment was
terminated (the "Put"). Both the Call and the Put shall expire on the date of
an initial public offering of the equity securities of OpTel (the "IPO
Date").
Prior to the IPO Date, holders of Class A Common shares issued upon the
exercise of options issued under the Plan may not transfer or sell any of
such shares except pursuant to a bona fide written offer to purchase such
shares for an all cash purchase price ("third party offer") and only after
such shares have first been offered to the Company. The Company shall have
the option to purchase all (but not less than all) of the Class A Common
shares subject to the third party offer at the price per share set forth in
the third party offer.
ANNUAL BONUS PLAN AND MEDIUM TERM PERFORMANCE PLAN
The Company has adopted an Annual Bonus Plan (the "Bonus Plan") and a
Medium Term Performance Plan (the "Performance Plan") pursuant to which the
Board is authorized to grant cash bonuses to certain officers of the Company.
Bonuses are payable only if the Company achieves certain performance targets
approved by the Compensation Committee at the beginning of the fiscal year,
in the case of the Bonus Plan, or three year period, in the case of the
Performance Plan.
LIMITATION OF DIRECTOR'S LIABILITY; INDEMNIFICATION; INSURANCE
The Issuer's Certificate of Incorporation provides that the Issuer shall,
to the fullest extent permitted by the General Corporation Law of the State
of Delaware, as amended from time to time (the "DGCL"), indemnify all persons
whom it may indemnify pursuant thereto (i.e., directors and officers) and
shall advance expenses incurred in defending any proceeding for which such
right to indemnification is applicable, provided that, if the DGCL so
requires, the indemnitee provides the Issuer with an undertaking to repay all
amounts advanced if it is determined by a final judicial decision that such
person is not entitled to indemnification pursuant to this provision. The
Issuer's Certificate of Incorporation also contains a provision eliminating,
to the fullest extent permitted by Delaware law, the personal liability of
the Issuer's directors for monetary damages for breach of any fiduciary duty.
By virtue of this provision, under current Delaware law, a director of the
Issuer will not
80
be personally liable for monetary damages for breach of his fiduciary duty as
a director, except for liability for (i) any breach of the director's duty of
loyalty to the Issuer or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) dividends or stock purchases or redemptions that are unlawful under
Delaware law, and (iv) any transaction from which a director derives an
improper personal benefit. However, this provision of the Issuer's
Certificate of Incorporation pertains only to breaches of duty by directors
as directors and not in any other corporate capacity such as officers, and
limits liability only for breaches of fiduciary duties under Delaware
corporate law and not for violations of other laws, such as the federal
securities laws. As a result of the inclusion of such provision, stockholders
may be unable to recover monetary damages against directors for actions taken
by them that constitute negligence or gross negligence or that are in
violation of their fiduciary duties, although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. The
inclusion of this provision in the Issuer's Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefitted the
Issuer and its stockholders.
The directors and officers of the Company are insured (subject to certain
exceptions and deductions) against liabilities that they may incur in their
capacity as such, including liabilities under the Securities Act, under a
liability insurance policy carried by GVL. Such policy provides coverage in
an aggregate amount of $50 million (subject to a $250,000 retention) and
expires on October 24, 1997.
81
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of February 28, 1997
regarding the beneficial ownership of OpTel's Common Stock by the owners of
5% or more of the Common Stock and by all directors and executive officers of
the Company as a group. As of February 28, 1997, securities convertible into,
or exercisable for, approximately 1,970,434 shares of Common Stock were
outstanding, of which 1,801,367 were underlying the Convertible Notes
(assuming the conversion of the Convertible Notes on April 30, 1999 at a
formula provide in the terms of the Convertible Notes if no initial public
offering were to occur by such date).
Number of Shares Percentage of Common Stock
Name and Address of Beneficial Owner Beneficially Owned Beneficially Owned
- ------------------------------------------ ------------------- --------------------------------
Voting Rights Equity Interest
------------- --------------
Le Groupe Videotron Ltee(1) ................... 1,923,977 83.49 76.06
300 Viger Avenue East Class B Common
Montreal, Quebec H2X3W4
Vanguard Communications, Inc.(2) .............. 429,521(3) 18.25(3) 16.66(3)
150 El Camino Drive, Suite 204 Class B Common
Beverly Hills, California 90212
All directors and executive officers as a group 0 0 0
(17 persons)
- ------
(1) Such shares are owned by the VPC, an indirect wholly-owned subsidiary of
GVL. As described below, VPC has agreed to certain restrictions on its
abilities to transfer or otherwise dispose of such shares. Andre Chagnon,
the founder of GVL, indirectly controls approximately 68% of GVL's
outstanding voting rights. Pursuant to the terms of the GVL Shareholders'
Agreement for as long as GVL controls the Company, Caisse will have certain
rights with respect to the Company as described below.
(2) Such shares are owned by Vanguard for which Vanguard Communications, Inc.
is the general partner. As described below, Vanguard has agreed to certain
restrictions on its ability to transfer or otherwise dispose of such shares.
Gary Winnick, the Chairman of the Board of Directors of Vanguard
Communications, Inc. and its President and Chief Executive Officer has a
controlling interest in Vanguard Communications, Inc. Prior to VPC acquiring
control of the Company, Pacific and its affiliates, including Vanguard
Communications, Inc. founded, controlled and financially sponsored the
Company. The Company has been advised that Vanguard has reached an agreement
in principle for the sale of its interest to an affiliate of Caisse and that
GVL, VPC and Caisse have reached an agreement in principle with respect to
certain changes to the Issuer's Certificate of Incorporation and the
Stockholders' Agreement, including the possible conversion of certain
outstanding Convertible Notes. No assurance can be given as to when, or if,
such sale will be consummated or the terms of any such sale.
(3) Includes 48,937 shares of Class B Common issuable upon exercise of the
Vanguard Option (as defined). Without giving effect to the Vanguard Option,
Vanguard beneficially owns 16.51% of the voting rights and 15.05% of the
outstanding equity interest. See "Certain Transactions."
STOCKHOLDERS' AGREEMENT
Transfer Restrictions/Rights of First Refusal. Pursuant to the terms of
the Stockholders' Agreement, the holders of the Issuer's Common Stock are
prohibited from transferring any shares of Common Stock, other than transfers
to affiliates of such holder with the consent of the Board. In addition,
except to the extent required by law, Vanguard and the General Partner are
prohibited from transferring or distributing any of the Common Stock owned by
Vanguard to Vanguard's partners prior to the IPO Date.
Prior to the IPO Date, Vanguard may, subject to certain conditions,
solicit offers from Institutional Investors (as defined in the Stockholders'
Agreement) to purchase all, but not less than all, of the shares of Common
Stock held by Vanguard. Any such offer, however, is subject to a right of
first refusal, in favor of VPC and the Issuer, pursuant to which VPC or the
Issuer may purchase the Common Stock offered on the same terms and
conditions. The Company has been advised that Vanguard has reached an
agreement in principle for the sale of its interest to an affiliate of Caisse
and that GVL, VPC and Caisse have reached an agreement in principle with
respect to certain
82
changes to the Issuer's Certificate of Incorporation and the Stockholders'
Agreement, including the possible conversion of certain outstanding
Convertible Notes. No assurance can be given as to when, or if, such sale
will be consummated or the terms of any such sale.
In addition, certain holders of partnership interests in Vanguard have
agreed not to transfer their interests, subject to limited exceptions. If a
holder of an interest in Vanguard who is not subject to this restriction,
proposes to dispose of their interest in Vanguard, the General Partner shall
provide notice to the Issuer and VPC of such proposed transfer, and VPC, or
at VPC's election, the Issuer shall have the right to purchase such interest
at the price and terms provided for in Vanguard's Partnership Agreement,
dated as of April 15, 1993, as amended to date. If VPC or the Issuer acquires
any interest in Vanguard pursuant to these agreements, if VPC or the Issuer,
as the case may be, so elects, Vanguard will redeem or purchase the
partnership interests in exchange for shares of Common Stock which would be
distributed with respect to such partnership interests if Vanguard were then
liquidated.
Preemptive Rights. Until the earlier of the IPO Date and July 31, 1999,
the Issuer shall not issue or sell to VPC or Vanguard or any of their
respective affiliates any additional shares of capital stock of the Issuer,
or any options or other rights to acquire any such capital stock, except with
the consent of both VPC and Vanguard in each instance. All investments during
such period by VPC or Vanguard are expected to be generally in the form of
the Convertible Notes, except they will include subordination terms that will
cause them to be "Deeply Subordinated Shareholders Loans" for purposes of the
Indenture. Subject to the foregoing, if the Board requests as necessary for
the financing of the Company and VPC so elects, VPC may purchase from the
Issuer one or more convertible promissory notes on substantially the same
terms as the outstanding Convertible Notes (except they will include
subordination terms that will cause them to be "Deeply Subordinated
Shareholders Loans" for purposes of the Indenture), subject to Vanguard's
right to participate, after providing written notice to Vanguard (the
"Purchase Notice"). Within 60 days after receipt of a Purchase Notice,
Vanguard may elect to participate in such financing in proportion to its
ownership interest in the Issuer at the time of the Purchase Notice, except
that Vanguard may not exercise such right in any instance as to less than 10%
of the aggregate principal amount of the convertible promissory notes to be
sold.
If, prior to the IPO Date but after July 31, 1999, the Board determines to
issue additional shares of Common Stock, VPC may require that such shares be
Class B Common and, subject to Vanguard's right to participate, VPC may
purchase, after providing a Purchase Notice to the Issuer and Vanguard, any
or all of such additional shares at the Valuation Price (as defined in the
Stockholders' Agreement). Within sixty days after receipt of a Purchase
Notice, Vanguard may elect to participate in such financing in proportion to
its ownership interest in the Issuer at the time of the Purchase Notice, in
which event the number of additional shares to be purchased by VPC shall be
reduced by the number of shares purchased by Vanguard.
Drag Along/Tag Along Rights. If, prior to the IPO Date, VPC elects to sell
a controlling interest in the Issuer, VPC may require Vanguard to join in
such a sale in the same proportion and on the same terms. If VPC elects to
sell ten percent or more of the Common Stock owned by it (other than in a
public offering), Vanguard has the right to join in such sale in the same
proportion and on the same terms. If VPC elects to sell fifty percent or more
of the Common Stock owned by it (other than in a public offering), Vanguard
has the right to join in such sale and may sell all of its shares on the same
terms.
If, prior to the IPO Date, VPC ceases to be an affiliate of GVL, then for
a period of 120 days after such change in control, Vanguard may sell all or
any part of the Common Stock owned by it to the entity then controlling VPC
on terms no less favorable than those in the transaction which resulted in
such entity acquiring control of VPC.
TAG ALONG/DRAG ALONG RIGHTS OF NON-VOTING COMMON
Subject to certain exceptions, until the consummation of a public offering
of the Common Stock, as a result of which at least 15% of the outstanding
shares of Common Stock are listed on a national
83
securities exchange or on the Nasdaq National Market (a "Qualified
Offering"), and provided that GVL beneficially owns more shares of Common
Stock (assuming the conversion of the Convertible Notes on April 30, 1999 at
a formula provided for in the terms of the Convertible Notes if no initial
public offering were to occur by such date) than any other person, then in
the event of any transfer of beneficial ownership of Common Stock or
Convertible Notes by GVL to any person (a "Proposed Purchaser"), each holder
on Non-Voting Common or securities issued or issuable with respect to the
Non-Voting Common ("Registrable Securities") may require the Proposed
Purchaser to purchase on the same terms the proportion of the Registrable
Securities held by such holder equal to the number of shares of Common Stock
(and, in the case of Convertible Notes, the number of shares of Common Stock
then represented thereby) that GVL proposes to transfer divided by the total
number of shares of Common Stock beneficially owned by GVL.
If the transfer by GVL results in GVL owning less than a majority of the
Common Stock (assuming the conversion of the Convertible Notes on April 30,
1999 at a formula provided for in the terms of the Convertible Notes if no
initial public offering were to occur by such date), each holder of
Registrable Securities has the right to require the Proposed Purchaser to
purchase all of the Registrable Securities owned by such holder.
Until the consummation of a Qualified Offering, and provided that GVL
beneficially owns a majority of the outstanding Common Stock (assuming the
conversion of the Convertible Notes on April 30, 1999 at a formula provided
for in the terms of the Convertible Notes if no initial public offering were
to occur by such date), if GVL determines to sell all of the Common Stock and
Convertible Notes beneficially owned by GVL to any person other than an
affiliate or a Permitted Holder, GVL has the right to require the holders of
Registrable Securities to sell all of the Registrable Securities to the
purchaser at the same price per share paid by the purchaser to GVL.
GVL SHAREHOLDERS' AGREEMENT
Caisse, CDPQ, Sojecci Ltee and Sojecci (1995) Ltee, the principal
shareholders of GVL, and Andre Chagnon are parties to the GVL Shareholders'
Agreement, which provides, among other things, that for so long as GVL
controls the Issuer, Caisse will be allowed to select one of GVL's nominees
to the Board of Directors of the Issuer and to have one representative on the
Audit Committee of the Issuer, subject to any prior commitments made by GVL
to other stockholders of the Issuer and certain other conditions. In
addition, the principal shareholders of GVL have agreed they shall not allow
the Company to take certain actions without the consent of Caisse, including
the incurrence of additional indebtedness or any acquisition or merger, each
outside the normal course of business, or the issuance of additional capital
stock of the Issuer.
REGISTRATION RIGHTS
Vanguard has the right, subject to certain conditions, to cause the Issuer
to register under the Securities Act not more than one-half of the shares of
Class A Common issuable upon conversion of the Class B Common then owned by
Vanguard. This demand right may be exercised at any time on or after the
earlier of (i) September 30, 1997 or (ii) one year after the IPO Date. If
Vanguard exercises its demand registration right, VPC has the option to
purchase all of the securities proposed to be offered by Vanguard in such
registration (the "Purchase Option"). In the event that VPC exercises the
Purchase Option, Vanguard will be entitled to one additional demand
registration right, exercisable not earlier than one year after the exercise
of the Purchase Option, which demand right shall permit Vanguard to register
all of the Class A Common issuable upon conversion of the Class B Common then
owned by Vanguard.
In the event that the Issuer proposes to register any of its equity
securities under the Securities Act, including in connection with an initial
public offering, Vanguard will be entitled to notice of such registration and
to include therein the shares of Class A Common issuable upon conversion of
the Class B Common held by them, provided that Vanguard may not exercise this
right with respect to less than 20% of the securities held by it. Vanguard
shall be entitled to such "piggyback"
84
registration rights in the Issuer's initial public offering and in each of
the two subsequent Issuer offerings. The managing underwriter of any such
offering, however, may limit the number of shares to be included in such
registration by Vanguard if, in the opinion of the managing underwriter, the
distribution of all or a portion of the securities requested to be included
in the registration by Vanguard would materially adversely affect the
distribution of securities by the Issuer. Notwithstanding the foregoing,
Vanguard will have priority over the Issuer with respect to the inclusion of
any such cutback securities in the registration for the purpose of satisfying
any exercise of an underwriters' over-allotment option.
In addition, in the event that the Issuer proposes to register any of its
equity securities under the Securities Act, including in connection with an
initial public offering, Mr. Kofalt, a former director and Chairman of the
Board of the Company, will be entitled to notice of such registration and to
include therein the shares of Class A Common issuable upon exercise of the
Kofalt Warrant. Mr. Kofalt shall be entitled to one such "piggyback"
registration. The managing underwriter of any such offering, however, may
limit the number of shares to be included in such registration by Mr. Kofalt
if in the opinion of the managing underwriter the distribution of all or a
portion of the securities requested to be included in the registration by Mr.
Kofalt would materially adversely affect the distribution of securities by
the Issuer.
Generally, the Issuer is required to bear the expenses of all requested
registrations, provided that any selling stockholder will be required to bear
their pro rata share of the underwriting discounts and commissions and
certain other specified expenses.
The holders of one-third or more of the Registrable Securities have the
right, subject to certain conditions, to cause the Issuer to effect one
registration under the Securities Act of the Registrable Securities. This
demand right may be exercised at any time after the earlier to occur of (i)
February 15, 2002, (ii) the date immediately prior to a Change of Control,
(iii) the 90th day after a primary public offering of Common Stock or (iv)
other than as a result of an initial public offering, the date on which a
class of common equity securities of the Issuer is listed on a national
securities exchange, is authorized for quotation on the Nasdaq National
Market or is otherwise subject to registration under the Exchange Act. In the
event that the demand right is exercised, the Issuer may satisfy its
obligations with respect to such demand by making and consummating an offer
to purchase all Registrable Securities at a price at least equal to the
current market value of the Registrable Securities.
In the event that the Issuer proposes to register Common Stock under the
Securities Act, the holders of Registrable Securities are entitled to notice
of such registration and to include such Registrable Securities therein,
subject to certain exceptions. The number of Registrable Securities to be
included therein is subject to the terms of certain other existing
registration rights agreements and to a pro rata reduction to the extent that
the Issuer is advised by the managing underwriter therefor that the total
number or type of Registrable Securities and other securities proposed to be
included therein is such as to materially and adversely affect the success of
the offering.
85
CERTAIN TRANSACTIONS
CONVERTIBLE NOTES
The Company has financed a large portion of its capital needs by borrowing
from its majority stockholder, VPC. As of February 28, 1997, the Issuer had
outstanding $121.0 million of Convertible Notes (including accrued interest).
The Convertible Notes bear interest at a rate of 15% per annum, payable
concurrently with the payment of principal. Interest not paid gets added to
principal on an annual basis. In connection with the Offering, the maturity
of the Convertible Notes was extended to six months after the final maturity
of the Notes and the Convertible Notes were subordinated in right of payment
to the Notes in the manner described below.
The principal of and interest on the Convertible Notes may be converted,
in whole but not in part, at the election of VPC, into shares of Class B
Common, during the period of (i) 180 days commencing on the IPO Date and (ii)
if such 180-day period shall not previously have commenced and expired, the
period of 90 days commencing on April 30, 1999 (the "Conversion Date").
Subject to customary anti-dilution adjustments, the conversion price of the
Convertible Notes will be (1) the price at which Common Stock is first sold
to the public in a public offering, provided that the product of such price
and the number of shares of Common Stock outstanding, on a fully-diluted
basis (excluding shares sold in the offering and shares issuable upon
conversion of outstanding Convertible Notes) equals or exceeds $225.0
million, or (2) if no such sale of Common Stock has taken place on or before
the Conversion Date, a price equal to the quotient of $225.0 million divided
by the number of shares of Common Stock outstanding on that date, on a fully
diluted basis (excluding shares issuable upon conversion of outstanding
Convertible Notes).
The Convertible Notes are not subject to prepayment without the consent of
VPC. Subject to the terms of the Indenture, the Convertible Notes must be
prepaid out of proceeds of any sale of debt or equity securities of OpTel to
the extent that VPC, in its sole discretion, shall require.
In the event of a liquidation, dissolution, reorganization, receivership
or winding-up of the Issuer, the holders of the Notes and the Trustee will be
entitled to the prior payment in full of all obligations owing under the
Indenture and the Notes before any payment whatsoever is made on account of
the Convertible Notes. In addition, no payment on account of the Convertible
Notes may be made at a time when (x) any Default or Event of Default (each as
defined under the Indenture) has occurred or is continuing or will occur as a
result of such action or (y) the maturity of the Notes has been accelerated.
Accordingly, the prepayment of the Convertible Notes and the payment of any
interest on account of the Convertible Notes will at all times be subject to
the covenants of the Indenture, particularly the covenant "Limitation on
Restricted Payments." See "Description of the Notes -- Certain Covenants."
RICHEY WARRANT
In connection with the acquisition by the Company (as the assignee of
Vanguard) of certain subsidiaries of International Richey Pacific
Cablevision, Ltd. ("Richey"), Vanguard granted to Richey a warrant (the
"Richey Warrant") to purchase certain limited partnership interests in
Vanguard at an exercise price of $1.25 million, subject to adjustment. The
Richey Warrant is exercisable, in whole or in part, at any time prior to
December 28, 1997. If the Richey Warrant is not exercised, Richey may, during
the 90 day period commencing on December 28, 1997, require the Issuer to
purchase the Richey Warrant for $1.0 million, subject to reduction (the "Put
Price"). Vanguard may, at its option, repurchase the Richey Warrant for $4.0
million, subject to adjustment. The Issuer has agreed to pay Vanguard, in the
event that the Richey Warrant is exercised, or Richey, in the event that
Vanguard opts to repurchase the Richey Warrant, the Put Price.
VANGUARD-RELATED TRANSACTIONS
In August 1996, the Issuer granted Vanguard a non-transferable option (the
"Vanguard Option") to purchase 48,937 shares of Class B Common at an exercise
price of $53.55 per share, subject to adjustment. The Vanguard Option is
exercisable at any time after August 31, 1996 and expires on the earlier to
occur of (i) July 31, 1999 or (ii) 180 days after the IPO Date.
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In September 1996, the Company entered into a consulting agreement with
James A. Kofalt, a former director of the Issuer and a limited partner of
Vanguard, pursuant to which the Company agreed to compensate Mr. Kofalt with
a one time payment of $70,000 and a per diem consulting fee of $3,500 (if
such consulting services are requested by the Company). In connection
therewith, the Issuer also granted Mr. Kofalt a warrant (the "Kofalt
Warrant") to purchase up to 24,992 shares of Class A Common at an exercise
price of $53.55 per share, subject to adjustment. The Kofalt Warrant is
presently exercisable and expires on August 31, 1999. In the event that the
Kofalt Warrant is exercised prior to the IPO Date, the shares of Class A
Common held by Mr. Kofalt will become subject to transfer restrictions,
rights of first refusal and drag along rights comparable to those applicable
to the Common Stock held by Vanguard. See "Principal Stockholders --
Stockholders' Agreement."
MANAGEMENT FEES
VPC and Pacific have agreed to provide, at the specific request of the
Board, such reasonable consultant, advisory and management services as the
Company may reasonably require. This arrangement terminates on the earlier to
occur of (i) the IPO Date or (ii) the date on which any public or
institutional financing obtained by the Company restricts the payment of fees
or charges to affiliates of the Company. The Company pays each of VPC and
Pacific $350,000 per annum (plus travel expenses) for such services.
LICENSE HOLDING COMPANY
The Company has agreed to assign substantially all of its frequency licenses
(the "Assigned Licenses") to THI in exchange for a $1.0 million principal amount
(subject to adjustment as described below) 8% secured promissory note due on
February 14, 2007 (the "License Note"). The License Note contains covenants
which restrict THI from, among other things, incurring indebtedness other than
to the Company or in the ordinary course of business, and merging or
consolidating with another entity. THI, which is controlled by United States
citizens, was created to permit the Company to use the Assigned Licenses,
modified as necessary, to provide "common carrier" telecommunications services
in the event that the Company should desire to do so in the future.
To establish the terms of the Company's continued and unencumbered use of
the Assigned Licenses, the Company and THI entered into a license and
services agreement (the "THI Agreement") pursuant to which THI has agreed to
provide to the Company all the transmission capacity it requires or may in
the future require and the Company has granted THI a non-exclusive license to
use all of the Company's facilities and related equipment, such as microwave
transmitting and receiving equipment, required to provide such transmission
capacity. THI will secure future licenses necessary to provide the Company
with the transmission capacity it requires. The THI Agreement provides for
payments from the Company to THI which are expected to approximate the
monthly interest due on the License Note plus an allowance for the
anticipated expenses of THI. The Company may also advance funds to THI to the
extent necessary to enable THI to fulfill its obligations under the THI
Agreement. All amounts of such advances will be added to the principal amount
of the License Note. It is not expected that payments made by the Company to
THI will have a material impact on the Company's cash flows or results of
operations.
In connection with the above described transaction, the Company has
received an option from THI (the "THI Option") to purchase all or, in certain
circumstances, some of the assets of THI and a separate option from each
stockholder of THI (each, an "Individual Option") to purchase all of such
person's shares of capital stock of THI. The exercise price of the THI Option
is equal to the current principal amount of, plus the accrued interest on,
the License Note on the closing date, which amount may be paid by tendering
the License Note to THI plus an amount equal to the lesser of (i) book value
of the assets being purchased or (ii) the initial capitalization of THI plus
10% premium compounded annually. The exercise price of each Individual Option
is equal to the lesser of (x) the book value of the shares being purchased
and (y) the price paid for such shares plus 10% premium compounded annually.
The THI Option and the Individual Options are exercisable at any time prior
to February 14, 2007, subject to FCC approval.
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POSSIBLE SALE OF VANGUARD INTEREST
The Company has been advised that Vanguard has reached an agreement in
principle for the sale of its interest to an affiliate of Caisse and that
GVL, VPC and Caisse have reached an agreement in principle with respect to
certain changes to the Issuer's Certificate of Incorporation and the
Stockholders' Agreement, including the possible conversion of certain
outstanding Convertible Notes. No assurance can be given as to when, or if,
such sale will be consummated or the terms of any such sale.
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DESCRIPTION OF THE NOTES
Set forth below is a summary of certain provisions of the Notes. The New
Notes, like the Old Notes, will be issued under the Indenture dated as of
February 14, 1997 between the Issuer and U.S. Trust Company of Texas, N.A.,
as trustee (the "Trustee"), a copy of the form of which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part. The
terms of the New Notes are substantially identical in all material respects
(including interest rate and maturity) to the Old Notes except for certain
transfer restrictions and registration rights relating to the Old Notes. The
following summary of certain provisions of the Indenture does not purport to
be complete and is subject to, and is qualified in its entirety by reference
to, the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"),
and to all of the provisions of the Indenture, including the definitions of
certain terms therein and those terms made a part of the Indenture by
reference to the Trust Indenture Act, as in effect on the date of the
Indenture. The definitions of certain capitalized terms used in the following
summary are set forth below under "Certain Definitions." As of the date of
this Prospectus, $225,000,000 principal amount of Old Notes were outstanding.
GENERAL
The Notes are general senior obligations of the Issuer. The Notes are
collateralized by a first priority security interest in the Escrow Account
described under "--Disbursement of Funds; Escrow Account." Like the Old
Notes, the New Notes will be issued only in fully registered form without
coupons, in denominations of $1,000 principal amount and integral multiples
thereof. Principal of, premium, if any, and interest on the Notes are
payable, and the Notes are exchangeable and transferable, at the office or
agency of the Issuer in the City of New York maintained for such purposes
(which initially will be the corporate trust office of the Trustee). See " --
Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer, exchange or redemption of the Notes, except in
certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Notes are limited to $225,000,000 aggregate principal amount and
mature on February 15, 2005. Interest on the Notes accrues at a rate of 13%
per annum and is payable semi-annually in arrears on each February 15 and
August 15 (each, an "Interest Payment Date"), commencing August 15, 1997 to
registered holders of Notes, on the February 1 or August 1, as the case may
be, immediately preceding such Interest Payment Date. Interest accrues from
the most recent Interest Payment Date to which interest has been paid or duly
provided for or, if no interest has been paid or duly provided for, from the
Issue Date. Cash interest is computed on the basis of a 360-day year of
twelve 30-day months. If the Issuer defaults on any payment of principal
and/or premium (whether upon redemption or otherwise), cash interest will
accrue on the amount in default at the rate of interest borne by the Notes.
Interest on overdue principal and premium and, to the extent permitted by
law, on overdue installments of interest will accrue at the rate of interest
borne by the Notes.
As discussed under "Exchange Offer; Registration Rights," pursuant to the
Registration Rights Agreement, the Issuer has agreed, for the benefit of the
holders of Notes, to effect at its expense a registered exchange offer under
the Securities Act to exchange the Old Notes for New Notes. The failure to
comply with such agreement in certain respects may result in an increase in
the interest rate applicable to the Notes.
REDEMPTION
Optional Redemption. The Notes are redeemable, at the option of the
Issuer, in whole or in part, at any time on or after February 15, 2002, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
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and unpaid interest to the redemption date, if redeemed during the 12-month
period beginning February 15 of the years indicated below:
Year Redemption Price
------------------- ----------------
2002 .................................................... 110%
2003 .................................................... 107
2004 and thereafter ...................................... 100
Notwithstanding the foregoing, in the event prior to February 15, 2000 of
(i) one or more Equity Offerings and/or (ii) a sale or series of related
sales by the Issuer of its Common Stock to one or more Strategic Equity
Investors for aggregate gross proceeds of $100.0 million or more, the Issuer
may redeem, at its option, up to a maximum of 35% of the initially
outstanding aggregate principal amount of Notes from the net proceeds thereof
at a redemption price equal to 113% of the principal amount of the Notes
(determined at the redemption date), together with accrued and unpaid
interest to the date of redemption; provided that not less than $145.0
million aggregate principal amount of Notes are outstanding following such
redemption. Any such redemption may only be effected once and must be
effected upon not less than 30 nor more than 60 days' notice given within 30
days after the last such Equity Offering or sale to a Strategic Equity
Investor, as the case may be, resulting in gross proceeds of $100.0 million
or more.
Mandatory Redemption. The Issuer is not required to make any mandatory
sinking fund payments in respect of the Notes. However, (i) upon the
occurrence of a Change of Control, each holder of the Notes will have the
right to require the Issuer to make an offer to purchase all outstanding
Notes at a price of 101% of the principal amount thereof (determined at the
date of purchase), plus accrued interest thereon, if any, to the date of
purchase, and (ii) upon the occurrence of an Asset Sale, the Issuer may be
obligated to make an offer to purchase all or a portion of the outstanding
Notes at a price of 100% of the principal amount, thereof (determined at the
date of purchase), plus accrued and unpaid interest, if any, to the date of
purchase. See " -- Certain Covenants -- Change of Control" and "--
Disposition of Proceeds of Asset Sales," respectively.
Selection; Effect of Redemption Notice. In the case of a partial
redemption, selection of the Notes for redemption will be made pro rata, by
lot or such other method as the Trustee in its sole discretion deems
appropriate and just; provided that any redemption pursuant to the provisions
relating to one or more Equity Offerings and/or sales to a Strategic Equity
Investor shall be made on a pro rata basis or on as nearly a pro rata basis
as practicable (subject to DTC procedures). No Notes of a principal amount of
$1,000 or less shall be redeemed in part. Notice of redemption shall be
mailed by first-class mail at least 30 but not more than 60 days before the
redemption date to each holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the holder thereof
upon surrender for cancellation of the original Note. Upon giving of a
redemption notice, interest on Notes called for redemption will cease to
accrue from and after the date fixed for redemption (unless the Issuer
defaults in providing the funds for such redemption) and such Notes will
cease to be outstanding.
DISBURSEMENT OF FUNDS; ESCROW ACCOUNT
The Notes are collateralized, pending disbursement pursuant to the Escrow
Agreement dated as of February 14, 1997, among the Issuer, the Trustee and
U.S. Trust Company of Texas, N.A., as Escrow Agent (the "Escrow Agreement"),
by a pledge of the Escrow Account (as defined in the Escrow Agreement), into
which the Issuer deposited $79.6 million of the net proceeds from the
Offering (the "Escrow Collateral"), representing funds that, together with
the proceeds from the investment thereof, will be sufficient to pay interest
on the Notes for six scheduled interest payments.
The Issuer entered into the Escrow Agreement which provided for the grant
by the Issuer to the Trustee, for the benefit of the holders, of security
interests in the Escrow Collateral. All such security interests collateralize
the payment and performance when due of all obligations of the Issuer under
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the Indenture and the Notes, as provided in the Escrow Agreement. The Liens
created by the Escrow Agreement are first priority security interests in the
Escrow Collateral. The ability of holders to realize upon any such funds or
securities may be subject to certain bankruptcy law limitations in the event
of the bankruptcy of the Issuer.
Pursuant to the Escrow Agreement, funds may be disbursed from the Escrow
Account only to pay interest on the Notes (or, if a portion of the Notes has
been retired by the Issuer, funds representing the lesser of (i) the excess
of the amount sufficient to pay interest through and including February 15,
2000 on the Notes not so retired and (ii) the interest payments which have
not previously been made on such retired Notes for each Interest Payment Date
through the Interest Payment Date to occur on February 15, 2000 shall be paid
to the Issuer if no Default then exists under the Indenture).
Pending such disbursements, all funds contained in the Escrow Account have
been invested in U.S. Government Securities. Interest earned on the U.S.
Government Securities will be placed in the Escrow Account. Upon the
acceleration of the maturity of the Notes, the Escrow Agreement will provide
for the foreclosure by the Trustee upon the net proceeds of the Escrow
Account. Under the terms of the Indenture, the proceeds of the Escrow Account
shall be applied, first, to amounts owing to the Trustee in respect of fees
and expenses of the Trustee and, second, to all obligations under the Notes
and the Indenture. Under the Escrow Agreement, assuming that the Issuer makes
the first six scheduled interest payments on the Notes in a timely manner
with funds or U.S. Government Securities held in the Escrow Account, all of
the U.S. Government Securities will be released from the Escrow Account.
RANKING
The indebtedness of the Issuer evidenced by the Notes ranks senior in
right of payment to all subordinated indebtedness of the Issuer and pari
passu in right of payment with all other existing and future unsubordinated
indebtedness of the Issuer.
The Issuer is a holding company with limited assets and no business
operations of its own. The Issuer operates its business through its
subsidiaries. Any right of the Issuer and its creditors, including holders of
the Notes, to participate in the assets of any of the Issuer's subsidiaries
upon any liquidation or administration of any such subsidiary will be subject
to the prior claims of the subsidiary's creditors, including trade creditors.
For a discussion of certain adverse consequences of the Issuer being a
holding company and of the terms of potential future indebtedness of the
Issuer and its subsidiaries, see "Risk Factors -- Holding Company Structure
and Need to Access Subsidiaries' Cash Flow."
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
Limitation on Additional Indebtedness. The Indenture provides that the
Issuer will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, create, incur, assume, issue, guarantee or in any manner
become directly or indirectly liable for or with respect to, contingently or
otherwise, the payment of (collectively, to "incur") any Indebtedness
(including any Acquired Indebtedness), except for Permitted Indebtedness;
provided that (i) the Issuer will be permitted to incur Indebtedness and (ii)
a Restricted Subsidiary will be permitted to incur Acquired Indebtedness, if,
in either case, after giving pro forma effect to such incurrence (including
the application of the net proceeds therefrom), the ratio of (x) Total
Consolidated Indebtedness (as of the date of incurrence) to (y) Annualized
Pro Forma Consolidated Operating Cash Flow (based upon the two most recent
fiscal quarters for which consolidated financial statements of the Issuer are
available preceding the date of such incurrence) would be less than or equal
to (A) 8.0 to 1.0 if such incurrence is prior to August 31, 2000 or (B) 7.0
to 1.0 if such incurrence is on or after August 31, 2000 and prior to August
31, 2002 or (C) 6.0 to 1.0 if such incurrence is on or after August 31, 2002.
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Limitation on Restricted Payments. The Indenture provides that the Issuer
will not, and will not permit any of the Restricted Subsidiaries to, make,
directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or
upon giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Issuer would be able to incur $1.00 of Indebtedness under the proviso of the
covenant "Limitation on Additional Indebtedness"; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after the
Issue Date and all Designation Amounts does not exceed an amount equal to the
sum of (a) the difference between (x) the Cumulative Available Cash Flow
determined at the time of such Restricted Payment and (y) Cumulative
Consolidated Interest Expense determined at the time of such Restricted
Payment, plus (b) the aggregate net cash proceeds received by the Issuer
either (x) as capital contributions to the Issuer after the Issue Date or (y)
from the issue and sale (other than to a Restricted Subsidiary of the Issuer)
of its Capital Stock (other than Disqualified Stock) on or after the Issue
Date, plus (c) the aggregate net proceeds received by the Issuer from the
issuance (other than to a Restricted Subsidiary of the Issuer) on or after
the Issue Date of its Capital Stock (other than Disqualified Stock) upon the
conversion of, or in exchange for, Indebtedness of the Issuer (other than the
Convertible Notes), plus (d) in the case of the disposition or repayment of
any Investment constituting a Restricted Payment made after the Issue Date
(other than an Investment made pursuant to clause (v), (vi), (vii) or (xii)
of the following paragraph), an amount equal to the lesser of the return of
capital with respect to such Investment and the cost of such Investment, in
either case, less the cost of the disposition of such Investment, plus (e) in
the case of any Revocation with respect to a Subsidiary of the Issuer that
was made subject to a Designation after the Issue Date, an amount equal to
the lesser of the Designation Amount with respect to such Subsidiary or the
Fair Market Value of the Investment of the Issuer and the Restricted
Subsidiaries in such Subsidiary at the time of Revocation. For purposes of
the preceding clauses (b)(y) and (c), as applicable, the value of the
aggregate net proceeds received by the Issuer upon the issuance of Capital
Stock either upon the conversion of convertible Indebtedness or in exchange
for outstanding Indebtedness or upon the exercise of options, warrants or
rights will be the net cash proceeds received upon the issuance of such
Indebtedness, options, warrants or rights plus the incremental amount
received, if any, by the Issuer upon the conversion, exchange or exercise
thereof.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property
other than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit (i) the payment of any
dividend or other distribution within 60 days after the date of declaration
thereof if at such date of declaration such payment would be permitted by the
provisions of the Indenture; (ii) the purchase, redemption, retirement or
other acquisition of any shares of Capital Stock of the Issuer in exchange
for, or out of the net cash proceeds of the substantially concurrent issue
and sale (other than to a Restricted Subsidiary of the Issuer) of, shares of
Capital Stock of the Issuer (other than Disqualified Stock); provided that
any such net cash proceeds are excluded from clause (iii)(b) of the preceding
paragraph; (iii) so long as no Default shall have occurred and be continuing,
the purchase, redemption, retirement, defeasance or other acquisition of
Subordinated Indebtedness (other than the Convertible Notes and Deeply
Subordinated Shareholders Loans) made by exchange for, or out of the net cash
proceeds of, a substantially concurrent issue and sale (other than to a
Restricted Subsidiary of the Issuer) of (x) Capital Stock (other than
Disqualified Stock) of the Issuer or (y) other Subordinated Indebtedness to
the extent that its stated maturity for the payment of principal thereof is
not prior to the 180th day after the final stated maturity of the Notes;
provided that any such net cash proceeds are excluded from clause (iii)(b) of
the preceding paragraph; (iv) the purchase, redemption, retirement or other
acquisition of the Convertible Notes or Deeply Subordinated
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Shareholders Loans to the extent made by exchange for (upon conversion in
accordance with their terms or otherwise), or out of the net cash proceeds
of, a substantially concurrent issue and sale (other than to a Restricted
Subsidiary of the Issuer) of Capital Stock (other than Disqualified Stock) of
the Issuer; provided that any such net proceeds or net cash proceeds, as
applicable, shall be excluded from clause (iii)(b) of the preceding
paragraph; (v) so long as no Default shall have occurred and be continuing,
Investments by the Issuer or any Restricted Subsidiary in a person (including
any Unrestricted Subsidiary) in an amount, at any time outstanding, not to
exceed $25.0 million less the amount of Investments then outstanding under
clause (xii) of this paragraph; (vi) the extension by the Issuer and the
Restricted Subsidiaries of trade credit to Unrestricted Subsidiaries,
represented by accounts receivable, extended on usual and customary terms in
the ordinary course of business; (vii) any renewal or reclassification of any
Investment in any Unrestricted Subsidiary outstanding on the Issue Date or
subsequently made in accordance with the provisions described herein; (viii)
purchases or redemptions of Capital Stock (including cash settlements of
stock options) held by employees, officers or directors upon or following
termination of their employment with the Issuer or one of its Subsidiaries,
subject to any put arrangements, provided that payments not subject to such
puts shall not exceed $1.0 million in any fiscal year in the aggregate; (ix)
so long as no Default shall have occurred and be continuing, Investments in
Unrestricted Subsidiaries to the extent promptly made with the proceeds of a
substantially concurrent (1) capital contribution to the Issuer or (2) issue
or sale of Capital Stock (other than Disqualified Stock) of the Issuer (other
than to a Restricted Subsidiary of the Issuer); provided that any such
proceeds are excluded from clause (iii)(b) of the preceding paragraph; (x)
the redemption or purchase of the Richey Warrant for an amount not to exceed
$1.0 million; (xi) the payment of management fees to each of VPC and Pacific
in an amount not to exceed $350,000 (plus out-of-pocket travel expenses
relating to the management of the Issuer) in any fiscal year; (xii)
Investments in an amount at any time outstanding not to exceed $25.0 million
less the amount of Investments then outstanding under clause (v) of this
paragraph so long as such investment is in the form of senior loans having a
maturity of not more than one year made in any person ("target") engaged in a
Cable/Telecommunications Business with respect to which the Issuer or a
Restricted Subsidiary has entered into a definitive acquisition agreement for
the acquisition by the Issuer or a Restricted Subsidiary of target such that
target will become a Restricted Subsidiary as a result of such acquisition;
provided any such acquisition is consummated or such Investment is repaid
within one year of the making of any such Investment; and (xiii) the use of
proceeds from the issue and sale of the Notes to repay up to $10.0 million
aggregate principal amount of Convertible Notes as described under "Use of
Proceeds."
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i), (v), (viii), (xii) and,
to the extent not deducted in arriving at Cumulative Available Cash Flow,
(xi) above shall be included as Restricted Payments.
Limitation on Liens Securing Certain Indebtedness. The Issuer will not,
and will not permit any Restricted Subsidiary to, create, incur, assume or
suffer to exist any Liens of any kind against or upon (i) any of property or
assets of the Issuer or any Restricted Subsidiary, whether now owned or
hereafter acquired, or any proceeds therefrom, which secure either (x)
Subordinated Indebtedness unless the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to the Liens securing
such Subordinated Indebtedness or (y) Indebtedness of the Issuer that is not
Subordinated Indebtedness, unless the Notes are equally and ratably secured
with the Liens securing such other Indebtedness, except, in the case of this
clause (y), Permitted Liens or (ii) the Escrow Account.
Limitation on Certain Guarantees and Indebtedness of Restricted
Subsidiaries. The Indenture provides that the Issuer will not permit any
Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any
other manner become liable with respect to (i) any Subordinated Indebtedness
or (ii) any Indebtedness of the Issuer that is not Subordinated Indebtedness
(other than, in the case of this clause (ii), (x) Indebtedness under any
Senior Bank Facility to the extent constituting Permitted Indebtedness or (y)
Indebtedness under any Vendor Credit Facility to the extent constituting
Permitted Indebtedness), unless such Restricted Subsidiary simultaneously
executes and delivers a
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supplemental indenture providing for the guarantee of payment of the Notes by
such Restricted Subsidiary on a basis senior to any such Subordinated
Indebtedness or pari passu with any such other Indebtedness referred to in
clause (ii), as the case may be. Each guarantee created pursuant to such
provisions is referred to as a "Guarantee" and the issuer of each such
Guarantee, so long as the Guarantee remains outstanding, is referred to as a
"Guarantor."
Notwithstanding the foregoing, in the event of the unconditional release
of any Guarantor from its obligations in respect of the Indebtedness which
gave rise to the requirement that a Guarantee be given, such Guarantor shall
be released from all obligations under its Guarantee. In addition, upon any
sale or disposition (by merger or otherwise) of any Guarantor by the Issuer
or a Restricted Subsidiary of the Issuer to any person that is not an
Affiliate of the Issuer or any of its Restricted Subsidiaries which is
otherwise in compliance with the terms of the Indenture and as a result of
which such Guarantor ceases to be a Subsidiary of the Issuer, such Guarantor
will be deemed to be released from all obligations under its Guarantee;
provided that each such Guarantor is sold or disposed of in accordance with
the "Disposition of Proceeds of Asset Sales" covenant.
Change of Control. Upon the occurrence of a Change of Control (the date of
such occurrence being the "Change of Control Date"), the Issuer shall make an
offer to purchase (the "Change of Control Offer"), on a business day (the
"Change of Control Payment Date") not later than 60 days following the Change
of Control Date, all Notes then outstanding at a purchase price equal to 101%
of the principal amount thereof on any Change of Control Payment Date, plus
accrued and unpaid interest, if any, to such Change of Control Payment Date.
Notice of a Change of Control Offer shall be given to holders of Notes, not
less than 25 days nor more than 45 days before the Change of Control Payment
Date. The Change of Control Offer is required to remain open for at least 20
business days and until the close of business on the Change of Control
Payment Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction which may be highly
leveraged.
The occurrence of the events constituting a Change of Control under the
Indenture may result in an event of default in respect of other Indebtedness
of the Issuer and its subsidiaries and, consequently, the lenders or holders
thereof may have the right to require repayment of such Indebtedness in full
or, as permitted by the covenant "Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries," to prevent the distribution,
advance or transfer of funds by the Restricted Subsidiaries to the Issuer.
See "Risk Factors -- Holding Company Structure and Need to Access
Subsidiaries' Cash Flow." If a Change of Control Offer is made, there can be
no assurance that the Issuer will have available funds sufficient to pay for
all of the Notes that might be delivered by holders of Notes seeking to
accept the Change of Control Offer. The Issuer shall not be required to make
a Change of Control Offer following a Change of Control if a third party
makes the Change of Control Offer in the manner, at the times and otherwise
in compliance with the requirements applicable to a Change of Control Offer
made by the Issuer and purchases all Notes validly tendered and not withdrawn
under such Change of Control Offer.
If the Issuer is required to make a Change of Control Offer, the Issuer
will comply with all applicable tender offer laws and regulations, including,
to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange
Act, and any other applicable securities laws and regulations.
Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Indenture provides that the Issuer will not, and
will not permit any Restricted Subsidiary to, directly or indirectly, create
or otherwise enter into or cause to become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (a) pay dividends, in cash or otherwise, or make any other
distributions on its Capital Stock or any other interest or participation in,
or measured by, its profits to the extent owned by the Issuer or any
Restricted Subsidiary, (b) pay any Indebtedness owed to the Issuer or any
Restricted Subsidiary, (c) make any Investment in the
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Issuer or any Restricted Subsidiary or (d) transfer any of its properties or
assets to the Issuer or to any Restricted Subsidiary, except for (i) any
encumbrance or restriction existing on the Issue Date, (ii) any encumbrance
or restriction applicable to a Restricted Subsidiary at the time that it
becomes a Restricted Subsidiary that is not created in contemplation thereof,
(iii) any encumbrance or restriction existing under any agreement that
refinances or replaces an agreement containing a restriction permitted by
clause (i) or (ii) above; provided that the terms and conditions of any such
encumbrance or restriction are not materially less favorable to the holders
of Notes than those under or pursuant to the agreement being replaced or the
agreement evidencing the Indebtedness refinanced, (iv) any encumbrance or
restriction imposed upon a Restricted Subsidiary pursuant to an agreement
which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted
Subsidiary and (v) any customary encumbrance or restriction applicable to a
Restricted Subsidiary that is contained in an agreement or instrument
governing or relating to Indebtedness contained in any Senior Bank Facility
or Vendor Credit Facility provided that the provisions of such agreement
permit the payment of interest and principal and mandatory repurchases
pursuant to the terms of the Indenture and the Notes and other indebtedness
that is solely an obligation of the Issuer, but provided further that such
agreement may nevertheless contain customary net worth, leverage, invested
capital and other financial covenants, customary covenants regarding the
merger of or sale of all or any substantial part of the assets of the Issuer
or any Restricted Subsidiary, customary restrictions on transactions with
affiliates, and customary subordination provisions governing indebtedness
owed to the Issuer or any Restricted Subsidiary.
Disposition of Proceeds of Asset Sales. The Issuer will not, and will not
permit any Restricted Subsidiary to, make any Asset Sale unless (a) the
Issuer or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the Fair
Market Value of the shares or assets sold or otherwise disposed of and (b) at
least 80% of such consideration consists of cash or Cash Equivalents;
provided that the following shall be treated as cash for purposes of this
covenant: (x) the amount of any liabilities (other than Subordinated
Indebtedness or Indebtedness of a Restricted Subsidiary that would not
constitute Restricted Subsidiary Indebtedness) that are assumed by the
transferee of any such assets pursuant to an agreement that unconditionally
releases the Issuer or such Restricted Subsidiary from further liability
("assumed liabilities"), (y) the amount of any notes or other obligations
that within 30 days of receipt, are converted into cash (to the extent of the
cash received) and (z) the amount (valued based upon the reported closing
sale price or average of the closing bid and ask prices, as the case may be,
on the principal securities or trading market on the date of the Asset Sale)
of any Publicly Traded Stock received as consideration in such Asset Sale.
The Issuer or the applicable Restricted Subsidiary, as the case may be, may
(i) apply the Net Cash Proceeds from such Asset Sale within 365 days of the
receipt thereof to repay an amount of Indebtedness (other than Subordinated
Indebtedness) of the Issuer or any Guarantor in an amount not exceeding the
Other Senior Debt Pro Rata Share and elect to permanently reduce the amount
of the commitments thereunder by the amount of the Indebtedness so repaid,
(ii) apply the Net Cash Proceeds from such Asset Sale to repay any Restricted
Subsidiary Indebtedness and elect to permanently reduce the commitments by
the amount of the Indebtedness so repaid or (iii) apply such Net Cash
Proceeds within 365 days thereof, to an investment in properties and assets
that will be used in a Cable/Telecommunications Business (or in Capital Stock
and other securities of any person that will become a Restricted Subsidiary
as a result of such investment to the extent such person owns properties and
assets that will be used in a Cable/Telecommunications Business) of the
Issuer or any Restricted Subsidiary ("Replacement Assets"). Any Net Cash
Proceeds from any Asset Sale that are neither used to repay, and permanently
reduce the commitments under, any Restricted Subsidiary Indebtedness as set
forth in clause (ii) of the preceding sentence or invested in Replacement
Assets within the 365-day period as set forth in clause (iii) shall
constitute "Excess Proceeds." Any Excess Proceeds not used as set forth in
clause (i) of the second preceding sentence shall constitute "Offer Excess
Proceeds" subject to disposition as provided below.
When the aggregate amount of Offer Excess Proceeds equals or exceeds $10.0
million, the Issuer shall make an offer to purchase (an "Asset Sale Offer"),
from all holders of the Notes, that
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aggregate principal amount of Notes as can be purchased by application of
such Offer Excess Proceeds at a price in cash equal to 100% of the principal
amount thereof on any purchase date, plus accrued and unpaid interest, if
any, to any purchase date. Each Asset Sale Offer shall remain open for a
period of 20 business days or such longer period as may be required by law.
To the extent that the principal amount of Notes tendered pursuant to an
Asset Sale Offer is less than the Offer Excess Proceeds, the Issuer or any
Restricted Subsidiary may use such deficiency for general corporate purposes.
If the principal amount of Notes validly tendered and not withdrawn by
holders thereof exceeds the amount of Notes which can be purchased with the
Offer Excess Proceeds, Notes to be purchased will be selected on a pro rata
basis. Upon completion of such Asset Sale Offer, the amount of Offer Excess
Proceeds shall be reset to zero.
Notwithstanding the two immediately preceding paragraphs, the Issuer and
the Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (i) at least 80% of the
consideration for such Asset Sale constitutes Replacement Assets, cash or
Cash Equivalents (including obligations deemed to be cash under this
covenant) and (ii) such Asset Sale is for Fair Market Value; provided that
any consideration constituting (or deemed to constitute) cash or Cash
Equivalents received by the Issuer or any of the Restricted Subsidiaries in
connection with any Asset Sale permitted to be consummated under this
paragraph shall constitute Net Cash Proceeds subject to the provisions of the
two preceding paragraphs.
If the Issuer is required to make an Asset Sale Offer, the Issuer will
comply with all applicable tender offer rules, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any
other applicable securities laws and regulations.
Limitation on Issuances and Sales of Preferred Stock by Restricted
Subsidiaries. The Indenture provides that the Issuer (i) will not permit any
Restricted Subsidiary to issue any Preferred Stock (other than to the Issuer
or a Restricted Subsidiary) and (ii) will not permit any person (other than
the Issuer or a Restricted Subsidiary) to own any Preferred Stock of any
Restricted Subsidiary.
Limitation on Transactions with Affiliates. The Indenture provides that
the Issuer will not, and will not permit, cause or suffer any Restricted
Subsidiary to, conduct any business or enter into any transaction (or series
of related transactions which are similar or part of a common plan) with or
for the benefit of any of their respective Affiliates or any beneficial
holder of 10% or more of the Common Stock of the Issuer or any officer or
director of the Issuer or any Restricted Subsidiary (each an "Affiliate
Transaction"), unless the terms of the Affiliate Transaction are set forth in
writing, and are fair and reasonable to the Issuer or such Restricted
Subsidiary, as the case may be. Each Affiliate Transaction (and each series
of related Affiliate Transactions which are similar or part of a common plan)
involving aggregate payments or other Fair Market Value in excess of $500,000
shall be approved by a majority of the Board, such approval to be evidenced
by a Board Resolution stating that the Board has determined that such
transaction or transactions comply with the foregoing provisions. In addition
to the foregoing, each Affiliate Transaction involving aggregate
consideration of $5.0 million or more shall be approved by a majority of the
Disinterested Directors; provided that, in lieu of such approval by the
Disinterested Directors, the Issuer may obtain a written opinion from an
Independent Financial Advisor stating that the terms of such Affiliate
Transaction to the Issuer or the Restricted Subsidiary, as the case may be,
are fair from a financial point of view. For purposes of this covenant, any
Affiliate Transaction approved by a majority of the Disinterested Directors
or as to which a written opinion has been obtained from an Independent
Financial Advisor, on the basis set forth in the preceding sentence, shall be
deemed to be on terms that are fair and reasonable to the Issuer and the
Restricted Subsidiaries, as the case may be, and, therefore, shall be
permitted under this covenant.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among, or solely for the benefit
of, the Issuer and/or any of the Restricted Subsidiaries, (ii) transactions
pursuant to agreements and arrangements existing on the Issue Date, including
payments of management fees to each of VPC and Pacific in an aggregate amount
not to exceed $350,000 (plus travel expenses incurred in providing management
services) in any fiscal year
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of the Issuer, (iii) the making of Deeply Subordinated Shareholders Loans
pursuant to and in compliance with the covenant "Limitation on Additional
Indebtedness," (iv) dividends paid by the Issuer pursuant to and in
compliance with the covenant "Limitation on Restricted Payments," (v)
customary directors' fees, indemnification and similar arrangements,
consulting fees, employee salaries, loans and bonuses or legal fees and (vi)
transactions contemplated by the License Co. Documents.
Notwithstanding any provision of the Indenture to the contrary, the Issuer
will not, and will not permit any Restricted Subsidiary to, amend, modify or
waive any provision of the License Co. Documents in a manner that is adverse,
from the perspective of creditors of the Issuer and the Restricted
Subsidiaries, in any material respect.
Reports. Whether or not the Issuer has a class of securities registered
under the Exchange Act, the Issuer shall furnish without cost to each holder
of Notes and file with the Trustee and (following the effective date of the
Registered Exchange Offer or Shelf Registration Statement, as applicable)
file with the SEC (i) within 135 days after the end of each fiscal year of
the Issuer, the information required by Form 10-K (or any successor form
thereto) under the Securities Act of 1933, as amended, with respect to such
period, (ii) within 60 days after the end of each of the first three fiscal
quarters of each fiscal year of the Issuer, the information required by Form
10-Q (or any successor form thereto) under the Securities Act with respect to
such period and (iii) within 15 days after it would be required to be filed
with the SEC, the information required by Form 8-K (or any successor form
thereto).
Limitation on Designations of Unrestricted Subsidiaries. The Indenture
provides that the Issuer will not designate any Subsidiary of the Issuer
(other than a newly created Subsidiary in which no Investment has previously
been made) as an "Unrestricted Subsidiary" under the Indenture (a
"Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) immediately after giving effect to such Designation, the Issuer
would be able to incur $1.00 of Indebtedness under the proviso of the
covenant "Limitation on Additional Indebtedness"; and
(c) the Issuer would not be prohibited under the Indenture from making
an Investment at the time of Designation (assuming the effectiveness of
such Designation) in an amount (the "Designation Amount") equal to the
Fair Market Value of the net Investment of the Issuer or any other
Restricted Subsidiary in such Restricted Subsidiary on such date.
In the event of any such Designation, the Issuer shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount. The Indenture further provides that neither the Issuer
nor any Restricted Subsidiary shall at any time (x) provide credit support
for, or a guarantee of, any Indebtedness of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness); provided that the Issuer may pledge Capital Stock or
Indebtedness of any Unrestricted Subsidiary on a nonrecourse basis such that
the pledgee has no claim whatsoever against the Issuer other than to obtain
such pledged property, (y) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly
liable for any Indebtedness which provides that the holder thereof may (upon
notice, lapse of time or both) declare a default thereon or cause the payment
thereof to be accelerated or payable prior to its final scheduled maturity
upon the occurrence of a default with respect to any Indebtedness of any
Unrestricted Subsidiary (including any right to take enforcement action
against such Unrestricted Subsidiary), except in the case of clause (x) or
(y) to the extent permitted under the covenants "Limitation on Restricted
Payments", and "Limitation on Transactions with Affiliates."
The Indenture further provides that the Issuer will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation")
unless:
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(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by Board Resolutions
delivered to the Trustee certifying compliance with the foregoing provisions.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Issuer will not consolidate or combine
with or merge with or into or, directly or indirectly, sell, assign, convey,
lease, transfer or otherwise dispose of all or substantially all of its
properties and assets to any person or persons in a single transaction or
through a series of transactions, or permit any of the Restricted
Subsidiaries to enter into any such transaction or series of transactions if
it would result in the disposition of all or substantially all of the
properties or assets of the Issuer and the Restricted Subsidiaries on a
consolidated basis, unless (a) the Issuer shall be the continuing person or,
if the Issuer is not the continuing person, the resulting, surviving or
transferee person (the "surviving entity") shall be a company organized and
existing under the laws of the United States or any State or territory
thereof; (b) the surviving entity shall expressly assume all of the
obligations of the Issuer under the Notes and the Indenture, and shall, if
required by law to effectuate such assumption, execute a supplemental
indenture to effect such assumption which supplemental indenture shall be
delivered to the Trustee and shall be in form and substance reasonably
satisfactory to the Trustee; (c) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including,
without limitation, any Indebtedness incurred or anticipated to be incurred
in connection with or in respect of such transaction or series of
transactions), the Issuer or the surviving entity (assuming such surviving
entity's assumption of the Issuer's obligations under the Notes and the
Indenture), as the case may be, would be able to incur $1.00 of Indebtedness
under the proviso of the covenant "Limitation on Additional Indebtedness";
provided that, in addition to the foregoing, (1) if immediately prior to such
transaction or series of transactions the ratio of Total Consolidated
Indebtedness of the Issuer to Annualized Pro Forma Consolidated Operating
Cash Flow of the Issuer (based upon the two most recent quarters for which
consolidated financial statements are available immediately preceding the
date of such transaction or series of transactions) (the "Pre-Transaction
Ratio") equals or exceeds 6.0:1.0, then, after giving pro forma effect to
such transaction or series of transactions, the ratio of Total Consolidated
Indebtedness of the Issuer or the surviving entity on a pro forma basis to
Annualized Pro Forma Consolidated Operating Cash Flow of the Issuer or the
surviving entity (based upon the two most recent quarters for which
consolidated financial statements are available immediately preceding the
date of such transaction or series of transactions) (the "Post-Transaction
Ratio") must not be any higher than the Pre-Transaction Ratio or (2) if the
Pre-Transaction Ratio is less than 6.0:1.0, then (x) the Post-Transaction
Ratio must be less than 6.0:1.0 and (y) the Annualized Pro Forma Consolidated
Coverage after giving pro forma effect to such transaction or series of
transactions must be greater than or equal to 1.75:1.0; (d) immediately after
giving effect to such transaction or series of transactions on a pro forma
basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction or series of transactions), no Default shall have occurred and be
continuing; and (e) the Issuer or the surviving entity, as the case may be,
shall have delivered to the Trustee an Officers' Certificate stating that
such transaction or series of transactions, and, if a supplemental indenture
is required in connection with such transaction or series of transactions to
effectuate such assumption, such supplemental indenture complies with this
covenant and that all conditions precedent in the Indenture relating to the
transaction or series of transactions have been satisfied.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Issuer in accordance with the foregoing in which the
Issuer or the Restricted Subsidiary, as the case may be, is not the
continuing corporation, the successor corporation formed by such a
consolidation or into which the Issuer or such Restricted Subsidiary is
merged or to which such transfer is made,
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will succeed to, and be substituted for, and may exercise every right and
power of, the Issuer or such Restricted Subsidiary, as the case may be, under
the Indenture with the same effect as if such successor corporation had been
named as the Issuer or such Restricted Subsidiary therein; and thereafter,
except in the case of (i) a lease or (ii) any sale, assignment, conveyance,
transfer, lease or other disposition to a Restricted Subsidiary of the
Issuer, the Issuer shall be discharged from all obligations and covenants
under the Indenture and the Notes.
The Indenture provides that for all purposes of the Indenture and the
Notes (including the provision of this covenant and the covenants "Limitation
on Additional Indebtedness," "Limitation on Restricted Payments" and
"Limitation on Liens"), Subsidiaries of any Surviving Entity will, upon such
transaction or series of related transactions, become Restricted Subsidiaries
or Unrestricted Subsidiaries as provided pursuant to the covenant "Limitation
on Designations of Unrestricted Subsidiaries" and all Indebtedness, and all
Liens on property or assets, of the Issuer and the Restricted Subsidiaries in
existence immediately prior to such transaction or series of related
transactions will be deemed to have been incurred upon such transaction or
series of related transactions.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest on the Notes when it becomes due
and payable and continuance of such default for a period of 30 days or
more (provided such 30 day grace period shall be inapplicable for the
first six interest payments due on the Notes); or
(ii) default in the payment of the principal of, or premium, if any, on
the Notes when due; or
(iii) default in the performance, or breach, of any covenant described
under " -- Certain Covenants -- Change of Control," " -- Disposition of
Proceeds of Asset Sales" or " -- Consolidation, Merger, Sale of Assets,
Etc."; or
(iv) default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clause (i), (ii) or (iii)
above), and continuance of such default or breach for a period of 30 days
or more after written notice to the Issuer by the Trustee or to the Issuer
and the Trustee by the holders of at least 25% in aggregate principal
amount of the outstanding Notes (in each case, when such notice is deemed
received in accordance with the Indenture); or
(v) failure to perform any term, covenant, condition or provision of
one or more classes or issues of Indebtedness in an aggregate principal
amount of $5.0 million or more under which the Issuer or a Material
Restricted Subsidiary is obligated, and either (a) such Indebtedness is
already due and payable in full or (b) such failure results in the
acceleration of the maturity of such Indebtedness; provided that, in the
case of a termination or expiration of an Interest Rate Obligation
requiring that the monetary liability thereunder be paid, no Event of
Default shall occur if such payment is made within 30 days after such
payment is due; or
(vi) any holder of at least $5.0 million in aggregate principal amount
of Indebtedness of the Issuer or any Material Restricted Subsidiary shall
commence judicial proceedings or take any other action to foreclose upon,
or dispose of assets of the Issuer or any Material Restricted Subsidiary
having an aggregate Fair Market Value, individually or in the aggregate,
of $5.0 million or more or shall have exercised any right under applicable
law or applicable security documents to take ownership of any such assets
in lieu of foreclosure provided that, in any such case, the Issuer or any
Material Restricted Subsidiary shall not have obtained, prior to any such
foreclosure or disposition of assets, a stay of all such actions that
remains in effect; or
(vii) one or more judgments, orders or decrees for the payment of money
of $5.0 million or more, either individually or in the aggregate, shall be
entered into against the Issuer or any
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Material Restricted Subsidiary or any of their respective properties and
shall not be discharged and there shall have been a period of 60 days or
more during which a stay of enforcement of such judgment or order, by
reason of pending appeal or otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, dissolution (in the case of the
Issuer or License Co. only), insolvency, reorganization, administration or
similar proceedings with respect to the Issuer or any Material Restricted
Subsidiary or License Co. shall have occurred; or
(ix) failure by License Co. or its shareholders to perform any material
term, covenant, condition or provision of the License Co. Documents; or
(x) the Issuer shall assert or acknowledge in writing that the Escrow
Agreement is invalid or unenforceable.
If an Event of Default (other than an Event of Default specified in clause
(viii) above with respect to the Issuer) occurs and is continuing, then the
Trustee or the holders of at least 25% in principal amount of the outstanding
Notes may, by written notice, and the Trustee upon the request of the holders
of not less than 25% in principal amount of the outstanding Notes shall,
declare the principal amount of, premium (if any) on, and any accrued and
unpaid interest on, all outstanding Notes to be immediately due and payable
and upon any such declaration such amounts shall become immediately due and
payable. If an Event of Default specified in clause (viii) above with respect
to the Issuer occurs and is continuing, then the principal amount of, premium
(if any) on, and any accrued and unpaid interest on, all outstanding Notes
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in
aggregate principal amount of outstanding Notes may, by notice to the
Trustee, rescind such declaration of acceleration if all existing Events of
Default, other than nonpayment of the principal of, premium (if any) on, and
any accrued and unpaid interest on, the Notes that has become due solely as a
result of such acceleration, have been cured or waived and if the rescission
of acceleration would not conflict with any judgment or decree. The holders
of a majority in principal amount of the outstanding Notes also have the
right to waive past defaults under the Indenture, except a default in the
payment of principal of, premium (if any) on, or any interest on, any
outstanding Note, or in respect of a covenant or a provision that cannot be
modified or amended without the consent of all holders of Notes.
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless the holders of
at least 25% in principal amount of the outstanding Notes have made written
request, and offered reasonable security or indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute
such proceeding within 60 days after receipt of such notice and the Trustee
has not within such 60-day period received directions inconsistent with such
written request by holders of a majority in principal amount of the
outstanding Notes. Such limitations do not apply, however, to a suit
instituted by a holder of a Note for the enforcement of the payment of the
principal of, preimum (if any) on, or any accrued and unpaid interest on,
such Note on or after the respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs. Subject to the provisions of the Indenture relating to the duties of
the Trustee, if an Event of Default shall occur and be continuing, the
Trustee is not under any obligation to exercise any of its rights or powers
under the Indenture at the request or direction of any of the holders unless
such holders shall have offered to such Trustee reasonable security or
indemnity. Subject to certain provisions concerning the rights of the
Trustee, the holders of a majority in principal amount of the outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.
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The Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
provided that the Trustee shall be protected in withholding such notice if it
determines in good faith that the withholding of such notice is in the
interest of such holders.
The Issuer is required to furnish to the Trustee annually a statement as
to its compliance with all conditions and covenants under the Indenture.
DEFEASANCE
The Issuer may at any time terminate all of its obligations with respect
to the Notes ("defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register
the transfer or exchange of the Notes, to replace mutilated, destroyed, lost
or stolen Notes as required by the Indenture and to maintain agencies in
respect of Notes. The Issuer may at any time terminate its obligations under
certain covenants set forth in the Indenture, some of which are described
under " -- Certain Covenants" above, and any omission to comply with such
obligations shall not constitute a Default with respect to the Notes
("covenant defeasance"). To exercise either defeasance or covenant
defeasance, the Issuer must irrevocably deposit in trust, for the benefit of
the holders of the Notes, with the Trustee money (in United States dollars)
or U.S. government obligations (denominated in United States dollars), or a
combination thereof, in such amounts as will be sufficient to pay the
principal of, and premium, if any, and interest on the Notes to redemption or
maturity and comply with certain other conditions, including the delivery of
a legal opinion as to certain tax matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of
Notes) as to all outstanding Notes when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes that have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Issuer and
thereafter repaid to the Issuer or discharged from such trust) have been
delivered to the Trustee for cancellation; or (b)(i) all such Notes not
theretofore delivered to the Trustee for cancellation have become due and
payable and the Issuer has irrevocably deposited or caused to be deposited
with the Trustee as trust funds in trust for the purpose an amount of money
sufficient to pay and discharge the entire indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal amount,
premium, if any, and accrued interest to the date of such deposit; (ii) the
Issuer has paid all sums payable by it under the Indenture; and (iii) the
Issuer has delivered irrevocable instructions to the Trustee to apply the
deposited money toward the payment of the Notes at maturity or on the
redemption date, as the case may be. In addition, the Issuer must deliver an
Officers' Certificate and an Opinion of Counsel stating that all conditions
precedent to satisfaction and discharge have been complied with.
AMENDMENT AND WAIVERS
From time to time, the Issuer, when authorized by resolutions of the
Board, and the Trustee, without the consent of the holders of the Notes, may
amend, waive or supplement the Indenture or the Notes for certain specified
purposes, including, among other things, curing ambiguities, defects or
inconsistencies, maintaining the qualification of the Indenture under the
Trust Indenture Act or making any change that does not adversely affect the
rights of any holder. Other amendments and modifications of the Indenture and
the Notes may be made by the Issuer and the Trustee by supplemental indenture
with the consent of the holders of not less than a majority of the aggregate
principal amount of the outstanding Notes; provided that no such modification
or amendment may, without the consent of the holder of each outstanding Note
affected thereby, (i) reduce the principal amount of, extend the fixed
maturity of, or alter the redemption provisions of, the Notes, (ii) change
the currency in which any Notes or any premium or the accrued interest
thereon is payable, (iii)
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reduce the percentage of the aggregate principal amount outstanding of Notes
which must consent to an amendment, supplement or waiver or consent to take
any action under the Indenture or the Notes, (iv) impair the right to
institute suit for the enforcement of any payment on or with respect to the
Notes, (v) waive a default in payment with respect to the Notes, (vi) reduce
the rate or extend the time for payment of interest on the Notes, (vii)
following the occurrence of a Change of Control or an Asset Sale, alter the
Issuer's obligation to purchase the Notes in accordance with the Indenture or
waive any default in the performance thereof, (viii) affect the ranking of
the Notes in a manner adverse to the holder of the Notes, (ix) release any
Guarantee except in compliance with the terms of the Indenture or (x) release
any Liens created by the Escrow Agreement except in strict accordance with
the terms of the Escrow Agreement.
REGARDING THE TRUSTEE AND ESCROW AGENT
U.S. Trust Company of Texas, N.A. is serving as Trustee under the Indenture
and Escrow Agent under the Escrow Agreement.
GOVERNING LAW
The Indenture and the Escrow Agreement provide that the Indenture and the
Notes and the Escrow Agreement, respectively, will be governed by and
construed in accordance with laws of the State of New York without giving
effect to principles of conflicts of law.
CERTAIN DEFINITIONS
Set forth below is a summary of certain defined terms used in the
Indenture or the Escrow Agreement. Reference is made to the Indenture for the
full definition of all such terms, as well as any other capitalized terms
used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a person existing at the
time such person becomes a Restricted Subsidiary or assumed in connection
with an Asset Acquisition by such person and not incurred in connection with,
or in anticipation of, such person becoming a Restricted Subsidiary or such
Asset Acquisition.
"Affiliate" of any specified person means any other person which, directly
or indirectly, controls, is controlled by or is under direct or indirect
common control with, such specified person. For the purposes of this
definition, "control" when used with respect to any person means the power to
direct the management and policies of such person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise,
and the terms "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Annualized Pro Forma Consolidated Coverage" means, as of any date of
determination, the ratio of (1) Annualized Pro Forma Operating Cash Flow to
(2) Consolidated Interest Expense for the four quarter period immediately
preceding the date of determination for which financial statements are
available; provided, that (1) if the Issuer or any of the Restricted
Subsidiaries has incurred any Indebtedness (whether through an Asset
Acquisition, Asset Sale or otherwise) since the beginning of such period and
through the date of determination that remains outstanding or if the
transaction or series of transactions giving rise to the need to calculate
such ratio involves an incurrence of Indebtedness, Consolidated Interest
Expense for such period shall be calculated after giving effect on a pro
forma basis to (A) such Indebtedness as if such Indebtedness had been
incurred on the first day of such period (provided that if such Indebtedness
is incurred under a revolving credit facility (or similar arrangement or
under any predecessor revolving credit or similar arrangement) only that
portion of such Indebtedness that constitutes the one year projected average
balance of such Indebtedness (as determined in good faith by senior
management of the Issuer shall be deemed outstanding for purposes of this
calculation), and (B) the discharge of any other Indebtedness repaid,
repurchased, defeased or otherwise discharged with the proceeds of such new
Indebtednes as if such discharge had occurred on the first day of such period
and (2) if since the beginning of such
102
period any Indebtedness of the Issuer or any of the Restricted Subsidiaries
has been repaid, repurchased, defeased or otherwise discharged (whether
through an Asset Acquisition, Asset Sale or otherwise) (other than
Indebtedness under a revolving credit or similar arrangement unless such
revolving credit Indebtedness has been permanently repaid and has not been
replaced), Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Indebtedness had been
repaid, repurchased, defeased or otherwise discharged on the first day of
such period.
"Annualized Pro Forma Consolidated Operating Cash Flow" means Consolidated
Operating Cash Flow for the latest two fiscal quarters for which consolidated
financial statements of the Issuer are available multiplied by two. For
purposes of calculating "Consolidated Operating Cash Flow" for any two fiscal
quarter period for purposes of this definition, (i) any Subsidiary of the
Issuer that is a Restricted Subsidiary on the date of the transaction (the
"Transaction Date") giving rise to the need to calculate "Annualized Pro
Forma Consolidated Operating Cash Flow" shall be deemed to have been a
Restricted Subsidiary at all times during such two fiscal quarter period and
(ii) any Subsidiary of the Issuer that is not a Restricted Subsidiary on the
Transaction Date shall be deemed not to have been a Restricted Subsidiary at
any time during such two fiscal quarter period. In addition to and without
limitation of the foregoing, for purposes of this definition, "Consolidated
Operating Cash Flow" shall be calculated after giving effect on a pro forma
basis for the applicable two fiscal quarter period to, without duplication,
any Asset Sales or Asset Acquisitions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a
result of the Issuer or one of the Restricted Subsidiaries (including any
person who becomes a Restricted Subsidiary as a result of the Asset
Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness) occurring during the period commencing on the first day of such
two fiscal quarter period to and including the Transaction Date (the
"Reference Period"), as if such Asset Sale or Asset Acquisition occurred on
the first day of the Reference Period.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Issuer or any
Restricted Subsidiary in any other person, or any acquisition or purchase of
Capital Stock of any other person by the Issuer or any Restricted Subsidiary,
in either case pursuant to which such person shall become a Restricted
Subsidiary or shall be merged with or into the Issuer or any Restricted
Subsidiary or (ii) any acquisition by the Issuer or any Restricted Subsidiary
of the assets of any person which constitute substantially all of an
operating unit or line of business of such person or which is otherwise
outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes)
or other disposition (that is not for security purposes) to any person other
than the Issuer or a Restricted Subsidiary, in one transaction or a series of
related transactions, of (i) any Capital Stock of any Restricted Subsidiary,
(ii) any material license or other authorization of the Issuer or any
Restricted Subsidiary pertaining to a Cable/Telecommunications Business
(other than the disposition to License Co. of the licenses and authorizations
on terms identical to or at least as favorable to the Issuer and the
Restricted Subsidiaries as those set forth in the License Co. Documents
(provided such new documents shall also constitute License Co. Documents for
all purposes hereunder) so long as the Issuer or a Restricted Subsidiary has
the ability (pursuant to contract or otherwise) to fully exploit such license
or authorization in a Cable/Telecommunications Business), (iii) any assets of
the Issuer or any Restricted Subsidiary which constitute substantially all of
an operating unit or line of business of the Issuer and the Restricted
Subsidiaries or (iv) any other property or asset of the Issuer or any
Restricted Subsidiary outside of the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" shall not include (i) any
disposition of properties and assets of the Issuer that is governed under "
- -- Consolidation, Merger, Sale of Assets, Etc." above, (ii) sales of property
or equipment that have become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of the Issuer or any
Restricted Subsidiary, as the case may be, and (iii) for purposes of the
covenant "Disposition of Proceeds of Asset Sales," any sale, conveyance,
transfer, lease or other disposition of any property or asset, whether in one
transaction or a series of related transactions occurring within one year,
either (x) involving assets with a Fair Market Value not in excess of
$250,000 or (y) which constitutes the incurrence of a Capitalized Lease
Obligation.
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"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from such date to the date or
dates of each successive scheduled principal payment (including, without
limitation, any sinking fund requirements) of such Indebtedness multiplied by
(b) the amount of each such principal payment by (ii) the sum of all such
principal payments; provided that, in the case of any Capitalized Lease
Obligation, all calculations hereunder shall give effect to any applicable
options to renew in favor of the Issuer or any Restricted Subsidiary.
"Board" means the Board of Directors of the Issuer.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of the Issuer to have been duly adopted by the
Board and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Cable Subscriber" means, as of any determination date, any individual
customer or bulk or commercial account (computed on an equivalent customer
basis) to whom the Issuer or any Restricted Subsidiary provides subscription
basic video programming services as well as accounts to whom the Issuer or
any Restricted Subsidiary provides other video services for a fee (computed
on an equivalent customer basis based on the basic programming service
subscriber fee), in each case as of such date.
"Cable/Telecommunications Business" means any business operating a cable
and/or telephone and/or telecommunications system (delivered by any means,
including, without limitation, cable, microwave, satellite or radio
frequency) in the United States or otherwise delivering or expected to
deliver services over the networks or systems of the Issuer and the
Restricted Subsidiaries (including, without limitation, any business
conducted by the Issuer or any Restricted Subsidiary on the Issue Date) and,
for all purposes of the Indenture other than clauses (c) and (d) of the
definition "Permitted Indebtedness," any business reasonably related to the
foregoing (including, without limitation, any television programming,
production and/or licensing business and any programming guide or telephone
directory business). Any company holding a license or licenses to conduct any
of the foregoing businesses that is not conducting any material business
other than a Cable/Telecommunications Business shall also be considered a
Cable/Telecommunications Business. A good faith determination by a majority
of the Board as to whether a business meets the requirements of this
definition shall be conclusive, absent manifest error.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however
designated and whether voting and/or non-voting) of, such person's capital
stock, whether outstanding on the Issue Date or issued after the Issue Date,
and any and all rights (other than any evidence of Indebtedness), warrants or
options exchangeable for or convertible into such capital stock.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a capitalized lease obligation
under GAAP, and, for the purpose of the Indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity
of 365 days or less issued or directly and fully guaranteed or insured by the
United States or any agency or instrumentality thereof (provided that the
full faith and credit of the United States is pledged in support thereof or
such Indebtedness constitutes a general obligation of such country); (ii)
deposits, certificates of deposit or acceptances with a maturity of 365 days
or less of any financial institution that is a member of the Federal Reserve
System, in each case having combined capital and surplus and undivided
profits (or any similar capital concept) of not less than $500.0 million and
whose senior unsecured debt is rated at least "A-1" by S&P or "P-1" by
Moody's; (iii) commercial paper with a maturity of 365 days or less issued by
a corporation (other than an Affiliate of the Issuer) organized under the
laws of the United States or any State thereof and rated at least "A-1" by
S&P or "P-1" by
104
Moody's; and (iv) repurchase agreements and reverse repurchase agreements
relating to marketable direct obligations issued or unconditionally
guaranteed by the United States Government or issued by any agency thereof
and backed by the full faith and credit of the United States Government
maturing within 365 days from the date of acquisition.
"Change of Control" is defined to mean the occurrence of any of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), excluding Permitted Holders,
is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total
Voting Stock of the Issuer; or (b) the Issuer consolidates with, or merges
with or into, another person or sells, assigns, conveys, transfers, leases or
otherwise disposes of all or substantially all of its assets to any person,
or any person consolidates with, or merges with or into, the Issuer, in any
such event pursuant to a transaction in which the outstanding Voting Stock of
the Issuer is converted into or exchanged for cash, securities or other
property, other than any such transaction where (i) the outstanding Voting
Stock of the Issuer is converted into or exchanged for (1) Voting Stock
(other than Disqualified Stock) of the surviving or transferee corporation
and/or (2) cash, securities and other property in an amount which could be
paid by the Issuer as a Restricted Payment under the Indenture and (ii)
immediately after such transaction no "person" or "group" (as such terms are
used in Sections 13(d) and 14(d) of the Exchange Act), excluding the
Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total
Voting Stock of the surviving or transferee corporation; or (c) during any
consecutive two-year period, individuals who at the beginning of such period
constituted the Board (together with any new directors whose election by the
Board or whose nomination for election by the stockholders of the Issuer was
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason
(other than by action of the Permitted Holders) to constitute a majority of
the Board then in office; provided that (i) to the extent that either (x) one
or more regulatory approvals are required for the consummation of one or more
of the events or circumstances described in clauses (a) through (c) above to
become effective under applicable law or (y) in the good faith judgment of
the Board, one or more regulatory approvals are desirable prior to making one
or more of the events or circumstances described in clauses (a) through (c)
above to become effective under applicable law (provided, in the case of this
clause (y), such approvals are sought on a reasonably prompt basis), then
such events or circumstances shall be deemed to have occurred at the time
such approvals have been obtained and become effective under applicable law,
and (ii) any event or circumstance which would constitute a Change of Control
solely by reason of the acquisition of "beneficial ownership" of securities
of GVL shall not constitute a Change of Control with respect to the Issuer,
unless it would result in a mandatory prepayment (by tender offer or
otherwise) of Indebtedness, or an event of default under Indebtedness, of GVL
or any of its Subsidiaries (other than the Issuer and its Subsidiaries). The
good faith determination by the Board, based upon advice of outside counsel,
of the beneficial ownership of securities of the Issuer within the meaning of
Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent
contrary controlling judicial precedent or contrary written interpretation
published by the SEC.
"Common Stock" means, with respect to any person, any and all shares,
interest or other participations in, and other equivalents (however
designated and whether voting or nonvoting) of such person's common stock
whether outstanding at the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for United States corporation, local, foreign and other income
taxes of the Issuer and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP.
105
"Consolidated Interest Expense" means without duplication, the sum of (i)
the interest expense of the Issuer and the Restricted Subsidiaries for such
period as determined on a consolidated basis in accordance with GAAP,
including, without limitation, (a) any amortization of debt discount, (b) the
net cost under Interest Rate Obligations (including any amortization of
discounts), (c) the interest portion of any deferred payment obligation, (d)
all commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing and (e) all accrued
interest, (ii) the interest component of Capitalized Lease Obligations paid,
accrued and/or scheduled to be paid or accrued by the Issuer and the
Restricted Subsidiaries during such period as determined on a consolidated
basis in accordance with GAAP and (iii) the amount of dividends in respect of
Disqualified Stock paid by the Issuer and the Restricted Subsidiaries during
such period. Notwithstanding the foregoing, in no event shall Consolidated
Interest Expense include interest expense arising under the Convertible Notes
or any Deeply Subordinated Shareholders' Loans to the extent incurred prior
to the Termination Date.
"Consolidated Net Income" means, with respect to any period, the
consolidated net income of the Issuer and the Restricted Subsidiaries for
such period, adjusted, to the extent included in calculating such
consolidated net income, by excluding, without duplication, (i) all
extraordinary, unusual or nonrecurring gains or losses of such person (net of
fees and expenses relating to the transaction giving rise thereto) for such
period, (ii) income of the Issuer and the Restricted Subsidiaries derived
from or in respect of all Investments in persons other than Subsidiaries of
the Issuer or any Restricted Subsidiary, (iii) the portion of net income (or
loss) of such person allocable to minority interests in unconsolidated
persons for such period, except to the extent actually received by the Issuer
or any Restricted Subsidiary, (iv) net income (or loss) of any other person
combined with such person on a "pooling of interests" basis attributable to
any period prior to the date of combination, (v) any gain or loss, net of
taxes, realized by such person upon the termination of any employee pension
benefit plan during such period, (vi) gains or losses in respect of any Asset
Sales (net of fees and expenses relating to the transaction giving rise
thereto) during such period and (vii) except in the case of any restriction
or encumbrance permitted under clause (v) of the covenant "Limitation on
Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries,"
the net income of any Restricted Subsidiary for such period to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Net Income of the Issuer and the Restricted Subsidiaries for
such period increased, to the extent deducted in arriving at Consolidated Net
Income for such period, by the sum of (i) the Consolidated Income Tax Expense
of the Issuer and the Restricted Subsidiaries accrued according to GAAP for
such period (other than taxes attributable to extraordinary gains or losses
and gains and losses from Asset Sales); (ii) Consolidated Interest Expense
for such period; (iii) depreciation of the Issuer and the Restricted
Subsidiaries for such period; (iv) amortization of the Issuer and the
Restricted Subsidiaries for such period, including, without limitation,
amortization of capitalized debt issuance costs for such period, all
determined on a consolidated basis in accordance with GAAP; and (v) for
purposes of the covenant "Limitation on Additional Indebtedness" only, other
non-cash charges decreasing Consolidated Net Income.
"consolidation" means, with respect to the Issuer, the consolidation of
the accounts of the Restricted Subsidiaries with those of the Issuer, all in
accordance with GAAP; provided that "consolidation" will not include
consolidation of the accounts of any Unrestricted Subsidiary with the
accounts of the Issuer. The term "consolidated" has a correlative meaning to
the foregoing.
"Convertible Notes" means all 15% convertible subordinated promissory
notes of the Issuer due six months after the final maturity of the Notes that
are outstanding on the Issue Date (after giving effect to the application of
proceeds of the Offering).
106
"Cumulative Available Cash Flow" means, as at any date of determination,
the positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on the Issue Date and ending on the last day of the most
recent fiscal quarter immediately preceding the date of determination for
which consolidated financial information of the Issuer is available or, if
such cumulative Consolidated Operating Cash Flow for such period is negative,
the amount by which cumulative Consolidated Operating Cash Flow is less than
zero.
"Cumulative Consolidated Interest Expense" means, at any date on which a
Restricted Payment is proposed to be made, the sum of the Quarterly
Consolidated Interest Expense Amounts for each quarter after the Issue Date
(with the first quarter commencing on the Issue Date and ending on May 31,
1997) through the most recent quarter immediately preceding such Restricted
Payment for which consolidated financial statements of the Issuer are
available. The "Quarterly Consolidated Interest Expense Amount" for any
quarter (the "Subject Quarter") will be the product of (a) Consolidated
Interest Expense for the Subject Quarter times (b) the Applicable Percentage
for the Subject Quarter, where the "Applicable Percentage" for the Subject
Quarter will be (1) 150% of the Consolidated Interest Expense of the Issuer
for the Subject Quarter if Total Consolidated Indebtedness for each day of
the Subject Quarter is less than 6.0 times the Annualized Pro Forma
Consolidated Operating Cash Flow of the Issuer (based upon the two most
recent quarters for which consolidated financial statements of the Issuer are
available immediately preceding the Subject Quarter) or (2) 200% of the
Consolidated Interest Expense of the Issuer for the Subject Quarter if Total
Consolidated Indebtedness for any day of the Subject Quarter is equal to or
greater than 6.0 times the Annualized Pro Forma Consolidated Operating Cash
Flow of the Issuer (based upon the two most recent quarters for which
consolidated financial statements of the Issuer are available immediately
preceding the Subject Quarter).
"Deeply Subordinated Shareholders Loans" means any Indebtedness of the
Issuer for money borrowed from either (x) a Permitted Holder or (y) another
person whose obligations have been guaranteed by a Permitted Holder, provided
such Indebtedness of the Issuer (i) has been expressly subordinated in right
of payment and postponed as to all payments of interest and principal to the
Notes, (ii) provides for no payments of interest or principal prior to the
earlier of (a) the end of the sixth month after the final maturity of the
Notes and (b) the indefeasible payment in full in cash of all Notes (or due
provision therefor which results in the discharge of all Obligations under
the Indenture); provided that the terms of the subordination agreement are in
the form annexed to the Indenture and the Issuer has received one or more
Opinions of Counsel as to the validity and enforceability of such
subordination agreement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designation" has the meaning set forth under " -- Certain Covenants --
Limitation on Designations of Unrestricted Subsidiaries."
"Disinterested Director" means, with respect to any transaction or series
of related transactions, a member of the Board of Directors of the Issuer
other than a director who (i) has any material direct or indirect financial
interest in or with respect to such transaction or series of related
transactions or (ii) is an employee or officer of the Issuer or an Affiliate
that is itself a party to such transaction or series of transactions or an
Affiliate of a party to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is exchangeable for Indebtedness at the option of
the holder thereof, or is redeemable at the option of the holder thereof, in
whole or in part, on or prior to the final maturity date of the Notes;
provided such Capital Stock shall only constitute Disqualified Stock to the
extent it so matures or is redeemable or exchangeable on or prior to the
final maturity date of the Notes.
"Equity Offering" means an underwritten public offering of Common Stock of
the Issuer which has been registered under the Securities Act.
107
"Existing Market Asset Acquisition" means an Asset Acquisition of a
Cable/Telecommunications Business (other than the Phonoscope Acquisition) to
the extent subscribers or customers are located in the metropolitan areas of
Houston, Texas; Dallas-Fort Worth, Texas; San Diego, California; Phoenix,
Arizona; Chicago, Illinois; Denver, Colorado; San Francisco, California; Los
Angeles, California; Miami-Ft. Lauderdale, Florida; Tampa, Florida; or
Austin, Texas (it being understood that where a Cable/Telecommunications
Business subject to an Asset Acquisition is conducted in more than one
market, an allocation of Indebtedness being incurred pursuant to clause (c)
of the definition of Permitted Indebtedness may be made on the basis of the
latest 12 months of revenues of the Cable/Telecommunications Business
immediately preceding the date of incurrence in a particular metropolitan
area).
"Fair Market Value" means, with respect to any asset or property, the
price that could be negotiated in an arms-length free market transaction, for
cash, between a willing seller and a willing buyer, neither of whom is under
pressure or compulsion to complete the transaction. Unless otherwise
specified in the Indenture, Fair Market Value shall be determined by the
Board acting in good faith and shall be evidenced by a Board Resolution
delivered to the Trustee.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States and which are applicable as of the
date of determination and which are consistently applied for all applicable
periods.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment
or performance (or payment of damages in the event of non-performance) of all
or any part of such obligation, including, without limiting the foregoing,
the payment of amounts drawn down by letters of credit.
"GVL" means Le Groupe Videotron Ltee.
"Incremental Qualifying Cable Subscribers" means, as of any date of
determination, the aggregate number of Qualifying Cable Subscribers of the
Issuer and the Restricted Subsidiaries minus (i) the number of Qualifying
Cable Subscribers of the Issuer and the Restricted Subsidiaries as of the
Issue Date (94,944) and minus (ii) the number of Qualifying Cable Subscribers
acquired pursuant to the Phonoscope Acquisition to the extent and only to the
extent Indebtedness is incurred under clause (d) of the definition of
"Permitted Indebtedness" to finance the Phonoscope Acquisition.
"Indebtedness" means, with respect to any person, without duplication, (i)
any liability, contingent or otherwise, of such person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of
such person or only to a portion thereof) or (B) evidenced by a note,
debenture or similar instrument or letter of credit (including a purchase
money obligation) or (C) for the payment of money relating to a Capitalized
Lease Obligation or other obligation relating to the deferred purchase price
of property or (D) in respect of an Interest Rate Obligation or currency
agreement; or (ii) any liability of others of the kind described in the
preceding clause (i) which the person has guaranteed or which is otherwise
its legal liability; or (iii) any obligation secured by a Lien (other than
(x) Permitted Liens of the type described in clauses (b), (d) or (e) of the
definition of Permitted Liens; provided that the obligations secured would
not constitute Indebtedness under clauses (i) or (ii) or (iii) of this
definition, and (y) Liens on Capital Stock or Indebtedness of any
Unrestricted Subsidiary) to which the property or assets of such person are
subject, whether or not the obligations secured thereby shall have been
assumed by or shall otherwise be such person's legal liability (the amount of
such obligation being deemed to be the lesser of the value of such property
or asset or the amount of the obligation so secured); (iv) all Disqualified
Stock valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accrued and unpaid dividends; and (v) any and all
deferrals, renewals, extensions and refundings of, or amendments,
modifications or supplements to, any liability of the kind described in any
of the preceding clauses (i),
108
(ii), (iii) or (iv). In no event shall "Indebtedness" include trade payables
and accrued liabilities that are current liabilities incurred in the ordinary
course of business, excluding the current maturity of any obligation which
would otherwise constitute Indebtedness. For purposes of the covenants
"Limitation on Additional Indebtedness" and "Limitation on Restricted
Payments" and the definition of "Events of Default," in determining the
principal amount of any Indebtedness to be incurred by the Issuer or a
Restricted Subsidiary or which is outstanding at any date, (x) the principal
amount of any Indebtedness which provides that an amount less than the
principal amount at maturity thereof shall be due upon any declaration of
acceleration thereof shall be the accreted value thereof at the date of
determination and (y) the principal amount of any Indebtedness shall be
reduced by any amount of cash or Cash Equivalent collateral securing on a
perfected basis, and dedicated for disbursement exclusively to the payment of
principal of and interest on, such Indebtedness.
"Independent Financial Advisor" means a United States investment banking
firm of national standing in the United States (i) which does not, and whose
directors, officers and employees or Affiliates do not have, a direct or
indirect financial interest in the Issuer and (ii) which, in the judgment of
the Board, is otherwise independent and qualified to perform the task for
which it is to be engaged.
"Interest Rate Obligations" means the obligations of any person pursuant
to any arrangement with any other person whereby, directly or indirectly,
such person is entitled to receive from time to time periodic payments
calculated by applying either a floating or a fixed rate of interest on a
stated notional amount and shall include without limitation, interest rate
swaps, caps, floors, collars, forward interest rate agreements and similar
agreements.
"Investment" means, with respect to any person, any advance, loan, account
receivable (other than an account receivable arising in the ordinary course
of business), or other extension of credit (including, without limitation, by
means of any guarantee) or any capital contribution to (by means of transfers
of property to others, payments for property or services for the account or
use of others, or otherwise), or any purchase or ownership of any stocks,
bonds, notes, debentures or other securities of, any other person.
Notwithstanding the foregoing, in no event shall any issuance of Capital
Stock (other than Disqualified Stock) of the Issuer in exchange for Capital
Stock, property or assets of another person constitute an Investment by the
Issuer in such other person.
"Issue Date" means February 14, 1997.
"License Co." means Transmission Holdings, Inc., a Delaware corporation.
"License Co. Documents" means, collectively, (i) the Assignment Agreement
dated as of the Issue Date among TVMAX Telecommunications, Inc. ("TVMAX"),
Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc. and
IRPC Arizona, Inc., as assignors, and License Co., as assignee, (ii) the
Equipment License and Services Agreement dated as of the Issue Date between
TVMAX and License Co. and the Promissory Note of License Co. in favor of
TVMAX annexed thereto, (iii) the Option Agreement dated as of the Issue Date
between TVMAX and License Co., (iv) each Shareholders Option Agreement dated
as of the Issue Date between TVMAX and a License Co. Shareholders (as defined
below), (v) the Subscription and Shareholders Agreement dated as of the Issue
Date among Rory O. Cole, Henry Goldberg and Russell B. Berman (collectively,
the "License Co. Shareholders") and License Co. and (vi) any other agreements
identical to the foregoing in all material respects and entered into for the
same purposes that the Issuer or any Restricted Subsidiary may enter into in
the future, as each of the foregoing documents referred to in clauses (i)
through (v) may be amended, modified or supplemented in compliance with the
covenant "Limitation on Transactions with Affiliates."
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any
property of any kind. A person shall be deemed to own subject to a Lien any
property which such person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
109
"Material Restricted Subsidiary" means any Restricted Subsidiary of the
Issuer, which, at any date of determination, is a "Significant Subsidiary"
(as that term is defined in Regulation S-X issued under the Securities Act),
but shall, in any event, include (x) any Guarantor, (y) TVMAX or (z) any
Restricted Subsidiary of the Issuer which, at any date of determination, is
an obligor under any Indebtedness in an aggregate principal amount equal to
or exceeding $10.0 million if another Material Restricted Subsidiary is also
obligated in respect of such Indebtedness.
"Maturity Date" means, with respect to any Note, the date specified in
such Note as the fixed date on which the principal of such Note is due and
payable.
"Moody's" means Moody's Investors Service.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash (including assumed liabilities and other items
deemed to be cash under the proviso to the first sentence of the covenant
"Disposition of Proceeds of Asset Sales") or Cash Equivalents including
payments in respect of deferred payment obligations when received in the form
of cash or Cash Equivalents (except to the extent that such obligations are
financed or sold with recourse to the Issuer or any Restricted Subsidiary)
net of (i) brokerage commissions and other fees and expenses (including fees
and expenses of legal counsel and investment bankers) related to such Asset
Sale, (ii) provisions for all taxes payable as a result of such Asset Sale,
(iii) amounts required to be paid to any person (other than the Issuer or any
Restricted Subsidiary) owning a beneficial interest in or having a Permitted
Lien on the assets subject to the Asset Sale and (iv) appropriate amounts to
be provided by the Issuer or any Restricted Subsidiary, as the case may be,
as a reserve required in accordance with GAAP against any liabilities
associated with such Asset Sale and retained by the Issuer or any Restricted
Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected
in an Officers' Certificate delivered to the Trustee.
"Other Senior Debt Pro Rata Share" means the amount of the applicable
Excess Proceeds obtained by multiplying the amount of such Excess Proceeds by
a fraction, (i) the numerator of which is the aggregate accreted value and/or
principal amount, as the case may be, of all Indebtedness (other than (x) the
Notes and (y) Subordinated Indebtedness) of the Issuer outstanding at the
time of the applicable Asset Sale with respect to which the Issuer is
required to use Excess Proceeds to repay or make an offer to purchase or
repay and (ii) the denominator of which is the sum of (a) the aggregate
principal amount of all Notes outstanding at the time of the applicable Asset
Sale and (b) the aggregate principal amount or the aggregate accreted value,
as the case may be, of all other Indebtedness (other than Subordinated
Indebtedness) of the Issuer outstanding at the time of the applicable Asset
Sale Offer with respect to which the Issuer is required to use the applicable
Excess Proceeds to offer to repay or make an offer to purchase or repay.
"Pacific" means Pacific Capital Group, Inc.
"Permitted Holder" means (i) any of GVL, Caisse de depot et placement du
Quebec or any of their respective controlled Affiliates, (ii) a Strategic
Equity Investor that, prior to August 31, 1999, invests on a primary basis in
Capital Stock (other than Disqualified Stock) representing not less than 15%
of the fully diluted Common Stock of the Issuer at the time of issuance by
the Issuer; provided that only the first such Strategic Equity Investor shall
be a Permitted Holder, or (iii) Andre Chagnon, his spouse or any of his
lineal descendants and their respective spouses (collectively, the "Chagnon
Family"), whether acting in their own name or as one or as a majority of
persons having the power to exercise the voting rights attached to, or having
investment power over, shares of Capital Stock held by others, or (iv) any
controlled Affiliate of any member of the Chagnon Family or (v) any trust
principally for the benefit of one or more members of the Chagnon Family
(whether or not any member of the Chagnon Family is a trustee of such trust)
or (vi) any charitable foundation a majority of whose members, trustees or
directors, as the case may be, are persons referred to in (iii) above. For
purposes of this definition, "lineal descendant" shall include at any time
any person that is treated as being adopted or is in the process of being
adopted by any member of the Chagnon Family at such time.
110
"Permitted Indebtedness" means the following Indebtedness (each of which
shall be given independent effect):
(a) Indebtedness under the Notes and the Indenture;
(b) Indebtedness of the Issuer and/or any Restricted Subsidiary
outstanding on the Issue Date;
(c) Indebtedness, including under any Senior Bank Facility or Vendor
Credit Facility, of the Issuer and/or any Restricted Subsidiary to the
extent that the proceeds of such Indebtedness are used to finance or
support working capital (including to fund operating losses) for, or the
construction of, a Cable/Telecommunications Business of the Issuer or any
of the Restricted Subsidiaries or the acquisition of properties or assets
(tangible or intangible) to be used in a Cable/Telecommunications Business
of the Issuer or any of its Restricted Subsidiaries (other than for an
Asset Acquisition to the extent that it is not an Existing Market Asset
Acquisition) or for an Existing Market Asset Acquisition; provided that,
after giving effect to the incurrence of any such Indebtedness, the
aggregate outstanding Indebtedness incurred under this clause (c) and
incurred pursuant to any Refinancings (whether the initial Refinancing or
any successive Refinancing) thereof incurred under clause (h) below does
not exceed the sum of (i) $100.0 million, plus (ii) the product of the
number of Incremental Qualifying Cable Subscribers times $1,200; provided
that no Indebtedness may be incurred under this clause (c) in reliance on
the immediately preceding clause (ii) on any date on or after February 15,
2001;
(d) to the extent not funded with the net proceeds from the sale of the
Notes, Indebtedness incurred by the Issuer or any Restricted Subsidiary to
finance the Phonoscope Acquisition;
(e) (i) Indebtedness of any Restricted Subsidiary owed to and held by
the Issuer or a Restricted Subsidiary and (ii) Indebtedness of the Issuer
owed to and held by any Restricted Subsidiary; provided that an incurrence
of Indebtedness shall be deemed to have occurred upon (x) any sale or
other disposition (excluding assignments as security to financial
institutions) of any Indebtedness of the Issuer or a Restricted Subsidiary
referred to in this clause (f) to a person (other than the Issuer or a
Restricted Subsidiary) or (y) any sale or other disposition of Capital
Stock of a Restricted Subsidiary, or Designation of a Restricted
Subsidiary, which holds Indebtedness of the Issuer or another Restricted
Subsidiary such that such Restricted Subsidiary, in any such case, ceases
to be a Restricted Subsidiary;
(f) Interest Rate Obligations of the Issuer and/or any Restricted
Subsidiary relating to (i) Indebtedness of the Issuer and/or such
Restricted Subsidiary, as the case may be (which Indebtedness (x) bears
interest at fluctuating interest rates and (y) is otherwise permitted to
be incurred under the "Limitation on Additional Indebtedness" covenant),
and/or (ii) Indebtedness (which Indebtedness would bear interest at
fluctuating interest rates) for which a lender has provided a commitment
(subject to customary conditions) in an amount reasonably anticipated to
be incurred by the Issuer and/or a Restricted Subsidiary in the following
12 months after such Interest Rate Obligation has been incurred, but only
to the extent, in the case of either subclause (i) or (ii), that the
notional principal amount of such Interest Rate Obligations does not
exceed the principal amount of the Indebtedness (and/or Indebtedness
subject to commitments) to which such Interest Rate Obligations relate;
(g) Indebtedness of the Issuer and/or any Restricted Subsidiary in
respect of performance bonds of the Issuer or any Restricted Subsidiary or
surety bonds provided by the Issuer or any Restricted Subsidiary incurred
in the ordinary course of business in connection with the construction,
implementation or operation of a Cable/Telecommunications Business;
(h) Indebtedness of the Issuer and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension (a
"Refinancing") of outstanding Indebtedness of the Issuer and/or of any
Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b)
(other than the Convertible Notes), (c) or (d) of this definition or the
proviso of the covenant
111
"Limitation on Additional Indebtedness"; provided that (1) Indebtedness of
the Issuer may not be Refinanced to such extent under this clause (h) with
Indebtedness of any Restricted Subsidiary and (2) any such Refinancing
shall only be permitted under this clause (h) to the extent that (x) it
does not result in a lower Average Life to Stated Maturity of such
Indebtedness as compared with the Indebtedness being Refinanced and (y) it
does not exceed the sum of the principal amount (or, if such Indebtedness
provides for a lesser amount to be due and payable upon a declaration of
acceleration thereof, an amount no greater than such lesser amount) of the
Indebtedness being Refinanced plus the amount of accrued interest thereon
and the amount of any reasonably determined prepayment premium necessary
to accomplish such Refinancing and such reasonable fees and expenses
incurred in connection therewith;
(i) Indebtedness of the Issuer under Deeply Subordinated Shareholders
Loans to the extent incurred prior to the Termination Date; and
(j) in addition to the items referred to in clauses (a) through (i)
above, Indebtedness of the Issuer and any Acquired Indebtedness of any
Restricted Subsidiary having an aggregate principal amount not to exceed
$50.0 million at any time outstanding.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits;
(c) loans and advances to employees made in the ordinary course of business;
(d) Interest Rate Obligations; (e) bonds, notes, debentures or other
securities received as a result of Asset Sales pursuant to and in compliance
with the covenant "Disposition of Proceeds of Asset Sales"; (f) Investments
made in the ordinary course of business as partial payment for constructing a
network relating principally to a Cable/Telecommunications Business; (g)
Investments in License Co. contemplated by the License Co. Documents; and (h)
Investments in companies owning or managing multiple dwelling units (or an
Affiliate thereof) with which the Issuer or any Restricted Subsidiary have
Rights of Entry in the ordinary course of business in lieu of (in whole or in
part) other customary financial inducements to property owners.
"Permitted Liens" means (a) Liens on property of a person existing at the
time such person is merged into or consolidated with the Issuer or any
Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such
Liens were in existence prior to the contemplation of such merger,
consolidation or acquisition and do not secure any property or assets of the
Issuer or any Restricted Subsidiary other than the property or assets subject
to the Liens prior to such merger or consolidation; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens and other similar
Liens arising in the ordinary course of business which secure payment of
obligations not more than 60 days past due or are being contested in good
faith and by appropriate proceedings; (c) Liens existing on the Issue Date,
including to secure the note in the amount of $1.0 million in favor of
International Richey Pacific Cablevision Ltd.; (d) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted; provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (e) easements, rights of way, restrictions and other
similar easements, licenses, restrictions on the use of properties, or minor
imperfections of title that, in the aggregate, are not material in amount and
do not in any case materially detract from the properties subject thereto or
interfere with the ordinary conduct of the business of the Issuer or the
Restricted Subsidiaries; (f) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations
of a like nature incurred in the ordinary course of business; (g) Liens
securing any Senior Bank Facility or Vendor Credit Facility to the extent it
would constitute "Permitted Indebtedness"; (h) Liens to secure any
Refinancing of any Indebtedness secured by Liens referred to in the foregoing
clauses (a) or (c), but only to the extent that such Liens do not extend to
any other property or assets and the principal amount of the Indebtedness
secured by such Liens is not increased; (i) Liens to secure the Notes; and
(j) Liens on real property incurred in connection with the financing of the
purchase of such real property (or incurred within 60 days of purchase) by
the Issuer or any Restricted Subsidiary.
112
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock whether now outstanding, or issued
after the Issue Date, and including, without limitation, all classes and
series of preferred or preference stock of such person.
"Publicly Traded Stock" means any Common Stock of an issuer that is listed
and traded on either the New York Stock Exchange or the American Stock
Exchange or the Nasdaq National Market System.
"Qualifying Cable Subscribers" means, as of any date of determination, the
aggregate number of Cable Subscribers for the Issuer and the Restricted
Subsidiaries as of the last day of the most recent month ending not more than
45 days prior to the date of determination.
"Refinancing" has the meaning set forth in clause (h) of the definition of
"Permitted "Indebtedness."
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the
Issuer or any payment made to the direct or indirect holders (in their
capacities as such) of Capital Stock of the Issuer (other than dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock)
of the Issuer or in options, warrants or other rights to purchase Capital
Stock (other than Disqualified Stock) of the Issuer); (ii) the purchase,
redemption or other acquisition or retirement for value of any Capital Stock
of the Issuer (other than any such Capital Stock owned by the Issuer or a
Restricted Subsidiary); (iii) the purchase, redemption, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness (other
than any Subordinated Indebtedness held by a Restricted Subsidiary); (iv) the
making of any payment (whether of principal or interest (other than the
payment of interest in the form of additional Deeply Subordinated
Shareholders Loans) in respect of the Convertible Notes or the Deeply
Subordinated Shareholders Loans; or (v) the making of any Investment (other
than a Permitted Investment) in any person (other than an Investment by a
Restricted Subsidiary in the Issuer or an Investment by the Issuer or a
Restricted Subsidiary in either (x) a Restricted Subsidiary engaged
principally in a Cable/Telecommunications Business or (y) a person engaged
principally in a Cable/Telecommunications Business that becomes a Restricted
Subsidiary as a result of such Investment). Notwithstanding the foregoing,
the payment of compensation to Le Groupe Videotron Ltee, Pacific or any of
their respective Subsidiaries pursuant to the Settlement Agreement dated as
of August 1, 1996 between Vanguard Communications, L.P., Pacific, VPC, the
Issuer and Le Groupe Videotron Ltee, as in effect on the Issue Date, shall
not constitute a Restricted Payment to the extent, and only to the extent,
that such amounts are deducted in arriving at Cumulative Available Cash Flow
of the Issuer.
"Restricted Subsidiary" means any Subsidiary of the Issuer that has not
been designated by the Board, by a Board Resolution delivered to the Trustee,
as an Unrestricted Subsidiary pursuant to and in compliance with the covenant
"Limitation on Designations of Unrestricted Subsidiaries." Any such
designation may be revoked by a Board Resolution delivered to the Trustee,
subject to the provisions of such covenant.
"Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted
Subsidiary (i) which is not subordinated to any other Indebtedness of such
Restricted Subsidiary and (ii) in respect of which the Issuer is not also
obligated (by means of a guarantee or otherwise) other than, in the case of
this clause (ii), Indebtedness under any Senior Bank Facility or Vendor
Credit Facility to the extent constituting "Permitted Indebtedness."
"Revocation" has the meaning set forth under " -- Certain Covenants --
Limitation on Designations of Unrestricted Subsidiaries."
"Richey Warrant" means the Warrant dated December 29, 1994 to purchase B
Units of Limited Partnership Interest of Vanguard Communications, L.P.
"S&P" means Standard & Poor's Corporation.
113
"Senior Bank Facility" means any senior commercial term loan and/or
revolving credit facility (including any letter of credit subfacility)
entered into principally with commercial banks and/or other financial
institutions typically party to commercial loan agreements.
"Strategic Equity Investor" means (i) any company (other than GVL and its
affiliates) which is engaged principally in a Cable/Telecommunications
Business and which has a rating from Moody's of Baa3 (or the equivalent
thereof) or higher or from S&P of BBB- (or the equivalent thereof) or higher
or (ii) any controlled Affiliate of any company referred to in the preceding
clause (i).
"Subordinated Indebtedness" means any Indebtedness of the Issuer or any
Guarantor which is expressly subordinated in right of payment to any other
Indebtedness of the Issuer or such Guarantor.
"Subsidiary" means, with respect to any person, (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors shall at the time be owned,
directly or indirectly, by such person, or (ii) any other person of which at
least a majority of voting interest is at the time, directly or indirectly,
owned by such person.
"Termination Date" means the earlier to occur of (i) July 31, 1999 and
(ii) an Equity Offering.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Issuer and
the Restricted Subsidiaries outstanding as of the date of determination,
provided that Total Consolidated Indebtedness shall exclude the Convertible
Notes and any Deeply Subordinated Shareholders Loans to the extent incurred
prior to the Termination Date.
"Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as
such pursuant to and in compliance with the covenant "Limitation on
Designations of Unrestricted Subsidiaries." Any such designation may be
revoked by a Board Resolution delivered to the Trustee, subject to the
provisions of such covenant.
"U.S. Government Securities" means securities that are direct obligations
of the United States of America for the payment of which its full faith and
credit is pledged.
"Vendor Credit Facility" means, collectively, any credit facility entered
into with any vendor or supplier (or any financial institution acting on
behalf of or for the purpose of directly financing purchases from such vendor
or supplier) to the extent the Indebtedness thereunder is incurred for the
purpose of financing the cost (including the cost of design, development,
site acquisition, construction, integration, manufacture or acquisition) of
personal property (tangible or intangible) used, or to be used, in a
Cable/Telecommunications Business.
"VPC" means VPC Corporation.
114
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the New Notes sold will be
issued in the form of one or more registered notes in global form (the "New
Global Note," together with the Global Note representing the Old Notes, the
"Global Note"). On the Exchange Date, the New Global Note will be deposited
with, or on behalf of, the Depository and registered in the name of the
Depository or its nominee. Except as set forth below, the Global Note may be
transferred, in whole and not in part, only to the Depository or another
nominee of the Depository. Investors may hold their beneficial interests in
the Global Note directly through the Depository if they have an account with
the Depository or indirectly through organizations which have accounts with
the Depository.
New Notes that were (i) originally issued to or transferred to
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3)
or (7) under the Securities Act) who are not qualified institutional buyers
("QIBs") or (ii) issued as described below under "--Certificated Notes" will
be issued in definitive form. Upon the transfer of a Note in definitive form,
such Note will, unless the applicable Global Note has previously been
exchanged for Notes in definitive form, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred.
The Depository has advised the Issuer as follows: The Depository is a
limited-purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of
securities certificates. The Depository's participants include securities
brokers and dealers, banks, trust companies, clearing corporations and
certain other organizations. Access to the Depository's book-entry system is
also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the New Global Note, the Depository will credit, on
its book-entry registration and transfer system, the principal amount of the
Notes represented by such New Global Note to the accounts of participants.
Ownership of beneficial interests in the Global Note will be limited to
participants or persons that may hold interests through participants.
Ownership of beneficial interests in the Global Note will be shown on, and
the transfer of those ownership interests will be effected only through,
records maintained by the Depository (with respect to participants' interest)
and such participants (with respect to the owners of beneficial interests in
the Global Notes other than participants). The laws of some jurisdictions may
require that certain purchasers of securities take physical delivery of such
securities in definitive form. Such limits and laws may impair the ability to
transfer or pledge beneficial interests in the Global Notes.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the Notes for all
purposes of such Notes and the Indenture . Except as set forth below, owners
of beneficial interests in the Global Note will not be entitled to have the
Notes represented by the Global Note registered in their names, will not
receive or be entitled to receive physical delivery of certificated Notes in
definitive form and will not be considered to be the owners or holders of any
Notes under the Global Note. The Issuer understands that under existing
industry practice, in the event an owner of a beneficial interest in the
Global Note desires to take any action that the Depository, as the holder of
the applicable Global Note, is entitled to take, the Depository would
authorize the participants to take such action, and that the participants
would authorize beneficial owners owning through such participants to take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
Payments in respect of the Notes represented by the Global Note registered
in the name of and held by the Depository or its nominee will be made to the
Depository or its nominee, as the case may be, as the registered owner and
holder of the Global Note.
115
The Issuer expects that the Depository or its nominee, upon receipt of any
payment in respect of the Notes will credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the Global Note as shown on the records of the Depository or its nominee. The
Issuer also expects that payments by participants to owners of beneficial
interests in the Global Note held through such participants will be governed
by standing instructions and customary practices and will be the
responsibility of such participants. The Issuer will not have any
responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in the Global
Note or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests or for any other aspect of the
relationship between the Depository and its participants or the relationship
between such participants and the owners of beneficial interests in the
Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated
Notes in definitive form, the Global Note may not be transferred except as a
whole by the Depository to a nominee of such Depository or by a nominee of
such Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of
the Depository, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Trustee nor the Issuer will have any responsibility for the performance
by the Depository or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED SECURITIES
The Notes represented by the Global Note are exchangeable for certificated
Notes in definitive form of like tenor as such Notes in denominations of
$1,000 and integral multiples thereof if (i) the Depository notifies the
Issuer that it is unwilling or unable to continue as Depository for the
Global Notes or if at any time the Depository ceases to be a clearing agency
registered under the Exchange Act and a successor depository is not appointed
by the Issuer within 90 days, (ii) the Issuer in its discretion at any time
determines not to have all of the Notes represented by the Global Note or
(iii) a default entitling the holders of the Notes to accelerate the maturity
thereof has occurred and is continuing. Any Note that is exchangeable
pursuant to the preceding sentence is exchangeable for certificated Notes
issuable in authorized denominations and registered in such names as the
Depository shall direct.
116
EXCHANGE OFFER; REGISTRATION RIGHTS
The Issuer has entered into the Registration Agreement pursuant to which
it agreed to file the registration statement of which this Prospectus forms a
part (the "Exchange Offer Registration Statement") and to use its best
efforts to cause the Exchange Offer Registration Statement to be declared
effective under the Securities Act not later than June 13, 1997. Upon the
effectiveness of the Exchange Offer Registration Statement, the Issuer will
promptly offer the New Notes in exchange for surrender of the Old Notes. See
"The Exchange Offer." Under existing SEC interpretations, the New Notes would
be freely transferable by holders other than affiliates of the Issuer after
the Exchange Offer without further registration under the Securities Act if
the holder of the New Notes represents that it is acquiring the New Notes in
the ordinary course of its business, that it has no arrangement or
understanding with any person to participate in the distribution of the New
Notes and that it is not an affiliate of the Issuer, as such terms are
interpreted by the SEC; provided that broker-dealers ("Participating
Broker-Dealers") receiving New Notes in the Exchange Offer will have a
prospectus delivery requirement with respect to resales of such New Notes.
The SEC has taken the position that Participating Brokers-Dealers may fulfill
their prospectus delivery requirements with respect to New Notes (other than
a resale of an unsold allotment from the original sale of the Notes) with the
prospectus contained in the Exchange Offer Registration Statement. Under the
Registration Agreement, the Issuer is required to allow Participating
Broker-Dealers and other persons, if any, with similar prospectus delivery
requirements to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of such New Notes for a
specified period of time.
A holder of Old Notes (other than certain specified holders of Old Notes)
who wishes to exchange such Notes for New Notes in the Exchange Offer is
required to represent that any New Notes to be received by it will be
acquired in the ordinary course of its business and that at the time of the
commencement of the Registered Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the New Notes and that is not an
"affiliate" of the Company, as defined in Rule 405 of the Securities Act, or
if it is an affiliate, that it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent
applicable.
In the event that applicable interpretations of the staff of the SEC do
not permit the Issuer to effect the Exchange Offer, or if for any other
reason the Exchange Offer is not consummated by July 13, 1997, or if Salomon
Brothers Inc. or Merrill Lynch, Pierce, Fenner & Smith Incorporated, the
initial purchasers of the Offering, so request with respect to Old Notes not
eligible to be exchanged for New Notes in the Exchange Offer, or if any
holder of Old Notes is not eligible to participate in the Exchange Offer or
participates in but does not receive freely tradeable (except for prospectus
delivery requirements) New Notes in the Exchange Offer the Issuer will, at
its cost, (a) as promptly as practicable, file a shelf registration statement
(the "Shelf Registration Statement") covering resales of the Old Notes or the
New Notes, as the case may be, (b) use its best efforts to cause the Shelf
Registration Statement to be declared effective under the Securities Act by
August 12, 1997 and (c) keep the Shelf Registration Statement effective until
three years after its effective date (or shorter period that will terminate
when all Old Notes or New Notes, as the case may be, covered by the Shelf
Registration Statement have been sold pursuant to the Shelf Registration
Statement). The Issuer will, in the event a Shelf Registration Statement is
filed, among other things, provide to each holder for whom such Shelf
Registration Statement was filed copies of the prospectus which is a part of
the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Old Notes or the New
Notes, as the case may be. A holder selling such Old Notes or New Notes
pursuant to the Shelf Registration Statement generally would be required to
be named as a selling security holder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales
and will be bound by the provisions of the Registration Agreement which are
applicable to such holder (including certain indemnification obligations).
117
If (i) by June 13, 1997, the Exchange Offer Registration Statement has not
been declared effective; (ii) by July 13, 1997, the Exchange Offer has not
been consummated or by August 12, 1997, the Shelf Registration Statement has
not been declared effective; or (iii) after either the Exchange Offer
Registration Statement or the Shelf Registration Statement has been declared
effective such Registration Statement thereafter ceases to be effective or
usable (subject to certain exceptions) in connection with resales of Old
Notes or New Notes in accordance with and during the periods specified in the
Registration Agreement (each such event referred to in clauses (i) through
(iii), a "Registration Default"), additional interest ("Liquidated Damages")
will accrue on the Old Notes and the New Notes (in addition to the stated
interest on the Old Notes and the New Notes) from and including the date on
which any such Registration Default shall occur but excluding the date on
which all Registration Defaults have been cured. Liquidated Damages will be
payable in cash semi-annually in arrears each February 15 and August 15,
commencing August 15, at a rate per annum equal to 0.50% of the principal
amount of the Notes during the 90-day period immediately following the
occurrence of any Registration Default and shall increase by 0.25% per annum
of the principal amount of the Notes at the end of each subsequent 90-day
period, but in no event shall such rate exceed 2.00% per annum in the
aggregate regardless of the number of Registration Defaults.
The summary herein of certain provisions of the Registration Agreement
does not purport to be complete and is subject to and is qualified in its
entirety by reference to all the provisions of the Registration Agreement, a
copy of which has been filed as an exhibit to the Exchange Offer Registration
Statement.
118
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The exchange of New Notes for Old Notes will not constitute a recognition
event for federal income tax purposes. Consequently, no gain or loss will be
recognized by holders upon receipt of the New Notes. For purposes of
determining gain or loss upon the subsequent sale or exchange of New Notes, a
holder's basis in the New Notes will be the same as the holder's basis in the
Old Notes exchanged therefor. Holders will be considered to have held the New
Notes from the time of their original acquisition of the Old Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Notes were acquired as a result of market-making activities or other
trading activities. The Issuer has agreed that, starting on the Exchange Date
(as defined) and ending on the close of business on the earlier of the first
anniversary of the Exchange Date or the date upon which all such New Notes
have been sold by such participating broker-dealer (the "Registration
Period"), it will make this Prospectus available to any broker-dealer for use
in connection with any such resale. In addition, until , 1997, all dealers
effecting transactions in the New Notes may be required to deliver a
Prospectus.
The Issuer will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any New
Notes. Any broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker-dealer that
participates in a distribution of New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
During the Registration Period, the Issuer will promptly send additional
copies of this Prospectus and any amendment or supplement to this Prospectus
to any broker-dealer that requests such documents in the Letter of
Transmittal. The Issuer has agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the holders of the
Notes) other than commissions or concessions of any brokers or dealers and
will indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
The Issuer has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer and
to the best of the Issuer's information and belief, each person participating
in the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to
participate in the distribution of the New Notes to be received in the
Exchange Offer.
119
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon and
certain other legal matters in connection with the sale of securities offered
hereby will be passed upon for the Issuer by Kronish, Lieb, Weiner & Hellman
LLP, 1114 Avenue of the Americas, New York, New York 10036-7798. In rendering
their opinion Kronish, Lieb, Weiner & Hellman LLP will rely upon the opinion
of Goldberg, Godles, Weiner & Wright, the Company's FCC Counsel, as to FCC
matters. Russell S. Berman of Kronish, Lieb, Weiner & Hellman LLP and Henry
Goldberg of Goldberg, Godles, Weiner & Wright each hold one-third of the
outstanding equity interests in THI (see "Certain Transactions -- License
Holding Company").
EXPERTS
The Consolidated Financial Statements of the Company for the year ended
August 31, 1996, for the period January 1, 1995 to August 31, 1995, the year
ended December 31, 1994 and the period April 20, 1993 (inception) to December
31, 1993, the Combined Statements of Operations and Cash Flows of Richey
Pacific Cablevision for the years ended December 31, 1993 and December 28,
1994, the Statements of Revenues and Expenses and Statements of Cash Flows of
EagleVision for the years ended December 31, 1993 and 1994, and the Statement
of Operations and Cash Flows of Triax Associates V, L.P. for the year ended
August 31, 1995 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports included herein and have been so included
in reliance upon their authority as experts in accounting and auditing.
120
INDEX TO FINANCIAL STATEMENTS
OPTEL, INC. AND SUBSIDIARIES:
Independent Auditors' Report ..................................................................... F-2
Consolidated Balance Sheets as of August 31, 1995 and 1996 and
February 28, 1997 (Unaudited) ................................................................... F-3
Consolidated Statements of Operations for the period from April 20, 1993 (Date of Inception) to
December 31, 1993, the year ended December 31, 1994, the period from January 1, 1995 to August
31, 1995, and the year ended August 31, 1996 and the six month periods ended February 29, 1996
and February 28, 1997 (Unaudited) ............................................................... F-4
Consolidated Statements of Stockholders' Equity for the period from April 30, 1993 (Date of
Inception) to December 31, 1993, the year ended December 31, 1994, the period from January 1,
1995 to August 31, 1995, and the year ended August 31, 1996 and the six month period ended
February 28, 1997 (Unaudited) ................................................................... F-5
Consolidated Statements of Cash Flows for the period from April 20, 1993 (Date of Inception) to
December 31, 1993, the year ended December 31, 1994, the period from January 1, 1995 to August
31, 1995, and the year ended August 31, 1996 and the six month periods ended February 29, 1996
and February 28, 1997 (Unaudited) ............................................................... F-6
Notes to Consolidated Financial Statements ....................................................... F-7
ACQUIRED COMPANIES:
Richey Pacific Cablevision:
Independent Auditors' Report ................................................................... F-17
Combined Statements of Operations for the years ended December 31, 1993 and December 28, 1994 .. F-18
Combined Statements of Cash Flows for the years ended December 31, 1993 and December 28, 1994 .. F-19
Notes to Combined Financial Statements ......................................................... F-20
EagleVision:
Independent Auditors' Report ................................................................... F-22
Statements of Revenues and Expenses for the years ended December 31, 1993 and 1994 ............. F-23
Statements of Cash Flows for the years ended December 31, 1993 and 1994 ........................ F-24
Notes to Financial Statements .................................................................. F-25
Triax Associates V, L.P.:
Independent Auditors' Report ................................................................... F-27
Statement of Operations for the year ended August 31, 1995 ..................................... F-28
Statement of Cash Flows for the year ended August 31, 1995 ..................................... F-29
Notes to Financial Statements .................................................................. F-30
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.:
We have audited the accompanying consolidated balance sheets of OpTel, Inc. and
subsidiaries (the "Company") as of August 31, 1995 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the period from April 20, 1993 (date of inception) to December 31, 1993, the
year ended December 31, 1994, the period from January 1, 1995 to August 31,
1995, and the year ended August 31, 1996. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of OpTel, Inc. and subsidiaries as of
August 31, 1995 and 1996 and the results of their operations and their cash
flows for the period from April 20, 1993 (date of inception) to December 31,
1993, the year ended December 31, 1994, the period from January 1, 1995 to
August 31, 1995, and the year ended August 31, 1996, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
November 7, 1996
(February 7, 1997 as to Note 13)
F-2
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------
August 31,
---------------------------------- February 28,
1995 1996 1997
--------------- --------------- --------------
(Unaudited)
ASSETS
Cash and cash equivalents ........................ $ 2,035,980 $ 1,677,332 $135,015,397
Restricted investments (Note 14) ................. -- -- 79,803,740
Accounts receivable (net of allowance for doubtful
accounts of $473,218, $542,134 and $819,999
(unaudited), respectively) ...................... 1,594,110 3,063,719 3,639,963
Prepaid expenses, deposits and other assets ...... 939,119 1,020,055 1,574,323
Amounts due from stockholder, net (Note 9) ....... -- 541,586 136,702
Property and equipment, net (Note 4) ............. 48,059,601 103,799,650 122,040,687
Intangible assets, net (Note 5) .................. 55,443,266 65,876,003 75,470,578
--------------- --------------- --------------
TOTAL ............................................ $108,072,076 $175,978,345 $417,681,390
=============== =============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable ................................. $ 2,370,976 $ 5,647,024 $ 3,276,664
Accrued expenses and other liabilities ........... 8,925,009 10,506,586 13,643,562
Deferred revenues and customer deposits .......... 1,258,120 2,167,253 2,436,370
Convertible notes payable to
stockholder (Notes 6 and 9) ..................... 17,949,690 89,414,364 121,006,370
Notes payable and long-term
obligations (Notes 6 and 14) .................... 2,849,423 2,443,341 220,615,287
Deferred acquisition liabilities (Notes 3 and 6) . 6,174,295 6,520,022 6,715,733
--------------- --------------- --------------
Total liabilities ...................... 39,527,513 116,698,590 367,693,986
COMMITMENTS AND CONTINGENCIES
(Notes 3 and 7)
STOCKHOLDERS' EQUITY (Notes 9, 10, 13 and 14):
Preferred stock, $.01 par value; 1,000,000
shares authorized; none issued and
outstanding ............................... -- -- --
Class A common stock, $.01 par value;
8,000,000 shares authorized; none issued
and outstanding ........................... -- -- --
Class B common stock, $.01 par value;
6,000,000 shares authorized; 2,149,332,
2,304,561 and 2,304,561 (unaudited) issued
and outstanding, respectively ............. 21,493 23,046 23,046
Class C common stock, $.01 par value; 300,000
shares authorized; 225,000 (unaudited)
issued and outstanding .................... -- -- 2,250
Additional paid-in capital .................. 78,902,382 88,065,805 95,063,555
Accumulated deficit ......................... (10,379,312) (28,809,096) (45,101,447)
--------------- --------------- --------------
Total stockholders' equity ............. 68,544,563 59,279,755 49,987,404
--------------- --------------- --------------
TOTAL ............................................ $108,072,076 $175,978,345 $417,681,390
=============== =============== ==============
See notes to consolidated financial statements.
F-3
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------------
Period From
April 20, 1993
(Date Of Period From
Inception) To Year Ended January 1, 1995 Six Month Period Ended
December 31, December 31, To August 31, Year Ended February 29, February 28,
1993 1994 1995 August 31, 1996 1996 1997
-------------- --------------- --------------- --------------- -------------- --------------
(Unaudited)
REVENUES:
Cable television .... $ 12,106 $ 240,193 $ 8,782,610 $ 25,893,401 $11,569,880 $ 17,208,297
Telecommunications.... -- 201,467 787,788 1,711,446 718,232 1,413,420
-------------- --------------- --------------- --------------- -------------- ---------------
Total revenues ...... 12,106 441,660 9,570,398 27,604,847 12,288,112 18,621,717
-------------- --------------- --------------- --------------- -------------- ---------------
OPERATING EXPENSES:
Cost of services .... 5,662 469,952 4,557,609 11,867,960 5,265,797 8,701,471
Customer support,
general and
administrative ..... 303,814 7,732,610 8,234,755 17,317,890 7,499,115 12,266,597
Depreciation and
amortization ....... 8,224 117,020 2,420,397 8,676,262 3,804,088 5,820,354
Nonrecurring
reorganization
costs (Note 1) ..... -- -- 3,819,916 2,318,383 825,741 --
-------------- --------------- --------------- --------------- -------------- ---------------
Total operating
expenses ........... 317,700 8,319,582 19,032,677 40,180,495 17,394,741 26,788,422
-------------- --------------- --------------- --------------- -------------- ---------------
LOSS FROM OPERATIONS ... (305,594) (7,877,922) (9,462,279) (12,575,648) (5,106,629) (8,166,705)
OTHER INCOME
(EXPENSE):
Interest expense
on convertible
notes payable to
stockholder
(Notes 4 and 9) -- -- (918,501) (5,342,208) (1,889,955) (6,907,852)
Other interest
expense ............ (2,658) (76,367) (349,297) (656,925) (321,008) (1,693,910)
Interest income
and other, net ..... 1,408 10,112 99,936 144,997 75,426 476,116
-------------- --------------- --------------- --------------- -------------- ---------------
LOSS BEFORE INCOME
TAXES ............... (306,844) (7,944,177) (10,630,141) (18,429,784) (7,242,166) (16,292,351)
INCOME TAX BENEFIT
(Note 8) ............ -- -- 469,502 -- -- --
-------------- --------------- --------------- --------------- -------------- ---------------
NET LOSS .............. $(306,844) $(7,944,177) $ (10,160,639) $(18,429,784) $(7,242,166) $(16,292,351)
============== =============== =============== =============== ============== ===============
NET LOSS PER COMMON
SHARE (Notes 2, 13
and 14) ............. $ (6.89) $ (8.30) $ (3.37) $ (7.01)
=============== =============== ============== ===============
WEIGHTED AVERAGE
NUMBER OF COMMON
SHARES OUTSTANDING
(Notes 2, 13 and 14). 1,474,554 2,219,770 2,149,332 2,323,207
=============== =============== ============== ===============
See notes to consolidated financial statements.
F-4
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
Class B Class C
Common Stock Common Stock
(Note 13) (Notes 13 and 14)
------------------------ ----------------------- Additional
Partnership Shares Par Shares Par Paid-In Accumulated
Capital Outstanding Value Outstanding Value Capital Deficit
-------------- ------------- --------- ------------- -------- ------------- ---------------
BALANCE, INCEPTION (APRIL 20,
1993) ...................... $ -- -- $ -- -- $ -- $ -- $ --
Contributions .......... 688,582 -- -- -- -- -- --
Net loss ............... -- -- -- -- -- -- (306,844)
-------------- ------------- --------- ------------- -------- ------------- ---------------
BALANCE, DECEMBER 31, 1993 .. 688,582 -- -- -- -- -- (306,844)
Contributions .......... 10,375,012 -- -- -- -- -- --
Net Loss of Partnership . -- -- -- -- -- -- (7,725,504)
Reorganization from
partnership .......... (11,063,594) 716,695 7,167 -- -- 3,024,079 8,032,348
Net loss ............... -- -- -- -- -- -- (218,673)
-------------- ------------- --------- ------------- -------- ------------- ---------------
BALANCE, DECEMBER 31, 1994 .. -- 716,695 7,167 -- -- 3,024,079 (218,673)
Issuance of stock upon debt
conversion, net of
transaction costs .... -- 1,120,985 11,210 -- -- 59,193,763 --
Sale and issuance of stock -- 311,652 3,116 -- -- 16,684,540 --
Net loss ............... -- -- -- -- -- -- (10,160,639)
-------------- ------------- --------- ------------- -------- ------------- ---------------
BALANCE, AUGUST 31, 1995 .... -- 2,149,332 21,493 -- -- 78,902,382 (10,379,312)
Issuance of stock upon debt
conversion ........... -- 171,162 1,712 -- -- 9,163,264 --
Contribution and
cancellation of shares . -- (15,933) (159) -- -- 159 --
Net loss ............... -- -- -- -- -- -- (18,429,784)
-------------- ------------- --------- ------------- -------- ------------- ---------------
BALANCE, AUGUST 31, 1996 .... -- 2,304,561 23,046 -- -- 88,065,805 (28,809,096)
Issuance of stock
(unaudited) .......... -- -- -- 225,000 2,250 6,997,750 --
Net loss (unaudited) ... -- -- -- -- -- -- (16,292,351)
-------------- ------------- --------- ------------- -------- ------------- ---------------
BALANCE, FEBRUARY 28, 1997
(unaudited) ............... $ -- 2,304,561 $23,046 225,000 $2,250 $95,063,555 $(45,101,447)
============== ============= ========= ============= ======== ============= ===============
See notes to consolidated financial statements.
F-5
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------
Period From
April 20, 1993
(Date Of Period From
Inception) To Year Ended January 1, 1995 Six Month Period Ended
December 31, December 31, To August 31, Year Ended February 29, February 28,
1993 1994 1995 August 31, 1996 1996 1997
------------- ------------- --------------- --------------- ------------ -------------
(Unaudited)
OPERATING ACTIVITIES:
Net loss ............................. $ (306,844) $ (7,944,177) $ (10,160,639) $ (18,429,784) $ (7,242,166) $(16,292,351)
Adjustments to reconcile net loss to
net cash flow used in operating
activities:
Depreciation and amortization ..... 8,224 117,020 2,420,397 8,676,262 3,804,088 5,820,354
Deferred tax benefit .............. -- -- (488,402) -- -- --
Noncash interest expense .......... -- -- 1,146,713 5,661,026 2,069,323 7,103,593
Increase (decrease) in cash from
changes in operating assets and
liabilities, net of effect of
business combinations:
Accounts receivable ............. (19,657) (58,300) (1,004,576) (1,369,646) (638,345) (566,244)
Prepaid expenses, deposits and
other assets ................. (19,025) (1,007,641) 180,363 (126,370) (369,387) (554,268)
Deferred revenue and other
liabilities .................. 11,059 164,106 894,993 906,413 565,957 269,117
Accounts payable and accrued
expenses ..................... 142,863 5,397,128 3,517,250 4,229,678 (2,550,085) 1,171,500
----------- ------------ ------------ ------------ ------------ ------------
Net cash flows used in
operating activities ....... (183,380) (3,331,864) (3,493,901) (452,421) (4,360,615) (3,048,299)
----------- ------------ ------------ ------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of businesses .............. -- (1,297,818) (49,974,397) (9,916,038) (5,793,484) (2,500,000)
Acquisition of intangible assets ..... -- (3,210,994) (608,345) (7,903,979) (3,994,366) (4,830,086)
Purchases and construction of property
and equipment ..................... (516,894) (6,067,215) (21,561,505) (54,217,352) (19,127,978) (20,095,260)
Purchase of restricted investments
(Note 14) ......................... -- -- -- -- -- (79,803,740)
----------- ------------ ------------ ------------ ------------ ------------
Net cash flows used in
investing activities ....... (516,894) (10,576,027) (72,144,247) (72,037,369) (28,915,828) (107,229,086)
----------- ------------ ------------ ------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from convertible notes
payable ........................... -- 15,000,000 62,823,304 73,437,817 32,523,994 23,700,000
Proceeds from issuance of
common stock ...................... -- -- 16,687,656 84 -- --
Payment on notes payable and
long-term obligations ............. -- (6,488,888) (6,855,767) (1,306,759) (464,393) (308,081)
Contributions received from
partners .......................... 688,582 10,375,012 -- -- -- --
Proceeds from notes payable and
long-term obligations ............. 52,394 -- -- -- -- --
Net proceeds from issuance of Senior
Notes and common stock (Note 14) .. -- -- -- -- -- 220,223,531
----------- ------------ ------------ ------------ ------------ ------------
Net cash flows provided by
financing activities ....... 740,976 18,886,124 72,655,193 72,131,142 32,059,601 243,615,450
----------- ------------ ------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................... 40,702 4,978,233 (2,982,955) (358,648) (1,216,842) 133,338,065
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ............................ -- 40,702 5,018,935 2,035,980 2,035,980 1,677,332
----------- ------------ ------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD ............................... $ 40,702 $ 5,018,935 $ 2,035,980 $ 1,677,332 $ 819,138 $135,015,397
=========== ============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION (Notes 3 and 9):
Cash paid during the period for:
Interest .......................... $ 2,658 $ 38,836 $ 119,725 $ 289,509 $ 141,190 $ 161,735
=========== ============ ============ ============ ============ ============
Taxes ............................. $ -- $ -- $ 18,900 $ -- $ -- $ --
=========== ============ ============ ============ ============ ============
Increase in capital lease obligations $ -- $ -- $ -- $ (878,988) $ 286,400 $ 480,026
=========== ============ ============ ============ ============ ============
Conversion of convertible debt and
partnership capital to common
stock:
Partnership capital ................. $ -- $ (3,031,246) $ -- $ -- $ -- $ --
=========== ============ ============ ============ ============ ============
Convertible debt and accrued
interest ........................ $ -- $ -- $(60,792,115) $ (9,165,805) $ -- $ --
=========== ============ ============ ============ ============ ============
Common stock ...................... $ -- $ 7,167 $ 11,210 $ 1,712 $ -- $ --
=========== ============ ============ ============ ============ ============
Additional paid-in capital, net of
transaction costs ............... $ -- $ 3,024,079 $ 59,193,763 $ 9,163,264 $ -- $ --
=========== ============ ============ ============ ============ ============
See notes to consolidated financial statements.
F-6
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
OpTel, Inc., a Delaware corporation, and subsidiaries (the "Company" or
"OpTel") is the successor of the cable television operations of Vanguard
Communications, L.P. ("Vanguard"). Vanguard commenced operations in April 1993.
On December 20, 1994, Vanguard contributed its cable television operations to
its wholly owned subsidiary, OpTel. The contribution to OpTel was recorded at
Vanguard's historical cost.
OpTel is a developer, operator and owner of private cable television and
telecommunications systems that utilize advanced technologies to deliver cable
television and telecommunications service to customers in multiple dwelling
units ("MDU"). The Company negotiates long-term, generally exclusive cable
television service agreements and nonexclusive telecommunications service
agreements with owners and managers of MDUs, generally for terms of up to 15
years. The company's primary markets are major metropolitan areas in Arizona,
California, Colorado, Florida, Illinois and Texas.
During the period from April 20, 1993 (date of inception) to March 31, 1995,
the Company was wholly owned by Vanguard. On March 31, 1995, VPC Corporation
("VPC") (a wholly owned subsidiary of Le Groupe Videotron Ltee ("Videotron") -
a Quebec corporation), acquired a 66.75% interest in the Company. VPC has
contributed additional capital and acquired OpTel's stock from Vanguard which
has increased its interest in the Company to 83.49% at August 31, 1996 (see
Note 9).
During 1995 and 1996, the Company relocated its corporate headquarters, began
relocating its customer service centers and completed several acquisitions. As a
result of these actions, significant nonrecurring costs were incurred primarily
relating to severance costs of former employees at the previous locations and
relocation and recruiting costs of employees at the new location.
In 1995, the Company elected to change its year-end to August 31 from
December 31 to conform to that of its new majority stockholder.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements include
the accounts of OpTel and its wholly owned and majority-owned subsidiaries and
limited partnerships. All significant intercompany accounts and transactions
have been eliminated. Amounts due to minority limited partners are included in
notes payable and long-term obligations.
Cash and Cash Equivalents -- Cash and cash equivalents of the Company are
composed of demand deposits with banks and short-term investments with
maturities of three months or less when purchased.
Property and Equipment -- Property and equipment are stated at cost, which
includes amounts for construction materials, direct labor and overhead, and
capitalized interest. When assets are disposed of, the costs and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Cost of maintenance and repairs is charged
to operations as incurred; significant renewals and betterments are capitalized.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the various classes of property and equipment as follows:
F-7
Headends............................................15 years
Telephone switches..................................10 years
Distribution systems and enhancements...............15 years
Computer software and equipment......................4 years
Other..........................................5 to 10 years
Intangible Assets -- Costs associated with licensing fees, commissions and
other direct costs incurred in connection with the execution of rights-of-entry
agreements to provide cable television and telecommunications service to MDUs,
the excess of purchase price over the fair value of tangible assets acquired and
other intangible assets are amortized using the straight-line method over the
following estimated useful lives:
Goodwill............................................20 years
Licensing fees and rights-of-entry costs....Life of contract
Deferred financing costs................Term of indebtedness
Other...........................................1 to 5 years
Management routinely evaluates its recorded investments for impairment based
on projected undiscounted cash flows and believes the investments to be
recoverable.
Federal and State Income Taxes -- Prior to August 2, 1996 the Company and its
corporate subsidiaries filed a consolidated federal income tax return. Beginning
August 2, 1996, in connection with VPC acquiring additional stock from Vanguard,
the Company will be included in VPC's consolidated federal income tax return.
For purposes of financial reporting, the Company records federal and state
income tax as if it were filing a separate return. Deferred tax assets and
liabilities are recorded based on the difference between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes,
referred to as temporary differences. Provision is made or benefit recognized
for deferred taxes relating to temporary differences in the recognition of
expense and income for financial reporting purposes. To the extent a deferred
tax asset does not meet the criterion of "more likely than not" for realization,
a valuation allowance is recorded.
Revenue Recognition and Deferred Revenue -- The Company recognizes revenue
upon delivery of cable television programming and telecommunications service to
subscribers. OpTel typically bills customers in advance for monthly cable
television services, which results in the deferral of revenue until those
services are provided.
Cost of Services -- System operating costs include programming,
telecommunications service costs and revenue sharing with owners of MDUs for
which OpTel provides cable television and/or telecommunications service.
Net Loss Per Common Share -- The computation of net loss per common share is
based on the weighted average number of common shares outstanding during the
period. No loss per share information is presented for the period the Company
was organized as a partnership. The net loss per common share, assuming full
dilution, is considered to be the same as primary since the effect of the
convertible notes payable to stockholder and common stock equivalents
outstanding for each period presented would be antidilutive. (See Note 13).
Acquisitions -- Acquisitions accounted for using the purchase method of
accounting include results of operations of the acquired businesses in the
accompanying consolidated financial statements from the dates of acquisition.
Identifiable tangible and intangible assets acquired and liabilities assumed are
recorded at their estimated fair value at the date of acquisition. The excess of
the purchase price over the net assets acquired is recorded as goodwill.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reporting amounts of certain assets,
liabilities, revenues and expenses. Actual results may differ from such
estimates.
F-8
Interim Financial Statements (Unaudited) -- The accompanying financial
statements for the interim periods ended February 29, 1996, and February 28,
1997 and related disclosures are unaudited and have been prepared in accordance
with generally accepted accounting principles for condensed interim financial
statements and pursuant to the rules and requirements of the Securities and
Exchange Commission. In the opinion of the Company, the unaudited information
reflects all adjustments that are of a normal recurring nature and that are
necessary to fairly present the financial position, results of operations, and
cash flows for the periods ended February 29, 1996, and February 28, 1997.
Reclassifications -- Certain reclassifications of prior year amounts have
been made to conform to the current year presentation.
New Accounting Pronouncements -- SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is
effective for fiscal years beginning after December 15, 1995, requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. SFAS No.
121 also requires that long-lived assets and certain identifiable intangibles to
be disposed of be reported at the lower of carrying amount or fair value less
cost to sell. The Company adopted SFAS No. 121 effective September 1, 1996, and
the impact of such adoption is expected to be insignificant to its financial
condition and results of operations.
3. ACQUISITIONS
On December 28, 1994, the Company acquired the stock of the operating
subsidiaries of International Richey Pacific Cablevision, Ltd. ("IRPC") by
assuming approximately $15,500,000 of liabilities, issuance of a note for
$1,000,000, payment of approximately $1,300,000 in cash and issuance of a
warrant for the right to purchase an ownership interest in Vanguard. IRPC may
exercise the warrant through December 28, 1997, at a price of $1,250,000. Upon
IRPC exercising the warrant, OpTel would be required to pay Vanguard $1,000,000.
Within the exercise period, Vanguard may call the warrant at a price of
$4,000,000. Upon Vanguard calling the warrant, OpTel would be required to pay
IRPC $1,000,000. If the warrant is neither exercised by IRPC nor called by
Vanguard, within 90 days of the expiration of the exercise period, IRPC may put
the warrant to OpTel at a price of $1,000,000. The warrant is recorded by OpTel
at its obligation under either situation of $1,000,000 at August 31, 1996.
Additionally, the $1,000,000 secured note payable was due to IRPC one year after
closing and is subject to adjustment based on the actual amount of assumed
liabilities. Based on the Company's current estimate of adjustments, no amount
has been paid as of August 31, 1996. The combined amounts due to IRPC are
included on the accompanying consolidated balance sheets in deferred acquisition
liabilities. The Company, as a result of the acquisition from IRPC, is a general
partner in limited partnership investments (the "Partnerships"). The operations
of these Partnerships have been consolidated with those of the Company. The
Company has the option to purchase the interest of each limited partner at
defined amounts ranging from 110% to 140% of each limited partner's initial
capital contribution for the first four years of the partnership agreements and
is required to purchase the interests at the end of the fifth year at 150% of
the initial capital contribution. From the date of initial capital contribution
until the date the Company purchases the interest of a limited partner, each
limited partner receives a guaranteed return equal to 10% per annum of their
initial capital contribution paid quarterly. During the period from January 1,
1995 to August 31, 1995 and the year ended August 31, 1996, OpTel paid
$2,114,431 and $392,403, respectively, to repurchase certain partnership
obligations.
On January 11, 1995, the Company purchased the assets of EagleVision, a
division of Nationwide Communications, Inc. ("NCI"). The purchase price
consisted of $15,200,000 in cash, the assumption of approximately $110,000 of
liabilities and a deferred payment due to NCI of not less than $6,000,000 and
not more than $10,000,000 based on the profitability of OpTel's assets in the
Houston, Texas market with certain adjustments. This deferred payment shall be
payable at NCI's option, either (a) following the sale of all or substantially
all of the EagleVision assets or the sale of a
F-9
majority of the outstanding voting capital of the OpTel subsidiary which
acquired EagleVision assets to a third party who is not an affiliate or (b) at
the conclusion of the fifth or sixth year following the acquisition. This
deferred payment is carried on the balance sheets in deferred acquisition
liabilities at the net present value of the estimated final payment with an
accretion of interest recorded to operations. As of the date of acquisition and
as of August 31, 1996, the estimated payment due was $6,000,000 with a net
present value at August 31, 1995 and 1996 of $3,928,500 and $4,502,770,
respectively. EagleVision's operations are located in the Houston, Texas, area.
On June 30, 1995, the Company purchased the stock of Sunshine Television
Entertainment, Inc. ("Sunshine") for $5,500,000 in cash and the assumption of
approximately $350,000 of liabilities. Sunshine's operations are located in the
Miami, Florida, area.
On July 31, 1995, the Company purchased the assets of Interface
Communications Group, Inc. and certain related entities ("Interface") for
$8,900,000 in cash and the assumption of approximately $30,000 of liabilities.
The operations of Interface are located in the Denver, Colorado, area.
On August 31, 1995, the Company purchased the general and limited partnership
interests of Triax Associates V L.P. ("Triax"), for $15,200,000 cash and the
assumption of approximately $100,000 of liabilities. The operations of Triax are
located in the Chicago, Illinois, area.
On January 30, 1996, the Company purchased the assets of Telecom Master L.P.
and Telecom Satellite Systems Corporation ("Telecom") for approximately
$5,700,000 in cash and the assumption of $100,000 of liabilities. The operations
of Telecom are located in the Dallas, Texas, area.
On August 2, 1996, the Company purchased certain assets of certain
subsidiaries of Wireless Holdings, Inc., and Videotron (Bay Area), Inc.,
companies that are 50% and 80% owned and controlled by Videotron, respectively,
for approximately $3,880,000. The amount paid represents the sellers' historical
cost which also approximates the acquired assets' estimated fair market value.
The operations of the acquired assets are located in the San Francisco,
California, and Tampa, Florida, areas.
The purchase price of certain of the above acquisitions are subject to final
adjustments for such items as working capital balances and number of subscribers
(see Note 6).
The pro forma effect of the acquisitions of Telecom, Wireless Holdings, Inc.,
and Videotron (Bay Area), Inc. would have an insignificant impact on the
consolidated results of operations of the Company for the eight months ended
August 31, 1995 and the year ended August 31, 1996.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
August 31,
--------------------------- February 28,
1995 1996 1997
---- ---- ----
(Unaudited)
Headends ...................... $18,281,508 $ 32,115,973 $ 39,839,545
Telephone switches ............ 2,535,497 4,976,699 6,163,888
Distribution systems and
enhancements ............... 15,337,808 36,372,848 42,819,704
Computer software and equipment 1,205,405 4,957,123 6,491,098
Other ......................... 2,183,117 5,813,345 6,792,364
Construction in progress ...... 9,903,862 25,434,861 29,360,714
----------- ------------ ------------
49,447,197 109,670,849 131,467,313
Less accumulated depreciation . (1,387,596) (5,871,199) (9,426,626)
----------- ------------ ------------
$48,059,601 $103,799,650 $122,040,687
=========== ============ ============
Total interest expense for 1995 and 1996 was $1,267,798 and $7,848,674,
respectively. Interest expense of $1,849,541 was capitalized during 1996.
F-10
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
August 31,
----------------------------- February 28,
1995 1996 1997
---- ---- ----
(Unaudited)
Goodwill ......................... $41,907,574 $47,344,322 $49,504,464
Licensing fees and rights-of-entry
costs ......................... 13,378,382 22,173,500 26,538,544
Deferred financing costs ......... -- -- 4,776,469
Other ............................ 1,322,382 1,649,989 2,129,529
----------- ------------ -----------
56,608,338 71,167,811 82,949,006
Less accumulated amortization .... (1,165,072) (5,291,808) (7,478,428)
----------- ------------ -----------
$55,443,266 $65,876,003 $75,470,578
=========== ============ ============
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consisted of the following:
August 31,
---------------------------- February 28,
1995 1996 1997
---- ---- ----
(Unaudited)
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 ............................ $1,022,408 $ 511,145 $ 359,265
Limited Partner Obligations (Note 3) ........... 991,071 633,134 671,362
Obligations under capital leases, net of amounts
representing interest of $273,455, 355,236 and
$402,242 (unaudited) for 1995, 1996 and
February 28, 1997, respectively ............... 835,944 1,299,062 1,548,202
13% Senior Notes due 2005 (unaudited)
(Note 14) ..................................... -- -- 218,036,458
----------- ----------- ------------
$2,849,423 $2,443,341 $220,615,287
========== ========== ============
Aggregate maturities of the Company's indebtedness are as follows as of
August 31, 1996:
Notes Payable Convertible Deferred
and Notes Payable Acquisition
Long-term to Stockholder Liabilities
Obligations (Note 11) (Note 3) Total
--------------- -------------- ------------- --------------
Fiscal year ending:
1997 ......... $1,288,992 $89,414,364 $1,017,252 $91,720,608
1998 ......... 510,444 -- 1,000,000 1,510,444
1999 ......... 455,523 -- -- 455,523
2000 ......... 169,191 -- 4,502,770 4,671,961
2001 ......... 17,802 -- -- 17,802
Thereafter ... 1,389 -- -- 1,389
--------------- -------------- ------------- --------------
Totals ....... $2,443,341 $89,414,364 $6,520,022 $98,377,727
=============== ============== ============= ==============
Convertible notes payable to stockholder includes $6,436,131 of accrued but
unpaid interest at August 31, 1996.
F-11
The Company leases office space and certain equipment under operating and
capital leases. The leases generally have initial terms of 3 to 20 years.
Equipment acquired under capital leases consists of the following:
August 31,
------------------------------
1995 1996
---- ----
Amount of equipment under capital leases ........................ $925,105 $1,717,161
Less accumulated amortization ................................... (93,962) (297,548)
----------- -------------
$831,143 $1,419,613
=========== =============
Minimum future obligations on operating leases at August 31, 1996, consist of
the following:
Operating
Leases
--------
Fiscal year ending:
1997 ..................................................... $ 1,546,033
1998 ..................................................... 1,481,102
1999 ..................................................... 1,359,637
2000 ..................................................... 1,086,160
2001 ..................................................... 896,703
Thereafter ............................................... 4,051,377
-----------
Total minimum lease payments .............................. $10,421,012
===========
Rental expense under operating leases for the periods ending August 31, 1995
and 1996 was $616,000 and $1,208,000, respectively.
7. COMMITMENTS AND CONTINGENCIES
Employment and Consulting Agreements -- Employment agreements with certain
executive employees provide for separation payments equal to 3 to 12 months of
the employee's annual salary if employment is terminated due to change of
control or without cause. However, stipulations for termination payment and
payment terms vary. The Company paid or accrued approximately $1,590,000 and
$297,000 in severance during 1995 and 1996, respectively, related to such
employment agreements. The severance costs are substantially the result of the
Company's acquisitions and the acquisition of the Company by VPC (see Notes 1
and 3).
Legal -- The Company is a defendant in certain lawsuits incurred in the
ordinary course of business. It is the opinion of the Company's management that
the outcome of the suits now pending will not have a material, adverse effect on
the operations, cash flows or the consolidated financial position of the
Company.
8. INCOME TAXES
The cumulative losses of Vanguard incurred prior to the transfer of its
assets to the Company on December 20, 1994, have been reported in the individual
income tax returns of Vanguard's partners. Upon transfer, the Company recorded
deferred taxes for the difference between the tax and book basis of the assets,
which was not material. Upon acquisition of the stock of the IRPC subsidiaries,
a deferred tax liability of $488,402 was recorded to recognize the excess of the
basis in the assets for financial reporting purposes over the tax basis of the
net assets acquired. During the period from January 1, 1995, to August 31, 1995,
the Company accumulated losses sufficient to offset these deferred liabilities;
accordingly, a tax benefit was recorded in the statement of operations.
Additionally, during the period ended August 31, 1995, the Company incurred
$18,900 of federal and state income tax expense.
F-12
Income tax expense (benefit) consists of the following for the period from
January 1, 1995 to August 31, 1995 and the year ended August 31, 1996:
1995 1996
------------- -------------
Current:
Federal ........................ $ -- $ --
State .......................... 18,900 --
------------ -------------
Total current tax expense ..... 18,900 --
Net deferred tax expense (benefit) (3,451,805) (4,470,008)
Change in deferred tax valuation
allowance ...................... 2,963,343 4,470,008
------------ -------------
Total income tax expense (benefit) $ (469,562) $ --
============ =============
A reconciliation of income taxes on reported pretax loss at statutory rates
to actual income tax expense (benefit) for the period from January 1, 1995 to
August 31, 1995 and the year ended August 31, 1996, is as follows:
1995 Rate 1996 Rate
--------------- ------- --------------- -------
Income tax at statutory rates ........... $(3,614,248) (34)% $(6,266,127) (34)%
State income taxes, net of federal tax
benefit ................................ 12,474 0 (833) 0
Valuation allowance ..................... 2,963,343 28 4,470,008 24
Expenses not deductible for tax purposes 168,869 2 1,796,952 10
--------------- ------- --------------- -------
Total income tax benefit ................ $ (469,562) (4)% $ -- 0%
=============== ======= =============== =======
The net deferred tax assets consist of the tax effects of temporary
differences related to the following:
August 31,
-----------------------------
1995 1996
------------- ------------
Allowance for uncollectible accounts receivable $ 160,894 $ 184,326
Equipment, furniture and fixtures .............. (742,900) (4,539,736)
Intangible assets .............................. (35,814) 105,249
Accrued employee compensation .................. 102,340 182,676
Net operating loss carryforwards ............... 4,374,934 12,371,690
IRPC deferred tax liability .................... (488,402) (488,402)
Other .......................................... (41,691) (16,434)
------------- ------------
Deferred tax asset before valuation
allowance ............................... 3,329,361 7,799,369
Valuation allowance ....................... (3,329,361) (7,799,369)
------------- ------------
Net deferred tax asset .................... $ -- $ --
============= ============
The following are the expiration dates and the approximate net operating loss
carryforwards at August 31, 1996:
Expiration Dates
Through:
2010 .................................................. $ 1,346,252
2011 .................................................. 11,521,202
2012 .................................................. 23,519,870
F-13
Realization of deferred tax assets is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. The Company is
unable to determine whether these accumulated losses will be utilized;
accordingly, a valuation allowance has been provided.
9. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER, STOCK ISSUANCE AND OTHER
TRANSACTIONS WITH STOCKHOLDERS (SEE NOTE 13)
From December 22, 1994 through March 31, 1995, the Company borrowed
$60,000,000 from VPC under a Senior Secured Convertible Note Agreement. The
note, with an original maturity of June 30, 1996, and the accrued interest of
$792,115 for the period from December 22, 1994 until conversion on March 31,
1995, was converted to 1,120,985 shares of common stock of OpTel on March 31,
1995. Concurrently, VPC purchased 105,667 shares of OpTel's common stock from
Vanguard. As a result of these transactions, VPC owned 66.75% of OpTel common
stock. Additionally, the Company incurred $1,587,142 of costs related to this
conversion of debt which was charged to additional paid-in capital.
On July 26, 1995, VPC invested $24,999,504 in the Company, of which
$16,687,656 represented VPC's purchase of an additional 311,652 shares of OpTel
common stock, and $8,311,848 represented a convertible note payable that bore
interest at 15% and was convertible to 155,229 shares of common stock at the
option of VPC on November 15, 1995 (extended to January 29, 1996). In connection
with the July 26, 1995, equity call, Vanguard had the option to fund its portion
to maintain its ownership interest at 33.25% by November 15, 1995 (extended to
January 29, 1996). The Company was required to use the proceeds from any
Vanguard contribution to repay the convertible note. On January 29, 1996,
Vanguard elected to let the option expire without funding its portion of the
equity call. On April 1, 1996, VPC converted the $8,311,848 note and accrued
interest of $853,957 into 155,229 shares of common stock.
During fiscal 1996, the Company issued $79,900,000 in convertible notes to
VPC all of which bear interest at 15%, compounded annually, generally with
principal and interest due on demand. As of August 31, 1996, $73,466,776 was
advanced to OpTel under these notes.
The principal and interest on convertible notes may be converted, subject to
anti-dilution adjustments and other terms, into Class B Common Stock (see Note
10) at the price at which common stock is first sold to the public in a public
offering ("IPO Date") or, after April 30, 1999, at a price equal to the quotient
of $225 million divided by the number of shares of common stock outstanding at
the conversion date.
Amounts due from stockholder of $541,586 as of August 31, 1996, represent
amounts paid by the Company on behalf of VPC. Such amounts were repaid by VPC in
October 1996.
In August 1996, the Company granted Vanguard a non-transferable option to
purchase 48,937 shares of Class B Common Stock at an exercise price of $53.55
per share, subject to adjustment. The option is exercisable at any time after
August 31, 1996 and expires on the earlier to occur of July 31, 1999 or 180 days
after the IPO Date.
In September 1996, the Company entered into a consulting agreement with a
former director of the Company who is a limited partner of Vanguard. In
connection therewith, the Company granted him a warrant to purchase up to 24,992
shares of Class A Common at an exercise price of $53.55 per share, subject to
adjustment, that is presently exercisable and expires on August 31, 1999.
VPC and an affiliate of Vanguard have each agreed to provide consultant,
advisory and management services for $350,000 per annum (plus travel expenses)
per party. This arrangement terminates on the earlier to occur of the IPO Date
or the date on which any public or institutional financing obtained by the
Company restricts the payment of fees or charges to affiliates of the Company.
F-14
10. STOCKHOLDERS' EQUITY
At August 31, 1996, the Class A Common Stock ("Class A stock") and Class B
Common Stock ("Class B stock") of the Company are identical in all respects and
have equal powers, preferences, rights and privileges except that each holder of
Class A stock is entitled to one vote for each share of Class A stock held, and
each holder of Class B stock is entitled to ten votes for each share of Class B
stock held. VPC and Vanguard (and their affiliates) are the only permitted
holders of Class B stock. Any Class B stock that is either sold or transferred
to any party other than the permitted holders automatically converts to a like
number of shares of Class A stock.
11. EMPLOYEE BENEFIT PLAN
401(k) Plan -- The OpTel 401(k) Plan (the "Plan"), established January 1,
1995, conforms to the provisions of the Employee Retirement Income Security Act
of 1974. It is a contributory tax deferred 401(k) plan. All employees are
eligible and may enter the Plan on the first day of the first full month of
employment, provided that they have attained the age of 21.
Each participant my elect to defer up to 15% of annual compensation up to the
annual contribution limit of the Internal Revenue Code. The Company matching
contribution is a discretionary amount to be annually determined by the Board of
Directors of the Company. The Company determined that, for the plan years ended
December 31, 1996 and 1995, it would match 50% of its employees' elective
contribution (to a maximum Company contribution of 3% of the employees'
compensation). For the years ended August 31, 1996 and 1995, the Company's match
of its employees' elective contributions were $187,577 and $80,886,
respectively.
12. FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirement of SFAS No. 107, "Disclosure About
Fair Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
August 31, 1995 August 31, 1996
------------------------------ ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
Assets:
Cash and cash equivalents .. $ 2,035,980 $ 2,035,980 $ 1,677,332 $ 1,677,332
Accounts receivable ........ 1,594,110 1,594,110 3,063,719 3,063,719
Liabilities:
Accounts payable ........... 2,370,976 2,370,976 5,647,024 5,647,024
Customer deposits and
deferred revenue ......... 1,258,120 1,258,120 2,167,253 2,167,253
Convertible notes payable to
stockholder .............. 17,949,690 17,950,000 89,414,364 89,415,000
Notes payable and long-term
obligations .............. 2,849,423 2,850,000 2,443,341 2,445,000
Deferred acquisition
liabilities .............. 6,174,295 6,175,000 6,520,022 6,525,000
F-15
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and customer deposits and deferred revenue approximates fair
value. The fair values of convertible notes payable to stockholder, notes
payable and long-term obligations and deferred acquisition liabilities are
estimated based on present values using applicable market discount rates or
rates that approximate what the Company could obtain from the open market. The
fair value estimates presented herein are based on pertinent information
available to management as of August 31, 1995 and 1996. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since the date presented, and therefore, current
estimates of fair value may differ significantly from the amounts presented
herein.
13. SUBSEQUENT EVENTS
On February 7, 1997 the Company approved a stock split effected in the form
of a stock dividend. Each share of outstanding Class B stock will receive
17.3768 additional shares. The number of authorized shares of Class A stock and
Class B stock was increased to 8,000,000 and 6,000,000, respectively. The
financial statements have been restated to reflect the stock split as if it had
occurred on December 20, 1994, the date the Company reorganized as a
corporation. Additionally, the Company authorized the issuance of 300,000 shares
of non-voting Class C Common Stock ("Class C stock").
14. ISSUANCE OF NOTES PAYABLE AND COMMON STOCK (UNAUDITED)
On February 14, 1997, the Company issued $225.0 million of 13% Senior Notes
Due 2005 ("Senior Notes"). The Senior Notes require semiannual interest payments
due on August 15 and February 15 of each year until their maturity on February
15, 2005. The Senior Notes are redeemable at the option of the Company generally
at a premium at any time after February 15, 2002 and can be redeemed, in part,
also at a premium, earlier upon the occurrence of certain defined events. The
Senior Notes are unsecured.
In connection with the issuance of the Senior Notes, the Company issued
225,000 shares of Class C stock. The portion of the net proceeds allocated to
the Class C stock is $7 million. Such amount has been recorded as stockholders'
equity and as a discount to the Senior Notes. As a result of issuing the Class C
stock, the Company will no longer be included in VPC's consolidated federal
income tax return.
Concurrent with the issuance of the Senior Notes, the Company was required to
deposit in an escrow account $79.6 million in cash that, together with the
proceeds from the investment thereof, will be sufficient to pay when due the
first six interest payments on the Senior Notes. Such amount is reflected as
restricted investments on the accompanying consolidated balance sheet.
F-16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of OpTel, Inc.:
We have audited the accompanying combined statements of operations and cash
flows of Richey Pacific Cablevision (the "Company") for the years ended December
31, 1993 and December 28, 1994. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements present fairly, in all
material respects, the results of operations and cash flows of Richey Pacific
Cablevision for the years ended December 31, 1993 and December 28, 1994, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
January 27, 1997
F-17
RICHEY PACIFIC CABLEVISION
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND DECEMBER 28, 1994
- ---------------------------------------------------------------------------------------
1993 1994
-------------- -------------
REVENUES .............................................. $ 3,913,967 $ 4,299,257
-------------- -------------
OPERATING EXPENSES:
Cost of services ...................................... 1,120,101 1,648,389
Customer support, general and administrative (Note 3).. 2,396,781 3,215,081
Depreciation and amortization ......................... 1,345,007 1,743,497
-------------- -------------
Total operating expenses ....................... 4,861,889 6,606,967
-------------- -------------
LOSS FROM OPERATIONS .................................. (947,922) (2,307,710)
INTEREST EXPENSE ...................................... (769,548) (1,218,719)
-------------- -------------
NET LOSS .............................................. $(1,717,470) $(3,526,429)
============== =============
See notes to combined financial statements.
F-18
RICHEY PACIFIC CABLEVISION
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND DECEMBER 28, 1994
- -------------------------------------------------------------------------------------------------
1993 1994
-------------- --------------
OPERATING ACTIVITIES:
Net loss ................................................... $(1,717,470) $(3,526,429)
Adjustments to reconcile net loss to cash flow provided by
operating activities:
Depreciation and amortization ........................... 1,345,007 1,743,497
Gain on sale of assets .................................. (6,889) (33,559)
Limited partners' interest .............................. 16,399 42,709
Increase (decrease) in cash from changes in operating
assets:
Accounts receivable ..................................... 14,880 (47,817)
Inventory ............................................... 10,812 23,020
Advances, deposits, and other ........................... 18,385 33,105
Advances -- officers .................................... (28,439) 65,210
Accounts payable and accrued liabilities ................ 819,665 1,138,870
Advance payments and deposits ........................... (27,264) 1,359
-------------- --------------
Net cash flows from operating activities ........... 445,086 (560,035)
-------------- --------------
INVESTING ACTIVITIES:
Purchases of cable systems, property, plant and equipment .. (1,349,954) (1,154,165)
Cable systems, property, plant and equipment sales ......... 714,594 137,633
Notes receivable ........................................... (14,414) --
-------------- --------------
Net cash flows from investing activities ........... (649,774) (1,016,532)
-------------- --------------
FINANCING ACTIVITIES:
Net borrowings under advances from related company ......... 49,826 (10,358)
Net changes to notes payable ............................... (16,325) 2,000,746
Additions to long-term debt ................................ 79,328 --
Principal payments on long-term debt ....................... (304,580) (282,640)
Additions to long-term debt -- related parties ............. 423,438 (63,657)
Other ...................................................... (16,396) (86,717)
-------------- --------------
Net cash flows from financing activities ........... 215,291 1,557,374
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................ 10,603 (19,193)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 8,590 19,193
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 19,193 $ --
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Conversion of accrued interest to long-term debt ........ $ 126,500 $ --
Conversion of trade payables to long-term debt .......... 290,221 --
Notes payable obligation assumed in acquisition of cable
systems, property, plant and equipment ................ 1,211,899 --
Additions to property by increase in limited partner
obligation ............................................ 150,962 512,672
Decrease in limited partnership interest by increase in
limited partner obligation ............................ 85,449 --
Long-term debt assumed in acquisition of cable systems,
property, plant and equipment ......................... -- --
Conversion of long-term debt to common stock ............ -- 2,958,112
See notes to combined financial statements.
F-19
RICHEY PACIFIC CABLEVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND DECEMBER 28, 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The combined financial statements of RICHEY
PACIFIC CABLEVISION (the Company) combine the accounts of Richey Pacific
Cablevision, Inc., IRPC-Texas, Inc., IRPC Texas-Ventana Inc. and IRPC-Arizona,
Inc. all of which are subsidiaries of International Richey Pacific Cablevision,
Ltd. (the Parent). All significant intercompany accounts and transactions have
been eliminated, except for transactions between RPC and the Parent. On December
28, 1994 all of the common stock of these entities was purchased by OpTel, Inc.
Results of operations for the period December 29, 1994 through December 31, 1994
are not material for comparative purposes.
Operations -- The Company's principal business operations include
constructing, purchasing, and operating private cable television systems in
California, Arizona and Texas.
Revenue Recognition -- Subscriber revenue is recognized on the accrual basis
and is recorded when the cable service has been received by its customers.
Included in subscriber revenue for the year ended December 31, 1993 is $100,000
of nonrecurring consulting services provided by the Company.
Depreciation and amortization -- Depreciation and amortization on cable
systems, property, plant and equipment is calculated using the straight-line
method over the estimated useful lives of the assets which range from three to
ten years. Cost of maintenance and repairs is charged to operations as incurred;
significant renewals and betterments are capitalized.
Income Taxes -- The Company adopted the provisions of the Financial
Accounting Standard Board's Statement No. 109, "Accounting for Income Taxes"
effective January 1, 1993. The effect of adopting this statement did not have
any impact on the results of operations or the Company's financial position. No
benefit of tax loss carryforwards has been recognized as realization is
uncertain. Additionally, the acquisition of the Company by OpTel will restrict
the utilization of tax loss carryforwards.
Investments in Limited Partnerships -- Investments in limited partnerships
have been consolidated with one of the combined companies and, accordingly, the
results of operations of the partnerships have been included in the combined
financial statements. (See Note 2).
F-20
2. INVESTMENTS
The Company, through Richey Pacific Cablevision, Inc. (RPCV), is a general
partner in limited partnership investments (the partnerships) and, as the
general partner, is to provide the management, technical and accounting support
for the partnerships. Compensation to be paid to RPCV for providing these
services includes receiving installation revenue, converter revenue, and
predetermined revenue per customer served, all as stated in the partnership
agreements. The operations and cash flows of the partnerships have been included
with those of the Company.
The partnership agreements prescribe that losses are shared in proportion to
the partnership capital balances. Income is shared as follows: for all, but one
of the partnerships, 50% to RPCV and 50% to the limited partners; for the other
partnership, 75% to RPCV and 25% to the limited partners. RPCV has the option to
purchase the interest of each limited partner at defined amounts ranging from
110% to 140% of each limited partner's initial capital contribution for the
first four years of the partnership agreements and is required to purchase the
interests at the end of the fifth year at 150% of the initial capital
contribution. From the date of initial capital contribution until the date RPCV
purchases the interest of a limited partner, each limited partner receives a
guaranteed return equal to 10% per annum of their initial capital contribution
paid quarterly. RPCV has agreed to provide the agent for the limited partners
with a carried interest in each partnership. This interest takes two forms; an
annual return equal to 5% of the funds invested by the limited partners and a
payment upon the sale of the systems equal to the proceeds received net of the
purchase cost of the limited partners' interest.
The Company has agreed to pay a broker dealer an annual fee equal to one
percent of the total capital raised for the partnerships.
3. RELATED PARTY TRANSACTIONS
Certain officers and shareholders of the Parent are owners of Richey
Construction Company which has advanced funds to the Company as needed for its
operations. Advances bear interest at 2% in excess of the prime rate, and are
unsecured. Additionally, Richey Construction Company provides accounting and
management services to the Company for which they were paid $48,000 per year.
4. COMMITMENTS AND CONTINGENCIES
At December 28, 1994, the Company had no material operating or capital leases
that extend beyond one year. The Company leases its office and warehouse
facilities in California on a month to month basis.
Rental expense under operating leases during the years ended December 31,
1993 and December 28, 1994, was approximately, $84,000 and $139,251,
respectively.
The Company is involved in certain claims and litigation. While the final
outcome with respect to these claims and litigation cannot be predicted with
certainty, it is the opinion of management, after consulting with its legal
counsel, that any ultimate liability will not have a material effect on the
combined financial statements of the Company.
F-21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of OpTel, Inc.:
We have audited the accompanying statements of revenues and expenses and
statements of cash flows of EagleVision (the "Company") for the years ended
December 31, 1993 and 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the revenues and expenses and cash flows of EagleVision for the years
ended December 31, 1993 and 1994, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Dallas, Texas
January 27, 1997
F-22
EAGLEVISION
STATEMENTS OF REVENUES AND EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
- ------------------------------------------------------------------------------
1993 1994
-------------- --------------
REVENUES .................................. $ 6,098,202 $ 6,616,392
-------------- --------------
EXPENSES:
Cost of services ........................ 1,793,644 2,085,753
Customer support, general and
administrative ....................... 3,815,106 3,543,252
Depreciation and amortization ........... 3,683,843 3,287,674
Loss on disposal of assets .............. 1,072,591 417,652
-------------- --------------
Total expenses .................. 10,365,184 9,334,331
-------------- --------------
EXCESS OF EXPENSES OVER REVENUES .......... $(4,266,982) $(2,717,939)
============== ==============
See notes to financial statements.
F-23
EAGLEVISION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
- ----------------------------------------------------------------------------------------------
1993 1994
-------------- --------------
OPERATING ACTIVITIES:
Excess of expenses over revenues ........................ $(4,266,982) $(2,717,939)
Adjustments to reconcile excess of expenses over revenues
to net cash flows provided by operations:
Depreciation and amortization ........................ 3,683,843 3,287,674
Loss on disposal of assets ........................... 1,072,591 417,652
Increase (decrease) in cash from changes in operating
assets:
Accounts receivable, net ........................... (20,128) (53,794)
Inventory .......................................... 194,518 (18,618)
Prepaid expenses ................................... (14,688) 9,591
Accounts payable ................................... (119,499) (152,153)
Accrued expenses and deferred revenues ............. 71,052 (66,398)
-------------- --------------
Net cash flows provided by operating activities . 600,707 706,015
-------------- --------------
INVESTING ACTIVITIES:
Purchases and construction of property and equipment .... (1,649,078) (474,315)
Other investing activities .............................. (102,745) 30,979
-------------- --------------
Net cash flows used for investing activities .... (1,751,823) (443,336)
-------------- --------------
FINANCING ACTIVITIES:
Net investment from Owner ............................... 1,229,719 (317,363)
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................. 78,603 (54,684)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............ -- 78,603
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR .................. $ 78,603 $ 23,919
============== ==============
See notes to financial statements.
F-24
EAGLEVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Related Information -- The accompanying financial
statements include the accounts of EagleVision (the Company), a division of
Nationwide Communications Inc. (NCI). The Company is a cable television system
operator serving the Metropolitan Houston, Texas area through franchise cable
and satellite master antenna television (SMATV) systems. On January 11, 1995,
OpTel, Inc. acquired the assets of the Company from NCI.
Depreciation and amortization -- Depreciation is calculated using the
Modified Accelerated Cost Recovery System (MACRS), an accelerated depreciation
method. When assets are disposed or retired, the costs and related accumulated
depreciation are removed and any resulting gain or loss is reflected in
operations for the period. Cost of maintenance and repairs is charged to
operations as incurred; significant renewals and betterments are capitalized.
Life
----------
Buildings and improvements .................... 31.5 years
Cable TV plant and equipment .................. 10 years
Headend equipment ............................. 10 years
Office furniture and equipment ................ 5-10 years
Vehicles ...................................... 5 years
Intangibles -- Intangible assets represent an allocation of the excess
purchase price over the fair value of certain operating assets and a franchise
agreement with the city of Houston acquired in connection with the purchase in
July 1990. These costs are amortized on a straight-line basis over approximately
eight years.
Operating Agreements -- The Company has obtained operating rights in Houston
and other markets through the purchase of these rights from others or by
entering into renewable operating agreements. Acquisitions of operating rights
are capitalized and amortized over the terms of the agreements which range from
3 to 18 years. When an MDU terminates an operating agreement, the cost and
related accumulated amortization are removed and any resulting gain or loss is
reflected in income for the period.
Revenue Recognition -- The Company recognizes subscriber revenue upon
delivery of programming. The Company bills customers in advance for monthly
services, which results in the deferral of revenue until those services are
provided.
Income Taxes -- The Company is included in a consolidated tax return filed by
NCI with its parent for federal tax purposes. The Company is not subject to
state and local income taxes. Since EagleVision is a division of NCI, NCI does
not allocate a tax provision or benefit to the Company. As such, the
accompanying financial statements do not reflect a benefit for taxes or any
current or deferred tax balances.
F-25
2. RELATED PARTY TRANSACTIONS
NCI has provided services to the Company, including legal, accounting,
general management, data processing, administration of benefit and insurance
programs and treasury services. In connection with these services, NCI charged
the Company $38,052 and $58,299 in 1993 and 1994 respectively. These charges
have been made based on a reasonable method of allocation, however, they are not
necessarily indicative of the level of expenses which might have been incurred
by the Company on a stand-alone basis. No charges for capital used to finance
the business are allocated to the Company.
Included in total expenses in the accompanying statements of revenues and
expenses is $360,000 and $343,000 for 1993 and 1994, respectively, relating to
noncompete agreements held by NCI which were obtained in connection with the
acquisition of EagleVision.
3. EMPLOYEE BENEFITS
The Company is a participant, together with other affiliated companies,
(collectively, Nationwide Enterprise), in a defined benefit pension plan
covering all employees who have completed at least 1,000 hours of service within
a 12-month period and who have met certain age requirements. The Company also
participates in the Nationwide Enterprise 401(k) savings plan which covers
substantially all employees. The Company recognizes amounts allocated by NCI
based on the number of employees as its net pension and retirement cost. The
annual pension and retirement expense allocated to the Company for 1993 and 1994
were $91,788 and $104,645 respectively.
4. LEASE COMMITMENTS
Effective September 1994, the Company entered into new lease agreements for
the use of certain office and warehouse space. The leases will expire January
31, 1997. The Company also leases certain office and phone equipment. Total rent
expense for all leases of the Company were approximately $67,000 and $112,000
for 1993 and 1994 respectively.
5. LEGAL MATTERS
NCI and EagleVision are involved in various legal actions in the ordinary
course of their business. These actions generally involve such matters as
property ownership and royalty payments. NCI believes these proceedings are
incidental to its business and will not result in adverse judgements that would
materially impact operating revenues and expenses. The primary responsibility
for such legal actions related to EagleVision (during NCI's ownership) remains
NCI's.
F-26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of OpTel, Inc.:
We have audited the accompanying statement of operations and cash flows of Triax
Associates V, L.P., (the "Company") for the year ended August 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements present fairly, in all material
respects, the results of operations and cash flows of Triax Associates V, L.P.,
for the year August 31, 1995, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Dallas, Texas
January 27, 1997
F-27
TRIAX ASSOCIATES V, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1995
- ------------------------------------------------------------------------------
1995
------
REVENUES ........................................................ $3,342,134
----------
OPERATING EXPENSES:
Cost of services .............................................. 923,597
Customer support, general and administrative (Note 3) ......... 1,155,866
Depreciation and amortization ................................. 1,181,753
----------
Total operating expenses .............................. 3,261,216
----------
INCOME FROM OPERATIONS .......................................... 80,918
INTEREST EXPENSE ................................................ (620,527)
----------
NET LOSS ........................................................ $ (539,609)
==========
See notes to financial statements.
F-28
TRIAX ASSOCIATES V, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED AUGUST 31, 1995
- -----------------------------------------------------------------------------
1995
----
OPERATING ACTIVITIES:
Net loss ................................................... $ (539,609)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization ......................... 1,181,753
Increase (decrease) in cash from changes in operating
assets:
Accounts receivable ................................. (4,316)
Prepaid expenses .................................... (13,342)
Accounts payable and other accrued expenses ......... 80,649
Subscriber prepayments and deposits ................. 13,855
-------------
Net cash flows from operating activities ......... 718,990
-------------
INVESTING ACTIVITIES:
Acquisition of intangibles ............................... (977,190)
Purchase of property, plant and equipment ................ (1,025,476)
-------------
Net cash flows from investing activities .............. (2,002,666)
-------------
FINANCING ACTIVITIES:
Proceeds from debt ....................................... 1,200,400
Advances from affiliate .................................. 48,038
-------------
Net cash flows from financing activities ............ 1,248,438
-------------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................. (35,238)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 76,650
-------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 41,412
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest ................... $ 659,338
=============
See notes to financial statements.
F-29
TRIAX ASSOCIATES V, L.P.
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
1. THE PARTNERSHIP
Triax Associates, V, L.P. (the "Partnership") is a Colorado limited
partnership formed for the purpose of owning, constructing and operating cable
television systems and satellite master antenna television ("SMATV") systems.
The Partnership allocates profits, losses, gains from capital events and cash
distributions among the partners in accordance with their "sharing fractions."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition -- Revenues are recognized in the period the related
services are provided to the subscribers.
Income Taxes -- No provision has been made for federal, state or local income
taxes because they are the responsibility of the individual partners. The
principal difference between tax and financial reporting net income (loss)
results primarily from the use of accelerated depreciation for tax purposes.
Depreciation and amortization -- Replacement, renewals and improvements are
capitalized and costs for repairs and maintenance are charged to operations when
incurred. Depreciation and amortization are calculated using the straight-line
method over the following estimated useful lives:
Life
----
Cable plant ......................... 5-10 years
Equipment ........................... 5 years
Leasehold improvements .............. 5 years
Vehicles ............................ 4 years
Intangible Assets -- Intangible assets are amortized using the straight-line
method over the following estimated useful lives:
Life
----
Operating rights .................... 15 years
Franchise costs ..................... 6-11 years
Noncompete agreements ............... 5 years
3. RELATED PARTY TRANSACTIONS
Triax Communications Corporation ("TCC"), a limited partner, has advanced
funds to the Partnership for working capital needs.
TCC provides management services to the Partnership for a fee equal to 7% of
gross revenues. Charges for such services amounted to $233,949. Additionally,
TCC allocated to the Partnership certain indirect costs incurred by TCC on
behalf of the Partnership which amounted to $40,516.
The Partnership purchases programming through TCC at rates which would be
available to the Partnership if purchased directly from the program suppliers.
4. LEASES
The Partnership leases office facilities, headend sites and other equipment
under noncancelable operating lease agreements, some of which contain renewal
options. Total rental expenses, including month-to-month rental arrangements,
was $34,961.
5. ACQUISITIONS
On December 30, 1994, the Partnership acquired certain assets of Diversified
Cable, Ltd., totalling 15 SMATV systems for $1,414,123, including closing costs.
The acquisition was accounted for under the purchase method of accounting.
F-30
No dealer, salesperson, or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus in connection with the offer made hereby, and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the information set forth herein or in the
affairs of the Company since the date as of which information is given in
this Prospectus. This Prospectus does not constitute an offer or a
solicitation by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is
unlawful to make such offer or solicitation.
------
TABLE OF CONTENTS
Page
------
Prospectus Summary ...................... 3
Risk Factors ............................ 14
The Exchange Offer ...................... 25
Use of Proceeds ......................... 33
Capitalization .......................... 33
Selected Consolidated Financial and
Operating Data ......................... 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................. 37
Business ................................ 47
Management .............................. 75
Principal Stockholders .................. 82
Certain Transactions .................... 86
Description of the Notes ................ 89
Book-Entry, Delivery and Form ........... 115
Exchange Offer; Registration Rights ..... 117
Certain Federal Income Tax Considerations . 119
Plan of Distribution .................... 119
Legal Matters ........................... 120
Experts ................................. 120
Index to Financial Statements ........... F-1
Until [25 days after effective date] all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
OPTEL, INC.
$225,000,000 OF 13%
SENIOR NOTES DUE 2005,
SERIES B
The Multi-Family Telecommunications Specialist
[LOGO]
VIDEO o VOICE o DATA
PROSPECTUS
DATED , 1997
OPTEL, Inc.
FINANCIAL STATEMENT SCHEDULES
Allowance for doubtful accounts Balance at Charged to Deductions-
beginning of costs and bad debt Balance at end
period expenses write-offs of period
-----------------------------------------------------------------
Period from April 20, 1993 (Date of Inception)
to December 31, 1993 - 238 - 238
Year Ended December 31, 1994 238 147,615 - 147,853
Eight Month Period Ended August 31, 1995 147,853 372,339 46,974 473,218
Year Ended August 31, 1996 473,218 1,376,835 1,307,919 542,134
Six Month Period Ended February 28, 1997 542,134 838,662 580,797 819,999
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that the Company will to
the fullest extent permitted by the DGCL, indemnify all persons whom it may
indemnify pursuant thereto. The Company's By-laws contain a similar provision
requiring indemnification of the Company's directors and officers to the fullest
extent authorized by the DGCL. The DGCL permits a corporation to indemnify its
directors and officers (among others) against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by them in connection with any action, suit or proceeding brought (or
threatened to be brought) by third parties, if such directors or officers acted
in good faith and in a manner they reasonably believed to be in or not opposed
to the best interests of the corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made for expenses (including attorneys'
fees) actually and reasonably incurred by directors and officers in connection
with the defense or settlement of such action if they had acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged liable to the Company unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses. The DGCL further provides that, to the extent any
director or officer has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in this paragraph, or in defense of
any claim, issue or matter therein, such person shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith. The Company has indemnification insurance under which
directors and officers are insured against certain liability that may occur in
their capacity as such.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
-------------
1.1 Purchase Agreement, dated February 7, 1997, between the Issuer and Salomon Brothers Inc and Merrill Lynch,
Pierce, Fenner & Smith.
3.1 Restated Certificate of Incorporation of the Issuer, together with all amendments thereto.
3.2 Bylaws of the Issuer.
4.1 Indenture, dated as of February 14, 1997, between the Issuer and U.S. Trust Company of Texas, N.A., as
Trustee
4.2 Form of Senior Note (included in Exhibit 4.1)
4.3 Escrow Agreement, dated as of February 14, 1997, between the Issuer and U.S. Trust Company of Texas, N.A.,
as Trustee and as Escrow Agent.
4.4 Registration Agreement, dated as of February 14, 1997, between the Issuer, Salomon Brothers Inc and Merrill
Lynch, Pierce, Fenner & Smith.
4.5 Common Stock Registration Rights Agreement, dated as of February 14, 1997, between the Issuer, VPC, GVL,
Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith.
5.1 Opinion of Kronish, Lieb, Weiner & Hellman LLP re: legality of securities offered.
10.1 Stockholders' Agreement, dated as of December 22, 1994, between VPC, Vanguard, the General Partner and
the Issuer.
10.2 Registration Rights Agreement, dated as of December 22, 1994, between the Issuer and Vanguard.
10.3 Settlement Agreement, dated as of August 1, 1996, between Vanguard, the General Partner, Pacific, VPC,
the Issuer and GVL.
10.4 Amendment, dated as of February 17, 1997, between Vanguard, the General Partner, Pacific, VPC, GVL and
the Issuer.
10.5 Form of Convertible Note (included as Exhibit B to the Amendment filed as Exhibit 10.4 hereto) and a list
of the issue dates and principal amounts of all outstanding Convertible Notes (included as Schedule 1
to the Amendment filed as Exhibit 10.4 hereto).
10.6 Warrant, dated as of December 29, 1994, between International Richey Pacific Capital Corporation and Vanguard.
10.7 Lease Agreement dated July 25, 1995 between Space Center Dallas, Inc. and the Issuer.
10.8 First Amendment to Lease Agreement dated August 8, 1996 between Space Center Dallas, Inc. and the Issuer.
10.9 Restated Stock Incentive Plan.
10.10 Annual Bonus Plan.
10.11 Medium Term Performance Plan.
10.12 Employment Agreement between Louis Brunel and the Issuer dated November 15, 1996.
10.13 Employment Agreement between Rory Cole and the Issuer dated January 3, 1997.
10.14 Employment Agreement between Michael Katzenstein and the Issuer dated September 18, 1995.
10.15 Employment Agreement between Julian Riches and the Issuer dated January 31, 1995.
10.16 Employment Agreement between William O'Neil and the Issuer dated February 8, 1995.
10.17 Separation and Consulting Agreement, dated as of September 1, 1996, between the Issuer and James A. Kofalt.
10.18 Warrant Agreement, dated as of September 1, 1997, between the Issuer and James A. Kofalt.
10.19 Assignment Agreement, dated as of February 14, 1997, among TVMAX Telecommunications, Inc. (TVMAX), Sunshine
Television Entertainment, Inc., Richey Pacific Cablevision, Inc., IRPC Arizona, Inc. and THI.
10.20 Equipment License and Services Agreement, dated as of February 14, 1997, between TVMAX and THI.
10.21 Form of Shareholders Option Agreement, dated as of February 14, 1997, between TVMAX and each of the shareholders
of THI, together with a list of the shareholders of THI.
10.22 Option Agreement, dated as of February 14, 1997, between TVMAX and THI.
10.23 City of Houston, Texas, Ordinance No. 97-285 dated March 19, 1997, granting TVMAX Communications (Texas),
Inc. a temporary permit to operate a Telecommunications Network.
II-2
(a) Exhibits
-------------
10.24 City of Houston, Texas, Ordinance No. 89-338 dated March 29, 1989 granting to PrimeTime Cable Partners
I, Ltd. the right to operate for 15 years a Community Antenna Television System, and subsequent ordinances
consenting to assignment of rights to Eaglevision and to TVMAX Communications (Texas), Inc.
12.1 Statement re: computation of ratio of earnings to fixed charges
21.1 List of subsidiaries of the Issuer.
23.1 Consent of Kronish, Lieb, Weiner & Hellman LLP is included in the opinion filed as Exhibit 5.1 to this
Registration Statement.
23.2 Consent of Goldberg, Godles, Weiner & Wright.
23.3 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney is set forth on the signature page of this Registration Statement.
25.1 Statement of Eligibility Under the Trust Indenture Act of 1939 on Form T-1.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.
(b) Financial Statement Schedule
The following Financial Statement Schedule is filed as part of the
Registration Statement.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
All other financial statement schedules have been omitted because the
required information is not present or not present in amounts to require
submission of the schedules, or because the information required is included in
the financial statements.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that paragraphs (i) and (ii) above do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Issuer pursuant to
Section 13 or Section 15(d) of the Exchange Act, that are incorporated by
reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
II-3
(4) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of this
Registration Statement through the date of responding to the request.
(5) To file an application for the purpose of determining eligibility of the
trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in
accordance with the rules and regulations prescribed by the Commission under
Section 305(b)(2) of the Trust Indenture Act of 1939, as amended.
(6) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
(7) That, for purposes of determining any liability under the Securities Act
of 1933, 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 the registrant 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.
(8) That, for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, on this 10th day
of April, 1997.
OPTEL, INC.
By: /s/ Louis Brunel
--------------------------------------
Louis Brunel
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated. Each person whose signature appears below under the
heading "Signature" constitutes and appoints Louis Brunel and Michael E.
Katzenstein or either of them, as true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any or all amendments to this
Registration Statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith, including, without limitation, any
registration statement for the same offering that is to be effective upon filing
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, with the
Commission, granting unto said attorneys-in-fact and agents, each acting alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, each acting alone, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
----------- ------- ------
Principal Executive Officer:
/s/ Louis Brunel President and Chief Executive Officer April 10, 1997
- ----------------------------
Louis Brunel
Principal Financial and
Accounting Officers:
/s/ Bertrand Blanchette Chief Financial Officer April 10, 1997
- ----------------------------
Bertrand Blanchette
/s/ Craig Milacek Controller April 10, 1997
- ----------------------------
Craig Milacek
Directors:
/s/ Claude Chagnon Chairman of the Board and Director April 10, 1997
- ----------------------------
Claude Chagnon
/s/ Louis Brunel Director April 10, 1997
- ----------------------------
Louis Brunel
/s/ Christian Chagnon Director April 10, 1997
- ----------------------------
Christian Chagnon
/s/ Pierre Collins Director April 10, 1997
- ----------------------------
Pierre Collins
/s/ Barry Porter Director April 10, 1997
- ----------------------------
Barry Porter
/s/ Gary Winnick Director April 10, 1997
- ----------------------------
Gary Winnick
II-5
EXHIBIT INDEX
Exhibit
Number Description Page
-------- -------------
1.1 Purchase Agreement, dated February 7, 1997, between the Issuer and Salomon Brothers Inc and
Merrill Lynch, Pierce, Fenner & Smith.
3.1 Restated Certificate of Incorporation of the Issuer, together with all amendments thereto.
3.2 Bylaws of the Issuer.
4.1 Indenture, dated as of February 14, 1997, between the Issuer and U.S. Trust Company of Texas,
N.A., as Trustee
4.2 Form of Senior Note (included in Exhibit 4.1)
4.3 Escrow Agreement, dated as of February 14, 1997, between the Issuer and U.S. Trust Company
of Texas, N.A., as Trustee and as Escrow Agent.
4.4 Registration Agreement, dated as of February 14, 1997, between the Issuer, Salomon Brothers
Inc and Merrill Lynch, Pierce, Fenner & Smith.
4.5 Common Stock Registration Rights Agreement, dated as of February 14, 1997, between the Issuer,
VPC, GVL, Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith.
5.1 Opinion of Kronish, Lieb, Weiner & Hellman LLP re: legality of securities offered.
10.1 Stockholders' Agreement, dated as of December 22, 1994, between VPC, Vanguard, the General
Partner and the Issuer.
10.2 Registration Rights Agreement, dated as of December 22, 1994, between the Issuer and Vanguard.
10.3 Settlement Agreement, dated as of August 1, 1996, between Vanguard, the General Partner,
Pacific, VPC, the Issuer and GVL.
10.4 Amendment, dated as of February 17, 1997, between Vanguard, the General Partner, Pacific,
VPC, GVL and the Issuer.
10.5 Form of Convertible Note (included as Exhibit B to the Amendment filed as Exhibit 10.4 hereto)
and a list of the issue dates and principal amounts of all outstanding Convertible Notes
(included as Schedule 1 to the Amendment filed as Exhibit 10.4 hereto).
10.6 Warrant, dated as of December 29, 1994, between International Richey Pacific Capital Corporation
and Vanguard.
10.7 Lease Agreement dated July 25, 1995 between Space Center Dallas, Inc. and the Issuer.
10.8 First Amendment to Lease Agreement dated August 8, 1996 between Space Center Dallas, Inc.
and the Issuer.
10.9 Restated Stock Incentive Plan.
10.10 Annual Bonus Plan.
10.11 Medium Term Performance Plan.
10.12 Employment Agreement between Louis Brunel and the Issuer dated November 15, 1996.
10.13 Employment Agreement between Rory Cole and the Issuer dated January 3, 1997.
10.14 Employment Agreement between Michael Katzenstein and the Issuer dated September 18, 1995.
10.15 Employment Agreement between Julian Riches and the Issuer dated January 31, 1995.
10.16 Employment Agreement between William O'Neil and the Issuer dated February 8, 1995.
10.17 Separation and Consulting Agreement, dated as of September 1, 1996, between the Issuer and
James A. Kofalt.
10.18 Warrant Agreement, dated as of September 1, 1997, between the Issuer and James A. Kofalt.
Exhibit
Number Description Page
-------- -------------
10.19 Assignment Agreement, dated as of February 14, 1997, among TVMAX Telecommunications, Inc.
(TVMAX), Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc., IRPC
Arizona, Inc. and THI.
10.20 Equipment License and Services Agreement, dated as of February 14, 1997, between TVMAX and
THI.
10.21 Form of Shareholders Option Agreement, dated as of February 14, 1997, between TVMAX and each
of the shareholders of THI, together with a list of the shareholders of THI.
10.22 Option Agreement, dated as of February 14, 1997, between TVMAX and THI.
10.23 City of Houston, Texas, Ordinance No. 97-285 dated March 19, 1997, granting TVMAX Communications
(Texas), Inc. a temporary permit to operate a Telecommunications Network.
10.24 City of Houston, Texas, Ordinance No. 89-338 dated March 29, 1989 granting to PrimeTime Cable
Partners I, Ltd. the right to operate for 15 years a Community Antenna Television System,
and subsequent ordinances consenting to assignment of rights to Eaglevision and to TVMAX
Communications (Texas), Inc.
12.1 Statement re: computation of ratio of earnings to fixed charges
21.1 List of subsidiaries of the Issuer.
23.1 Consent of Kronish, Lieb, Weiner & Hellman LLP is included in the opinion filed as Exhibit
5.1 to this Registration Statement.
23.2 Consent of Goldberg, Godles, Weiner & Wright.
23.3 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney is set forth on the signature page of this Registration Statement.
25.1 Statement of Eligibility Under the Trust Indenture Act of 1939 on Form T-1.
27.1 Financial Data Schedule.
99.1 Form of Letter of Transmittal.