1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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OPTEL, INC.
(Exact name of registrant as specified in its charter)
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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:
ERIC SIMONSON, ESQ. MICHAEL E. KATZENSTEIN, ESQ. JONATHAN A. SCHAFFZIN, ESQ.
KRONISH, LIEB, WEINER & HELLMAN LLP OPTEL, INC. CAHILL GORDON & REINDEL
1114 AVENUE OF THE AMERICAS 1111 W. MOCKINGBIRD LANE 80 PINE STREET
NEW YORK, NEW YORK 10036-7798 DALLAS, TEXAS 75247 NEW YORK, NEW YORK 10005
(212) 479-6000 (214) 634-3800 (212) 701-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES NUMBER OF SHARES OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED TO BE REGISTERED PER SHARE PRICE(1) REGISTRATION FEE
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Class A Common Stock, par
value $.01 per share.... $100,000,000 $29,500
==========================================================================================================================
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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OPTEL, INC.
CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF
REGULATION S-K, SHOWING THE LOCATION
IN THE PROSPECTUS OF THE ITEMS ON FORM S-1
NAME AND CAPTION IN FORM S-1 CAPTION OR LOCATION IN PROSPECTUS
---------------------------- ---------------------------------
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus..... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front Cover Page; Additional
Information; Outside Back Cover Page
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Underwriting
6. Dilution................................... Dilution
7. Selling Stockholders....................... N/A
8. Plan of Distribution....................... Outside Front Cover Page; Underwriting
9. Description of Capital Stock to be
Registered................................. Outside Front Cover Page; Prospectus
Summary; Description of Capital Stock;
Certain Federal Income Tax Considerations
10. Interests of Named Experts and Counsel..... Legal; Experts
11. Information with Respect to the
Registrant................................. Prospectus Summary; Risk Factors; Dividend
Policy; Capitalization; Selected
Historical Consolidated Financial and
Operating Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Principal Stockholders;
Certain Relationships and Related
Transactions; Description of Capital
Stock; Description of Certain
Indebtedness; Certain Market Information;
Financial Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ Management
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 5, 1998
PROSPECTUS
SHARES
OPTEL, INC. [LOGO]
CLASS A COMMON STOCK
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All of the shares (the "Shares") of Class A Common Stock, par value
$.01 per share (the "Class A Common Stock"), offered hereby (the "Offering") are
being offered by OpTel, Inc. ("OpTel" or the "Company"). Prior to the Offering,
there has been no public market for the Class A Common Stock of the Company. It
is currently estimated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. OpTel
intends to apply for quotation of the Class A Common Stock on the National
Association of Securities Dealers Automated Quotation System ("Nasdaq") National
Market System (the "Nasdaq National Market") under the symbol " " upon
effectiveness of the Registration Statement.
Immediately following the Offering, the Company will have outstanding shares
of two classes of common stock, the Class A Common Stock and the Class B Common
Stock, par value $.01 per share (the "Multi-Vote Common" and, together with the
Class A Common Stock, the "Common Stock"). The rights of the holders of the
Class A Common Stock and the Multi-Vote Common are substantially identical,
except that (i) holders of the Class A Common Stock are entitled to one vote for
each issued and outstanding share and holders of the Multi-Vote Common are
entitled to 10 votes for each issued and outstanding share and (ii) the
Multi-Vote Common is fully convertible into Class A Common Stock at any time at
the option of the holder or automatically upon the occurrence of a Conversion
Event (as defined herein), on a one-for-one basis. Except as provided by law,
holders of both classes vote together as one class on all matters submitted to a
vote of stockholders including the election of directors. See "Description of
Capital Stock."
Immediately following the Offering, Le Groupe Videotron Ltee ("GVL"), owner
of the second largest cable television operator in Canada, will own
approximately % of the outstanding Multi-Vote Common, representing
approximately % of the total voting power of the outstanding Common Stock.
See "Risk Factors -- Control by GVL" and "Principal Stockholders."
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY(2)
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Per Share........................................... $ $ $
- --------------------------------------------------------------------------------------------------------------------
Total(3)............................................ $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to an aggregate of additional shares of the Class A Common
Stock on the same terms and conditions as set forth above solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised
in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and
$ , respectively.
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The Shares are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if delivered and accepted by them and
subject to certain conditions. The Underwriters reserve the right to withdraw,
cancel or modify the Offering and to reject orders in whole or in part. It is
expected that delivery of the Class A Common Stock will be made against payment
therefor on or about , 1998, at the offices of Smith Barney Inc., 333
West 34th Street, New York, New York 10001.
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
CIBC OPPENHEIMER
, 1998
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES INCLUDING
ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY
ALSO ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET. SEE "UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information included elsewhere in this
Prospectus, including the Consolidated Financial Statements and the notes
thereto. As used in this Prospectus, the terms "Company" or "OpTel" mean OpTel,
Inc., a Delaware corporation, and its subsidiaries, except where the context
otherwise requires. Certain terms used herein are defined in the glossary
attached hereto as Appendix A. References to fiscal years throughout this
Prospectus are to the Company's fiscal years, which end on August 31 of each
calendar year. Unless otherwise indicated, the information in this Prospectus
(i) assumes an initial public offering price of $ per share, (ii) assumes
the Underwriters' over-allotment option will not be exercised, (iii) gives
effect to the conversion of the outstanding shares of OpTel's Class C Common
Stock, par value $.01 per share ("Non-Voting Common"), into shares of Class A
Common Stock upon consummation of the Offering, (iv) gives effect to the
conversion of the outstanding shares of OpTel's 9.75% Series A Preferred Stock,
par value $.01 per share ("Series A Preferred"), into shares of Multi-Vote
Common upon consummation of the Offering and (v) gives effect to the conversion
of the outstanding shares of OpTel's 8% Series B Preferred Stock, par value $.01
per share ("Series B Preferred"), into shares of Class A Common Stock promptly
following the consummation of the Offering. Prospective investors should
carefully consider the factors set forth in "Risk Factors." This Prospectus
contains "forward-looking" statements concerning the Company's operations,
economic performance and financial condition, which are subject to inherent
risks and uncertainties, including those identified under "Risk Factors."
THE COMPANY
OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone and cable television
services, to residents of multiple dwelling units ("MDUs") in the United States.
As a rapidly growing integrated communications provider ("ICP"), OpTel continues
to build upon its position as the largest provider of private cable television
services to MDUs in the United States. In each market that it serves, OpTel
seeks to become the principal competitor in the MDU marketplace to the incumbent
local exchange carrier ("ILEC") and the incumbent franchise cable television
operator by providing a package of voice, video and Internet access services at
competitive prices. OpTel believes its contractual relationships with MDU owners
and associations and its ability to deliver an integrated service offering to
MDU residents over its own networks provide it with a competitive advantage.
Industry sources estimate that annual revenues generated by the U.S.
communications industry in 1997 were approximately $223 billion (consisting of
approximately $192 billion in telecommunications revenues and $31 billion in
cable television revenues). The Company believes that a significant portion of
such revenue is attributable to residential users. OpTel recognizes the
opportunity to address the residential market by focusing on providing
integrated services to MDUs. MDUs comprise a wide variety of high density
residential complexes, including high- and low-rise apartment buildings,
condominiums, cooperatives, town houses and mobile home communities. According
to 1990 U.S. Census Bureau data, there are more than 13.2 million dwelling units
in MDUs with greater than 10 dwelling units in the United States. Within the MDU
market, the Company focuses on MDUs of 150 or more dwelling units ("Large
MDUs"). Based on industry sources, the Company believes that, within its
existing markets, as of March 25, 1998, there were approximately 3.0 million
dwelling units within these Large MDUs.
The Company is currently building telecommunications infrastructure in its
serviced markets and expects, by the end of calendar 1999, to be in a position
to offer facilities based telecommunications services in each of its major
markets. The Company presently offers services where it has a right of entry
agreement ("Right of Entry") with an MDU owner to provide its cable television
and/or telecommunications services. The Company classifies a unit as "passed" if
it is within an MDU for which the Company has a Right of Entry and the Company
has connected and activated the equipment necessary to provide services. As of
April 30, 1998, the Company had 369,090 units passed for cable television
services. At that date, OpTel had 202,716 cable television subscribers and 7,399
telecommunication lines in service.
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OpTel began operations in April 1993 with a strategy of consolidating the
then fragmented "private cable" television, or non-franchise cable television,
industry serving MDUs. Securing long-term Rights of Entry has been an integral
element of this strategy. The Company's Rights of Entry typically have original
terms of 10 to 15 years (five years for Rights of Entry with condominium
associations). The weighted average unexpired term of the Company's Rights of
Entry was approximately eight years as of April 30, 1998 (assuming the Company's
exercise of available renewal options). Rights of Entry generally provide
financial incentives to the property owners to promote and sell the Company's
cable television and telecommunications services to MDU residents. The Company
provides video programming to MDUs primarily under exclusive Rights of Entry.
The Company initially offered shared tenant telecommunications services ("STS")
to MDUs serviced under telephone Rights of Entry utilizing remote private branch
exchange ("PBX") switches. In accordance with its communications strategy, the
Company has begun the process of migrating its STS traffic to its own central
office switches and its own network facilities. The Company intends to grow its
business by negotiating additional Rights of Entry to serve MDUs currently
served by other providers and newly-constructed MDUs, by acquiring other
existing operators that serve MDUs, as appropriate, and by providing MDUs it
currently serves for cable television with additional services, such as
telephone and Internet access.
The Company currently provides cable television and telecommunications
services in several metropolitan areas including Houston, Dallas-Fort Worth, Los
Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta and Orlando-Tampa. The Company has commenced offering central
office switched local exchange services in Houston and Dallas-Fort Worth and is
licensed as a competitive local exchange carrier ("CLEC") in each of its other
major markets. The Company selected its current markets based upon their growth
characteristics, competitive conditions, MDU concentrations, favorable
demographics and regulatory environment.
Since April 1995, OpTel has been indirectly majority owned by Le Groupe
Videotron Ltee ("GVL"), which also owns the second largest cable television
operator in Canada (based on number of subscribers). GVL has invested
approximately $250 million in OpTel in the form of equity capital and
subordinated convertible notes (including accrued interest). See "-- Recent
Developments." These invested amounts have been critical to OpTel's growth. In
addition, key members of the Company's management team gained experience in the
competitive offering of telecommunications and cable television to residential
markets while serving as executives of a GVL affiliate in the United Kingdom.
OpTel management's extensive operating experience in both the telecommunications
and cable television industries, including the construction and design of
networks and sales and customer support, provides OpTel with significant
expertise in managing and developing an infrastructure to support voice, video
and Internet access operations.
OpTel was incorporated in Delaware in July 1994 as the successor to a
California limited partnership that was organized in April 1993. The Company's
principal offices are located at 1111 W. Mockingbird Lane, Dallas, Texas 75247,
and its telephone number is (214) 634-3800.
STRATEGY
OpTel's goal is to become the nation's largest ICP focusing on MDU markets.
OpTel's strategy for achieving this goal includes the following key components:
Provide an Integrated Service Offering. OpTel believes that by utilizing a
single advanced network infrastructure it can be among the first to market a
competitive integrated package of voice and video services in its target
markets. OpTel focuses exclusively on the integrated communications needs of the
MDU resident, which distinguishes OpTel from other competitors. OpTel believes
that MDU residents are attracted by bundled service offerings, competitive
pricing and integrated billing. The Company plans to supplement its voice and
video offerings with high speed Internet access in all of its serviced markets.
The Company also intends to introduce integrated billing of its bundled services
during fiscal 1999.
Deploy Cost Effective Networks. OpTel's networks are specifically designed
to provide services to MDUs. The Company uses a combination of point-to-point
microwave transmission equipment and fiber optic cable in order to offer a
single source for video, voice telecommunications and eventually high speed
Internet access services. A substantial amount of the capital required to
provide property-specific voice and video
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services to an individual MDU is invested only after the Company and the owner
of the MDU have entered into a Right of Entry for the MDU. The capital
expenditures required to serve an MDU are therefore, to a large extent,
"success-based" and will only be incurred shortly before properties are first
brought into service or as needed to bring non-network served MDUs onto the
Company's networks. In markets served by the Company's microwave networks, OpTel
expects that the incremental capital required for it to launch central office
switched telecommunications services and to connect customers will be lower than
that of its competitors. Unlike copper- and fiber-based systems that require
installation and maintenance of a significant amount of wire and cable, the
Company's microwave networks generally will not require the installation and
maintenance of physical wires between the MDU based equipment and the Company's
Network Hubs. As a result, OpTel expects to enjoy a lower network cost structure
than certain of its competitors.
Pursue Focused Marketing Strategy. Strategic relationships with MDU owners
are a key element of the Company's marketing strategy. The Company negotiates
long term Rights of Entry with MDU owners under which the Company obtains, among
other things, the exclusive right to provide cable television services to an MDU
or group of MDUs and an undertaking by the MDU owner to promote OpTel as the
preferred telecommunications alternative to the ILEC within the MDU. The Rights
of Entry generally provide MDU owners with financial incentives to work closely
with the Company to promote its products and services. The Company offers
prospective customers the opportunity to subscribe for Company services at the
same time they sign their unit leases. The Company believes this access, coupled
with customer preference for a single source of cable television and
telecommunications services, significantly enhances its customer marketing
efforts. In addition, the Company markets to MDU residents through (i) direct
mail and direct sales campaigns, (ii) special promotion and sign-up parties,
(iii) establishment of a physical presence at a MDU and (iv) distribution of
point-of-sale marketing materials.
Provide Superior Customer Service. The Company believes that superior
customer service is important to MDU residents. Therefore, the Company has
dedicated resources to providing services that attract and retain subscribers.
The Company has a national customer service center staffed with knowledgeable
representatives to address the needs of customers 24-hours-a-day,
seven-days-a-week. The Company has established direct lines to facilitate rapid
response to calls initiated by MDU owners and managers. The Company also has
dedicated local service teams that provide prompt installation and response to
customer service calls. Because the Company believes that the best way to
control the quality and consistency of technical and field services is to train
and supervise the service technicians, the Company relies primarily on its own
personnel to perform these functions. The Company also has established stringent
staff training procedures, including its Operational Excellence continuous
improvement program, and internal customer service standards.
Pursue Selective Acquisitions and Strategic Relationships. To expand its
markets and to achieve critical mass in its existing markets, the Company often
evaluates opportunities to make acquisitions. Since May 1996, the Company has
completed six acquisitions representing approximately 700 MDUs served and
103,000 subscribers. In addition, the Company has entered into strategic
relationships for the delivery of high speed Internet access services, and will
continue to evaluate other alliances including those permitting it to host
additional third-party traffic on its switches.
RECENT DEVELOPMENTS
The Company commenced operating a central office telephone switch in
Houston in September 1997 and has migrated most of its telecommunications
subscribers in the Houston market to this switch. The Company has recently
commenced operating a central office telephone switch in the Dallas-Fort Worth
market and intends to migrate the MDUs it currently serves through PBX switches
in that market to that central office switch over the coming months.
On April 13, 1998, OpTel closed the initial phase of the acquisition of the
private cable television and telecommunications service agreements and related
assets of Interactive Cable Systems, Inc. ("ICS") in Houston, Dallas-Fort Worth,
Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta, Orlando-Tampa, Indianapolis, Austin and greater Washington,
D.C. (the "ICS
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Operations"). As of May 31, 1998, OpTel had acquired approximately 66,000 cable
television and telecommunications units under contract (or approximately 72% of
the approximately 90,000 units under contract to be acquired). A corresponding
percentage of the aggregate $80.8 million purchase price remains in escrow
subject to release upon fulfillment of closing conditions. While the Company
expects the acquisition of the remaining units to be completed over the next few
months, the acquisition of these units is subject to certain conditions,
including the receipt of third party consents, and there can be no assurance
that the balance of the acquisition will be consummated. See "Risk
Factors -- Risks Associated with Acquisitions." The $80.8 million purchase price
is comprised of approximately $4.5 million in cash, approximately $16.1 million
in shares of Class A Common Stock, approximately $59.4 million in shares of
Series B Preferred plus assumed liabilities of $.8 million. Promptly following
the consummation of the Offering, the Series B Preferred will be converted into
shares of Class A Common Stock (based on an assumed initial public offering
price of $ per share).
Effective March 1, 1998, the Company's majority stockholder, VPC
Corporation ("VPC"), an indirect wholly-owned subsidiary of GVL, exchanged
$139.2 million of the Company's 15% Convertible Notes (the "GVL Notes")
(including accrued interest), constituting all of the outstanding GVL Notes, for
approximately 6,962 shares of Series A Preferred. Upon consummation of the
Offering, the Series A Preferred will be converted into shares of
Multi-Vote Common (based on an assumed initial public offering price of
$ per share).
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THE OFFERING
Class A Common Stock offered by
the Company...................... shares
Common Stock outstanding after
the Offering..................... shares of Class A Common
Stock(1)
________ shares of Multi-Vote Common(2)
shares of Common Stock(1)
Use of Proceeds.................. The Company intends to use the net proceeds
from the Offering for capital expenditures
related to the purchase and installation of
communications equipment and for general
corporate purposes, including working
capital related to its expansion into new
markets. See "Use of Proceeds."
Proposed Nasdaq National Market
Symbol...........................
Risk Factors..................... For a description of certain risks inherent
in an investment in the Class A Common
Stock, see "Risk Factors."
- ---------------
(1) Excludes (i) 15,657.87 shares of Class A Common Stock issuable upon exercise
of presently exercisable stock options granted to officers, employees and
consultants at a weighted average exercise price of $84.10 per share and
(ii) 35,127.22 shares of Class A Common Stock issuable upon exercise of
presently exercisable warrants at a weighted average exercise price of
$59.81 per share.
(2) The Multi-Vote Common is fully convertible into Class A Common Stock, on a
one-for-one basis, at any time at the option of the holder or upon the
occurrence of a Conversion Event. Upon consummation of the Offering, each of
(i) the transfer of beneficial ownership of the Multi-Vote Common to any
person or entity that is not a Permitted Holder (defined generally as
certain affiliates of GVL and Caisse de depot et placement du Quebec
("Caisse")) or (ii) any event or circumstance which results in such holder
of Multi-Vote Common ceasing to be a Permitted Holder will be a Conversion
Event. See "Description of the Capital Stock."
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The summary consolidated financial data as of and for the eight month
period ended August 31, 1995 and the years ended August 31, 1996 and 1997 have
been derived from the consolidated financial statements of the Company included
elsewhere herein and audited by Deloitte & Touche LLP, independent auditors, as
set forth in their report thereon also included herein. The summary historical
consolidated financial and operating data presented below as of and for the six
month periods ended February 28, 1997 and 1998 have been derived from unaudited
consolidated financial statements of the Company. In the opinion of management,
the unaudited consolidated financial statements have been prepared on the same
basis as the audited financial statements and include all adjustments, which
consist only of normal recurring adjustments, necessary for the fair
presentation of the Company's financial position and results of operation for
these periods. In 1995, the Company changed its fiscal year end to August 31 to
match that of its majority stockholder. As a result of the change in fiscal year
end and the Company's history of growth through acquisitions, the Company's
historical financial results are not directly comparable from period to period,
nor are they indicative of future results of operations in many respects. The
unaudited pro forma consolidated operations data for the year ended August 31,
1997 and for the six months ended February 28, 1998 and the unaudited pro forma
balance sheet data as of February 28, 1998 give effect to the acquisition of
100% of the ICS Operations and the conversion of the GVL Notes into Series A
Preferred, subject to the assumptions stated in the notes set forth below, as
though such events occurred at the beginning of or on the date of the period
presented. The unaudited pro forma as adjusted balance sheet data as of February
28, 1998 give effect to each of the above pro forma adjustments as well as the
Offering subject to the assumptions stated in the notes set forth below as if
such events had occurred on such date. The unaudited pro forma consolidated
statements of operations data and the unaudited pro forma balance sheet data are
not necessarily indicative of what the actual results of operations or financial
position of the Company would have been had such events occurred at such dates,
nor do they purport to represent the Company's results of operations or
financial position for future periods. The following information should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," the Consolidated Financial Statements of
the Company and the notes thereto and the Pro Forma Financial Information,
appearing elsewhere in this Prospectus.
HISTORICAL PRO FORMA
---------------------------------------------------------------- -------------------------
EIGHT MONTH YEAR ENDED SIX MONTHS
PERIOD ENDED AUGUST 31, SIX MONTHS ENDED YEAR ENDED ENDED
AUGUST 31, ------------------- FEBRUARY 28, FEBRUARY 28, AUGUST 31, FEBRUARY 28,
1995 1996 1997 1997 1998 1997(1) 1998(1)
------------ -------- -------- ------------ ------------ ---------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED OPERATIONS
DATA
Revenues:
Cable television........ $ 8,783 $ 25,893 $ 36,915 $ 17,208 $ 25,247 $ 51,334 $ 32,853
Telecommunications...... 788 1,711 2,922 1,414 1,644 5,131 2,561
-------- -------- -------- -------- -------- -------- --------
Total
revenues...... 9,571 27,604 39,837 18,622 26,891 56,465 35,414
Operating expenses:
Cost of services........ 4,558 11,868 19,202 8,702 12,419 28,149 16,273
Customer support,
general and
administrative....... 12,055 19,636 28,926 12,267 15,855 35,529 18,836
Depreciation and
amortization......... 2,420 8,676 14,505 5,820 10,759 25,952 16,482
-------- -------- -------- -------- -------- -------- --------
Total operating
expenses................ 19,033 40,180 62,633 26,789 39,033 89,631 51,591
-------- -------- -------- -------- -------- -------- --------
Loss from operations...... (9,462) (12,576) (22,796) (8,167) (12,142) (33,166) (16,177)
Interest expense,
net(2).................. (1,169) (5,854) (25,739) (8,125) (21,885) (10,677) (12,316)
-------- -------- -------- -------- -------- -------- --------
Loss before income
taxes................... (10,631) (18,430) (48,535) (16,292) (34,027) (43,843) (28,493)
Net loss(3)............... $(10,161) $(18,430) $(48,535) $(16,292) $(34,027) $(59,047) $(28,493)
-------- -------- -------- -------- -------- -------- --------
Dividends on preferred
stock................... -- -- -- -- -- (14,640) (8,645)
Loss attributable to
common equity........... $(10,161) $(18,430) $(48,535) $(16,292) $(34,027) $(58,483) $(37,138)
======== ======== ======== ======== ======== ======== ========
Basic and diluted loss per
share of common
equity(4)............... $ (6.89) $ (8.30) $ (19.98) $ (7.01) $ (13.20) $ (22.54) $ (13.54)
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HISTORICAL PRO FORMA
------------------------- PRO FORMA AS ADJUSTED
AUGUST 31, FEBRUARY 28, FEBRUARY 28, FEBRUARY 28,
1997 1998 1998(1) 1998(1)(5)
---------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents....................... $ 87,305 $ 18,388 $ 13,844 $ 13,844
Restricted investments.......................... 67,206 54,509 54,509 54,509
Short-term investments.......................... -- 111,154 111,154
Property, plant and equipment, net.............. 160,442 203,778 225,578 225,578
Intangible assets............................... 82,583 110,051 169,744 169,744
Total assets.................................... 403,416 505,171 583,701
Convertible notes due stockholder............... 129,604 139,244 -- --
Total indebtedness.............................. 358,177 492,667 354,216 354,216
Total liabilities............................... 383,051 518,833 382,554 383,098
Stockholders' equity............................ 20,365 (13,662) 201,147
SIX MONTHS
EIGHT MONTH YEAR ENDED ENDED
PERIOD ENDED AUGUST 31, FEBRUARY 28,
AUGUST 31, -------------------- ---------------------
1995 1996 1997 1997 1998
------------ -------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA
Net cash flows used in operating
activities....................... $ (3,494) $ (453) $ (15,935) $ (3,048) $ (15,215)
Net cash flows used in investing
activities....................... (72,144) (72,037) (143,125) (107,229) (171,447)
Net cash flows provided by
financing activities............. 72,655 72,131 244,688 243,615 117,745
Capital expenditures(6)............ 22,170 62,121 71,506 24,925 37,900
EBITDA(7).......................... (7,042) (3,900) (8,291) (2,347) (1,383)
AS OF
---------------------------------------------
AUGUST 31,
------------------------------ FEBRUARY 28,
1995 1996 1997 1998
-------- -------- -------- ------------
OPERATING DATA
CABLE TELEVISION
Units under contract(8)............................ 173,324 241,496 295,149 372,138
Units passed(9).................................... 170,336 225,433 254,032 320,286
Basic subscribers.................................. 75,944 114,163 132,556 172,643
Basic penetration(10).............................. 44.6% 50.6% 52.2% 53.9%
Premium units(11).................................. 39,753 60,641 95,150 144,832
Pay-to-basic ratio(11)(12)......................... 52.3% 53.1% 71.8% 83.9%
Average monthly revenue per basic subscriber(13)... $ 22.84 $ 22.70 $ 24.94 $ 27.57
TELECOMMUNICATIONS
Units under contract(8)............................ 10,322 20,945 39,831 61,082
Units passed(9).................................... 9,116 12,364 16,572 17,551
Lines(14).......................................... 2,650 4,126 6,185 6,375
Line penetration(15)............................... 29.1% 33.4% 37.3% 36.3%
Average monthly revenue per line(16)............... N/A $ 42.10 $ 47.23 $ 43.64
- ---------------
(1) Gives effect to the acquisition of 100% of the ICS Operations and the
conversion of the GVL Notes into Series A Preferred. As of April 30, 1998,
the acquisition of approximately 72% of the ICS Operations had been
consummated. See "Risk Factors -- Risks Associated with Acquisitions."
(2) Interest expense, net is reflected net of interest income and interest
capitalized in property, plant and equipment. Includes interest expense on
the GVL Notes of approximately $919,000, $5,342,000, $15,204,000,
$6,907,000 and $9,640,000 for the eight month period ended August 31, 1995,
the years ended August 31, 1996 and 1997 and the six months ended February
28, 1997 and 1998, respectively.
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(3) The Company had no taxable income for the periods reported. The Company
reported an income tax benefit of approximately $469,000 for the eight
month period ended August 31, 1995.
(4) Loss per share has been restated to reflect the adoption of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share."
(5) Gives effect to the Offering. The conversion of Non-Voting Common into
Class A Common Stock and the Series A Preferred into Multi-Vote Common upon
consummation of the Offering and the Series B Preferred into Class A Common
Stock promptly following consummation of the Offering will have no impact
on stockholders' equity.
(6) Capital expenditures include expenditures on property, plant and equipment
together with intangible assets excluding expenditures for business
acquisitions.
(7) EBITDA represents earnings before interest expense (net of interest income
and amounts capitalized), income tax benefits, depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
or an alternative to net loss, each as defined by generally accepted
accounting principles. In addition, the measure of EBITDA presented herein
may not be comparable to other similarly titled measures by other
companies. The Company believes that EBITDA is a standard measure commonly
reported and widely used by analysts, investors and other interested
parties in the cable television and telecommunications industries.
Accordingly, this information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance
relative to other companies in its industry.
(8) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into Rights
of Entry for the provision of cable television and telecommunications
services, respectively, but which the Company has not yet passed and which
the Company expects to pass within the next five years. At this time
substantially all units under contract for telecommunications are also
under contract for cable television.
(9) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications systems,
respectively. The difference between units under contract and units passed
represents units for which Rights of Entry have been entered into, but
which are not yet connected and activated for cable television and
telecommunications services, respectively.
(10) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(11) Beginning with the year ended August 31, 1997, to be consistent with most
other cable television providers, the Company revised the method of
reporting premium penetration to include all premium units in the
calculation. Historically the calculation excluded premium channels that
were provided to customers as part of an expanded basic line up or other
special arrangements. Prior years have not been restated.
(12) Pay-to-basic ratio is calculated by dividing the total number of premium
units by the total number of basic subscribers.
(13) Represents average monthly revenue per the average number of basic
subscribers for the fiscal periods ended as of the date shown.
(14) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line. The Company has revised its method of
reporting lines to reflect only one line in service where multiple
customers share a single line. The Company has restated the number of lines
previously reported to reflect this change.
(15) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.
(16) Represents average monthly revenue per the average number of lines for the
fiscal periods ended as of the date shown. Information with respect to the
telecommunications business for the period ended August 31, 1995 is not
available.
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RISK FACTORS
Any investment in the Class A Common Stock offered hereby involves a high
degree of risk. Prospective investors should consider carefully the following
factors in addition to other information set forth elsewhere in this Prospectus.
LIMITED OPERATIONS OF CERTAIN SERVICES; HISTORY OF NET LOSSES AND NEGATIVE CASH
FLOW
OpTel's business commenced in 1993. Historically, substantially all of
OpTel's revenues were derived from providing cable television services. The
Company's telephone and Internet access services only recently have been
initiated or their availability only recently expanded in new market areas.
OpTel expects to increase substantially the size of these operations in the near
future. Prospective investors, therefore, have limited historical financial
information about OpTel upon which to base an evaluation of OpTel's performance
in the markets and for the services that will be its principal focus in the
future. Given OpTel's limited experience operating telecommunications networks,
there can be no assurance that it will be able to compete successfully in the
telecommunications industry.
The development of OpTel's business and the expansion of its networks will
require substantial capital, operational and administrative expenditures, a
significant portion of which may be incurred before the realization of revenues.
These expenditures will result in negative cash flow until an adequate customer
base is established and revenues are realized. Although its revenues have
increased in each of the last three years, OpTel has incurred substantial
up-front operating expenses for marketing, customer operations, administration
and maintenance of facilities, general and administrative expenses and
depreciation and amortization in order to solicit and service customers in
advance of generating significant revenues. As a result of these factors, the
Company has generated operating losses of $5.6 million, $22.8 million, $12.6
million, and $9.5 million for the quarter ended February 28, 1998, fiscal 1997,
fiscal 1996 and the eight months ended August 31, 1995, respectively, as its
cable television and telecommunications customer base has grown. The Company
reported positive EBITDA of $0.1 million for the quarter ended February 28, 1998
as compared with negative EBITDA of $8.3 million, $3.9 million and $7.0 million
for fiscal 1997, fiscal 1996 and the eight months ended August 31, 1995,
respectively. There can be no assurance that OpTel will achieve or sustain
profitability or positive EBITDA in the future. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL INDEBTEDNESS; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES;
ABILITY TO SERVICE DEBT
The Company's indebtedness is substantial in relation to its stockholders'
equity and cash flow. As of April 30, 1998, the Company had total consolidated
indebtedness of approximately $385 million (including approximately $125 million
under the $150 million senior secured credit facility (the "Senior Credit
Facility") which the Company obtained from a syndicate of financial institutions
in December 1997 and $219 million principal amount of 13% Senior Notes Due 2005
(the "Senior Notes")) and stockholders' equity of approximately $192 million.
The Company's earnings were insufficient to cover its fixed charges by
approximately $51 million for fiscal 1997 and $35 million for the six month
period ended February 28, 1998. See "Capitalization" and "Selected Historical
Consolidated Financial and Operating Data."
The Senior Credit Facility contains financial maintenance requirements and
both the Senior Credit Facility and the indenture governing the Senior Notes
(the "Indenture") impose certain restrictions on the operations and activities
of the Company. See "Description of Certain Indebtedness." The Company's ability
to meet its financial maintenance covenants and to make scheduled payments of
principal of, or to pay interest on, or to refinance, its indebtedness depends
upon the success of its business strategies and its future performance, which to
a significant extent are subject to general economic, financial, competitive,
regulatory and other factors beyond its control. There can be no assurance that
the Company will be able to generate the substantial increases in cash flow from
operations that will be necessary to service its indebtedness. In the absence of
such operating results, the Company could face substantial liquidity problems
and might be required to raise additional financing through the issuance of debt
or equity securities. Further, the Company expects that it may need to refinance
the principal amount of both the Senior Credit Facility and the Senior
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14
Notes at their respective maturities. There can be no assurance that the Company
will be successful in raising such financing when required or that the terms of
any such financing will be attractive. See "-- Significant Capital Requirements
and Need for Additional Financing" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The degree to which OpTel is leveraged could have adverse consequences to
holders of the Common Stock, including the following: (i) a substantial portion
of OpTel's cash flow from operations will be dedicated to the payment of the
principal of and interest on its indebtedness thereby reducing funds available
for other purposes, (ii) OpTel's vulnerability to changes in general economic
conditions or increases in prevailing interest rates could be increased, (iii)
OpTel's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes could
be impaired, and (iv) OpTel may be more leveraged than certain of its
competitors, which may be a competitive disadvantage.
SIGNIFICANT CAPITAL REQUIREMENTS AND NEED FOR ADDITIONAL FINANCING
The Company will require substantial capital on a continuing basis to
finance cable television and telecommunications network expansion related to
subscriber and market growth, to upgrade existing facilities to desired
technical and signal quality standards and to finance any acquisitions of other
operators. The Company believes, based on its current business plan, that the
net proceeds from the Offering, together with its cash on hand and availability
under the Senior Credit Facility, will provide the Company with sufficient
financial resources to fund its capital requirements through the third quarter
of fiscal 2000. However, the Company's future capital requirements will depend
upon a number of factors, including the Company's success in obtaining new
Rights of Entry, the extent of its telecommunications roll out, the size and
timing of any acquisitions, marketing expenses, staffing levels and customer
growth, as well as other factors that are not within the Company's control, such
as competitive conditions, changes in technology, government regulation and
capital costs. The Company expects to fund additional capital requirements
through internally generated funds and public or private debt and/or equity
financing. There can be no assurance, however, that OpTel will be successful in
raising sufficient debt or equity when required or on terms that it will
consider acceptable. Moreover, the terms of OpTel's outstanding indebtedness
impose certain restrictions upon OpTel's ability to incur additional
indebtedness or issue additional stock. See "Description of Certain
Indebtedness." In addition, GVL has the power to prevent the Company from
obtaining additional debt or equity financing. See "-- Control by GVL." Failure
to generate or raise sufficient funds may require OpTel to delay or abandon some
of its future expansion or expenditures, which would have a material adverse
effect on its growth and its ability to compete in the cable television and
telecommunications industries. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
RISKS ASSOCIATED WITH ACQUISITIONS
OpTel expects to continue to make acquisitions of strategically important
businesses in the future when sufficiently attractive opportunities arise.
Acquisitions may divert the resources and management time of OpTel and will
require integration of the acquired operations with OpTel's existing networks
and services. There can be no assurance that any acquisition of assets,
operations or businesses, including the acquisition of the ICS Operations, will
be successfully integrated into OpTel's operations. The Company typically has
acquired businesses that were privately held by entrepreneurs, many of which
businesses were without the same regulatory compliance practices and internal
accounting controls and procedures as the Company. Accordingly, the Company
frequently is required to take remedial actions, which may include the
expenditure of funds and take extensive time to implement. In general, the
Company factors the costs associated with these matters into the terms of its
acquisitions, including, where practicable, through indemnification rights.
However, there can be no assurance that the Company's results of operations will
not be adversely affected by these or other matters arising from past or future
acquisitions. Consistent with its consolidation strategy, OpTel is currently
evaluating and often engages in discussions regarding various acquisition
opportunities. These acquisitions may be funded by cash on hand and/or through
the issuance of OpTel's debt and/or equity securities. It is possible that one
or more of such possible future acquisitions, if completed, could adversely
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affect OpTel's cash flow, or increase OpTel's debt, or that such an acquisition
could be followed by a decline in the market value of OpTel's securities.
OpTel recently closed the initial phase of its acquisition of the ICS
Operations. A portion of the purchase price paid for the acquisition of the ICS
Operations was deposited in escrow subject to the closing of the balance of the
acquisition. The consummation of the balance of the acquisition is subject to
certain conditions, including the receipt of third party consents, and there can
be no assurance that the balance of the acquisition will be consummated. This
prospectus contains certain pro forma information which gives effect to the
acquisition of 100% of the ICS Operations. This pro forma information is not
indicative of the actual results or financial position that would have been
achieved had the acquisition in fact been consummated at the beginning of the
periods presented. As of April 30, 1998, the acquisition of approximately 72% of
the ICS Operations had been consummated. There can be no assurance that the
Company will consummate the acquisition of all or part of the balance of the ICS
Operations.
RISK ASSOCIATED WITH TELECOMMUNICATIONS STRATEGY
The Company is currently introducing central office switched
telecommunications services to MDUs served by its existing networks. The Company
believes that a successful introduction of these telecommunications services is
important to its long-term growth. Its success will be dependent upon, among
other things, the Company's ability to assess markets, design and install
telecommunications networks, including switches, obtain cooperation of the
ILECs, when needed, and obtain any required government authorizations and
permits, all in a timely manner, at reasonable costs and on satisfactory terms
and conditions, and the willingness of MDU residents to accept a new provider of
telecommunications services. There can be no assurance that the Company will be
able to successfully introduce central office switched telecommunications
services in each of its markets in a timely manner in accordance with its
strategic objectives and failure to do so could have a material adverse effect
on the Company. Specific risks associated with the Company's telecommunications
strategy include:
Switch Installation and Network Enhancement; Lack of Redundant Switches. An
essential element of the Company's telecommunications strategy is the provision
of switched local exchange service. The Company has recently commenced operating
central office switches in Houston and Dallas-Fort Worth and intends to
implement central office switches in substantially all of its major markets by
the end of calendar year 1999. In connection with the implementation of central
office switches in additional markets, the Company will be reconfiguring its
microwave networks in such markets to carry bi-directional voice traffic. The
Company intends to use certain components of its existing infrastructure to
deliver bi-directional transmission utilizing microwave frequencies, principally
in the 23GHz band. While the Company believes this frequency and other required
frequencies are available for license on the paths that will be required, the
Company has not yet commenced frequency coordination in each of its markets and
there can be no assurance regarding path or frequency availability. In addition,
there can be no assurance that the installation of the required switches and the
reconfiguration of the network will be completed on schedule. The failure of the
Company to successfully reconfigure its microwave networks and to have its
switches operational on a timely basis could have a material adverse effect upon
the Company's ability to expand its telecommunications services. In addition,
the Company intends initially to install only one switch in each market. As a
result, a switch failure which disables both the primary and redundant
capabilities of a Company switch may have a material adverse effect on the
Company's ability to provide telecommunications services in the affected market
which may continue for an indefinite period. The Company may seek to enter into
contracts with other telecommunications service providers to provide backup
capabilities in the event of a switch failure. However, there can be no
assurance that the Company will be able to successfully negotiate such
agreements or that such agreements will be available on favorable terms. See
"Business -- Network Architecture."
Reliance On Third Parties. As part of its telecommunications configuration,
the Company may transport telephone traffic across municipal boundaries or local
access and transport areas ("LATAs") which may require the Company to have
multiple interconnection agreements. While the Company has entered into
interconnection agreements with ILECs serving portions of its markets, the
Company is currently negotiating agreements for the interconnection of its
networks with the network of other ILECs in certain of the
13
16
metropolitan areas the Company serves. There can be no assurance that the
Company will be able to successfully negotiate interconnection agreements with
the ILEC or any other local exchange carrier ("LEC") in each market where the
Company plans to offer central office switched telecommunications services or
that it will be able to do so on favorable terms. In addition, the Company has
experienced delays and difficulties accessing inside wiring used or owned
exclusively by the ILEC even in circumstances where it has a Right of Entry. The
failure to negotiate the necessary interconnection agreements or gain access to
inside wiring used or owned exclusively by the ILEC could have a material
adverse effect upon the Company's ability to expand its telecommunication
services. Currently, the Company provides local telephone service as an STS
provider in most of its markets. STS providers generally use the ILEC's
facilities (although in many states CLECs can now supply STS operators with
facilities) to provide local telephone service as a reseller, subject to state
regulation. If LECs were no longer required to provide tariffed services to STS
providers or if STS-type service classifications were to be eliminated, the
Company's telephone operations could be materially adversely affected. The
Company relies on the services of a third-party vendor to provide certain
carrier-to-carrier billing services. The failure by such vendor to accurately
bill interexchange carriers' ("IXCs") access charges could have a material
adverse effect on the Company.
Uncertainties Related to Reciprocal Compensation. The Telecommunications
Act of 1996, as amended (the "Telecom Act"), requires ILECs to provide
reciprocal compensation to other carriers for local traffic terminated on such
other carrier's network. Notwithstanding this requirement, a number of ILECs
have taken the position that traffic terminated to Internet service providers
("ISPs") is not local traffic. Competitive carriers generally have been
successful in challenging this position before the public utility commissions
("PUCs") in several states. However, this issue is under consideration and
subject to review at the Federal Communications Commission (the "FCC"), various
state PUCs and state and federal courts. There can be no assurance that traffic
terminated to an ISP will not ultimately be held to be exempt from the
reciprocal compensation contribution requirements.
Potential 911, E-911 and Intrusion Alarm Liability. The Company delivers
local exchange service, including access to emergency ("911") services, to MDU
residents through either its central office switches or PBX switches installed
by the Company at each property. Mechanical or electrical defects, power
failures or catastrophic events may temporarily disrupt operation of the
Company's switches, preventing, delaying or impeding access to 911 service. In
many jurisdictions, telecommunications carriers are required to implement
services which permits a 911 operator to immediately identify the location of
the caller ("E-911 service"). To provide E-911 service at an MDU, the
telecommunications service provider or its agent must maintain a database with
certain information relating to the MDU residents. The failure of the Company or
its agent to maintain such database in a timely and accurate manner could
prevent, delay or impede the operation of E-911 service. In addition, because of
the configuration of the Company's telecommunications networks, the Company's
telecommunications traffic may cross more than one E-911 jurisdiction. This will
require the Company to coordinate among these various jurisdictions. There can
be no assurance that the Company will not be liable for damage to property or
personal injuries that may directly or indirectly result from any failure of 911
or E-911 service to operate properly. Moreover, the Company may provide 911,
E-911 or operator services by contracting such services from other carriers in
its markets. The providers of these services will generally require the Company
to indemnify them for any losses or liability incurred in connection with such
services except for those caused exclusively by the gross negligence or
malfeasance of the carrier. In addition, the Company currently provides certain
intrusion alarm services through subcontractors. There can be no assurance that
the Company will not be liable for any property damage or personal injuries that
may result from intrusion alarm malfunctions or from a subcontractor's failure
to appropriately monitor the intrusion alarm systems under contract.
RISKS ASSOCIATED WITH RIGHTS OF ENTRY
The Company's business depends upon its ability to enter into and exploit
favorable new long-term Rights of Entry for demographically attractive MDUs and
to exploit and renew its existing Rights of Entry. Its success in doing so may
be affected by a number of factors, including (i) the extent of competition in
the provision of multichannel television and telecommunications services, (ii)
its ability to identify suitable MDUs and contract with their owners, (iii) the
continuing demographic attractiveness of the markets in
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which the Company has chosen to focus its business, (iv) occupancy rates in the
MDUs to which it provides services, (v) its ability to maintain superior levels
of customer service, (vi) the absence of material adverse regulatory
developments and (vii) the enforceability of the material terms of its Rights of
Entry, including exclusivity provisions. Although the Company does not believe
that any of its existing arrangements will be cancelled or will not be renewed
as needed in the near future, cancellation or non-renewal of certain of such
arrangements could materially adversely affect the Company's business in any
such affected area. In addition, the failure by the Company to enter into and
maintain any such arrangements for a particular network which is already under
development may affect the Company's ability to acquire or develop that network.
See "Business -- Competition" and "-- Regulation."
The Company's Rights of Entry generally provide that the Company will have
the exclusive right to provide residents within the applicable MDU with
multichannel television services and, where Rights of Entry extend to
telecommunications services, an undertaking by the MDU owner to promote OpTel as
the preferred telecommunications alternative to the ILEC. While the Company
believes that the exclusivity provisions in its cable television Rights of Entry
are now generally enforceable under applicable law, current trends at the state
and federal level suggest that the future enforceability of these provisions may
be uncertain. Certain states in which the Company operates, including Illinois
and Florida (for condominiums only), and certain cities and municipalities in
states in which the Company operates, have adopted "mandatory access" laws that
provide that no resident of an MDU may be denied access to programming provided
by incumbent franchise cable systems, regardless of any rights granted by an MDU
owner to another multichannel television operator. Texas has adopted a
"mandatory access" law for state certified telecommunications service providers.
In addition, Virginia prohibits private cable television operators from entering
into revenue sharing or up front incentive payment arrangements with MDU owners.
The ICS Operations included several MDUs located in Virginia. Further, the FCC
has initiated a notice of proposed rule making seeking comment on whether the
FCC should adopt regulations restricting exclusive contracts. While the
constitutionality of present "mandatory access" laws is uncertain, there can be
no assurance that such laws will not be adopted elsewhere or on bases which may
be upheld as constitutional. There can be no assurance that legislative,
regulatory or judicial actions which challenge the enforceability of these
provisions will not have a material adverse effect on the Company's business.
Broad mandatory access would likely increase the Company's capital costs
associated with new Rights of Entry if installing duplicate wiring were required
and result in competitive services being offered at MDUs where the Company
presently has exclusive rights of entry. See "-- Regulation."
In a number of instances individual Rights of Entry are subordinate by
their terms to indebtedness secured by the MDU, with the effect that enforcement
of the security interest or default under such indebtedness could result in
termination of such Right of Entry. Bankruptcy of an MDU owner could also result
in rejection of a Right of Entry as an "executory contract." Moreover, the terms
of a number of the Company's Rights of Entry require it to remain competitive
with other competitors in that market in general or competitive in terms of
price of offering, technology, number of programming channels and levels of
service. To meet these requirements, the Company could be required to upgrade
its networks and equipment, which would require capital expenditures. The
failure to remain competitive under any of these standards in a market could
result in a loss or cancellation of the related Right of Entry. Such losses or
cancellations could, in the aggregate, have a material adverse effect on the
Company's business. See "Business -- Strategic Relationships with MDU Owners."
DISTANCE AND WEATHER LIMITATIONS; LINE OF SIGHT; AVAILABILITY OF TRANSMISSION
SITES
Point-to-point microwave transmission requires a direct line of sight
between two dishes comprising a link and is subject to distance and rain
attenuation. The Company expects that its average coverage radius of Network
Hubs will be approximately five miles, depending on local conditions, and it is
expected that the Company's Network Hubs will utilize power control to increase
signal strength and mitigate the effects of rain attenuation. In areas of heavy
rainfall, transmission links are engineered for shorter distances and greater
power to maintain transmission quality. The reduction of path link distances to
maintain transmission quality may increase the cost of service coverage. While
these increased costs may not be significant in all cases, such costs may render
point-to-point microwave transmissions uneconomical in certain circumstances.
15
18
Due to line of sight limitations, the Company currently plans to install
its dishes and antennas on the rooftops of buildings and on other tall
structures. The Company expects generally to be able to construct intermediate
links or use other means to resolve line of sight and distance issues. However,
these limitations may render point-to-point links uneconomical in certain
locations.
The Company's microwave network expansion plans require the Company to
lease or otherwise obtain permission to install equipment at rooftop and tower
transmission sites in substantially all of its markets. The availability of
these sites is subject to market conditions and may be subject to zoning and
other municipal restrictions. The Company believes that as additional wireless
video and telecommunications providers emerge, competition for such transmission
sites will continue to increase. There can be no assurance that the necessary
sites will be available or that the terms upon which access to such sites may be
obtained will be acceptable.
RAPID TECHNOLOGICAL CHANGES AND UNCERTAIN MARKET DEVELOPMENT
The multichannel television and telecommunications industries are subject
to rapid and significant changes in technology and frequent service innovations.
The effect on the business of the Company of future technological changes, such
as changes relating to emerging transmission technologies, cannot be predicted.
The Company believes that its future success will depend on its ability, as to
which no assurance can be given, to enhance its existing systems or implement
new systems to respond to new technologies and to develop and introduce in a
timely fashion new products and services on a competitive basis.
The markets in which the Company competes are constantly evolving. The
convergence of traditional telecommunications services and multichannel
television services is a recent trend in the industries within which the Company
competes. As part of this trend, many telecommunications and cable television
operators are attempting to integrate network components. For example, video
distribution equipment is being considered for voice and data telecommunications
and vice versa. The convergence of these traditional services towards integrated
multimedia services presents both opportunity and material risk to companies
such as OpTel. The Company will face enhanced competition from competitors with
greater financial, technical, marketing and other resources. Many of these
competitors may offer packages of services that are more extensive than the
services which the Company plans to offer. There can be no assurance that the
Company will be able to predict accurately the direction of this evolving market
or be able to respond effectively to the highly competitive environment. See
"-- Competition" and "Business -- Competition."
INFORMATION SYSTEMS AND AUTOMATION
The Company has ordered a new customer management information system which
is to be implemented during fiscal 1999 and which the Company expects to be an
important factor in its operations. If the customer management information
system is not implemented in a timely manner, or is not implemented at all or if
it fails or is unable to perform as expected, it could have a material adverse
effect on the Company. Furthermore, as the Company's business expands, problems
may be encountered with higher processing volumes or with additional automation
features, in which case the Company might experience system breakdowns, delays
and additional unbudgeted expense to remedy the defect or to replace the
defective system with an alternative system.
MANAGEMENT OF GROWTH AND DEPENDENCE ON QUALIFIED PERSONNEL
The Company is highly dependent upon the efforts of its senior management,
the loss of any of whom could impede the achievement of service delivery and
marketing objectives and could have a material adverse effect on the Company.
The Company has undertaken a rapid expansion of its networks and services. This
growth has increased the operating complexity of the Company as well as the
level of responsibility for both existing and new management personnel. The
Company's ability to manage its expansion effectively will require it to
continue to implement and improve its operational and financial systems and to
expand, train and manage its employee base and attract and retain highly skilled
and qualified personnel. Any failure by the
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Company to effectively manage its growth and attract and retain qualified
personnel could have a material adverse effect on its business.
COMPETITION
OpTel competes with a wide range of service providers for each of the
services it provides. See "Business -- Competition." Substantially all markets
for voice and video services are highly competitive and the Company expects that
competition will intensify. In each of its markets, the Company faces
significant competition from larger companies with greater access to capital,
technology and other competitive resources. The Company's switched local
exchange services compete with ILECs, other STS providers, CLECs and competitive
access providers ("CAPs") and will compete with long distance telephone
companies and franchise cable television operators as they begin to enter the
local telephone business. The Company's long distance service competes with
established IXCs and resellers. In addition, recent telecommunications
offerings, including PCS, and future offerings may increase competition in the
telecommunications industry. The Company's private cable television services
compete with incumbent franchise cable television operators as well as wireless
cable television operators, other private cable television operators, DBS
operators and stand-alone satellite service providers. Recent and future
legislative, regulatory and technological developments likely will result in
additional competition, as telecommunications companies enter the cable
television market and as franchise cable television operators and IXCs begin to
enter the local telephone market. See "Business -- Regulation." Similarly,
mergers, joint ventures and alliances among franchise, wireless or private cable
television operators and regional Bell operating Companies ("RBOCs") may result
in providers capable of offering bundled cable television and telecommunications
services in direct competition with the Company.
The Company competes with multichannel television operators and
telecommunications service providers to obtain Rights of Entry and to enroll
subscribers. In most markets serviced by the Company, franchise cable television
operators now offer revenue sharing and access fee arrangements to MDU owners.
There can be no assurance that these payments will not increase in the future as
competition increases for access to the higher quality MDUs. Another basis of
competition is the breadth of programming and range of services offered.
Although the Company as a matter of course investigates new sources of
programming and technologies that may increase its range of services, other
larger and more diversified competitors may attract the targeted MDUs based on
their increased menu of services. There can be no assurance that the Company
will be able to compete successfully with existing competitors or new entrants
in the market for such services. See "Business -- Competition."
Competition also may be enhanced by technological developments that allow
competitors of the Company to bypass property owners altogether and market their
services directly to the tenants of MDUs. Although the Company's Rights of Entry
prohibit tenants from installing receiving equipment on the exterior of the
building, these provisions are not always enforced and do not prohibit tenants
from utilizing other services and technologies. For example, the Rights of Entry
do not prevent a resident from using cellular telephone service offered by
another provider. While the Company believes that the exclusivity provisions of
its Rights of Entry provide it with competitive advantages, such advantages may
be significantly diminished by technological, regulatory and other developments
beyond the control of the Company. Such developments may impact the Company's
strategies and may require it to expend funds beyond the levels currently
contemplated.
As an emerging CLEC in each of its markets, OpTel faces significant
competition for the local exchange services it offers from ILECs which currently
dominate their local telecommunications markets. ILECs have longstanding
relationships with their customers, which relationships may create competitive
barriers. Furthermore, ILECs may have the potential to subsidize competitive
service from monopoly service revenues. OpTel believes that various legislative
initiatives, including the Telecom Act have removed most of the remaining
legislative barriers to local exchange competition. Nevertheless, in light of
the passage of the Telecom Act, regulators also are likely to provide ILECs with
increased pricing flexibility as competition increases. If ILECs are permitted
to lower their rates substantially or engage in excessive volume or term
discount pricing practices for their customers, the net income or cash flow of
ICPs and CLECS, including OpTel, could be materially adversely affected. In
addition, while OpTel currently competes with AT&T, Inc. ("AT&T"),
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MCI Telecommunications Corporation ("MCI") and others in the interexchange
services market, recent federal legislation permits the RBOCs to provide
interexchange services once certain criteria are met. Once the RBOCs begin to
provide such services, they will be in a position to offer single source
telecommunications service similar to that being offered by OpTel. On December
31, 1997, a Federal District Court in Texas found unconstitutional certain
provisions of the Telecom Act restricting the RBOCs from offering long distance
service in their operating regions until they could demonstrate that their
networks have been made available to competitive providers of local exchange
services in those regions. This decision has been stayed pending appeal. If this
decision is permitted to stand, it could result in RBOCs providing interexchange
service in their operating regions sooner than previously expected. In addition,
AT&T and MCI have entered, and other IXCs have announced their intent to enter,
the local exchange services market, which is facilitated by the Telecom Act's
resale and unbundled network element provisions. OpTel cannot predict the number
of competitors that will emerge as a result of existing or new federal and state
regulatory or legislative actions. Competition from the RBOCs with respect to
interexchange services or from AT&T, MCI or others with respect to local
exchange services could have a material adverse effect on OpTel's business. In
addition, a continuing trend toward business combinations and alliances in the
telecommunications industry may create significant new competitors for OpTel.
Many of OpTel's existing and potential competitors have financial, personnel and
other resources significantly greater than those of OpTel.
DEPENDENCE UPON PROGRAM MATERIAL
The Company has fixed-term contracts with various program suppliers. The
average term of such contracts is approximately five years and such contracts
are typically renewed upon expiration. If the contracts were terminated or not
renewed, the Company would be required to seek program material from other
sources, which could place the Company at a competitive disadvantage. Although
federal law and FCC regulations require that vertically integrated franchise
cable television system operators and cable television programmers sell
programming to other video distributors, such as the Company, on fair and
non-discriminatory terms, the Company has been denied certain popular sports
programming by certain providers who claim that the programming is not required
to be licensed to the Company. These denials have adversely impacted, and any
such denials in the future could adversely impact, the Company's activities in
the affected markets. There can be no assurance that the equal program access
laws and regulations will not be invalidated, changed or repealed, which could
limit the Company's ability to obtain programming or raise the cost of
programming. In addition, one aspect of the equal program access laws, the
prohibition on the sale of exclusive distribution rights by certain programmers,
is scheduled to expire on October 5, 2002, unless the FCC finds, during a
proceeding to be conducted in 2001, that the prohibition continues to be
necessary to promote competition in the multichannel television market. See
"Business -- Regulation."
REGULATION
The cable television and telecommunications industries are subject to
extensive regulation at the federal, state and local levels. Many aspects of
regulation at the federal, state and local levels currently are subject to
judicial review or are the subject of administrative or legislative proposals to
modify, repeal, or adopt new laws and administrative regulations and policies,
the results of which the Company is unable to predict. The United States
Congress and the FCC have in the past, and may in the future, adopt new laws,
regulations and policies regarding a wide variety of matters, including
rulemakings arising as a result of the Telecom Act, that could, directly or
indirectly, affect the operation of the Company's business. The business
prospects of the Company could be materially adversely affected (i) by the
application of current FCC rules or policies in a manner leading to the denial
of applications by the Company for FCC licenses or a change in the regulatory
status of the Company's private cable television and telecommunications
operations, (ii) by the adoption of new laws, policies or regulations, (iii) by
changes in existing laws, policies or regulations, including changes to their
interpretations or applications, that modify the present regulatory environment
or (iv) by the failure of certain rules or policies to change in the manner
anticipated by the Company. See "Business -- Regulation."
The Company believes that its exclusive Rights of Entry are now generally
enforceable under applicable law; however, current trends at the state and
federal level suggest that the future enforceability of these provisions may be
uncertain. The FCC is seeking comment on whether such exclusive contracts should
be
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limited to a maximum period of seven years and whether such an amount of time is
reasonably necessary to recover the capital costs of providing service to that
MDU. In another proceeding, the FCC is seeking comment on the legal, technical
and practical issues relating to whether the FCC should issue a rule preempting
state, local and private restrictions on over-the-air reception antennas placed
on rental properties or properties not within the exclusive control of the
viewer. Although it is open to question whether the FCC has statutory and
constitutional authority to compel mandatory access or preempt private
restrictions on antennas located on property owned or controlled by others,
there can be no assurance that it will not attempt to do so. Any such action
would tend to undermine the exclusivity provisions of the Company's Rights of
Entry. See "-- Risks Associated with Rights of Entry." There can be no assurance
that future state or federal laws or regulations will not restrict the ability
of the Company to offer revenue sharing or access payments, limit MDU owners
from receiving revenue sharing, or prohibit MDU owners from entering into
exclusive access agreements, any of which could have a material adverse effect
on the Company's business. See "Business -- Sales and Marketing," "-- Strategic
Relationships with MDU Owners" and "-- Regulation."
The Company uses a substantial number of point-to-point microwave paths,
using frequencies in the 18GHz band, in its network architecture. In addition,
the Company intends to obtain licenses for paths in other frequency bands,
principally in the 23GHz band, in the future. The 18GHz, 23GHz and other
frequency bands are licensed by the FCC. After paths are licensed by the FCC,
FCC rules require that facilities utilizing such paths must be constructed and
fully operational within 18 months of the grant of the license. There can be no
assurance that the Company will be able to acquire licenses for the microwave
paths that it seeks in the future, or that changes in the FCC's regulations will
not limit the Company's ability to use the 18GHz, 23GHz or other desirable
frequencies for the distribution of its services, or otherwise impair the
Company's microwave licenses. If the Company cannot license the necessary paths
on the desired frequencies, it may be necessary to utilize other frequencies for
signal transport or other means of signal transport. There can be no assurance
that the cost of such alternate means of transport will not exceed those
associated with the desired microwave frequency. Further, even if the FCC grants
the desired licenses, the Company may not have the financial resources to
construct the necessary facilities within the mandated 18 month period. Failure
to complete the construction within the mandated period may result in forfeiture
of the license. In addition, state and local zoning and land use laws may impede
the efficient deployment of the Company's microwave antennas. Any of the
foregoing developments could have a material adverse effect on the Company's
business. See "Business -- Network Architecture."
As an emerging CLEC, OpTel is subject to varying degrees of federal, state
and local regulation. OpTel is not currently subject to price cap or rate of
return regulation at the state or federal level. OpTel is, however, generally
subject to certification or registration and tariff or price list filing
requirements for intrastate services by state regulators. Although passage of
the Telecom Act should result in increased opportunities for companies that are
competing with the ILECs, no assurance can be given that changes in current or
future regulations adopted by the FCC or state regulators or other legislative
or judicial initiatives relating to the telecommunications industry would not
have a material adverse effect on OpTel. Moreover, while the Telecom Act reduces
regulation to which non-dominant LECs are subject, it also reduces the level of
regulation that applies to the ILECs and increases their ability to respond
quickly to competition from OpTel and others. In addition, the Telecom Act will
permit RBOCs, for the first time, to offer long distance service in the regions
where they provide local exchange service upon demonstrating to the FCC and
state regulatory agencies that they have complied with the FCC's interconnection
regulations designed to foster local exchange competition. While the FCC has not
approved the applications to provide in-region long distance service filed to
date, it may do so in the future. On December 31, 1997, a federal District Court
in Texas found unconstitutional the provisions of the Telecom Act restricting
RBOCs from providing long distance service in-region until they could
demonstrate that their networks have been made available to competitive
providers of local exchange services. The Court has stayed the decision and the
issue is under appeal but if the decision is upheld, RBOCs may be able to offer
in-region long distance service earlier than otherwise expected. RBOCs would
then be able to offer a combination of local and interexchange service to
customers in direct competition with OpTel's service offerings.
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In addition, the FCC has put in place access charge reform rules which may
over time result in a net decrease in the access charges paid by IXCs to LECs
for originating or terminating long distance traffic. To the extent ILECs are
afforded increased pricing flexibility or access charges are reduced, the
ability of the Company to compete with ILECs for certain services may be
adversely affected. On May 8, 1997, the FCC issued an order establishing a new
Universal Service support fund. The new Universal Service support fund rules
will be administered jointly by the FCC and state regulatory authorities, many
of which rules are still in the process of being formulated. The net revenue
effect on the Company of these rules is incalculable at this time.
The majority of states currently permit STS services with relatively few
regulatory barriers. However, several states require certification and place
some conditions or restraints on the provision of STS services. Additionally,
STS providers must comply with the conditions of service set forth in the LEC's
tariffs under which STS providers receive service. There can be no assurance
that the regulatory environment will continue to be favorable for STS providers
or that regulatory changes will not slow or stop the Company's planned migration
from an STS provider into a CLEC in each of its markets. Although the current
regulatory environment enables competition for local exchange services, there is
no assurance that the Company will be able to compete successfully against
established providers and new entrants in that marketplace. In addition, various
state and federal laws and regulations limit the Company's ability to enforce
exclusivity provisions of Rights of Entry so as to exclude other
telecommunications providers from an MDU.
CONTROL OF LICENSES BY UNAFFILIATED COMPANY
The Telecom Act prohibits any corporation directly or indirectly controlled
by any other corporation of which more than 25 percent of the capital stock is
owned or voted by non-U.S. citizens from holding a common carrier radio station
license absent a finding by the FCC that the grant of such a license to such a
licensee would serve the public interest. In 1997, the United States agreed, in
the context of the World Trade Organization ("WTO") Basic Telecom Agreement, to
allow foreign suppliers from WTO member nations, including Canada, to provide a
broad range of basic telecommunications services in the United States. Those
commitments became effective in February 1998. In light of those commitments,
the FCC has determined that it will adopt an "open entry standard" for suppliers
of telecommunications services from WTO member nations, including Canada. In
conjunction with its new open entry policies, the FCC has adopted a presumption
favoring grant of applications to exceed the 25 percent limit on non-U.S.
ownership described above when the non-U.S. investment is from a WTO member
nation. GVL, the Company's principal stockholder, is a Canadian corporation.
Prior to the recent developments described above, the Company assigned
substantially all of its frequency licenses to Transmissions Holding, Inc.
("THI"), a Delaware corporation controlled by United States citizens, to permit
the Company to use its frequency licenses to provide "common carrier"
telecommunications services in the event that the Company should desire to do
so. The Company has an option to purchase the assets (or the stock) of THI,
exercisable at any time, subject to FCC approval. THI is not an affiliate of the
Company. While the Company is in the process of reevaluating whether it should
hold FCC authorizations directly and, specifically, whether it should exercise
its option to purchase the assets or stock of THI, the current ownership of
these licenses by THI is subject to a number of risks, including the risk that
acts or omissions of THI or its stockholders could result in the revocation of
such licenses or the unavailability of such licenses to the Company and the risk
that THI may be subject to bankruptcy or similar proceedings which could result
in the rejection or termination of the arrangements between THI and the Company
with respect to the use of such licenses. While THI and its stockholders have
made various affirmative and negative covenants intended to limit the risk to
the Company, there can be no assurance that such covenants will not be violated
or will be adequate to protect the Company. See "Certain Relationships and
Related Transactions -- License Holding Company."
USE OF THE NAME OPTEL
On April 27, 1998, an action was commenced against the Company in the
United States District Court for the Northern District of California by Octel
Communications Corp. ("Octel"), charging the Company
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with trademark infringement, trade name infringement, trademark dilution, and
unfair competition (the "Civil Action") based on its use of the name "OpTel" and
seeking to enjoin the Company from using the name and trademark "OpTel." The
Civil Action follows a now-suspended administrative proceeding in the United
States Patent and Trademark Office ("PTO") relating to registration of the
"OpTel" mark by the Company. The PTO found the Company's application for
registration to be allowable; however, Octel commenced an opposition proceeding
claiming that the Company's mark is confusingly similar to the "Octel" mark used
by that party in a related field, and claiming that the Company's application
had procedural deficiencies. During the course of the PTO proceeding, the
Company acquired rights to the marks "Optel" and "Optel Communications" in the
telecommunications field which are believed to predate the rights of Octel to
its trademark, and the Company commenced two further proceedings against Octel
in the PTO seeking cancellation of two of the trademark registrations owned by
Octel. The various proceedings in the PTO between the Company and Octel were
consolidated and thereafter suspended on May 15, 1998, in view of the
commencement of the Civil Action. The answer and counterclaims must be filed by
the Company in mid-June. The Company believes it has meritorious counterclaims
in the Civil Action and intends to vigorously defend against Octel's claims.
Although the Company does not believe that its use of the name "OpTel" infringes
on the trademark rights or trade name rights of Octel or any other person, there
can be no assurance as to the outcome of the Civil Action or the proceedings in
the PTO (if reinstated) or that any such outcome would not materially adversely
affect the Company.
LATE FEES CLASS ACTION LITIGATION
On April 9, 1998, a purported class action complaint was filed in the
District Court of Harris County, Texas by Gavin Stewart Clarkson, individually
and on behalf of all cable subscribers in the U.S. that have paid late fees to
either the group of affiliated entities known as Phonoscope (collectively,
"Phonoscope") or the Company. The plaintiff, who formerly subscribed to cable
television services provided by Phonoscope, alleges that Phonoscope's charging
pre-established late fees for delinquent payments of cable subscription charges
constitutes an illegal collection of a penalty and that cable service providers
should only be entitled to their actual collection costs. The plaintiff seeks to
enjoin Phonoscope and OpTel from collecting, or attempting to collect, such late
fees. The case is in its very early stages and the Company has not yet been
served with process of the summons and complaint. No assurance can be given as
to its ultimate outcome or that any such outcome will not materially adversely
affect the Company. OpTel believes that it will have meritorious factual and
legal defenses, and intends to defend vigorously against these claims.
CONTROL BY GVL
After the consummation of the Offering, VPC, an indirect wholly-owned
subsidiary of GVL, will own shares of the Company's Multi-Vote Common,
representing % of the voting rights of the Company. Accordingly, VPC can
and, following consummation of the Offering, will continue to be able to elect a
majority of the Board of Directors of the Company (the "Board") and to control
the vote on matters submitted to the vote of the Company's stockholders.
In addition to its investment in the Company, GVL, through other
subsidiaries, currently holds interests in wireless cable systems or licenses to
operate wireless cable systems in a number of U.S. markets including San
Francisco, San Diego and Victorville, California and Tampa, Florida. These
subsidiaries employ multipoint multichannel distribution systems ("MMDS"),
satellite master antenna television ("SMATV") systems or hard wire franchise
cable television systems. As a result, affiliates of GVL may compete with the
Company in markets where their services overlap. In addition, an affiliate of
GVL has recently announced its intention to deliver high speed Internet access
in the San Francisco area. These services may compete with the Company's high
speed Internet offering.
GVL is party to an indenture which limits the aggregate amount of
indebtedness which can be incurred by GVL and its subsidiaries, including the
Company, taken as a whole (based upon a ratio of total consolidated indebtedness
to consolidated operating cash flow). As a result, GVL's strategies and the
operating results of its subsidiaries other than the Company may affect the
ability of the Company to incur additional indebtedness. As of February 28,
1998, GVL was able to incur approximately Cdn $670 million
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(approximately $462 million based on an exchange rate of $1.00 = Cdn $1.4489 as
reported by the Wall Street Journal on Tuesday, May 19, 1998) of indebtedness
under its indenture, but there can be no assurance that this number may not
decrease substantially in the future. There can be no assurance that GVL will
not restrain the Company's growth or limit the indebtedness incurred by the
Company so as to ensure GVL's compliance with the terms of its debt instruments.
GVL, VPC, Capital Communications CDPQ Inc. ("CDPQ"), a subsidiary of
Caisse, a Quebec financial institution and minority shareholder of GVL, and the
Company are parties to a Stockholders' Agreement, dated as of August 15, 1997
(the "Stockholders' Agreement"), pursuant to which, among other things, CDPQ was
granted the right to elect certain directors of OpTel, preemptive rights to
acquire new securities issued by the Company subject to certain exceptions
(including a registered public offering) and tag along rights upon the sale by
VPC of its interest in OpTel. In addition, CDPQ agreed to certain restrictions
on the transfer of its shares of Multi-Vote Common. See "Principal
Stockholders -- Stockholders' Agreement."
A transfer by VPC of its interest in OpTel or a transfer by GVL of its
interest in VPC may result in a "Change of Control" under the Indenture, which
could require the Company to offer to purchase the Senior Notes. There can be no
assurance that the Company would have the financial resources to meet this
obligation. Neither VPC nor GVL is under any obligation to prevent a "Change of
Control." The occurrence of a "Change of Control" could have a material adverse
effect on the Company, including the loss of GVL's strategic involvement with
the Company.
YEAR 2000 RISK
OpTel has implemented a Year 2000 program to ensure that its computer
systems and applications will function properly beyond 1999. OpTel believes that
it has allocated adequate resources for this purpose and expects its Year 2000
conversion program to be successfully completed on a timely basis. However,
successful completion of the Year 2000 conversion program is substantially
dependent upon successful implementation of the Company's new customer
management information system. The Company's financial accounting system has not
been upgraded to eliminate potential Year 2000 related malfunctions. The Company
has undertaken a selection process for a new financial accounting system and
plans to have the new system selected and implemented within the next twelve
months. There can be no assurance that the new customer management information
system and financial accounting system will be implemented on schedule or that
other components of the Year 2000 conversion program will be completed in a
timely manner. See "-- Information Systems and Automation." Other than expenses
relating to the acquisition of the customer management information system, OpTel
does not expect to incur significant expenditures to address this issue. The
ability of third parties with which OpTel transacts business to adequately
address their Year 2000 issues is outside of OpTel's control. There can be no
assurance that the failure of OpTel or such third parties to adequately address
their respective Year 2000 issues will not have a material adverse effect on
OpTel's business, financial condition, cash flows and results of operations.
LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Class A
Common Stock and there can be no assurance that an active trading market will
develop or be sustained. The initial public offering price for the Shares will
be determined through negotiations among the Company and the Underwriters and
may not be indicative of the market price of the Class A Common Stock after the
Offering. See "Underwriting." The market prices of securities of early stage
communications companies similar to the Company have historically been highly
volatile. Future announcements concerning the Company or its competitors,
including quarterly results, technological innovations, services offered,
government legislation or regulation and general market, economic and political
conditions, may have a significant effect on the market price of the Class A
Common Stock.
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DILUTION
There will be an immediate and substantial dilution of a purchaser's
investment in the Class A Common Stock in that the net tangible book value per
share of Class A Common Stock after the Offering will be substantially less than
the per share offering price of the Class A Common Stock. See "Dilution."
LACK OF DIVIDEND HISTORY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
OpTel has never declared or paid any cash dividends on its Common Stock and
does not expect to declare any such dividends in the foreseeable future. Payment
of any future dividends will depend upon earnings and capital requirements of
OpTel, OpTel's debt facilities and other factors the Board considers
appropriate. OpTel intends to retain earnings, if any, to finance the
development and expansion of its business, In addition, the terms of OpTel's
outstanding indebtedness, including the Senior Credit Facility and the
Indenture, and preferred stock restrict the payment of dividends on Common
Stock. See "Description of Capital Stock" and "Description of Certain
Indebtedness."
ANTI-TAKEOVER PROVISIONS
VPC's voting control of OpTel, certain other provisions of OpTel's
Certificate of Incorporation and Bylaws, the provisions of the Delaware General
Corporation Law (the "DGCL") and OpTel's outstanding indebtedness may make it
difficult in some respects to effect a change in control of OpTel and replace
incumbent management. The existence of these provisions may have a negative
impact on the price of the Common Stock, may discourage third-party bidders from
making a bid for OpTel or may reduce any premiums paid to stockholders for their
Class A Common Stock. In addition, the Board has the authority to fix the rights
and preferences of, and to issue shares of, OpTel's preferred stock, which may
have the effect of delaying or preventing a change in control of OpTel without
action by its stockholders. See "Description of Capital Stock -- Certain
Provisions of OpTel's Certificate of Incorporation and Bylaws and of Delaware
Law."
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of shares, or the perception that such sales may occur, by
existing stockholders under Rule 144 of the Securities Act, or through the
exercise of outstanding registration rights or the issuance of shares of Common
Stock upon the exercise of options or warrants or conversion of convertible
securities, could materially adversely affect the market price of shares of
Class A Common Stock and could materially impair OpTel's future ability to raise
capital through an offering of equity securities. No predictions can be made as
to the effect, if any, that market sales of such shares or the availability of
such shares for future sale will have on the market price of shares of Class A
Common Stock prevailing from time to time. See "Description of Capital
Stock -- Shares Eligible for Future Sales" and "-- Registration Rights of
Certain Security Holders."
FORWARD LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "estimates," "projects," "anticipates,"
"expects," "intends," "believes" or the negative thereof or other variations
thereon or comparable terminology or by discussions of strategy that involve
risks and uncertainties. Management wishes to caution the reader that these
forward-looking statements are only estimates or predictions. No assurance can
be given that future results will be achieved. Actual events or results may
differ materially as a result of risks facing OpTel or actual events differing
from the assumptions underlying such statements. All forward-looking statements
made in connection with this Prospectus which are attributable to OpTel or
persons acting on its behalf are expressly qualified in their entirety by these
cautionary statements. The safe harbor for forward-looking statements provided
in the Private Securities Litigation Reform Act of 1995 does not apply to
initial public offerings.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering (based on an assumed
initial public offering price of $ per share) are estimated to be
approximately $ million ($ million if the over-allotment option granted
to the Underwriters is exercised in full) after deducting estimated underwriting
discounts and commissions and other offering expenses payable by the Company.
The Company intends to use the net proceeds from the Offering for capital
expenditures related to the purchase and installation of communications
equipment and for general corporate purposes, including working capital related
to its expansion into new markets. In addition, the Company may use a portion of
the net proceeds for acquisitions. Although the Company considers acquisitions
from time to time, no agreement or agreement in principal to effect any material
acquisition has been reached. Pending such uses, the net proceeds of the
Offering will be invested in short-term investment grade securities.
DIVIDEND POLICY
The Company has never paid cash dividends on the Common Stock and does not
anticipate paying dividends in the foreseeable future. Any future determination
to pay dividends will be at the discretion of the Board and will be dependent
upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board deems relevant. In addition,
the Company's ability to declare and pay dividends on the Common Stock is
restricted by the terms of OpTel's outstanding indebtedness, including the
Senior Credit Facility and the Indenture, and preferred stock. See "Risk
Factors -- Lack of Dividend History; Restrictions on Payment of Dividends."
24
27
CAPITALIZATION
The following table sets forth, on an unaudited basis at February 28, 1998,
(i) the capitalization of the Company, (ii) the pro forma capitalization after
giving effect to the acquisition of the ICS Operations and the conversion of the
GVL Notes into Series A Preferred and (iii) the pro forma capitalization as
adjusted to give effect to the Offering and the conversion of all outstanding
shares of Non-Voting Common and Series B Preferred into shares of Class A Common
Stock and the conversion of all outstanding shares of Series A Preferred into
shares of Multi-Vote Common. This table should be read in connection with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements of the Company and the notes
thereto and the Pro Forma Financial Information appearing elsewhere in this
Prospectus.
AS OF FEBRUARY 28, 1998
-----------------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(1) ADJUSTED(1)(2)(3)
--------- --------- -----------------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents.............................. $ 18,388 $ 13,844 $ 13,844
Restricted Investments................................. 54,509 54,509 54,509
Short-term investments................................. 111,154 111,154
--------- --------- --------
Total................................................ $ 184,051 $ 179,507 $
========= ========= ========
Indebtedness:
13% Senior Notes Due 2005............................ $ 218,911 $ 218,911 $218,911
Convertible notes payable to stockholder............. 139,244 -- --
Notes payable and other long-term liabilities........ 128,856 129,649 129,649
Deferred acquisition liabilities..................... 5,656 5,656 5,656
--------- --------- --------
Subtotal........................................ 492,667 354,216 354,216
Stockholders' equity:
Class A common stock, $0.01 par value ("Class A
Common Stock"); 8,000,000 shares authorized; none
issued and outstanding; 164,272 issued and
outstanding pro forma; issued and outstanding
pro forma as adjusted............................. -- 2
Class B common stock, $0.01 par value ("Multi-Vote
Common"); 6,000,000 shares authorized; 2,353,498
issued and outstanding; 2,353,498 issued and
outstanding pro forma; issued and outstanding
pro forma as adjusted............................. 24 24
Class C common stock, $0.01 par value ("Non-Voting
Common"); 300,000 shares authorized; 225,000
issued and outstanding; 225,000 issued and
outstanding pro forma; none issued and outstanding
pro forma as adjusted............................. 2 2 --
Series A Preferred Stock, $0.01 par value, 10,000
shares authorized; none issued and outstanding;
6,962.2 shares issued and outstanding pro forma;
none issued and outstanding pro forma as
adjusted.......................................... -- 139,244 --
Series B Preferred Stock, $0.01 par value; 1,000
shares authorized; none issued and outstanding;
991.1 shares issued and outstanding pro forma;
none issued and outstanding pro forma as
adjusted.......................................... -- 59,466 --
Additional paid-in capital........................... 97,683 113,780
Accumulated deficit.................................. (111,371) (111,371)
--------- --------- --------
Subtotal........................................ (13,662) 201,147
--------- --------- --------
Total capitalization......................... $ 479,005 $ 555,363 $
========= ========= ========
- ---------------
(1) Gives effect to the acquisition of 100% of the ICS Operations and the
conversion of the GVL Notes into Series A Preferred as if such events had
occurred on February 28, 1998. As of April 30, 1998, the acquisition of
approximately 72% of the ICS Operations had been consummated. See "Risk
Factors -- Risks Associated with Acquisitions."
(2) Gives effect to the Offering and to (i) the conversion of all outstanding
shares of Non-Voting Common into shares of Class A Common Stock upon
consummation of the Offering, (ii) the conversion of all outstanding shares
of Series B Preferred into shares of Class A Common Stock promptly
following consummation of the Offering and (iii) the conversion of all
outstanding shares of Series A Preferred into shares of Multi-Vote
Common upon consummation of the Offering.
(3) Gives effect to the Offering assuming an initial public offering price of
$ per share and after deducting the Underwriters' discounts and
commissions and estimated fees and expenses of $ .
25
28
DILUTION
The net tangible book value per share of the Class A Common Stock is the
difference between the Company's tangible assets and its liabilities, divided by
the number of shares of Class A Common Stock, Multi-Vote Common and Non-Voting
Common outstanding. For investors in the Class A Common Stock, dilution is the
per share difference between the assumed $ per share initial offering
price of the Class A Common Stock offered hereby and the net tangible book value
of the Class A Common Stock immediately after completing the Offering. Dilution
in this case results from the fact that the per share offering price of the
Class A Common Stock is substantially in excess of the per share net tangible
book value of the Class A Common Stock prior to the Offering.
On February 28, 1998, the Company's net tangible book value was
approximately negative $123.7 million and the per share net tangible book value
based on 2,742,769.54 shares of Class A Common Stock, Multi-Vote Common and
Non-Voting Common outstanding was approximately negative $45.11 per share.
As of February 28, 1998, without taking into account any changes in the
Company's net tangible book value subsequent to that date other than to give
effect to the sale of the Class A Common Stock offered hereby based on an
assumed offering price of $ per share (after deducting the estimated
offering expenses, including underwriting discounts and commissions), the
conversion of the Non-Voting Common into shares of Class A Common Stock and
the conversion of the Series A Preferred and Series B Preferred into shares
of Multi-Vote Common and shares of Class A Common Stock, respectively
(based on an assumed offering price of $ per share), the pro forma net
tangible book value of each of the assumed outstanding shares of Class A Common
Stock, Multi-Vote Common and Non-Voting Common would have been $ per
share after the Offering. Therefore, investors in the Class A Common Stock would
have paid $ for a share of Class A Common Stock having a net tangible
book value of approximately $ per share after the Offering; that is,
their investment would have been diluted by approximately $ per share.
At the same time, existing stockholders would have realized an increase in net
tangible book value of $ per share after the Offering without further
cost or risk to themselves. The following table illustrates this per share
dilution:
Assumed initial public offering price per share of Class A
Common Stock.............................................. $
Net tangible book value per share of Class A Common Stock
before the Offering.................................... $(45.11)
Increase in net tangible book value per share of Class A
Common Stock attributable to investors in the
Offering(1)(2)......................................... $
Pro forma net tangible book value per share of Class A
Common Stock after the Offering(1)(2)..................... $
--------
Dilution to new investors(2)................................ $
========
- ---------------
(1) After deduction of the estimated offering expenses payable by the Company
(including the underwriting discounts and commissions).
(2) Assumes that none of the Company's outstanding options or warrants are
exercised. See "Management -- Incentive Stock Plan," and "-- Stock Purchase
Plan" and "Description of Capital Stock."
26
29
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected historical consolidated financial data for the year
ended December 31, 1994, the eight month period ended August 31, 1995 and as of
and for the years ended August 31, 1996 and 1997 have been derived from the
consolidated financial statements of the Company included elsewhere herein and
audited by Deloitte & Touche LLP, independent auditors as set forth in their
report thereon also included herein. The selected financial data of the Company
as of and for the period ended December 31, 1993 and as of December 31, 1994 and
August 31, 1995 is derived from the Company's audited financial statements not
included herein. The selected financial data presented below as of and for the
six month periods ended February 28, 1997 and February 28, 1998 have been
derived from unaudited consolidated financial statements of the Company. In the
opinion of management, the unaudited consolidated financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, which consist only of normal recurring adjustments, necessary for
the fair presentation of the Company's financial position and results of
operation for these periods. In 1995, the Company changed its fiscal year end to
August 31 to match that of its majority stockholder. As a result of the change
in fiscal year and the Company's history of growth through acquisitions the
Company's historical financial results are not directly comparable from period
to period, nor are they indicative of future results of operations in many
respects. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the Consolidated Financial Statements of the Company
and the notes thereto, appearing elsewhere in this Prospectus.
PERIOD FROM
APRIL 20, 1993 EIGHT MONTH
(DATE OF INCEPTION) YEAR ENDED PERIOD ENDED
TO DECEMBER 31, DECEMBER 31, AUGUST 31,
1993 1994 1995
------------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television.............. $ 12 $ 240 $ 8,783
Telecommunications............ -- 202 788
----- ------- --------
Total revenues................ 12 442 9,571
Operating expenses:
Cost of services.............. 6 470 4,558
Customer support, general and
administrative............. 304 7,733 12,055
Depreciation and
amortization............... 8 117 2,420
----- ------- --------
Total operating expenses........ 318 8,320 19,033
----- ------- --------
Loss from operations............ (306) (7,878) (9,462)
Interest expense, net(1)........ (1) (66) (1,169)
----- ------- --------
Loss before income taxes........ (307) (7,944) (10,631)
Net loss(2)..................... $(307) $(7,944) $(10,161)
===== ======= ========
Basic and diluted loss per share
of Common Stock(3)............ N/A N/A $ (6.89)
SIX MONTHS
YEAR ENDED ENDED
AUGUST 31, FEBRUARY 28,
----------------------- ---------------------------
1996 1997 1997 1998
---------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED OPERATIONS DATA
Revenues:
Cable television.............. $ 25,893 $ 36,915 $ 17,208 $ 25,247
Telecommunications............ 1,711 2,922 1,414 1,644
-------- -------- -------- --------
Total revenues................ 27,604 39,837 18,622 26,891
Operating expenses:
Cost of services.............. 11,868 19,202 8,702 12,419
Customer support, general and
administrative............. 19,636 28,926 12,267 15,855
Depreciation and
amortization............... 8,676 14,505 5,820 10,759
-------- -------- -------- --------
Total operating expenses........ 40,180 62,633 26,789 39,033
-------- -------- -------- --------
Loss from operations............ (12,576) (22,796) (8,167) (12,142)
Interest expense, net(1)........ (5,854) (25,739) (8,125) (21,885)
-------- -------- -------- --------
Loss before income taxes........ (18,430) (48,535) (16,292) (34,027)
Net loss(2)..................... $(18,430) $(48,535) $(16,292) $(34,027)
======== ======== ======== ========
Basic and diluted loss per share
of Common Stock(3)............ $ (8.30) $ (19.98) $ (7.01) $ (13.20)
DECEMBER 31, AUGUST 31,
-------------- ------------------------------ FEBRUARY 28,
1993 1994 1995 1996 1997 1998
---- ------- -------- -------- -------- ------------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents......................... $ 41 $ 5,019 $ 2,036 $ 1,677 $ 87,305 $ 18,388
Restricted investments............................ -- -- -- -- 67,206 54,509
Short-term investment............................. -- -- -- -- -- 111,154
Property, plant and equipment, net................ 509 11,379 48,060 103,800 160,442 203,778
Intangible Assets................................. -- 16,189 55,443 65,876 82,583 110,051
Total Assets...................................... 588 33,820 108,072 175,978 403,416 505,171
Convertible notes due stockholder................. -- 15,000 17,950 89,414 129,604 139,244
Total liabilities................................. 206 31,007 39,527 116,700 383,051 518,833
Stockholders' equity.............................. 382 2,813 68,545 59,279 20,365 (13,662)
27
30
PERIOD FROM
APRIL 20, 1993 SIX MONTHS
(DATE OF EIGHT MONTH YEAR ENDED ENDED
INCEPTION) YEAR ENDED PERIOD ENDED AUGUST 31, FEBRUARY 28,
TO DECEMBER 31, DECEMBER 31, AUGUST 31, ----------------------- ---------------------------
1993 1994 1995 1996 1997 1997 1998
--------------- ------------ ------------ ---------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
OTHER FINANCIAL DATA
Net cash flows used in
operating activities.... $(183) $ (3,332) $ (3,494) $ (453) $ (15,935) $ (3,048) $ (15,215)
Net cash flows used in
investing activities.... (517) (10,576) (72,144) (72,037) (143,125) (107,229) (171,447)
Net cash flows provided by
financing activities.... 741 18,886 72,655 72,131 244,688 243,615 117,745
Capital expenditures(4)... 517 9,278 22,170 62,121 71,506 24,925 37,900
EBITDA(5)................. (298) (7,761) (7,042) (3,900) (8,291) (2,347) (1,383)
AS OF
----------------------------------------------
AUGUST 31,
------------------------------- FEBRUARY 28
1995 1996 1997 1998
------- ------- ------- -----------
OPERATING DATA
CABLE TELEVISION
Units under contract(6)..................................... 173,324 241,496 295,149 372,138
Units passed(7)............................................. 170,336 225,433 254,032 320,286
Basic subscribers........................................... 75,944 114,163 132,556 172,643
Basic penetration(8)........................................ 44.6% 50.6% 52.2% 53.9%
Premium units(9)............................................ 39,753 60,641 95,150 144,832
Pay-to-basic ratio(9)(10)................................... 52.3% 53.1% 71.8% 83.9%
Average monthly revenue per basic subscriber(11)............ $ 22.84 $ 22.70 $ 24.94 $ 27.57
TELECOMMUNICATIONS
Units under contract(6)..................................... 10,322 20,945 39,831 61,082
Units passed(7)............................................. 9,116 12,364 16,572 17,551
Lines(12)................................................... 2,650 4,126 6,185 6,375
Line penetration(13)........................................ 29.1% 33.4% 37.3% 36.3%
Average monthly revenue per line(14)........................ N/A $ 42.10 $ 47.23 $ 43.64
- ---------------
(1) Interest expense, net is reflected net of interest income and interest
capitalized in property, plant and equipment. Includes interest expense on
the GVL Notes of approximately $919,000, $5,342,000, $15,204,000,
$6,907,000 and $9,640,000 for the eight month period ended August 31, 1995,
the years ended August 31, 1996 and 1997 and the six months ended February
28, 1997 and 1998, respectively.
(2) The Company had no taxable income for the periods reported. The Company
reported an income tax benefit of approximately $469,000 in the eight month
period ended August 31, 1995.
(3) Loss per share is not presented for the periods the Company was organized
as a partnership. Loss per share has been restated to reflect the adoption
of statement of Financial Accounting Standards No. 128, "Earnings Per
Share."
(4) Capital expenditures include expenditures on property, plant and equipment
together with intangible assets excluding expenditures for business
acquisitions.
(5) EBITDA represents earnings before interest expense (net of interest income
and amounts capitalized), income tax benefits, depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
or an alternative to net loss, each as defined by generally accepted
accounting principles. In addition, the measure of EBITDA presented herein
may not be comparable to other similarly titled measures by other
companies. The Company believes that EBITDA is a standard measure commonly
reported and widely used by analysts, investors and other interested
parties in the cable television and telecommunications industries.
Accordingly, this information has been disclosed herein to permit a more
complete comparative analysis of the Company's operating performance
relative to other companies in its industry.
(6) Units under contract represents the number of units currently passed and
additional units with respect to which the Company has entered into Rights
of Entry for the provision of cable television and telecommunications
services, respectively, but which the Company has not yet passed and which
the Company expects to pass within the next five years. At this time
substantially all units under contract for telecommunications are also
under contract for cable television.
(7) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications systems,
respectively. The difference between units under contract and units passed
represents units for which Rights of Entry have been entered into, but
which are not yet connected and activated for cable television and
telecommunications services, respectively.
(8) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
28
31
(9) Beginning with the year ended August 31, 1997, to be consistent with most
other cable television providers, the Company has revised the method of
reporting premium penetration to include all premium units in the
calculation. Historically the calculation excluded premium channels that
were provided to customers as part of an expanded basic line up or other
special arrangements. Prior years have not been restated.
(10) Pay-to-basic ratio is calculated by dividing the total number of premium
units by the total number of basic subscribers.
(11) Represents average monthly revenue per the average number of basic
subscribers for the fiscal periods ended as of the date shown.
(12) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line. The Company has revised its method of
reporting lines to reflect only one line in service where multiple
customers share a single line. The Company has restated the number of lines
previously reported to reflect this change.
(13) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.
(14) Represents average monthly revenue per the average number of lines for the
fiscal period ended as of the date shown. Information with respect to the
telecommunications business for the period ended August 31, 1995 is not
available.
29
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and notes thereto appearing elsewhere in this
Prospectus. Except as otherwise indicated, the following analysis relates solely
to historical results and does not consider any potential impact that the
Offering or the proposed use of proceeds may have on the operations and
financial condition of the Company.
OVERVIEW
OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone and cable television
services, to residents of MDUs in the United States. The Company was organized
in April 1993 to build, acquire and operate private cable television and
telecommunications systems. The Company seeks to capitalize on opportunities
created by the Telecom Act to become the principal competitor in the MDU market
to the ILEC and the incumbent franchise cable television operator. The Company
has commenced offering central office switched telecommunications services in
Houston and Dallas-Fort Worth and expects to offer such services in
substantially all of its major markets by the end of calendar 1999.
Since inception, the Company has experienced substantial growth. This
growth has been achieved through a combination of acquisitions of other
operators, many of which operated SMATV systems, and the negotiation of new
Rights of Entry. As of April 30, 1998, the Company had 369,090 and 27,346 units
passed for cable television and telecommunications, respectively. As of such
date, OpTel had 202,716 cable television subscribers and 7,399 telecommunication
lines in service. In general, the conduct of the acquired operations prior to
acquisition was materially different from the conduct of operations following
acquisition. Among the changes made in many of the businesses after acquisition
were (i) commencing conversion of SMATV systems to 18GHz or fiber optic
networks, (ii) delivering customer service from a more advanced national call
center in Dallas, (iii) increasing the number of programming channels, (iv)
improving technical and field service and system reliability, (v) improving
regulatory and financial controls, and (vi) initiating telecommunications
services offerings.
OpTel believes that by utilizing a single advanced network infrastructure
it can be the first to market a competitive integrated package of voice and
video services in its serviced markets. As of March 31 and April 30, 1998,
respectively, the Company's networks delivered cable television services to
approximately 229,935 and 244,452 units representing approximately 72% and 61%
of the Company's units passed for cable television. The decrease in the
percentage of units passed served by the Company's networks is a direct result
of the acquisition of the ICS Operations on April 13, 1998. OpTel expects to
connect substantially all of the MDUs currently served by SMATV systems to 18GHz
or fiber optic networks by the end of calendar 2000. Once an MDU is brought onto
the Company's networks, gross profit per subscriber at the MDU generally
increases. In addition, networks provide OpTel with the infrastructure necessary
to deliver an integrated package of communications services to subscribers at
the MDU.
The Company's telecommunications revenue is comprised of monthly recurring
charges, usage charges and initial non-recurring charges. Monthly recurring
charges include fees paid by subscribers for line rental and additional
features. Usage charges consist of fees paid by end users for long distance,
fees paid by the ILEC for terminating intraLATA traffic to the Company's network
and access charges paid by carriers for long distance traffic originated and
terminated to and from local customers. Initial non-recurring charges include
fees paid by subscribers for installation.
The Company's cable television revenue is comprised of monthly recurring
charges paid by subscribers, monthly recurring charges paid by MDU-owners for
bulk services and fees paid by subscribers for premium services, and some
non-recurring charges. The Company offers its cable services under either retail
or bulk agreements. Under retail agreements, the Company contracts directly with
MDU residents. Under bulk agreements, the Company contracts directly with MDU
owners for basic cable to be provided to all units in a particular MDU, but
generally at lower prices than under retail agreements. This lower per unit rate
is generally offset by the 100% penetration achieved by bulk agreements. Premium
services are contracted for
30
33
directly by subscribers under both types of agreements and include fees paid for
premium channels and pay-per-view. The Company anticipates that its overall
revenue per subscriber will increase as the number of bulk contracts declines as
a percentage of the Company's Rights of Entry. Additionally, the Company
believes that its revenue per subscriber will increase as it migrates its SMATV
properties onto the Company's networks. See "Business -- Network Architecture."
The cost of services for the Company's telecommunications services consists
of leased transport facilities, terminating access charges from ILECs, fees paid
to IXCs for long distance and revenue sharing. Leased transport facility costs
may include the rental of T-1s to connect the MDU's to the ILEC and may include
costs associated with connecting the Company's Network Hubs to each other and to
its central office switch. Terminating access charges are fees paid to the ILEC
for intraLATA calls which are originated by OpTel's subscribers and terminated
on the ILECs network. Fees paid to IXCs for long distance include costs
associated with terminating toll calls initiated by OpTel's subscribers. Revenue
sharing costs include a commission type payment to owners of MDUs for marketing
the Company's telephone product.
The cost of services for the Company's cable television services consists
of programming costs, franchise fees and revenue sharing. Programming costs
include those fees paid to obtain the rights to broadcast certain video
programming. Revenue sharing costs include a commission type payment to owners
of MDUs.
The Company's selling, general and administrative expenses include selling
and marketing costs, customer service, engineering, facilities and corporate and
regional administration.
Through February 28, 1998, the Company had invested approximately $339
million primarily in its cable television and telecommunications assets. The
Company's revenues have grown from $0.4 million for the year ended December 31,
1994 to $39.8 million for fiscal 1997. While pursuing its investment and
development strategy, the Company has incurred substantial up-front operating
expenses for marketing, customer operations, administration and maintenance of
facilities, general and administrative expenses and depreciation and
amortization in order to solicit and service customers in advance of generating
significant revenues. As a result of these factors, the Company has generated
operating losses of $5.6 million, $22.8 million, $12.6 million, and $9.5 million
for the quarter ended February 28, 1998, fiscal 1997, fiscal 1996 and the eight
months ended August 31, 1995, respectively, as its cable television and
telecommunications customer base has grown. The Company reported positive EBITDA
of $0.1 million for the quarter ended February 28, 1998 as compared with
negative EBITDA of $1.4 million, $8.3 million, $3.9 million and $7.0 million for
the six months ended February 28, 1998 and for fiscal 1997, fiscal 1996 and the
eight months ended August 31, 1995, respectively. The Company expects that the
incremental operating costs associated with the addition of new customers in its
existing markets will be principally limited to customer operations and
marketing expenses and, therefore, that its EBITDA will improve significantly.
There can be no assurance that the Company will generate operating profits or
continue to generate positive EBITDA in the future.
FACTORS AFFECTING FUTURE OPERATIONS
The principal operating factors affecting the Company's future results of
operations are expected to include (i) changes in the number of MDUs under
Rights of Entry, (ii) penetration rates for its services, (iii) the terms of its
arrangements with MDU owners, including revenue sharing and length of contract,
(iv) the prices that it charges its subscribers, (v) normal operating expenses,
which in the cable television business principally consist of programming
expenses and in the telecommunications business principally consist of fees paid
to long distance carriers, the cost of trunking services and other LEC charges,
as well as, in each case, billing and collection costs, technical service and
maintenance expenses and customer support services, and (vi) capital
expenditures as the Company commences offering central office switched
telecommunication services in additional markets and completes its conversion of
SMATV systems. The Company's results of operations may also be impacted by
future acquisitions.
The Company anticipates that it will continue to have higher churn than is
typical of an incumbent franchise cable television operator due to the frequent
turnover of MDU tenants. This churn generally does not result in a reduction in
overall penetration rates since the outgoing subscriber is generally quickly
replaced by a new tenant in the unit. This may result in average installation
revenue per subscriber that is higher than
31
34
for a franchise cable television operator. Although this may also require higher
installation expenses per subscriber, because of the layout of MDUs and the
Company's ability to obtain "permission to enter" from the MDU owner,
installations can often be completed when the subscriber is not home, limiting
the expense of installation. Accordingly, the Company does not believe that
churn is as significant an operating statistic as would be the case for
franchise cable television operators. With respect to the Company's
telecommunications services, the Company believes that its best opportunity for
a sale arises when a subscriber first signs a lease and takes occupancy in an
MDU. Accordingly, the Company believes that during the early stages of the roll
out its central office switched telecommunications services in a market it
benefits from the high rate of MDU resident turnover.
RESULTS OF OPERATIONS
In 1995, the Company changed its fiscal year end to August 31 to match that
of its majority stockholder. In addition, all of the Company's acquisitions have
been accounted for by the purchase method of accounting. As a result of the
Company's growth through acquisitions and the change in fiscal year, the
Company's historical financial results are not directly comparable from period
to period, nor are they indicative of future results of operations in many
respects.
The following table sets forth, for the periods indicated, certain
operating and financial information relating to the Company.
AS OF AS OF
AUGUST 31, FEBRUARY 28,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
OPERATING DATA
CABLE
Units passed(1).............................. 170,336 225,433 254,032 239,801 320,286
Basic subscribers............................ 75,944 114,163 132,556 125,090 172,643
Basic penetration(2)......................... 44.6% 50.6% 52.2% 52.2% 53.9%
Average monthly revenue per basic
subscriber(3).............................. $ 22.84 $ 22.70 $ 24.94 $ 23.98 $ 27.57
TELECOMMUNICATIONS
Units passed(1).............................. 9,116 12,364 16,572 14,416 17,551
Lines(4)..................................... 2,650 4,126 6,185 5,059 6,375
Line penetration(5).......................... 29.1% 33.4% 37.3% 35.0% 36.3%
Average monthly revenue per line(6).......... N/A $ 42.10 $ 47.23 $ 51.29 $ 43.64
EIGHT MONTH YEAR ENDED SIX MONTH PERIOD
PERIOD ENDED AUGUST 31, ENDED FEBRUARY 28,
AUGUST 31, ----------------- -------------------
1995 1996 1997 1997 1998
------------ ------- ------- -------- --------
(DOLLARS IN
THOUSANDS)
FINANCIAL DATA
REVENUE
Cable television........................ $ 8,783 $25,893 $36,915 $17,208 $25,247
Telecommunications...................... 788 1,711 2,922 1,414 1,644
------- ------- ------- ------- -------
$ 9,571 $27,604 $39,837 $18,622 $26,891
Gross profit.............................. $ 5,013 $15,736 $20,635 $ 9,920 $14,472
Gross margin.............................. 52.4% 57.0% 51.8% 53.3% 53.8%
EBITDA(7)................................. $(7,042) $(3,900) $(8,291) $(2,347) $(1,383)
- ---------------
(1) Units passed represents the number of units with respect to which the
Company has connected its cable television and telecommunications systems,
respectively.
(2) Basic penetration is calculated by dividing the total number of basic
subscribers at such date by the total number of units passed.
(3) Represents average monthly revenue per the average number of basic
subscribers for the fiscal periods ended as of the date shown.
32
35
(4) Lines represent the number of telephone lines currently being provided to
telecommunications subscribers. A telecommunications subscriber can
subscribe for more than one line. The Company has revised its method of
reporting lines to reflect only one line in service where multiple customers
share a single line. The Company has restated the number of lines previously
reported to reflect this change.
(5) Line penetration is calculated by dividing the total number of
telecommunications lines at such date by the total number of units passed.
(6) Represents average monthly revenue per the average number of lines for the
fiscal period ended as of the date shown. Information with respect to the
telecommunications business for the period ended August 31, 1995 is not
available.
(7) EBITDA represents income (loss) from operations before interest (net of
interest income and amounts capitalized), income taxes and depreciation and
amortization. EBITDA is not intended to represent cash flow from operations
or an alternative to net loss, each as defined by generally accepted
accounting principles. In addition, the measure of EBITDA presented herein
may not be comparable to other similarly titled measures by other companies.
The Company believes that EBITDA is a standard measure commonly reported and
widely used by analysts, investors and other interested parties in the cable
television and telecommunications industries. Accordingly, this information
has been disclosed herein to permit a more complete comparative analysis of
the Company's operating performance relative to other companies in its
industry.
Six months ended February 28, 1998 compared with six months ended February 28,
1997
Total Revenues. Total revenues for the first six months of fiscal 1998
increased by $8.3 million or 45% to $26.9 million compared to revenues of $18.6
million for the first six months of fiscal 1997.
Cable Television. Cable television revenues in the first six months of
fiscal 1998 increased by $8.0 million, or 47%, to $25.2 million from $17.2
million for the comparable period of fiscal 1997, reflecting both a 38% increase
in the number of subscribers and a 12% increase in the average monthly revenue
per basic subscriber which rose from $23.98 for the first six months of fiscal
1997 to $27.57 for the first six months of fiscal 1998. This increase mainly
resulted from property upgrades, annual rate increases and increased premium
revenues as the Company's pay to basic ratio improved substantially from 68.5%
at February 28, 1997 to 83.9% at February 28, 1998. The Company also continued
to grow basic penetration which increased by 1.7% as compared to the first six
months of fiscal 1997.
Telecommunications. Telecommunications revenues for the first six months of
fiscal 1998 increased by 14% to $1.6 million from $1.4 million for the
comparable period of fiscal 1997. The Company's telecommunication lines
penetration over the comparable period rose 1.3% to 36.3% at February 28, 1998.
In Houston, the Company has substantially completed its conversion of properties
previously served by PBXs to the central office switch. In addition, the Company
has installed and tested its central office switch in Dallas-Fort Worth and
intends to migrate the MDUs it currently serves through PBXs in that market to
the central office switch over the coming months.
The reduction in average monthly revenue per line to $43.64 for the first
six months of fiscal 1998 from $51.29 for the first six months of fiscal 1997 is
largely due to an increase in the proportion of total telephone lines supplied
to student accommodation where usage is lower than average and to a decrease of
the Company's long distance rates. As the number of telephone lines is
increased, management expects the influence of the lower usage contracts to be
substantially reduced.
Cost of Services. Gross margins in the first six months of fiscal 1998
improved by 0.5% over gross margins for the first six months of fiscal 1997,
reflecting an increase in basic cable margins, an improvement of
telecommunications margins with respect to customers served by the Houston
central office switch and were partially offset by an increase in the
penetration of lower margin premium services.
Expenses. Expenses (customer support, general and administrative expenses)
were $15.9 million for the first six months of fiscal 1998 compared to $12.2
million for the first six months of fiscal 1997. The increase in customer
support, general and administrative expenses were in line with the company's
budget and was largely due to an increase in personnel associated with the
expansion of the Company's operations and recruitment for the roll out of the
Company's telecommunications services.
EBITDA. The Company's EBITDA for the first six months of fiscal 1998 was
negative $1.4 million compared to negative $2.3 million for the comparable
period of fiscal 1997.
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Interest Expense, Net. Interest expense (net of interest income and amounts
capitalized) was $21.9 million for the first six months of fiscal 1998, an
increase of $13.8 million over net interest expense of $8.1 million for the
first six months of fiscal 1997, reflecting the increase in the Company's debt
incurred principally to fund the build out of its network. See "-- Liquidity and
Capital Resources."
Fiscal year ended August 31, 1997 compared to fiscal year ended August 31, 1996
Total revenues. Total revenues for the fiscal year ended August 31, 1997
increased by $12.2 million or 44% to $39.8 million compared to revenues of $27.6
million for the fiscal year ended August 31, 1996.
Cable television. Compared to fiscal 1996, cable television revenues
increased by $11.0 million, or 42%, to $36.9 million from $25.9 million,
reflecting both a 16% increase in the number of subscribers and a 10% increase
in the average monthly revenue per basic subscriber which rose from $22.7 for
fiscal 1996 to $24.9 for fiscal 1997. The increase in revenue per subscriber
resulted from a combination of rate increases following property upgrades,
annual rate increases and increased premium revenues as the Company's pay to
basic ratio improved from 53% to 64% over the course of the year. The Company
continued to grow basic penetration which increased by 1.6% over the year.
Telecommunications. The Company's strategy is to roll out central office
switched local exchange services in each of the major markets in which it
operates. Until recently the Company served certain properties as an STS
provider, reselling telephone service using PBXs situated at the MDU properties.
The Company has not historically promoted such STS service because it was not in
line with its strategy to offer central office switched telecommunications
services to its subscribers. Despite not promoting telecommunications services
during the year, telecommunications contributed $2.9 million of revenue compared
to $1.7 million in the preceding year, mainly as a result of increased
penetration and a 34% increase in the number of units where telephone service is
offered from 12,364 at the end of fiscal 1996 to 16,572 at the end of fiscal
1997.
Cost of Services. Overall, gross margins decreased over the year from 57.0%
to 51.8%, largely due to costs associated with the increase in the number of
subscribers served by PBX telephone service, the increase in premium cable
penetration which has lower associated margins and, to a lesser extent, an
increase in the proportion of the Company's portfolio under revenue sharing
arrangements with property owners. The PBX costs represent the costs of
interconnecting individual properties with the ILEC's central office switch.
These costs will be substantially reduced once the Company is able to utilize
its own networks to pass telephone traffic to Company owned central office
switches. Consequently the Company expects gross profit margins to improve once
its central office switches are employed to serve telephone customers.
Expenses. Expenses (customer support, selling, general and administrative
expenses) were $28.9 million for fiscal 1997 compared to $19.6 million for
fiscal 1996. The increase in expenses was largely due to an increase in
personnel associated with the expansion of the Company's operations and
recruitment for the roll out of the Company's telecommunications services in
advance of the expected revenues. In addition the Company incurred a one time
reorganization charge of $1.4 million associated with the restructuring of
certain senior management positions during the year which was included in
operating expenses.
EBITDA. The Company's EBITDA decreased from negative $3.9 million to
negative $8.3 million over the year, largely due to the reduced gross margins
and the expansion of the Company's operations in anticipation of the roll out of
telecommunications services. The increase in negative EBITDA was largely within
expectations given that the Company increased its personnel in the middle of
fiscal 1997 in anticipation of two significant events that occurred after the
end of the fiscal year: the launch of the Houston central office switch and the
consummation of the acquisition of the residential cable television and
associated fiber optic network assets of Phonoscope.
Interest Expense, Net. Interest expense (net of interest income and amounts
capitalized) was negative $25.7 million for fiscal 1997, an increase of $19.9
million over net interest expense of negative $5.8 million for fiscal 1996,
reflecting the increase in the Company's debt incurred principally to fund the
build out of its network.
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Fiscal year ended August 31, 1996 compared with eight months ended August 31,
1995
Total revenues. Revenues were $27.6 million for fiscal 1996, an increase of
188% over revenues of $9.6 million for the eight months ended August 31, 1995.
Of the revenues generated in fiscal 1996, 93.8% and 6.2% represented revenues
from cable television and telecommunications, respectively, compared to 91.8%
and 8.2%, respectively, for the eight months ended August 31, 1995.
Cable television. Cable television revenues were $25.9 million for fiscal
1996, an increase of 194%, over cable television revenues of $8.8 million for
the eight months ended August 31, 1995. The growth was attributable in part to
an increase in the average number of cable television subscribers, which
accounted for approximately $15.6 million of the increase. Cable television
revenues also grew in part from an increase in the retail price of the Company's
cable television services which accounted for approximately $1.5 million of the
increase.
Telecommunications. Telecommunications revenues were $1.7 million for
fiscal 1996, an increase of 113% over the eight months ended August 31, 1995.
This growth was largely due to an increase in the average number of
telecommunications lines.
Cost of Services. Cost of services was $11.9 million for fiscal 1996, an
increase of 159%, from $4.6 million for the eight months ended August 31, 1995.
The increases in costs were primarily attributable to the growth in the number
of cable television subscribers and telecommunications lines. Gross margins
increased from 52.4% for the eight months ended August 31, 1995 to 57.0% for
fiscal 1996.
Expenses. Expenses (customer support, selling, general and administrative
expenses) increased to $19.6 million from $12.1 million, or 111%, over the eight
months ended August 31, 1995. The increase was largely due to an increase in
personnel associated with the expansion of the Company's operations and the
rapid growth in the size of the cable television and telecommunications networks
and the number of subscribers.
Included in the above amounts are costs of $2.3 million for fiscal 1996 and
$3.8 million for the eight months ended August 31, 1995, relating to
assimilating acquisitions made by the Company and including severance,
relocation and recruitment costs.
EBITDA. Negative EBITDA increased to $3.9 million for fiscal 1996. The
improvement in negative EBITDA represents an increase of $3.1 million over
negative EBITDA of $7.0 million for eight months ended August 31, 1995. Negative
EBITDA represented 14.1% of total revenues for fiscal 1996 compared to 73.6% of
total revenues for the eight months ended August 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated net losses since its inception, resulting in an
accumulated deficit of $111.4 million as of February 28, 1998. During the past
year, the Company has required external funds to finance capital expenditures
associated with the completion of acquisitions in strategic markets, expansion
of its networks and operating activities. Net cash used in building the
Company's cable television and telecommunications networks and related business
activities was $74.9 million for the first six months of fiscal 1998 (including
$36.5 million for the acquisition of Phonoscope) compared to $27.4 million for
the first six months of fiscal 1997.
From inception and until the issuance of the Senior Notes, the Company
relied primarily on investments from GVL, its principal stockholder, in the form
of equity and convertible notes to fund its operations. Effective March 1, 1998,
GVL converted all of the outstanding GVL Notes, including accrued interest, into
shares of Series A Preferred with an aggregate liquidation preference of
approximately $139.2 million. The Series A Preferred earns dividends at the
annual rate of 9.75%, payable in additional shares, and is convertible under
certain circumstances and at certain prices at the option of the holder into
shares of Multi-Vote Common. VPC has advised the Company that upon consummation
of the Offering it intends to convert the Series A Preferred into
shares of Multi-Vote Common. Based on an initial public offering price of
$ per share, the Series A Preferred will convert into shares
of Multi-Vote Common. None
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of the Company's stockholders or affiliates are under any contractual obligation
to provide additional financing to the Company.
In February 1997, the Company issued the Senior Notes along with 225,000
shares of Non-Voting Common for aggregate net proceeds of $220.2 million. Of
this amount, approximately $79.8 million was placed in an escrow account in
order to cover the first six semi-annual interest payments due on the Senior
Notes. At February 28, 1998, approximately $54.5 million remained in such escrow
account.
In December 1997, the Company obtained the Senior Credit Facility which
consists of a $125 million term loan bearing interest at LIBOR plus 3.5% and a
$25 million revolving credit commitment. The Senior Credit Facility is secured
by a first fixed and floating lien on substantially all of the assets of the
Company and its subsidiaries including liens on the shares of the Company's
subsidiaries. The proceeds of the term loan have been funded although
availability under the Senior Credit Facility will be subject to the Company
meeting certain performance criteria and the limitations on additional
indebtedness, limitations on certain payments, investments and distributions and
limitations on liens and certain asset sales. The Company is in compliance with,
or has obtained waivers for, all covenants of the Senior Credit Facility. The
Company entered into an interest rate swap agreement covering approximately $75
million of the Senior Credit Facility to comply with certain covenants of the
Senior Credit Facility.
The Company believes, based on its current business plan, that the net
proceeds from the Offering, together with its cash on hand and availability
under the Senior Credit Facility, will provide the Company with sufficient
financial resources to fund its capital requirements through the third quarter
of fiscal 2000. The foregoing estimates are based on certain assumptions,
including the timing of the signing of Rights of Entry, the conversion of MDUs
currently served by SMATV systems to the networks and the telecommunications
roll out, each of which may vary significantly from the Company's plan. The
Company plans to fund its future capital requirements through internally
generated funds with additional public or private debt and/or equity offerings.
There can be no assurance that the Company will be successful in obtaining any
necessary financing on reasonable terms or at all. See "Risk
Factors -- Significant Capital Requirements and Need for Additional Financing."
In addition, GVL has the power to prevent the Company from obtaining
additional debt or equity financing. See "Risk Factors -- Control by GVL" and
"Principal Stockholders -- Stockholders' Agreement." GVL is party to an
indenture which limits the aggregate amount of indebtedness which can be
incurred by GVL and its subsidiaries, including the Company taken as a whole
(based upon a ratio of total consolidated indebtedness to consolidated operating
cash flow). As a result, GVL's strategies and the operating results of its
subsidiaries other than the Company may affect the ability of the Company to
incur additional indebtedness. There can be no assurance that GVL will not
restrain the Company's growth or limit the indebtedness incurred by the Company
so as to ensure GVL's compliance with the terms of its debt instruments.
The Company benefits from the fact that it does not require a substantial
capital investment in its cable television and telecommunications networks in
advance of connecting subscribers to its networks since a significant proportion
of the costs comprises the internal wiring and the erection of microwave
transmitting and receiving equipment specific to the MDU. These expenditures
are, to a large extent, "success-based" and will only be incurred when new
properties are brought into service or when existing properties serviced by
SMATV or PBX systems are connected to the networks. When a new Right of Entry is
signed, it takes approximately four months of construction work to activate
signal at the property. Once the property is activated, penetration rates
increase rapidly. The balance of the budgeted capital expenditures is for
infrastructure assets not related to individual MDUs. These assets include
central office switches, cable television head ends, computer hardware and
software and capitalized construction costs. The Company can to some degree
control the timing of the infrastructure capital expenditures by controlling the
timing of the telecommunications roll out and the scope of its expansion.
In order to accelerate the achievement of the Company's strategic goals,
the Company has from time to time held, and continues to hold, preliminary
discussions relating to possible acquisitions by the Company and possible
investments in the Company by strategic investors. There can be no assurance
that any agreement
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with any potential strategic investor or acquisition target will be reached nor
does management believe that any thereof is necessary to successfully implement
its strategic options.
YEAR 2000 COMPLIANCE
OpTel has implemented a Year 2000 program to ensure that its computer
systems and applications will function properly beyond 1999. OpTel believes that
it has allocated adequate resources for this purpose and expects its Year 2000
conversion program to be successfully completed on a timely basis. However,
successful completion of the Year 2000 conversion program is substantially
dependent upon successful implementation of the Company's new customer
management information system. The Company's financial accounting system has not
been upgraded to eliminate potential Year 2000 related malfunctions. The Company
has undertaken a selection process for a new financial accounting system and
plans to have the new system selected and implemented within the next twelve
months. Other than expenses relating to the acquisition of the customer
management information system and financial accounting system OpTel does not
expect to incur significant expenditures to address this issue. See "Risk
Factors -- Year 2000 Risk."
RECENTLY ISSUED ACCOUNTING PRINCIPLES
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," is effective for earnings per share calculations and disclosures for
periods ending after December 15, 1997, including interim periods, and requires
restatement of all prior period earnings per share data that is presented. SFAS
No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per
Share," and provides reporting standards for calculating "Basic" and "Diluted"
earnings per share. The Company has adopted SFAS No. 128 and its earnings per
share computations have been restated for all prior periods.
The Financial Accounting Standards Board ("FASB") issued, in February 1997,
SFAS No. 129, "Disclosure of Information about Capital Structure," which
establishes standards for disclosing information about an entity's capital
structure and is effective for financial statements for periods ending after
December 15, 1997. The Company currently discloses substantially all of the
requirements of SFAS No. 129. Any additional information required will be
disclosed beginning August 31, 1998. There will be no impact on the Company's
results of operations or financial position.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997. The Company
has evaluated the requirements of SFAS No. 130 and will begin disclosing the
appropriate information in the first quarter of fiscal 1999. There will be no
impact on the Company's results of operations or financial position.
The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way public companies disclose information about operating segments,
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company is currently evaluating the applicability of the requirements
of SFAS No. 131. Depending on the outcome of the Company's evaluation,
additional disclosure may be required beginning in fiscal 1999. There will be no
impact on the Company's results of operations or financial position.
INFLATION
The Company does not believe that inflation has had a material effect on
its results of operations to date. However, there can be no assurance that the
Company's business will not be adversely affected by inflation in the future.
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BUSINESS
THE COMPANY
OpTel is a leading network based provider of integrated communications
services, including local and long distance telephone and cable television
services, to residents of MDUs in the United States. As a rapidly growing ICP,
OpTel continues to build upon its position as the largest provider of private
cable television services to MDUs in the United States. In each market that it
serves, OpTel seeks to become the principal competitor in the MDU marketplace to
the ILEC and the incumbent franchise cable television operator by providing a
package of voice, video and Internet access services at competitive prices.
OpTel believes its contractual relationships with MDU owners and associations
and its ability to deliver an integrated service offering to MDU residents over
its own networks provide it with a competitive advantage.
Industry sources estimate that annual revenues generated by the U.S.
communications industry in 1997 were approximately $223 billion (consisting of
approximately $192 billion in telecommunications revenues and $31 billion in
cable television revenues). The Company believes that a significant portion of
such revenue is attributable to residential users. OpTel recognizes the
opportunity to address the residential market by focusing on providing
integrated services to MDUs. MDUs comprise a wide variety of high density
residential complexes, including high- and low-rise apartment buildings,
condominiums, cooperatives, town houses and mobile home communities. According
to 1990 U.S. Census Bureau data, there are more than 13.2 million dwelling units
in MDUs with greater than 10 dwelling units in the United States. Within the MDU
market, the Company focuses on Large MDUs. Based on industry sources, the
Company believes that, within its existing markets, as of March 25, 1998, there
are approximately 3.0 million dwelling units within these Large MDUs.
The Company is currently building telecommunications infrastructure in its
serviced markets and expects, by the end of calendar 1999, to be in a position
to offer facilities based telecommunications services in each of its major
markets. The Company presently offers services where it has a Right of Entry
with an MDU owner to provide its cable television and/or telecommunications
services. The Company classifies a unit as "passed" if it is within an MDU for
which the Company has a Right of Entry and the Company has connected and
activated the equipment necessary to provide services. As of April 30, 1998, the
Company had 369,090 units passed for cable television services. At that date,
OpTel had 202,716 cable television subscribers and 7,399 telecommunication lines
in service.
OpTel began operations in April 1993 with a strategy of consolidating the
then fragmented "private cable" television, or non-franchise cable television,
industry serving MDUs. Securing long-term Rights of Entry has been an integral
element of this strategy. The Company's Rights of Entry typically have original
terms of 10 to 15 years (five years for Rights of Entry with condominium
associations). The weighted average unexpired term of the Company's Rights of
Entry was approximately eight years as of April 30, 1998 (assuming the Company's
exercise of available renewal options). Rights of Entry generally provide
financial incentives to the property owners to promote and sell the Company's
cable television and telecommunications services to MDU residents. The Company
provides video programming to MDUs primarily under exclusive Rights of Entry.
The Company initially offered STS to MDUs serviced under telephone Rights of
Entry utilizing remote PBX switches. In accordance with its communications
strategy, the Company has begun the process of migrating its STS traffic to its
own central office switches and its own network facilities. The Company intends
to grow its business by negotiating additional Rights of Entry to serve MDUs
currently served by other providers and newly-constructed MDUs, by acquiring
other existing operators that serve MDUs, as appropriate, and by providing MDUs
it currently serves for cable television with additional services, such as
telephone and Internet access.
The Company currently provides cable television and telecommunications
services in several metropolitan areas including Houston, Dallas-Fort Worth, Los
Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco,
Chicago, Atlanta and Orlando-Tampa. The Company has commenced offering central
office switched local exchange services in Houston and Dallas-Fort Worth and is
licensed as a CLEC in each
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of its other major markets. The Company selected its current markets based upon
their growth characteristics, competitive conditions, MDU concentrations,
favorable demographics and regulatory environment.
Since April 1995, OpTel has been indirectly majority owned by GVL, which
also owns the second largest cable television operator in Canada (based on
number of subscribers). GVL has invested approximately $250 million in OpTel in
the form of equity capital and subordinated convertible notes (including accrued
interest). See "Prospectus Summary -- Recent Developments." These invested
amounts have been critical to OpTel's growth. In addition, key members of the
Company's management team gained experience in the competitive offering of
telecommunications and cable television to residential markets while serving as
executives of a GVL affiliate in the United Kingdom. OpTel management's
extensive operating experience in both the telecommunications and cable
television industries, including the construction and design of networks and
sales and customer support, provides OpTel with significant expertise in
managing and developing an infrastructure to support voice, video and Internet
access operations.
INDUSTRY OVERVIEW -- MARKET OPPORTUNITIES
Widespread Changes in Communications Industry
Both the telephone and cable television segments of the communications
industry are currently undergoing widespread changes brought about by, among
other things, (i) decisions of federal and state regulators which have opened
the monopoly local telephone and cable television markets to competition, (ii)
the ensuing transformation of the previously monopolistic communications market
controlled by heavily regulated incumbents into a consumer-driven competitive
service industry, and (iii) the need for higher speed, higher capacity networks
to meet the increasing consumer demand for expanded communications services
including broader video choices and high speed Internet services. The
convergence of these trends has created opportunities for new types of
communications companies capable of providing a wide range of voice, video and
data services.
Opening of Communications Markets
Divestiture of the Bell System. Until the passage of recent federal
legislative reform and other state and federal regulatory efforts to expand
competition into the local telephone market, the structure of the U.S.
telecommunications industry was shaped principally by the 1984 court-supervised
divestiture of local telephone services from AT&T (the "Divestiture") and other
judicial and regulatory initiatives which were designed primarily to implement
structural and technical industry changes through which competition could
develop in the long distance market. Under this structure, the RBOCs and certain
other LECs were permitted to retain their monopolies in the provision of local
exchange services, but were required to connect their local subscribers to the
long-distance services of AT&T and other IXCs. Under this regime, two distinct
industry segments developed; competitive IXCs, which offered subscribers long
distance telephone services between judicially defined LATAs, and monopoly LECs,
which offered subscribers local and toll services within judicially defined
LATAs, including connection (or "access") to IXCs for interLATA long-distance
services. As a result, the long-distance business became intensely competitive,
with low barriers to entry and many service providers competing in a
commodity-type market, while providers of local exchange services continued to
face relatively little competition.
Deregulation of Local Telephone Services. After the structural and
technical network changes were put in place following the Divestiture to give
IXCs other than AT&T "equal access" to the local exchange facilities of the
monopoly ILECs, and with long-distance competition beginning to provide
consumers with diverse services and lower rates, regulatory policy gradually
began to examine whether the competitive benefits which were being experienced
in the long-distance marketplace as a result of Divestiture should be expanded
to local exchange services. While a small number of states and the FCC had
already adopted rules and regulations which opened certain limited and discrete
segments of the local exchange market to competition from CAPs and CLECs
offering primarily dedicated high-speed private line and some local switching
services to large business users, the passage of the Telecom Act in February
1996 codified the pro-competitive policies on a national level and required both
the FCC and the state regulatory commissions to adopt dramatic and
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sweeping changes in their rules and regulations in furtherance of those
policies. The Telecom Act required regulators to remove market entry barriers
and to enable companies like OpTel to become full service providers of local
telephone service by, among other things, mandating that the ILECs provide
interconnection and competitively priced network facilities to competitors. In
addition, the Telecom Act permits RBOCs to offer long-distance interLATA
services in competition with IXCs once they have demonstrated that they have
implemented changes to permit economically efficient competition in their local
markets for both business and residential services. The Telecom Act also
repealed the LEC/cable television cross-ownership restriction, which prohibited
LECs from providing multichannel television directly to subscribers in their
telephone service areas. See "-- Regulation."
Deregulation of Cable Television. Unlike the local telephone market, the
cable television market is not subject to regulatory or statutory prohibitions
on competition. Nevertheless, competition to incumbent franchised cable
television operators has developed in only a handful of markets nationwide.
Because of the lack of any meaningful competition, in 1992 Congress passed
legislation providing for the regulation of certain cable rates. Subsequently,
as part of its general goal of supplanting regulation with competition, the
Telecom Act took further steps to provide alternative regulatory structures to
encourage entry into the multichannel video programming distribution market.
OpTel's Opportunity. The incumbent local telephone and cable television
providers to date have generally been slow to expand their services beyond their
traditional lines of business. In particular, the LECs generally have not
offered video programming services, nor have the incumbent cable operators
generally entered the telephone services market. In addition, most of the other
new competitive entrants, including most CLECs, have focused almost exclusively
on providing telephone service to medium to large commercial customers and have
tailored the coverage area of their networks and the configuration of their
business operations to provision services accordingly. Similarly, while a number
of companies have begun to market wireless alternatives to cable television
service, those companies have not generally begun to offer telephone services to
their customers.
Typically, the last mile connection between an ILEC and its customer is a
copper wire twisted pair and the last mile connection of a cable television
company is coaxial cable. The Company believes that in its markets, it is the
only competitor able to serve a single subscriber with both twisted pair and
coaxial cable last mile connections. Accordingly, OpTel believes that it is
well-positioned to take advantage of the new regulatory and market environment
and that it will be among the first to offer a single-source package of
integrated voice, video and Internet access services in its MDU markets. By
combining the enhanced telephone and Internet access services offered by CLECs
with high quality video programming, OpTel will act as a single source provider
of a wide range of voice, video and Internet access services to the MDU market.
OpTel's integrated service offerings are available either individually or in
bundled packages, providing the consumer with added choice and convenience.
STRATEGY
OpTel's goal is to become the nation's largest ICP focusing on MDU markets.
OpTel's strategy for achieving this goal includes the following key components:
Provide an Integrated Service Offering. OpTel believes that by utilizing a
single advanced network infrastructure it can be among the first to market a
competitive integrated package of voice and video services in its target
markets. OpTel focuses exclusively on the integrated communications needs of the
MDU resident, which distinguishes OpTel from other competitors. OpTel believes
that MDU residents are attracted by bundled service offerings, competitive
pricing and integrated billing. The Company plans to supplement its voice and
video offerings with high speed Internet access in all of its serviced markets.
The Company also intends to introduce integrated billing of its bundled services
during fiscal 1999.
Deploy Cost Effective Networks. OpTel's networks are specifically designed
to provide services to MDUs. The Company uses a combination of point-to-point
microwave transmission equipment and fiber optic cable in order to offer a
single source for video, voice telecommunications and eventually high speed
Internet access services. A substantial amount of the capital required to
provide property-specific voice and video services to
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an individual MDU is invested only after the Company and the owner of the MDU
have entered into a Right of Entry for the MDU. The capital expenditures
required to serve an MDU are therefore, to a large extent, "success-based" and
will only be incurred shortly before properties are first brought into service
or as needed to bring non-network served MDUs onto the Company's networks. In
markets served by the Company's microwave networks, OpTel expects that the
incremental capital required for it to launch central office switched
telecommunications services and to connect customers will be lower than that of
its competitors. Unlike copper- and fiber-based systems that require
installation and maintenance of a significant amount of wire and cable, the
Company's microwave networks generally will not require the installation and
maintenance of physical wires between the MDU based equipment and the Company's
Network Hubs. As a result, OpTel expects to enjoy a lower network cost structure
than certain of its competitors.
Pursue Focused Marketing Strategy. Strategic relationships with MDU owners
are a key element of the Company's marketing strategy. The Company negotiates
long term Rights of Entry with MDU owners under which the Company obtains, among
other things, the exclusive right to provide cable television services to an MDU
or group of MDUs and an undertaking by the MDU owner to promote OpTel as the
preferred telecommunications alternative to the ILEC within the MDU. The Rights
of Entry generally provide MDU owners with financial incentives to work closely
with the Company to promote its products and services. The Company offers
prospective customers the opportunity to subscribe for Company services at the
same time they sign their unit leases. The Company believes this access, coupled
with customer preference for a single source of cable television and
telecommunications services, significantly enhances its customer marketing
efforts. In addition, the Company markets to MDU residents through (i) direct
mail and direct sales campaigns, (ii) special promotion and sign-up parties,
(iii) establishment of a physical presence at a MDU and (iv) distribution of
point-of-sale marketing materials.
Provide Superior Customer Service. The Company believes that superior
customer service is important to MDU residents. Therefore, the Company has
dedicated resources to providing services that attract and retain subscribers.
The Company has a national customer service center staffed with knowledgeable
representatives to address the needs of customers 24-hours-a-day,
seven-days-a-week. The Company has established direct lines to facilitate rapid
response to calls initiated by MDU owners and managers. The Company also has
dedicated local service teams that provide prompt installation and response to
customer service calls. Because the Company believes that the best way to
control the quality and consistency of technical and field services is to train
and supervise the service technicians, the Company relies primarily on its own
personnel to perform these functions. The Company also has established stringent
staff training procedures, including its Operational Excellence continuous
improvement program, and internal customer service standards.
Pursue Selective Acquisitions and Strategic Relationships. To expand its
markets and to achieve critical mass in its existing markets, the Company often
evaluates opportunities to make acquisitions. Since May 1996, the Company has
completed six acquisitions representing approximately 700 MDUs served and
103,000 subscribers. In addition, the Company has entered into strategic
relationships for the delivery of high speed Internet access services, and will
continue to evaluate other alliances including those permitting it to host
additional third-party traffic on its switches.
MARKETS
Historically, the Company's strategy has been to enter markets either
through the acquisition of private cable television operators serving the target
market or by entering into Rights of Entry with a major MDU owner in the market.
Upon acquisition of an operator, the Company historically has begun the process
of upgrading the acquired systems by converting MDUs from SMATV technology to
the Company's microwave or, in Houston, fiber optic networks, adding additional
programming and improving customer service. In addition, the Company has been
able to achieve cost efficiencies by consolidating acquired operations into its
existing organization. The Company's strategy for entering new
telecommunications markets is through the deployment of network infrastructure
and interconnecting such infrastructure to the Company's existing video
distribution network. See "-- Network Architecture."
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The following table sets forth the markets where OpTel currently operates
and, for each such market, certain additional information including the date the
Company launched, or intends to launch, its central office switched
telecommunications service offering. The timing and order of the launch of
central office switched telecommunications services in each of the Company's
markets may vary and will depend on a number of factors, and no assurance can be
given the Company will launch such services in each of its markets.
NUMBER OF
UNITS
NUMBER OF IN MDUS CABLE
UNITS IN WITH OVER 150 UNITS PASSED TELEVISION TELECOMMUNICATIONS EXPECTED CLEC SERVICES
LOCATION MARKET(1) UNITS(2) FOR CABLE(3) SUBSCRIBERS LINES IN SERVICE LAUNCH DATE
-------- --------- ------------- ------------ ----------- ------------------ ----------------------
Houston.................... 362,960 315,401 136,722 67,715 2,251 In service
Dallas-Fort Worth.......... 485,623 405,122 43,644 21,395 2,291 In service
Los Angeles................ 730,405 294,644 17,777 10,966 75 Fiscal 1999
San Diego.................. 503,899 304,043 21,224 12,469 164 Fiscal 1999
Miami-Ft. Lauderdale....... 233,507 224,859 20,857 16,290 129 Fiscal 1999
Phoenix.................... 219,334 155,412 24,648 10,377 117 Fiscal 1999
Denver..................... 141,789 105,670 17,449 10,047 303 Fiscal 1999
San Francisco.............. 409,555 246,278 24,466 17,128 68 Fiscal 1999
Chicago.................... 416,985 342,214 29,708 17,974 113 Fiscal 1999
Atlanta.................... 284,805 233,242 9,456 5,146 75 Fiscal 2000
Orlando-Tampa.............. 239,955 204,928 11,396 7,318 245 Fiscal 2000
Other markets(4)........... 198,036 156,925 11,743 5,891 1,568
--------- --------- ------- ------- -----
Total(5)........... 4,226,853 2,988,738 369,090 202,716 7,399
========= ========= ======= ======= =====
- ---------------
(1) Represents rental units in MDUs and is based on information published by
industry sources. The number of units do not include condominiums. According
to 1990 U.S. Census Bureau data there were 1.8 million dwelling units in
condominiums in the Company's markets.
(2) Represents rental units in MDUs with more than 150 dwelling units in the
United States and is based on information published by industry sources. The
number of dwelling units in MDUs with greater than 150 dwelling units do not
include condominiums.
(3) Units passed represents the number of units to which the Company has
connected its cable television systems. The Company has connected and
activated telecommunications infrastructure at only 27,346 of the units
passed for cable television services.
(4) Other markets include Austin, Corpus Christi and San Antonio, Texas; Daytona
Beach and Tallahassee, Florida; Las Vegas, Nevada; Indianapolis, Indiana;
and greater Washington, D.C. Other than with respect to Austin, Texas and
Indianapolis, Indiana, the Company has not yet decided whether to
concentrate in these markets and launch telecommunication services or to
dispose of assets in these markets.
(5) Excludes 29,051 units passed for cable, 15,828 cable television subscribers,
and 778 telecommunications lines in services related to the portion of the
acquisition of the ICS Operations not consummated as of April 30, 1998.
The Company installed its first central office switch in the Houston market
in October 1997 and currently offers switched access local exchange services to
most of its telecommunications customers in Houston. The Company installed,
activated and tested its central office switch in the Dallas-Fort Worth market
in April 1998 and is currently providing switched access local exchange services
to select customers in Dallas-Fort Worth. As of April 30, the Company had 44,359
units under contract for telecommunications in Houston and Dallas-Fort Worth.
The Company intends to progressively commence full scale marketing of local
exchange based telecommunications services in all of its major markets by the
end of calendar 1999. The Company is licensed as a CLEC in all of its major
markets and has completed or is negotiating interconnection agreements with the
principal ILECs in each of these markets.
SERVICES
OpTel provides a wide range of voice, video and Internet access services,
both individually and as integrated service offerings.
Voice. OpTel's telephone Rights of Entry generally provide that the MDU
owner will market exclusively OpTel's local telephone services to MDU residents.
In the markets where it has central office switches, OpTel competes with ILECs
and CLECs by offering local exchange telephone service, including standard dial
tone access and substantially all other feature groups provided by the ILEC.
OpTel offers a wide range of value-
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added services, including call forwarding, call waiting, caller identification,
conference calling, speed dial, calling card, 800-numbers and voice mail. OpTel
generally prices its local telephone offering at a discount to the ILEC rates in
each of its serviced markets. OpTel also provides long distance services,
including outbound, inbound, calling card and operator services. OpTel contracts
or plans to contract for other ancillary services, including operator service,
directory listings and emergency 911 service and, in certain markets, transport,
from the local ILEC and other service providers.
The Company currently provides telephone service under two regulatory
frameworks. In Houston and Dallas-Fort Worth, the Company provides telephone
services as a CLEC through Company owned central office switches. In other
markets, OpTel provides telephone services as an STS provider. The Company
intends to convert substantially all of its STS telephone operations to CLEC
operations and to provide switched access local exchange services to
substantially all of its telephone customers by the end of calendar 1999.
Video. OpTel offers its subscribers a full range of popular cable
television programming at competitive prices. The Company's networks are capable
of delivering up to 72 uncompressed analog channels of programming. The Company
offers various programming packages to its cable television subscribers. The
Company's basic video programming package provides extensive channel selection
featuring all major cable and broadcast networks. The Company's premium video
programming package features uninterrupted, full-length motion pictures,
sporting events, concerts and other entertainment programming and includes HBO,
Cinemax, Showtime and The Movie Channel, as well as supplementary channels such
as HBO 2, HBO 3 and Cinemax 2. Premium services are offered individually or in
discounted packages with basic or other services. Certain of the Company's
systems are capable of offering movies, sporting events, concerts and other
special events on a pay-per-view basis.
In addition, the programming selections available at an MDU can be tailored
to the demographics of each MDU and, unlike franchise cable television operators
which may be required to carry all local broadcast channels and public access
channels, the Company can utilize all of its available channels to provide
popular entertainment, news and information programming.
The Company's programming packages are generally competitively priced
compared to similar packages offered by the incumbent franchise cable television
operator.
To enhance its video programming offerings, the Company has made
arrangements with a DBS service provider for distribution of additional video
programming via DBS technology. The Company currently provides this programming
on a limited basis to MDUs in its San Francisco and Miami-Ft. Lauderdale markets
using a single, standard direct broadcast satellite receiving antenna at each
serviced MDU. The DBS signal is received in digital form, converted at the MDU
receiver site to analog form and over coaxial cable distributed to the
subscriber's unit. DBS transport permits the Company to provide basic
programming or to supplement the Company's other programming services.
High-Speed Internet Access. OpTel currently provides Internet access
service to residents of certain properties in the Houston market in
collaboration with a local ISP and a local CAP. OpTel is currently testing a
high-speed Internet access service in Dallas-Fort Worth in conjunction with
I(3)S, Inc. ("I(3)S"), an ISP. The Company and I(3)S have a strategic alliance
to provide high-speed Internet services in the Company's major markets.
Following successful completion of its testing, the Company intends to roll out
its high speed Internet access service in substantially all of its major
markets.
The Company expects to offer customers a choice of transmission speeds
ranging from approximately 64 kilobits ("KB") per second (normal dial-up
Internet speed is typically 28.8 KB per second) to 10 megabits ("MB") per
second. In MDUs where data transport is to be provided via the Company's
networks, the Company expects to be able to offer transmission speeds of up to
10 MB per second. In MDUs where the Company utilizes leased transport
facilities, the Company may choose to offer transmission speeds of up to 1.5 MB
per second, however, higher transmission speeds could be offered through the
lease of incremental bandwidth. Internet connections providing transmission
speeds over 0.5 MB per second are generally referred to as "high-speed." The
transmission speeds that the Company intends to offer will greatly exceed the 64
KB
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per second speed available from many LECs through Integrated Services Digital
Network ("ISDN") technology.
OpTel initially will connect each property to the ISP's point of presence
using OpTel's microwave transport or its owned or leased fiber transport. At
each property, the data stream will be carried to the subscriber's unit via the
property's existing coaxial cable distribution wiring. The subscriber will
connect a personal computer to the high-speed Internet service using software
provided by the ISP and the subscriber's cable modem which will be connected to
a standard cable television outlet.
Wholesale Services to ISPs. The Company believes that with the recent
growth in demand for Internet services, numerous ISPs are unable to obtain
network capacity rapidly enough to meet customer demand and eliminate network
congestion problems. The Company plans to supplement its core end user product
offerings by providing a full array of local services to ISPs, including
telephone numbers and switched and dedicated access to the Internet.
NETWORK ARCHITECTURE
The Company's strategy is to deliver all of its service offerings through
integrated networks. OpTel's networks are designed specifically to provide
services to MDUs. The Company uses a combination of point-to-point microwave
transmission equipment and fiber optic cable in order to offer a single source
for video, voice telecommunications and eventually high speed Internet access
services. As of April 30, 1998, the Company had 46 microwave networks in service
in eleven metropolitan areas, and, in Houston, three fiber optic networks,
covering over 400 route miles. In order to integrate service offerings, the
Company actively adds properties it services within existing network coverage to
these networks and seeks to cost effectively develop new networks to cover MDU
clusters serviced by the Company in new or expanded markets.
To maximize network coverage of its microwave networks, the Company
establishes hubs designed to service MDU clusters (each a "Network Hub").
Network Hubs usually are located on rooftops or towers. The network is extended
from the Network Hubs to the serviced MDUs via point-to-point microwave. Each
Network Hub includes equipment to receive and transmit the Company's video
programming. The signal is transmitted to a receiving dish at the MDU which must
be within the line of site of the Network Hub or a repeater site. To ensure
transmission quality, the Company limits the radius of each microwave link to
between four and ten miles, depending on topographic and climatic conditions.
Within the MDUs it serves the Company distributes video programming via
conventional coaxial cable. The on-property network uses a combination of traps
(electronic filtering devices), addressable decoder-converter boxes and
interdiction. The Company has recently completed field testing interdiction
devices and has begun deploying them in several of its current systems.
Interdiction devices will permit the Company to activate and deactivate services
or specific channels by remote command from a centralized location. When
implemented, these devices will afford quicker activation and disconnection,
eliminate or significantly reduce the need for traps and for decoder-converter
boxes in the home, eliminate or significantly reduce service calls and provide
better picture quality. The Company believes that these devices will also result
in better collection experience, higher premium service penetration and greater
customer satisfaction.
OpTel's network design is digital capable. All voice traffic over OpTel's
networks is digitally compressed. The networks will facilitate digital
compression for video signal when economical and required by the marketplace. If
OpTel is required to carry digital broadcast programming (e.g., HDTV), then the
networks may be upgraded to transmit such programming without material
architectural change. See "-- Regulation."
The Company transports video programming to MDUs which are not yet on the
Company's networks by receiving video programming at a self-contained SMATV head
end located at the MDU. The Company intends to convert substantially all of its
SMATV systems to 18GHz, 12GHz (principally in Denver) or fiber optic networks by
the end of fiscal 2000.
To roll out its central office switched voice telecommunications offering
in areas covered by its microwave networks, the Company will link its Network
Hubs to both the central office switch and other Network Hubs to form a network
backbone. This network backbone will utilize either of 6GHz or 11GHz microwave
or fiber
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optic transmission capacity to form synchronous optical network ("SONET")
self-healing rings that provide high speed redundant connections for the
delivery of voice traffic. Where it uses fiber, the Company either will install
its own fiber optic facilities or on a limited basis will lease fiber from other
providers. Voice traffic will be delivered from a Network Hub to a serviced MDU
over 23GHz microwave links. The 23GHz microwave links will use the same
microwave transmission equipment that is used to relay video signal. Voice
traffic is delivered to the individual unit using a traditional copper wire
twisted pair. The Company has recently commenced offering network based central
office switched telecommunication services on its fiber optic networks in
Houston and in Dallas-Fort Worth over its microwave networks.
The Company has chosen the 5ESS-2000 digital switch manufactured by Lucent.
Unlike traditional long distance or local switches, the Lucent switch enables
the Company to provide local and long distance services from a single platform.
This uniform and advanced switch platform enables the Company to (i) deploy
features and functions quickly in all of its networks, (ii) expand switch
capacity in a cost effective manner and (iii) lower maintenance costs through
reduced training and spare part requirements. The Company expects to continue to
deploy Lucent switches to provide a consistent technology platform throughout
its network. The Company will use its networks to aggregate MDU long distance
and local traffic at its central office switch. As an initial entry strategy in
certain markets, the Company intends to lease telecommunication switch capacity
in certain markets from third-party providers in order to accelerate the roll
out of telephone services and to migrate telecommunications services to its own
switch over time. OpTel has entered into an agreement with a national CLEC,
pursuant to which OpTel may purchase local telephone service and local loop
elements. During any time period and in any market that the Company is
purchasing such services from the CLEC, the CLEC has the exclusive right to
provide OpTel with these services. OpTel is required to maintain each service
ordered for a 24-month minimum period.
In areas where the Company offers telecommunications services but where it
has not yet migrated to its networked central office switch architecture, a PBX
switch is installed at the MDU and traffic from the MDU is transported via
leased trunk lines to the LEC's central office. From the LEC's central office,
local calls are routed through the LEC's network. The Company intends to convert
all of its PBX serviced properties to its central office switched
telecommunications offering.
OpTel has contracted with a third-party to monitor its networked
telecommunications services. In 1998, OpTel will establish a Network Operations
Center to internalize the functions now provided by the third-party and to
enhance monitoring, control and maintenance of its networks. OpTel's Network
Operational Center is intended to be operational in August, 1998 at its Dallas
headquarters and will be staffed 24-hours-a-day, seven-days-a-week. The Network
Operations Center will monitor and manage OpTel's central office telephone
switches, PBX switches, video headend equipment and certain additional elements
of its telecommunications and cable television networks.
SALES AND MARKETING
A critical aspect of the Company's sales and marketing efforts is the
development of strategic contractual relationships with MDU owners. These
relationships encourage the owners to promote and sell the Company's cable
television and telecommunications services to MDU residents. The Company intends
to grow its business by negotiating additional Rights of Entry to serve MDUs
currently served by other providers and newly-constructed MDUs, by acquiring
other existing operators that serve MDUs, as appropriate, and by providing MDUs
it currently serves for cable television with additional services, such as
telephone and Internet access.
The Company tailors its sales and marketing efforts to two different
constituencies: (i) owners of MDUs and their agents and (ii) residents at MDUs
for which the Company has entered into Rights of Entry. Each constituency is
served by separate sales and marketing teams.
Sales and Marketing to MDU Owners
The Company maintains a full-time professional sales force dedicated to
securing Rights of Entry from owners of MDUs. Many of the Company's sales
representatives have previous experience in commercial real
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estate sales and leasing. The Company has developed an incentive compensation
plan for sales personnel which the Company believes encourages sales personnel
to target MDUs with more favorable demographic characteristics.
Marketing to local MDU owners is conducted primarily by (i) using
established relationships with property developers, owners and management
companies, (ii) direct mail and direct sales campaigns to owners and apartment
managers, (iii) canvassing MDU owners with properties within the coverage of the
Company's existing and planned networks and (iv) attending and participating in
trade shows, conventions and seminars targeted to the MDU industry. In addition,
the Company markets to owners of large multiregional portfolios of MDUs via a
dedicated sales team. When marketing to MDUs, the Company emphasizes the
following competitive advantages:
New Revenue Source for MDU Owner. An MDU owner who enters into Rights of
Entry with the Company generally receives a percentage of the revenue generated
by the MDU. The revenue sharing percentages generally range between six and ten
percent of such revenue, are often scaled based on penetration and are fixed
over the term of the Right of Entry. The Company may from time to time pay
up-front "key-money" in lieu of or in combination with revenue participation.
While some franchise cable television operators and ILECs now offer revenue
sharing and access fee arrangements to some MDU owners, it is the Company's
experience that neither the ILECs nor the incumbent franchise cable television
operators are willing to offer broad-based, revenue-based incentive compensation
to MDU owners generally.
Property Enhancements. The Company often installs a package of
telecommunications and security enhancements at the MDUs it serves, at a nominal
cost or at no cost to the MDU owner. For example, the Company can install a
monitoring camera at the main entrance that permits MDU residents to identify
guests by tuning their television set to the building's security channel. In
addition, the Company often provides a dedicated information channel that
permits the building's management to send messages to the MDU residents over the
private cable television system. These enhancements are relatively inexpensive
for the Company to provide and can be important to MDU owners and property
managers concerned with security and emergency communications.
New Marketing Tool and Amenity to Rent Apartments. The principal concern of
an MDU owner is to rent apartments. The Company believes that its services and
property enhancements can serve as an important marketing tool for owners to
attract prospective tenants because its services are generally provided at a
price competitive with those charged by the franchise cable operator and lower
than those charged by the ILEC and long distance carriers. The Company works
with on-site managers to emphasize the benefits of the Company's services and
the added value and convenience provided by the Company. The Company also
maintains direct lines to facilitate rapid response to customer support calls
initiated by MDU owners and managers.
Marketing to MDU Residents
Once an MDU owner executes a Right of Entry, the Company aggressively
markets its services to actual and potential subscribers within the MDU in order
to increase penetration rates for basic and additional services. The Company
believes that its best opportunity for a sale arises when a resident first signs
a lease and takes occupancy in an MDU. Accordingly, the Company believes that
during the first few years after it activates cable television or
telecommunications services at an MDU it benefits from the high rate of MDU
resident turnover. The Company has developed orientation and incentive programs
for on-site property managers and leasing agents, with the objective of
enlisting them as the Company's subscriber sales force. In addition, the Company
markets to MDU residents through (i) direct mail and direct sales campaigns,
(ii) special promotions and sign-up parties, (iii) establishment of a physical
presence at a building and (iv) distribution of point-of-sale marketing
materials. The Company stresses the following themes when marketing its services
to MDU tenants:
Simplicity and Convenience. In general, a subscriber can order any of the
Company's services through the MDU's leasing agent at the time of lease signing.
In addition, in certain of its markets, the Company is able to provide one stop
shopping for both cable television and telecommunications services.
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Competitive Pricing. The Company believes it offers a competitive
telecommunications offering and cable television channel line-up (often
including pay-per-view and premium services) at prices that are generally
competitive with those charged by the ILEC and local franchise cable television
operator. Upon introduction of its integrated billing system, the Company plans
to offer pricing incentives to purchase more than one service from OpTel.
Superior Video Offering. The number of channels provided by the Company at
an MDU generally equals or exceeds that of the local franchise operator in that
market. In addition, the programming selections available at an MDU can be
tailored to the demographic characteristics of the MDU and, unlike franchise
cable television operators which may be required to carry all local broadcast
channels and public access channels, the Company can utilize all of its
available channels to provide popular programming.
Better Service and Quality. The Company is upgrading its networks and
support systems to ensure continued reliable, high quality delivery of a range
of cable television and telecommunications services and expanding its offerings
to encompass a broad range of value-added telecommunications services. The
Company is committed to providing excellent customer service. The Company
believes the most effective means of attracting and retaining MDU owners and
subscribers is by providing high quality subscriber service, including: (i)
24-hour-a-day, seven-day-a-week subscriber telephone support, (ii) computerized
tracking of all incoming calls to minimize waiting times, (iii) service calls
generally made the same day the subscriber indicates a service problem, (iv)
flexible, seven-day-a-week installation and service appointments, (v) follow-up
calls and on-site inspections to verify subscriber satisfaction, and (vi) 80% of
installations completed within three business days of receiving the initial
installation request, often within 24 hours. The Company also uses focus groups
and subscriber surveys to monitor subscriber satisfaction.
STRATEGIC RELATIONSHIPS WITH MDU OWNERS
A critical aspect of the Company's growth strategy is the development of
strategic relationships with owners of MDU portfolios. These relationships
encourage the MDU owner (which may be an ownership association) to promote and
sell the Company's cable television and telecommunications services to MDU
residents.
The Company solicits and negotiates Rights of Entry with owners of
national, regional and local portfolios of MDUs, as well as with institutions
such as hospitals, universities and hotels. The Company's Rights of Entry
typically have original terms of ten to fifteen years (five years for Rights of
Entry with condominium associations). The weighted average unexpired term of the
Company's Rights of Entry was approximately eight years as of April 30, 1998
(assuming the Company's exercise of available renewal options).
Many Rights of Entry provide MDU owners with financial incentives to work
closely with the Company to promote its products and services. Financial
incentives may include revenue sharing or payment of up-front inducements to MDU
owners. In addition, the Company believes that the delivery of special services
tailored to MDU owners and residents provides marketing advantages to the MDU
owner in leasing its units. The Rights of Entry acquired by the Company through
its various acquisitions (which represent approximately 77% of the Company's
units under contract as of April 30, 1998) have not always contained all of the
foregoing terms and provisions.
The long-term Rights of Entry negotiated with MDU owners effectively make
the Company the exclusive multichannel television provider, leaving MDU
residents with the option of receiving multichannel television from the Company
or receiving off-air programming from local broadcasters. Rights of Entry
covering telecommunications include an undertaking by the MDU owner to promote
OpTel as the preferred telecommunications alternative to the ILEC within the
MDU. The Company believes that the development of strategic relationships with
MDU owners will enable the Company to maintain its preferred competitive
position even if the exclusivity of the Rights of Entry becomes limited by
future developments. However, statutory limitations on exclusivity could
adversely affect the Company's ability to form new strategic relationships with
MDU owners and could increase the capital costs associated therewith. See "Risk
Factors -- Risks Associated with Rights of Entry."
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COMPETITION
OpTel competes with a wide range of service providers for each of the
services it provides. Substantially all markets for voice, video and Internet
services are highly competitive and the Company expects that competition will
intensify. In each of its markets, the Company faces significant competition
from larger companies with greater access to capital, technology and other
competitive resources. The Company's switched local exchange services compete
with the ILEC, other STS providers, CLECs and CAPs and will compete with long
distance telephone companies and franchise cable television operators as they
begin to enter the local telephone business. The Company's long distance
services compete with established IXCs and resellers. In addition, recent
telecommunications offerings, including PCS, and future offerings may increase
competition in the telecommunications industry. The Company's private cable
television services compete with incumbent franchise cable television operators
as well as wireless cable television operators, other private cable television
operators, DBS operators and stand-alone satellite service providers. Recent and
future legislative, regulatory and technological developments likely will result
in additional competition in each of the markets in which the Company competes.
Moreover, mergers, joint ventures and alliances among franchise, wireless or
private cable television operators and RBOCs may result in providers capable of
offering bundled cable television and telecommunications services in direct
competition with the Company. Although the Company as a matter of course
investigates new sources of programming and technologies that may increase its
range of services, other larger and more diversified competitors may attract the
targeted MDUs based on their increased menu of services. While the Company
believes that the exclusivity provisions of its Rights of Entry provide it with
competitive advantages, such advantages may be significantly diminished by
technological and other developments beyond the control of the Company. In
addition, technological developments may allow competitors of the Company to
bypass property owners altogether and market their services directly to tenants
of MDUs. See "Risk Factors -- Risks Associated with Rights of Entry" and
"-- Competition."
Certain of the Company's current and potential competitors are described
below.
ILECs. In each of its markets, OpTel faces, and expects to continue to
face, significant competition for the local exchange services it offers from the
ILECs, which currently dominate their local telephone markets. OpTel competes
with the ILECs in its markets on the basis of product offerings (including the
ability to offer integrated voice and video services), reliability, technology
and customer service, as well as price.
In addition, under the Telecom Act and ensuing federal and state regulatory
initiatives, barriers to local exchange competition are being removed. The
introduction of such competition, however, also establishes the predicate for
the incumbent RBOCs to provide in-region interexchange long distance services.
The RBOCs are currently allowed to offer "incidental" long distance service
in-region and to offer out-of-region long distance service. Once the RBOCs are
allowed to offer in-region long distance services, they will also be in a
position to offer single source local and long distance service similar to that
offered by OpTel and proposed by the three largest IXCs (AT&T, MCI and Sprint
Corporation). The Company expects that the increased competition made possible
by regulatory reform will result in certain pricing and margin pressures in the
telecommunications services businesses. See "Risk Factors -- Regulation" and
"-- Regulation."
OpTel has sought, and will continue to seek, to provide a full range of
local voice services in competition with ILECs in its service areas. The Company
expects to compete in this market by (i) establishing strategic relationships
with MDU owners so as to allow the Company to market effectively to MDU
residents, (ii) providing value added, enhanced services to MDU residents, (iii)
bundling its telecommunications and cable television services, (iv) providing a
high level of customer service and responsiveness, and (v) competitively pricing
its products.
The Telecom Act permits the ILECs and others to provide a wide variety of
video services directly to subscribers in competition with OpTel. Various LECs
currently provide video services within and outside their telephone service
areas through a variety of distribution methods, including both the deployment
of broadband wire facilities and the use of wireless transmission facilities.
The Company cannot predict the likelihood of success of video service ventures
by LECs or the impact on the Company of such competitive ventures.
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CLECs and Other Competitors. OpTel also faces, and expects to continue to
face, competition from other potential competitors in certain of its markets.
Other CLECs compete for local telephone services, although they have to date
focused primarily on the market for corporate customers. In addition, potential
competitors capable of offering private line and special access services also
include other smaller long distance carriers, cable television companies,
electric utilities, microwave carriers, wireless telephone system operators and
private networks built by large end-users. However, OpTel believes that it will
be among the first to offer an integrated package of voice, video and Internet
access services to customers in MDUs.
Incumbent Franchise Cable Systems. The Company's major competition for
cable television Rights of Entry in each market comes from the incumbent
franchise cable television operator. In certain markets serviced by the Company,
franchise cable television operators now offer revenue sharing and access fee
arrangements to MDU owners. There can be no assurance that these payments will
not increase in the future as competition increases for access to the higher
quality MDUs. Another basis of competition is the breadth of programming and
range of services offered. The Company competes with franchise cable operators
by (i) focusing exclusively on MDUs, (ii) sharing profits with MDU owners, (iii)
providing an integrated product offering that to an increasing extent in the
future will include Internet services, (iv) offering customized programming, and
(v) charging lower cable and local telephone rates to subscribers.
Multipoint Multichannel Distribution Systems. MMDS systems are similar to
the Company's 18GHz and 12GHz networks in that they use microwave transmitting
and receiving equipment. MMDS differs from 18GHz and 12GHz in that (i) it
"broadcasts" its video programming directly to individual subscribers and
generally not to an MDU's receiver and (ii) its systems transmit in an
omni-directional manner, while 18GHz systems are point-to-point. As a result,
MMDS wireless cable can provide service to all households within a wireless
operator's "line-of-sight." The 2.5GHz spectrum utilized by MMDS wireless cable
was initially allocated by the FCC to applicants other than MMDS operators
within a given market, with 20 of the available channels generally allocated to
educational institutions. As a result, MMDS wireless operators have had
difficulty acquiring or leasing the critical mass of channels required to offer
a diverse programming lineup. Moreover, absent digital compression technology,
channel capacity is limited to 33 analog channels.
Local Multipoint Distribution Service. The FCC has issued rules
reallocating the 28GHz band to create a new local exchange and video programming
delivery service referred to as local multipoint distribution service ("LMDS").
LMDS licensees may hold up to 1000MHz of spectrum in each prescribed geographic
area. LMDS systems, like MMDS, will use point-to-multipoint microwave
distribution. Unlike MMDS, however, LMDS systems, using the proposed allocation
in the 28GHz band, will be able to provide channel capacity equal or greater to
that of most cable systems, including the Company's. In addition, LMDS systems
may include subscriber-to-hub transmission capabilities, which would allow them
to provide interactive and telecommunication services. In March 1998, the FCC
completed its auction of LMDS licenses. So far, however, there has been no
significant commercial deployment of LMDS systems in the Company's serviced
markets.
SMATV Systems. The largest number of private cable companies are operators
of SMATV systems. Like the Company, these SMATV operators offer a multichannel
television service pursuant to Rights of Entry with MDU owners. Where the
Company has introduced or will introduce 18GHz systems, the Company competes
with SMATV systems on the basis of (i) larger channel offerings (typically SMATV
offers 33 to 45 channels), (ii) the quality of its video programming delivery,
(iii) customer service, and (iv) the perceived high price of SMATV relative to
the programming package provided.
Direct Broadcast Satellite. DBS systems involve the transmission of encoded
video programming direct from a satellite to the home user without any
intermediate processing or retransmission by a terrestrial operator. Although
prices have been decreasing, DBS service typically requires the purchase of
equipment and installation fees which are a significant cost to the subscriber.
In addition, subscribers generally pay a monthly programming fee to receive DBS
service, which can be lower than those charged by the Company before
consideration of the equipment costs. However, the Company believes that it can
effectively compete with DBS systems in the MDU marketplace for the following
reasons. First, DBS line-of-sight problems are significant (unless an entire MDU
is connected to the service) because a DBS antenna must be pointed in the
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proper direction to receive video programming from the satellite. In addition,
most MDU owners prohibit the placement of individual antennas on their property
by MDU residents. More importantly, DBS operators are generally not permitted to
retransmit network or local broadcasting programming. Certain DBS operators have
announced "MDU programs" which generally consist of either (i) paying
commissions to a local satellite dish dealer who has, at its own expense,
overbuilt an MDU or (ii) billing MDU owners for the service on a bulk basis. The
Company's Rights of Entry currently prohibit an MDU owner from allowing a DBS
system to be installed at the MDU.
Internet Services. The market for Internet access services is extremely
competitive and highly fragmented. No significant barriers to entry exist, and
competition in this market is expected to intensify as use of the Internet
grows. The Company competes (or in the future may compete) directly or
indirectly with (i) national and regional ISPs, (ii) national telecommunications
companies, (iii) LECs, (iv) cable operators, and (v) nonprofit or educational
ISPs. Some of these present or potential future competitors have or can be
expected to have substantially greater market presence and financial, technical,
marketing and other resources than the Company. Certain of the Company's online
competitors have introduced unlimited access to the Internet and their
proprietary content at flat rates, and certain of the LECs have also introduced
competitive flat-rate pricing for unlimited access (without a set-up fee for at
least some period of time). There can be no assurance that competition will not
lead to pricing pressures in the Internet business.
Advances in communications technology as well as changes in the marketplace
and the regulatory and legislative environment are constantly occurring. In
addition, a continuing trend toward business combinations and alliances in the
communications industry may also create significant new competitors to OpTel.
The Company cannot predict whether competition from such developing and future
technologies or from such future competitors will have a material impact on its
operations. See "Risk Factors -- Competition."
REGULATION
The telecommunications and multichannel television industries are subject
to extensive regulation at the federal, state and local levels. The following
summary does not purport to describe all present and proposed federal, state and
local regulations and legislation relating to the telecommunications and
multichannel television industries. Legislative and regulatory proposals under
consideration from time to time by Congress and various federal agencies, as
well as state and local franchise requirements, have in the past, and may in the
future, materially affect the Company and the telecommunications and
multichannel television industries. Additionally, many aspects of regulation at
the federal, state and local levels currently are subject to judicial review or
are the subject of administrative or legislative proposals to modify, repeal or
adopt new laws and administrative regulations and policies. Neither the outcome
of these proceedings nor their impact on the Company can be predicted at this
time. The Company believes that it is in compliance in all material respects
with all federal, state and local regulations applicable to it. In some
instances, the Company has acquired businesses that did not comply with all
regulations applicable to them and it undertook to remediate such matters as
soon as practicable.
TELECOMMUNICATIONS ACT OF 1996
The Telecom Act, which amended the Communications Act of 1933 (as amended,
the "Communications Act"), has altered, and will continue to alter, federal,
state and local laws and regulations regarding telecommunications providers and
services. The law is intended, in part, to promote competition in the
marketplace for local telephone service and in the delivery of video and other
services. Although the Company believes that certain provisions of the Telecom
Act will help the Company compete with ILECs and with franchised cable
operators, it is not possible at this time to predict the effect of the Telecom
Act on the telecommunications and multichannel television industries in general
or the Company in particular. In large part, the impact of the Telecom Act will
depend upon the outcome of various FCC rulemaking proceedings to interpret and
implement the Telecom Act.
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TELECOMMUNICATIONS REGULATION
The telecommunications services provided by the Company are subject to
regulation by federal, state and local government agencies. As the Company
implements its telecommunications strategy, which includes replacing many of its
current PBX switches with networked central office switches, the Company will
increasingly become regulated as a CLEC. The FCC has jurisdiction over
interstate services, and state regulatory commissions exercise jurisdiction over
intrastate services. Additionally, local authorities may regulate limited
aspects of the Company's business, such as the use of public rights-of-way. The
following subsections summarize the local, state and federal regulations that
pertain to the Company's current and projected telecommunications services.
Competitive Local Exchange Carrier Regulation
Recent and impending changes in federal law and regulation likely will
affect the conduct of the Company's telecommunication service business. The FCC
historically has left the regulation of the intrastate aspects of local exchange
service to the states. It has, however, exercised its jurisdiction over
interstate matters and jurisdictionally mixed matters respecting local telephone
service. The Telecom Act expands the FCC's authority to regulate local exchange
service and there can be no assurance that the FCC will not exercise this
authority aggressively.
State regulation of local exchange service traditionally has favored the
ILECs. The state laws have, with the exception of STS, generally prohibited
competition in the local exchange services market. The Telecom Act expressly
preempts such prohibitions. The Telecom Act declares that no state or local laws
or regulations may prohibit or have the effect of prohibiting the ability of any
entity to provide any interstate or intrastate telecommunications service.
States may, however, impose "competitively neutral" requirements regarding
universal service, public safety and welfare, service quality and consumer
protection. Local authorities may also require reasonable, competitively neutral
compensation for use of the public rights-of-way.
The Company anticipates that it will, in the future, increasingly compete
in telecommunications markets as a CLEC. For purposes of the Telecom Act, CLECs
and ILECs are subject to the same basic set of requirements. However, certain
additional obligations are imposed on ILECs, but not on CLECs. Although the
Company does not believe that the regulatory burdens applicable to CLECs will
have a material effect on its business, no assurance can be given at this time
regarding the extent or impact of such regulation.
The Telecom Act requires all carriers, both CLECs and ILECs, to
interconnect with the facilities of other carriers, resell their services,
provide number portability, provide dialing parity, afford access to their
poles, ducts, conduits and rights-of-way, and to establish reciprocal
compensation for the transport and termination of other LECs' telephone traffic.
All providers of telecommunications services are also subject to the Telecom
Act's requirements that they contribute to state and federal universal service
funds. ILECs are subject to certain additional requirements, such as a duty to
negotiate interconnection agreements in good faith, to unbundle elements of
their networks, to provide nondiscriminatory interconnection with their
networks, to comply with specific resale obligations, to provide notice of
changes to their networks and to allow collocation of other carriers' equipment
on their premises. The Company is not, however, considered an ILEC in any state.
The FCC and various state PUCs are in the process of defining the precise
contours of the requirements that will govern local exchange service in the
future. Although the Telecom Act sets forth certain standards, it also
authorizes the states to adopt additional regulations provided that such
regulations do not conflict with the federal standards. It is unclear at this
time how the states will respond to the Telecom Act, and what additional
regulations they may adopt. Moreover, the United States Court of Appeals for the
Eighth Circuit overturned portions of the FCC's First Report and Order that had
set forth pricing methodologies for unbundling, resale and interconnection, and
that had also set forth certain technical requirements, such as obligations
relating to quality of service and combination of unbundled network elements.
The Supreme Court has granted certiorari and agreed to review the Eighth Circuit
decision. Further, a U.S. District Court has held unconstitutional certain
provisions of the Telecom Act that limit the ability of the RBOCs to provide
in-region long-distance telecommunications services. This decision has been
stayed pending appeal. Absent these
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restrictions, the RBOCs may have less incentive to cooperate with CLECs seeking
to enter local exchange markets. The Company cannot predict the outcome of this
litigation or the impact of any court decision on the Company's operations.
It is not possible for the Company to predict the outcome of these or any
other proceedings relating to the Telecom Act. Nonetheless, at this time it is
clear that an increasing number of service providers will be seeking to compete
as CLECs in the local exchange markets and that state and federal regulations
will, to some extent, allow for such market entry. Although jurisdictional lines
of authority and basic implementation issues are being determined by the FCC and
the federal courts in accordance with the statutory provisions outlined above,
several states already have begun the process of opening the local exchange
market to competition.
Most states require companies seeking to compete in intrastate
telecommunications services to be certified to provide such services. These
certifications generally require a showing that the carrier has the financial,
managerial and technical resources to offer the proposed services consistent
with the public interest. State regulation of telecommunications services may
impose upon the Company additional regulatory burdens, including quality of
service obligations and universal service contributions.
Shared Tenant Services
The resale of STS is subject to the terms and conditions in the tariffs of
the telecommunications company whose services it resells and to regulation by
the states in which the Company resells such services. Historically, virtually
all such telecommunications company tariffs flatly prohibited resale of local
exchange service. However, in recent years several state legislatures and PUCs
determined that resale of local exchange service is in the public interest and
have directed telecommunications companies within their jurisdictions to allow
for resale of local exchange service, opening the way for STS operations.
Moreover, the Telecom Act requires such resale pursuant to interconnection
agreements with the ILEC. In some states, PUCs have issued detailed regulations
governing the provision of STS and other resale services. In other jurisdictions
where no formal requirements have been adopted, most telecommunications
companies have nonetheless modified their tariffs to provide for resale of local
exchange services.
The precise terms and conditions under which such resale services may be
provided varies from state to state, and from LEC to LEC, and may include
significant restrictions and limitations. These include: (i) a requirement to be
certified by the state PUC, (ii) restrictions with respect to the location and
ownership of MDUs to which STS service may be provided and the crossing of
public rights-of-way by STS operator facilities, (iii) regulations allowing
telecommunications companies to apply different local service rate structures
(e.g., measured use vs. flat rate) to STS providers and other subscribers, in
some cases lessening or even eliminating efficiencies which might otherwise be
realized through the use of the LECs' trunking facilities, (iv) regulations
providing for LEC access or rights-of-way to directly service individual
customers within an MDU, and (v) in certain states, limits or prohibitions on
resale of intrastate long distance and local service at a profit.
None of the states in which the Company has significant operations has
adopted regulations governing the provision of STS services. The California PUC
has, however, adopted informal STS "guidelines." In addition, Florida requires
providers of STS services to be certified to resell local exchange services.
Other than the California "guidelines" and Florida's certification requirement,
the Company may provide STS services in each of its major markets, subject only
to individual telecommunications company tariff provisions. The tariffs of all
major LECs serving these jurisdictions provide for resale of local exchange
service pursuant to varying terms and conditions. Provision of STS service in
these states in the future will be subject to any regulations that ultimately
may be adopted by state authorities, and to changes in telephone company
tariffs.
Information Service Provider Regulation
Information service providers, including Internet access providers, are
largely unregulated at this time (apart from federal, state, and local laws and
regulations applicable to business in general). However, there can be no
assurance that this business will not become subject to regulatory restraints.
For instance, although
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the FCC has rejected proposals to impose additional costs and regulations on
information service providers to the extent they use local exchange telephone
network facilities, it has suggested that certain telephone-to-telephone
services provided by information service providers using the Internet backbone
may be reclassified as "telecommunications services" and subject to regulation
as such. Any such change may affect demand for the Company's Internet related
services. In addition, the FCC has pending a proceeding in which it will
determine whether CLECs that serve as information service providers are entitled
to reciprocal compensation from other LECs for terminating Internet traffic that
originates on the other LEC's network. An FCC determination that information
service provider traffic should not be included within reciprocal compensation
calculations could have a negative effect on the Company's revenues.
There also have been efforts at the federal and state level to impose taxes
and other burdens on information service providers and to regulate content
provided via the Internet and other information services. These efforts have not
generally been upheld when challenged in court. Nonetheless, the Company expects
that proposals of this nature will continue to be debated in Congress and state
legislatures in the future. No assurance can be given that changes in current or
future regulations adopted by the FCC or state regulators or other legislative
or judicial initiatives relating to Internet services would not have a material
adverse effect on OpTel. In addition, although there is a trend in the law away
from ISP liability for content posted or published on the Internet, there can be
no assurance that the Company's involvement in the provision of ISP services
will not subject it to liability for acts performed by third parties using the
Internet.
Long Distance Resale Regulation
Non-dominant IXCs, such as the Company, are subject to limited federal
regulation. Nonetheless, carriers are required by statute to offer their
services under rates, terms and conditions that are just, reasonable and not
unreasonably discriminatory, and to file tariffs for their international and
interexchange services. As a non-dominant carrier, the Company is permitted to
make tariff filings on a single day's notice and without cost support to justify
specific rates. The FCC generally does not exercise direct oversight over cost
justification and the level of charges for service of non-dominant carriers,
although it has the statutory power to do so. The FCC has jurisdiction to act
upon complaints brought by third parties, or on the FCC's own motion, against a
carrier for failure to comply with its statutory obligations.
Foreign Ownership Restrictions
Section 310(b) of the Communications Act limits the extent to which foreign
controlled companies may hold common carrier radio licenses. Under Section
310(b)(4) of the Communications Act, the FCC has discretion to permit common
carrier licensees to exceed some of these limits. To allow the Company to
provide common carrier telecommunications services using its networks, in the
event that the Company decides to provide such services, the Company has
assigned substantially all of its frequency licenses (the "Assigned Licenses")
to THI, an entity controlled by United States citizens. To establish the terms
of the Company's continued and unencumbered use of the Assigned Licenses, the
Company has entered into a license and services agreement pursuant to which THI
has agreed to provide to the Company all the transmission capacity it requires
or may in the future require and the Company has granted THI a non-exclusive
license to use all of the Company's facilities and related equipment, such as
microwave transmitting and receiving equipment, required to provide transmission
capacity. The Company has also obtained an option to acquire the assets or
equity of THI, subject to FCC approval.
In 1997, the United States agreed, as part of the WTO Basic Telecom
Agreement, to allow foreign suppliers from WTO member nations, including Canada,
to provide a broad range of basic telecommunications services in the United
States. In light of those commitments, which became effective in February of
1998, and consistent with its authority under Section 310(b)(4) of the
Communications Act, the FCC has adopted a presumption favoring grant of
applications to exceed the limits on non-U.S. ownership of common carrier
licensees when the non-U.S. investment is from a WTO member nation. Accordingly,
the Company is in the process of reevaluating whether it should hold FCC
authorizations directly and, specifically, whether it should exercise its option
to purchase the assets of THI.
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REGULATION OF CABLE TELEVISION
Certain of the Company's networks are, for regulatory purposes, deemed to
be "Cable Systems." To constitute a Cable System, a multichannel television
system must use hard-wire or fiber optic cable that makes a tangible physical
crossing or use of a public right-of-way. As a result, all Cable Systems are
required to obtain a local franchise and are subject to state and local
regulation as well as federal Cable System regulation, including rate regulation
in certain circumstances. The Company's 18GHz networks, its 12GHz networks to be
developed and SMATV systems are not considered Cable Systems and thus are not
subject to local franchising requirements and are free from most Cable System
regulation. The Company's Houston system, a portion of its Fort Worth system and
certain other small systems are regulated as Cable Systems. However, the
Company's Houston, Fort Worth and other small franchise cable television systems
are exempt from federal rate regulation and the universal service obligation,
even though they are Cable Systems, because they are subject to "effective
competition" as discussed in greater detail below.
Set forth below is a discussion of the principal laws and regulations
governing the Company's private and franchise cable television operations.
Federal "Cable System" Regulation. The Communications Act governs the
regulation of Cable Systems. The regulations imposed on Cable Systems include
requirements to (i) obtain a local franchise (which may require the franchisee
to pay franchise fees to local governments of up to 5% of yearly gross
revenues), (ii) delete certain programs from cablecasts, (iii) comply with
certain customer service standards, (iv) retransmit certain broadcast television
programming, (v) in most circumstances, conform subscriber service and equipment
rates to applicable federal regulations, (vi) comply with FCC equal employment
opportunity ("EEO") rules and policies, (vii) make available channels for
leased-access programmers at rates that are to be calculated on a formula
established by the FCC and (viii) offer customer service to all buildings passed
by its network. In addition, rates for basic cable service on Cable Systems not
subject to "effective competition" are regulated by local franchising
authorities. Rates for upper tier or "cable programming services" on such
systems are regulated by the FCC. The Telecom Act eliminates cable programming
service tier rate regulation effective March 31, 1999, for all Cable System
operators. The Company's networks that are Cable Systems are subject to these
requirements, which impose regulatory costs and reduce the speed and flexibility
with which the Company and its Cable System competitors can respond to
competitive challenges from other video distribution technologies. The Company's
Cable Systems, however, are exempt from rate regulation because they are, the
Company believes, subject to "effective competition."
Prior to the enactment of the Telecom Act, Cable Systems were deemed to be
subject to "effective competition" if any of: (i) fewer than 30% of the
households in the franchise area subscribe to the service of the Cable System,
(ii) the area is served by at least two unaffiliated multichannel television
operators, both of which are able to provide service to at least 50% of the
households in the franchise area, and the number of households actually
subscribing to all but the largest multichannel television operator exceeds 15%,
or (iii) the local franchising authority itself offers multichannel television
to at least 50% of the households in the franchise area. The Telecom Act
expanded the definition of "effective competition" to include situations in
which a LEC or its affiliate offers multichannel television directly to
subscribers by any means (other than direct-to-home satellite services) in the
franchise area. It is expected that this change will provide franchise cable
television operators with increased pricing flexibility to the extent that LECs
begin to provide multichannel television services. No assurance can be given
that the Company does not, or will not in the future, constitute "effective
competition" to any franchise cable television operator with which it competes.
Copyright Licensing. Cable Systems and private cable television systems are
entitled to federal compulsory copyright licensing privileges. In order to
obtain a compulsory copyright, such systems must make semi-annual payments to a
copyright royalty pool administered by the Library of Congress. A compulsory
copyright provides a blanket license to retransmit the programming carried on
television broadcast stations. Non-broadcast programming, often referred to as
cable channel programming, is not subject to the compulsory copyright license.
The Company purchases this copyrighted programming from program suppliers (e.g.,
ESPN), which in turn obtain rights to the programming directly from the program
copyright owner pursuant to a private negotiated agreement. Bills have been
introduced in Congress over the past several years
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that would eliminate or modify the cable compulsory license. The need to
negotiate with the copyright owners for each program carried on each broadcast
station in the channel lineup could increase the cost of carrying broadcast
signals or could impair the Company's ability to obtain programming.
Must-Carry and Retransmission Consent. The Communications Act grants local
television stations the right to elect either to force local Cable Systems to
"carry" the television station free of charge (a "must carry" right) or to
prohibit Cable Systems and private cable television systems from carrying the
local television station (a "retransmission consent" right). Under the
must-carry rules, a Cable System, subject to certain restrictions, generally
must carry, upon request by the station and depending on the number of usable
activated channels on the system, all commercial television stations with
adequate signals that are licensed to the same market as the Cable System. Under
the retransmission consent rules, Cable Systems and private cable television
systems are precluded from carrying commercial broadcast stations that choose
not to exercise their must-carry rights, all "distant" commercial broadcast
stations (except for "superstations", i.e., commercial satellite-delivered
independent stations such as WTBS), commercial radio stations and certain low-
powered television stations, without obtaining those stations' explicit written
consent for the retransmission of their programming. Retransmission consent
agreements do not obviate a copyright license for the programming carried on the
broadcaster's signal. However, Cable Systems and private cable television
systems may obtain a compulsory copyright license for broadcast programming as
described above. To date, the "must carry/retransmission consent" regulations
have not had a significant impact on either the operations or profitability of
the Company. The Company has had little difficulty obtaining retransmission
consent agreements with local broadcasters. Nonetheless, there can be no
assurance that broadcasters, in some circumstances, will not withhold
retransmission consent, require excessive compensation for that consent or
impose onerous conditions thereon which could adversely affect the Company.
Furthermore, it is unclear at this time the extent to which Cable Systems will
be required to carry multiple signals of digital television broadcast stations
or high definition television ("HDTV") signals. The resolution of these
must-carry issues may have a significant impact on the programming carried on
the Company's systems.
Changes in the Definition of a "Cable System." Formerly, to avoid being
classified as a Cable System, private cable television systems were limited to
linking with hard wire only commonly owned or managed MDUs without crossing a
public right-of-way. The Telecom Act amended the definition of Cable System such
that systems which make no use of public streets or public rights-of-way no
longer are deemed to be Cable Systems, regardless of the type or ownership of
properties served by the system. Thus, for example, the Company's private cable
television systems now may serve mobile home parks and private communities
without a local franchise and free of most federal Cable System regulations.
Elimination of the Telco-Cable Cross-Ownership Restriction. The Telecom Act
repealed the LEC cable television cross-ownership restriction, which prohibited
LECs from providing multichannel television directly to subscribers in their
telephone service areas. This change may increase the level of competition in
the multichannel television market. LECs now have several options for entering
and competing in the multichannel television marketplace. LECs now may (i)
provide video programming to subscribers through radio communications under
Title III of the Communications Act, (ii) provide transmission of video
programming on a common carrier basis under Title II of the Communications Act
(i.e., provide a common carrier video platform), (iii) provide video programming
as a Cable System under Title VI of the Communications Act (franchise cable),
and (iv) provide video programming by means of an "open video system." Open
video systems are not required to comply with the full panoply of federal Cable
System regulation, but they are subject to certain additional programming
selection limitations. It is unclear at this time the extent to which any of
these market entry options will be used by LECs.
Rate Relief for Small Cable Operators. The Telecom Act deregulated the
rates charged for cable programming services in any Cable System operated by a
"small cable operator" that serves 50,000 or fewer subscribers. The law defines
a "small cable operator" as one which, in the aggregate, serves fewer than one
percent of all subscribers in the United States and which is not affiliated with
any entity with gross annual revenues in excess of $250 million. This provision
may provide increased pricing flexibility for certain of the Company's
competitors who qualify as "small cable operators."
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The Uniform Rate Requirement. Prior to enactment of the Telecom Act, the
Communications Act generally provided that Cable Systems were required to have a
rate structure for the provision of cable service that was uniform throughout
its geographic area. The Telecom Act provides that this requirement is
applicable only where "effective competition" is absent. Further, the Telecom
Act exempts from the uniform rate requirement non-predatory bulk discounts
offered to MDUs. Consequently, the franchise cable television operators with
which the Company competes now have increased pricing flexibility with respect
to MDU bulk discounts.
Program Access. The program access provisions of the Communications Act
were intended to eliminate unfair competitive practices and facilitate
competition by providing competitive access to certain defined categories of
programming. Generally, these restrictions are applicable to Cable System
operators, satellite cable programming vendors in which a Cable System operator
has an attributable interest and satellite broadcast programming vendors. The
programming access provisions prohibit these entities from charging unfair,
unreasonable or discriminatory prices for programming. Further, the programming
access provisions prohibit most exclusive dealing arrangements pursuant to which
Cable Systems obtain the exclusive right to distribute the subject programming
within their franchise areas. Such exclusive distribution arrangements have been
found to inhibit the ability of new entrants to compete in the multichannel
television market. The prohibition on exclusive contracts, however, is scheduled
to expire on October 5, 2002 unless the FCC determines, during a proceeding that
is to be conducted in 2001, that the prohibition continues to be necessary to
promote competition in the multichannel television market. The Telecom Act
amended the program access provisions by adding that the provisions shall also
apply to common carriers and their affiliates. Thus, telecommunications
companies entering the market will find it more difficult to limit their
competitors' access to programming.
Subscriber Access. The FCC has initiated a notice of proposed rulemaking
seeking comment on whether the FCC should adopt regulations restricting
exclusive contracts. The FCC has indicated that it seeks to ensure a level
competitive playing field in the emerging multichannel television market. One
possibility raised by the FCC is the establishment of a federal mandatory access
requirement or a limit on the duration of exclusive service agreements between
MDU owners and video programming providers. In another proceeding, the FCC is
contemplating an order preempting state, local and private restrictions on
over-the-air reception antennas placed on rental properties or properties not
within the exclusive control of the viewer. Although it is open to question
whether the FCC has statutory and constitutional authority to compel mandatory
access, restrict exclusive agreements or preempt private restrictions on
antennas located on property owned or controlled by others, there can be no
assurance that it will not attempt to do so. Either such action would tend to
undermine the exclusivity provisions of the Company's Rights of Entry with MDU
owners.
State and Local Cable System Regulation. Because Cable Systems use public
rights-of-way, they are subject to state and local regulation, typically imposed
through the franchising process. State and/or local officials often are involved
in the franchisee selection, system design and construction, safety, consumer
relations, billing, and community-related programming and services among other
matters. Cable Systems generally are operated pursuant to nonexclusive
franchises, permits, or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchise operator fails to comply with
material provisions of the franchise. Franchising authorities are immune from
monetary damage awards arising out of regulation of Cable Systems or decisions
made on franchise grants, renewals, transfers and amendments.
Cable franchises typically contain provisions governing fees to be paid to
the franchising authority, length of the franchise term, renewal, sale or
transfer of the franchise, territory of the franchise, design and technical
performance of the system, use and occupancy of public rights-of-way and types
of cable services provided.
Although federal law contains certain procedural safeguards to protect
incumbent Cable Systems from arbitrary denials of franchise renewal, the renewal
of a cable franchise cannot be assured unless the franchisee has met certain
statutory standards. Moreover, even if a franchise is renewed, a franchising
authority may impose new requirements, such as the upgrading of facilities and
equipment or higher franchise fees. At least two states, Massachusetts and
Connecticut, have adopted legislation subjecting Cable Systems to regulation
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by a centralized state government agency. There can be no assurance that other
states will not similarly adopt state level regulation.
The Company's Houston cable television franchise and its other limited
cable television franchises are subject to state and local franchise laws.
Moreover, although the Company's non-franchised private cable systems that use
microwave distribution technologies are not subject to local franchise laws,
state and local property tax and environmental laws are applicable to the
Company's business. For example, the Company has to comply with local zoning
laws and applicable covenants, conditions and restrictions when installing its
antennae and other microwave equipment.
In addition, a number of states have enacted mandatory access laws.
Although such laws differ in some respects from state to state, state mandatory
access laws generally require that, in exchange for just compensation (typically
set by statute or regulation to be as low as $1.00), the owners of rental
apartments (and, in some instances, the owners of condominiums and manufactured
housing parks) must allow the local franchise cable television operator to have
access to the property to install its equipment and provide cable service to
residents of the MDU. Such state mandatory access laws effectively eliminate the
ability of the property owner to enter into an exclusive Right of Entry
agreement with a provider of cable or other video programming services. To the
best of the Company's knowledge, states that have enacted cable mandatory access
statutes in some form are: Connecticut, Delaware, Illinois, Kansas, Maine,
Minnesota, Nevada, New Jersey, New York, Pennsylvania, Rhode Island and
Wisconsin. The District of Columbia and the cities of Scottsdale and Glendale,
Arizona, and Lewisville, Texas also have adopted municipal ordinances requiring
mandatory access. Florida currently has a mandatory access statute for
condominiums, but the validity of that statute has been called into question
because an identical provision of Florida law that applied to rental properties
has been held to be unconstitutional. Virginia has an anti-compensation statute
that forbids an owner of an MDU from accepting compensation from whomever the
owner permits to provide cable or other video programming services to the
property. Such a statute limits the ability of a cable or other video
programming provider to enter into an exclusive Right of Entry agreement with an
owner of an MDU because an owner usually is induced to enter an exclusive
agreement through financial incentives. These statutes have been and are being
challenged on constitutional grounds in various states.
The Company does not have significant operations in any mandatory access
state other than Florida (with respect to condominiums) and Illinois. When
operating in Illinois, the Company generally enters into bulk sales agreements
with MDU owners, whereby the MDU owner agrees to purchase cable television, at a
discount, for each unit in the MDU and provides the service to the MDU resident
as one of the amenities included in their rent.
Microwave and Private Cable Regulation
The Company uses microwave distribution networks, which typically operate
in the 18GHz band, to interconnect individual private cable systems with each
other and with head-end facilities. The FCC exercises jurisdiction over 18GHz
microwave and other transport technologies using the radio frequency spectrum
pursuant to Title III of the Communications Act, which vests authority in the
FCC to regulate radio transmissions and to issue licenses for radio stations.
The scope, content, and meaning of existing laws, rules and regulations
governing all microwave technologies are subject to legislative, judicial and
administrative changes. There can be no assurance that future legislative or
regulatory actions will not adversely affect the Company's ability to deliver
video or telecommunications programming using the radio frequency spectrum or
raise the cost of such delivery.
The Company's microwave networks must comply with the FCC's licensing
procedures and rules governing a licensee's operations. Application to use
microwave "paths" and frequencies is made to the FCC and is subject to certain
technical requirements and eligibility qualifications. After microwave paths are
licensed to an applicant, the facilities must normally be constructed and fully
operational within 18 months of the grant. The facilities must be built in
strict accordance with the terms of the granted application. Most of the
Company's licenses are valid for a period of five years from the grant date,
however, new licenses are valid for ten years from the date of grant, after
which the licensee must apply to the FCC for license renewal.
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License renewal is not an automatic right, although it is routinely granted if
the licensee is in substantial compliance with the FCC rules.
Licensing procedures include (i) obtaining an engineering report confirming
that the proposed path does not interfere with existing paths and (ii) filing
with the FCC a statement of eligibility and use, a system diagram, and a
statement regarding compliance with the frequency coordination requirement. The
entire licensing procedure requires approximately 120 days.
The Company does not "own" the paths and frequencies granted by the FCC.
Rather, the Company is merely licensed or permitted to "use" the frequencies.
Moreover, the rights granted to the Company to use microwave frequencies are not
to the complete exclusion of other potential licensees. First, the Company's
rights only extend to the microwave paths identified in its application as
connecting the various points in its video distribution system. Other microwave
users are permitted to file applications and serve the same buildings as the
Company (in so far as the microwave licensing is concerned), but they may not
interfere with an incumbent user's licensed microwave paths. Second, the Company
has no right to the airspace over which the programming is transmitted.
Obstructions could be constructed in the line-of-sight of the microwave paths,
precluding connection of the satellite earth station with the various reception
points to be served. The microwave bands used by the Company also are authorized
for use by other kinds of users, including non-video, point-to-point microwave,
mobile communications and satellite transmissions. Although sharing these
frequencies is technically feasible, it is possible that the Company will be
unable to obtain licenses for frequency paths it desires, or that it will be
able to use only a portion of the frequencies at certain locations because of
pre-existing users. In addition, there have been proposals by certain satellite
operators to blanket license satellite downlink transmissions in the 18GHz band.
If adopted, such blanket licensing could impair the use of the 18GHz band by
private microwave operators such as the Company.
Radio frequency ("RF") emissions from microwave equipment may pose health
risks to humans. The FCC recently adopted new guidelines and methods for
evaluating the environmental effects of RF emissions from FCC-regulated
transmitters, including microwave equipment. The updated guidelines and methods
generally are more stringent than those previously in effect. The Company
expects that the microwave equipment to be provided by its vendors will comply
with applicable FCC guidelines.
Although private cable television operators are not subject to the full
range of regulation applicable to Cable Systems, they are subject to the
following federal regulations. First, private cable television operators are
entitled to the compulsory copyright license described above. Second, private
cable television operators benefit from the federal laws and regulations that
require certain programming providers to make cable programming available to all
multichannel video programming distributors on fair, reasonable and
nondiscriminatory terms. Third, as noted above, private cable television
operators are required to obtain retransmission consent from local broadcasters
in order to retransmit their signals. Finally, private cable television systems
are required to comply with the FCC's EEO rules and policies, although the
continuing validity of these rules and policies has been called into question by
a recent court of appeals decision overturning portions of the FCC's EEO rules
applicable to broadcast stations.
Because they are subject to minimal federal regulation, private cable
television operators have significantly more competitive flexibility than do the
franchised Cable Systems with which they compete. Private cable television
operators have fewer programming restrictions, greater pricing freedom, and they
are not required to serve any customer whom they do not choose to serve. In
addition, with the exception of local zoning laws and regulations, state and
local authorities generally have no jurisdiction over private cable television
operators. The Company believes that these advantages help to make its private
cable television systems competitive with larger franchised Cable Systems.
6GHz, 11GHz, 12GHz and 23GHz Microwave Regulation
The Company anticipates that in the future it will use 6GHz, 11GHz and
23GHz microwave frequencies, which are available for both private or common
carrier communications, to provide bi-directional telecommunications services.
The application and licensing procedures for authorizations to use the 6GHz,
11GHz and 23GHz frequencies are substantially the same as those described above.
Although the Company expects that
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6GHz, 11GHz and 23GHz frequencies will be available on its current paths and to
meet its future needs, the Company has not commenced frequency coordination and
there can be no assurance that the Company will be able to obtain licenses for
these frequencies on the paths it desires.
Recently the FCC, at the request of national defense agencies, restricted
the use of 18GHz frequencies in the greater Denver and Washington, D.C. areas.
This change could severely limit the Company's ability to use 18GHz microwave
technologies in these two markets. The Company has, however, received assurances
from the FCC that it will be permitted, subject to certain waiver and/or
rulemaking procedures, to use 12GHz microwave as a medium to deliver
multi-channel video programming and telecommunications services in Denver. The
Company believes that 12GHz microwave paths are an acceptable substitute for
18GHz microwave paths and that the change will not materially adversely affect
the Company's network plans in Denver. The 12GHz frequencies are not, however,
generally available to private microwave licensees. Nonetheless, based on the
assurances received from the FCC, the Company has commenced frequency
coordinations for 12GHz paths on Denver and obtained waivers permitting it to
use 12GHz frequencies on selected paths in Denver. There can be no assurance
that 12GHz paths will be available for the Company's future needs in Denver or
the Washington, D.C. area.
To reduce the Company's reliance on 18GHz microwave and to take advantage
of superior propagation characteristics of lower frequency microwave
transmissions, the Company has initiated two proceedings at the FCC that would,
if resolved in a manner satisfactory to the Company, make additional microwave
bands available for use by the Company on a nationwide basis. First, the Company
has filed a petition for rulemaking that proposes FCC rule changes to allow the
Company and other private microwave licensees to use 12GHz frequencies
nationwide for the delivery of video programming materials. These bands, which
the Company has obtained limited waivers to use in the Denver market, normally
are not available for video distribution services by private microwave
licensees. Second, the Company has sought a nationwide waiver of a restriction
in the FCC's rules that prohibits non-common carrier microwave licensees from
transmitting video entertainment material in the 11GHz microwave bands. Although
the Company anticipates that one or both of these regulatory initiatives will be
successful, there can be no assurance that either of these bands will be made
generally available to the Company on a nationwide basis.
EMPLOYEES
As of April 30, 1998, the Company employed a total of 597 full-time
employees. The Company believes that its continued success will depend in large
part on its ability to attract and retain highly skilled and qualified
personnel. The Company has nondisclosure agreements with all of its senior
executive officers. From time to time the Company also uses the services of
contract technicians for installation and maintenance services. The Company
relies principally on outside contractors for network construction. None of the
Company's employees are currently represented by a collective bargaining
agreement. The Company believes that its relationships with its employees are
good.
PROPERTIES
The Company's executive offices are located in Dallas, Texas and house its
national call center and its corporate, engineering, sales and marketing and
corporate administrative services groups. The original lease provides for
approximately 52,000 square feet of space and has a ten year term expiring
November 30, 2005. The Company has an option to extend the lease term for an
additional five year term at the then market rental rate. The Company recently
leased an additional 17,000 square feet in the same building, for a term of one
year, to provide for needed expansion. The Company pays approximately $71,000
per month for the space in its headquarters building. The Company has the right
to acquire additional space at its current location when such space becomes
available. In light of the Company's rapid growth, the Company is currently
evaluating relocating its executive offices to a new location within the
Dallas-Fort Worth area.
In October 1997, the Company purchased a building proximate to its
executive offices in Dallas, Texas. The Company has installed the central office
switch for the Dallas-Fort Worth market in the building and
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intends to relocate its Dallas regional operations to the same building by the
end of calendar 1998. The Company also leases facilities in each of the fourteen
cities in which it has established regional operations.
The Company owns substantially all of the telecommunications and cable
television equipment essential to its operations. The Company's major fixed
assets are telecommunications switches, cable television head ends, microwave
transmitters and receivers, SMATV receivers, PBX switches and coaxial fiber
optic cable. Such properties do not lend themselves to description by character
and location of principal units. Substantially all of this equipment (other than
fiber optic cable laid under public rights of way) resides on or under the MDUs
served by the Company or in leased facilities in various locations throughout
the metropolitan areas served by the Company.
LEGAL PROCEEDINGS
Except as set forth below, the Company is not a party to any legal
proceedings except for those arising in the ordinary course of business. The
Company does not believe that any legal proceeding to which it is a party will
have a material adverse impact on the Company's financial condition or results
of operations.
On April 27, 1998, the Civil Action was commenced against the Company in
the United States District Court for the Northern District of California by
Octel, charging the Company with trademark infringement, trade name
infringement, trademark dilution, and unfair competition based on its use of the
name "OpTel" and seeking to enjoin the Company from using the name "OpTel." The
Civil Action follows a now-suspended administrative proceeding in the PTO
relating to registration of the "OpTel" mark by the Company. The PTO found the
Company's application for registration to be allowable; however, Octel commenced
the PTO proceeding claiming that the Company's mark is confusingly similar to
the "Octel" mark used by that party in a related field, and claiming that the
Company's application had procedural deficiencies. During the course of the PTO
proceeding, the Company acquired rights to the marks "Optel" and "Optel
Communications" in the telecommunications field which are believed to predate
the rights of Octel to its trademark, and the Company commenced two further
proceedings against Octel in the PTO seeking cancellation of two of the
trademark registrations owned by Octel. The various proceedings in the PTO
between the Company and Octel were consolidated and thereafter suspended on May
15, 1998, in view of the commencement of the Civil Action. The Company believes
it has meritorious counterclaims in the Civil Action and intends to vigorously
defend against Octel's claims. The answer and counterclaims must be filed by the
Company in mid-June. Although the Company does not believe that its use of the
name "OpTel" infringes on the trademark or trade name rights of Octel or any
other person, there can be no assurance as to the outcome of the Civil Action or
that the Company will not be enjoined from the use of the name and trademark
"OpTel" or the proceedings in the PTO (if reinstated) or of any other action
that may be brought by any other party or that any such outcome would not
materially adversely affect the Company. See "Risk Factors -- Use of the Name
OpTel."
On April 9, 1998, a purported class action complaint was filed in the
District Court of Harris County, Texas by Gavin Stewart Clarkson, individually
and on behalf of all cable subscribers in the U.S. that have paid late fees to
either Phonoscope or the Company. The plaintiff, who formerly subscribed to
cable television services provided by Phonoscope, alleges that Phonoscope's
charging pre-established late fees for delinquent payments of cable subscription
charges constitutes an illegal collection of a penalty and that cable service
providers should only be entitled to their actual collection costs. The
plaintiff seeks to enjoin Phonoscope and OpTel from collecting, or attempting to
collect, such late fees. The case is in its very early stages and the Company
has not yet been served with process of the summons and complaint. No assurance
can be given as to its ultimate outcome or that any such outcome will not
materially adversely affect the Company. OpTel believes that it will have
meritorious factual and legal defenses, and intends to defend vigorously against
these claims.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of the Company as of May 31, 1998:
NAME POSITION AGE
---- -------- ---
Claude Chagnon................ Chairman of the Board and Director 43
Louis Brunel.................. Director; President and Chief Executive Officer 56
Christian Chagnon............. Director 42
William O. Hunt............... Director 65
Lynn McDonald................. Director 38
Alain Michel.................. Vice Chairman of the Board and Director 49
Bertrand Blanchette........... Chief Financial Officer 40
John Czapko................... Vice President, Sales 56
Stephen Dube.................. Vice President, Operations 42
James Greene.................. Vice President, Telephone 52
Michael E. Katzenstein........ Vice President, Legal Affairs and General Counsel 38
Thomas Watson................. Vice President, Engineering and Information Services 41
Lynn Zera..................... Vice President, Human Resources 50
Claude Chagnon has served as a Director since August 1996. Since October
1996, he has been the President and Chief Operating Officer of GVL. From January
1994 to October 1996, Mr. Chagnon was Vice Chairman of GVL. Prior to 1994, Mr.
Chagnon held various positions at GVL and its subsidiaries including, from May
1988 to January 1994, President of Videotron Ltee, a Canadian cable television
company and wholly-owned subsidiary of GVL.
Louis Brunel has served as a Director since March 1995 and as President and
Chief Executive Officer since April 1996. Since 1988, Mr. Brunel has held
various positions at GVL and its subsidiaries, including, immediately prior to
joining OpTel, Vice-Chairman and Chief Executive Officer of Videotron Holdings
Plc ("VHP"), a recently divested United Kingdom based cable and telephone
subsidiary of GVL. While at VHP, Mr. Brunel was the chief architect of VHP's
cable television/telecommunications business. From 1988 to 1990, he served as
Vice President, Corporate Development of GVL. In addition, he served as
President of Videotron International Ltee from September 1994 through December
1996.
Christian Chagnon has served as a Director since March 1997 and has been
Senior Vice President, Strategic Planning and Technology of GVL since September
1994. Prior to August 1994, Mr. Chagnon was also President of Videotron Services
Informatiques Ltee. Mr. Chagnon also serves as a Director of GVL. Mr. Christian
Chagnon is the brother of Mr. Claude Chagnon.
William O. Hunt was appointed as a Director in June 1998. Since December
1992, Mr. Hunt has served as Chairman of the Board, Chief Executive Officer and
President of Intellicall, Inc., a manufacturer of network and customer premise
equipment. From June 1986 to July 1992, Mr. Hunt was Chairman and Chief
Executive Officer of Alliance Telecommunications Corporation, a wireless
telecommunications company. Mr. Hunt also serves on the boards of The Allen
Group Inc., American Homestar Corporation, DSC Communications Corporation and
Dr. Pepper Bottling Company of Texas.
Lynn McDonald was appointed as a Director in June 1998. Since 1996, Ms.
McDonald has been a Manager with CDPQ, a subsidiary of Caisse that actively
manages private placements in communications companies. Prior to joining CDPQ,
Ms. McDonald worked at the Fonds de Solidarite des Travailleurs du Quebec, a
leading venture capital fund. Previously, Ms. McDonald was a special situations
equity analyst at BBN James Capel, a Canadian stock brokerage firm. Ms. McDonald
is also a director of Fundy Communications Inc., Telexis Corporation, Les
Systemes Proxima Ltee and Regional Vision Inc.
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Alain Michel has served as a Director since April 1997. Since July 1992,
Mr. Michel has held various management positions at GVL, including, since July
1994, Senior Vice President and Chief Financial Officer. Mr. Michel is also a
director of NB Capital, Inc., a publicly traded Delaware real estate investment
trust, Microcell Telecommunications Inc., a Canadian public company which
provides telecommunications services and in which GVL holds a minority interest,
and Groupe Goyette Inc., a Canadian private company which provides
transportation and storage services.
Bertrand Blanchette was appointed Chief Financial Officer in September
1996. From September 1995 to December 1996, Mr. Blanchette served as Chief
Financial Officer of VHP. From June 1994 to December 1995, he was Vice
President, Control of GVL. From October 1986 to May 1994, Mr. Blanchette was
Vice President, Finance of Heroux, Inc., a Canadian public company which
manufactures airplane parts.
John Czapko was appointed Vice President, Sales in March 1997. From
September 1993 to February 1997, Mr. Czapko was Director of Indirect
Distribution of Metrocel Cellular Telephone Company ("Metrocel"). From June 1991
to September 1993, he was Director of Direct Distribution of Metrocel.
Stephen Dube was appointed Vice President, Operations in March 1998. Prior
to that date, Mr. Dube served as Vice President, Marketing and Corporate
Development for OpTel from May 1997 to March 1998 and as Vice President,
Acquisitions and Strategic Planning for OpTel from July 1995 to May 1997. From
July 1995 to March 1997, Mr. Dube served as a Director of OpTel. From January
1992 to April 1995, Mr. Dube was Senior Vice President of Laurentian Financial
Inc., a financial services company.
James Greene was appointed Vice President, Telephone in April 1998. From
June 1997 to April 1998, Mr. Greene was an independent consultant and advised
the Company on the launch of its first central office switch in Houston, Texas
and the commencement of CLEC services. Mr. Greene consulted for OpTel on an
exclusive basis from November 1997 until his appointment as Vice President. From
1993 to November 1997, Mr. Greene was a consultant for several state and local
regulatory bodies and worked principally with the State of Oregon.
Michael E. Katzenstein was appointed Vice President, Legal Affairs and
General Counsel in November 1995. Prior to joining OpTel, Mr. Katzenstein was a
partner at Kronish, Lieb, Weiner and Hellman LLP. Mr. Katzenstein received his
J.D. from Boston University School of Law in 1985.
Thomas Watson was appointed Vice President, Information Services in
September 1996. In August 1997, he also assumed the role of Vice President,
Engineering. From January 1992 to September 1996, Mr. Watson held various
positions at GTE Telephone Operations, an ILEC, including Group Product Manager,
Group Manager Engineering and Senior Program Manager.
Lynn Zera was appointed Vice President, Human Resources in November 1995.
From July 1994 to October 1995, Ms. Zera was Executive Director of Keystone
Consulting. From July 1993 to July 1994, she was Executive Director of Human
Resources of Intellicall, Inc., a telecommunications company. From March 1978 to
January 1993, she held various management and marketing positions with Oryx
Energy, a company involved with the production and exploration of oil and gas.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information concerning compensation
awarded to or paid to the Company's Chief Executive Officer and the four most
highly compensated executive officers (collectively, the "Named Executive
Officers") for the fiscal years ended August 31, 1997, 1996 and the eight month
period ended August 31, 1995.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------ ------------------------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION(14)
--------------------------- ------ -------- ------- ------------ ---------- ----------------
Louis Brunel........................ 1997 $269,623 -- $ 66,062(7) 16,034.79 --
President and Chief 1996 $ 35,095(2) -- -- -- --
Executive Officer 1995 -- -- -- -- --
Michael E. Katzenstein.............. 1997 $175,000 $57,500 $ 65,196(8) 9,137.61 $2,820
Vice President, Legal Affairs 1996 $135,346(3) $40,000 $103,756(9) -- $3,334
and General Counsel 1995 -- -- -- -- --
Rory Cole(1)........................ 1997 $163,654 $43,750 -- 9,406.36(13) $3,629
Vice President and 1996 $175,000 $36,500 -- -- $4,750
Chief Operating Officer 1995 $102,980 -- $ 22,405(10) -- --
Bertrand Blanchette................. 1997 $129,702(4) $ 5,000 $ 33,961(11) 4,373.12 --
Vice President and 1996 -- -- -- -- --
Chief Financial Officer 1995 -- -- -- -- --
Stephen Dube........................ 1997 $119,139 $15,000 $ 63,514(12) 3,381.88 $2,844
Vice President, Operations 1996 $ 36,542(5) -- -- -- --
1995 -- -- -- -- --
Lynn Zera........................... 1997 $112,877 $21,040 -- 2,565.57 $2,809
Vice President, Human Resources 1996 $ 83,750(6) -- -- -- $2,513
1995 -- -- -- -- --
- ---------------
(1) Mr. Cole resigned from the Company effective July 11, 1997.
(2) During fiscal 1996, Mr. Brunel was paid primarily by GVL. Beginning June 1,
1996, a portion of Mr. Brunel's salary was allocated to the Company.
Effective November 1, 1996, Mr. Brunel accepted the position of President
and Chief Executive Officer on a full-time basis.
(3) Mr. Katzenstein commenced employment with the Company in November 1995.
(4) Mr. Blanchette commenced employment with the Company as Chief Financial
Officer in September 1996. During the period September 1996 through
December 1996, Mr. Blanchette continued to act as Chief Financial Officer
of VHP, a subsidiary of GVL which was divested in December 1996. During
such period, Mr. Blanchette's salary was paid by VHP and a portion of such
salary was allocated to the Company. Mr. Blanchette commenced full-time
employment with the Company effective January 1, 1997.
(5) During fiscal 1996, Mr. Dube was paid primarily by GVL. Beginning June 1,
1996, a portion of Mr. Dube's salary was allocated to the Company.
Effective January 1, 1997, Mr. Dube became a full-time employee of the
Company.
(6) Ms. Zera commenced employment with the Company in November 1995.
(7) $39,790 represents relocation payments and $21,680 represents an automobile
allowance.
(8) $49,823 represents tax reimbursements resulting from relocation.
(9) $93,706 represents relocation payments.
(10) The entire amount represents an automobile allowance.
(11) $29,161 represents relocation payments.
(12) $54,288 represents relocation payments.
(13) The options granted to Mr. Cole were exchanged for the Cole Warrant (as
defined herein) in connection with the termination of Mr. Cole's
employment. See "Certain Relationships and Related Transactions -- Cole
Warrant."
(14) Represents 401(k) matching fund contributions by the Company.
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OPTION GRANTS IN FISCAL 1997
The following table sets forth options to purchase shares of the Class A
Common Stock granted to the Named Executive Officers during fiscal 1997. Prior
to fiscal 1997, no options were granted by the Company.
POTENTIAL REALIZED VALUE
AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO TERM
OPTIONS EMPLOYEES IN EXERCISE ------------------------
NAME GRANTED FISCAL YEAR PRICE EXPIRATION DATE 5% 10%
---- ---------- ------------ -------- --------------- --------- -----------
Louis Brunel.................. 16,034.79 18.40% $85.75 November, 2006 $758,067 $1,867,155
Rory Cole(1).................. 9,406.36 10.80% $74.42 November, 2006 $551,273 $1,201,888
Michael E. Katzenstein........ 9,137.61 10.49% $74.42 November, 2006 $535,522 $1,167,549
Bertrand Blanchette........... 4,373.12 5.02% $85.75 November, 2006 $206,745 $ 509,224
Stephen Dube.................. 3,381.88 3.88% $85.75 November, 2006 $159,883 $ 393,800
Lynn Zera..................... 2,565.57 2.94% $85.75 November, 2006 $121,291 $ 298,745
- ---------------
(1) In connection with the termination of Mr. Cole's employment, all of the
options granted to Mr. Cole were exchanged for the Cole Warrant. See
"Certain Relationships and Related Transactions -- Cole Warrant."
AGGREGATED OPTIONS EXERCISES IN FISCAL 1997 AND FISCAL YEAR END OPTION VALUES
The following table shows the values of options held by the Named Executive
Officers as of the end of fiscal 1997. No options were exercised by the Named
Executive Officers during fiscal 1997.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END
1997(#) 1997($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Louis Brunel.......................... -- 16,034.79 -- --
Rory Cole(2).......................... -- -- -- --
Michael E. Katzenstein................ -- 9,137.61 -- $103,529
Bertrand Blanchette................... -- 4,373.12 -- --
Stephen Dube.......................... -- 3,381.88 -- --
Lynn Zera............................. -- 2,565.57 -- --
- ---------------
(1) The value of the options at fiscal year-end 1997 is based on an assumed fair
market value of $85.75 per share of Class A Common Stock.
(2) In connection with the termination of Mr. Cole's employment, all of the
options granted to Mr. Cole were exchanged for the Cole Warrant. See
"Certain Relationships and Related Transactions -- Cole Warrant." At fiscal
year-end 1997, the Cole Warrant was presently exercisable and, assuming a
cashless exercise, had a value of $106,574 based on an assumed fair market
value of $85.75 per share of Class A Common Stock.
EMPLOYMENT AGREEMENTS
Louis Brunel is employed as President and Chief Executive Officer of the
Company pursuant to an at will employment agreement. Under the employment
agreement, Mr. Brunel currently receives an annual base salary of $350,000, a
Company automobile and a housing allowance. In addition, Mr. Brunel is entitled
to participate in the Company's Incentive Stock Plan (as described below) and
Bonus Plan (as described below). If Mr. Brunel's employment is terminated by the
Company for other than cause, Mr. Brunel will receive a severance payment equal
to two years base salary.
Michael E. Katzenstein is employed as Vice President, Legal Affairs and
General Counsel of the Company pursuant to an employment agreement expiring in
November 2000. Under the employment agreement, Mr. Katzenstein currently
receives an annual base salary of $182,000 and a Company automobile. In
addition, Mr. Katzenstein is entitled to participate in the Company's Incentive
Stock Plan and Bonus Plan.
Bertrand Blanchette is employed as Vice President and Chief Financial
Officer of the Company pursuant to an at will employment agreement. Under the
employment agreement, Mr. Blanchette currently receives an
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annual base salary of $158,000 and a Company automobile. In addition, Mr.
Blanchette is entitled to participate in the Company's Incentive Stock Plan and
Bonus Plan.
Stephen Dube is employed as Vice President, Operations of the Company
pursuant to an at will employment agreement. Under the employment agreement, Mr.
Dube currently receives an annual base salary of $180,000 and a Company
automobile. In addition, Mr. Dube is entitled to participate in the Company's
Incentive Stock Plan and Bonus Plan.
Lynn Zera is employed as Vice President, Human Resources of the Company
pursuant to an at will employment agreement. Under the employment agreement, Ms.
Zera currently receives an annual base salary of $124,000 and a Company
automobile. In addition, Ms. Zera is entitled to participate in the Company's
Incentive Stock Plan and Bonus Plan.
Upon termination by the Company of any of its most senior executives
without cause, the Company has in the past offered severance equal to one year's
base salary.
INCENTIVE STOCK PLAN
In fiscal 1997, the Company adopted an Incentive Stock Plan. In fiscal
1998, the Company adopted certain amendments to such plan which will become
effective, subject to stockholder approval, on the date the Offering is
consummated (as so amended, the "Plan"). Five percent of the Class A Common
Stock outstanding, on a fully diluted basis, on the date the Offering is
consummated, may be issued under the terms of the Plan. The number of shares
issuable under the Plan will be adjusted on each January 1 to 5% of the then
outstanding Class A Common Stock, on a fully diluted basis, if such adjustment
would increase the number of shares. As of April 30, 1998, options to purchase
88,004 shares of Class A Common Stock have been granted under the Plan, none of
which have been exercised, at a weighted average exercise price of $84.37 per
share of Class A Common Stock. The Plan authorizes the Board to issue incentive
stock options ("ISOs") as defined in Section 422(b) of the Internal Revenue Code
of 1986, as amended (the "Code"), stock options that do not conform to the
requirements of that Code section ("Non-ISOs"), stock appreciation rights
("SARs"), restricted stock, stock awards, dividend equivalent rights,
performance based awards and similar stock-based awards. The Plan shall
terminate on the tenth anniversary of the date the Offering is consummated.
Stock Options. The Board has discretionary authority to determine the types
of options to be granted, the persons to whom options shall be granted (provided
that options shall only be granted to directors, senior executives and other
employees designated by the Board), the number of shares to be subject to each
option granted (provided that no single participant in the Plan shall be
entitled to receive more than 100,000 shares of Class A Common Stock pursuant to
the Plan) and the terms of the stock option agreements. Unless otherwise
specifically provided in the option agreement, (i) the exercise price of an
option will not be less than the fair market value, as determined by the Board,
of the Class A Common Stock on the date of the grant and (ii) the options shall
become exercisable in equal installments on each of the second, third, fourth
and fifth anniversaries of the effective date of grant; provided that if a
participant owns 10% of the voting power or equity interests of all classes of
the Company's stock, ISOs granted to such person (i) shall have an exercise
price not less than 110% of the fair market value of the Class A Common Stock on
the date of the grant and (ii) shall expire five years from the date of grant.
In the event of a "change of control," all options shall vest and become
immediately exercisable. The exercise price may be paid by personal check, bank
draft, money order, or money transfers, through the delivery of shares of the
Class A Common Stock, pursuant to a broker-assisted "cashless exercise" program
if established by the Company or by such other method as the Board may deem
appropriate.
Stock Appreciation Rights. The Board may award SARs, which may or may not
be granted together with options, under the plan. Generally, SARs permit the
holder thereof to receive an amount (in cash, Class A Common Stock or a
combination thereof) equal to the number of shares of Class A Common Stock with
respect to which SARs are exercised multiplied by the excess of the fair market
value of the Class A Common Stock on the exercise date over the exercise price.
In general, the exercise of any portion of the SARs or any related option will
cause a corresponding reduction in the number of shares of Class A Common Stock
remaining subject to such SARs and related option.
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Restricted Stock. Awards of Class A Common Stock granted under the Plan may
be subject to forfeiture until such restrictions, terms and conditions as the
Board may determine lapse or are fulfilled, as the case may be. The Board will
determine how the price for the Class A Common Stock, if any, may be paid.
Generally, a participant obtaining a restricted stock award will have all the
rights of a stockholder while the Class A Common Stock is subject to
restrictions, including the right to vote the Class A Common Stock and to
receive dividends. Restricted Class A Common Stock will be issued in the name of
the participant and held in escrow until any applicable restrictions lapse or
terms and conditions are fulfilled, as the case may be. Until the restrictions
are eliminated, restricted Class A Common Stock may not be transferred.
Dividend Equivalent Award. The Board may grant an award that represents the
right to receive a dividend or its equivalent with respect to any new or
previously existing award, which will entitle the recipient to receive at the
time of settlement an amount equal to the actual dividends paid on the Class A
Common Stock delivered to the recipient, calculated from the date of award and
accounted for as if reinvested in Class A Common Stock on the dividend payment
dates. This type of award may be paid in the form of Class A Common Stock, cash
or a combination of both.
Performance-Based Awards. The Board may grant awards under the Plan upon
the satisfaction of specified performance goals. The performance period for a
performance based award shall be established prior to the time such award is
granted and may overlap with performance periods relating to other awards
granted under the Plan to the same recipient. Each award shall be contingent
upon future performance and achievement of objectives described either in terms
of Company-wide performance or in terms that are related to the performance of
the recipient or of the division, subsidiary, department or function within the
Company in which the recipient is employed. Such objectives shall be based on
increases in share prices, operating income, net income or cash flow thresholds,
sales results, return on common equity or any combination of the foregoing.
Following the end of each performance period, the holder of each award shall be
entitled to receive payment of an amount, not exceeding the maximum value of the
award, based on the achievement of the performance measures for such performance
period, as determined by the Board. Unless the award specifies otherwise,
including restrictions in order to satisfy the conditions under Section 162(m)
of the Code, the Board may adjust the payment of awards or the performance
objectives if events occur or circumstances arise which would cause a particular
payment or set of performance objectives to be inappropriate, as determined by
the Board.
Other Stock Based Awards. The Board may grant Class A Common Stock or other
Class A Common Stock based awards that are related to or similar to the awards
described above.
STOCK PURCHASE PLAN
In fiscal 1998, the Company adopted the 1998 Employee Stock Purchase Plan
(the "Stock Purchase Plan") which is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code. One percent of the Class A Common
Stock outstanding, on a fully diluted basis, on the date the Offering is
consummated, may be issued under the terms of the Stock Purchase Plan. The Stock
Purchase Plan provides for a series of six month "Option Periods." Subject to
certain limitations, employees may contribute between 1% and 10% of their
compensation to the Stock Purchase Plan during an Option Period and purchase
Class A Common Stock at the end thereof. At the start of each Option Period,
employees electing to participate in the Stock Purchase Plan are deemed to have
been granted an option to purchase a number of whole shares of Class A Common
Stock at an exercise price (the "Exercise Price") equal to eighty-five percent
(85%) of the lower of the fair market value of one share of the Class A Common
Stock on (i) the first day of the Option Period or (ii) the last day of the
Option Period (the "Exercise Date"). The number of shares underlying such option
is determined by dividing (i) the amount contributed by such employee to the
Stock Purchase Plan during the Option Period by (ii) the Exercise Price. On each
Exercise Date, each employee will automatically be deemed to have exercised his
or her option to purchase at the Exercise Price the largest number of whole
shares of Class A Common Stock which can be purchased with the amount
contributed by such employee to the Stock Purchase Plan less any amounts
previously applied to option exercises under the terms of the Stock Purchase
Plan; provided, however, no employee shall be permitted to purchase more than
4,000 shares of
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Class A Common Stock during any Option Period and subject to reduction in order
to avoid issuance of more shares than are provided for under the terms of the
Stock Purchase Plan.
ANNUAL BONUS PLAN
The Company has adopted an Annual Bonus Plan (the "Bonus Plan") pursuant to
which the Board is authorized to grant cash bonuses to certain employees of the
Company. Bonuses are payable only if the Company achieves certain performance
targets approved by the Compensation Committee at the beginning of the fiscal
year.
401(K) PLAN
The Company has implemented an employee savings and retirement plan (the
"401(k) Plan") covering certain of the Company's employees who have at least
three months of service with the Company and have attained the age of 21.
Pursuant to the 401(k) Plan, eligible employees may elect to reduce their
current compensation by up to the lesser of 15% of such compensation or the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The Company has made, and may in the future
make, contributions to the 401(k) Plan on behalf of eligible employees.
Employees become 100% vested in these Company contributions after one year of
service. The 401(k) Plan is intended to qualify under Section 401 of the Code so
that contributions by employees or by the Company to the 401(k) Plan, and income
earned on the 401(k) Plan contributions, are not taxable to employees until
withdrawn from the 401(k) Plan, and so that contributions by the Company, if
any, will be deductible by the Company when made. The trustee under the 401(k)
Plan, at the direction of each participant, invests the 401(k) Plan employee
salary deferrals in selected investment options.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has an Audit Committee and a Compensation Committee. The
functions of the Audit Committee include recommending to the Board the retention
of independent public accountants, reviewing the scope of the annual audit
undertaken by the Company's independent public accountants and the progress and
results of their work, and reviewing the financial statements of the Company and
its internal accounting and auditing procedures. The Audit Committee is composed
of Claude Chagnon, William O. Hunt, Lynn McDonald and Alain Michel. The chairman
of the Audit Committee is Mr. Hunt. The function of the Compensation Committee
is to supervise the Company's compensation policies, administer the employee
incentive plans, review officers' salaries and bonuses, approve significant
changes in employee benefits and consider other matters referred to it by the
Board. The Compensation Committee is composed of Claude Chagnon, William O.
Hunt, Lynn McDonald and Alain Michel. The Chairman of the Compensation Committee
is Mr. Chagnon.
COMPENSATION OF DIRECTORS
After the consummation of the Offering, Directors of the Company who are
neither employees of the Company nor designees of the Company's significant
stockholders will receive an annual fee of $15,000, a fee of $1,000 per meeting
of the Board and an annual fee of $1,500 if they serve as the chairperson of a
committee of the Board. Each such Director will also receive options to purchase
shares of Class A Common Stock having an aggregate value of $150,000 upon
consummation of the Offering (or, if such Director is not serving in such
capacity upon consummation of the Offering, on the date of his or her election
to the Board) with an exercise price equal to the initial public offering price
(or the fair market value on the date of grant). The options will become
exercisable in equal installments on each of the second, third, fourth and fifth
anniversaries of the consummation of the Offering. Directors who are either
employees of the Company or designees of the Company's significant stockholders
will not be compensated for their services. However, all Directors will be
reimbursed for actual out-of-pocket expenses incurred by them in connection with
their attending meetings of the Board or any committees of the Board.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, Mr. Brunel served as a member of the Compensation
Committee. Effective May 19, 1998, Mr. Brunel resigned from the Compensation
Committee.
LIMITATION OF LIABILITY; INDEMNIFICATION; INSURANCE
The Company's Certificate of Incorporation provides that the Company shall,
to the fullest extent permitted by the DGCL, indemnify all persons which it may
indemnify pursuant thereto (i.e., directors and officers) and shall advance
expenses incurred in defending any proceeding for which such right to
indemnification is applicable, provided that, if the DGCL so requires, the
indemnitee provides the Company with an undertaking to repay all amounts
advanced if it is determined by a final judicial decision that such person is
not entitled to indemnification pursuant to this provision. The Company's
Certificate of Incorporation also contains a provision eliminating the personal
liability of the Company's directors for monetary damages for breach of any
fiduciary duty. By virtue of this provision, under the DGCL, a director of the
Company will not be personally liable for monetary damages for breach of his
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) dividends or stock purchases or redemptions that are
unlawful under the DGCL and (iv) any transaction from which a director derives
an improper personal benefit. However, this provision of the Company's
Certificate of Incorporation pertains only to breaches of duty by directors as
directors and not in any other corporate capacity such as officers, and limits
liability only for breaches of fiduciary duties under the DGCL and not for
violations of other laws, such as the federal securities laws. As a result of
the inclusion of such provision, stockholders may be unable to recover monetary
damages against directors for actions taken by them that constitute negligence
or gross negligence or that are in violation of their fiduciary duties, although
it may be possible to obtain injunctive or other equitable relief with respect
to such actions. The inclusion of this provision in the Company's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
the Company and its stockholders.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling OpTel pursuant to
the foregoing provisions, OpTel has been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Company
of expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The directors and officers of the Company are insured (subject to certain
exceptions and deductions) against liabilities that they may incur in their
capacity as such, including liabilities under the Securities Act, under a
liability insurance policy carried by GVL. Such policy provides coverage in an
aggregate amount of $50 million (subject to a $250,000 deductible) and expires
in October 1998. The Company expects that this insurance will be renewed in the
ordinary course.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock by (i) each Director of the Company, (ii) each
Named Executive Officer, (iii) each person known by the Company to beneficially
own 5% or more of the outstanding shares of any class of Common Stock and (iv)
all directors and executive officers of the Company as a group, in each case as
adjusted to reflect the sale of the Class A Common Stock in the Offering and the
conversion of all of the outstanding shares of Non-Voting Common and Series B
Preferred into Class A Common Stock and all of the outstanding shares of Series
A Preferred into Multi-Vote Common in connection with the Offering.
PERCENT OF
AMOUNT AND PERCENT OF TOTAL
TITLE OF NATURE OF PERCENT OF TOTAL SHARES VOTING
BENEFICIAL OWNER CLASS OWNERSHIP(1) CLASS(2)(3)(4) OUTSTANDING(2)(3)(4) POWER(2)(3)(4)
---------------- -------------------- ------------ -------------- -------------------- --------------
Le Groupe Videotron Ltee.... Multi-Vote Common (5)
Caisse de depot et placement
du Quebec................. Multi-Vote Common (6)
Interactive Cable Systems,
Inc....................... Class A Common Stock (7)(8)
Nomura Holding America
Inc....................... Class A Common Stock (7)(8)
MCI Telecommunications
Corporation............... Class A Common Stock (7)(8)
James A. Kofalt............. Class A Common Stock 24,992.00(9)
Rory Cole................... Class A Common Stock 9,406.36(10)
Louis Brunel................ Class A Common Stock 6,559.83(11)
Michael E. Katzenstein...... Class A Common Stock 2,284.40(12)
Bertrand Blanchette......... Class A Common Stock --(13)
Stephen Dube................ Class A Common Stock 1,195.34(14)
Lynn Zera................... Class A Common Stock 1,282.78(15)
All directors and officers
as a group (13 persons)... Class A Common Stock 11,322.35(16)
- ---------------
(1) Except as otherwise indicated in the other footnotes to this table, each
person named in the table has sole voting and dispositive power with
respect to the shares of Common Stock beneficially owned by such person.
(2) "*" indicates less than one percent.
(3) In accordance with the Commission's rules, each beneficial owner's holdings
have been calculated assuming the full exercise of warrants and options and
the conversion of all shares of convertible preferred stock held by such
holder which are currently exercisable or convertible or which will become
exercisable or convertible within 60 days after the date of this Prospectus
and no exercise of warrants and options or conversion of preferred stock
held by any other person.
(4) Assumes that the over-allotment option granted to the Underwriters has not
been exercised.
(5) Such shares are owned by VPC, an indirect wholly-owned subsidiary of GVL.
Andre Chagnon, the founder of GVL, indirectly controls approximately 72% of
GVL's outstanding voting rights. All such shares are fully convertible into
Class A Common Stock on a one-for-one basis upon the occurrence of a
Conversion Event. See "-- Stockholders' Agreement" and "-- GVL
Shareholders' Agreement" for the terms of certain agreements governing the
voting and disposition of the shares of Common Stock held by VPC and GVL.
GVL's address is 300 Avenue Viger East, Montreal, Quebec, H2X 3W4.
(6) Such shares are owned by CDPQ, a wholly-owned subsidiary of Caisse. All
such shares are fully convertible into Class A Common Stock on a
one-for-one basis upon the occurrence of a Conversion Event. See "--
Stockholders' Agreement" and "-- GVL Shareholders' Agreement" for the terms
of certain agreements covering the voting and disposition of the shares of
Common Stock held by Caisse and CDPQ. Caisse's address is 1981, Avenue
McGill College, Montreal, Quebec, H3A 3C7.
(7) See "-- ICS Stockholders' Agreement and ICS Registration Rights Agreement"
for the terms of certain agreements governing the disposition of such
shares of Common Stock. ICS's address is 1901 N. Glenville Drive, Suite
800, Richardson, Texas 75081. Nomura Holding America Inc.'s ("Nomura")
address is 2 World Financial Center, Building B, New York, New York 10281.
MCI's address is 1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006.
(8) Includes shares currently held in escrow pending the consummation of the
balance of the acquisition of the ICS Operations.
(9) Represents a presently exercisable warrant to purchase 24,992 shares of
Class A Common Stock. Mr. Kofalt's address is 50209 Manly, Chapel Hill,
North Carolina 27514.
(10) Represents a presently exercisable warrant to purchase 9,406.36 shares of
Class A Common Stock. Mr. Cole's address is 4339 Beverly Drive, Dallas,
Texas 75205.
(11) Includes at least 6,559.83 shares of Class A Common Stock underlying
presently exercisable options. Excludes 19,679.51 shares of Class A Common
Stock underlying options which are not exercisable until at least 60 days
after the date of this Prospectus.
(12) Includes 2,284.40 shares of Class A Common Stock underlying presently
exercisable options. Excludes 6,853.21 shares of Class A Common Stock
underlying options which are not exercisable until at least 60 days after
the date of this Prospectus.
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(13) Excludes 4,373.12 shares of Class A Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.
(14) Includes 1,195.34 shares of Class A Common Stock underlying presently
exercisable options. Excludes 5,102.04 shares of Class A Common Stock
underlying options which are not exercisable until at least 60 days after
the date of this Prospectus.
(15) Includes 1,282.78 shares of Class A Common Stock underlying presently
exercisable options. Excludes 1,282.79 shares of Class A Common Stock
underlying options which are not exercisable until at least 60 days after
the date of this Prospectus.
(16) With respect to executive officers who are not Named Executive Officers,
excludes 9,912.52 shares of Class A Common Stock underlying options which
are not exercisable until at least 60 days after the date of this
Prospectus.
As of May 31, 1998, all of the outstanding shares of the Multi-Vote Common
were held by VPC and CDPQ and all of the outstanding shares of Common Stock were
held by ICS. See "Risk Factors -- Control by GVL."
ICS STOCKHOLDERS' AGREEMENT AND ICS REGISTRATION RIGHTS AGREEMENT
In connection with the Company's acquisition of the ICS Operations, ICS,
Nomura, MCI (ICS, Nomura, and MCI, together, the "ICS Group"), VPC, GVL and the
Company entered into a Stockholders' Agreement (the "ICS Stockholders'
Agreement") dated as of April 9, 1998 and the Company, ICS, Nomura and MCI
entered into a Registration Rights Agreement (the "ICS Registration Rights
Agreement") dated as of April 9, 1998.
Under the ICS Stockholders' Agreement, (i) the transfer of the shares of
Class A Common Stock and Series B Preferred owned by the ICS Group
(collectively, the "ICS Shares") is restricted, subject to certain exceptions,
and (ii) the ICS Shares are subject to drag-along rights if VPC (or GVL through
the sale of its interests in VPC) elects to sell equity interests representing
50% or more of the voting power of the outstanding capital stock of the Company
or 50% or more of the equity interests held by VPC.
Pursuant to the ICS Registration Rights Agreement, following the
consummation of the Offering, the ICS Group has piggyback registration rights,
on three occasions, in registration statements filed by the Company for the sale
of its equity securities, subject to certain conditions, including customary
allocation and holdback provisions.
STOCKHOLDERS' AGREEMENT
In August 1997, CDPQ purchased the minority interest in the Company from
Vanguard Communications L.P. ("Vanguard"). Vanguard also transferred to CDPQ an
option (the "Vanguard Option") to purchase 48,937 shares of the Multi-Vote
Common at an exercise price of $53.55 per share, subject to adjustment, which
CDPQ promptly exercised.
In connection with the sale by Vanguard of its minority stock position in
the Company to CDPQ, the Company, VPC and CDPQ entered into the Stockholders'
Agreement and the Company and CDPQ entered into a related Registration Rights
Agreement (the "Registration Rights Agreement"), under which CDPQ has certain
rights and obligations relating to the Company and VPC. CDPQ is also a party to
the GVL Shareholders' Agreement described below. The following is a summary of
certain provisions of the Stockholders' Agreement and the Registration Rights
Agreement.
Designation of Directors. Under the Stockholders' Agreement, for as long as
CDPQ holds at least 5% of the Company's voting stock, CDPQ may designate a
number of Directors of the Company and each of its subsidiaries, and each
committee of the Board and each of its subsidiaries, which is proportionate (in
relation to the total number of Directors or committee members) to CDPQ's
percentage ownership of the Company's voting stock, but in no event less than
one Director and one committee member. This agreement supersedes the rights of
Caisse to designate a Director of the Company pursuant to the GVL Shareholders'
Agreement; however, such rights are subject to reinstatement in the event CDPQ
ceases to be a stockholder of the Company. Pursuant to the terms of the
Stockholders' Agreement, Lynn McDonald has been designated as a Director of the
Company.
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Rights in Connection with Other Financings; Tag-Along Rights. Pursuant to
the Stockholders' Agreement, VPC is obligated to cause the Company to afford
CDPQ rights equivalent to those afforded other purchasers of the Company's
capital stock to the extent they are more advantageous than the rights held by
CDPQ. Subject to certain exceptions (including a public offering of the
Company's equity securities) and waiver by CDPQ at VPC's request in connection
with certain events, the Company is obligated to afford CDPQ preemptive rights
to purchase equity securities which the Company proposes to sell in proportion
to CDPQ's ownership of the total outstanding equity securities of the Company
prior to the sale. In addition, pursuant to the Stockholders' Agreement, CDPQ
has certain tag-along rights in connection with sales by VPC of outstanding
shares of the Company's voting stock.
Registration Rights. Pursuant to the Registration Rights Agreement, nine
months after the consummation of the Offering and, subject to certain
conditions, CDPQ has the right, on two occasions, to require the Company to
register under the Securities Act shares of common stock issued to CDPQ upon the
conversion of the Multi-Vote Common. In addition, CDPQ has piggyback
registration rights, on three occasions, to include common stock held by it in
registration statements filed by the Company for the sale of its equity
securities, subject to certain conditions, including customary allocation and
holdback provisions.
GVL SHAREHOLDERS' AGREEMENT
Caisse, CDPQ, Sojecci Ltee and Sojecci (1995) Ltee, the principal
shareholders of GVL, and Andre Chagnon (the founder of GVL) are parties to an
amended and restated shareholders agreement, dated as of May 10, 1995 (the "GVL
Shareholders' Agreement"), which provides, among other things, that for so long
as GVL controls the Company, Caisse will be allowed to select one of GVL's
nominees to the Board and to have one representative on the Audit Committee of
the Company. While this right has been superseded by the Stockholders'
Agreement, it is subject to reinstatement in the event CDPQ ceases to be a
stockholder of the Company or the Stockholders' Agreement ceases to be
enforceable. See "-- Stockholders' Agreement."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONVERTIBLE NOTES AND SERIES A PREFERRED
The Company has financed a large portion of its capital needs by borrowing
from its majority stockholder, VPC. The Company borrowed approximately $17.8
million, $73.4 million and $23.7 million from VPC in the form of the GVL Notes
during the eight month period ended August 31, 1995, fiscal 1996 and fiscal
1997, respectively. The GVL Notes bore interest at a rate of 15% per annum,
payable concurrently with the payment of principal. Interest was added to
principal on an annual basis. Effective March 1, 1998, VPC exchanged all of the
GVL Notes for 6,962.21365 shares of the Series A Preferred. VPC has advised the
Company that it intends to convert all of its shares of Series A Preferred into
Multi-Vote Common upon the consummation of the Offering.
COLE WARRANT
As part of a severance package, Rory O. Cole was granted a warrant (the
"Cole Warrant") to purchase up to 9,406.36 shares of Class A Common Stock at an
exercise price of $74.42 per share, subject to adjustment. The Cole Warrant was
granted by the Company in exchange for the cancellation of options granted to
Mr. Cole under the Plan to purchase an equivalent amount of shares. The Cole
Warrant is presently exercisable and expires on July 11, 2002.
VANGUARD-RELATED TRANSACTIONS
In August 1996, in connection with a negotiated settlement of certain
disputes between the Company and Vanguard, which then held a minority interest
in the Company, the Company granted Vanguard an option to purchase 48,937 shares
of Multi-Vote Common at an exercise price of $53.55 per share, subject to
adjustment. On August 15, 1997, Vanguard sold the option along with its minority
interest in the Company to CDPQ.
In September 1996, the Company entered into a consulting agreement with
James A. Kofalt, a former Chairman of the Board and active participant in the
management of the Company and a limited partner of Vanguard, pursuant to which
the Company agreed to compensate Mr. Kofalt with a one time payment of $70,000.
In connection therewith, the Company also granted Mr. Kofalt a warrant (the
"Kofalt Warrant") to purchase up to 24,992 shares of Class A Common Stock at an
exercise price of $53.55 per share, subject to adjustment. The Kofalt Warrant is
presently exercisable and expires on August 31, 1999. In addition, pursuant to
the terms of the Kofalt Warrant, Mr. Kofalt has piggyback registration rights in
registration statements filed by the Company for the sale of its equity
securities, subject to certain conditions, including customary allocation and
holdback provisions. See "Description of Capital Stock -- Registration Rights of
Certain Security Holders."
MANAGEMENT FEES
In connection with a negotiated settlement of certain disputes between the
Company and Vanguard, in August 1996, VPC and Vanguard agreed to provide, at the
specific request of the Board, such reasonable consultant, advisory and
management services as the Company might reasonably require. These arrangements
with Vanguard and VPC were terminated as of August 15, 1997, upon the sale of
Vanguard's minority interest in the Company to CDPQ. The Company is unable to
determine if the aggregate fees paid to VPC and Vanguard in connection with such
services were greater or less than the fees the Company would have been required
to pay if it had obtained such services from an unaffiliated third party. The
Company accrued a liability of $29,167 to each of VPC and Vanguard for general
consulting services during fiscal 1996. Vanguard was paid such amount during
fiscal 1997. In fiscal 1997, the Company accrued and paid Vanguard $350,000
(plus travel expenses) for such services and accrued $350,000 to VPC for similar
services. None of such amounts have been paid to VPC.
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LICENSE HOLDING COMPANY
The Company has assigned substantially all of its frequency licenses to THI
in exchange for a $1.0 million secured promissory note with interest at 8% due
on February 14, 2007 (the "License Note"). The License Note contains covenants
which restrict THI from, among other things, incurring indebtedness other than
to the Company or in the ordinary course of business, and merging or
consolidating with another entity.
Section 310(b) of the Communications Act prohibits any corporation of which
more than one-fifth of the capital stock is owned or voted by non-U.S. citizens
from holding a common carrier radio station license. In addition, under Section
310(b)(4) of the Communications Act, the FCC may, if it finds that it would
serve the public interest, deny or revoke a common carrier license if the
applicant or licensee is controlled directly or indirectly by any other
corporation of which more than one-fourth of the capital stock is owned or voted
by non-U.S. citizens. GVL, the Company's principal stockholder, is a Canadian
corporation. Consequently, THI was created to permit the Company to use the
Assigned Licenses, modified as necessary, to provide "common carrier"
telecommunications services in the event that the Company should desire to do so
in the future. Russell S. Berman, Henry Goldberg and Thomas Watson, each U.S.
citizens, each own one-third of the outstanding equity interests in THI. Russell
S. Berman is a partner at Kronish, Lieb, Weiner & Hellman LLP which represents
both the Company and THI with respect to various legal matters. Henry Goldberg
is a partner at Goldberg, Godles, Wiener & Wright which represents both the
Company and THI with respect to certain federal regulatory matters. Mr. Watson
is the Vice President of Engineering and Information Services of OpTel.
To establish the terms of the Company's continued and unencumbered use of
the Assigned Licenses, the Company and THI entered into a license and services
agreement (the "THI Agreement") pursuant to which THI has agreed to provide to
the Company all the transmission capacity it requires or may in the future
require and the Company has granted THI a nonexclusive license to use all of the
Company's facilities and related equipment, such as microwave transmitting and
receiving equipment, required to provide such transmission capacity. THI will
obtain future licenses necessary to provide the Company with the transmission
capacity it requires. The THI Agreement provides for payments from the Company
to THI which are expected to approximate the monthly interest due on the License
Note plus an allowance for the anticipated expenses of THI. The Company may also
advance funds to THI to the extent necessary to enable THI to fulfill its
obligations under the THI Agreement. All amounts of such advances will be added
to the principal of the License Note. It is not expected that payments made by
the Company to THI will have a material impact on the Company's cash flows or
results of operations.
In connection with the above described transaction, the Company received an
option from THI (the "THI Option") to purchase all or, in certain circumstances,
some of the assets of THI and a separate option from each stockholder of THI
(each, an "Individual Option") to purchase all of such person's shares of
capital stock of THI. The exercise price of the THI Option is equal to the
current principal of, plus the accrued interest on, the License Note on the
closing date, which may be paid by tendering to THI the License Note plus an
amount equal to the lesser of (i) the book value of the assets being purchased
or (ii) the initial capitalization of THI plus a 10% premium compounded
annually. The exercise price of each Individual Option is equal to the lesser of
(x) the book value of the shares being purchased and (y) the price paid for such
shares plus a 10% premium compounded annually. The THI Option and the Individual
Options are exercisable at any time prior to February 14, 2007, subject to FCC
approval.
In 1997, the United States agreed, in the context of the WTO Basic Telecom
Agreement, to allow foreign suppliers from WTO member nations, including Canada,
to provide a broad range of basic telecommunications services in the United
States. Those commitments became effective in February of 1998. In light of
those commitments, the FCC has determined that it will adopt an "open entry
standard" for suppliers of telecommunications services from WTO member nations.
In conjunction with its new open entry policies, the FCC has adopted a
presumption favoring grant of applications to exceed the 25 percent limit on
non-U.S. ownership contained in Section 310(b)(4) of the Communications Act when
the non-U.S. investment is from a WTO member nation. Accordingly, the Company is
in the process of reevaluating whether it should hold
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FCC authorizations directly and, specifically, whether it should exercise its
option to purchase the assets or stock of THI.
ACQUISITION OF CERTAIN ASSETS
Effective as of July 31, 1996, the Company purchased certain assets from
certain affiliates of VPC for an aggregate purchase price of approximately $3.9
million. The assets represented approximately 23,000 units passed. The
operations of the acquired assets are located in the San Francisco, California
and Tampa, Florida areas. The amounts paid represented the sellers' historical
costs. At the time of the purchase, the Board received a valuation report which
estimated the fair market value of such assets to be approximately equal to
their historical cost.
INSURANCE
The Company purchases certain insurance coverage through GVL, including
directors and officers liability insurance. The Company paid an aggregate of
approximately $478,000 and $434,000 to GVL for this insurance coverage in fiscal
1996 and 1997, respectively.
SERVICE AGREEMENTS
Pursuant to the terms of the Stockholders' Agreement, VPC and certain of
its affiliates provide certain strategic planning and treasury support services
to the Company and perform internal audits of the Company's operations.
Additional services may be provided as and when requested by the Company. The
Company is charged for such services based on an estimate of the actual cost of
the personnel engaged and materials used to provide such services (without an
allowance for profit). The Company estimates that its costs for such services in
fiscal 1998 will not exceed $310,000.
In addition, OpTel provides certain customer support and billing services
to certain affiliates of GVL which operate wireless cable systems using MMDS
technology. OpTel charges such affiliates based on the actual cost of the
personnel engaged and materials used to provide such services.
SHARED LITIGATION EXPENSES
GVL, the Company and certain other affiliates of GVL have been named as
defendants in a lawsuit by a former employee of the Company. GVL and the Company
have agreed to joint representation by a single law firm and to share the
associated expenses. The Company does not believe the litigation (or the
associated expenses) to be material.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Following the Offering, the authorized capital stock of the Company will
consist of shares of Class A Common Stock, shares of
Multi-Vote Common, 300,000 shares of Non-Voting Common and shares of
preferred stock. All of the outstanding shares of Non-Voting Common will be
converted into Class A Common Stock upon consummation of the Offering, all of
the outstanding shares of Series B Preferred will be converted into Class A
Common Stock promptly following the Offering and all shares of Series A
Preferred will be converted into Multi-Vote Common upon consummation of the
Offering. After giving effect thereto and assuming the exercise of all
outstanding options and warrants to acquire Class A Common Stock, there will be
shares of Class A Common Stock and shares of Multi-Vote
Common outstanding on a fully diluted basis. All of the outstanding shares of
all classes of Common Stock and all series of preferred stock are fully paid and
nonassessable.
COMMON STOCK
Each share of Multi-Vote Common is convertible, at the option of the holder
and automatically and irrevocably upon the occurrence of a Conversion Event,
into one share of Class A Common Stock. Upon consummation of the Offering, a
"Conversion Event" will be defined as the occurrence of (i) the direct or
indirect transfer by a holder of Multi-Vote Common of beneficial ownership of
the Multi-Vote Common to a person or entity other than a Permitted Holder or
(ii) any event or circumstance as a result of which a holder of Multi-Vote
Common ceases to be a Permitted Holder. A "Permitted Holder" will be defined as
any of GVL or Caisse or any of their respective controlled affiliates or (ii)
Andre Chagnon, his spouse or any of his lineal descendants and their respective
spouses (collectively, the "Chagnon Family"), whether acting in their own name
or as one or as a majority of persons having the power to exercise the voting
rights attached to, or having investment power over, shares of Common Stock held
by others, or (iii) any controlled affiliate of any member of the Chagnon Family
or (iv) any trust principally for the benefit of one or more members of the
Chagnon Family (whether or not any member of the Chagnon Family is a trustee of
such trust) or (v) any charitable foundation a majority of whose members,
trustees or directors, as the case may be, are persons referred to in (ii)
above. For purposes of this definition, "lineal descendant" shall include at any
time any person that is adopted, is treated as being adopted or is in the
process of being adopted by any member of the Chagnon Family at such time. The
rights of the holders of the Class A Common Stock and Multi-Vote Common are
identical in all respects except that holders of the Class A Common Stock are
entitled to one vote for each issued and outstanding share and the holders of
Multi-Vote Common are entitled to 10 votes for each issued and outstanding
share. Holders of Common Stock do not have cumulative rights, so that holders of
more than 50% of the voting rights attached to the Common Stock are able to
elect all of the Company's Directors. The holders of all of the outstanding
shares of Multi-Vote Common have entered into a voting agreement pursuant to
which they have agreed to vote their shares for certain nominees. See "Principal
Stockholders -- Stockholders' Agreement" and "Risk Factors -- Control by GVL."
Holders of the Class A Common Stock and Multi-Vote Common vote together as a
single class on all matters submitted to a vote of the stockholders, other than
certain matters which may adversely affect the rights of the individual class.
The holders of Common Stock will be entitled to receive dividends and other
distributions as may be declared thereon by the Board out of assets or funds of
the Company legally available therefor, subject to the rights of the holders of
any series of preferred stock and any other provision of the certificate of
incorporation. The certificate of incorporation of the Company provides that if
at any time a dividend or other distribution in cash or other property is paid
on Class A Common Stock or Multi-Vote Common, a like dividend or other
distribution in cash or other property will also be paid on Class A Common Stock
or Multi-Vote Common, as the case may be, in an equal amount per share. In this
connection, the certificate of incorporation specifically provides that if
shares of Multi-Vote Common are paid on Multi-Vote Common and shares of Class A
Common Stock are paid on Class A Common Stock, in an equal amount per share of
Multi-Vote Common and Class A Common Stock, such payment will be deemed to be a
like dividend or other distribution. In the case of any split, subdivision,
combination or reclassification of Multi-Vote Common or Class A Common
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Stock, the shares of Class A Common Stock or Multi-Vote Common, as the case may
be, will also be split, subdivided, combined or reclassified so that the number
of shares of Multi-Vote Common and Class A Common Stock outstanding immediately
following such split, subdivision, combination or reclassification will bear the
same relationship to each other as that which existed immediately prior thereto,
unless a different basis has been consented to by the holders of a majority of
the outstanding shares of each class adversely affected by such action.
In the event of any corporate merger, consolidation, purchase or
acquisition of property or stock, or other reorganization in which any
consideration is to be received by the holders of the Class A Common Stock or
the holders of Multi-Vote Common, the holders of the Class A Common Stock and
the holders of Multi-Vote Common will receive the same consideration on a per
share basis; except that, if such consideration shall consist in any part of
voting securities (or of options or warrants to purchase, or securities
convertible into or exchangeable for, voting securities), the holders of
Multi-Vote Common may receive, on a per share basis, voting securities with ten
times the number of votes per share as those voting securities to be received by
the holders of the Class A Common Stock (or options or warrants to purchase, or
securities convertible into or exchangeable for, voting securities with ten
times the number of votes per share as those voting securities issuable upon the
exercise of the options or warrants, or into which the convertible or
exchangeable securities may be converted or exchanged, to be received by the
holders of the Class A Common Stock).
In the event of any liquidation, dissolution or winding up of the Company,
the holders of the Common Stock will be entitled to receive the assets and funds
of the Company available for distribution after payments to creditors and to the
holders of any preferred stock of the Company that may at the time be
outstanding in proportion to the number of shares held by them, respectively,
without regard to class. There are no rights of redemption or sinking fund
provisions with respect to outstanding shares of any class of capital stock. The
Company, VPC and CDPQ have contractually agreed to certain preemptive rights
with respect to any future issuances of capital stock. Subject to certain
exceptions (including a public offering of the Company's equity securities), the
Company is obligated to afford CDPQ preemptive rights to purchase equity
securities which the Company proposes to sell in proportion to CDPQ's ownership
of the total outstanding equity securities of the Company prior to the sale. See
"Principal Stockholders -- Stockholders' Agreement."
This description is intended as a summary and is qualified in its entirety
by reference to the DGCL and the Company's Certificate of Incorporation and
Bylaws. Copies of the Company's Certificate of Incorporation and Bylaws have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
PREFERRED STOCK
The preferred stock may be issued at any time or from time to time in one
or more series with such designations, powers, preferences, rights,
qualifications, limitations and restrictions (including dividend, conversion and
voting rights) as may be fixed by the Board, without any further vote or action
by the stockholders. Although the Company has no present plans to issue any
additional shares of preferred stock, the ownership and control of the Company
by the holders of the Class A Common Stock would be diluted if the Company were
to issue preferred stock that had voting rights or that was convertible into
Class A Common Stock or Multi-Vote Common. In addition, the holders of preferred
stock issued by the Company would be entitled by law to vote on certain
transactions such as a merger or consolidation, and thus the issuance of
preferred stock could dilute the voting rights of the holders of the Class A
Common Stock on such issues. The issuance of preferred stock could also have the
effect of delaying, deferring or preventing a change of control of the Company.
The Company currently has outstanding two series of preferred stock. VPC
has informed the Company that it intends to exercise its right to convert all of
the outstanding shares of Series A Preferred into shares of Multi-Vote
Common upon consummation of the Offering. The Company will cause all of the
shares of Series B Preferred to be converted into shares of Class A
Common Stock promptly following the Offering. Thereafter, there will be no
outstanding shares of any series of preferred stock and the holders of the
Common Stock and Multi-Vote Common will have all the equity voting rights in the
Company.
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The Series A Preferred is convertible into Multi-Vote Common, at the option
of the holder, during the 180-day period following the receipt by the Company of
the proceeds from the Offering (the "Series A Conversion Period"). Shares of
Series A Preferred may be converted by the holder into Multi-Vote Common at the
"conversion price" which is defined as the price per share which is the highest
of (i) $82.18, (ii) the price per share at which the Common Stock is first sold
to the public in the Offering, and (iii) the quotient of $225 million divided by
the number of shares of Common Stock outstanding, on a fully diluted basis,
subject to certain adjustments and exceptions. VPC has advised the Company that
it intends to convert all of the Series A Preferred upon consummation of the
Offering. The number of shares of Multi-Vote Common issuable upon conversion of
each share of Series A Preferred will be determined by dividing the sum of (i)
the liquidation preference ($20,000 per share) plus all accrued and unpaid
dividends on such share by (ii) the conversion price. Based on an assumed
initial public offering price of $ per share, a total of approximately
shares of Multi-Vote Common will be issued upon conversion of all the
outstanding shares of Series A Preferred.
The Company will cause the conversion of all the outstanding shares of
Series B Preferred into Class A Common Stock promptly after the consummation of
the Offering by delivering a notice to each holder of Series B Preferred. Such
notice will automatically become effective upon receipt thereof. The number of
shares of Class A Common Stock issuable upon conversion of each share of Series
B Preferred will be determined by dividing the sum of (i) the liquidation
preference ($60,000 per share) plus all accrued and unpaid dividends on such
share by (ii) the initial public offering price. Based on an assumed initial
public offering price of $ per share, a total of shares of
the Class A Common Stock will be issued upon conversion of all of the
outstanding shares of Series B Preferred.
As of May 31, 1998, the Company had outstanding 991.1039 shares of the
Series B Preferred (having an aggregate liquidation preference $59,466,228).
Holders of the Series B Preferred are entitled to receive cumulative dividends
accruing at the annual rate of 8% of the aggregate liquidation preference
thereof. Dividends are payable quarterly, in arrears, by the issuance of
additional shares of Series B Preferred having an aggregate liquidation
preference equal to the amount of such dividends. Unless full cumulative
dividends on all outstanding shares of Series B Preferred have been paid, the
Company may not make dividend payments or distributions on any securities junior
to the Series B Preferred ("Series B Junior Securities") (other than dividend
payments or other distributions paid solely in shares of Series B Junior
Securities) or redeem or make sinking fund or similar contributions for the
redemption of any Series B Junior Securities.
This description is intended as a summary and is qualified in its entirety
by reference to the DGCL and the Series B Preferred Certificate of Designation.
OUTSTANDING OPTIONS AND WARRANTS
As of May 31, 1998, there were outstanding options to purchase 85,557.98
shares of the Class A Common Stock pursuant to the Plan with a weighted average
exercise price of $84.37 per share. See "Management -- Incentive Stock Plan." As
of the same date, there are outstanding warrants to purchase 35,127.22 shares of
the Class A Common Stock with a weighted average exercise price of $59.81 per
share.
REGISTRATION RIGHTS OF CERTAIN SECURITY HOLDERS
Pursuant to the Registration Rights Agreement, nine months after the
consummation of the Offering, CDPQ has the right, on two occasions, subject to
certain conditions, to require the Company to register under the Securities Act
shares of common stock issued to CDPQ upon the conversion of the Multi-Vote
Common. Pursuant to the Common Stock Registration Rights Agreement among the
Company, VPC, GVL, Salomon Brothers Inc, Merrill Lynch, Pierce Fenner & Smith
Incorporated and U.S. Trust Company of Texas, N.A., dated as of February 14,
1997, holders of the Non-Voting Common have the right after the 90th day
following the Offering, and subject to certain conditions, to require the
Company to effect one demand registration of the Class A Common Stock to be
issued upon conversion of the Non-Voting Common (the "Non-Voting Registration
Shares"). Such demand registration rights only may be exercised upon the written
request of holders of at least one-third of the Non-Voting Registration Shares.
In lieu of filing and causing to become
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effective a demand registration, the Company may satisfy its obligation with
respect to such demand registration by making and consummating an offer to
purchase all of the Non-Voting Registration Shares at a price at least equal to
the fair market value.
The Company is party to several agreements pursuant to which certain
holders of the Company's securities have the right, under certain circumstances,
to require the Company to include their shares of Common Stock (or shares of
Common Stock issuable upon exercise or conversion of certain outstanding
warrants or convertible securities) in registration statements filed by the
Company under the Securities Act. The rights cover an aggregate of
shares of Common Stock. In addition, certain stockholders may exercise the right
to include certain shares of Common Stock in the Registration Statement of which
this Prospectus forms a part.
TRANSFER AGENT
The Transfer Agent and Registrar for the Class A Common Stock is
.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have outstanding
shares of Class A Common Stock and shares of Multi-Vote Common. Of these
shares, the Shares (and any additional shares of Class A Common Stock sold
upon exercise of the Underwriters' over-allotment option) will be freely
tradeable without restriction or further registration under the Securities Act.
The remaining shares of Class A Common Stock held by the existing stockholders
(including any shares of Class A Common Stock which may be issued upon
conversion of the Multi-Vote Common) are "restricted securities" under the
Securities Act. The restricted shares were issued and sold by the Company in
private transactions in reliance upon exemptions from registration under the
Securities Act and may not be sold except in compliance with the registration
requirements of the Securities Act or pursuant to an exemption from
registration, such as the exemption provided by Rule 144 under the Securities
Act ("Rule 144"). In general, under Rule 144 as currently in effect, beginning
90 days after the conclusion of the Offering, a person (or persons whose shares
are aggregated) who has beneficially owned restricted shares for at least one
year, including persons who may be deemed "affiliates" of the Company, will be
entitled to sell in any three-month period a number of shares of Class A Common
Stock that does not exceed the greater of: (i) 1% of the then outstanding shares
of Class A Common Stock (approximately shares after giving effect to the
Offering) or (ii) the average weekly trading volume of the Class A Common Stock
during the four calendar weeks immediately preceding the date on which notice of
the sale is filed with the Commission. Sales pursuant to Rule 144 are also
subject to certain other requirements relating to manner of sale, notice and
availability of current public information about the Company. A person who has
beneficially owned restricted securities for at least two years and who is not,
and has not been at anytime during the three month period immediately preceding
the sale, an affiliate of the Company is entitled to sell restricted shares
pursuant to Rule 144(k) without regard to the limitations described above.
Because there has been no public market for shares of the Class A Common
Stock of the Company, the Company is unable to predict the effect that sales
made under Rule 144, pursuant to future registration statements or otherwise,
may have on the market price for the shares of Class A Common Stock.
Nevertheless, sales of a substantial amount of Class A Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect market prices.
FUTURE SALES OF STOCK TO EMPLOYEES
The Company plans to seek to attract and retain employees in part by
offering stock options and other purchase rights for a significant number of
shares of Class A Common Stock. These plans may have the effect of diluting the
percentage of ownership in the Company of the then existing stockholders. See
"Management -- Incentive Stock Plan" and "-- Stock Purchase Plan."
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CERTAIN PROVISIONS OF OPTEL'S CERTIFICATE OF INCORPORATION AND BYLAWS AND OF
DELAWARE LAW
General. The Certificate of Incorporation and the Bylaws of OpTel and the
DGCL contain certain provisions that could make more difficult the acquisition
of OpTel by means of a tender offer, a proxy contest or otherwise. These
provisions are expected to discourage certain types of coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control of OpTel first to negotiate with OpTel. Although such provisions
may have the effect of delaying, deferring or preventing a change in control of
OpTel, the Company believes that the benefits of increased protection of OpTel's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms. See
"Risk Factors -- Anti-Takeover Provisions." The description set forth below is
intended as a summary only and is qualified in its entirety by reference to the
Certificate of Incorporation and Bylaws of OpTel.
Multi-Vote Common and Blank Check Preferred Stock. Upon consummation of the
Offering, the Company will have outstanding shares of Multi-Vote
Common. In addition, the Company's Certificate of Incorporation authorizes the
issuance of up to 1,000,000 shares of preferred stock from time to time in one
or more designated series. The approximately 6,962 outstanding shares of Series
A Preferred and the approximately 991 outstanding shares of Series B Preferred
will revert to authorized but unissued status upon their conversion into
Multi-Vote Common and Class A Common Stock, respectively. See "-- Preferred
Stock." The Board, without approval of the stockholders, is authorized to
establish voting, dividend, redemption, conversion, liquidation and other
provisions of a particular series of preferred stock. The outstanding Multi-Vote
Common does, and the issuance of additional shares of Multi-Vote Common or
preferred stock could, among other things, adversely affect the voting power or
other rights of the holders of Class A Common Stock and, under certain
circumstances, make it more difficult for a third party to acquire, or
discourage a third party from acquiring, control of the Company. See "Risk
Factors -- Control by GVL" and "-- Anti-Takeover Provisions." The Board has no
present intention to authorize the issuance of any additional series of
preferred stock.
Stockholder Action and Special Meetings. Prior to the consummation of the
Offering, OpTel's certificate of incorporation and bylaws will be amended to
provide that (i) any action required or permitted to be taken by OpTel's
stockholders must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing and (ii) the
authorized number of directors may be changed only by resolution of the Board.
The Company's Bylaws will also provide that, subject to any rights of the
holders of any series of preferred stock, special meetings of stockholders may
be called only by the Chairman of the Board or the President of OpTel, by a
majority of the Board or by stockholders owning shares representing at least a
majority of the capital stock of OpTel issued and outstanding and entitled to
vote.
Anti-Takeover Statute. Section 203 of the DGCL ("Section 203") prohibits
certain persons ("Interested Stockholders") from engaging in a "business
combination" with a Delaware corporation for three years following the date such
persons become Interested Stockholders. Interested Stockholders generally
include (i) persons who are the beneficial owners of 15% or more of the
outstanding voting stock of the corporation and (ii) persons who are affiliates
or associates of the corporation and who held 15% or more of the corporation's
outstanding voting stock at any time within three years before the date on which
such person's status as an Interested Stockholder is determined. Subject to
certain exceptions, a "business combination" includes, among other things (i)
mergers or consolidations, (ii) the sale, lease, exchange, mortgage, pledge,
transfer or other disposition of assets having an aggregate market value equal
to 10% or more of either the aggregate market value of all assets of the
corporation determined on a consolidated basis or the aggregate market value of
all the outstanding stock of the corporation, (iii) transactions that result in
the issuance or transfer by the corporation of any stock of the corporation to
the Interested Stockholder, except pursuant to a transaction that effects a pro
rata distribution to all stockholders of the corporation, (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series, or securities convertible into the
stock of any class or series, of the corporation that is owned directly or
indirectly by the Interested Stockholder or (v) any receipt by the Interested
Stockholder of the benefit
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(except proportionately as a stockholder) of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 does not apply to a business combination if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination, (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (other than certain excluded shares) or (iii) concurrently
with or following a transaction in which the person became an Interested
Stockholder, the business combination is (a) approved by the board of directors
of the corporation and (b) authorized at an annual or special meeting of
stockholders (and not by written consent) by the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the Interested Stockholder.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal
income tax considerations generally applicable to holders acquiring the Class A
Common Stock on original issue but does not purport to be a complete analysis of
all potential consequences. The discussion is based upon the Code, Treasury
regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now
in effect, all of which are subject to change at any time by legislative,
judicial or administrative action. Any such changes may be applied retroactively
in a manner that could adversely affect a holder of the Class A Common Stock.
The discussion assumes that the holders of the Class A Common Stock will hold it
as a "capital asset" within the meaning of Section 1221 of the Code.
The tax treatment of a holder of the Class A Common Stock may vary
depending on such holder's particular situation or status. Certain holders
(including S corporations, insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, taxpayers subject to alternative minimum
tax and persons holding the Class A Common Stock as part of a straddle, hedging
or conversion transaction) may be subject to special rules not discussed below.
The following discussion does not consider all aspects of United States federal
income taxation that may be relevant to the purchase, ownership and disposition
of the Class A Common Stock by a holder in light of such holder's personal
circumstances. In addition, the discussion does not consider the effect of any
applicable foreign, state or local tax laws. PERSONS CONSIDERING THE PURCHASE OF
CLASS A COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION.
For purposes of this discussion, a "U.S. Holder" means a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in the United States or under the laws of the United States
or of any political subdivision thereof, an estate whose income is includible in
gross income for United States federal income tax purposes regardless of its
source or a trust if a U.S. court is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the authority
to control all substantial decisions of the trust. A "Non-U.S. Holder" means a
holder that is not a U.S. Holder.
TAX CONSEQUENCES TO U.S. HOLDERS
Distributions on the Class A Common Stock
A cash distribution on the Class A Common Stock will be taxable to the U.S.
Holder as ordinary dividend income to the extent that the amount of the
distribution does not exceed the Company's current or accumulated earnings and
profits allocable to such distribution (as determined for United States federal
income tax purposes). To the extent that the amount of the distribution exceeds
the Company's current or accumulated earnings and profits allocable to such
distribution, the distribution will be treated as a return of capital, thus
reducing the holder's adjusted tax basis in the Class A Common Stock with
respect to which such distribution is made. The amount of any such excess
distribution that exceeds the U.S. Holder's adjusted tax basis in the Class A
Common Stock will be taxed as capital gain and will be long-term capital gain if
the U.S. Holder's holding period for the Class A Common Stock exceeds one year.
The most favorable tax rate on long-term capital gains of non-corporate U.S.
Holders (20%) will not be available unless the holding period exceeds 18 months.
There can be no assurance that the Company will have sufficient earnings and
profits to cause distributions on the Class A Common Stock to be treated as
dividends for United States federal income tax purposes. For purposes of the
remainder of this discussion, the term "dividend" refers to a distribution paid
out of current or accumulated earnings and profits, unless the context indicates
otherwise.
Dividends received by corporate U.S. Holders will generally be eligible for
the 70% dividends-received deduction under Section 243 of the Code. There are,
however, many exceptions and restrictions relating to the availability of the
dividends-received deduction, such as restrictions relating to (i) the holding
period of the stock on which the dividends are received, (ii) debt-financed
portfolio stock, (iii) dividends treated as "extraordinary dividends" for
purposes of Section 1059 of the Code and (iv) taxpayers that pay alternative
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minimum tax. Corporate U.S. Holders should consult their own tax advisors
regarding the extent, if any, to which such exceptions and restrictions may
apply to their particular factual situations. A corporate holder must satisfy a
separate 46-day (91-day, in the case of certain preferred stock dividends)
holding period requirement with respect to each dividend in order to be eligible
for the dividends-received deduction with respect to such dividend.
Sale or Other Taxable Disposition of Class A Common Stock
Upon a sale or other taxable disposition of the Class A Common Stock, the
difference between the sum of the amount of cash and the fair market value of
other property received and the holder's adjusted tax basis in the Class A
Common Stock will be capital gain or loss. This gain or loss will be long-term
capital gain or loss if the U.S. Holder's holding period for the Class A Common
Stock exceeds one year. The most favorable tax rate on long-term capital gains
of non-corporate U.S. Holders (20%) will not be available unless the holding
period exceeds 18 months.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
Distributions on the Class A Common Stock
Dividends paid to a Non-U.S. Holder of Class A Common Stock that are not
effectively connected with the conduct of a trade or business within the United
States by the Non-U.S. Holder (or, if certain tax treaties apply, attributable
to a permanent establishment therein maintained by the Non-U.S. Holder) will be
subject to United States federal income tax, which generally will be withheld at
a rate of 30% of the gross amount of the dividends unless the rate is reduced by
an applicable income tax treaty. Under currently applicable Treasury
regulations, dividends paid to an address in a country other than the United
States are subject to withholding (unless the payor has knowledge to the
contrary).
Dividends paid to a Non-U.S. Holder of Class A Common Stock that are
effectively connected with a United States trade or business conducted by such
Non-U.S. Holder will be taxed at the graduated rates applicable to United States
citizens, resident aliens and domestic corporations (the "Regular Federal Income
Tax") and will not be subject to withholding if the Non-U.S. Holder gives an
appropriate statement to the Company or its paying agent in advance of the
dividend payment. In addition to the Regular Federal Income Tax, effectively
connected dividends (or dividends attributable to a permanent establishment)
received by a Non-U.S. Holder that is a corporation may also be subject to an
additional branch profits tax at a rate of 30% (unless the rate is reduced by an
applicable income tax treaty).
Sale or Other Taxable Disposition of Class A Common Stock
A Non-U.S. Holder generally will not be subject to United States federal
income tax or withholding on gain recognized upon a sale or other disposition of
Class A Common Stock unless: (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-U.S. Holder
(or, if certain tax treaties apply, attributable to a permanent establishment
therein maintained by the Non-U.S. Holder), in which case the branch profits tax
also may apply if the Non-U.S. Holder is a corporation; (ii) in the case of a
Non-U.S. Holder who is a non-resident alien individual and holds the Class A
Common Stock as a capital asset, such holder is present in the United States for
183 or more days in the taxable year and certain other conditions are met; or
(iii) the Class A Common Stock constitutes a United States real property
interest by reason of the Company's status as a "United States real property
holding corporation" ("USRPHC") for United States federal income tax purposes at
any time within the shorter of the five-year period preceding such disposition
or such Non-U.S. Holder's holding period for the Class A Common Stock. The
Company does not believe that it is or will become a USRPHC for federal income
tax purposes.
If a Non-U.S. Holder falls within clause (i) or (iii) in the preceding
paragraph, the holder will be taxed on the net gain derived from the sale under
the Regular Federal Income Tax and may be subject to withholding under certain
circumstances (and, in the case of a corporate Non-U.S. Holder, may also be
subject to the branch profits tax described above). If a Non-U.S. Holder falls
under clause (ii) in the
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preceding paragraph, the holder generally will be subject to United States
federal income tax at a rate of 30% on the gain derived from the sale.
Federal Estate Tax
An individual Non-U.S. Holder who owns, or is treated as owning, Class A
Common Stock at the time of his or her death or has made certain lifetime
transfers of an interest in Class A Common Stock will be required to include the
value of such Class A Common Stock in his or her gross estate for United States
federal estate tax purposes, and therefore may be subject to United States
federal tax and therefore may be subject to United States federal tax unless an
applicable estate tax treaty provides otherwise.
New Withholding Regulations
The Treasury Department recently promulgated final regulations regarding
the withholding and information reporting rules applicable to payments made to
Non-U.S. Holders (the "New Withholding Regulations"). In general, the New
Withholding Regulations do not significantly alter the substantive withholding
and information reporting requirements but rather unify current certification
procedures and forms and clarify reliance standards. The New Withholding
Regulations are generally effective for payments made after December 31, 1999,
subject to certain transition rules. NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW WITHHOLDING
REGULATIONS.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Generally, distributions on (and, in the case of U.S. Holders, proceeds
from the sale of) Class A Common Stock will be reported annually to holders of
Class A Common Stock and to the IRS.
A U.S. Holder of Class A Common Stock may be subject to backup withholding
at the rate of 31% with respect to dividends paid on, or the proceeds of a sale
or exchange of, the Class A Common Stock, unless such holder (a) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates its exemption or (b) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A U.S. Holder of Class A Common Stock that does not provide the Company with the
holder's correct taxpayer identification number may be subject to penalties
imposed by the IRS. A Non-U.S. Holder of Class A Common Stock may also be
subject to certain information reporting or backup withholding if certain
requisite certification is not received or other exemptions do not apply. Any
amount paid as backup withholding with respect to a holder of Class A Common
Stock would be creditable against such holder's United States federal income tax
liability, provided that the required information is furnished to the IRS.
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE SENIOR NOTES
As of May 31, 1998, the Company had outstanding $225,000,000 principal
amount of 13% Senior Notes due 2005. The Senior Notes mature on February 15,
2005. Cash interest on the Senior Notes is payable semi-annually in arrears on
each February 15 and August 15 at a rate of 13% per annum. Upon issuance of the
Senior Notes, the Company deposited with an escrow agent an amount of cash and
government securities that, together with the proceeds from the investment
thereof, were estimated to be sufficient to pay when due the first six interest
payments on the Senior Notes, with the balance to be retained by the Company.
The Senior Notes are collateralized by a first priority security interest in
such escrow account. The Senior Notes may be redeemed at the Company's option at
any time after February 15, 2002 upon payment of the redemption price plus
accrued and unpaid interest, if any, to the date of redemption. In the event of
a change of control of the Company, holders of the Senior Notes have the right
to require the Company to purchase their Senior Notes, in whole or in part, at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase.
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The Indenture contains certain covenants that, among other things, limit
the ability of the Company and its subsidiaries to make certain restricted
payments, incur additional indebtedness, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell assets of
the Company or its subsidiaries, issue or sell equity interests of the Company's
subsidiaries or enter into certain mergers and consolidations. In addition,
under certain circumstances, the Company is required to offer to purchase Senior
Notes at a price equal to 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase, with the proceeds of certain
asset sales. The Indenture also provides for customary events of default. This
description is intended as a summary and is qualified in its entirety by
reference to the Indenture, a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part.
THE SENIOR CREDIT FACILITY
On December 19, 1997, the Company obtained the Senior Credit Facility from
a group of financial institutions. The Senior Credit Facility consists of a $125
million term loan (which was drawn on December 19, 1997) bearing interest at
LIBOR plus 3.5% and a $25 million revolving credit commitment. As of the date
hereof, the Company has not drawn down any of the funds available to it under
the revolving credit commitment.
TVMAX Telecommunications, Inc. ("TVMAX"), a wholly-owned subsidiary of
OpTel, is the primary borrower under the Senior Credit Facility. OpTel and each
subsidiary of OpTel is a guarantor of the obligations of TVMAX under the Senior
Credit Facility. The Senior Credit Facility is secured by a lien on
substantially all of the assets of OpTel and its subsidiaries, including the
stock of each such subsidiary. The proceeds of the Senior Credit Facility may be
used by TVMAX to finance capital expenditures and permitted acquisitions, to
provide working capital and for other general corporate purposes.
Interest on the Senior Credit Facility is payable, in arrears, on the last
day of each two month LIBOR period. Principal will be payable starting February
2001, in 14 quarterly installments. TVMAX may make voluntary prepayments of
either the term loan or the revolving credit commitment. Prepayments of the term
loan on or prior to December 19, 1998 will incur a fee equal to 1% of the
prepaid principal. TVMAX also may be required to make prepayments under certain
circumstances, including the sale of all or part of any wholly-owned subsidiary
of OpTel or any of its subsidiaries or the sale of all or substantially all of
the assets of any division or line of business.
The Senior Credit Facility contains customary covenants, including certain
limitations on the Company's ability to incur indebtedness, create liens, make
investments, incur consolidated capital expenditures in excess of a certain
amount per year, incur contingent obligations, make certain payments such as
dividends, enter into certain fundamental organizational changes, dispose of
subsidiary stock, sell or discount receivables, transact business with
shareholders or affiliates and enter into a new line of business. The Company
also must meet certain financial covenants including minimum revenues and
maximum debt ratios. The Senior Credit Facility also provides for customary
events of default, including defaults arising if guaranties given by the Company
pursuant to the terms of the Senior Credit Facility are or become invalid or any
material license held by the Company is terminated or cancelled.
This description is intended as a summary and is qualified in its entirety
by reference to the agreements governing the Senior Credit Facility, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
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UNDERWRITING
Subject to the terms and conditions set forth in an agreement between the
Underwriters and the Company (the "Underwriting Agreement"), the Company has
agreed to sell to each of the Underwriters named below (the "Underwriters"), and
each of the Underwriters for whom Smith Barney Inc., Goldman, Sachs & Co., Bear,
Stearns & Co. Inc. and CIBC Oppenheimer Corp. are acting as representatives (the
"Representatives"), has severally agreed to purchase the number of shares of
Class A Common Stock set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Smith Barney Inc............................................
Goldman, Sachs & Co.........................................
Bear, Stearns & Co. Inc.....................................
CIBC Oppenheimer Corp. .....................................
----------
Total.............................................
==========
The Company has been advised by the Representatives that the several
Underwriters initially propose to offer such Shares to the public at the Price
to Public set forth on the cover page of this Prospectus and part of the Shares
to certain dealers at such price less a concession not in excess of $
per Share under the Price to Public. The Underwriters may allow and such dealers
may reallow a concession not in excess of $ per Share to certain other
dealers. After the Offering, the Price to Public and such concessions may be
changed.
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to the approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above Shares if any are purchased. The Shares are offered subject to receipt and
acceptance by the Underwriters and to certain other conditions, including the
right to reject orders in whole or in part.
The Company granted to the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to an aggregate
of additional shares of Class A Common Stock from the Company at the
Price to Public less the Underwriting Discounts and Commissions, each as set
forth on the cover page of this Prospectus. If the Underwriters exercise such
option in whole or in part, then each Underwriter will be committed, subject to
certain conditions, to purchase such additional shares proportionate to such
Underwriter's initial commitment.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities and expenses, including liabilities
under the Securities Act, or will contribute to payments that the Underwriters
may be required to make in respect thereof.
Subject to certain exceptions, the Company, its directors, officers and
certain stockholders, including VPC and CDPQ, have agreed not to offer, sell,
contract to sell or otherwise dispose of, directly or indirectly, or announce
the offering of any shares of Class A Common Stock, including any such shares
beneficially owned or controlled by any such person, or any securities
convertible into, or exchangeable or exercisable for, shares of the Class A
Common Stock, for 180 days from the date of this Prospectus, without the prior
written consent of Smith Barney Inc.
The Underwriters will not confirm sales to any discretionary account
without the prior specific written approval of the customer.
At the Company's request, the Underwriters have reserved up to
Shares (the "Directed Shares") for sale at the Price to Public to persons who
are directors, officers or employees of, or otherwise associated with, the
Company and its affiliates and who have advised the Company of their desire to
purchase such Shares. The number of Shares available for sale to the general
public will be reduced to the extent of sales of Directed Shares to any of the
persons for whom they have been reserved. Any Shares not so purchased will be
offered by the Underwriters on the same basis as all other Shares offered
hereby.
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During and after the Offering, the Underwriters may purchase and sell the
Class A Common Stock in the open market. These transactions may include
overallotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offering. The Underwriters also
may impose a penalty bid, whereby selling concessions allowed to syndicate
members of other broker-dealers in respect of the Shares sold in the Offering
for their account may be reclaimed by the syndicate if such Shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Class A Common Stock which may be higher than the price that might otherwise
prevail in the open market. The Underwriters are not required to engage in these
activities and may end these activities at any time.
Prior to the Offering, there has been no public market for the Class A
Common Stock. The Price to Public was determined by negotiations between the
Company and the Representatives. Among the factors considered in determining the
Price to Public were prevailing market conditions, the market values of publicly
traded companies that the Underwriters believed to be somewhat comparable to the
Company, the demand for the Shares and for similar securities of publicly traded
companies that the Underwriters believed to be somewhat comparable to the
Company, the future prospects of the Company and its industry in general, sales,
earnings and certain other financial and operating information of the Company in
recent periods and other factors deemed relevant. There can be no assurance that
the prices at which the Shares will sell in the public market after the Offering
will not be lower than the Price to Public.
Salomon Brothers Inc, an affiliate of Smith Barney Inc., was an initial
purchaser in connection with the Company's offering, in February 1997, of units
consisting of $225,000,000 aggregate principal amount of the Senior Notes and
225,000 shares of the Non-Voting Common, for which it received customary fees.
From time to time, Smith Barney Inc. (or certain of its affiliates) has
provided, and may in the future provide, financial advisory services to the
Company for which it has received, and expects to continue to receive, customary
fees. Canadian Imperial Bank of Commerce, an affiliate of CIBC Oppenheimer
Corp., is acting as the administrative agent for the syndicate of lenders and as
a lender in connection with the Senior Credit Facility, for which it is
receiving customary fees. Goldman Sachs Credit Partners, L.P., an affiliate of
Goldman Sachs, & Co., arranged the Senior Credit Facility and is acting as a
lender, for which it received customary fees.
CERTAIN MARKET INFORMATION
Prior to the Offering, no class of equity securities of the Company has
been traded in any public market. There can be no assurance that a public
trading market will develop for the Class A Common Stock or, if one develops
after the completion of the Offering, that it will be sustained. See "Risk
Factors -- Lack of Prior Public Market; Possible Volatility of Stock Price."
The Company intends to apply for approval for quotation of the shares of
Class A Common Stock through the Nasdaq National Market under the symbol " "
upon the effectiveness of this Registration Statement of which this Prospectus
is a part.
LEGAL MATTERS
The validity of the Shares will be passed upon and certain other legal
matters in connection with the sale of securities offered hereby will be passed
upon for the Company by Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the
Americas, New York, New York 10036. Certain federal regulatory matters related
to the Offering or described herein will be passed upon for the Company by
Goldberg, Godles, Wiener & Wright, 1229 Nineteenth Street, N.W., Washington,
D.C. 20036, the Company's FCC counsel. Certain legal matters relating to the
sale of the Shares will be passed upon for the Underwriters by Cahill Gordon &
Reindel (a partnership including a professional corporation), 80 Pine Street,
New York, New York 10005. Russell S. Berman of Kronish, Lieb, Weiner & Hellman
LLP and Henry Goldberg of Goldberg, Godles, Wiener & Wright each hold one-third
of the outstanding equity interests in THI. See "Certain Relationships and
Related Transactions -- License Holding Company."
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EXPERTS
The Consolidated Financial Statements of the Company for the year ended
December 31, 1994, the eight month period ended August 31, 1995 and as of and
for the years ended August 31, 1996 and August 31, 1997, and the Financial
Statements of the Assets and Liabilities of ICS Communications, LLC acquired by
the Company as of and for the year ended December 31, 1997, have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein and have been so included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Shares offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement or the
exhibits and schedules thereto, certain portions having been omitted as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Shares offered hereby, reference
is made to the Registration Statement, including the exhibits and financial
statement schedules thereto, which may be inspected without charge at the public
reference facility maintained by the Commission at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located
at Seven World Trade Center, 13th Floor, New York, New York 10007 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. Such Web site is located at
http://www.sec.gov. Statements made in this Prospectus concerning the contents
of any document referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, a copy of any or all of the documents (other
than exhibits to such documents) which have been incorporated by reference in
the Registration Statement, upon the oral or written request of such person to
OpTel, Inc., 1111 W. Mockingbird Lane, Dallas, Texas 75247 (telephone (214)
634-3800), Attention: Andrew N. Jent.
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APPENDIX A
GLOSSARY
Access Charges -- The charges paid by an IXC to an ILEC or CLEC for the
origination or termination of the IXC's customer's long distance calls.
CAP (Competitive Access Provider) -- A service provider that competes with
local telephone companies for access traffic by providing to high-volume
customers private line access to IXCs. Although traditional CAPs did not provide
a complete package of local exchange services, some CAPs have begun to provide
local exchange services following the passage of the Telecom Act.
Central Office -- The switching center and/or central circuit termination
facility of a local telephone company.
CLEC (Competitive Local Exchange Carrier) -- A telephone service provider
(carrier) offering services similar to those offered by the former monopoly
local telephone company. A CLEC may also provide other types of
telecommunications services (e.g., long distance).
CLEC Certification -- Granted by a state public service commission or
public utility commission, this certification provides a telecommunications
services provider with the legal standing to offer local exchange telephone
services in direct competition with ILECs and other CLECs. Such certifications
are granted on a state-by-state basis.
Communications Act of 1934 -- Federal legislation that established rules
for broadcast and nonbroadcast communications, including both wireless and wire
line telephone service which continues, as amended, to be in effect today.
FCC (Federal Communications Commission) -- The principal U.S. Government
agency charged with the oversight of all public communications media.
HDTV (High Definition Television) -- Digital signals used in television
broadcasting which have been the subject of recent federal legislation.
Head End -- Equipment necessary to receive video programming via satellite
transmission and combine the signals into a channel lineup for distribution.
Hertz, Megahertz and Gigahertz -- The dimensional unit for measuring the
frequency with which an electromagnetic signal cycles through the zero-value
state between lowest and highest states. One Hertz (abbreviated Hz) equals one
cycle per second. MHz (MegaHertz) stands for millions of Hertz. GHz (GigaHertz)
stands for billions of Hertz.
ICP (Integrated Communications Provider) -- A communications carrier that
provides packaged or integrated services from among a broad range of categories,
including local exchange services, long distance services, data services, cable
television services and other communications services.
ILEC (Incumbent Local Exchange Carrier) -- The local exchange carrier that
was the monopoly carrier prior to the opening of local exchange services to
competition.
Interconnection (co-carrier) Agreement -- A contract between an ILEC and a
CLEC for the interconnection of the two networks for the purpose of mutual
exchange of traffic between the networks, allowing customers of one of the
networks to call users served by the other network. These agreements set out the
financial and operational aspects of such interconnection.
Interexchange Services -- Telecommunications services that are provided
between two exchange areas, generally meaning between two cities (i.e., long
distance).
InterLATA -- Telecommunications services originating inside a LATA and
terminating outside of that LATA.
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Internet -- A global collection of interconnected computer networks which
use a specific communications protocol.
ISDN (Integrated Services Digital Network) -- An information transfer
standard for transmitting digital voice and data over telephone lines at speeds
up to 128 KB per second.
ISP (Internet Service Provider) -- A service provider that provides access
to the Internet, normally for dial-access customers, by sharing communications
lines and equipment.
IXC (Interexchange Carrier) -- A provider of telecommunications services
that extend between exchanges or cities, also known as a long distance provider.
KB (Kilobits) per second -- A transmission rate. One kilobit equals 1,024
bits of information.
LATA (Local Access and Transport Area) -- A geographic area inside of which
a LEC can offer switched telecommunications services, including long distance
(known as local toll). The LATA boundaries were established at the divestiture
of the local exchange business of AT&T.
LEC (Local Exchange Carrier) -- Any telephone service provider offering
local exchange services. LECs include ILECs, RBOCs and CLECs.
LMDS (Local Multipoint Distribution Service) -- A wireless point to
multipoint communications service.
Local Exchange -- An area inside of which telephone calls are generally
completed without any toll or long distance charges. Local exchange areas are
defined by the state regulator of telephone services.
Local Exchange Services -- Telephone services that are provided within a
local exchange. These usually refer to local calling services (e.g., dial tone
services).
MB (Megabits) per second -- A transmission rate. One megabit equals 1,024
kilobits.
MDU (Multiple Dwelling Unit) -- High density residential complexes such as
high- and low-rise apartment buildings, condominiums, cooperatives, townhouses
and mobile home communities.
MMDS (Multichannel Multipoint Distribution Service) -- A wireless point to
multipoint distribution system using microwave transmitting and receiving
equipment that broadcasts to individual subscribers in an omni-directional
manner.
Modem -- A device for transmitting digital information over an analog
telephone line.
Network Hubs -- Locations where the Company has installed Head End
equipment and telecommunications transmitting and receiving equipment for
distribution to MDUs.
Network Operations Center -- A facility where the Company monitors and
manages the Company's networks.
PBX (Private Branch Exchange) -- A telephone switching system designed to
operate at the MDU. A PBX connects telephones to each other and to lines and
trunks that connect the PBX to the public network and/or private telephone
networks.
POP (Point of Presence) -- A location where a carrier, usually an IXC, has
located transmission and terminating equipment to connect its network to the
networks of other carriers or to customers.
RBOC (Regional Bell Operating Company) -- ILECs created by the divestiture
of the local exchange business of AT&T. These include BellSouth, Bell Atlantic,
Ameritech, US WEST, SBC Communications, Inc. and PacBell.
Reciprocal Compensation -- The compensation paid to and from one local
exchange carrier to another for termination of a local call on the other's
networks.
STS (Shared Tenant Services) -- The provision of telecommunications
services to multiple tenants by allowing these users to have shared access to
telephone lines and other telephone services.
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SMATV (Satellite Master Antenna Television) -- Non-networked systems which
transmit video programming via Head Ends located at individual MDUs.
SONET (Synchronous Optical Network) -- Self-healing rings that provide high
speed redundant connections for the delivery of voice traffic.
Switch -- A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is the process of
interconnecting circuits to form a transmission path between users. A switch
also captures information for billing purposes.
Switch-based -- A communications provider that delivers its services to the
end-user via owned switches and leased (or owned) transport.
T-1 -- A high-speed digital circuit typically linking high volume customer
locations to long distance carriers or other customer locations. Typically
utilized for voice transmissions as well as the interconnection of local area
networks, T-1 service accommodates transmission speeds of up to 1.544 MB per
second, which is equivalent to 24 voice grade equivalent circuits.
Trunk -- A dedicated circuit which concentrates subscriber lines. A trunked
system combines multiple channels with unrestricted access in such a manner that
user demands for channels are automatically "queued" and then allocated to the
first available channel.
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INDEX TO FINANCIAL STATEMENTS
OPTEL, INC. AND SUBSIDIARIES:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of August 31, 1996 and 1997
and February 28, 1998 (unaudited)......................... F-3
Consolidated Statements of Operations for the year ended
December 31, 1994, the period from January 1, 1995 to
August 31, 1995, the years ended August 31, 1996 and 1997,
and the six months ended February 28, 1997 and 1998
(unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity for the year
ended December 31, 1994, the period from January 1, 1995
to August 31, 1995, the years ended August 31, 1996 and
1997, and the six months ended February 28, 1997 and 1998
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1994, the period from January 1, 1995 to
August 31, 1995, the years ended August 31, 1996 and 1997,
and the six months ended February 28, 1997 and 1998
(unaudited)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
Pro Forma Balance Sheet as of February 28, 1998............. F-23
Pro Forma Statements of Operations for the year ended August
31, 1997 and the six months ended February 28, 1998....... F-24
Notes to Pro Forma Financial Information.................... F-26
ACQUIRED COMPANY:
Assets and Liabilities Acquired of ICS Communications, LLC
by OpTel, Inc.:
Independent Auditors' Report.............................. F-27
Statements of Assets and Liabilities Acquired as of
December 31, 1997 and March 31, 1998 (unaudited)....... F-28
Statements of Revenues and Direct Expenses for the year
ended December 31, 1997 and the three months ended
March 31, 1998 (unaudited)............................. F-29
Notes to Financial Statements............................. F-30
F-1
94
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.:
We have audited the accompanying consolidated balance sheets of OpTel, Inc.
and subsidiaries (the "Company") as of August 31, 1996 and 1997 and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1994, the period from January 1, 1995 to August 31,
1995 and the years ended August 31, 1996 and 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of OpTel, Inc. and subsidiaries as
of August 31, 1996 and 1997 and the results of their operations and their cash
flows for the year ended December 31, 1994, the period from January 1, 1995 to
August 31, 1995 and the years ended August 31, 1996 and 1997 in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
October 14, 1997
Dallas, Texas
F-2
95
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
AUGUST 31, AUGUST 31, FEBRUARY 28,
1996 1997 1998
---------- ---------- ------------
(UNAUDITED)
Cash and cash equivalents................................. $ 1,677 $ 87,305 $ 18,388
Restricted investments (Notes 6 and 12)................... -- 67,206 54,509
Short-term investments.................................... -- -- 111,154
Accounts receivable (Net of allowance for doubtful
accounts of $542, $1,125 and $1,301, respectively)...... 3,064 4,044 5,440
Prepaid expenses, deposits and other assets............... 1,562 1,836 1,851
Property and equipment, net (Note 4)...................... 103,800 160,442 203,778
Intangible assets, net (Note 5)........................... 65,876 82,583 110,051
-------- -------- ---------
TOTAL........................................... $175,979 $403,416 $ 505,171
======== ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable.......................................... $ 5,649 $ 7,927 $ 6,042
Accrued expenses and other liabilities.................... 10,507 13,969 16,120
Deferred revenue and customer deposits.................... 2,167 2,978 4,004
Convertible notes payable to stockholder (Notes 6 and
9)...................................................... 89,414 129,604 139,244
Notes payable and long-term obligations (Note 6).......... 2,443 221,653 347,767
Deferred acquisition liabilities (Notes 3 and 6).......... 6,520 6,920 5,656
-------- -------- ---------
Total liabilities............................... 116,700 383,051 518,833
Commitments and contingencies (Notes 3 and 7)
Stockholders' equity (deficit) (Notes 9, 10 and 13)
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued and outstanding.............. -- -- --
Class A common stock, $.01 par value; 8,000,000 shares
authorized; none issued and outstanding.............. -- -- --
Class B common stock, $.01 par value; 6,000,000 shares
authorized; 2,304,561, 2,353,498 and 2,353,498 issued
and outstanding, respectively........................ 23 24 24
Class C common stock, $.01 par value; 300,000 shares
authorized; 225,000 issued and outstanding........... -- 2 2
Additional paid-in capital................................ 88,065 97,683 97,683
Accumulated deficit....................................... (28,809) (77,344) (111,371)
-------- -------- ---------
Total stockholders' equity (deficit)............ 59,279 20,365 (13,662)
-------- -------- ---------
TOTAL........................................... $175,979 $403,416 $ 505,171
======== ======== =========
See notes to consolidated financial statements.
F-3
96
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM SIX MONTHS ENDED
YEAR ENDED JANUARY 1, 1995 YEAR ENDED AUGUST 31, FEBRUARY 28,
DECEMBER 31, TO AUGUST 31, ----------------------- ---------------------------
1994 1995 1996 1997 1997 1998
------------ --------------- ---------- ---------- ------------ ------------
(UNAUDITED)
REVENUES:
Cable television.................... $ 240 $ 8,783 $ 25,893 $ 36,915 $ 17,208 $ 25,247
Telecommunications.................. 202 788 1,711 2,922 1,414 1,644
------- -------- -------- -------- -------- --------
Total revenues.............. 442 9,571 27,604 39,837 18,622 26,891
OPERATING EXPENSES:
Cost of services.................... 470 4,558 11,868 19,202 8,702 12,419
Customer support, general and
administrative................... 7,733 12,055 19,636 28,926 12,267 15,855
Depreciation and amortization....... 117 2,420 8,676 14,505 5,820 10,759
------- -------- -------- -------- -------- --------
Total operating expenses.... 8,320 19,033 40,180 62,633 26,789 39,033
------- -------- -------- -------- -------- --------
LOSS FROM OPERATIONS.................. (7,878) (9,462) (12,576) (22,796) (8,167) (12,142)
OTHER INCOME (EXPENSE):
Interest expense on convertible
notes payable to stockholder
(Notes 4 and 9).................. -- (919) (5,342) (15,204) (6,907) (9,640)
Other interest expense.............. (76) (349) (657) (16,210) (1,694) (16,386)
Interest and other income........... 10 99 145 5,675 476 4,141
------- -------- -------- -------- -------- --------
LOSS BEFORE INCOME TAXES.............. (7,944) (10,631) (18,430) (48,535) (16,292) (34,027)
Income Tax Benefit (Note 8)........... -- 470 -- -- -- --
------- -------- -------- -------- -------- --------
NET LOSS.............................. $(7,944) $(10,161) $(18,430) $(48,535) $(16,292) $(34,027)
======= ======== ======== ======== ======== ========
BASIC AND DILUTED LOSS PER COMMON
SHARE (Notes 2 and 10).............. $ (6.89) $ (8.30) $ (19.98) $ (7.01) $ (13.20)
======== ======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Notes 2 and
10)................................. 1,475 2,220 2,430 2,323 2,578
======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-4
97
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS AND SHARES IN THOUSANDS)
CLASS B CLASS C
COMMON STOCK COMMON STOCK
------------------- ------------------- ADDITIONAL
PARTNERSHIP SHARES PAR SHARES PAR PAID-IN ACCUMULATED
CAPITAL OUTSTANDING VALUE OUTSTANDING VALUE CAPITAL DEFICIT
----------- ----------- ----- ----------- ----- ---------- -----------
BALANCE, JANUARY 1, 1994................ $ 689 -- $-- -- $-- $ -- $ (307)
Contributions......................... 10,375... -- -- -- -- -- --
Net loss of partnership............... -- -- -- -- -- -- (7,725)
Reorganization from partnership....... (11,064) 717 7 -- -- 3,024 8,032
Net loss.............................. -- -- -- -- -- -- (219)
-------- ------ --- ---- --- ------- ---------
BALANCE, DECEMBER 31, 1994.............. -- 717 7 -- -- 3,024 (219)
Issuance of stock upon debt
conversion, net of transaction
costs.............................. -- 1,121 11 -- -- 59,194 --
Sale and issuance of stock............ -- 312 3 -- -- 16,684 --
Net loss.............................. -- -- -- -- -- -- (10,160)
-------- ------ --- ---- --- ------- ---------
BALANCE, AUGUST 31, 1995................ -- 2,150 21 -- -- 78,902 (10,379)
Issuance of stock upon debt
conversion......................... -- 171 2 -- -- 9,163 --
Contribution and cancellation of
shares............................. -- (16) -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- (18,430)
-------- ------ --- ---- --- ------- ---------
BALANCE, AUGUST 31, 1996................ -- 2,305 23 -- -- 88,065 (28,809)
Issuance of stock with senior notes
offering........................... -- -- -- 225 2 6,998 --
Stock options exercised............... -- 48 1 -- -- 2,620 --
Net loss.............................. -- -- -- -- -- -- (48,535)
-------- ------ --- ---- --- ------- ---------
BALANCE, AUGUST 31, 1997................ -- 2,353 24 225 2 97,683 (77,344)
Net loss (unaudited).................. -- -- -- -- -- -- (34,027)
-------- ------ --- ---- --- ------- ---------
BALANCE, FEBRUARY 28, 1998
(unaudited)........................... $ -- 2,353 $24 225 $ 2 $97,683 $(111,371)
======== ====== === ==== === ======= =========
See notes to consolidated financial statements.
F-5
98
OPTEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SIX MONTHS
PERIOD FROM YEAR ENDED ENDED
YEAR ENDED JANUARY 1, 1995 AUGUST 31, FEBRUARY 28,
DECEMBER 31, TO AUGUST 31, ------------------- ---------------------
1994 1995 1996 1997 1997 1998
------------ --------------- -------- -------- --------- ---------
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss......................................... $(7,944) $(10,161) $(18,430) $(48,535) $ (16,292) $ (34,027)
Adjustments to reconcile net loss to net cash
flow used in operating activities:
Depreciation and amortization.................. 117 2,420 8,676 14,505 5,820 10,759
Deferred tax benefit........................... -- (488) -- -- -- --
Noncash interest expense....................... -- 1,147 5,661 15,107 7,104 10,291
Noncash interest earned on restricted
investments.................................. -- -- -- (2,303) -- (1,927)
Increase(decrease) in cash from changes in
operating assets and liabilities, net of
effect of business combinations:
Accounts receivable.......................... (58) (1,005) (1,370) (754) (566) (1,493)
Prepaid expenses, deposits and other
assets..................................... (1,008) 180 (126) (785) (554) 118
Deferred revenue and other liabilities....... 164 895 906 640 268 653
Accounts payable and accrued expenses........ 5,397 3,518 4,230 6,190 1,172 411
------- -------- -------- -------- --------- ---------
Net cash flows used in operating
activities............................... (3,332) (3,494) (453) (15,935) (3,048) (15,215)
------- -------- -------- -------- --------- ---------
INVESTING ACTIVITIES:
Purchases of businesses.......................... (1,298) (49,974) (9,916) (6,717) (2,500) (37,018)
Purchases of short term investments.............. -- (126,154)
Proceeds from sale of short term investments..... -- 15,000
Acquisition of intangible assets................. (3,211) (608) (7,904) (10,112) (4,830) (4,274)
Purchases and construction of property and
equipment...................................... (6,067) (21,562) (54,217) (61,393) (20,095) (33,626)
Purchases of restricted investments.............. -- -- -- (79,609) (79,804) --
Proceeds from maturity of restricted
investments.................................... -- -- -- 14,706 -- 14,625
------- -------- -------- -------- --------- ---------
Net cash flows used in investing
activities............................... (10,576) (72,144) (72,037) (143,125) (107,229) (171,447)
------- -------- -------- -------- --------- ---------
FINANCING ACTIVITIES:
Proceeds from convertible notes payable.......... 15,000 62,823 73,438 33,700 23,700 --
Repayments on convertible notes payable.......... -- -- -- (10,000) -- --
Proceeds from senior notes payable............... -- -- -- 218,000 218,000 --
Financing costs of senior notes payable.......... -- -- -- (5,738) (4,776) --
Proceeds from bank financing, net of transaction
costs.......................................... -- -- -- -- -- 119,852
Proceeds from issuance of common stock........... -- 16,688 -- 9,620 7,000 --
Payment on notes payable and long term
obligations.................................... (6,489) (6,856) (1,307) (894) (309) (630)
Payment of deferred acquisition liabilities...... -- -- -- -- -- (1,477)
Contributions received from partners............. 10,375 -- -- -- -- --
------- -------- -------- -------- --------- ---------
Net cash flows provided by financing
activities............................... 18,886 72,655 72,131 244,688 243,615 117,745
------- -------- -------- -------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 4,978 (2,983) (359) 85,628 133,338 (68,917)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... 41 5,019 2,036 1,677 1,677 87,305
------- -------- -------- -------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 5,019 $ 2,036 $ 1,677 $ 87,305 $ 135,015 $ 18,388
======= ======== ======== ======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
(Notes 3 and 9)
Cash paid during the period for:
Interest....................................... $ 39 $ 120 $ 290 $ 15,059 $ 162 $ 15,997
======= ======== ======== ======== ========= =========
Taxes.......................................... $ -- $ 19 $ -- $ -- $ -- $ --
======= ======== ======== ======== ========= =========
Increase in capital lease obligations............ $ -- $ -- $ 879 $ 1,630 $ 480 $ 1,306
======= ======== ======== ======== ========= =========
Convertible debt issued for accrued interest..... $ -- $ -- $ 6,436 $ 16,490 $ -- $ 9,640
======= ======== ======== ======== ========= =========
Conversion of convertible debt and partnership
capital to common stock:
Partnership capital............................ $(3,031) $ -- $ -- $ -- $ -- $ --
======= ======== ======== ======== ========= =========
Convertible debt and accrued interest.......... $ -- $(60,792) $ (9,166) $ -- $ -- $ --
======= ======== ======== ======== ========= =========
Common stock................................... $ 7 $ 11 $ 2 $ -- $ -- $ --
======= ======== ======== ======== ========= =========
Additional paid-in capital, net of transaction
costs........................................ $ 3,024 $ 59,194 $ 9,163 $ -- $ -- $ --
======= ======== ======== ======== ========= =========
See notes to consolidated financial statements.
F-6
99
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1. DESCRIPTION OF BUSINESS
OpTel, Inc., a Delaware corporation, and subsidiaries (the "Company" or
"OpTel") is the successor of the cable television and telecommunications
operations of Vanguard Communications, L.P. ("Vanguard"). Vanguard commenced
operations in April 1993. On December 20, 1994, Vanguard contributed its cable
television and telecommunications operations to its wholly owned subsidiary,
OpTel. The contribution to OpTel was recorded at Vanguard's historical cost.
OpTel is a developer, operator and owner of private cable television and
telecommunications systems that utilize advanced technologies to deliver cable
television and telecommunications services to customers in multiple dwelling
units ("MDUs"). The Company negotiates long-term, generally exclusive cable
television service agreements and nonexclusive telecommunications service
agreements with owners and managers of MDUs, generally for terms of up to 15
years. The company's primary markets are major metropolitan areas in Arizona,
California, Colorado, Florida, Illinois and Texas.
During the period from April 20, 1993 (date of inception) to March 31,
1995, the Company was wholly owned by Vanguard. On March 31, 1995, VPC
Corporation ("VPC") (a wholly owned subsidiary of Le Groupe Videotron Ltee
("Videotron") -- a Quebec corporation), acquired a 66.75% interest in the
Company. At August 31, 1997, VPC's interest in the Company was 74.62% (see Note
9).
In 1995, the Company elected to change its year-end to August 31 from
December 31 to conform to that of its new majority stockholder.
2. SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information -- The accompanying unaudited interim
consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial information. In the opinion of management, all adjustments (consisting
only of normal recurring entries) considered necessary for a fair presentation
have been included. Operating results for the six month period ended February
28, 1997 and 1998, are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other interim period.
Principles of Consolidation -- The consolidated financial statements
include the accounts of OpTel and its wholly owned and majority-owned
subsidiaries and limited partnerships. All significant intercompany accounts and
transactions have been eliminated. Amounts due to minority limited partners are
included in notes payable and long-term obligations.
Cash and Cash Equivalents -- Cash and cash equivalents of the Company are
composed of demand deposits with banks and short-term investments with
maturities of three months or less when purchased.
Restricted Investments -- Restricted investments of the Company are
composed of U.S. Treasury securities restricted for payment of interest on the
Company's Senior Notes. These investments are classified as held to maturity and
are carried at amortized cost.
Property and Equipment -- Property and equipment are stated at cost, which
includes amounts for construction materials, direct labor and overhead, and
capitalized interest. When assets are disposed of, the costs and related
accumulated depreciation are removed, and any resulting gain or loss is
reflected in income for the period. Cost of maintenance and repairs is charged
to operations as incurred; significant renewals and
F-7
100
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
betterments are capitalized. Depreciation is calculated using the straight-line
method over the estimated useful lives of the various classes of property and
equipment as follows:
Headends............................................... 15 years
Telephone switches..................................... 10 years
Distribution systems and enhancements.................. 15 years
Computer software and equipment........................ 4 years
Other.................................................. 5 to 10 years
Management routinely evaluates its recorded investments for impairment
based on projected undiscounted cash flows and other methods and believes the
investments to be recoverable.
Intangible Assets -- Costs associated with licensing fees, commissions and
other direct costs incurred in connection with the execution of rights-of-entry
agreements to provide cable television and telecommunications service to MDUs,
the excess of purchase price over the fair value of tangible assets acquired,
goodwill and other intangible assets, are amortized using the straight-line
method over the following estimated useful lives:
Goodwill....................................... 20 years
Licensing fees and rights-of entry costs....... Life of contract
Deferred financing costs....................... Terms of indebtedness
Other.......................................... 1 to 5 years
Management routinely evaluates its recorded investments for impairment
based on projected undiscounted cash flows and other methods and believes the
investments to be recoverable.
Federal and State Income Taxes -- Prior to August 2, 1996 the Company and
its corporate subsidiaries filed a consolidated federal income tax return.
Beginning August 2, 1996, in connection with VPC acquiring additional stock from
Vanguard, the Company was included in VPC's consolidated federal income tax
return. Effective February 14, 1997, as the result of issuing Class C Common
(see Notes 6 and 9), the Company will again be required to file a separate
consolidated federal income tax return. During the period in which the Company
was consolidated with VPC, for purposes of financial reporting, the Company has
recorded federal and state income tax as if it were filing a separate return.
Deferred tax assets and liabilities are recorded based on the difference between
the tax basis of the assets and liabilities and their carrying amounts for
financial reporting purposes, referred to as temporary differences. Provision is
made or benefit recognized for deferred taxes relating to temporary differences
in the recognition of expense and income for financial reporting purposes. To
the extent a deferred tax asset does not meet the criterion of "more likely than
not" for realization, a valuation allowance is recorded.
Revenue Recognition and Deferred Revenue -- The Company recognizes revenue
upon delivery of cable television programming and telecommunications service to
subscribers. OpTel typically bills customers in advance for monthly cable
television services, which results in the deferral of revenue until those
services are provided.
Cost of Services -- System operating costs include programming,
telecommunications service costs, revenue sharing with owners of MDUs for which
OpTel provides cable television and/or telecommunications service, and franchise
fees.
F-8
101
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
Net Loss Per Common Share -- The computation of basic and diluted loss per
common share is based on the weighted average number of common shares
outstanding during the period (see Note 10). No loss per share information is
presented for the period the Company was organized as a partnership. Common
stock equivalents are included in the computation if they are material. Diluted
earnings per share will continue to be calculated in a manner similar to the
historical fully diluted calculation. The diluted loss per common share is
considered to be the same as basic since the effect of the convertible notes
payable to stockholder and common stock equivalents outstanding for each period
presented would be antidilutive.
Acquisitions -- Acquisitions accounted for using the purchase method of
accounting include results of operations of the acquired businesses in the
accompanying consolidated financial statements from the dates of acquisition.
Identifiable tangible and intangible assets acquired and liabilities assumed are
recorded at their estimated fair value at the date of acquisition. The excess of
the purchase price over the net assets acquired is recorded as goodwill.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reporting amounts of certain assets,
liabilities, revenues and expenses. Actual results may differ from such
estimates. The Company is in the initial stages of entering new markets and
acquiring or constructing the infrastructure necessary to deliver cable
television and telecommunication services. The Company's network upgrades and
investment in central office switched telecommunications require significant
investment, a portion of which will not be recovered unless the Company's
customer base increases from current levels, as to which there can be no
assurance because of possible changes due to competition, regulatory changes,
technology changes, the ability to finance future expenditures or other
unforeseen factors. The carrying value of property, equipment, and intangible
assets will be subject to ongoing assessment.
New Accounting Pronouncements -- On September 1, 1996, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of", which did not have a significant impact on the Company's results of
operations or financial position.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings per Share," which established new standards for
computing and presenting earnings per share and was effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Prior periods presented have been restated to reflect the adoption of
SFAS No. 128 which did not have a significant impact upon the Company's reported
earnings per share.
The FASB issued, in February 1997, SFAS No. 129, "Disclosure of Information
about Capital Structure," which establishes standards for disclosing information
about an entity's capital structure and is effective for financial statements
for periods ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in the financial statements. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997.
The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way public companies disclose information about operating segments,
products and services, geographic areas and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997.
Reclassifications -- Certain reclassifications of prior year amounts have
been made to conform to the current year presentation.
F-9
102
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
3. ACQUISITIONS
On December 28, 1994, the Company acquired the stock of the operating
subsidiaries of International Richey Pacific Cablevision, Ltd. ("IRPC") by
assuming approximately $15,500 of liabilities, issuance of a note for $1,000,
payment of approximately $1,300 in cash and issuance of a warrant for the right
to purchase an ownership interest in Vanguard. The $1,000 secured note payable
was due to IRPC one year after closing and was subject to adjustment based on
the actual amount of assumed liabilities. In December 1997, the Company and IRPC
reached an agreement with respect to the actual amount of liabilities assumed.
Also in December 1997, IRPC exercised its right to put the warrant to OpTel. The
obligations for the secured note payable and the warrant were satisfied by the
Company by payment of approximately $1,477. The combined amounts due to IRPC
were included on the accompanying August 31, 1996 and 1997 consolidated balance
sheets in deferred acquisition liabilities. The Company, as a result of the
acquisition from IRPC, is a general partner in limited partnership investments
(the "Partnerships"). The operations of these Partnerships have been
consolidated with those of the Company. The Company has the option to purchase
the interest of each limited partner at defined amounts ranging from 110% to
140% of each limited partner's initial capital contribution for the first four
years of the partnership agreements and is required to purchase the interests at
the end of the fifth year at 150% of the initial capital contribution. From the
date of initial capital contribution until the date the Company purchases the
interest of a limited partner, each limited partner receives a guaranteed return
equal to 10% per annum of their initial capital contribution paid quarterly.
During the periods ended August 31, 1995, 1996 and 1997 OpTel paid $2,114, $392,
and $0, respectively, to repurchase certain partnership obligations (see Note
6). The operations of the acquired subsidiaries and the partnerships are located
in the San Diego, California, and Phoenix, Arizona areas.
On January 11, 1995, the Company purchased the assets of EagleVision, a
division of Nationwide Communications, Inc. ("NCI"). The purchase price
consisted of $15,200 in cash, the assumption of approximately $110 of
liabilities and a deferred payment due to NCI of not less than $6,000 and not
more than $10,000 based on the profitability of OpTel's assets in the Houston,
Texas market with certain adjustments. This deferred payment shall be payable at
NCI's option, either (a) following the sale of all or substantially all of the
EagleVision assets or the sale of a majority of the outstanding voting capital
of the OpTel subsidiary which acquired EagleVision assets to a third party who
is not an affiliate or (b) at the conclusion of the fifth or sixth year
following the acquisition. This deferred payment is carried on the accompanying
consolidated balance sheets in deferred acquisition liabilities at the net
present value of the estimated final payment with an accretion of interest
recorded to operations. As of the date of acquisition and as of August 31, 1997,
the estimated payment due was $6,000 with a net present value at August 31, 1996
and 1997 of $4,503 and $4,903, respectively. EagleVision's operations are
located in the Houston, Texas area.
On June 30, 1995, the Company purchased the stock of Sunshine Television
Entertainment, Inc. ("Sunshine") for $5,500 in cash and the assumption of
approximately $350 of liabilities. Sunshine's operations are located in the
Miami, Florida area.
On July 31, 1995, the Company purchased the assets of Interface
Communications Group, Inc. and certain related entities ("Interface") for $8,900
in cash and the assumption of approximately $30 of liabilities. The operations
of Interface are located in the Denver, Colorado area.
On August 31, 1995, the Company purchased the general and limited
partnership interests of Triax Associates V, L.P. ("Triax"), for $15,200 in cash
and the assumption of approximately $100 of liabilities. The operations of Triax
are located in the Chicago, Illinois area.
F-10
103
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
On January 30, 1996, the Company purchased the assets of Telecom Master
L.P. and Telecom Satellite Systems Corporation ("Telecom") for approximately
$5,700 in cash and the assumption of $100 of liabilities. The operations of
Telecom are located in the Dallas, Texas area.
On August 2, 1996, the Company purchased certain assets of certain
subsidiaries of Wireless Holdings, Inc., and Videotron (Bay Area), Inc.,
companies that are 50% and 80% owned and controlled by Videotron, respectively,
for approximately $3,880. The amount paid represents the sellers' historical
cost which also approximates the acquired assets' estimated fair market value.
The operations of the acquired assets are located in the San Francisco,
California, and Tampa, Florida areas.
On November 12, 1996, the Company purchased the assets of Malvey Cable
Company ("Nor-Cal") for approximately $2,500 in cash. The operations of Nor-Cal
are located in the San Francisco, California area.
On March 14, 1997, the Company purchased the stock of Tara Communication
Systems, Inc. ("Tara") for $2,450 in cash and the assumption of approximately
$65 of liabilities. The operations of Tara are located in the Chicago, Illinois
area.
On August 1, 1997, the Company purchased certain assets of Northgate
Communications, Inc. ("Northgate") for approximately $1,700 in cash. The
operations of Northgate are located in the Los Angeles and San Diego, California
areas.
On October 27, 1997, the Company purchased the residential cable television
and associated fiber optic network assets of Phonoscope Ltd. and the stock of
several affiliated entities (collectively "Phonoscope"). The operations of
Phonoscope are in Houston, Texas. The purchase price consisted of $36.5 million
in cash and was recorded as a purchase acquisition. At February 28, 1998, the
allocation of the purchase price is recorded on a preliminary basis and is
subject to adjustment.
The pro forma effect of the 1996 and 1997 acquisitions would have an
insignificant impact on the consolidated results of operations of the Company
for the years ended August 31, 1996 and 1997.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
AUGUST 31,
------------------- FEBRUARY 28,
1996 1997 1998
-------- -------- ------------
(UNAUDITED)
Headends............................................. $ 32,119 $ 53,088 $ 58,669
Telephone switches................................... 4,976 9,347 11,679
Distribution systems and enhancements................ 36,372 68,538 109,216
Computer software and equipment...................... 4,957 9,512 11,573
Other................................................ 5,813 8,762 8,758
Construction in progress............................. 25,434 26,177 25,936
-------- -------- --------
109,671 175,424 225,831
Less accumulated depreciation........................ (5,871) (14,982) (22,053)
-------- -------- --------
$103,800 $160,442 $203,778
======== ======== ========
Interest expense of $1,849 and $2,256 was capitalized during 1996 and 1997
respectively.
F-11
104
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
5. INTANGIBLE ASSETS
Intangible assets consisted of the following:
AUGUST 31,
------------------ FEBRUARY 28,
1996 1997 1998
------- -------- ------------
(UNAUDITED)
Goodwill.............................................. $47,344 $ 53,081 $ 69,982
Licensing fees and rights-of-entry costs.............. 22,174 30,833 40,643
Deferred financing costs.............................. -- 5,784 10,973
Other................................................. 1,650 3,243 2,419
------- -------- --------
71,168 92,941 124,017
Less accumulated amortization......................... (5,292) (10,358) (13,966)
------- -------- --------
$65,876 $ 82,583 $110,051
======= ======== ========
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable and long-term obligations consisted of the following:
AUGUST 31,
----------------- FEBRUARY 28,
1996 1997 1998
------ -------- ------------
(UNAUDITED)
13% Senior Notes Due 2005, Series B, net of
unamortized discount of $0, $6,526 and $6,089....... $ -- $218,474 $218,911
Senior credit facility bearing interest at LIBOR plus
3.5% per annum, payable quarterly, collateralized by
substantially all of the assets of the Company...... -- -- 125,000
Installment notes payable bearing interest at rates
ranging from 7.75% to 13% per annum, substantially
all collateralized by certain transportation
equipment or private cable television systems....... 511 280 218
Limited partner obligations (see Note 3).............. 633 714 760
Obligations under capital leases, net of amounts
representing interest of $581 and $355 for 1997 and
1996, respectively.................................. 1,299 2,185 2,878
------ -------- --------
$2,443.. $221,653 $347,767
====== ======== ========
On February 14, 1997, the Company issued $225.0 million of 13% Senior Notes
Due 2005 ("Senior Notes"). The Senior Notes require semiannual interest payments
due on August 15 and February 15 of each year until their maturity on February
15, 2005. The Senior Notes are redeemable at the option of the Company generally
at a premium at any time after February 15, 2002 and can be redeemed, in part,
also at a premium, earlier upon the occurrence of certain defined events. The
Senior Notes are unsecured.
In connection with the issuance of the Senior Notes, the Company issued
225,000 shares of Class C Common. The portion of the net proceeds allocated to
the Class C Common is $7 million. Such amount has been recorded as stockholders'
equity and as a discount to the Senior Notes. As a result of issuing the Class C
Common, the Company will no longer be included in VPC's consolidated federal
income tax return.
F-12
105
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
Concurrent with the issuance of the Senior Notes, the Company was required
to deposit in an escrow account $79.6 million in cash that, together with the
proceeds from such investment, will be sufficient to pay when due the first six
interest payments on the Senior Notes. Such amount is reflected as restricted
investments on the accompanying consolidated balance sheet.
In December 1997, the Company, through subsidiaries, secured a $150 million
senior secured credit facility (the "Senior Facility") from a syndicate of
financial institutions. The Senior Facility consists of a term loan in the
amount of $125.0 million (which was drawn on December 19, 1997) bearing interest
at LIBOR plus 3.5% and a $25.0 million revolving credit commitment. The Senior
Facility is secured by a first fixed and floating lien on substantially all of
the assets of the Company and its subsidiaries. The Senior Facility contains
financial maintenance requirements and certain limitations on the Company's
ability to incur indebtedness, maximum capital expenditures, and pay dividends.
The Company is in compliance with, or has obtained waivers for, all covenants of
the Senior Credit Facility. The Company entered into an interest rate swap
agreement covering approximately $75 million of the Senior Credit Facility to
comply with certain covenants of the Senior Credit Facility.
Aggregate maturities of the Company's indebtedness are as follows as of
August 31, 1997:
NOTES PAYABLE CONVERTIBLE DEFERRED
AND NOTES PAYABLE ACQUISITION
LONG-TERM TO STOCKHOLDER LIABILITIES
OBLIGATIONS (NOTE 9) (NOTE 3) TOTAL
------------- -------------- ----------- --------
Fiscal year ending:
1998............................... $ 1,587 $ -- $2,017 $ 3,604
1999............................... 811 -- -- 811
2000............................... 530 -- 4,903 5,433
2001............................... 249 -- -- 249
2002............................... 2 -- -- 2
Thereafter........................... 218,474 129,604 -- 348,078
-------- -------- ------ --------
Totals..................... $221,653 $129,604 $6,920 $358,177
======== ======== ====== ========
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,
---------------
1996 1997
------ ------
Amount of equipment under capital leases.................... $1,717 $3,069
Less accumulated amortization............................... (298) (470)
------ ------
$1,419 $2,599
====== ======
F-13
106
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
Minimum future obligations on operating leases at August 31, 1997, consist
of the following:
Fiscal year ending:
1998............................................. $ 2,474
1999............................................. 2,285
2000............................................. 1,880
2001............................................. 1,546
2002............................................. 1,218
Thereafter......................................... 3,646
-------
Total minimum lease payments............. $13,049
=======
Rental expense under operating leases for the periods ending August 31,
1995, 1996 and 1997 was $616, $2,158 and $2,763, respectively. The company's
rental expense under operating leases includes facility rentals as well as
rental of roof top space for distribution purposes.
7. COMMITMENTS AND CONTINGENCIES
Employment and Consulting Agreements -- Employment agreements with certain
executive employees provide for separation payments ranging from 3 to 24 months
of the employee's annual salary if employment is terminated due to change of
control or without cause. However, stipulations for termination payment and
payment terms vary. The Company paid or accrued approximately $1,590, $297 and
$278 in severance during 1995, 1996 and 1997, respectively, related to such
employment agreements.
Legal -- The Company is a defendant in certain lawsuits incurred in the
ordinary course of business. It is the opinion of the Company's management that
the outcome of the suits now pending will not have a material, adverse effect on
the operations, cash flows or the consolidated financial position of the
Company.
8. INCOME TAXES
The cumulative losses of Vanguard incurred prior to the transfer of its
assets to the Company on December 20, 1994, have been reported in the individual
income tax returns of Vanguard's partners. Upon transfer, the Company recorded
deferred taxes for the difference between the tax and book basis of the assets,
which was not material. Upon acquisition of the stock of the IRPC subsidiaries,
a deferred tax liability of $488 was recorded to recognize the excess of the
basis in the assets for financial reporting purposes over the tax basis of the
net assets acquired. During the period from January 1, 1995, to August 31, 1995,
the Company accumulated losses sufficient to offset these deferred liabilities;
accordingly, a tax benefit was recorded in the statement of operations.
Additionally, during the period ended August 31, 1995, the Company incurred $19
of federal and state income tax expense.
F-14
107
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
Income tax expense (benefit) consists of the following for the period from
January 1, 1995 to August 31, 1995 and the years ended August 31, 1996 and 1997:
1995 1996 1997
-------- ------- -------
Current:
Federal.............................................. $ -- $ -- $ --
State................................................ 19 -- --
-------- ------- -------
Total current tax expense.................... 19 -- --
Deferred tax expense (benefit)......................... (3,452) (4,470) (13,213)
Change in deferred tax valuation allowance............. 2,963 4,470 13,213
-------- ------- -------
Total income tax expense (benefit)........... $ (470) $ -- $ --
======== ======= =======
A reconciliation of income taxes on reported pretax loss at statutory rates
to actual income tax expense (benefit) for the period from January 1, 1995 to
August 31, 1995 and the years ended August 31, 1996 and 1997, is as follows:
1995 1996 1997
---------------- --------------- ----------------
Income tax at statutory rates.......... $ (3,614) (34)% $(6,266) (34)% $(16,502) (34)%
State income taxes, net of federal tax
benefit.............................. 12 0 (1) 0 8 0
Valuation allowance.................... 2,963 28 4,470 24 13,213 27
Expenses (deductible) not deductible
for tax purposes..................... 169 2 1,797 10 (842) (2)
Utilization of current loss by parent
company in consolidated return....... -- -- -- -- 4,123 9
-------- --- ------- --- -------- ---
Total income tax benefit..... $ (470) (4)% $ -- 0% $ -- 0%
======== === ======= === ======== ===
The net deferred tax assets consist of the tax effects of temporary
differences related to the following:
AUGUST 31,
---------------------------
1996 1997
------------ -----------
Allowance for uncollectible accounts receivable.......... $ 184 $ 381
Equipment, furniture and fixtures........................ (4,540) (10,694)
Intangible assets........................................ 105 421
Accrued employee compensation............................ 183 214
Net operating loss carryforwards......................... 12,372 31,121
IRPC deferred tax liability.............................. (488) (480)
Other.................................................... (16) 59
------------ -----------
Deferred tax asset before valuation allowance.......... 7,800 21,022
Valuation allowance.................................... (7,800) (21,022)
------------ -----------
Net deferred tax asset......................... $ -- $ --
============ ===========
Realization of deferred tax assets is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. The Company is
unable to determine whether these accumulated losses will be utilized;
accordingly, a valuation allowance has been provided.
F-15
108
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
The following are the expiration dates and the approximate net operating
loss carryforwards at August 31, 1997:
Expiration Dates Through:
2010.......................................... $ 1,346
2011.......................................... 11,521
2012.......................................... 26,161
2013.......................................... 52,504
Certain of the Company's net operating losses were utilized by VPC while
the Company was included in VPC's consolidated tax return. Such losses will not
be available for future use by the Company, and, accordingly, the deferred tax
benefit and valuation allowance were reduced. In connection with the revised
shareholder agreement (see Note 9), subsequent to August 31, 1997, the Company
will be reimbursed for any tax benefit generated by the Company and utilized by
VPC.
9. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER, STOCK ISSUANCE AND OTHER
TRANSACTIONS WITH STOCKHOLDERS
From December 22, 1994 through March 31, 1995, the Company borrowed $60,000
from VPC under a Senior Secured Convertible Note Agreement. The note, with an
original maturity of June 30, 1996, and the accrued interest of $792 for the
period from December 22, 1994 until conversion on March 31, 1995, was converted
to 1,120,985 shares of Class B Common of OpTel on March 31, 1995. Concurrently,
VPC purchased 105,667 shares of OpTel's Class B Common from Vanguard.
Additionally, the Company incurred $1,587 of costs related to this conversion of
debt which was charged to additional paid-in capital.
On July 26, 1995, VPC invested $25,000 in the Company, of which $16,688
represented VPC's purchase of an additional 311,652 shares of OpTel's Class B
Common, and $8,312 represented a convertible note payable that bore interest at
15% and was convertible to 155,229 shares of Class B Common at the option of VPC
on November 15, 1995 (extended to January 29, 1996). In connection with the July
26, 1995, equity call, Vanguard had the option to fund its portion to maintain
its ownership interest at 33.25% by November 15, 1995 (extended to January 29,
1996). The Company was required to use the proceeds from any Vanguard
contribution to repay the convertible note. On January 29, 1996, Vanguard
elected to let the option expire without funding its portion of the equity call.
On April 1, 1996, VPC converted the $8,312 note and accrued interest of $854
into 155,229 shares of Class B Common.
From August 1995 through August 1997, the Company issued a total of
$131,400 in convertible notes ("Convertible Notes") to VPC, all of which bear
interest at 15%, generally with principal and interest due on demand. Under the
terms of the Convertible Notes, any accrued interest on which there is no demand
for payment as of each August 31, automatically converts to additional principal
payable. As of August 31, 1997, $106,678 was advanced to OpTel under the
Convertible Notes and a total of $22,926 of interest on the Convertible Notes
has been converted to principal to date. As of February 29, 1998 an additional
$10,291 of interest on the Convertible Notes has been converted to principle.
The principal and interest on Convertible Notes were convertible into Class B
Common after the earlier to occur of an initial public offering or April 30,
1999 (See Note 16).
In August 1997, in connection with a revised shareholder agreement, Capital
Communication CDPQ, Inc. ("CDPQ"), a minority stockholder of Videotron, acquired
all of Vanguard's interest in OpTel, including an option to purchase 48,937
shares of Class B Common at an exercise price of $53.55 per share, subject to
F-16
109
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
adjustment, that had been granted to Vanguard in August 1996. The option was
exercised by CDPQ on August 15, 1997, resulting in the Company receiving $2,620
in cash.
In September 1996, the Company entered into a consulting agreement with a
former director of the Company who is a limited partner of Vanguard. In
connection therewith, the Company granted him a warrant to purchase up to 24,992
shares of Class A Common at an exercise price of $53.55 per share, subject to
adjustment, that is presently exercisable and expires on August 31, 1999.
VPC and an affiliate of Vanguard had each agreed to provide consultant,
advisory and management services for $350 per annum (plus travel expenses) per
party. This arrangement terminated in August 1997 with the sale of Vanguard's
interest in the Company.
10. STOCKHOLDERS' EQUITY
The Class A Common, Class B Common and Class C Common of the Company are
identical in all respects and have equal powers, preferences, rights and
privileges except that each holder of Class A Common is entitled to one vote for
each share of Class A Common held, each holder of Class B Common is entitled to
ten votes for each share of Class B Common held, and each holder of Class C
Common does not possess any voting privileges. VPC and CDPQ are the only holders
of Class B Common and, upon any transfer other than to a permitted holder, the
Class B Common automatically converts to a like number of shares of Class A
Common.
On February 7, 1997 the Company approved a stock split effected in the form
of a stock dividend. Each share of outstanding Class B Common (the only class of
common stock then outstanding) received 17.3768 additional shares. The number of
authorized shares of Class A Common and Class B Common was increased to
8,000,000 and 6,000,000, respectively. The financial statements have been
restated to reflect the stock split as if it had occurred on December 20, 1994,
the date the Company reorganized as a corporation. Additionally, the Company
authorized the issuance of 300,000 shares of Class C Common.
11. EMPLOYEE BENEFIT PLAN
401(k) Plan -- The OpTel 401(k) Plan (the "Plan"), established January 1,
1995, conforms to the provisions of the Employee Retirement Income Security Act
of 1974. It is a contributory tax deferred 401(k) plan. All employees are
eligible and may enter the Plan on the first day of the first full month of
employment, provided that they have attained the age of 21.
Each participant my elect to defer up to 15% of annual compensation up to
the annual contribution limit of the Internal Revenue Code. The Company matching
contribution is a discretionary amount to be annually determined by the Board of
Directors of the Company. The Company determined that, for the plan years ended
December 31, 1995, 1996 and 1997, it would match 50% of its employees' elective
contribution (to a maximum Company contribution of 3% of the employees'
compensation). For the periods ended August 31, 1995, 1996 and 1997, the
Company's match of its employees' elective contributions was $81, $188 and $289,
respectively.
12. RESTRICTED INVESTMENTS
Concurrent with the issuance of the Senior Notes, the Company was required
to deposit in an escrow account $79.6 million in cash that was subsequently
invested in U.S. Treasury securities. The securities are classified as
held-to-maturity and, at August 31, 1997, have an amortized cost basis of
$67,206, and aggregate
F-17
110
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
fair value of $67,233, and gross unrealized holding gains of $27. The
contractual maturity of the securities correspond to the semi-annual interest
payments required under the Senior Notes through February 15, 2000.
13. EMPLOYEE STOCK OPTIONS AND WARRANTS
During the year ended August 31, 1997 the Company adopted a stock option
and award plan for the benefit of officers and key employees. The plan is
administered by a committee of the Board of Directors. The plan authorizes the
Board to issue incentive stock options, as defined in Section 422A(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and stock options which
do not conform to the requirements of that Code section. The Board has
discretionary authority to determine the types of options to be granted, the
persons to whom options shall be granted, the number of shares to be subject to
each option granted and the terms of the stock option agreements. Unless
otherwise specifically provided in the option agreement, (i) the exercise price
of an option will not be less than the fair market value, as determined by the
Board, of the Class A Common on the date of grant and (ii) the options vest in
equal installments on each of the second, third, fourth and fifth anniversaries
of the date of grant. The options issued as of August 31, 1997, expire ten years
from the date of grant. In the event of a "change in control," all options shall
vest and become immediately exercisable. The Board has authorized 95,137 shares
of Class A Common to be issued under the plan. Stock option activity under the
plan and warrants issued (see Note 9) for the year ended August 31, 1997, was as
follows:
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE PRICE PER SHARE
--------- --------------- ----------------
Options and warrants outstanding at August
31, 1996................................. -- -- --
Granted.................................... 112,115 $53.55 to $85.75 $76.70
Exercised.................................. -- -- --
Forfeited.................................. 22,078 $53.55 to $85.75 $80.92
-------
Options and warrants outstanding at August
31, 1997................................. 90,037 $53.55 to $85.75 $75.66
-------
Options and warrants exercisable at August
31, 1997................................. 27,095 $53.55 to $85.75 $56.05
Options available for grant at August 31,
1997..................................... 30,092
The weighted average remaining contractual life of the stock options
outstanding at August 31, 1997 is nine years.
At August 31, 1997, the Company has reserved a total of 65,045 shares of
Class A Common for issuance upon the exercise of stock options. The Company has
also granted stock warrants in connection with an agreement to provide
consulting services (see Note 9).
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" in accounting for its stock option and award plan and the stock
warrants. During 1997, the exercise price of each option granted was greater
than or equal to the estimated fair value of the Company's stock on the date of
grant. Accordingly, no compensation expense has been recognized under this plan.
For the year ended August 31, 1997, the difference between actual net loss and
loss per share and net loss and loss per share on a proforma basis as if the
Company had utilized the accounting methodology prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," would have been $44 and $.02 per
share, respectively.
F-18
111
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
The estimated weighted average grant date fair value of options and
warrants granted during 1997 was $1.10 per share. For purposes of determining
fair value of each option, the Company used the minimum value method using the
following assumptions:
Risk-free interest rate..................... 6.18% -- 6.88%
Expected life............................... 3 to 10 years
14. FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirement of SFAS No. 107,
"Disclosure About Fair Value of Financial Instruments." The estimated fair value
amounts have been determined by the Company using available market information
and appropriate valuation methodologies. However, considerable judgment is
necessarily required to interpret market data to develop estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
AUGUST 31, 1996 AUGUST 31, 1997
----------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
Assets:
Cash and cash equivalents................... $ 1,677 $ 1,677 $ 87,305 $ 87,305
Restricted investments...................... -- -- 67,206 67,233
Accounts receivable......................... 3,064 3,064 4,044 4,044
Liabilities:
Accounts payable............................ 5,647 5,647 7,927 7,927
Customer deposits and deferred revenue...... 2,167 2,167 2,978 2,978
Convertible notes payable to stockholder.... 89,414 89,415 129,604 129,605
Notes payable and long-term obligations..... 2,443 2,445 221,653 228,650
Deferred acquisition liabilities............ 6,520 6,525 6,920 6,920
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable and customer deposits and deferred revenue approximates fair
value. The fair values of convertible notes payable to stockholder, certain
notes payable and long-term obligations and deferred acquisition liabilities are
estimated based on present values using applicable market discount rates or
rates that approximate what the Company could obtain from the open market. The
fair value of restricted investments and the Senior Notes are based on quoted
market prices. The fair value estimates presented herein are based on pertinent
information available to management as of August 31, 1996 and 1997. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since the date presented,
and therefore, current estimates of fair value may differ significantly from the
amounts presented herein.
F-19
112
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED AUGUST 31, 1996
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
Revenues................................. $ 5,825 $ 6,463 $ 7,320 $ 7,996
Operating Expenses....................... $ 8,000 $ 9,395 $ 10,320 $ 12,465
Other Expense............................ $ 614 $ 1,522 $ 1,573 $ 2,145
Net Income (Loss)........................ $(2,789) $(4,453) $ (4,573) $ (6,615)
Basic and diluted loss per common
share.................................. $ (1.30) $ (2.07) $ (2.02) $ (2.86)
Weighted average number of shares
outstanding............................ 2,149 2,149 2,263 2,315
YEAR ENDED AUGUST 31, 1997
---------------------------------------------------------------
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
------------- -------------- ------------- --------------
Revenues................................. $ 9,076 $ 9,546 $ 10,495 $ 10,720
Operating expenses....................... $12,693 $14,096 $ 17,003 $ 18,841
Other expense............................ $ 3,277 $ 4,849 $ 8,867 $ 8,746
Net income (loss)........................ $(6,894) $(9,398) $(15,376) $(16,867)
Basic and diluted loss per common
share.................................. $ (2.99) $ (4.01) $ (6.08) $ (6.65)
Weighted average number of shares
outstanding............................ 2,305 2,342 2,530 2,538
16. SUBSEQUENT EVENTS (UNAUDITED)
As of March 1, 1998, the Company's majority stockholder converted its
Convertible Notes payable, including accrued interest, of $139.2 million into a
like amount of Series A Preferred. Such stock earns dividends at the annual rate
of 9.75%, payable in additional shares of Series A Preferred, and is convertible
under certain circumstances and at certain prices at the option of the holder of
the shares into shares of Class B Common.
On March 3, 1998, the Company entered into a definitive purchase agreement
to acquire certain cable television and telephone assets of Interactive Cable
Systems, Inc. ("ICS"). The total purchase price is, including service agreements
and customers, approximately $80.8 million and is comprised of approximately
$4.5 million of cash, Series B Preferred with a liquidation preference of $59.4
million, and 164,272 shares of Class A Common plus assumed liabilities of $.8
million. In April, 1998, the Company completed the acquisition of approximately
62% of the assets which are the subject of the aggregate acquisition. The
Company expects the balance of the acquisition to be completed over the next few
months as ICS meets certain conditions to the purchase of these remaining
assets. Approximately 38% of the total purchase price is contingent upon ICS
meeting these conditions. The assets being acquired are located in Houston,
Dallas-Fort Worth, San Diego, Phoenix, Chicago, Denver, San Francisco, Los
Angeles, Miami-Ft. Lauderdale, Tampa-Orlando, Atlanta, Indianapolis and greater
Washington, D.C.
On April 9, 1998, a purported class action complaint was filed in the
District Court of Harris County, Texas by Gavin Stewart Clarkson, individually
and on behalf of all cable subscribers in the U.S. that have paid late fees to
either Phonoscope or the Company. The plaintiff, who formerly subscribed to
cable television services provided by Phonoscope, alleges that Phonoscope's
charging pre-established late fees for delinquent
F-20
113
OPTEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995
TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997,
AND THE SIX MONTHS ENDED FEBRUARY 28, 1997 AND 1998 (UNAUDITED),
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED)
payments of cable subscription charges constitutes an illegal collection of a
penalty and that cable service providers should only be entitled to their actual
collection costs. The plaintiff seeks to enjoin Phonoscope and OpTel from
collecting, or attempting to collect, such late fees. The case is in its very
early stages and the Company has not yet been served with process of the summons
and complaint. No assurance can be given as to its ultimate outcome or that any
such outcome will not materially adversely affect the Company. OpTel believes
that it will have meritorious factual and legal defenses, and intends to defend
vigorously against these claims.
On April 27, 1998, a civil action was commenced against the Company in the
United States District Court for the Northern District of California by Octel,
charging the Company with trademark infringement, trade name infringement,
trademark dilution, and unfair competition based on its use of the name "OpTel"
and seeking to enjoin the Company from using the name "OpTel." The Civil Action
follows a now-suspended administrative proceeding in the Patent and Trademark
Office ("PTO") relating to registration of the "OpTel" mark by the Company. The
PTO found the Company's application for registration to be allowable; however,
Octel commenced the PTO proceeding claiming that the Company's mark is
confusingly similar to the "Octel" mark used by that party in a related field,
and claiming that the Company's application had procedural deficiencies. During
the course of the PTO proceeding, the Company acquired rights to the marks
"Optel" and "Optel Communications" in the telecommunications field which are
believed to predate the rights of Octel to its trademark, and the Company
commenced two further proceedings against Octel in the PTO seeking cancellation
of two of the trademark registrations owned by Octel. The various proceedings in
the PTO between the Company and Octel were consolidated and thereafter suspended
on May 15, 1998, in view of the commencement of the civil action. The Company
believes it has meritorious counterclaims in the Civil Action and intends to
vigorously defend against Octel's claims. Although the Company does not believe
that its use of the name "OpTel" infringes on the trademark or trade name rights
of Octel or any other person, there can be no assurance as to the outcome of the
civil action or that the Company will not be enjoined from the use of the name
and trademark "OpTel" or the proceedings in the PTO (if reinstated) or that any
such outcome would not materially adversely affect the Company.
F-21
114
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma information is based on the historical
financial statements of the Company and the historical financial statements of
the assets and liabilities of ICS Communications, L.L.C. (the "ICS Operations")
acquired by the OpTel, Inc. ("Company").
The pro forma statements of operations for the year ended August 31, 1997
and the six months ended February 28, 1998 have been prepared to illustrate the
effects of the acquisition as if it had occurred on the first day of the periods
presented. The pro forma balance sheet as of February 28, 1998 has been prepared
as if the acquisition had occurred on that date. The unaudited pro forma
adjustments are based upon available information and certain assumptions that
the Company believes are reasonable. The pro forma financial information and
accompanying notes should be read in conjunction with the consolidated financial
statements and other financial information included elsewhere herein pertaining
to the Company and the ICS Operations, including "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The pro forma financial information is not necessarily indicative
of either future results of operations or the results that might have been
achieved if such transactions had been consummated on the indicated dates.
The acquisition of the ICS Operations was accounted for using the purchase
method of accounting. The aggregate purchase price is allocated to the tangible
and intangible assets and liabilities acquired based upon their respective fair
values. The allocation of the aggregate purchase price reflected in the pro
forma financial information is preliminary, the final allocation of the purchase
price is contingent upon the final valuation of the acquired assets and the
revision of other estimates; however, the allocation is not expected to differ
materially from the preliminary allocation.
F-22
115
OPTEL, INC. AND SUBSIDIARIES
PRO FORMA BALANCE SHEET
AS OF FEBRUARY 28, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
HISTORICAL
----------------------
ICS PRO FORMA COMPANY
COMPANY OPERATIONS ADJUSTMENTS PRO FORMA
--------- ---------- ----------- ---------
(A) (B)
Cash and cash equivalents....................... $ 18,388 $ $(4,544)(D) $ 13,844
Restricted investments.......................... 54,509 54,509
Short-term investments.......................... 111,154 111,154
Accounts receivable............................. 5,440 1,332 6,772
Prepaid expenses, deposits and other assets..... 1,851 290 (41)(C) 2,100
Property and equipment, net..................... 203,778 21,084 716(C) 225,578
Intangible assets, net.......................... 110,051 8,167 51,526(C) 169,744
--------- ------- ------- ---------
TOTAL................................. $ 505,171 $30,873 $47,657 $ 583,701
========= ======= ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable................................ $ 6,042 $ $ $ 6,042
Accrued expenses and other liabilities.......... 16,120 1,330(E) 17,450
Deferred revenue and customer deposits.......... 4,004 842 4,846
Convertible notes payable to Stockholder........ 139,244 139,244
Notes payable and long-term obligations......... 347,767 807 (14)(C) 348,560
Deferred acquisition liabilities................ 5,656 5,656
--------- ------- ------- ---------
Total liabilities..................... 518,833 1,649 1,316 521,798
Stockholders' equity(deficit)
Series B Preferred stock, 8.0%................ 59,466(F) 59,466
Class A Common................................ 2(G) 2
Class B Common................................ 24 24
Class C Common................................ 2 2
Additional paid-in-capital.................... 97,683 16,097(G) 113,780
Accumulated deficit........................... (111,371) (111,371)
--------- ------- ------- ---------
Total stockholders' equity
(deficit)........................... (13,662) 75,565 61,903
--------- ------- ------- ---------
TOTAL................................. $ 505,171 $ 1,649 $76,881 $ 583,701
========= ======= ======= =========
See notes to unaudited pro forma financial information.
F-23
116
OPTEL, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS -- YEAR ENDED AUGUST 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
HISTORICAL
----------------------------------- PRO FORMA COMPANY
COMPANY ICS OPERATIONS ADJUSTMENTS PRO FORMA
--------------- ----------------- ----------- ---------
(H) (I)
REVENUES:
Cable television.......................................... $ 36,915 $14,419 $ $ 51,334
Telecommunications........................................ 2,922 2,209 5,131
-------- ------- ------- --------
Total revenues..................................... 39,837 16,628 56,465
OPERATING EXPENSES:
Cost of services.......................................... 19,202 8,947 28,149
Customer support, general and administrative.............. 28,926 5,518 1,086(K) 35,530
Depreciation and amortization............................. 14,505 8,089 3,358(L) 25,952
-------- ------- ------- --------
Total operating expenses........................... 62,633 22,554 4,444 89,631
LOSS FROM OPERATIONS........................................ (22,796) (5,926) (4,444) (33,166)
Interest expense on -- Convertible Notes.................... (15,204) (15,204)
Other interest expense...................................... (16,210) (142) (16,352)
Interest and other income................................... 5,675 5,675
-------- ------- ------- --------
LOSS BEFORE INCOME TAXES.................................... (48,535) (6,068) (4,444) (59,047)
INCOME TAXES................................................
-------- ------- ------- --------
NET LOSS.................................................... $(48,535) $(6,068) $(4,444) $(59,047)
-------- ------- ------- --------
DIVIDENDS ON PREFERRED SHARES:
Series B Preferred Stock 8.0%............................. $ (4,757)(M)
-------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.................... $(48,535) $(63,804)
======== ========
BASIC AND DILUTED LOSS PER SHARE............................ $ (19.98) $ (24.60)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 2,430 2,594(G)
======== ========
- ---------------
See notes to unaudited pro forma financial information.
F-24
117
OPTEL, INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED FEBRUARY 28, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
HISTORICAL
------------------------------------- PRO FORMA COMPANY
COMPANY ICS OPERATIONS ADJUSTMENTS PRO FORMA
----------------- ----------------- ----------- ---------
(H) (J)
REVENUES:
Cable television.......................................... $ 25,247 $ 7,606 $ $ 32,853
Telecommunications........................................ 1,644 917 2,561
-------- ------- ------- --------
Total revenues..................................... 26,891 8,523 35,414
OPERATING EXPENSES:
Cost of services.......................................... 12,419 3,854 16,273
Customer support, general and administrative.............. 15,855 2,426 555(K) 18,836
Depreciation and amortization............................. 10,759 4,044 1,679(L) 16,482
-------- ------- ------- --------
Total operating expenses........................... 39,033 10,324 2,234 51,591
LOSS FROM OPERATIONS........................................ (12,142) (1,801) (2,234) (16,177)
Interest expense on Convertible Notes....................... (9,640) (9,640)
Other interest expense...................................... (16,386) (71) (16,457)
Interest and other income................................... 4,141 4,141
-------- ------- ------- --------
LOSS BEFORE INCOME TAXES.................................... (34,027) (1,872) (2,234) (38,133)
INCOME TAXES................................................
-------- ------- ------- --------
NET LOSS.................................................... $(34,027) $(1,872) $(2,234) $(38,133)
-------- ------- ------- --------
DIVIDENDS ON PREFERRED SHARES:
Dividends -- Series B Preferred, 8.0%..................... $ (2,379)(M)
-------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.................... $(34,027) $(40,512)
BASIC AND DILUTED LOSS PER SHARE............................ $ (13.20) $ (14.77)
======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING......................... 2,578 2,742(G)
======== ========
See notes to unaudited pro forma financial information.
F-25
118
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(DOLLARS IN THOUSANDS)
(UNAUDITED)
(A) Represents the historical unaudited consolidated balance sheet of the
Company as of February 28, 1998.
(B) Represents the historical unaudited statement of assets and liabilities
acquired of ICS Communications, LLC ("ICS Operations") as of March 31, 1998
acquired by the Company.
(C) Reflects the adjustment to the assets purchased and liabilities assumed to
record them at their estimated fair value and the recording of goodwill for
the excess of the aggregate purchase price over the fair value of the
tangible and intangible assets acquired. The preliminary allocation of the
purchase price is as follows:
ALLOCATION OF CARRYING PRO FORMA
PURCHASE PRICE VALUE ADJUSTMENTS
-------------- -------- -----------
Accounts receivable, net................................. $ 1,332 $ 1,332 $
Prepaid expenses and other............................... 249 290 (41)
Property and equipment, net.............................. 21,800 21,084 716
Intangible assets, net................................... 59,693 8,167 51,526
Accrued acquisition costs................................ (1,330) -- (1,330)
Deferred revenue and customer deposits................... (842) (842) --
Notes payable and long-term obligations.................. (793) (807) 14
-------
Total.......................................... $80,109
=======
(D) Represents the cash payment to purchase the ICS Operations.
(E) Represents the estimated costs of the acquisition including professional
fees.
(F) Represents the issuance of 991.1 shares (liquidation preference of $59,466)
of Series B Preferred to purchase the ICS Operations.
(G) Represents the issuance of 164,272 shares of Class A Common, $.01 par value
at an estimated price per share of $98 and total fair value of $16,099 to
purchase the ICS Operations.
(H) Represents the historical consolidated statement of operations of the
Company for the period indicated.
(I) Represents the unaudited statement of revenues and direct expenses of the
ICS Operations for the year ended November 30, 1997. Such presentation is
made to conform to the Company's quarter ended November 30, 1997 and were
derived from the financial records of ICS using the audited December 31,
1997, statement of revenues and direct expenses adjusted for the exclusion
of the December 1997 results and inclusion of the December 1996 results.
The amounts include amounts representing allocated regional overhead
attributable to the acquired operations. The statement of revenues and
direct expenses include only the results of operations for the assets
acquired and liabilities assumed and do not include any amounts
representing corporate overhead of ICS or interest incurred on liabilities
not assumed by the Company.
(J) Represents the unaudited statement of revenues and direct expenses of the
acquired ICS Operations for the six months ended February 28, 1998 and were
derived from the financial records of ICS. The statement of revenues and
direct expenses include only the results of operations for the assets
acquired and liabilities assumed and do not include any amounts
representing corporate overhead of ICS or interest incurred on liabilities
not assumed by the Company. The amounts do include amounts representing
allocated regional overhead attributable to the acquired operations.
(K) Represents incremental customer support, corporate and administrative
expenses not included in the historical financial statements of the
acquired ICS Operations. The amounts have been estimated based upon the
Company's average historical cost per subscriber for the appropriate period
applied to the expected number of subscribers added as part of the
acquisition.
(L) Represents an adjustment to depreciation expense for acquired property and
equipment and to record amortization expense for the acquired intangible
assets over 5 to 15 years.
(M) Represents adjustment to reflect cumulative dividend accrued during the
period presented, assuming issuance on the first day of the period
presented, for the $59,466 of the Company's Series B Preferred issued to
acquire the ICS Operations. The adjustment reflects the Series B Preferred
dividend accrual rate of 8.0%.
F-26
119
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
OpTel, Inc.
We have audited the accompanying statement of assets and liabilities of ICS
Communications, LLC acquired by OpTel, Inc. ("OpTel") as of December 31, 1997,
and the statement of revenues and direct expenses of such assets and liabilities
for the year then ended. These financial statements are the responsibility of
OpTel's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the assets and liabilities of ICS Communications, LLC acquired by
OpTel, Inc. at December 31, 1997 and the related revenues and direct expenses
for the year ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------
May 15, 1998
Dallas, Texas
F-27
120
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
STATEMENTS OF ASSETS AND LIABILITIES ACQUIRED
ASSETS
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ---------------
(UNAUDITED)
Accounts receivable (Net of allowance for doubtful accounts
of $737,000 and $333,000)................................. $ 1,181,677 $ 1,332,000
Prepaid expenses, deposits and other assets................. 295,639 290,233
Property and equipment, net (Note 2)........................ 21,824,123 21,084,342
Intangible assets, net (Note 3)............................. 9,241,488 8,166,744
----------- -----------
Total assets...................................... 32,542,927 30,873,319
----------- -----------
LIABILITIES
Deferred revenues and customer deposits..................... 758,109 841,620
Capital lease obligations (Note 4).......................... 825,056 807,047
----------- -----------
Total liabilities................................. 1,583,165 1,648,667
----------- -----------
Net assets acquired............................... $30,959,762 $29,224,652
=========== ===========
See notes to financial statements.
F-28
121
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
STATEMENTS OF REVENUES AND DIRECT EXPENSES
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- --------------
(UNAUDITED)
REVENUES:
Cable television.......................................... $14,559,625 $4,028,128
Telecommunications........................................ 2,127,310 354,587
----------- ----------
Total revenues.................................... 16,686,935 4,382,715
OPERATING EXPENSES:
Cost of services.......................................... 8,747,441 1,909,037
Customer support, general and administrative.............. 5,371,633 1,215,493
Depreciation and amortization............................. 8,088,727 1,988,608
----------- ----------
Total operating expenses.......................... 22,207,802 5,113,138
----------- ----------
LOSS FROM OPERATIONS........................................ (5,520,867) (730,423)
INTEREST EXPENSE............................................ (141,504) (35,376)
----------- ----------
NET LOSS.................................................... $(5,662,371) $ (765,799)
=========== ==========
See notes to financial statements.
F-29
122
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements include the accounts of ICS
Communications, LLC (the "Company") only as they relate to the assets acquired
and liabilities assumed by OpTel, Inc. ("OpTel") on April 9, 1998. The statement
of revenues and direct expenses include only the results of operations for the
assets acquired and liabilities assumed and do not include any amounts
representing corporate overhead of the Company or interest incurred on
liabilities not assumed by OpTel. In preparation of the statement of revenues
and direct expenses, certain regional overhead costs were allocated to the
assets acquired. Such allocations were based upon subscriber counts, cable
passings or other criteria as considered appropriate.
The Company's operations are in a single business segment, the providing of
cable television and local and long distance telephone services to the high
density residential market, including apartment complexes, condominiums and
other multi-family residential properties (collectively "MDUs"). The Company
provides these services generally under exclusive, long-term contracts with
owners and managers of MDUs.
The assets acquired include long-term contracts to provide cable television
and telephone services to MDU properties, the property and equipment comprising
the cable television and telephone delivery systems for each of the contracts,
other prepaid assets specifically identified at the date of the purchase
(generally prepaid rent on delivery equipment) and customer receivables. In
connection with the purchase, certain liabilities were assumed, generally
capital lease obligations related to the property and equipment used in
telephone delivery systems.
The primary markets of the assets acquired are major metropolitan areas in
Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Texas, and
the greater Washington D.C. area.
Interim Financial Information -- The accompanying unaudited consolidated
financial statements of the Company have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial information. In
the opinion of management, all adjustments (consisting only of normal recurring
entries) considered necessary for a fair presentation have been included.
Operating results for the three month periods ended March 31, 1998, are not
necessarily indicative of the results that may be expected for the entire fiscal
year or any other interim period.
Property and Equipment -- Property and equipment, including equipment under
capital leases, is stated at cost, which includes amounts for construction
materials, direct labor and overhead and capitalized interest. Cost of
maintenance and repairs is charged to operations as incurred. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
various classes of property and equipment as follows:
Installed cable and headend equipment............ 5-10 years
Telephone switches and equipment................. 5-10 years
Intangible Assets -- Intangible assets includes costs associated with
licensing fees, commissions and other direct costs incurred in connection with
the execution of rights-of-entry agreements to provide cable television and
telecommunications service to MDUs. Intangible assets are amortized using the
straight-line method over the lesser of the term of the right-of-entry agreement
or 5 years.
Revenue Recognition -- Cable subscriber fees for basic monthly services and
premium channels are billed in advance and recorded as revenue in the month the
service is provided. Telecommunication service billings include residential
service fees billed in advance plus amounts based on minutes of use billed in
arrears. Telecommunications service revenues are recognized in the month the
service is provided.
F-30
123
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
Cost of Services -- System operating costs include programming,
telecommunications service costs, revenue sharing with owners of MDUs and
franchise fees.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Significant estimates included in the accompanying financial statements include
the allowance for doubtful accounts, the recoverability of the carrying value of
property and equipment and intangible assets and the allocation of regional
overhead as it relates to the assets acquired. Actual results could differ from
those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997, including assets under capital
lease, consist of the following:
Installed cable and headend equipment.......... $ 30,051,718
Telephone switches and equipment............... 2,020,330
------------
Sub-total............................ 32,072,048
Less accumulated depreciation................ (10,247,925)
------------
Property and equipment, net.......... $ 21,824,123
============
Telephone switches and equipment at December 31, 1997 include $1,238,273 in
net assets under capital lease.
3. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 consist of the following:
Rights-of-entry costs.......................... $ 21,979,856
Less accumulated amortization................ (12,738,368)
------------
Intangible assets, net............... $ 9,241,488
============
4. CAPITAL LEASE OBLIGATIONS
During 1995 and 1996 the Company entered into capital leases for telephone
equipment with five year terms. The leases are payable in monthly installments
ranging from $1,267 to $2,121 bearing interest at rates ranging from 10.4% to
13.0%. Scheduled maturities on capital lease obligations are as follows:
Year ending:
1998........................................... $ 379,980
1999........................................... 379,980
2000........................................... 243,440
Thereafter..................................... --
----------
Total payments......................... 1,003,400
Less amounts representing interest............. (178,344)
----------
Capital lease obligation............... $ 825,056
==========
F-31
124
ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC
ACQUIRED BY OPTEL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
5. RELATED PARTY TRANSACTIONS
The Company's largest shareholder is MCI Telecommunications Corporation
("MCI"). In the ordinary course of the Company's local and long distance
telephone services, the Company purchases certain services from MCI under terms
and rates that management believes are no more favorable to the Company than
those arranged with other parties.
F-32
125
======================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS A
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................... 3
Risk Factors............................ 11
Use of Proceeds......................... 24
Dividend Policy......................... 24
Capitalization.......................... 25
Dilution................................ 26
Selected Historical Consolidated
Financial and Operating Data.......... 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 30
Business................................ 38
Management.............................. 61
Principal Stockholders.................. 69
Certain Relationships and Related
Transactions.......................... 72
Description of Capital Stock............ 75
Certain Federal Income Tax
Considerations........................ 81
Description of Certain Indebtedness..... 83
Underwriting............................ 85
Certain Market Information.............. 86
Legal Matters........................... 86
Experts................................. 87
Additional Information.................. 87
Glossary................................ A-1
Index to Financial Statements........... F-1
------------------
Until , 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
SHARES
OPTEL, INC.
CLASS A COMMON STOCK
[LOGO]
------------
PROSPECTUS
, 1998
------------
SALOMON SMITH BARNEY
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
CIBC OPPENHEIMER
======================================================
126
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following statement sets forth the expenses payable in connection with
this Registration Statement (estimated except for the registration fee and the
NASD filing fee), all of which will be borne by OpTel:
Securities and Exchange Commission filing fee............... $ 29,500
NASD filing fee............................................. $ 10,500
National Market listing fee................................. $ 50,000
Legal fees and expenses..................................... $200,000
Accountant's fees and expenses.............................. $150,000
Printing costs.............................................. $150,000
Miscellaneous............................................... $160,000
--------
Total............................................. $750,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that the Company shall,
to the fullest extent permitted by the DGCL, indemnify all persons whom it may
indemnify pursuant thereto (i.e., directors and officers) and shall advance
expenses incurred in defending any proceeding for which such right to
indemnification is applicable, provided that, if the DGCL so requires, the
indemnitee provides the Company with an undertaking to repay all amounts
advanced if it is determined by a final judicial decision that such person is
not entitled to indemnification pursuant to this provision. The Company's
Certificate of Incorporation also contains a provision eliminating the personal
liability of the Company's directors for monetary damages for breach of any
fiduciary duty. By virtue of this provision, under the DGCL, a director of the
Company will not be personally liable for monetary damages for breach of his
fiduciary duty as a director, except for liability for (i) any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) dividends or stock purchases or redemptions that are
unlawful under the DGCL, and (iv) any transaction from which a director derives
an improper personal benefit. However, this provision of the Company's
Certificate of Incorporation pertains only to breaches of duty by directors as
directors and not in any other corporate capacity such as officers, and limits
liability only for breaches of fiduciary duties under the DGCL and not for
violations of other laws, such as the federal securities laws. As a result of
the inclusion of such provision, stockholders may be unable to recover monetary
damages against directors for actions taken by them that constitute negligence
or gross negligence or that are in violation of their fiduciary duties, although
it may be possible to obtain injunctive or other equitable relief with respect
to such actions. The inclusion of this provision in the Company's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefitted
the Company and its stockholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On April 13, 1998, in connection with the initial closing of the
acquisition of the ICS Operations and the payment of the purchase price thereof,
the Company issued 164,271.54 shares of Class A Common Stock and 991.1039 shares
of the Series B Preferred. Such issuances were made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act as transactions
by an issuer not involving a public offering. All of the securities were
acquired by the recipients thereof for investment and with no view toward the
sale or redistribution thereof. The sales were made without any public
solicitation; the stock certificates bear restrictive legends and appropriate
stop transfer instructions have been or will be given to the transfer agent.
II-1
127
Effective March 1, 1998, VPC exchanged $139.2 million principal amount of
the GVL Notes, constituting all of the GVL Notes, for 6,962.21365 shares of the
Series A Preferred. The issuance of the shares of Series A Preferred in exchange
for the GVL Notes was made in reliance on the exemption from registration
provided by Section 3(a)(9) of the Securities Act for securities exchanged by an
issuer with its existing security holders exclusively. No commissions or other
remuneration was paid or given for soliciting such exchange.
In August 1997, in connection with CDPQ's purchase of Vanguard's minority
interest in the Company, CDPQ exercised the Vanguard Option and purchased 48,937
shares of the Multi-Vote Common at a price of $53.55 per share (aggregate
consideration of $2,620,392). The issuance of the shares of Multi-Vote Common
pursuant to CDPQ's exercise of the Vanguard Option was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. The securities were
acquired by the recipient thereof for investment and with no view toward the
sale or redistribution thereof. The securities were acquired without any public
solicitation; the securities bears a restrictive legend and appropriate stop
transfer instructions have been or will be given to the transfer agent.
On July 11, 1997, the Company issued to Mr. Cole a warrant to purchase up
to 9406.36 shares of Class A Common Stock at an exercise price of $74.42 per
share, subject to adjustment, in consideration for Mr. Cole's separation
agreement. The warrant is exercisable until July 11, 2002. On July 3, 1997, the
Company issued to Mr. Hecht a warrant to purchase up to 728.86 shares of Class A
Common Stock at an exercise price of $85.75 per share, subject to adjustment, in
consideration for Mr. Hecht's settlement agreement. The warrant is exercisable
until December 31, 2000. The issuance of these securities was made in reliance
on the exemption from registration provided by Section 4(2) of the Securities
Act as transactions by an issuer not involving a public offering. The securities
were acquired by the recipients thereof for investment and with no view toward
the sale or redistribution thereof. The securities were acquired without any
public solicitation; the securities bear restrictive legends and appropriate
stop transfer instructions have been or will be given to the transfer agent.
During February 1997, the Company issued $225,000,000 principal amount of
Senior Notes and 225,000 shares of the Non-Voting Common to qualified
institutional buyers who purchased the securities in a private placement
pursuant to Rule 144A and/or Regulation D. The gross proceeds of this private
placement were approximately $220 million. In each instance, the offers and
sales were made without any public solicitation; the note and stock certificates
bear restrictive legends; and appropriate stop transfer instructions have been
or will be given to the transfer agent. In connection with such offering,
Salomon Brothers Inc and Merrill Lynch, Pierce Fenner & Smith Incorporated
received customary commissions. All issuances of securities in this private
placement were made in reliance on the exemptions from registration provided by
Section 4(2) of the Securities Act, and Rule 144A and Regulation D promulgated
thereunder, as transactions by an issuer not involving a public offering.
During fiscal 1997 and fiscal 1998, the Company granted options to purchase
a total of 119,971.71 shares of Class A Common Stock to certain employees of the
Company as part of their compensation packages. Such issuances were made in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. All
of the securities were acquired by the recipients thereof for investment and
with no view toward the sale or redistribution thereof. The securities were
acquired without any public solicitation; the securities bear restrictive
legends; and appropriate stop transfer instructions have been or will be given
to the transfer agent.
On September 1, 1996, the Company issued to Mr. Kofalt a warrant to
purchase up to 24,992 shares of Class A Common Stock at an exercise price of
$53.55 per share in consideration for Mr. Kofalt's separation agreement. The
warrant is exercisable until August 31, 1999. The issuance of this security was
made in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering. The security was acquired by the recipient thereof for investment and
with no view toward the sale or redistribution thereof. The security was
acquired without any public solicitation; the security bears a restrictive
legend; and appropriate stop transfer instructions have been or will be given to
the transfer agent.
II-2
128
In August 1996, in connection with a negotiated settlement of certain
disputes between the Company and Vanguard, which at such time held a minority
interest in the Company, the Company granted Vanguard an option to purchase
48,937 shares of Multi-Vote Common at an exercise price of $53.55 per share,
subject to adjustment. The issuance of this security was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as
transactions by an issuer not involving a public offering. The security was
acquired by the recipient thereof for investment and with no view toward the
sale or redistribution thereof. The Vanguard Option was subsequently transferred
to, and exercised by, CDPQ.
The Company issued GVL Notes to VPC in the amount of $23.7 million , $73.4
million and $17.8 million during fiscal 1997, fiscal 1996 and the eight-month
period ended August 31, 1995, respectively. All of the GVL Notes were
subsequently exchanged for shares of Series A Preferred, as described above. The
issuance of the GVL Notes was made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act as transactions not
involving a public offering. The GVL Notes were acquired by VPC for investment
and with no view toward the sale or distribution thereof.
ITEM 16. EXHIBITS AND FINANCIAL DATA SCHEDULES.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 -- Proposed Form of Underwriting Agreement.*
2.1 -- Purchase Agreement (the "ICS Purchase Agreement") among
OpTel, ICS and ICS Licenses, Inc. dated as of March 4,
1998.
2.2 -- Amendment Number One to the ICS Purchase Agreement dated
as of March 4, 1998.
2.3 -- Purchase Agreement (the "Phonoscope Purchase Agreement")
dated as of August 13, 1997 among OpTel, Phonoscope,
Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook
and Lee Cook Family Trust.(2)
2.4 -- Amendment Number One to the Phonoscope Purchase Agreement
dated as of August 13, 1997.
2.5 -- Amendment Number Two to the Phonoscope Purchase Agreement
dated as of August 13, 1997.
3.1 -- Amended and Restated Certificate of Incorporation of
OpTel, together with all amendments thereto.*
3.2 -- Amended and Restated Bylaws of OpTel.*
4.1 -- See the Amended and Restated Certificate of Incorporation
and the amendments thereto filed as Exhibit 3.1 and the
Amended and Restated Bylaws filed as Exhibit 3.2.
4.2 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series A Preferred.
4.3 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series B Preferred.
4.4 -- Registration Agreement, dated as of February 14, 1997,
between OpTel and Salomon Brothers Inc and Merrill Lynch,
Pierce, Fenner & Smith Incorporated.(1)
4.5 -- Common Stock Registration Rights Agreement, dated as of
February 14, 1997, among OpTel, VPC, GVL and Salomon
Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and U.S. Trust Company of Texas, N.A.(1)
4.6 -- Registration Rights Agreement, dated as of August 15,
1997, between OpTel and CDPQ.(2)
II-3
129
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.7 -- Registration Rights Agreement dated as of April 9, 1998
between OpTel, ICS, Nomura and MCI.
4.8 -- Warrant Agreement dated as of September 1, 1996 between
OpTel and James A. Kofalt.(1)
4.9 -- Warrant Agreement, dated as of July 11, 1997, between
OpTel and Rory O. Cole.(2)
4.10 -- Indenture, dated as of February 14, 1997, between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee.(1)
4.11 -- Form of Senior Note (included in Exhibit 4.10).(1)
4.12 -- Escrow Agreement, dated as of February 14, 1997, between
OpTel and U.S. Trust Company of Texas, N.A., as Trustee
and as Escrow Agent.(1)
5.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP.*
8.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP re: Tax
matters (included in Exhibit 5.1)
10.1 -- Stockholders' Agreement, dated as of December 22, 1994,
between VPC, Vanguard, Vanguard Communications, Inc.
("General Partner") and OpTel.(1)
10.2 -- Registration Rights Agreement, dated as of December 22,
1994, between OpTel and Vanguard.(1)
10.3 -- Settlement Agreement, dated as of August 1, 1996, between
Vanguard, General Partner, Pacific Capital Group, Inc.
("Pacific"), VPC, OpTel and GVL.(1)
10.4 -- Amendment, dated as of February 17, 1997, between
Vanguard, General Partner, Pacific, VPC, OpTel and
GVL.(1)
10.5 -- Form of Convertible Note (included as Exhibit B to the
Amendment referenced as Exhibit 10.4 hereto) and a list
of the issue dates and principal amounts of all
outstanding Convertible Notes (included as Schedule 1 to
the Amendment referenced as Exhibit 10.4 hereto).(1)
10.6 -- Stockholders' Agreement dated as of August 15, 1997 by
and among VPC, CDPQ and OpTel.(3)
10.7 -- Stockholders' Agreement dated as of April 9, 1998 among
OpTel, Nomura, MCI, GVL and ICS.
10.8 -- Lease Agreement dated July 25, 1995 between Space Center
Dallas, Inc. and OpTel.(1)
10.9 -- First Amendment to Lease Agreement dated August 8, 1996
between Space Center Dallas, Inc. and OpTel.(1)
10.10 -- Restated Incentive Stock Plan of OpTel.*
10.11 -- Annual Bonus Plan of OpTel.(1)
10.12 -- 1998 Employee Stock Purchase Plan of OpTel.*
10.13 -- Employment Agreement between Louis Brunel and OpTel dated
November 15, 1996.(1)
10.14 -- Employment Agreement between Rory Cole and OpTel dated
January 3, 1997.(1)
10.15 -- Employment Agreement between Michael Katzenstein and
OpTel dated September 18, 1995.(1)
10.16 -- Separation and Consulting Agreement, dated as of
September 1, 1996, between OpTel and James A. Kofalt.(1)
10.17 -- Separation Agreement dated as of July 11, 1997, between
OpTel and Rory O. Cole.
II-4
130
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.18 -- Assignment Agreement, dated as of February 14, 1997,
among TVMAX, Sunshine Television Entertainment, Inc.,
Richey Pacific Cablevision, Inc., IRPC Arizona, Inc. and
THI.(1)
10.19 -- Equipment License and Services Agreement, dated as of
February 14, 1997, between TVMAX and THI.(1)
10.20 -- Form of Shareholders Option Agreement, dated as of
February 14, 1997, between TVMAX and each of the
shareholders of THI, together with a list of the
shareholders of THI.(1)
10.21 -- Option Agreement, dated as of February 14, 1997, between
TVMAX and THI.(1)
10.22 -- City of Houston, Texas, Ordinance No. 89-338 dated March
29, 1989 granting to PrimeTime Cable Partners I, Ltd. the
right to operate for 15 years a Community Antenna
Television System, and subsequent ordinances consenting
to assignment of rights to EagleVision and to TVMAX
Communications (Texas), Inc.(1)
10.23 -- City of Houston, Texas, Ordinance No. 97-285 dated March
19, 1997, granting TVMAX Communications (Texas), Inc. a
temporary permit to operate a Telecommunications
Network.(1)
10.24 -- City of Houston, Texas, Ordinance No. 97-1088 dated
September 3, 1997, extending to TVMAX Communications
(Texas), Inc. a temporary permit to operate a
Telecommunications Network (originally granted pursuant
to the permit referenced in Exhibit 10.23 hereto).(2)
10.25 -- City of Houston, Texas, Ordinance No. 97-1567 dated
December 23, 1997, granting to TVMAX Communications
(Texas), Inc. a franchise to operate a Telecommunications
Network (superseding and replacing the temporary permits
referenced in Exhibits 10.23 and 10.24 hereto).
10.26 -- Amendment Number 001 to the Videotron/Lucent Agreement,
dated August 28, 1997, among Videotron Telecom Ltee and
Lucent Technologies Canada Inc. and TVMAX and Lucent
Technologies Inc.(2)
10.27 -- Credit Agreement dated as of December 19, 1997 (the
"Credit Agreement") among TVMAX, OpTel, Goldman Sachs
Credit Partners L.P., as arranger and syndication agent,
Canadian Imperial Bank of Commerce, individually and as
administrative agent, General Electric Capital
Corporation, individually and as documentation agent, and
the lenders party thereto from time to time
(collectively, the "Lenders").
10.28 -- First Amendment to the Credit Agreement dated as of April
29, 1998.
10.29 -- Guaranty dated as of December 19, 1997 between OpTel and
the Lenders.*
10.30 -- Pledge Agreement dated as of December 19, 1997 between
OpTel and the Lenders.*
10.31 -- Security Agreement dated as of December 19, 1997 between
OpTel and the Lenders.*
10.32 -- Interconnection Agreement under Sections 251 and 252 of
the Telecom Act by and between Southwestern Bell
Telephone Company and OpTel (Texas) Telecom, Inc.(2)
21.1 -- List of Subsidiaries of the Company.(3)
23.1 -- Consent of Kronish, Lieb, Weiner & Hellman LLP included
in Exhibit 5.1.
23.2 -- Consent of Deloitte & Touche LLP.
24.1 -- Power of Attorney is set forth on the signature page of
this Registration Statement.
II-5
131
- ---------------
(1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with
the Commission on April 10, 1997.
(2) Filed as an exhibit to the Company's 10-K filed with the Commission for
fiscal year ended August 31, 1997.
(3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for
fiscal year ended August 31, 1997.
* To be filed by Amendment to this Registration Statement.
(b) The financial statements and financial statement schedules filed as
part of this Registration Statement are as follows:
1. Financial Statements. See Index to Financial Statements on page F-1
of the Prospectus included in this Registration Statement.
2. Financial Statement Schedules.
All schedules have been omitted as they are not required under the related
instructions, are inapplicable, or because the information required is included
in the financial statements and related notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by OpTel pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of OpTel
pursuant to the foregoing provisions, or otherwise, OpTel has been advised that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by OpTel of expenses incurred or paid by a director, officer or
controlling person of OpTel in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, OpTel will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-6
132
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on this 5th day of June, 1998.
OPTEL, INC.
By: /s/ LOUIS BRUNEL
----------------------------------
Louis Brunel
President and Chief Executive
Officer
Each person whose signature appears below constitutes and appoints Louis
Brunel and Bertrand Blanchette or either of them (with full power in each to act
alone), his true and lawful attorneys-in-fact, with full power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith including, without limitation, any registration
statements for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act with the Commission, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated below.
SIGNATURE TITLE DATE
--------- ----- ----
Principal Executive Officer:
/s/ LOUIS BRUNEL President and Chief Executive June 5, 1998
- ----------------------------------------------------- Officer
Louis Brunel
Principal Financial and Accounting Officers:
/s/ BERTRAND BLANCHETTE Chief Financial Officer June 5, 1998
- -----------------------------------------------------
Bertrand Blanchette
/s/ CRAIG MILACEK Controller June 5, 1998
- -----------------------------------------------------
Craig Milacek
Other Directors:
/s/ CLAUDE CHAGNON Chairman of the Board June 5, 1998
- -----------------------------------------------------
Claude Chagnon
/s/ ALAIN MICHEL Vice Chairman of the Board June 5, 1998
- -----------------------------------------------------
Alain Michel
/s/ LOUIS BRUNEL Director June 5, 1998
- -----------------------------------------------------
Louis Brunel
/s/ CHRISTIAN CHAGNON Director June 5, 1998
- -----------------------------------------------------
Christian Chagnon
/s/ WILLIAM O. HUNT Director June 5, 1998
- -----------------------------------------------------
William O. Hunt
/s/ LYNN MCDONALD Director June 5, 1998
- -----------------------------------------------------
Lynn McDonald
II-7
133
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1 -- Proposed Form of Underwriting Agreement.*
2.1 -- Purchase Agreement (the "ICS Purchase Agreement") among
OpTel, ICS and ICS Licenses, Inc. dated as of March 4,
1998.
2.2 -- Amendment Number One to the ICS Purchase Agreement dated
as of March 4, 1998.
2.3 -- Purchase Agreement (the "Phonoscope Purchase Agreement")
dated as of August 13, 1997 among OpTel, Phonoscope,
Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook
and Lee Cook Family Trust.(2)
2.4 -- Amendment Number One to the Phonoscope Purchase Agreement
dated as of August 13, 1997.
2.5 -- Amendment Number Two to the Phonoscope Purchase Agreement
dated as of August 13, 1997.
3.1 -- Amended and Restated Certificate of Incorporation of
OpTel, together with all amendments thereto.*
3.2 -- Amended and Restated Bylaws of OpTel.*
4.1 -- See the Amended and Restated Certificate of Incorporation
and the amendments thereto filed as Exhibit 3.1 and the
Amended and Restated Bylaws filed as Exhibit 3.2.
4.2 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series A Preferred.
4.3 -- Certificate of Designation of Voting Power, Designations,
Preferences, Limitations, Restrictions and Relative
Rights of the Series B Preferred.
4.4 -- Registration Agreement, dated as of February 14, 1997,
between OpTel and Salomon Brothers Inc and Merrill Lynch,
Pierce, Fenner & Smith Incorporated.(1)
4.5 -- Common Stock Registration Rights Agreement, dated as of
February 14, 1997, among OpTel, VPC, GVL and Salomon
Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith
Incorporated and U.S. Trust Company of Texas, N.A.(1)
4.6 -- Registration Rights Agreement, dated as of August 15,
1997, between OpTel and CDPQ.(2)
4.7 -- Registration Rights Agreement dated as of April 9, 1998
between OpTel, ICS, Nomura and MCI.
4.8 -- Warrant Agreement dated as of September 1, 1996 between
OpTel and James A. Kofalt.(1)
4.9 -- Warrant Agreement, dated as of July 11, 1997, between
OpTel and Rory O. Cole.(2)
4.10 -- Indenture, dated as of February 14, 1997, between OpTel
and U.S. Trust Company of Texas, N.A., as Trustee.(1)
4.11 -- Form of Senior Note (included in Exhibit 4.10).(1)
4.12 -- Escrow Agreement, dated as of February 14, 1997, between
OpTel and U.S. Trust Company of Texas, N.A., as Trustee
and as Escrow Agent.(1)
5.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP.*
8.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP re: Tax
matters (included in Exhibit 5.1)
134
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 -- Stockholders' Agreement, dated as of December 22, 1994,
between VPC, Vanguard, Vanguard Communications, Inc.
("General Partner") and OpTel.(1)
10.2 -- Registration Rights Agreement, dated as of December 22,
1994, between OpTel and Vanguard.(1)
10.3 -- Settlement Agreement, dated as of August 1, 1996, between
Vanguard, General Partner, Pacific Capital Group, Inc.
("Pacific"), VPC, OpTel and GVL.(1)
10.4 -- Amendment, dated as of February 17, 1997, between
Vanguard, General Partner, Pacific, VPC, OpTel and
GVL.(1)
10.5 -- Form of Convertible Note (included as Exhibit B to the
Amendment referenced as Exhibit 10.4 hereto) and a list
of the issue dates and principal amounts of all
outstanding Convertible Notes (included as Schedule 1 to
the Amendment referenced as Exhibit 10.4 hereto).(1)
10.6 -- Stockholders' Agreement dated as of August 15, 1997 by
and among VPC, CDPQ and OpTel.(3)
10.7 -- Stockholders' Agreement dated as of April 9, 1998 among
OpTel, Nomura, MCI, GVL and ICS.
10.8 -- Lease Agreement dated July 25, 1995 between Space Center
Dallas, Inc. and OpTel.(1)
10.9 -- First Amendment to Lease Agreement dated August 8, 1996
between Space Center Dallas, Inc. and OpTel.(1)
10.10 -- Restated Incentive Stock Plan of OpTel.*
10.11 -- Annual Bonus Plan of OpTel.(1)
10.12 -- 1998 Employee Stock Purchase Plan of OpTel.*
10.13 -- Employment Agreement between Louis Brunel and OpTel dated
November 15, 1996.(1)
10.14 -- Employment Agreement between Rory Cole and OpTel dated
January 3, 1997.(1)
10.15 -- Employment Agreement between Michael Katzenstein and
OpTel dated September 18, 1995.(1)
10.16 -- Separation and Consulting Agreement, dated as of
September 1, 1996, between OpTel and James A. Kofalt.(1)
10.17 -- Separation Agreement dated as of July 11, 1997, between
OpTel and Rory O. Cole.
10.18 -- Assignment Agreement, dated as of February 14, 1997,
among TVMAX, Sunshine Television Entertainment, Inc.,
Richey Pacific Cablevision, Inc., IRPC Arizona, Inc. and
THI.(1)
10.19 -- Equipment License and Services Agreement, dated as of
February 14, 1997, between TVMAX and THI.(1)
10.20 -- Form of Shareholders Option Agreement, dated as of
February 14, 1997, between TVMAX and each of the
shareholders of THI, together with a list of the
shareholders of THI.(1)
10.21 -- Option Agreement, dated as of February 14, 1997, between
TVMAX and THI.(1)
10.22 -- City of Houston, Texas, Ordinance No. 89-338 dated March
29, 1989 granting to PrimeTime Cable Partners I, Ltd. the
right to operate for 15 years a Community Antenna
Television System, and subsequent ordinances consenting
to assignment of rights to EagleVision and to TVMAX
Communications (Texas), Inc.(1)
135
EXHIBIT
NUMBER DESCRIPTION
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10.23 -- City of Houston, Texas, Ordinance No. 97-285 dated March
19, 1997, granting TVMAX Communications (Texas), Inc. a
temporary permit to operate a Telecommunications
Network.(1)
10.24 -- City of Houston, Texas, Ordinance No. 97-1088 dated
September 3, 1997, extending to TVMAX Communications
(Texas), Inc. a temporary permit to operate a
Telecommunications Network (originally granted pursuant
to the permit referenced in Exhibit 10.23 hereto).(2)
10.25 -- City of Houston, Texas, Ordinance No. 97-1567 dated
December 23, 1997, granting to TVMAX Communications
(Texas), Inc. a franchise to operate a Telecommunications
Network (superseding and replacing the temporary permits
referenced in Exhibits 10.23 and 10.24 hereto).
10.26 -- Amendment Number 001 to the Videotron/Lucent Agreement,
dated August 28, 1997, among Videotron Telecom Ltee and
Lucent Technologies Canada Inc. and TVMAX and Lucent
Technologies Inc.(2)
10.27 -- Credit Agreement dated as of December 19, 1997 (the
"Credit Agreement") among TVMAX, OpTel, Goldman Sachs
Credit Partners L.P., as arranger and syndication agent,
Canadian Imperial Bank of Commerce, individually and as
administrative agent, General Electric Capital
Corporation, individually and as documentation agent, and
the lenders party thereto from time to time
(collectively, the "Lenders").
10.28 -- First Amendment to the Credit Agreement dated as of April
29, 1998.
10.29 -- Guaranty dated as of December 19, 1997 between OpTel and
the Lenders.*
10.30 -- Pledge Agreement dated as of December 19, 1997 between
OpTel and the Lenders.*
10.31 -- Security Agreement dated as of December 19, 1997 between
OpTel and the Lenders.*
10.32 -- Interconnection Agreement under Sections 251 and 252 of
the Telecom Act by and between Southwestern Bell
Telephone Company and OpTel (Texas) Telecom, Inc.(2)
21.1 -- List of Subsidiaries of the Company.(3)
23.1 -- Consent of Kronish, Lieb, Weiner & Hellman LLP included
in Exhibit 5.1.
23.2 -- Consent of Deloitte & Touche LLP.
24.1 -- Power of Attorney is set forth on the signature page of
this Registration Statement.
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(1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with
the Commission on April 10, 1997.
(2) Filed as an exhibit to the Company's 10-K filed with the Commission for
fiscal year ended August 31, 1997.
(3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for
fiscal year ended August 31, 1997.
* To be filed by Amendment to this Registration Statement.