-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JSD1wkrYiz4Ob4QXpPOblv6EAXpFc13/UrTTQ3URe5HtQQdmjPuDT6v+vwncyxx2 l7dGSkJrArA4PRn+s6MBkw== 0000950116-97-000699.txt : 19970411 0000950116-97-000699.hdr.sgml : 19970411 ACCESSION NUMBER: 0000950116-97-000699 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 39 FILED AS OF DATE: 19970410 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTEL INC CENTRAL INDEX KEY: 0001036712 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 95445524 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-24881 FILM NUMBER: 97577677 BUSINESS ADDRESS: STREET 1: 1114 W MOCKINGBIRD LANE CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146343800 MAIL ADDRESS: STREET 1: 1114 W MOCKINGBIRD LANE CITY: DALLAS STATE: TX ZIP: 75247 S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1997 REGISTRATION NO. 333- ============================================================================= SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------ OPTEL, INC. (Exact name of registrant as specified in its charter) ------
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) ------ Louis Brunel, President and Chief Executive Officer OpTel, Inc. 1111 W. Mockingbird Lane Dallas, Texas 75247 (214) 634-3800 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------ Copies to: Ralph J. Sutcliffe, Esq. Michael E. Katzenstein, Esq. Kronish, Lieb, Weiner & Hellman LLP OpTel, Inc. 1114 Avenue of the Americas 1111 W. Mockingbird Lane New York, New York 10036-7798 Dallas, Texas 75247 (212) 479-6000 (214) 634-3800 ------
Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / CALCULATION OF REGISTRATION FEE ==============================================================================
Proposed Proposed Maximum Title of Securities Amount to be Maximum Aggregate Amount of to be Registered Registered Offering Price(1) Offering Price Registration Fee - --------------------------------------------------------------------------------------------------- 13% Senior Notes Due 2005, Series B ......... $225,000,000 100% $225,000,000 $68,182
============================================================================= (1) Estimated solely for the purpose of calculating the registration fee. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date or dates as the Commission, acting pursuant to said Section 8(a), may determine. ============================================================================= OPTEL, INC. CROSS-REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-4
Registration Statement Item Number and Caption Caption or Location In Prospectus ------------------------------------------------------- ---------------------------------------------------- 1 Forepart of the Registration Statement and Outside Front Cover Page of Prospectus ............. Outside Front Cover Page 2 Inside Front and Outside Back Cover Pages of Prospectus ......................................... Inside Front Cover Page; Outside Back Cover Page 3 Risk Factors, Ratio of Earnings to Fixed Charges, and Other Information .............................. Prospectus Summary; Risk Factors; Selected Consolidated Financial and Operating Data 4 Terms of the Transaction ........................... Prospectus Summary; Risk Factors; The Exchange Offer; Description of the Notes; Plan of Distribution; Certain Federal Income Tax Consequences 5 Pro Forma Financial Information .................... * 6 Material Contacts with the Company Being Acquired .. * 7 Additional Information Required for Reoffering by Persons and Parties Deemed to be Underwriters ...... * 8 Interests of Named Experts and Counsel ............. Legal Matters; Independent Auditors 9 Disclosure of Commission Position on Indemnification for Securities Act Liabilities ..................... 10 Information With Respect to S-3 Registrants ........ * 11 Incorporation of Certain Information by Reference .. * 12 Information With Respect to S-2 or S-3 Registrants ........................................ * 13 Incorporation of Certain Information by Reference .. * 14 Information With Respect to Registrants Other Than S-3 or S-2 Registrants ............................. Prospectus Summary; Risk Factors; Capitalization; Selected Financial and Other Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Description of the Notes 15 Information With Respect to S-3 Companies .......... * 16 Information With Respect to S-2 or S-3 Companies ... * 17 Information With Respect to Companies Other Than S-2 or S-3 Companies ................................... * 18 Information if Proxies, Consents or Authorizations Are to be Solicited ................................ * 19 Information if Proxies, Consents or Authorizations Are Not to be Solicited, or in an Exchange Offer ... Management; Principal Stockholders; Certain Transactions
- ------ * Omitted because item is inapplicable or answer is in the negative. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION, DATED APRIL 10, 1997 PROSPECTUS OFFER TO EXCHANGE 13% SENIOR NOTES DUE 2005, SERIES B FOR ANY AND ALL OUTSTANDING 13% SENIOR NOTES DUE 2005 OF OPTEL, INC. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [30 DAYS FROM NOTICE], 1997, UNLESS EXTENDED OpTel, Inc., a Delaware corporation (the "Issuer") hereby offers, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (which together constitute the "Exchange Offer"), to exchange $1,000 principal amount of 13% Senior Notes Due 2005, Series B of the Issuer (the "New Notes") for each $1,000 principal amount of the issued and outstanding 13% Senior Notes Due 2005 of the Issuer (the "Old Notes", and, collectively with the New Notes, the "Notes"). As of the date of this Prospectus, $225,000,000 principal amount of the Old Notes were outstanding. The terms of the New Notes are substantially identical in all material respects (including interest rate and maturity) to the Old Notes except for certain transfer restrictions and registration rights relating to the Old Notes. The Exchange Offer is being made to satisfy certain obligations of the Issuer under the Registration Agreement, dated as of February 14, 1997, among the Issuer and the other signatories thereto (the "Registration Agreement"). Upon consummation of the Exchange Offer, holders of Old Notes that were not prohibited from participating in the Exchange Offer and did not tender their Old Notes will not have any registration rights under the Registration Agreement covering such Old Notes not tendered and such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. If the Exchange Offer is not consummated, or a shelf registration statement is not filed or is not declared effective or, after either this registration statement or the shelf registration statement has been declared effective, such registration statement thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of Old Notes or New Notes in accordance with and during the periods specified in the Registration Agreement, additional interest will accrue and be payable on the Notes until so declared effective or consummated. See "Exchange Offer; Registration Rights." Based on interpretations by the staff of the Commission with respect to similar transactions, the Issuer believes that the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than any holder which is an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act of 1933, as amended (the "Securities Act") without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that the New Notes are acquired in the ordinary course of the holders' business, the holders have no arrangement with any person to participate in the distribution of the New Notes and neither the holder nor any other person is engaging in or intends to engage in a distribution of the New Notes. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of the New Notes received in exchange for the Old Notes where such New Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuer has agreed that, starting on the Exchange Date (as defined) and ending on the close of business on the earlier of the first anniversary of the Exchange Date or the date upon which all such New Notes have been sold by such participating broker-dealer, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." The New Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of the Indenture (as defined). For a more complete description of the terms of the New Notes, see "Description of the Notes." There will be no cash proceeds to the Issuer from the Exchange Offer. The New Notes will be senior unsecured obligations of the Issuer, ranking pari passu in right of payment with all present and future senior unsecured obligations of the Issuer and will rank senior to all present and future subordinated indebtedness of the Issuer. The Issuer is a holding company that derives all of its operating income and cash flow from its subsidiaries and claims in respect of the New Notes will be effectively subordinated to all existing and future indebtedness and liabilities of such subsidiaries. As of February 28, 1997, the total indebtedness and other liabilities of subsidiaries of the Issuer (excluding any indebtedness owed to the Issuer) were $27.3 million and the Issuer's subsidiaries are expected to incur substantial additional indebtedness in the future. See "Capitalization" and "Description of the Notes - Ranking." The Old Notes were originally issued and sold on February 14, 1997 (the "Offering") in a transaction exempt from registration under the Securities Act in reliance upon the exemptions provided by Rule 144A and by Section 4(2) of the Securities Act. Accordingly, the Old Notes may not be reoffered, resold or otherwise pledged, hypothecated or transferred in the United States unless so registered or unless an exemption from the registration requirements of the Securities Act and applicable state securities laws is available. The Issuer has not entered into any arrangement or understanding with any person to distribute the New Notes to be received in the Exchange Offer and to the best of the Issuer's information and belief, each person participating in the Exchange Offer is acquiring the New Notes in its ordinary course of business and has no arrangement or understanding with any person to participate in the distribution of the New Notes to be received in the Exchange Offer. The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered for exchange. The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1997, unless extended (the "Expiration Date"), provided that the Exchange Offer shall not be extended beyond 60 days from the date of this Prospectus. The date of acceptance for exchange of the Old Notes for the New Notes (the "Exchange Date") will be the first business day following the Expiration Date. Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date; otherwise such tenders are irrevocable. Prior to this Exchange Offer, there has been no public market for the Notes. The Old Notes have traded on the PORTAL Market. If a market for the New Notes should develop, the New Notes could trade at a discount from their principal amount. The Issuer does not currently intend to list the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system. There can be no assurance that an active public market for the New Notes will develop. See "Risk Factors" beginning on page 14 for a description of certain factors that should be considered by participants in the Exchange Offer. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1997. PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including the Financial Statements and the notes thereto, appearing elsewhere in this Prospectus. As used in this Prospectus, the terms the "Company" or "OpTel" mean OpTel, Inc. and its subsidiaries, except where the context otherwise requires. References to fiscal years throughout this Offering Memorandum are to the Company's fiscal years which end on August 31 of each calendar year. This Prospectus contains certain "forward-looking statements" concerning the Company's operations, economic performance and financial condition, which are subject to inherent uncertainties and risks, including those identified under "Risk Factors." Actual results could materially differ from those anticipated in this Prospectus. THE COMPANY OVERVIEW OpTel is the largest provider of private cable television services to residents of multiple dwelling unit developments ("MDUs") in the United States and is expanding the telecommunications services it offers to MDU residents. The Company provides cable television and, where currently offered, telecommunications services to MDU residents principally under long-term contracts ("Rights of Entry") with owners of MDUs. The Company's Rights of Entry are generally for a term of ten to fifteen years (five years for Rights of Entry with condominium associations). The weighted average unexpired term of the Company's cable television Rights of Entry was approximately seven years as of February 28, 1997. The Company currently provides cable television services in the metropolitan areas of Houston, Dallas-Fort Worth, San Diego, Phoenix, Chicago, Denver, San Francisco, Los Angeles, Miami-Ft. Lauderdale, Tampa and Austin. The Company also provides telecommunications services in Houston, Dallas-Fort Worth, Austin, Denver and Miami-Ft. Lauderdale. As of February 28, 1997, the Company had 125,090 cable television subscribers and 4,791 telecommunications subscribers with 6,039 telephone lines. For regulatory purposes, the Company is considered to be a private cable television operator in most of the markets it serves. Private cable television operators deliver services to consumers without hard-wire crossings of public rights of way. Consequently, private cable television operators are not required to obtain cable television franchises and are subject to significantly less regulatory oversight than are traditional franchise cable television operators. As a result, they have significant latitude in terms of system coverage, pricing and customized delivery of services to selected properties. The Company has no universal service obligations and generally does not incur capital costs to build its networks until it has entered into Rights of Entry from which it reasonably expects to build an appropriate customer base. The Company offers a full range of multichannel video programming (including basic and premium services) which the Company believes is competitive in both content and pricing with the programming packages offered by its major competitors. The Company currently provides its telecommunications services as a shared tenant services ("STS") operator through private branch exchange ("PBX") switches. The Company offers customers access to services comparable in scope and price to those provided by the incumbent local exchange carrier ("LEC") and long distance carrier. The Company's telecommunications strategy includes replacing its PBX switches with networked central office switches. See "Business -- Network Architecture - -- Telecommunications Architecture." The Company invests in networks because it believes that networks provide the optimal mechanism for delivering bundled cable television and telecommunications services. The Company's networks use technologies that are capable of bi-directional transmission. The Company provides its video programming to MDUs through 18-Gigahertz microwave ("18GHz") and fiber optic networks and non-networked Satellite Master Antenna Television ("SMATV") 3 systems. As of February 28, 1997, approximately 130,000 of the 239,801 units passed for cable television are served by the Company's networks. These networks generally provide up to 72 channels of video programming. The Company intends to convert substantially all of its SMATV systems to 18GHz or fiber optic networks by the end of fiscal 1999. The Company's networks will also facilitate delivery of voice signal from each MDU to the central office switches to be deployed by the Company in its markets. The Company intends to license additional spectrum, which it currently anticipates principally will be in the 23-Gigahertz ("23GHz") band, which it will use to provide bi-directional voice transmission. OpTel was incorporated in the State of Delaware in July 1994, as the successor to a Delaware corporation that was founded in April 1993. The Company's principal offices are located at 1111 W. Mockingbird Lane, Dallas, Texas 75247, and its telephone number is (214) 634-3800. MARKETS MDUs comprise a wide variety of high density residential complexes, including high- and low-rise apartment buildings, condominiums, cooperatives, townhouses and mobile home communities. According to 1990 U.S. Census Bureau data, there are more than 13.2 million MDU units in MDUs with greater than 10 MDU units in the United States, of which approximately 4.0 million are within the Company's existing geographic markets. The Company estimates that approximately 2.5 million of the MDU units within its existing markets are within MDUs which meet the Company's preference for MDUs of 150 or more units. The Company selected its current markets based upon their growth characteristics, competitive conditions, MDU concentrations, topographical and climatic conditions, favorable demographics and, to a lesser extent, favorable regulatory environments. See "Business -- Markets." OpTel operated in the following geographic markets as of February 28, 1996:
Units Under Estimated Contract Units Passed Tele- Number of Units Under Cable for Tele- for Tele- communica- MDU Units Contract for Units Passed Television communica- communica- tions Market in Market(1) Cable(2) for Cable(3) Subscribers tions(2)(4) tions(3) Lines ------------- ------------ -------------- -------------- ------------- ------------- -------------- ------------ Houston 305,961 80,267 79,199 29,492 6,816 6,654 2,122 Dallas- Fort Worth 366,646 44,233 34,385 17,173 11,421 5,026 1,720 Chicago 333,442 23,117 21,765 11,378 400 -- -- Phoenix 143,674 22,987 21,856 9,884 -- -- -- San Diego 295,375 22,960 21,628 14,853 1,486 768 299 San Francisco 202,698 22,886 22,643 16,196 243 -- -- Denver 97,056 18,867 15,804 8,876 2,975 877 214 Los Angeles 270,006 13,921 8,531 6,095 1,791 -- -- Miami-Ft. Lauderdale 275,202 12,849 10,559 9,142 1,241 91 62 Tampa 151,724 2,777 2,777 1,435 -- -- -- Austin 63,811 654 654 566 1,000 1,000 1,622 ------------ -------------- -------------- ------------- ------------- -------------- ------------ 2,505,595 265,518 239,801 125,090 27,373 14,416 6,039 ============ ============== ============== ============= ============= ============== ============
- ------ (1) Represents units in MDUs with greater than 150 units. For rental units, market data has been estimated by REIS Reports, Inc. For the Tampa and Miami-Ft. Lauderdale markets, the rental unit data has been adjusted based on Company estimates to include condominium units. (2) Units under contract represents the number of units currently passed and additional units with respect to which the Company has entered into Rights of Entry for the provision of cable television services and telecommunication services, respectively, but which the Company has not yet passed and which the Company expects to pass within the next five years. (3) Units passed represents the number of units with respect to which the Company has connected and activated its cable television and telecommunication systems, respectively. The Company anticipates passing approximately 15,800 and 8,700 additional units currently under contract for cable television and units currently under contract for telecommunications, respectively, by the end of calendar 1997. (4) At this time substantially all units under contract for telecommunications are also units under contract for cable television. 4 The Company has recently entered into Rights of Entry with respect to approximately 5,500 units in the Las Vegas market, has begun construction of certain of these units and is considering further expansion in this market. STRATEGY The Company intends to grow its business and increase its market concentration by attracting MDUs currently served by other operators, providing services to newly-constructed MDUs and, as appropriate, acquiring existing private cable operators and entering new markets. See "-- Recent Developments: Proposed Phonoscope Acquisition." A critical aspect of the Company's growth strategy is the development of strategic relationships with owners of portfolios of MDUs. These relationships encourage the MDU owner to promote and sell the Company's cable television and telecommunications services to MDU residents. Many Rights of Entry provide incentives to the MDU owner, including payment on Rights of Entry execution and long-term revenue sharing. In addition, the Company believes that its ability to deliver special services tailored to MDU owners and residents enhances the MDU owners marketing of unit rentals and sales. The Company's customer marketing strategy is to offer a complete package of cable television and telecommunications services backed by a high level of customer service. The Company believes that, given a comparable level of product offerings, MDU residents prefer the simplicity and pricing benefits of dealing with one supplier for all of their cable television and telecommunications services. The Company also believes that prompt response to service requests and customer inquiries is important to MDU residents. The Company affords customers the opportunity to subscribe for Company services at the time the unit lease is signed and believes that this added convenience is important to its marketing efforts. The Company also plans to supplement its cable television and telecommunications services by providing customers with access to additional services, including Internet access, intrusion alarm, utility monitoring, and PCS, cellular and paging services. The Company is expanding the telecommunications component of its business both by increasing the number of MDUs to which it provides telecommunications services and by expanding the number of services offered. As part of its ongoing telecommunications roll out and coincident with the conversion of its SMATV systems to networks, the Company intends to replace its PBX switches located at MDUs with networked central office switches. Subject to receipt of regulatory approvals, the Company intends to deploy its first central office switch in the Houston market by mid-1997 and to have installed central office switches in substantially all of its markets by the end of calendar 1999. See "Business -- Business Strategy." PRINCIPAL STOCKHOLDER AND MANAGEMENT The Company has benefited and expects to continue to benefit from the management and technical expertise of its principal stockholder, Le Groupe Videotron Ltee ("GVL"), Canada's third largest cable television company which holds, indirectly, 76.1% of the outstanding Common Stock of OpTel. Key members of the Company's management team gained experience in developing and operating cable television and combined cable television/telecommunications businesses while serving as executives of GVL or its affiliates in Canada and the United Kingdom. From inception, OpTel's owners have invested over $200 million in the Company in the form of equity and subordinated convertible notes. 5 COMPETITIVE STRENGTHS The Company has certain strengths that position it well to compete in its markets, including the following: Strong Relationships with MDU Owners. The Company believes that its formation of strategic relationships with MDU owners is the key to its potential long-term success. Under its long-term Rights of Entry with MDU owners, the Company is effectively the exclusive multichannel television operator in the covered MDUs and, where Rights of Entry extend to telecommunications services, the only wire-line alternative to the LEC for telecommunications services in those MDUs. By providing services that are attractive to MDU residents, the Company endeavors to enhance the rental performance of the MDUs that it serves. The Rights of Entry provide MDU owners with financial incentives to work closely with the Company to promote its products and services. The Company believes that its maintenance and development of strategic relationships with MDU owners will help the Company to maintain a preferred competitive position even if the exclusivity of the Rights of Entry becomes limited by future developments. See "Risk Factors -- Risks Associated with Rights of Entry" and "Business -- Regulation." Established Presence in Favorable Markets. The Company focuses on major markets with favorable characteristics and is a leading provider of private cable television services to residents of MDUs in substantially all of its markets. The Company is expanding the telecommunications services it offers to MDU residents. As of February 28, 1997, the Company had 265,518 units under contract for cable television and 27,373 units under contract for telecommunications. See "Business -- Markets." Ability to Offer Bundled Services. The Company's ability to offer bundled cable television and telecommunications services affords a number of potential benefits to MDU residents and owners, enhancing the Company's competitive position. MDU residents and owners benefit from the simplicity of dealing with a single service provider. Management believes that the Company typically offers a superior, or at least comparable, range of products and level of customer service than its competitors at a lower total price. The Company also believes that bundling services results in better collection experience versus non-bundled services. The Company plans to offer MDU residents access to additional bundled services, including Internet access, intrusion alarm, utility monitoring, and PCS, cellular and paging services. The Company intends to introduce integrated billing of its bundled services in fiscal 1998. Network Design Advantages. Private cable systems utilizing 18GHz technology do not require the large networks of coaxial or fiber optic cable and amplifiers that are utilized by traditional hard-wire cable television operators or the installation of a headend facility at each MDU as is required for SMATV systems. Thus, private cable television operators using 18GHz technology are able to provide services at lower per unit capital and maintenance costs than franchise cable or SMATV operators. The Company can deliver as many as 72 channels of programming in uncompressed analog format over its networks which, in most of the Company's markets, exceeds the number of channels offered by other multichannel television service providers. Additional capacity, if required, can be provided through the application of available digital compression technology. The point-to-point nature of the networks enables the Company to customize the programming to be delivered to any MDU based on the demographics of the MDU's residents. The Company's networks will also facilitate delivery of voice signal from each MDU to the central office switches to be deployed by the Company in each of its markets. The Company intends to license additional spectrum, which it currently anticipates will principally be in the 23GHz band, to provide bi-directional voice transmission. 6 Focus on Customer Service. The Company seeks to attain excellence in customer service in all aspects of its operations. The Company is upgrading its networks and support systems to ensure reliable, high quality delivery of a range of cable television and telecommunications services and expanding its offerings to encompass a broad range of value-added telecommunications services. The Company has a national customer service center staffed with knowledgeable representatives to address the needs of customers 24-hours-a-day, seven-days-a-week. The Company has established direct lines to facilitate rapid response to calls initiated by MDU owners and managers. The Company has also established stringent staff training procedures, including its Operational Excellence continuous improvement program, and internal customer service standards, which management believes meet, and in many respects exceed, those established by the National Cable Television Association. Minimal Regulation of Cable Television Operations. In most of its markets, the Company is not subject to most of the regulations applicable to a typical franchise cable television operator. Consequently, the Company has significantly greater flexibility in determining its target markets and customizing its programming offerings. Specifically, by contrast to franchise cable television operators, as a private cable television operator, the Company (i) does not face regulatory constraints on the geographic areas in which it may offer video services, (ii) does not pay franchise and Federal Communications Commission ("FCC") subscriber fees, (iii) is not obligated to pass every resident in a given area, (iv) is not subject to rate regulation, and (v) is not subject to "must carry" and local government access obligations. Even in those markets where the Company is a franchise cable television operator, the Company is not subject to rate regulation or the obligation to provide universal service. In addition, 18GHz licenses are available to the Company in all of its markets without any significant regulatory restrictions. See "Business -- Regulation." RECENT DEVELOPMENTS: PROPOSED PHONOSCOPE ACQUISITION The Company has entered into a Summary of Terms (the "Letter of Intent") relating to its proposed acquisition (the "Phonoscope Acquisition") of the residential portion of the franchise cable television system business of Phonoscope, Ltd. and the capital stock of three affiliated companies (collectively "Phonoscope"). The purchase price for Phonoscope would be approximately $34.6 million, subject to certain adjustments (including a dollar for dollar downward adjustment for the value of any liabilities assumed), payable in cash at closing. The Letter of Intent is not binding, and negotiations are continuing. There can be no assurance that the Phonoscope Acquisition will be consummated on the terms contemplated by the Letter of Intent or otherwise. The Exchange Offer is not conditioned on the consummation of the Phonoscope Acquisition. See "Risk Factors -- Consummation of the Phonoscope Acquisition." Phonoscope, which operates in the greater Houston metropolitan area, provides its services over a fiber optic and coaxial cable distribution system. The Company expects to use its existing franchise with the City of Houston to serve Phonoscope subscribers within the City of Houston, and, where required to serve acquired Rights of Entry, will seek assignment of the appropriate municipal franchises. Based on information made available to the Company, the Company believes that (i) as of November 30, 1996, Phonoscope had Rights of Entry or subscriber agreements covering approximately 59,000 units (principally at MDUs, but including certain single family units within the footprint of its network) and approximately 27,000 subscribers; (ii) the weighted average unexpired term of the Rights of Entry held by Phonoscope was approximately five years as of November 30, 1996; and (iii) for the eleven month period ended November 30, 1996, Phonoscope revenues were approximately $8.6 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Proposed Phonoscope Acquisition" and "Business -- Markets." 7 THE EXCHANGE OFFER Securities Offered .......... Up to $225,000,000 principal amount of 13% Senior Notes Due 2005, Series B of the Issuer. The terms of the New Notes and the Old Notes are substantially identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes which will not apply to the New Notes. See "Description of the Notes." The Exchange Offer ......... The Issuer is offering to exchange $1,000 principal amount of New Notes for each $1,000 principal amount of Old Notes. See "The Exchange Offer" for a description of the procedures for tendering Old Notes. The Exchange Offer satisfies the registration obligations of the Issuer under the Registration Agreement. Upon consummation of the Exchange Offer, holders of Old Notes that were not prohibited from participating in the Exchange Offer and did not tender their Old Notes will not have any registration rights under the Registration Agreement with respect to such non-tendered Old Notes and, accordingly, such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. Tenders, Expiration Date; Withdrawal ................ The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1997, or such later date and time to which it is extended, provided that the Exchange Offer shall not be extended beyond 60 days from the date of this Prospectus. Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn and retendered at any time prior to the Expiration Date. Any Old Notes not accepted for exchange for any reason will be returned without expense to the tendering holder as promptly as practicable after the expiration or termination of the Exchange Offer. Federal Income Tax Considerations ............ The Exchange Offer will not result in any income, gain or loss to the holders of Notes or the Issuer for federal income tax purposes. See "Certain Federal Income Tax Considerations." Use of Proceeds ............ There will be no proceeds to the Issuer from the exchange of the New Notes for the Old Notes pursuant to the Exchange Offer. Exchange Agent ............. U.S. Trust Company of Texas, N.A., the Trustee under the Indenture, is serving as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. 8 CONSEQUENCES OF EXCHANGING OR FAILING TO EXCHANGE OLD NOTES PURSUANT TO THE EXCHANGE OFFER Generally, holders of Old Notes (other than any holder who is an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act) who exchange their Old Notes for New Notes pursuant to the Exchange Offer may offer their New Notes for resale, resell their New Notes, and otherwise transfer their New Notes without compliance with the registration and prospectus delivery provisions of the Securities Act, provided such New Notes are acquired in the ordinary course of the holders' business, such holders have no arrangement with any person to participate in a distribution of such New Notes and neither the holder nor any other person is engaging in or intends to engage in a distribution of such New Notes. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of its New Notes. See "Plan of Distribution." To comply with the securities laws of certain jurisdictions, it may be necessary to qualify for sale or register the New Notes prior to offering or selling such New Notes. The Issuer is required, under the Registration Agreement, to register the New Notes in any jurisdiction requested by the holders, subject to certain limitations. Upon consummation of the Exchange Offer, holders that were not prohibited from participating in the Exchange Offer and did not tender their Old Notes will not have any registration rights under the Registration Agreement with respect to such non-tendered Old Notes and, accordingly, such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Old Notes may not be offered or sold (except in private transactions), unless registered under the Securities Act and applicable state securities laws. See "The Exchange Offer -- Consequences of Failure to Exchange." SUMMARY DESCRIPTION OF THE NOTES Securities Offered ....... Up to $225,000,000 principal amount of 13% Senior Notes due 2005, Series B of the Issuer. The terms of the New Notes and the Old Notes are substantially identical in all material respects, except for certain transfer restrictions and registration rights relating to the Old Notes which will not apply to the New Notes. See "Description of the Notes." Maturity ................. February 15, 2005. Interest Payment Dates ... Each February 15 and August 15, commencing on August 15, 1997. Escrow Proceeds .......... At the closing of the Offering, the Issuer deposited with an escrow agent (the "Escrow Agent") $79.6 million; which, together with the proceeds from the investment thereof, will be sufficient to pay when due the first six interest payments on the Notes, with any balance to be retained by the Issuer. See "Description of the Notes -- Disbursement of Funds; Escrow Account." 9 Ranking .................. The Notes rank pari passu in right of payment with all present and future senior unsecured obligations of the Issuer and rank senior in right of payment to all present and future subordinated indebtedness of the Issuer. The Notes are effectively subordinated to all existing and future indebtedness and liabilities of the Issuer's subsidiaries. As of February 28, 1997, the total indebtedness and other liabilities of the Issuer's subsidiaries (excluding any indebtedness owed to the Issuer) were $27.3 million and such subsidiaries are expected to incur substantial additional indebtedness in the future Sinking Fund ............. None. Optional Redemption ...... On or after February 15, 2002, the Notes will be redeemable at the option of the Issuer, in whole or in part at any time, at the redemption prices set forth herein, plus accrued and unpaid interest, if any, to the date of redemption. In addition, in the event, prior to February 15, 2000, of one or more Equity Offerings (as defined) and/or sales of Common Stock (as defined) of the Issuer to one or more Strategic Equity Investors (as defined) for gross proceeds of $100.0 million or more in aggregate, the Issuer may redeem up to 35% of the initially issued aggregate principal amount of Notes at a redemption price of 113% of the principal amount, together with accrued and unpaid interest thereon to the date of redemption, provided that at least $145.0 million aggregate principal amount of Notes are outstanding following such redemption. See "Description of the Notes -- Redemption." Change of Control ........ Upon the occurrence of a Change of Control (as defined), each holder of Notes will have the right to require the Issuer to make an offer to purchase all or any part of such holder's Notes at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, through the date of purchase. The Issuer may not have sufficient funds or the financial resources necessary to satisfy its obligations to repurchase the Notes and other debt that may become repayable upon a Change of Control. See "Description of the Notes -- Certain Covenants -- Change of Control." Certain Covenants ........ The indenture governing the Notes (the "Indenture") contains covenants relating to, among other things, the following matters: (i) incurrence of additional indebtedness; (ii) restricted payments; (iii) limitations on liens; (iv) disposition of proceeds of asset sales; (v) dividend and other payment restrictions affecting subsidiaries; (vi) mergers, consolidation or sales of assets; and (vii) limitations on transactions with affiliates. See "Description of the Notes -- Certain Covenants." For additional information concerning the Notes and the definitions of certain capitalized terms used above, see "Description of the Notes." 10 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The summary consolidated financial data presented below as of and for the periods ended December 31, 1993 and 1994 and August 31, 1995 and 1996 have been derived from the consolidated financial statements of the Company, which consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors. The summary financial data presented below as of and for the six month periods ended February 29, 1996 and February 28, 1997 have been derived from unaudited consolidated financial statements of the Company. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position and results of operation for these periods. In 1995, the Company changed its fiscal year end to August 31 to match that of its majority stockholder. As a result of the change in fiscal year and the Company's history of growth through acquisitions the Company's historical financial results are not directly comparable from period to period, nor are they indicative of future results of operations in many respects. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Consolidated Financial Statements of the Company and the notes thereto, appearing elsewhere in this Prospectus.
Period from April 20, 1993 (date Eight Month of inception) Year Ended Period Six Month Six Month to December December Ended Year Ended Period Ended Period Ended 31, 31, August 31, August 31, February 29, February 28, -------------- ------------ ------------- ------------ ------------- -------------- 1993 1994 1995 1996 1996 1997 -------------- ------------ ------------- ------------ ------------- -------------- (in thousands except per share data) Statement of Operations Data: Revenues: Cable television ......... $ 12 $ 240 $ 8,782 $ 25,893 $11,570 $ 17,208 Telecommunications ....... -- 202 788 1,712 718 1,414 -------------- ------------ ------------- ------------ ------------- -------------- Total revenues ........ 12 442 9,570 27,605 12,288 18,622 -------------- ------------ ------------- ------------ ------------- -------------- Operating Expenses: Cost of services ......... 6 470 4,557 11,868 5,266 8,702 Customer support, general and administrative .... 304 7,733 8,235 17,319 7,499 12,267 Depreciation and amortization .......... 8 117 2,420 8,676 3,804 5,820 Nonrecurring reorganization costs(1) -- -- 3,820 2,318 826 -- -------------- ------------ ------------- ------------ ------------- -------------- Total operating expenses ............ 318 8,320 19,032 40,181 17,395 26,789 -------------- ------------ ------------- ------------ ------------- -------------- Loss from operations ....... (306) (7,878) (9,462) (12,576) (5,107) (8,167) Interest expense on Convertible Notes due to stockholder (2) ....... -- -- (919) (5,342) (1,890) (6,907) Other interest expense, net (1) (66) (249) (512) (245) (1,218) -------------- ------------ ------------- ------------ ------------- -------------- Loss before income taxes ... (307) (7,944) (10,630) (18,430) (7,242) (16,292) Income tax benefits (3) .... -- -- 469 -- -- -- -------------- ------------ ------------- ------------ ------------- -------------- Net loss ................... $(307) $ (7,944) $(10,161) $(18,430) $(7,242) $(16,292) ============== ============ ============= ============ ============= ============== Loss per share(4) .......... $ (6.89) $ (8.30) $ (3.37) $ (7.01) ============= ============ ============= ============== Cash dividends declared .... -- -- -- -- -- -- Financial Data: EBITDA(5) .................. $(298) $ (7,761) $ (3,222) $ (1,582) $ (477) $ (2,347) Capital expenditures(6) .... 517 9,278 22,170 62,121 23,122 24,925 Acquisition of private cable businesses ............... -- 1,298 49,974 9,916 5,793 2,500 Deficiency of earnings to fixed charges(7) ......... 307 7,944 10,630 20,280 7,876 17,276
11
As of February 28, 1997 --------------------- (In thousands except per share data) Balance Sheet Data: Cash and cash equivalents (excluding Escrow Account) $135,015 Escrow Account(8) .................................. 79,804 Property, plant and equipment, net ................. 122,041 Intangible assets .................................. 75,471 Total assets ....................................... 417,681 13% Senior Notes Due 2005 .......................... 218,036 Convertible Notes due to stockholder(9) ............ 121,006 Total liabilities .................................. 367,693 Stockholders' equity ............................... 49,988 Book value per share ............................... 19.76
As of As of August 31, February 28, ---------------------- ------------- 1995 1996 1997 --------- --------- ------------- Operating Data:(10) Cable Television: Units under contract(11) ............... 173,324 241,496 265,518 Units passed(12) ....................... 170,336 225,433 239,801 Basic subscribers ...................... 75,944 114,163 125,090 Basic penetration(13) .................. 44.6% 50.6% 52.2% Premium units .......................... 39,753 60,641 74,441 Pay-to-basic ratio(14) ................. 52.3% 53.1% 59.5% Average monthly cable revenue per subscriber(15) ...................... $ 22.84 $ 24.29 $ 24.02 Telecommunications: Units under contract(11) ............... 10,322 20,945 27,373 Units passed(12) ....................... 9,116 12,364 14,416 Subscribers ............................ 2,207 4,080 4,791 Lines(16) .............................. 2,650 5,166 6,039 Penetration(17) ........................ 24.2% 33.0% 33.2% Average monthly telecommunications revenue per subscriber(15) .......... -- $ 59.08 $ 53.16
- ------ (1) During the eight month period ended August 31, 1995 and fiscal 1996, the Company relocated its corporate headquarters, began relocating its customer services centers and completed several acquisitions. As a result of these actions, significant nonrecurring reorganization costs were incurred primarily relating to severance costs of former employees at the previous locations and relocation and recruiting costs of employees at the new location. (2) Interest expense on Convertible Notes due to stockholder, is reported net of interest capitalized in property, plant and equipment. In connection with the Offering, the stockholder, VPC Corporation ("VPC"), agreed to subordinate the Convertible Notes to the prior payment of the Notes under certain circumstances. See "Certain Transactions -- Convertible Notes." (3) The Company has not had taxable income for the periods reported. The Company reported an income tax benefit in the eight months ended August 31, 1995 due to the reduction of a deferred tax liability established as the result of an acquisition. See note 8 of notes to the Consolidated Financial Statements. (4) Loss per share information is not presented for the periods the Company was organized as a partnership. 12 (5) EBITDA represents earnings before interest expense, income tax benefits, depreciation, amortization and nonrecurring reorganization costs. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to net loss as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. The Company believes that EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in the cable television and telecommunications industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in the industry. (6) Capital expenditures include expenditures on property, plant and equipment together with intangible assets. (7) For the purposes of calculating the deficiency of earnings to fixed charges, (i) earnings consist of loss before income taxes plus fixed charges and (ii) fixed charges consist of interest expense on all debt, amortization of deferred financing costs and the portion of operating lease rental expense that is representative of the interest factor (deemed to be one third of minimum operating lease rental). On a pro forma basis, after giving effect to the Offering (excluding interest earned on the Escrow Account), the deficiency of earnings to fixed charges for the periods ended August 31, 1996 and February 28, 1997 would have been $49.5 million (including $7.2 million in respect of Convertible Notes) and $31.9 million (including $7.9 million in respect of Convertible Notes), respectively. (8) Of the net proceeds of the Offering, $79.6 million was deposited in the Escrow Account to fund the first six interest payments due in respect of the Notes. See "Description of the Notes -- Disbursement of Funds; Escrow Account." (9) The Convertible Notes mature six months following the maturity or indefeasible payment in full of the Notes and are subordinated in right of payment to the Notes under certain circumstances. See "Certain Transactions." (10) Information with respect to the periods ended December 31, 1993 and 1994 is not meaningful and not presented. (11) Units under contract represent the number of units currently passed and additional units with respect to which the Company has entered into Rights of Entry for the provision of cable television and telecommunications services, respectively, but which the Company has not yet passed and which the Company expects to pass within the next five years. At this time substantially all units under contract for telecommunications are also under contract for cable television. The Company anticipates passing approximately 15,800 and 8,700 additional units currently under contract for cable television and units currently under contract for telecommunications, respectively, by the end of calendar 1997. (12) Units passed represents the number of units with respect to which the Company has connected its cable television and telecommunications systems, respectively. The difference between units under contract and units passed represents units for which Rights of Entry have been entered into, but which are not yet connected and activated for cable television and telecommunications services, respectively. (13) Basic penetration is calculated by dividing the total number of basic subscribers at such date by the total number of units passed. (14) Pay-to-basic ratio is calculated by dividing the total number of premium units subscribed for by the total number of basic subscribers. (15) Represents revenues per average monthly subscriber for the fiscal periods ended as of the date shown. Information with respect to the telecommunications business for the period ended August 31, 1995 is not available. (16) Lines represent the number of telephone lines currently being provided to telecommunications subscribers. A telecommunications subscriber can subscribe for more than one line. (17) Penetration is calculated by dividing the total number of telecommunications subscribers at such date by the total number of units passed. 13 RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be considered in evaluating the Company and its business in connection with the Exchange Offer. CONSEQUENCES OF FAILURE TO EXCHANGE Upon consummation of the Exchange Offer, holders of Old Notes that were not prohibited from participating in the Exchange Offer and did not tender their Old Notes will not have any registration rights under the Registration Agreement with respect to such non-tendered Old Notes and, accordingly, such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act and applicable state securities laws, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Issuer does not intend to register the Old Notes under the Securities Act. Based on interpretations by the staff of the Commission with respect to similar transactions, the Issuer believes that the New Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be offered for resale, resold or otherwise transferred by holders (other than any holder that is an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the New Notes are acquired in the ordinary course of the holders' business, the holders have no arrangement with any person to participate in the distribution of the New Notes and neither the holder nor any other person is engaging in or intends to engage in a distribution of the New Notes. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of the New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of the New Notes received in exchange for the Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Issuer has agreed that, starting on the Exchange Date (as defined) and ending on the close of business on the earlier of the first anniversary of the Exchange Date or the date upon which all such New Notes have been sold by such participating broker-dealer, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." The New Notes may not be offered or sold unless they have been registered or qualified for sale under applicable state securities laws or an exemption from registration or qualification is available and is complied with. The Registration Agreement requires the Issuer to register or qualify the New Notes for resale in any state (if required) as may be requested by their holders, subject to certain limitations. LACK OF PUBLIC MARKET Prior to this Exchange Offer, there has been no public market for the Old Notes. If a market for the New Notes should develop, the New Notes may trade at a discount from their principal amount, depending upon prevailing interest rates, the market for similar securities and other factors including general economic conditions and the financial condition of the Company. The Issuer does not currently intend to apply for a listing or quotation of the New Notes on any securities exchange or to seek approval for quotation through any automated quotation system. No assurance can be given as to the liquidity of the trading market for the New Notes. The liquidity of, and trading market for, the New Notes also may be adversely affected by general declines in the market for similar securities. Such a decline may adversely affect such liquidity and trading markets independent of the financial performance of, and prospects for, the Company. 14 NEGATIVE CASH FLOW AND CONTINUING NET LOSSES The Company has incurred substantial losses since it commenced operations in 1993, primarily attributable to entering into Rights of Entry, the development and expansion of its networks and the integration of acquisitions. The Company reported net losses of approximately $0.3 million, $7.9 million, $10.2 million, $18.4 million and $16.3 million for the nine months ended December 31, 1993, year ended December 31, 1994, eight months ended August 31, 1995, year ended August 31, 1996 and six months ended February 28, 1997 respectively. In addition, the Company has reported negative EBITDA of approximately $0.3 million, $7.8 million, $3.2 million, $1.6 million and $2.3 million respectively, for such periods. The Company expects to incur continuing net losses as it incurs substantial additional costs in introducing its telecommunications services and expanding its private cable television services. There can be no assurance that it will be able to achieve or sustain profitability or positive cash flow. EFFECT OF SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT Following the Offering, the Company became highly leveraged. The Company expects to incur substantial additional indebtedness as described under "-- Future Capital Needs." At February 28, 1997, the Company had total consolidated indebtedness of approximately $348.3 million (including approximately $121.0 million of Convertible Notes which are subordinated in right of payment to the Notes under certain circumstances, as described under "Certain Transactions") and stockholders' equity of approximately $50.0 million. After giving pro forma effect to the Offering (excluding interest earned on the Escrow Account), the Company's earnings would have been insufficient to cover its fixed charges by approximately $49.5 million (including approximately $7.2 million in respect of the 15% convertible Notes due to VPC (the "Convertible Notes") for the year ended August 31, 1996 and $31.9 million (including approximately $7.9 million in respect of Convertible Notes) for the six month period ended February 28, 1997. See "Capitalization" and "Selected Consolidated Financial and Operating Data." The Company's ability to make scheduled payments of principal of, or to pay interest on, or to refinance, its indebtedness (including the Notes) depends upon the success of its business strategies and its future performance, which to a significant extent are subject to general economic, financial, competitive, regulatory and other factors beyond its control. There can be no assurance that the Company will be able to generate the substantial increases in cash flow from operations that will be necessary to service its indebtedness. In the absence of such operating results, the Company could face substantial liquidity problems and might be required to raise additional financing through the issuance of debt or equity securities. Further, the Company expects that it will need to refinance the Notes at their maturity. There can be no assurance that the Company will be successful in raising such financing when required, or that the terms of any such financing will be attractive. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The degree to which the Company is leveraged could have important consequences to the holders of the Notes, including the following: (i) the Company will have significant cash interest expense and principal repayment obligations with respect to outstanding indebtedness, including the Notes; (ii) the Company's degree of leverage and related debt service obligations may make it more vulnerable than some of its competitors to the effects of an economic downturn or other adverse developments in its business; and (iii) the Company's ability to obtain additional financing for working capital, capital expenditures, technology investments, acquisitions, general corporate purposes or other purposes could be impaired. The instruments governing the Company's indebtedness will impose restrictions on the operations and activities of the Company and may contain financial maintenance requirements. The ability of the Company to comply with any of the foregoing restrictions and covenants will be dependent on the future performance of the Company, which will be subject to prevailing economic conditions and other factors including factors beyond the Company's control, such as interest rate fluctuations, regulatory changes and changes in technology and the level of competition. 15 HOLDING COMPANY STRUCTURE AND NEED TO ACCESS SUBSIDIARIES' CASH FLOW The Issuer is a holding company with limited assets that conducts all of its operations through its subsidiaries. The Issuer derives substantially all of its revenue from the operations of its subsidiaries. The Notes are effectively subordinated to the indebtedness and other liabilities and commitments of the Issuer's subsidiaries. The ability of the Issuer's creditors, including the holders of the Notes, to participate in the assets of any of the Issuer's subsidiaries upon any liquidation or bankruptcy of any such subsidiary will be subject to the prior claims of the subsidiary's creditors, including trade creditors. As of February 28, 1997, the claims of holders of Notes are effectively subordinated to approximately $27.3 million of indebtedness (excluding any indebtedness owed to the Issuer) and other liabilities of the Issuer's subsidiaries. However, the Issuer's subsidiaries are expected to incur substantial additional indebtedness as described under "-- Future Capital Needs." In addition, the ability of the Issuer's creditors, including the holders of Notes, to participate in distributions of assets of the Issuer's subsidiaries will be limited to the extent that the outstanding shares of any of its subsidiaries are either pledged to secure other creditors of the Issuer or are not owned by the Issuer. The Notes are obligations solely of the Issuer. The ability of the Issuer to pay interest on the Notes or to repay the Notes at maturity or otherwise will be dependent upon the cash flows of its subsidiaries and the payment of funds by those subsidiaries to the Issuer in the form of repayment of loans, dividends, management fees or otherwise. The Issuer's subsidiaries have no obligation, contingent or other, to pay amounts due pursuant to the Notes or to make funds available therefor, whether in the form of loans, dividends or other distributions. Accordingly, the Issuer's ability to repay the Notes at maturity or otherwise may be dependent upon the Issuer's ability to refinance the Notes, which will depend, in large part, upon factors beyond the control of the Company. The agreements governing future indebtedness of the Issuer's subsidiaries may contain covenants prohibiting subsidiaries from distributing or advancing funds to the Issuer under certain circumstances, including to fund interest payments in respect of the Notes. The Company's future indebtedness may be expected to be secured, which could have material consequences to investors in the Notes, which are unsecured. Such security may include substantially all of the fixed assets of the Company and all of the capital stock of the Issuer's subsidiaries. The value of a substantial portion of the Company's fixed assets is derived from the employment of such assets in a cable television and telecommunications business. These assets are highly specialized and, taken individually, can be expected to have limited marketability. Consequently, in the event of a realization by the Company's secured creditors on the collateral securing the Company's secured debt, creditors would likely seek to sell the business as a going concern through a sale of pledged capital stock of subsidiaries, either in its entirety, or by franchise or other business unit, in order to maximize the proceeds realized. The price obtained upon any such sale could be adversely affected by the necessity of obtaining approval of the sale from the applicable regulatory authorities and compliance with other applicable governmental regulations. FUTURE CAPITAL NEEDS The Company will require substantial capital on a continuing basis to finance cable television and telecommunications network expansion related to subscriber and market growth, to upgrade existing facilities to desired technical and signal quality standards and to finance any acquisitions of other operators. The Company expects to fund additional capital requirements through internally generated funds and debt and/or equity financing. The Issuer's stockholders have no commitment to fund any future capital requirements of the Company and, prior to the earlier of an initial public offering or July 31, 1999, the Issuer's voting stockholders have agreed among themselves to fund all investments in the Issuer in the form of "Deeply Subordinated Shareholders Loans (as defined under "Description of the Notes - -- Certain Definitions") rather than equity. There can be no assurance that the Company will be successful in producing sufficient cash flow and raising sufficient debt and/or equity capital when required or on terms that it will consider acceptable. In addition, the Company's future capital requirements will depend upon a number of factors, including the Company's success 16 in entering into new Rights of Entry, the extent of its telecommunications roll out, the size and timing of any acquisitions, marketing expenses, staffing levels and customer growth, as well as other factors that are not within the Company's control, such as competitive conditions, changes in technology, government regulation and capital costs. Failure to raise sufficient funds may require the Company to delay or abandon some of its future expansion or expenditures, which may have a material adverse effect on its growth and its ability to compete in the cable television and telecommunications industry or on its ability to meet its obligations in respect of its indebtedness, including the Notes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business." RISK ASSOCIATED WITH TELECOMMUNICATIONS STRATEGY The Company is currently introducing telecommunications services to MDUs served by its existing networks. The Company believes that a successful introduction of its telecommunications services is important to its long-term growth. Its success will be dependent upon, among other things, the Company's ability to assess markets, design and install telecommunications networks, including switches, and obtain any required government authorizations and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions, and the willingness of MDU residents to accept a new provider of telecommunications services. There can be no assurance that the Company will be able to successfully introduce its telecommunications services in a timely manner in accordance with its strategic objectives, but it expects to spend capital to acquire and construct the necessary telecommunications infrastructure. Specific risks associated with the Company's telecommunications strategy include: Switch Installation and Network Reconfiguration; Lack of Redundant Switches. An essential element of the Company's telecommunications strategy is the provision of switched local exchange service. The Company is in the process of ordering central office switches which it intends to install and test in early 1997. In connection with the implementation of central office switches, the Company will be reconfiguring its microwave networks so that they can deliver bi-directional transmissions. The Company intends to use certain components of its existing infrastructure to deliver bi-directional transmission utilizing frequencies, principally in the 23GHz band. While the Company believes this frequency and other required frequencies are available for license on the paths that will be required, the Company has not yet commenced frequency coordination and there can be no assurance as to availability. Moreover, although the Company believes that it can implement its telecommunications plan using these frequencies and that equipment will be readily available from several sources for such purposes, the Company has not yet concluded field trials. There can be no assurance, that the installation of the required switches and the reconfiguration of the network will be completed on time or that, during the testing of the switches and the reconfigured networks, the Company will not experience technological problems that cannot be resolved. The failure of the Company to successfully reconfigure its microwave networks and to have its switches operational on a timely basis could have a material adverse effect upon the Company's ability to expand its telecommunications services. In addition, the Company intends to initially install only one switch in each market. As a result, a switch failure may have a material adverse effect on the Company's ability to provide telecommunications services in the affected market. The Company intends to enter into contracts with other telecommunications service providers to provide backup capabilities in the event of a switch failure. However, there can be no assurance that the Company will be able to successfully negotiate such agreements or that such agreements will be available on favorable terms. Interconnection Agreements. As part of its telecommunications configuration, the Company may transport telephone traffic across municipal boundaries or LATAs which may require that Company to have multiple interconnection agreements. The Company is currently negotiating agreements for the interconnection of its networks with the network of the incumbent LEC in certain of the metropolitan areas the Company serves. There can be no assurance that the Company will successfully negotiate these agreements for interconnection with the LEC or that it will be able to do so on favorable terms. 17 The failure to negotiate the interconnection agreements could have a material adverse effect upon the Company's ability to expand its telecommunication services. Currently, the Company provides local telephone service as an STS provider. STS providers generally use the LEC's facilities (although in many states competitive local exchange carriers ("CLECs") can now supply STS operators with facilities) to provide local telephone service, subject to state regulation. If LECs were no longer required to provide tariffed services to STS providers or if STS-type service classifications were to be eliminated, the Company's telephone operations would be materially adversely affected. Products and Services. The Company expects to continue to enhance its systems in order to offer its customers switched local exchange and enhanced products and services in all of its networks as quickly as practicable and as permitted by applicable regulations. The Company believes its ability to offer, market and sell these additional products and services will be important to the Company's ability to meet its long-term strategic growth objectives but is dependent on the Company's ability to obtain needed capital, favorable regulatory developments and the acceptance of such products and services by the Company's customers. No assurance can be given that the Company will be able to obtain such capital or that such developments or acceptance will occur. CONSUMMATION OF THE PHONOSCOPE ACQUISITION The Company has signed a Letter of Intent relating to the acquisition of the private cable television assets of Phonoscope by the Company. The Letter of Intent is not binding, and negotiations are continuing. The significant conditions to closing the Phonoscope Acquisition are expected to include (i) receipt of municipal consents and approvals, principally in respect of franchise transfers or changes of control; (ii) receipt of third party consents to the assignment of various contracts, including Rights of Entry, and (iii) expiration or earlier termination of the waiting period under applicable antitrust law. There can be no assurance that the Company will be able to successfully negotiate and enter into definitive and binding agreements for the Phonoscope Acquisition, or that if such definitive agreements are entered into, the Phonoscope Acquisition will be completed on the terms contemplated by the Letter of Intent or otherwise. The terms of the Letter of Intent provide for the acquisition by the Company of certain (but not all) of the purchased assets if certain consents are not obtained. There can be no assurance that there will not be material changes in the information presented herein with respect to Phonoscope and that the Phonoscope Acquisition will nevertheless be consummated or that there will not be sigificant changes in the terms of the Phonoscope Acquisition. The Exchange Offer is not conditioned upon the consummation of the Phonoscope Acquisition on the terms described herein or otherwise. See "Prospectus Summary -- Recent Developments: Proposed Phonoscope Acquisition," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview" and "-- Proposed Phonoscope Acquisition." RISKS ASSOCIATED WITH RIGHTS OF ENTRY The Company's business depends upon its ability to enter into and exploit favorable new long-term Rights of Entry for demographically attractive MDUs and to exploit and renew its existing Rights of Entry. Its success in doing so may be affected by a number of factors, including (i) the extent of competition in the provision of multichannel television and telecommunications services (see "Business -- Competition"), (ii) its ability to identify suitable MDUs and contract with their owners, (iii) the continuing demographic attractiveness of the markets in which the Company has chosen to focus its business, (iv) high occupancy rates in the MDUs to which it provides services, (v) its ability to maintain superior levels of customer service, (vi) the absence of material adverse regulatory developments (see "Business -- Regulation"), and (vii) the enforceability of the material terms of its Rights of Entry, including exclusivity provisions. The Company's Rights of Entry generally provide that the Company will have the exclusive right to provide residents within the applicable MDU with multichannel television services and, where 18 Rights of Entry extend to telecommunications services, subject to the legal right of residents to utilize the services of the incumbent LEC and certain other carriers, wire-line telecommunications services. While the Company believes that these exclusivity provisions are now generally enforceable under applicable law, current trends at the state and federal level suggest that the future enforceability of these provisions may be uncertain. Certain states in which the Company operates, including Illinois and Florida (for condominiums only), and Nevada, where the Company intends to commence operations, and the cities of Scottsdale and Glendale, Arizona and Lewisville, Texas (where the Company operates) have adopted "mandatory access" laws that provide that no resident of an MDU may be denied access to programming provided by incumbent franchise cable systems, regardless of any rights granted by an MDU owner to another multichannel television operator. Texas has adopted a "mandatory access" law for certified telecommunications service providers. In addition, the FCC has initiated a review of the rights of various multichannel television service providers to obtain access to MDUs and other private property. While the constitutionality of present "mandatory access" laws is uncertain, there can be no assurance that such laws will not be adopted elsewhere or on bases which may be upheld as constitutional. While the Company does not consider the exclusivity provisions in its Rights of Entry to be essential to its future success, there can be no assurance that legislative, regulatory or judicial actions which challenge the enforceability of these provisions will not have a material adverse effect on the Company's business. Broad mandatory access would likely increase the Company's capital costs associated with new Rights of Entry if overbuilding were required. It should also be noted that in a number of instances Rights of Entry are subordinate by their terms to indebtedness secured by the MDU, with the effect that enforcement of the security interest or default under the indebtedness could result in termination of the Rights of Entry. Bankruptcy of an MDU owner could also result in rejection of the Rights of Entry as an "executory contract." AVAILABILITY OF TRANSMISSION SITES The Company's microwave network expansion plans require the Company to lease or otherwise obtain permission to install equipment at rooftop and tower transmission sites in substantially all of its markets. The availability of these sites is subject to market conditions and may be subject to zoning and other municipal restrictions. The Company believes that as additional wireless video and telecommunications providers emerge, competition for such transmission sites will continue to increase. There can be no assurance that the necessary sites will be available or that the terms upon which access to such sites may be obtained will be acceptable. RAPID TECHNOLOGICAL CHANGES AND UNCERTAIN MARKET DEVELOPMENT The multichannel television and telecommunications industry is subject to rapid and significant changes in technology and frequent service innovations. The effect on the business of the Company of future technological changes, such as changes relating to emerging transmission technologies, cannot be predicted. The Company believes that its future success will depend on its ability, as to which no assurance can be given, to enhance its existing systems or implement new systems to respond to new technologies and to develop and introduce in a timely fashion new products and services on a competitive basis. The markets in which the Company competes are constantly evolving. The convergence of traditional telecommunications services and multichannel television services is a recent trend in the industries within which the Company competes. As part of this trend, many telecommunications and cable television operators are attempting to integrate network components. For example, video distribution equipment is being considered for voice and data telecommunications and vice versa. The convergence of these traditional services towards integrated multimedia services presents both opportunity and material risk to companies such as OpTel. The Company will face enhanced competition from competitors with much greater financial, technical, marketing and other resources. Many of these competitors may offer packages of services that are more extensive than the services 19 which the Company plans to offer. See "Business -- Competition." There can be no assurance that the Company will be able to predict accurately the direction of this evolving market or be able to respond effectively to the highly competitive environment. MANAGEMENT OF GROWTH AND DEPENDANCE ON QUALIFIED PERSONNEL The Company has undertaken a rapid expansion of its networks and services. This growth has increased the operating complexity of the Company as well as the level of responsibility for both existing and new management personnel. The Company's ability to manage its expansion effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base and attract and retain highly skilled and qualified personnel. The Company's inability to effectively manage its growth and attract and retain qualified personnel could have a material adverse effect on its business. COMPETITION The multichannel television and telecommunications industries are highly competitive. The Company presently competes with companies that specialize in the provision of multichannel television or telecommunication services and, increasingly, with companies that offer bundled multichannel television and telecommunications services. Many of these competitors are larger companies with greater access to capital, technology and other competitive resources. The Company's private cable television service competes with traditional franchise cable television operators as well as wireless cable television operators, other private cable television operators, direct broadcast satellite ("DBS") operators, stand-alone satellite service providers and, to a lesser extent, off-air broadcasters. The Company's telecommunications services compete with other STS providers, LECs, CLECs and competitive access providers ("CAPs") and will compete with long distance telephone companies and franchise cable television operators as they begin to enter the local telephone business. The Company's long distance service competes with established interexchange carriers and resellers. In addition, recent telecommunications offerings, including PCS, and future offerings may increase competition in the telecommunications industry. Recent and future legislative, regulatory and technological developments will likely result in additional competition, as telecommunications companies enter the cable television market and as franchise cable television operators and interexchange carriers begin to enter the local telephone market. See "-- Regulation." Similarly, mergers, joint ventures and alliances among franchise, wireless or private cable television operators and Regional Bell Operating Companies ("RBOCs") may result in providers capable of offering bundled cable television and telecommunications services in direct competition with the Company. The Company competes with multichannel television operators and telecommunications service providers to obtain Rights of Entry and to enroll subscribers. In most markets serviced by the Company, franchise cable television operators now offer revenue sharing and access fee arrangements to MDU owners. There can be no assurance that these payments will not increase in the future as competition increases for access to the higher quality MDUs. Another basis of competition is the breadth of programming and range of services offered. Although the Company as a matter of course investigates new sources of programming and technologies that may increase its range of services, other larger and more diversified competitors may attract the targeted MDUs based on their increased menu of services. Consequently, the Company may be compelled to reduce its prices and improve its range of services under its existing Rights of Entry which generally require the Company to remain competitive with the market in general. At present, the Company believes that its existing Rights of Entry give it a competitive advantage within its present markets; however, these advantages may deteriorate with changes in regulations, the types of competitors and with technological advances. See "-- Risks Associated with Rights of Entry." There can be no assurance that the Company will be able to compete successfully with existing competitors or new entrants in the market for such services. See "Business -- Competition." 20 Competition may also be enhanced by technological developments that allow competitors of the Company to bypass property owners altogether and market their services directly to the tenants of MDUs. Although the Company's Rights of Entry prohibit tenants from installing receiving equipment on the exterior of the building, these provisions are not always enforced. The Rights of Entry do not prevent a resident from using cellular telephone service, for example, offered by another provider. While the Company believes that the exclusivity provisions of its Rights of Entry provide it with competitive advantages, such advantages may be significantly diminished by technological and other developments beyond the control of the Company. Such developments may impact the Company's strategies and may require it to expend funds beyond the levels currently contemplated. DEPENDENCE UPON PROGRAM MATERIAL The Company has fixed-term contracts with various program suppliers. The average term of such contracts is four years and such contracts are typically renewed upon expiration. If the contracts were terminated or not renewed, the Company would be required to seek program material from other sources, which could place the Company at a competitive disadvantage. Although federal law and FCC regulations require that vertically integrated franchise cable television system operators and cable television programmers sell programming to other video distributors, such as the Company, on fair and non-discriminatory terms, the Company has been denied certain popular sports programming by certain providers who claim that the programming is not required to be licensed to the Company. These denials have, and any such denials in the future could, adversely impact the Company's activities in the affected markets. There can be no assurance that the equal program access laws and regulations will not be invalidated or repealed, in which case programmers could charge the Company higher prices than those charged other multichannel television operators or make their programs unavailable to the Company. In addition, one aspect of the equal program access laws -- the prohibition on the sale of exclusive distribution rights by certain programmers -- is scheduled to expire on October 5, 2002, unless the FCC finds, during a proceeding to be conducted in 2001, that the prohibition continues to be necessary to promote competition in the multichannel television market. See "Business -- Regulation." REGULATION The cable television and telecommunications industries are subject to extensive regulation at the federal, state and local levels. Additionally, many aspects of regulation at the federal, state and local levels currently are subject to judicial review or are the subject of administrative or legislative proposals to modify, repeal, or adopt new laws and administrative regulations and policies, the results of which the Company is unable to predict. The United States Congress and the FCC have in the past, and may in the future, adopt new laws, regulations and policies regarding a wide variety of matters, including rulemakings arising as a result of the Telecommunications Act of 1996 (the "Telecommunications Act"), that could, directly or indirectly, affect the operation of the Company's business. The business prospects of the Company could be materially adversely affected (i) by the application of current FCC rules or policies in a manner leading to the denial of applications by the Company for FCC licenses or a change in the regulatory status of the Company's private cable television and telecommunications operations, (ii) by the adoption of new laws, policies or regulations, (iii) by changes in existing laws, policies or regulations, including changes to their interpretations or applications, that modify the present regulatory environment or (iv) by the failure of certain rules or policies to change in the manner anticipated by the Company. See "Business -- Regulation." Among other things, the FCC has initiated a review of the rights of various multichannel television service providers to obtain access to MDUs and other private property. One possibility raised by the FCC is the establishment of a federal MDU mandatory access requirement, which would require property owners to open their MDUs to any service provider. In another proceeding, the FCC is contemplating an order preempting state, local and private restrictions on over-the-air reception antennas placed on rental properties or properties not within the exclusive control of the 21 viewer. Although it is open to question whether the FCC has statutory and constitutional authority to compel mandatory access or preempt private restrictions on antennas located on property owned or controlled by others, there can be no assurance that it will not attempt to do so. Any such action would tend to undermine the exclusivity provisions of the Company's Rights of Entry with MDU owners. See "-- Risks Associated with Rights of Entry." States also have, in some cases, enacted various forms of MDU access statutes that inhibit the Company's ability to obtain exclusive Rights of Entry from MDU owners. Some of these state laws require MDU owners to provide franchise cable television operators with access to their MDUs. The Company currently operates in two such states, Florida (where the mandatory access requirement applies only to condominiums) and Illinois. The Company also intends to commence operations in Nevada, which has a mandatory access law. In addition, Virginia, where the Company does not currently operate, prohibits private cable television operators from entering into revenue sharing or up front incentive payment arrangements with MDU owners. There can be no assurance that future laws or regulations will not restrict the ability of the Company to offer revenue sharing or access payments, limit MDU owners from receiving revenue sharing, or prohibit MDU owners from entering into exclusive access agreements, any of which could have a material adverse effect on the Company's business. See "Business -- Sales, Marketing and Customer Service" and "-- Regulation." The majority of states currently permit STS services with relatively few regulatory barriers. However, several states require certification and place some conditions or restraints on the provision of STS services. Additionally, STS providers must comply with the conditions of service set forth in the LEC's tariffs under which STS providers receive service. There can be no assurance that the regulatory environment will continue to be favorable for STS providers or that regulatory changes will not slow or stop the Company's planned migration from an STS provider into a CLEC. Although the current regulatory environment enables competition for local exchange services, there is no assurance that the Company will be able to compete successfully against established providers and new entrants in that marketplace. In addition, various state and federal laws and regulations limit the Company's ability to enforce exclusivity provisions of Rights of Entry so as to exclude other telecommunications providers from an MDU. The Company uses a substantial number of point-to-point microwave paths, using frequencies in the 18GHz range, in its network architecture. In addition, the Company intends to license frequencies, principally in the 23GHz range, in the future. These paths are licensed by the FCC. There can be no assurance that the Company will be able to acquire a license for the microwave paths that it seeks in the future, or that changes in the FCC's regulations will not limit the Company's ability to use the 18GHz, 23GHz and other desirable frequencies for the distribution of its services or otherwise impair the Company's microwave licenses. In addition, state and local zoning and land use laws may impede the efficient deployment of the Company's microwave antennas. CONTROL OF LICENSES BY UNAFFILIATED COMPANY To permit the Company to use its frequency licenses to provide "common carrier" telecommunications services in the event that the Company should desire to do so in the future, the Company has assigned substantially all of its frequency licenses to Transmissions Holding, Inc. ("THI"), a Delaware corporation controlled by United States citizens. THI is not an affiliate of the Company. The ownership of these licenses by THI is subject to a number of risks, including the risk that acts or omissions of THI or its stockholders could result in the revocation of such licenses or the unavailability of such licenses to the Company and the risk that THI may be subject to bankruptcy or similar proceedings which could result in the rejection or termination of the arrangements between THI and the Company with respect to the use of such licenses. While THI and its stockholders have made various affirmative and negative covenants intended to limit the risk to the Company, there can be no assurance that such covenants will not be violated or will be adequate to protect the Company. See "Certain Transactions -- License Holding Company." 22 USE OF THE NAME OPTEL The Company is engaged in an administrative proceeding before the United States Patent and Trademark Office ("PTO") relative to registration of the "OpTel" trademark. The PTO found the Company's application to be allowable; however, a proceeding in the PTO was commenced by a third party claiming that the Company's trademark is confusingly similar to the mark used by that party in a related field and claiming that the Company's application has procedural deficiencies. The PTO proceeding is related solely to the Company's right to register the mark and does not have a direct bearing on the Company's continued use of the OpTel trademark. The PTO proceeding is in its relatively early stages and the Company is vigorously pursuing its right to register the OpTel trademark. However, there can be no assurance as to the outcome of the PTO proceeding. In addition, there can be no assurance that a third party will not commence an infringement action against the Company under applicable federal or state law. Although the Company does not believe that its use of the name "OpTel" infringes on the trademark rights of any other person, there can be no assurance as to the outcome of any future infringement action or that any such outcome would not materially adversely affect the Company. CONTROL BY GVL VPC, an indirect wholly-owned subsidiary of GVL, owns 1,923,977 shares of the Issuer's Class B Common Stock, $.01 par value (the "Class B Common"), representing 83.5% of the voting rights of the Issuer. Accordingly, VPC can and will continue to be able to elect a majority of the Board of Directors of the Issuer and to control the vote on matters submitted to the vote of the Issuer's stockholders. The interests of GVL as a beneficial owner of an equity interest in the Issuer may differ in material respects from those of the holders of the Notes, and there can be no assurance that actions taken by GVL or on its behalf will not materially adversely affect the holders of the Notes. In addition to its investment in the Issuer, GVL, through other subsidiaries, currently holds interests in wireless cable systems in a number of U.S. markets including San Francisco and San Diego, California and Tampa, Florida. These subsidiaries employ multipoint multichannel distribution systems, SMATV systems or hard wire franchise cable television systems. In November 1995, GVL entered into an agreement for the sale of all such interests to an unrelated third party. In November 1996, the prospective purchaser terminated the agreement. GVL is now seeking damages as a result of such termination or, in the alternative, contesting the termination. Under an agreement with Vanguard Communications, L.P. ("Vanguard"), one of the Issuer's minority stockholders, GVL and its affiliates are generally barred from competing with the Company; however, GVL's wireless cable business is excluded from the restriction. Affiliates of GVL may continue to hold and develop these interests and, in doing so, may compete with the Company in markets where their services overlap. GVL is party to debt instruments which limit the amount of indebtedness which can be incurred by GVL and its subsidiaries, including the Company. There can be no assurance that GVL will not restrain the Company's growth or limit the indebtedness incurred by the Company so as to ensure GVL's compliance with the terms of its debt instruments. The principal shareholders of GVL entered into an amended and restated shareholders agreement, dated as of May 10, 1995 (the "GVL Shareholders' Agreement"), pursuant to which they have agreed they shall not allow the Issuer to take certain actions without the consent of Caisse de dep|f.t et placement du Quebec ("Caisse"), including the incurrence of additional indebtedness or any acquisition or merger, each outside the normal course of business, or the issuance of additional capital stock of the Issuer, and that, for so long as GVL controls the Issuer, Caisse will be allowed to select one of GVL's nominees to the Board of Directors of the Issuer and to have one representative on the Audit Committee of the Issuer, subject to any prior commitments made by GVL to other stockholders of the Issuer and certain other conditions. See "Principal Stockholders -- GVL Shareholders' Agreement." A transfer by VPC of the Class B Common or a transfer by GVL of its interest in VPC, may result in a "Change of Control" under the Indenture, which could require the Issuer to offer to 23 purchase the Notes. There can be no assurance that the Issuer would have the financial resources to meet this obligation. Neither VPC nor GVL is under any obligation to prevent a "Change of Control." The occurrence of a "Change of Control" could have a material adverse effect on the Company, including the loss of GVL's strategic involvement with the Company. POTENTIAL 911, E-911 AND INTRUSION ALARM LIABILITY The Company delivers local exchange service, including access to emergency ("911") services, to MDU residents through switches installed by the Company at each property. Mechanical or electrical defects, power failures or catastrophic events may temporarily disrupt operation of the Company's switch, preventing, delaying or impeding access to 911 service. In many jurisdictions, telecommunications carriers are required to implement services which permits a 911 operator to immediately identify the location of the caller ("E-911 service"). To provide E-911 service at an MDU, the telecommunications service provider or its agent must maintain a database with certain information relating to the MDU residents. The failure of the Company or its agent to maintain such database in a timely and accurate manner could prevent, delay or impede the operation of E-911 service. In addition, because of the configuration of the Company's telecommunications networks, the Company's telecommunications traffic may cross more than one E-911 jurisdiction. This will require the Company to coordinate among these various jurisdictions. There can be no assurance that the Company will not be liable for damage to property or personal injuries that may directly or indirectly result from any failure of 911 or E-911 service to operate properly. Moreover, the Company may provide 911, E-911 or operator services by contracting such services from other carriers in its markets. The providers of these services will generally require the Company to indemnify them for any losses or liability incurred in connection with such services except for those caused exclusively by the gross negligence or malfeasance of the carrier. The Company currently provides all its intrusion alarm monitoring through subcontractors. There can be no assurance that the Company will not be liable for any property damage or personal injuries that may result from intrusion alarm malfunctions or from a subcontractor's failure to appropriately monitor the intrusion alarm systems under contract. BANKRUPTCY RISKS RELATED TO ESCROW ACCOUNT The right of the Trustee (as defined) under the Indenture and the Escrow Agreement (as defined) to foreclose upon and sell Collateral (as defined) upon the occurrence of an Event of Default (as defined) on the Notes is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy or reorganization case were to be commenced by or against the Company or one or more of its subsidiaries. Under applicable bankruptcy law, secured creditors such as the holders of the Notes are prohibited from foreclosing upon or disposing of a debtor's property without prior bankruptcy court approval. See "Description of the Notes -- Disbursement of Funds; Escrow Account." 24 THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER The Old Notes were originally issued and sold on February 14, 1997 in reliance upon the exemptions from registration under Rule 144A and Section 4(2) of the Securities Act. Pursuant to the Registration Agreement, the Company agreed to register with the Commission a series of notes with substantially identical terms as the Old Notes, to be offered in exchange for the Old Notes. The purpose of the Exchange Offer is to satisfy the Company's obligations under the Registration Agreement. Upon consummation of the Exchange Offer, holders that were not prohibited from participating in the Exchange Offer and did not tender their Old Notes will not have any registration rights under the Registration Agreement with respect to such non-tendered Old Notes and, accordingly, such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. TERMS OF THE EXCHANGE The Company offers to exchange, subject to the conditions set forth in this Prospectus and in the Letter of Transmittal accompanying this Prospectus, the same principal amount of New Notes for the Old Notes tendered for exchange. The terms of the New Notes are substantially identical to the Old Notes in all material respects (including interest rate and maturity), except that (i) the New Notes will not be subject to the restrictions on transfer (other than with respect to holders who are affiliates) and (ii) the Registration Agreement covenants regarding registration and the related Liquidated Damages (other than those that have accrued and were not paid) with respect to Registration Defaults will have been deemed satisfied. The New Notes will evidence the same debt as the Old Notes and will be entitled to the same benefits of the Indenture. See "Description of the Notes." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered for exchange. The Company believes that New Notes tendered in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any holder (other than any holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that the New Notes are acquired in the ordinary course of the holder's business, the holder has no arrangement or understanding with any person to participate in the distribution of the New Notes and neither the holder nor any other person is engaging in or intends to engage in a distribution of the New Notes. Any holder who tenders in the Exchange Offer for the purpose of participating in a public distribution of the New Notes must comply with registration and prospectus delivery requirements of the Securities Act in connection with the distribution. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. Tendering holders of the Old Notes will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the Exchange Offer. EXPIRATION DATE; TERMINATION; AMENDMENT The Exchange Offer will expire on the Expiration Date. The term "Expiration Date" means 5:00 p.m., New York City time, on __________, 1997, or such later date and time, if any, to which it is extended by the Company, provided that the Expiration Date shall not be extended beyond 60 days from the date of this Prospectus. In connection with the Exchange Offer, the Company will comply with all applicable requirements of the federal securities laws, including, but not limited to, Rule 14e-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 25 The Exchange Date will be the first business day following the Expiration Date. The Company expressly reserves the right to (i) terminate the Exchange Offer and not accept for exchange any Old Notes if either of the events set forth under "--Conditions to the Exchange Offer" shall have occurred and shall not have been waived by the Company and (ii) amend the terms of the Exchange Offer in any manner which, in its good faith judgment, is advantageous to the holders of the Old Notes, whether before or after any tender of the Old Notes. Unless the Company terminates the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date, the Company will exchange the New Notes for the Old Notes on the Exchange Date. PROCEDURES FOR TENDERING OLD NOTES The Exchange Offer is subject to the terms and conditions set forth in this Prospectus and the Letter of Transmittal. Old Notes may be tendered by properly completing and signing the Letter of Transmittal and delivering the Letter of Transmittal to the Exchange Agent at its address set forth in this Prospectus on or prior to the Expiration Date, together with (i) the certificate or certificates, if any, representing the Old Notes being tendered and any required signature guarantees, (ii) a timely confirmation of a book-entry transfer (a "Book- Entry Confirmation") of the Old Notes, if such procedure is available, into the Exchange Agent's account at The Depository Trust Company (the "Book-Entry Transfer Facility" or "Depositary") pursuant to the procedure for book-entry transfer described below, or (iii) the completion of the procedures for guaranteed delivery set forth below. See "--Guaranteed Delivery Procedures." If the New Notes (and any untendered Old Notes) are to be issued in the name of the registered holder and the registered holder has signed the Letter of Transmittal, the holder's signature need not be guaranteed. In any other case, the tendered Old Notes must be endorsed or accompanied by written instruments of transfer in form satisfactory to the Exchange Agent and duly executed by the registered holder and the signature on the endorsement or instrument of transfer must be guaranteed by a commercial bank or trust company located or having an office or correspondent in the United States, or by a member firm of a national securities exchange or of the NASD (an "Eligible Institution"). If the New Notes and/or Old Notes not exchanged are to be delivered to an address other than that of the registered holder appearing on the register for the Old Notes, the signature on the Letter of Transmittal must be guaranteed by an Eligible Institution. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SENT BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED, PROPER INSURANCE OBTAINED, AND THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR BEFORE THE EXPIRATION DATE. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. A tender will be deemed to have been received as of the date when the tendering holder's properly completed and duly signed Letter of Transmittal, the Old Notes or a Book-Entry Confirmation and all other required documents are received by the Exchange Agent. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any tender of Old Notes will be determined by the Company in its sold discretion, which determination will be final and binding. The Company reserves the right to reject any or all tenders not in proper form or the acceptance for exchange of which may, in the opinion of the Company's counsel, be unlawful. The Company also reserves the right to waive any of the conditions of the Exchange Offer or any defect, withdrawal, rejection of tender or irregularity in the tender of any Old Notes. Neither the Company, the Exchange Agent nor any other person will be under any duty to give notification of any defects, withdrawals, rejections or irregularities or incur any liability for failure to give any such notification. 26 TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL The Letter of Transmittal contains, among other things, the following terms and conditions, which are part of the Exchange Offer: The holder tendering Old Notes exchanges, assigns and transfers the Old Notes to the Company and irrevocably constitutes and appoints the Exchange Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be assigned, transferred and exchanged. The holder represents and warrants to the Company and the Exchange Agent that (i) it has full power and authority to tender, exchange, assign and transfer the Old Notes and to acquire the New Notes in exchange for the Old Notes, (ii) when the Old Notes are accepted for exchange, the Company will acquire good and unencumbered title to the Old Notes, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, (iii) it will, upon request, execute and deliver any additional documents deemed by the Company to be necessary or desirable to complete the exchange, assignment and transfer of tendered Old Notes and (iv) acceptance of any tendered Old Notes by the Company and the issuance of New Notes in exchange therefor will constitute performance in full by the Company of its obligations under the Registration Rights Agreement and the Company will have no further obligations or liabilities thereunder to such holders (except with respect to accrued and unpaid Liquidated Damages, if any). All authority conferred by the holder will survive the death or incapacity of the holder and every obligation of the holder will be binding upon the heirs, legal representatives, successors assigns, executors and administrators of the holder. Each holder will also certify that it (i) is not an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act or that, if it is an "affiliate," it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable, (ii) is acquiring the New Notes offered in the ordinary course of its business and (iii) has no arrangement with any person to participate in the distribution of the New Notes. WITHDRAWAL RIGHTS Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any time prior to the Expiration Date. To be effective, a written notice of withdrawal must be timely received by the Exchange Agent at its address set forth in this Prospectus by mail, courier, telegraphic, telex or facsimile transmission. Any notice of withdrawal must specify the person named in the Letter of Transmittal as having tendered Old Notes to be withdrawn, the certificate numbers of the Old Notes to be withdrawn, the principal amount of the Old Notes to be withdrawn, a statement that the holder is withdrawing its election to tender the Old Notes for exchange, and the name of the registered holder of the Old Notes, and must be signed by the holder in the same manner as the original signature on the Letter of Transmittal (including any required signature guarantees) or be accompanied by evidence satisfactory to the Exchange Agent that the person withdrawing the tender has succeeded to the beneficial ownership of the Old Notes being withdrawn. The Exchange Agent will return the properly withdrawn Old Notes promptly following receipt of notice of withdrawal. If the Old Notes have been tendered pursuant to a book-entry transfer, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and otherwise comply with the procedures of the Book-Entry Transfer Facility. All questions as to the validity of notices of withdrawals, including time of receipt, will be determined by the Company, and such determination will be final and binding on all parties. Any Old Notes which have been tendered for exchange but which are not exchanged will be returned to the holder thereof without cost to the holder (or, in the case of Old Notes tendered by book-entry transfer by crediting an account maintained with the Book-Entry Transfer Facility for the Old Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered at any time on or prior to the Expiration Date. Any Old Notes so withdrawn and not retendered will not be exchanged for New Notes under the Exchange Offer. 27 ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon the terms and subject to the conditions of the Exchange Offer, the acceptance for exchange of the Old Notes validly tendered and not withdrawn and issuance of the New Notes will be made on the Exchange Date. For the purposes of the Exchange Offer, the Company shall be deemed to have accepted for exchange validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering holders of the Old Notes for the purpose of causing the Old Notes to be assigned, transferred and exchanged for the New Notes. Upon the terms and subject to the conditions of the Exchange Offer, delivery of the New Notes in exchange for the Old Notes will be made by the Exchange Agent promptly after acceptance for exchange of the tendered Old Notes by the Company. Tendered Old Notes not accepted for exchange by the Company will be returned without expense to the tendering holders (or, in the case of Old Notes tendered by book-entry transfer, crediting an account maintained with the Depositary) promptly following the Expiration Date, or, if the Company terminates the Exchange Offer prior to the Expiration Date, promptly after the Exchange Offer is terminated. BOOK-ENTRY TRANSFER The Exchange Agent will establish an account at the Book-Entry Transfer Facility for purposes of the Exchange Offer within two business days after the date of this Prospectus, and any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of the Old Notes by causing the Book-Entry Transfer Facility to transfer the Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedure for transfer. The Letter of Transmittal with any required signature guarantees and any other required documents must be received by the Exchange Agent on or prior to the Expiration Date for any book-entry transfers. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes, the Letter of Transmittal or any other documents required hereby to the Exchange Agent prior to the Expiration Date, must tender their Old Notes and follow the guaranteed delivery procedures. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed notice of guaranteed delivery (a "Notice of Guaranteed Delivery") (by facsimile transmission, mail or hand delivery), setting forth the name and address of the holder of the Old Notes, the certificate number or numbers of such Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five business days after the Expiration Date, the Letter of Transmittal (or facsimile thereof), together with the certificate(s) representing the Old Notes (or a confirmation of electronic delivery or book-entry delivery into the Exchange Agent's account at the Depositary) and any of the required documents will be deposited by the Eligible Institution with the Exchange Agent; and (iii) such properly completed and executed Letter of Transmittal (or facsimile thereof), as well as all other documents required by the Letter of Transmittal and the certificate(s) representing all tendered Old Notes in proper form for transfer (or a confirmation of electronic mail delivery or book-entry delivery into the Exchange Agent's account at the Depositary), must be received by the Exchange Agent within five business days after the Expiration Date. Any holder of Old Notes who wishes to tender its Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration Date. CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the Exchange Offer, the Company will not be required to issue New Notes in exchange for any properly tendered Old Notes not previously accepted and may 28 terminate the Exchange Offer (by oral or written notice to the holders and by timely public announcement communicated, unless otherwise required by applicable law or regulation, by making a release to the Dow Jones News Service), or, at its option, modify or otherwise amend the Exchange Offer, if any of the following events occur: (a) there shall be threatened, instituted or pending any action or proceeding before, or any injunction, order or decree shall have been issued by, any court or governmental agency or other governmental regulatory or administrative agency or commission (i) seeking to restrain or prohibit the making or consummation of the Exchange Offer or any other transaction contemplated by the Exchange offer, or assessing or seeking any damages as a result thereof, or (ii) resulting in a material delay in the ability of the Company to accept for exchange or exchange some or all of the Old Notes pursuant to the Exchange Offer, or any statute, rule, regulation, order or injunction shall be sought, proposed, introduced, enacted, promulgated or deemed applicable to the Exchange Offer or any of the transactions contemplated by the Exchange Offer by any government or governmental authority, domestic or foreign, or any action shall have been taken, proposed or threatened, by any government, governmental authority, agent or court, domestic or foreign, that in the sole judgment of the Company might directly or indirectly result in any of the consequences referred to in clause (i) or (ii) above or, in the sole judgment of the Company, might result in the holders of New Notes having obligations with respect to resales and transfers of New Notes which are greater than those described in the interpretation of the Commission referred to on the cover page of this Prospectus, or would otherwise make it inadvisable to proceed with the Exchange Offer; or (b) any change (or any development involving a prospective change) shall have occurred or be threatened in the business, properties, assets, liabilities, financial condition, operations, results of operations or prospects of the Company, taken as a whole, that, in the sole judgment of the Company is or may be adverse to the Company, or the Company shall have become aware of facts that, in the sole judgment of the Company, have or may have adverse significance with respect to the value of the Old Notes or the New Notes; which, in the sole judgment of the Company in any case, and regardless of the circumstances (including any action by the Company) giving rise to any such condition, makes it unlawful to proceed with the Exchange Offer and/or with such acceptance for exchange or with such exchange. The Company expressly reserves the right to terminate the Exchange Offer and not accept for exchange any Old Notes upon the occurrence of any of the foregoing conditions (which represent all of the material conditions to the acceptance by the Company of properly tendered Old Notes). In addition, the Company may amend the Exchange Offer at any time prior to the Expiration Date if any of the conditions set forth above occur. Moreover, regardless of whether any of such conditions has occurred, the Company may amend the Exchange Offer in any manner which, in its good faith judgment, is advantageous to holders of the Old Notes. These conditions are for the sole benefit of the Company and may be waived by the Company, in whole or in part, in its sole discretion; provided, however, that in the event that the Company waives any of such conditions that is material to the Exchange Offer on a date (the "Waiver Date") that is fewer than five business days prior to the Expiration Date, the Company will extend the Exchange Offer to five business days from the Waiver Date. Any determination made by the Company that any of these conditions has occurred will be final and binding on all holders of the Notes, absent manifest error. In addition, the Company will not accept for exchange any Old Notes tendered, and no New Notes will be issued in exchange for any such Old Notes, if at such time any stop order shall be threatened or in effect with respect to the Registration Statement of which this Prospectus constitutes a part or the qualification of the Indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). 29 EXCHANGE AGENT U.S. Trust of Texas, N.A., the Trustee under the Indenture, has been appointed as the Exchange Agent for the Exchange Offer. All executed Letters of Transmittal, questions and requests for assistance and requests for additional copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent as follows:
If by Mail: U.S. Trust Company of Texas, N.A. P.O. Box 841 Cooper Station New York, NY 10276-0841 If by Hand: U.S. Trust Company of Texas, N.A. 111 Broadway Lower Level New York, NY 10006-1906 If by Overnight Courier: U.S. Trust Company of Texas, N.A. 770 Broadway 13th Floor - Corporate Trust Operations New York, NY 10003-9598 Confirm by Telephone: 1-800-225-2398 Bondholder Inquiry or 212-420-6668 Tony Nista
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. SOLICITATION OF TENDERS; EXPENSES The Company has not retained any dealer-manager or similar agent in connection with the Exchange Offer and will not make any payments to brokers, dealers or others for soliciting acceptances of the Exchange Offer. No person has been authorized to give any information or to make any representations in connection with the Exchange Offer other than those contained in this Prospectus and the Letter of Transmittal. If given or made, such information or representations should not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any exchange made thereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the respective dates as of which information is given herein. The Exchange Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Old Notes in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. The company may, however, at the reasonable request of any holder, take such action as it may deem necessary to make the Exchange Offer in any such jurisdiction and extend the Exchange Offer to holders of Old Notes in such jurisdiction. TRANSFER TAXES Holders who tender their Old Notes in exchange for New Notes will not be obligated to pay any transfer taxes in connection therewith, except that holders who instruct the Company to register New Notes in the name of, or request that Old Notes not tendered or not accepted in the Exchange Offer be returned to, a person other than the registered tendering holder will be responsible for the payment of any applicable transfer taxes thereon. 30 CONSEQUENCES OF FAILURE TO EXCHANGE Upon consummation of the Exchange Offer, holders of Old Notes that were not prohibited from participating in the Exchange Offer and did not tender their Old Notes will not have any registration rights under the Registration Agreement with respect to such non-tendered Old Notes and, accordingly such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act and the applicable state securities laws, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not intend to register the Old Notes under the Securities Act. Based on interpretations by the staff of the Commission, New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by holders (other than any holder that is an "affiliate" of the Company within the meaning of rule 405 under the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act provided that the New Notes are acquired in the ordinary course of the holders' business, the holders have no arrangement with any person to participate in the distribution of the New Notes and neither the holder nor any other person is engaging in or intends to engage in a distribution of the New Notes. If any holder has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, the holder (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transactions. Each broker-dealer that receives New Notes for its own account in exchange for Old Notes, where such Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of the New Notes. See "Plan of Distribution." In addition, to comply with the securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdiction or an exemption from registration or qualification is available and is complied with. The Company has agreed under the Registration Agreement to register or qualify the New Notes for resale in any jurisdictions requested by any holder, subject to certain limitations. OTHER Participation in the Exchange Offer is voluntary and holders should carefully consider whether to accept. Holders of the Old Notes are urged to consult their financial and tax advisors in making their own decisions on what action to take. Upon consummation of the Exchange Offer, holders of Old Notes that were not prohibited from participating in the Exchange Offer and did not tender their Old Notes will not have any registration rights under the Registration Agreement with respect to such non-tendered Old Notes and, accordingly, such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. The Company has not entered into any arrangement or understanding with any person to distribute the New Notes to be received in the Exchange Offer and to the best of the Company's information and belief, each person participating in the Exchange Offer is acquiring the New Notes in its ordinary course of business and has no arrangement or understanding with any person to participate in the distribution of the New Notes to be received in the Exchange Offer. The Company will make each person participating in the Exchange Offer aware (through this Prospectus or otherwise) that any holder using the Exchange Offer to participate in a distribution of New Notes to be acquired in the registered Exchange Offer (i) may not rely on the staff position enunciated in Morgan Stanley and Co. Inc. (avail. June 5, 1991) and Exxon Capital Holding Corp. (avail. May 13, 1988) or similar letters and (ii) must comply with registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. 31 ACCOUNTING TREATMENT The New Notes will be recorded at the same aggregate carrying value as the Old Notes, approximately $218.0 million, as reflected in the Company's accounting records on the Exchange Date. Accordingly, no gain or loss for accounting purposes will be recognized by the Company. The expenses of the Exchange Offer will be amortized over the term of the New Notes. 32 USE OF PROCEEDS There will be no proceeds to the Company from the Exchange Offer. CAPITALIZATION The following table sets forth, on an unaudited basis, the capitalization of the Company as of February 28, 1997. This table should be read in connection with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and the notes thereto, appearing elsewhere in this Prospectus.
February 28, 1997 -------------- (in thousands) Cash and cash equivalents (excluding Escrow Account) ........................ $ 135,015 Escrow Account(1) ........................................................... 79,804 -------------- Total ..................................................................... $ 214,819 ============== Indebtedness: 13% Senior Notes Due 2005(2) ........................................... $218,036(2) Convertible Notes due to stockholder(3) ................................ 121,006 Notes payable and long-term liabilities ................................ 2,579 Deferred acquisition liabilities ....................................... 6,716 -------------- Subtotal .......................................................... 348,337 Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding ............................................... -- Class A common stock, $.01 par value; 8,000,000 shares authorized; none issued and outstanding ............................................... -- Class B common stock, $.01 par value; 6,000,000 shares authorized; 2,304,561 issued and outstanding(4) ...................... 23 Class C common stock, $.01 par value (the "Non-Voting Common"); 300,000 shares authorized; 225,000 issued and outstanding, as adjusted(5)(2) . 2 Additional paid in capital ............................................. 95,064 Accumulated deficit .................................................... (45,101) -------------- Subtotal .......................................................... 49,988 -------------- Total capitalization ......................................... $ 398,325 ==============
- ------ (1) Of the net proceeds of the Offering, $79.6 million was used to purchase U.S. government securities pledged to secure the Notes and held in escrow for payment of the first six interest payments on the Notes. See "Description of the Notes -- Disbursement of Funds; Escrow Account." (2) Reflects $7.0 million allocated to the shares of Non-Voting Common issued in connection with the Offering which constitutes original issue discount. (3) In connection with the Offering, VPC agreed (i) to extend the maturity of the Convertible Notes until six months following the maturity or indefeasible payment in full of the Notes and (ii) to subordinate the Convertible Notes in right of payment to the Notes under certain circumstances. See "Certain Transactions -- Convertible Notes." (4) Each share of Class B Common is convertible into one share of Class A Common. The rights of the holders of the Class A Common and Class B Common are identical except that holders of Class A Common are entitled to one vote for each issued and outstanding share and holders of Class B Common are entitled to 10 votes for each issued and outstanding share. The Class B Common shares may only be held by VPC, Vanguard and their respective affiliates. As used herein, the term "Common Stock" refers collectively to the Class A Common, Class B Common and Non-Voting Common. (5) Each share of Non-Voting Common will automatically convert into the Class A Common or any other class of common stock of the Issuer that is registered with the SEC or is listed on a national securities exchange or authorized for quotation on Nasdaq or otherwise subject to registration under the Exchange Act, provided the terms thereof are no less favorable to holders than were the Shares. See "Description of Capital Stock." The rights of the holders of the Class A Common, Class B Common and the Non-Voting Common are identical except as to voting rights. Holders of Non-Voting Common are not entitled to notice of, or to vote at, any meeting of the stockholders or action taken by written consent, except as required by Delaware law. 33 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The selected consolidated financial data presented below as of and for the periods ended December 31, 1993 and 1994 and August 31, 1995 and 1996 have been derived from the consolidated financial statements of the Company, which consolidated financial statements have been audited by Deloitte & Touche LLP, independent auditors. The selected financial data presented below as of and for the six month periods ended Fenruary 29, 1996 and February 28, 1997 have been derived from unaudited consolidated financial statements of the Company. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position and results of operation for these periods. In 1995, the Company changed its fiscal year end to August 31 to match that of its majority stockholder. As a result of the change in fiscal year and the Company's history of growth through acquisitions the Company's historical financial results are not directly comparable from period to period, nor are they indicative of future results of operations in many respects. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Consolidated Financial Statements of the Company and the notes thereto, appearing elsewhere in this Prospectus.
Period from April 20, 1993 (date Eight Month Six Month Six Month of inception) Year Ended Period Period Period to December December Ended Year Ended Ended Ended 31, 31, August 31, August 31, February 29, February 28, -------------- ------------ ------------- ------------ ------------- -------------- 1993 1994 1995 1996 1996 1997 -------------- ------------ ------------- ------------ ------------- -------------- (in thousands except per share data) Statement of Operations Data: Revenues: Cable television ............ $ 12 $ 240 $ 8,782 $ 25,893 $11,570 $ 17,208 Telecommunications .......... -- 202 788 1,712 718 1,414 -------------- ------------ ------------- ------------ ------------- -------------- Total revenues ........... 12 442 9,570 27,605 12,288 18,622 -------------- ------------ ------------- ------------ ------------- -------------- Operating Expenses: Cost of services ............ 6 470 4,557 11,868 5,266 8,702 Customer support, general and administrative ........... 304 7,733 8,235 17,319 7,499 12,267 Depreciation and amortization . 8 117 2,420 8,676 3,804 5,820 Nonrecurring reorganization costs(1) ................. -- -- 3,820 2,318 826 -- -------------- ------------ ------------- ------------ ------------- -------------- Total operating expenses . 318 8,320 19,032 40,181 17,395 26,789 -------------- ------------ ------------- ------------ ------------- -------------- Loss from operations .......... (306) (7,878) (9,462) (12,576) (5,107) (8,167) Interest expense on Convertible Notes due to stockholder (2) .......... -- -- (919) (5,342) (1,890) (6,907) Other interest expense, net ... (1) (66) (249) (512) (245) (1,218) -------------- ------------ ------------- ------------ ------------- -------------- Loss before income taxes ...... (307) (7,944) (10,630) (18,430) (7,242) (16,292) Income tax benefits (3) ....... -- -- 469 -- -- -- -------------- ------------ ------------- ------------ ------------- -------------- Net loss ...................... $ (307) $ (7,944) $(10,161) $(18,430) $(7,242) $(16,292) ============== ============ ============= ============ ============= ============== Loss per share(4) ............. $ (6.89) $ (8.30) $ (3.37) $ (7.01) ============= ============ ============= ============== Cash dividend declared ........ -- -- -- -- -- -- Financial Data: EBITDA(5) ..................... $ (298) $ (7,761) $ (3,222) $ (1,582) $ (477) $ (2,347) Capital expenditures(6) ....... 517 9,278 22,170 62,121 23,122 24,925 Acquisition of private cable businesses .................. -- 1,298 49,974 9,916 5,793 2,500 Deficiency of earnings to fixed charges(7) .................. 307 7,944 10,630 20,280 7,876 17,276
34
As of As of As of December 31, August 31, February 28, ------------------- ---------------------- ------------- 1993 1994 1995 1996 1997 ------ --------- --------- --------- ------------- (in thousands except per share data) Balance Sheet Data: Cash and cash equivalents (excluding Escrow Account) . $ 41 $ 5,019 $ 2,036 $ 1,677 $135,015 Escrow Account .............. -- -- -- -- 79,804 Property, plant and equipment, net ............. 509 11,379 48,060 103,800 122,041 Intangible assets ........... -- 16,189 55,443 65,876 75,471 Total assets ................ 588 33,820 108,072 175,978 417,681 13% Senior Notes Due 2005 ... -- -- -- -- 218,036 Convertible Notes due to stockholder(8) ............. -- 15,000 17,950 89,414 121,006 Total liabilities ........... 206 31,007 39,527 116,698 367,693 Stockholders' equity ........ 382 2,813 68,545 59,280 49,988 Book value per share(4) ..... 31.89 25.72 19.76
As of As of August 31, February 28, ---------------------- ------------- 1995 1996 1997 --------- --------- ------------- Operating Data:(9) Cable Television: Units under contract(10) .................... 173,324 241,496 265,518 Units passed(11) ............................ 170,336 225,433 239,801 Basic subscribers ........................... 75,944 114,163 125,090 Basic penetration(12) ....................... 44.6% 50.6% 52.2% Premium units ............................... 39,753 60,641 74,441 Pay-to-basic ratio(13) ...................... 52.3% 53.1% 59.5% Average monthly cable revenue per subscriber(14) ........................... $ 22.84 $ 24.29 $ 24.02 Telecommunications: Units under contract(10) .................... 10,322 20,945 27,373 Units passed(11) ............................ 9,116 12,364 14,416 Subscribers ................................. 2,207 4,080 4,791 Lines(15) ................................... 2,650 5,166 6,039 Penetration(16) ............................. 24.2% 33.0% 33.2% Average monthly telecommunications revenue per subscriber(14) ....................... -- $ 59.08 $ 53.16
- ------ (1) During the eight month period ended August 31, 1995 and fiscal 1996, the Company relocated its corporate headquarters, began relocating its customer services centers and completed several acquisitions. As a result of these actions, significant nonrecurring reorganization costs were incurred primarily relating to severance costs of former employees at the previous locations and relocation and recruiting costs of employees at the new location. (2) Interest expense on Convertible Notes due to stockholder, is reported net of interest capitalized in property, plant and equipment. In connection with the Offering, the stockholder, VPC, agreed to subordinate the Convertible Notes to the prior payment of the Notes under certain circumstances. See "Certain Transactions -- Convertible Notes." (3) The Company has not had taxable income for the periods reported. The Company reported an income tax benefit in the eight months ended August 31, 1995 due to the reduction of a deferred tax liability established as the result of an acquisition. See note 8 of notes to the Consolidated Financial Statements. (4) Loss per share and book value per share information is not presented for the periods the Company was organized as a partnership. (5) EBITDA represents earnings before interest expense, income tax benefits, depreciation, amortization and nonrecurring reorganization costs. EBITDA is not intended to represent cash flow from operations and should not be considered as an alternative to net loss as an indicator of the Company's operating performance or to cash flows as a measure of liquidity. The Company believes that EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in the cable television and telecommunications industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in the industry. 35 (6) Capital expenditures include expenditures on property, plant and equipment together with intangible assets. (7) For the purposes of calculating the deficiency of earnings to fixed charges, (i) earnings consist of loss before income taxes plus fixed charges and (ii) fixed charges consist of interest expense on all debt, amortization of deferred financing costs and the portion of operating lease rental expense that is representative of the interest factor (deemed to be one third of minimum operating lease rental). On a pro forma basis, after giving effect to the Offering (excluding interest on the Escrow Account), the deficiency of earnings to fixed charges for the periods ended August 31, 1996 and February 28, 1997 would have been $49.5 million (including $7.2 million in respect of Convertible Notes) and $31.9 million (including $7.9 million in respect of Convertible Notes), respectively. (8) The Convertible Notes mature six months following the maturity or indefeasible payment in full of the Notes and are subordinated in right of payment to the Notes under certain circumstances. See "Certain Transactions -- Convertible Notes." (9) Information with respect to the periods ended December 31, 1993 and 1994 is not meaningful and not presented. (10) Units under contract represent the number of units currently passed and additional units with respect to which the Company has entered into Rights of Entry for the provision of cable television and telecommunications services, respectively, but which the Company has not yet passed and which the Company expects to pass within the next five years. At this time substantially all units under contract for telecommunications are also under contract for cable television. The Company anticipates passing approximately 15,800 and 8,700 additional units currently under contract for cable television and units currently under contract for telecommunications, respectively, by the end of calendar 1997. (11) Units passed represents the number of units with respect to which the Company has connected its cable television and telecommunications systems, respectively. The difference between units under contract and units passed represents units for which Rights of Entry have been entered into, but which are not yet connected and activated for cable television and telecommunications services, respectively. (12) Basic penetration is calculated by dividing the total number of basic subscribers at such date by the total number of units passed. (13) Pay-to-basic ratio is calculated by dividing the total number of premium units subscribed for by the total number of basic subscribers. (14) Represents revenues per average monthly subscriber for the fiscal periods ended as of the date shown. Information with respect to the telecommunications business for the period ended August 31, 1995 is not available. (15) Lines represent the number of telephone lines currently being provided to telecommunications subscribers. A telecommunications subscriber can subscribe for more than one line. (16) Penetration is calculated by dividing the total number of telecommunications subscribers at such date by the total number of units passed. 36 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Set forth below is a discussion of the financial condition and results of operations of the Company for the six month periods ended February 29, 1996 and February 28, 1997 and for the year ended December 31, 1994, for the eight month period ended August 31, 1995 and for the fiscal year ended August 31, 1996. This discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. OVERVIEW The Company was founded in April 1993 to build, acquire and operate private cable television systems. Since inception, the Company has experienced substantial growth. This growth has been achieved through acquisitions of other operators, many of which were SMATV systems, and the negotiation by the Company of new Rights of Entry. Since inception, the number of units under contract for cable television increased to 265,518 at February 28, 1997. Of such increase, approximately 193,000 units were attributable to acquisitions. In general, the conduct of the acquired operations prior to acquisition was materially different than following acquisition. Substantially all of the SMATV systems acquired by the Company are being converted to 18GHz or fiber optic networks, a process which is expected to be substantially complete by the end of fiscal 1999. Currently the Company's networks provide cable television services to over 130,000 units representing approximately 54% of the units passed for cable television. In addition, the Company is rolling out telecommunications offerings in its markets and expects to offer telecommunications services in substantially all of its markets by the end of calendar 1999. In 1995, the Company changed its fiscal year end to August 31 to match that of its majority stockholder. As a result, the Company's historical financial results are not directly comparable from period to period, nor are they indicative of future results of operations in many respects. All of the Company's acquisitions have been accounted for by the purchase method of accounting. Through February 28, 1997, the Company had invested approximately $209 million primarily in its cable television and telecommunications systems. The Company's revenues have grown from $0.4 million for the year ended December 31, 1994 to $27.6 million for fiscal 1996 and from $12.3 million to $18.6 million for the six month periods ended February 29, 1996 and February 28, 1997, respectively. Results of operations for fiscal 1996 include negative EBITDA of $(1.6) million as compared with $(3.2) million for the eight month period ended August 31, 1995. EBITDA represents earnings before interest expense, income tax benefits, depreciation, amortization and nonrecurring reorganization costs. The Company earns substantially all of its cable television revenues from monthly customer fees for basic, premium and ancillary services. Substantially all of its telecommunications revenues are earned from monthly fees for line rental and toll usage. While pursuing its investment and development strategy, the Company incurred and continues to incur substantial up-front operating expenses for sales (including obtaining Rights of Entry), customer operations, administration and maintenance of facilities, general and administrative expenses and depreciation and amortization in order to solicit and service customers in advance of generating significant revenues. As a result of these factors, the Company has generated operating losses of $12.6 million, $9.5 million and $7.9 million for fiscal 1996, the eight months ended August 31, 1995 and the year ended December 31, 1994, respectively, as its cable television and telecommunications customer base has grown. In general, negative EBITDA has decreased substantially over this period. The Company reported negative EBITDA of $(1.6) million, $(3.2) million and $(7.8) million for fiscal 1996, the eight months ended August 31, 1995 and the year ended December 31, 1994, respectively. The Company expects that the significant expenses to be incurred as it implements its telecommunications roll out strategy will adversely effect EBITDA for a significant period of time. See "Business--Network Architecture--Telecommunication Architecture". Once the buildout of the telecommunications networks and conversion of SMATV systems is completed, the Company expects 37 that the incremental costs associated with the addition of new customers in its existing markets will be principally limited to sales and marketing and, therefore, that its EBITDA will improve significantly. There can be no assurance that the Company will generate positive EBITDA in the future. The principal operating factors affecting the Company's future results of operations are expected to include (i) changes in the number of MDUs under Rights of Entry, (ii) penetration rates for its services, (iii) the terms of its arrangements with MDU owners, including revenue sharing, (iv) the prices that it charges its subscribers, (v) normal operating expenses, which in the cable television business comprise principally programming expenses and in the telecommunications business comprise principally fees paid to long distance carriers, the cost of trunking services and other LEC charges, as well as, in each case, billing and collection costs, technical service and maintenance expenses and customer support services, and (vi) capital expenditures as the Company implements its telecommunication roll out strategy and completes its conversion of SMATV systems. The Company's results of operations may also be impacted by future acquisitions. The Company has typically acquired businesses that are private companies owned by entrepreneurs and without the same regulatory compliance practices and internal accounting controls and procedures of the Company. Accordingly, the Company frequently is required to take remedial actions, which may include the expenditure of funds and may take extensive time to implement. In general, the Company factors the costs associated with these matters into the terms of its acquisitions, including, where practicable through indemnification rights. However, there can be no assurance that the Company's results of operations or liquidity would not be affected by these or other matters arising from past or future acquisitions. The Company anticipates that it will continue to have higher churn than is typical of a franchise cable television operator due to the frequent turnover of MDU units. This churn generally does not result in a reduction in overall penetration rates since the outgoing subscriber is often quickly replaced by a new tenant in his or her unit. This may result in average installation revenue per subscriber that is higher than for a franchise cable television operator. Although this may also require higher installation expenses per subscriber, because of the layout of MDUs and the Company's ability to obtain "permission to enter" from the MDU owner, installations can often be completed when the subscriber is not home, limiting the expense of installation. Accordingly, the Company does not believe that churn is as significant an operating statistic as would be the case for franchise cable television operators. The Company's cable television churn for fiscal 1996 was 67.4%. Despite this level of cable television churn, the Company's basic cable television penetration rate increased from 44.6% at August 31, 1995 to 50.6% at August 31, 1996. Churn as calculated, is the number of basic cable television subscribers disconnected during the relevant period divided by the average number of basic cable television subscribers during such period. PROPOSED PHONOSCOPE ACQUISITION The Company has entered into a Letter of Intent relating to its proposed acquisition of the residential portion of the franchise cable television system business of Phonoscope. The Letter of Intent is not binding, and negotiations are continuing. Based on information made available to the Company, the Company believes that, as of November 30, 1996, Phonoscope had Rights of Entry or subscriber agreements covering approximately 59,000 units of which approximately 87% were in MDUs and that for the eleven month period ended November 30, 1996, Phonoscope revenues were approximately $8.6 million. As provided for in the Letter of Intent, the proposed purchase price for Phonoscope would be approximately $34.6 million, subject to certain adjustments (including a dollar for dollar reduction for the value of any liabilities assumed), payable in cash at closing. At closing, a portion of the purchase price (which has yet to be agreed) would be placed in escrow to cover indemnity claims and post closing purchase price adjustments. In addition, Phonoscope and certain of its affiliates are expected to enter into non-compete agreements with respect to the residential portion of Phonoscope's franchise cable system business. The Phonoscope Acquisition would be financed with the proceeds 38 of the Offering or, if proceeds are required for the Company's operations before the Phonoscope Acquisition is consummated, with other sources (which may include Deeply Subordinated Shareholders Loans (as defined). There is no financing condition to the consummation of the Phonoscope Acquisition. There can be no assurance that there will not be significant changes in the information presented herein with respect to Phonoscope and that the Phonoscope Acquisition will nevertheless be consummated. There can be no assurance that the Phonoscope Acquisition will be consummated on the terms contemplated by the Letter of Intent or otherwise. The Exchange Offer is not conditioned on the consummation of the Phonoscope Acquisition. See "Risk Factors -- Consummation of the Phonoscope Acquisition." The Company believes that the consummation of the Phonoscope Acquisition will allow the Company (i) to expand its subscriber base; (ii) cross sell the Company's telecommunications services at MDUs currently served by Phonoscope; and (iii) achieve operating efficiencies and improved field service in the Houston market. The Company intends to offer telecommunications services to MDUs served by the Phonoscope network in a manner consistent with its overall telecommunications roll out plan. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain information derived from the Company's Consolidated Statements of Operations, included elsewhere in this Prospectus, expressed as a percentage of total revenues. Information with respect to the period ended December 31, 1994 is not included herein because the percentages do not convey meaningful information.
Eight Month Six Month Six Month Period Ended Year Ended Period Ended Period Ended August 31, August 31, February 29, February 28, 1995 1996 1996 1997 -------------- ------------ ------------- -------------- Statement of Operations Data: Revenues: Cable television ............... 91.8% 93.8% 94.2% 92.4% Telecommunications ............. 8.2 6.2 5.8 7.6 -------------- ------------ ------------- -------------- Total revenues ................ 100.0% 100.0% 100.0% 100.0% -------------- ------------ ------------- -------------- Operating Expenses: Cost of services .................. 47.6 43.0 42.9 46.7 Customer support, general and administrative ................. 86.1 62.8 61.0 65.9 Depreciation and amortization ..... 25.3 31.4 31.0 31.3 Nonrecurring reorganization costs . 39.9 8.4 6.7 -- -------------- ------------ ------------- -------------- Total operating expenses ..... 198.9 145.6 141.6 143.9 -------------- ------------ ------------- -------------- Loss from operations .............. (98.9) (45.6) (41.6) (43.9) Interest expense on Convertible Notes due to stockholder ..... (9.6) (19.4) (15.3) (37.1) Other interest expense, net .... (2.6) (1.8) (2.0) (6.5) -------------- ------------ ------------- -------------- Loss before income taxes .......... (111.1) (66.8) (58.9) (87.5) Income tax benefit ................ 4.9 -- -- -- -------------- ------------ ------------- -------------- Net loss ....................... (106.2)% (66.8)% (58.9)% (87.5)% ============== ============ ============= ============== Other Data: EBITDA ............................ (33.7)% (5.7)% (3.9)% (12.6)% ============== ============ ============= ==============
39 SIX MONTH PERIOD ENDED FEBRUARY 28, 1997 COMPARED WITH SIX MONTH PERIOD ENDED FEBRUARY 29, 1996 Operating information for the six month period ended February 28, 1997 included the following: o Cable television subscribers grew to 125,090 at February 28, 1997, an increase of 10% from 114,163 at August 31, 1996. o Telecommunications subscribers grew to 4,791 at February 28, 1997, an increase of 17% from 4,080 at August 31, 1996. o The Company's market presence in San Francisco was strengthened by the acquisition of a private cable business with approximately 4,300 cable television subscribers. Revenues. Revenues were $18.6 million for the six month period ended February 28, 1997, an increase of $6.3 million or 51% over revenues of $12.3 million for the six month period ended February 29, 1996. Of the revenues generated in the six month period ended February 28, 1997, 92.4% and 7.6% represented revenues from cable television and telecommunications, respectively, compared to 94.2% and 5.8%, respectively, for the six month period ended February 29, 1996. Cable television revenues were $17.2 million for the six month period ended February 28, 1997, an increase of $5.6 million, or 48%, over cable television revenues of $11.6 million for the six month period ended February 29, 1996. The growth in cable television revenues was principally attributable to an increase in the average number of cable television subscribers, which accounted for approximately $5.4 million of the increase. Telecommunications revenues were $1.4 million for the six month period ended February 28, 1997, an increase of $0.7 million, or 100%, over the six month period ended February 29, 1996. This growth was largely due to an increase in the average number of telecommunications customers. Operating Expenses and Margins. Operating expenses (excluding depreciation and amortization and nonrecurring reorganization costs) were $21.0 million for the six month period ended February 28, 1997, an increase of $8.2 million, or 64%, over operating expenses of $12.8 million for the six month period ended February 29, 1996. As a percentage of revenues, operating expenses increased to 112.6% for the six month period ended February 28, 1997 from 103.9% for the six month period ended February 29, 1996 as a result of the expansion of the Company's operations. Cost of services were $8.7 million for the six month period ended February 28, 1997, an increase of $3.4 million, or 64%, from $5.3 million for the six month period ended February 29, 1996. These expenses represent variable costs of the Company, including programming, interconnection costs and revenue sharing with property owners, and these increases in costs were primarily attributable to the growth in the number of cable television subscribers and telecommunications lines. Gross margins, which represent total revenues less cost of services, decreased from 57.1% for the six month period ended February 29, 1996 to 53.3% for the six month period ended February 28, 1997. The decrease in gross margins is partly attributable to an increase in programming fees resulting from expanded channel line ups as properties are converted to the 18GHz or fiber networks in advance of price increases to customers and increased premium channel penetration, which have lower gross margins. Gross margins also decreased as a result of higher revenue sharing payments to property owners due to new properties being added to the Company's systems with revenue sharing arrangements. Customer support, general and administrative expenses were $12.3 million for the six month period ended February 28, 1997, an increase of $4.8 million, or 64%, over customer support, general and administrative expenses of $7.5 million for the six month period ended February 29, 1996. The increase in customer support, general and administrative expenses was largely due to an increase in personnel associated with the expansion of the Company's operations, the telecommunications roll out and the rapid growth in the size of the cable television and telecommunications networks and the number of subscribers. 40 Depreciation and Amortization. Depreciation and amortization expenses were $5.8 million for the six month period ended February 28, 1997, an increase of $2.0 million, or 53%, over depreciation and amortization expenses of $3.8 million for the six month period ended February 29, 1996. This increase was due primarily to increased depreciation expenses associated with capital expenditures for the continuing construction of the Company's cable television and telecommunications networks. Nonrecurring reorganization costs. Nonrecurring reorganization costs of $0.8 million were incurred for the six month period ended February 29, 1996. These costs represent the costs of assimilating the acquisitions made by the Company and include severance, relocation and recruitment costs. Since the Company has substantially completed the reorganization of its operations and plans only to make acquisitions on a limited basis for strategic purposes in the future, these costs are not expected to be significant in future periods. Loss from Operations and EBITDA. For the reasons discussed above, loss from operations was $8.2 million for the six month period ended February 28, 1997, an increase of $3.1 million, or 61%, over loss from operations of $5.1 million for the six month period ended February 29, 1996. Negative EBITDA increased to $(2.4) million for the six month period ended February 28, 1997 from $(0.5) million for the six month period ended February 29, 1996. The increase in negative EBITDA is the result of higher programming fees and revenue sharing, and the expansion of the Company's operations in anticipation of the roll out of telecommunications services. Negative EBITDA represented (12.6)% of total revenues for the six month period ended February 28, 1997 compared to (3.9)% of total revenues for the six month period ended February 29, 1996. Interest and Income Taxes. Total net interest expense was $8.1 million for the six month period ended February 28, 1997, an increase of $6.0 million over total net interest expense of $2.1 million for the six month period ended February 29, 1996. This increase was primarily attributable to additional loans from the stockholder and to a lesser extent the issuance on February 14, 1997 of $225 million of 13% Senior Notes Due 2005 to finance the Company's ongoing investment in its networks. The Company recorded no income tax expense for the six month period ended February 28, 1997. The Company has significant tax loss carryforwards which can be carried forward for up to fifteen years and does not anticipate paying any income taxes for the next several years. Deferred tax assets are fully reserved as realization is uncertain. YEAR ENDED AUGUST 31, 1996 COMPARED WITH EIGHT MONTHS ENDED AUGUST 31, 1995 Operating information for fiscal 1996 included the following: o Cable television subscribers grew to 114,163 at August 31, 1996, an increase of 50% from 75,944 at August 31, 1995. o Telecommunications subscribers grew to 4,080 at August 31, 1996, an increase of 85% from 2,207 at August 31, 1995. o New markets in San Francisco and Tampa were entered through acquisition of properties from other GVL subsidiaries, acquiring approximately 12,000 and 1,500 cable television subscribers, respectively. o Completed the acquisition of a private cable business in Dallas with approximately 5,000 cable television subscribers to strengthen the Company's presence in that market. Revenues. Revenues were $27.6 million for fiscal 1996, an increase of $18.0 million or 188% over revenues of $9.6 million for the eight months ended August 31, 1995. Of the revenues generated in fiscal 1996, 93.8% and 6.2% represented revenues from cable television and telecommunications, respectively, compared to 91.8% and 8.2%, respectively, for the eight months ended August 31, 1995. Cable television revenues were $25.9 million for fiscal 1996, an increase of $17.1 million, or 194%, over cable television revenues of $8.8 million for the eight months ended August 31, 1995. The growth in cable television revenues was attributable in part to an increase in the average 41 number of cable television subscribers, which accounted for approximately $15.6 million of the increase. Cable television revenues also grew in part from an increase in the retail price of the Company's cable television services which accounted for approximately $1.5 million of the increase. Telecommunications revenues were $1.7 million for fiscal 1996, an increase of $0.9 million or 113%, over the eight months ended August 31, 1995. This growth was largely due to an increase in the average number of telecommunications subscribers. Operating Expenses and Margins. Operating expenses (excluding depreciation and amortization and nonrecurring reorganization costs) were $29.2 million for fiscal 1996, an increase of $16.4 million, or 128%, over operating expenses of $12.8 million for the eight months ended August 31, 1995. As a percentage of revenues, operating expenses decreased to 105.8% for fiscal 1996 from 133.7% for the eight months ended August 31, 1995. Cost of services were $11.9 million for fiscal 1996, an increase of $7.3 million, or 159%, from $4.6 million for the eight months ended August 31, 1995. These expenses represent variable costs of the Company, including programming, interconnection costs and revenue sharing with property owners, and these increases in costs were primarily attributable to the growth in the number of cable television subscribers and telecommunications lines. Gross margins increased from 52.4% for the eight months ended August 31, 1995 to 57.0% for fiscal 1996. Customer support, general and administrative expenses were $17.3 million for fiscal 1996, an increase of $9.1 million, or 111%, over customer support, general and administrative expenses of $8.2 million for the eight months ended August 31, 1995. The increase in customer support, general and administrative expenses was largely due to an increase in personnel associated with the expansion of the Company's operations and the rapid growth in the size of the cable television and telecommunications networks and the number of subscribers. Depreciation and Amortization. Depreciation and amortization expenses were $8.7 million for fiscal 1996, an increase of $6.3 million, or 263%, over depreciation and amortization expenses of $2.4 million for the eight months ended August 31, 1995. This increase was due primarily to increased depreciation expenses associated with acquisitions and capital expenditures for the continuing construction of the Company's cable television and telecommunications networks. Nonrecurring reorganization costs. Nonrecurring reorganization costs were $2.3 million for fiscal 1996 and $3.8 million for the eight months ended August 31, 1995. These costs represent the costs of assimilating the acquisitions made by the Company and include severance, relocation and recruitment costs. Since the Company has substantially completed the reorganization of its operations and plans only to make acquisitions on a limited basis for strategic purposes in the future, these costs are not expected to be significant in future periods. Loss from Operations and EBITDA. For the reasons discussed above, loss from operations was $12.6 million for fiscal 1996, an increase of $3.1 million, or 33%, over loss from operations of $9.5 million for the eight months ended August 31, 1995. Negative EBITDA increased to $(1.6) million for fiscal 1996. The improvement in negative EBITDA represents an increase of $1.6 million over negative EBITDA of $(3.2) million for the eight months ended August 31, 1995. Negative EBITDA represented (5.7)% of total revenues for fiscal 1996 compared to (33.7)% of total revenues for the eight months ended August 31, 1995. Interest and Income Taxes. Total net interest expense was $5.9 million for fiscal 1996, an increase of $4.7 million over total net interest expense of $1.2 million for the eight months ended August 31, 1995. This increase was attributable to additional loans from the stockholder to finance the Company's ongoing investment in its networks. The Company recorded no income tax expense for fiscal 1996. The Company recorded an income tax benefit of $0.5 million for the eight months ended August 31, 1995 which was the result of the reduction of a deferred tax liability due to increased tax losses being available. The Company has significant tax loss carryforwards which can be carried forward for up to fifteen years and does not anticipate paying any income taxes for the next several years. Deferred tax assets are fully reserved as realization is uncertain. 42 EIGHT MONTHS ENDED AUGUST 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994 Operating information for the eight months ended August 31, 1995 included the following: o Cable television subscribers grew to 75,944 at August 31, 1995. o Telecommunications subscribers grew to 2,207 at August 31, 1995. o Acquisitions were completed in Houston, Chicago, Denver, Miami and Dallas. These acquisitions generated approximately 119,300 units passed for cable television and 48,400 cable television subscribers at the date of acquisition. o GVL acquired the controlling interest in OpTel. o Corporate headquarters were transferred from Los Angeles to Dallas and a new management team was recruited with experience in the development and operation of the cable television and telecommunications companies owned or affiliated with GVL. Revenues. Revenues were $9.6 million for the eight months ended August 31, 1995, an increase of $9.2 million over revenues of $0.4 million for the year ended December 31, 1994. Of the revenues generated in the eight months ended August 31, 1995, 91.8% and 8.2% represented revenues from cable television and telecommunications, respectively, compared to 54.3% and 45.7%, respectively, for the year ended December 31, 1994. Cable television revenues were $8.8 million for the eight months ended August 31, 1995, an increase of $8.6 million over cable television revenues of $0.2 million for the year ended December 31, 1994. The growth in cable television revenues was primarily attributable to an increase in the average number of cable television subscribers. Telecommunications revenues were $0.8 million for the eight months ended August 31, 1995, an increase of $0.6 million over the year ended December 31, 1994. This growth was primarily due to an increase in the average number of telecommunications subscribers. Operating Expenses and Margins. Operating expenses (excluding depreciation and amortization and nonrecurring reorganization costs) were $12.8 million for the eight months ended August 31, 1995, an increase of $4.6 million, or 56%, over operating expenses of $8.2 million for the year ended December 31, 1994. As a percentage of revenues, operating expenses were 133.7% for the eight months ended August 31, 1995. Cost of services were $4.6 million for the eight months ended August 31, 1995, an increase of $4.1 million from $0.5 million for the year ended December 31, 1994. These expenses represent variable costs of the Company, including programming, interconnection costs and revenue sharing property owners and their increase was primarily attributable to the growth in the number of cable television subscribers and telecommunications lines. Gross margins increased from negative (6.3)% for the year ended December 31, 1994 to 52.4% for the eight months ended August 31, 1995. Customer support, general and administrative expenses were $8.2 million for the eight months ended August 31, 1995, an increase of $0.5 million, or 6%, over customer support, general and administrative expenses of $7.7 million for the year ended December 31, 1994. The increase in customer support, general and administrative expenses was largely due to an increase in personnel associated with the expansion of the Company's operations generated primarily by the acquisition of private cable companies in five markets and the rapid growth in the size of the Company's cable television and telecommunications networks and the number of subscribers. Depreciation and Amortization. Depreciation and amortization expenses were $2.4 million for the eight months ended August 31, 1995, an increase of $2.3 million over depreciation and amortization expenses of $0.1 million for the year ended December 31, 1994. This increase was due primarily to increased depreciation expenses associated with acquisitions and capital expenditures for the continuing construction of the Company's cable television and telecommunications networks. 43 Nonrecurring reorganization costs. Nonrecurring reorganization costs were $3.8 million for the eight month period ended August 31, 1995. These costs represent the costs of assimilating the acquisitions made by the Company and include severance, relocation and recruitment costs. Loss from Operations and EBITDA. For the reasons discussed above, loss from operations was $9.5 million for the eight months ended August 31, 1995, an increase of $1.6 million, or 20%, over loss from operations of $7.9 million for the year ended December 31, 1994. Negative EBITDA increased to $(3.2) million for the eight months ended August 31, 1995. The improvement in negative EBITDA represents an increase of $4.6 million over negative EBITDA of $(7.8) million for the year ended December 31, 1994. Negative EBITDA represented (33.7)% of total revenues for the eight months ended August 31, 1995. Interest and Income Taxes. Total net interest expense was $1.2 million for the eight months ended August 31, 1995, an increase of $1.2 million over total net interest expense of $0.1 million for the year ended December 31, 1994. This increase was attributable to loans from the stockholder to finance the acquisitions and investments in the Company's networks. The Company recorded an income tax benefit of $0.5 million for the eight months ended August 31, 1995 which was the result of the reduction of a deferred tax liability no longer required due to increased tax losses being available. No income tax expense was recorded for the year ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES The Company has generated net losses since its inception, resulting in an accumulated deficit of $45.1 million as of February 28, 1997. During the past year, the Company has required external funds to finance capital expenditures associated with the completion of acquisitions in strategic markets, expansion of its networks and operating activities. Net cash used in acquisitions was $2.5 million in the six month period ended February 28, 1997, $9.9 million in fiscal 1996, $50.0 million in the eight months ended August 31, 1995 and $1.3 million in the year ended December 31, 1994. Net cash used in building the Company's cable television and telecommunications networks and related business activities was $24.9 million in the six month period ended February 28, 1997, $62.1 million in fiscal 1996, $22.2 million in the eight months ended August 31, 1995 and $9.3 million in the year ended December 31, 1994. Since inception, the Company has relied primarily on investments from its principal stockholder in the form of equity and Convertible Notes to fund its expenditures. The Company received funding from its principal stockholder of $23.7 million in the six month period ended February 28, 1997, $73.4 million during fiscal 1996, $79.5 million during the eight months ended August 31, 1995 and $25.4 million during the year ended December 31, 1994. None of the Company's stockholders or affiliates are under any contractual obligation to provide additional financing to the Company. In connection with the Offering, VPC agreed (i) to extend the maturity of the Convertible Notes until six months following the maturity or indefeasible payment in full of the Notes and (ii) to subordinate the Convertible Notes in right of payment to the Notes under certain circumstances. See "Certain Transactions -- Convertible Notes." The Company's future results of operations will be materially impacted by its ability to finance its planned business strategies. The Company anticipates that it will require approximately $250 million in capital expenditures in fiscal 1997 and fiscal 1998 of which approximately $24.9 million had been expended as of February 28, 1997. The key elements of the Company's business strategies requiring financing include the roll out of its telecommunications networks including central office switches, the conversion of SMATV systems to networks, the connection of additional properties to the networks and the implementation of addressable interdiction devices in substantially all of the MDUs served. The Company believes that the net proceeds from the Offering (excluding the $79.6 million of U.S. Government Securities held in escrow that will be used to fund the first six interest payments on the Notes) available for use by the Company of $130.2 million will be sufficient to finance the Company's 44 capital requirements through January 1998. If the Company consummates the Phonoscope Acquisition, it will defer other network expansion. As a result, whether or not the Phonoscope Acquisition is consummated, the Company believes that it will have sufficient funds to finance the Company's capital requirements through January 1998. The foregoing estimates are based on certain assumptions, including the timing of the signing of Rights of Entry, the conversion of MDUs currently served by SMATV systems to the networks and the telecommunications roll out, each of which may vary significantly from the Company's plan. After utilizing the net proceeds of the Offering, the Company expects to fund its capital requirements through the end of fiscal 1998 through a combination of cash available from operations, bank or vendor financing or other available debt or equity financings. As of the date hereof, the Company has no agreement or agreement in principle with any bank, vendor or other person to provide any such debt or equity financing. There can be no assurance that the Company will be successful in obtaining any necessary financing on reasonable terms or at all. See "Risk Factors -- Future Capital Needs." The Company benefits from the fact that it does not require a substantial capital investment in its cable television and telecommunications networks in advance of connecting subscribers to its networks since a significant proportion of the costs comprises the internal wiring and the erection of microwave transmitting and receiving equipment specific to the MDU. Of the $250 million in capital expenditures budgeted through fiscal 1998, approximately $180 million is related to specific MDUs. These expenditures are, to a large extent, discretionary and will only be incurred when new properties are brought into service or when existing properties serviced by SMATV systems are connected to the networks. When a new Right of Entry is signed it takes approximately four months of construction work to activate signal at the property. Once the property is activated, penetration rates increase rapidly. The balance of the budgeted capital expenditures, totaling approximately $70 million, is for infrastructure assets not related to specific MDUs. These assets include central office switches, cable television headends, computer hardware and software and capitalized construction costs. The Company can to some degree control the timing of the infrastructure capital expenditures by controlling the timing of the telecommunications roll out and the expansion of its networks. Following fiscal 1998, the Company expects to continue to require significant capital investment and additional financing. Such additional financing may be obtained through additional equity or debt financing, including senior bank credit facilities at one or more subsidiaries of the Company and further securities offerings. See "Risk Factors -- Holding Company Structure and Need to Access Subsidiaries Cash Flow." To the extent that the Company determines to pursue further acquisitions or negative cash flow from operations continues, substantial additional funds may be required. To the extent that these or any other funds are not obtained on a timely basis, it may be necessary for the Company to delay the implementation of portions of its networks and to delay pursuit of its telecommunications strategy. There can be no assurance that the Company will be successful in obtaining the requisite debt and/or equity financing on reasonable terms or at all. In order to accelerate the achievement of the Company's strategic goals, the Company has from time to time held, and continues to hold, preliminary discussions relating to possible acquisitions by the Company and possible investments in the Company by strategic investors. Other than the non-binding Letter of Intent with respect to the Phonoscope Acquisition, no agreement has been reached for any material acquisition by or strategic investment in the Company. See "Business-- Business Strategy." 45 IMPACT OF NEW ACCOUNTING STANDARDS Statement of Financial Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is effective for fiscal years beginning after December 15, 1995, requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. SFAS No. 121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The Company adopted SFAS No. 121 effective September 1, 1996, and the impact of such adoption is expected to be insignificant to its financial condition and results of operations. Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," issued by the Financial Accounting Standards Board, which is effective for fiscal years beginning after December 15, 1995, requires that an employer's financial statements include certain disclosures about stock-based employee compensation arrangements regardless of the method used to account for them. The Company will measure compensation costs using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and will therefore include pro forma disclosures in the notes to the financial statements for all awards granted after December 31, 1994. The Company will disclose the pro forma net income and pro forma earnings per share as if the fair value based accounting methods in SFAS No. 123 had been used to account for stock-based compensation cost in future financial statement presentations. Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings Per Share," is effective for earnings per share calculations and disclosures for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period earnings per share data that is presented. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share," and provides reporting standards for calculating "Basic" and "Diluted" earnings per share. Management does not believe the impact of the adoption of SFAS No. 128 will have a meterial impact on its earnings per share computations. INFLATION The Company does not believe that inflation has had a material effect on its results of operations to date. However, there can be no assurance that the Company's business will not be adversely affected by inflation in the future. 46 BUSINESS OVERVIEW OpTel is the largest provider of private cable television services to residents of MDUs in the United States and is expanding the telecommunications services it offers to MDU residents. The Company provides cable television and, where currently offered, telecommunications services to MDU residents principally under long-term Rights of Entry with owners of MDUs. The Company's Rights of Entry are generally for a term of ten to fifteen years (five years for Rights of Entry with condominium associations). The weighted average unexpired term of the Company's cable television Rights of Entry was approximately seven years as of February 28, 1997 (assuming the Company's exercise of available renewal options). The Company currently provides cable television services in the metropolitan areas of Houston, Dallas-Fort Worth, San Diego, Phoenix, Chicago, Denver, San Francisco, Los Angeles, Miami-Ft. Lauderdale, Tampa and Austin. The Company also provides telecommunications services in Houston, Dallas-Fort Worth, Austin, Denver and Miami-Ft. Lauderdale. As of February 28, 1997, the Company had 125,090 cable television subscribers and 4,791 telecommunications subscribers with 6,039 telephone lines. For regulatory purposes, the Company is considered to be a private cable television operator in most of the markets it serves. Private cable television operators deliver services to consumers without hard-wire crossings of public rights of way. Consequently, private cable television operators are not required to obtain cable television franchises and are subject to significantly less regulatory oversight than are traditional franchise cable television operators. As a result, they have significant latitude in terms of system coverage, pricing and customized delivery of services to selected properties. The Company has no universal service obligation and generally does not incur capital costs to build its networks until it has entered into Rights of Entry from which it reasonably expects to build an appropriate customer base. The Company offers a full range of multichannel video programming to the MDUs it serves (including basic and premium services) which the Company believes is competitive in both content and pricing with the programming packages offered by its major competitors. The Company currently provides its telecommunications services as an STS operator through PBX switches. The Company offers customers access to services comparable in scope and price to those provided by the incumbent LEC and long distance carrier. The Company's telecommunications strategy includes replacing its PBX switches with networked central office switches. See "Network Architecture -- Telecommunications Architecture." The Company invests in networks because it believes that networks provide the optimal mechanism for delivering bundled cable television and telecommunications services. The Company's networks use technologies that are capable of bi-directional transmission. The Company provides its video programming to MDUs through 18GHz and fiber optic networks and non-networked SMATV systems. As of February 28, 1997, approximately 130,000 of the 239,801 units passed for cable television are served by the Company's networks. These networks generally provide up to 72 channels of video programming. The Company intends to convert substantially all of its SMATV systems to 18GHz or fiber optic networks by the end of fiscal 1999. The Company's networks will also facilitate delivery of voice signal from each MDU to the central office switches to be deployed by the Company in its markets. The Company intends to license additional spectrum, which it currently anticipates will principally be in the 23GHz band, which it will use to provide bi-directional voice transmission. GVL, Canada's third largest cable television company, holds a 76.1% equity interest in OpTel through VPC, its indirect wholly-owned subsidiary. The Company has benefited and expects, in the future, to continue to benefit from the management and technical expertise of GVL. Key members of the Company's management team gained experience in building out and operating cable television networks and combined cable television/telecommunications networks while working for GVL or its affiliates in Canada and the United Kingdom. From inception, OpTel's owners have invested over $200 million in the Company in the form of equity and Convertible Notes. 47 OpTel was incorporated in the State of Delaware in July 1994, as the successor to a Delaware corporation that was founded in April 1993. The Company's principal offices are located at 1111 W. Mockingbird Lane, Dallas, Texas 75247, and its telephone number is (214) 634-3800. INDUSTRY The private cable television industry has undergone significant changes and consolidation in recent years as a result of changes in cable television and telecommunications laws and regulations. Until February 1991, the primary technology available to private cable television operators was SMATV, whereby the operator received and processed satellite signals directly at an MDU or other private property with an on-site headend facility consisting of receivers, processors and modulators, and distributed the programming to individual units through an internal hard-wire system in the building. SMATV operators spread the relatively high fixed costs of operations (headend equipment, management, customer service, billing, installation and maintenance) over a small subscriber base (frequently the residents of a single MDU). This high cost structure reduced the incentives for SMATV operators to invest in technology and overhead, resulting in inferior channel capacity (usually 20 to 40 channels) and a lesser resource commitment to customer service, which produced lower penetration rates. In February 1991, regulatory changes made 18GHz technology, which had been in use for more than 25 years in commercial and military applications, available for use by private cable television operators for the point-to-point delivery of video programming services. Private cable systems utilizing 18GHz technology do not require the large networks of coaxial or fiber optic cable and amplifiers that are utilized by traditional hard-wire cable television operators or the installation of a headend facility at each MDU as is required for SMATV systems. Thus, private cable television operators using 18GHz technology are able to provide services at lower per unit capital and maintenance costs than franchise cable or SMATV operators. In addition, private cable television operators are not subject to the regulatory constraints of a typical franchise cable television operator. Specifically, as a private cable television operator, the Company (i) does not face regulatory constraints on the geographic areas in which it may offer video services, (ii) does not pay franchise and FCC subscriber fees, (iii) is not obligated to pass every resident in a given area, (iv) is not subject to rate regulation, and (v) is not subject to "must carry" and local government access obligations. The present structure of the U.S. telecommunications market resulted largely from the break-up of the "Bell System" in 1984 which created two distinct telecommunications industries: local exchange and interexchange or "long distance". The long distance industry was immediately opened to direct competition; however, until recently, the local exchange industry has been virtually closed to competition. Efforts to open the local exchange market to competition began in the late 1980's on a state by state basis when CAPs began offering dedicated private line transmission and access services which account for less than 10% of the local exchange market. In the summer of 1995, several states began opening their markets to local exchange competition. In February 1996, the Telecommunications Act was signed into law. The Telecommunications Act provides a framework by which all states must allow competition for local exchange services. Specifically, the Telecommunications Act (i) requires the incumbent LEC to (a) allow competitors to interconnect to the LEC's network at any technically feasible point and (b) allow competitors access to components of the LECs network selectively and (ii) establishes a framework for reciprocal compensation between the LEC and a CLEC for use of each other's network. See "-- Regulation -- Telecommunications Regulation." According to 1990 U.S. Census Bureau data, there are more than 13.2 million MDU units in MDUs with greater than 10 MDU units in the United States, of which approximately 4.0 million are within the Company's existing geographic markets. The Company estimates that approximately 2.5 million of the MDU units within its existing markets are within MDUs which meet the Company's preference for MDUs of 150 or more units. Industry sources estimate that in 1995 the total revenues for cable television in the United States were $25 billion and total revenues from telecommunications services in the United States were $168 billion, of which approximately $96 billion represented revenues from local exchange services. 48 BUSINESS STRATEGY The Company's goal is to distinguish itself from its competitors by becoming a leading provider of a comprehensive set of both cable television and telecommunications services to MDUs. The key components of the Company's strategy to achieve this objective are: Maintain Long-Term Relationships with MDU Owners. The Company believes that the strategic relationships it forms with MDU owners are the key to the Company's long-term success. By providing services that are attractive to MDU residents, the Company endeavors to enhance the rental performance of the MDUs that it serves. The Rights of Entry provide MDU owners with financial incentives to work closely with the Company to promote its products and services. The Company believes that its strategic relationships with MDU owners will enable the Company to maintain its preferred competitive position even if the exclusivity of the Rights of Entry becomes limited by future developments. See "-- Regulation." Increase Market Share in Existing Markets. In order to increase its market share, the Company markets its services to owners of national, regional and local portfolios of MDUs who own MDUs within the Company's existing (or future) markets and to owners of individual MDUs located within the coverage of the Company's existing networks. In addition, from time to time the Company considers acquiring private cable television systems within its markets. See "Prospectus Summary -- Recent Developments: Proposed Phonoscope Acquisition." Increase Penetration at MDUs. Upon executing Rights of Entry, the Company aggressively markets its services to actual and potential subscribers within the MDU in order to increase penetration rates for basic and ancillary services. The Company believes that its best opportunity for a sale arises when a tenant first signs a lease and takes occupancy in an MDU. The Company therefore enlists on-site property managers and leasing agents to market its services. The Company believes that its presence at the leasing office and its sponsorship by the MDU owner assist it significantly in its marketing efforts. Expand Coverage of Company Networks. Upon entering into Rights of Entry for an MDU, the Company seeks to link the MDU to the Company's 18GHz or, in Houston, fiber optic networks. Private cable systems utilizing 18GHz technology do not require the large networks of coaxial or fiber optic cable and amplifiers that are utilized by traditional hard-wire cable television operators or the installation of a headend facility at each MDU as is required for SMATV systems. Thus, private cable television operators using 18GHz technology are able to provide services at lower per unit capital and maintenance costs than franchise cable or SMATV operators. The Company can deliver as many as 72 channels of programming in uncompressed analog format over its networks which, in most of the Company's markets, exceeds the number of channels offered by other multichannel television service providers. Additional capacity, if required, can be provided through the application of available digital compression technology. The point-to-point nature of the networks enables the Company to customize the programming to be delivered to any MDU based on the demographics of the MDU's residents. The Company's networks will also facilitate delivery of voice signal from each MDU to the central office switches to be deployed by the Company in its markets. The Company intends to license additional spectrum, which it anticipates will principally be in the 23GHz band, to provide bi-directional voice transmission. Roll out Telecommunications Services. The Company currently provides telecommunications services in Houston, Dallas-Fort Worth, Austin, Denver and Miami-Ft. Lauderdale. The Company is expanding the telecommunications component of its business both by increasing the number of MDUs to which it provides telecommunications services and by expanding the number of services offered. As part of its ongoing telecommunications roll out and coincident with the conversion of its SMATV systems to its networks, the Company intends to replace its PBX switches located at the MDUs with networked central office switches. Subject to receipt of regulatory approvals, the Company intends to deploy its first central office switch in the Houston market by mid-1997 and to have installed central office switches in substantially all of its markets by the end of calendar 1999. 49 Bundle and Differentiate Product Offering. The Company offers MDU owners and residents bundled cable television and telecommunications services. MDU residents and owners benefit from the simplicity of dealing with a single service provider. Management believes that the Company typically offers a superior, or at least comparable, range of products and level of customer service than its competitors at a lower total price. The Company also believes that bundling services results in better collection experience versus non-bundled services. The Company plans to offer MDU residents access to additional bundled services, including Internet access, intrusion alarm, utility monitoring, and PCS, cellular and paging services. The Company also intends to introduce integrated billing of its bundled services in fiscal 1998. Provide Superior Customer Service. The Company is committed to providing excellent customer service to MDU owners and subscribers in the home, in the field and on the telephone. The Company believes the most effective means of attracting and retaining MDU owners and residents is by providing high quality subscriber service, including: a 24-hours-a-day, seven-days-a-week customer call center; direct lines to facilitate rapid response to calls initiated by MDU owners and managers; flexible, seven-day-a-week installation and service appointments; 80% of installations completed within three business days of receiving the initial installation request (often within 24 hours) and service calls generally made the same day the subscriber indicates a service problem. In addition, the Company has established stringent staff training procedures, including its Operational Excellence continuous improvement program, and internal customer service standards, which management believes meet, and in many respects exceed, those established by the National Cable Television Association. MARKETS The Company selected its current markets based upon their growth characteristics, competitive conditions, MDU concentrations, topographical and climatic conditions, favorable demographics and, to a lesser extent, favorable regulatory environments. The Company's strategy has been to enter markets either through the acquisition of a private cable television operator serving the target market or by entering into Rights of Entry with a major MDU owner in the market. The Company has entered substantially all of its markets through acquisitions. Upon acquisition of an operator, the Company historically has begun the process of upgrading the acquired systems by converting MDUs from SMATV technology to the Company's 18GHz or, in Houston, fiber optic networks, adding additional programming and improving customer service. In addition, the Company has been able to achieve cost efficiencies by consolidating acquired operations into its existing organization. As acquired operations generally have not offered telecommunications services, the Company is in the process of adding such services to its acquired systems. As of February 28, 1997, the Company operated in the following geographic markets:
Units Under Units Estimated Contract Passed Tele- Number of Units Under Cable for Tele- for Tele- communi- MDU Units Date of Contract for Units Passed Television communi- communi- cations Market in Market(1) Entry Cable(2) for Cable(3) Subscribers cations(2)(4) cations(3) Lines ------------------ ------------ --------- -------------- -------------- ----------- ------------- ----------- ---------- Houston .......... 305,961 1/95 80,267 79,199 29,492 6,816 6,654 2,122 Dallas-Fort Worth 366,646 9/94 44,233 34,385 17,173 11,421 5,026 1,720 Chicago .......... 333,442 8/95 23,117 21,765 11,378 400 -- -- Phoenix .......... 143,674 12/94 22,987 21,856 9,884 -- -- -- San Diego ........ 295,375 12/94 22,960 21,628 14,853 1,486 768 299 San Francisco .... 202,698 8/96 22,886 22,643 16,196 243 -- -- Denver ........... 97,056 7/95 18,867 15,804 8,876 2,975 877 214 Los Angeles ...... 270,006 5/94 13,921 8,531 6,095 1,791 -- -- Miami-Ft. Lauderdale ...... 275,202 6/95 12,849 10,559 9,142 1,241 91 62 Tampa ............ 151,724 8/96 2,777 2,777 1,435 -- -- -- Austin ........... 63,811 7/94 654 654 566 1,000 1,000 1,622 ------------ -------------- -------------- ------------- ----------- ----------- ---------- 2,505,595 265,518 239,801 125,090 27,373 14,416 6,039 ============ ============== ============== ============= =========== =========== ==========
50 - ------ (1) Represents units in MDUs with greater than 150 units. For rental units, market data has been estimated by REIS Reports, Inc. For the Tampa and Miami-Ft. Lauderdale markets, the rental unit data has been adjusted based on Company estimates to include condominium units. (2) Units under contract represents the number of units currently passed and additional units with respect to which the Company has entered into Rights of Entry for the provision of cable television services and telecommunication services, respectively, but not yet passed and which the Company expects to pass within the next five years. (3) Units passed represents the number of units with respect to which the Company has connected and activated its cable television and telecommunication systems, respectively. The Company anticipates passing approximately 15,800 and 8,700 additional units currently under contract for cable television and units currently under contract for telecommunications, respectively, by the end of calendar 1997. (4) At this time substantially all units under contract for telecommunications are also units under contract for cable television. The Company has recently entered into Rights of Entry with respect to approximately 5,500 units in the Las Vegas market, has begun consturction of certain of these units and is considering further expansion in this market. HOUSTON The Company entered the Houston market in January 1995 through an acquisition. The Houston market includes the Company's operations in Bryan/College Station. The Company has a cable franchise for the Houston market and utilizes a fiber optic/coaxial cable network to service approximately 82% of its units passed for cable television with the remainder serviced via SMATV systems. As of February 28, 1997, the Company had 79,199 units passed for cable television and had 29,492 cable subscribers for a penetration rate of 37.2%. The penetration rate is low when compared to the overall cable television penetration rate for the Houston market of 53% as reported in the TV & Cable Factbook No. 63 (the "Factbook"). The Company believes that this low penetration is largely the result of the particular attributes of certain MDUs for which Rights of Entry were acquired. The Company believes that as new Rights of Entry are signed and activated, and as the remaining SMATV systems are converted to the fiber optic/coaxial cable network thereby improving the picture quality and channel line up, the penetration rate will increase. In addition, the Company intends to utilize customized channel line ups combined with an entry level package to increase penetration rates. The Houston market generates one of the Company's highest revenue per cable subscriber figures. As of February 28, 1997, the Company had 6,654 telecommunications units passed and had 1,672 telecommunications subscribers for a penetration rate of 25.1%. The Company intends to install its first central office switch in the Houston market in the second half of fiscal 1997. Phonoscope, which operates in the greater Houston metropolitan area, provides its services over a fiber optic and coaxial cable distribution system. If the Phonoscope Acquisition is consummated, the Company expects to use its existing franchise with the City of Houston to serve Phonoscope subscribers within the City of Houston, and, where required to serve acquired Rights of Entry, will seek assignment of the appropriate municipal franchises. Phonoscope provides cable television services principally under Rights of Entry in competition with traditional franchise cable television operators, and aside from these franchise cable television operators is second only to the Company in number of MDUs served in the greater Houston area. Based on information made available to the Company, the Company believes that, as of November 30, 1996, (i) Phonoscope had Rights of Entry or subscriber agreements covering approximately 59,000 units (principally at MDUs, but including certain single family units within the footprint of its network) and approximately 27,000 subscribers and (ii) the weighted average unexpired term of the Rights of Entry held by Phonoscope was approximately 5 years. Phonoscope's network and the Company's existing Houston network are in close proximity with each other, but do not overlap in any material respect. Following the consummation of the Phonoscope Acquisition, the Company intends to expand the acquired fiber optic network and, over time, interconnect the acquired network with the Company's existing Houston network. There are no material technical obstacles to the interconnection of the networks. The Company expects to enter into a construction agreement with Phonoscope for post-closing construction work on the network purchased by the Company. The aggregate compensation payable to Phonoscope with respect to such construction agreements is expected to be approximately $1.8 million. 51 The Company believes that the consummation of the Phonoscope Acquisition will allow the Company (i) to expand its subscriber base; (ii) cross sell the Company's telecommunications services at MDUs currently served by Phonoscope; and (iii) achieve operating efficiencies and improved field service in the Houston market. The Company intends to offer telecommunications services to MDUs served by the Phonoscope network in a manner consistent with its overall telecommunications roll out plan. Although the Company believes the Phonoscope Acquisition will be consummated, there can be no assurance that the Phonoscope Acquisition will be consummated on the terms contemplated herein or otherwise. The Exchange Offer is not conditioned on the consummation of the Phonoscope Acquisition. See "Risk Factors -- Consummation of the Phonoscope Acquisition." DALLAS-FORT WORTH The Company entered the Dallas-Fort Worth market in September 1994 by entering into Rights of Entry with a significant property owner. Since that date the Company has increased its market share by acquisition and by entering into additional Rights of Entry. The Company's corporate headquarters and centralized customer service center for all of its markets is located in Dallas-Fort Worth. The Company utilizes 18GHz networks to service approximately 32% of its units passed for cable television in the Dallas-Fort Worth market with the remainder serviced via SMATV systems. As of February 28, 1997, the Company had 34,385 units passed for cable television and had 17,173 cable subscribers for a penetration rate of 49.9%. This penetration rate is comparable to the overall cable television penetration rate for the Dallas-Fort Worth market of 49% as reported in the Factbook. As of February 28, 1997, the Company had 5,026 units passed for telecommunications and had 1,372 telecommunications subscribers for a penetration rate of 27.3%. The Company intends to install a central office switch in the Dallas-Fort Worth market by early fiscal 1998. CHICAGO The Company entered the Chicago market in August 1995 through an acquisition. In the Chicago market, the Company currently services substantially all of its units passed for cable television via SMATV systems. The Company intends to convert substantially all of these SMATV systems to 18GHz networks by the end of fiscal 1999. As of February 28, 1997, the Company had 21,765 units passed for cable television and had 11,378 cable subscribers for a penetration rate of 52.3%. Despite the use of SMATV systems, this penetration rate is comparable to the overall cable television penetration rate for the Chicago market of 56% as reported in the Factbook and the revenue per subscriber is the highest in the Company. The Company believes that this is the result of the quality demographics of the MDUs served. The Company intends to commence telecommunications service offerings and install a central office switch in the Chicago market by the end of fiscal 1999. The Company has recently consummated an acquisition of a private cable operator in the Chicago market having approximately 5,600 units passed for cable television and 5,000 cable television subscribers. PHOENIX The Company entered the Phoenix market in December 1994 through an acquisition. Since that date the Company has increased its market share by entering into additional Rights of Entry. The Company utilizes 18GHz networks to service approximately 42% of its units passed for cable television in the Phoenix market with the remainder serviced via SMATV systems. As of February 28, 1997, the Company had 21,856 units passed for cable television and had 9,884 cable subscribers for a penetration rate of 45.2%. This penetration rate is low when compared to the overall cable television penetration rate for the Phoenix market of 54% as reported in the Factbook. The Company believes that the low penetration rate is largely the result of the limited channel line ups offered by the acquired operator and that as the remaining SMATV systems are converted to 18GHz networks 52 thereby improving the picture quality and channel line up, the penetration rate will increase. The Company intends to commence telecommunications service offerings and install a central office switch in the Phoenix market by the end of fiscal 1998. SAN DIEGO The Company entered the San Diego market in December 1994 through an acquisition. The San Diego market includes parts of Orange County, San Bernadino County, Riverside County and North County. Since that date the Company has increased its market share by entering into additional Rights of Entry. The Company utilizes 18GHz networks to service approximately 72% of its units passed for cable television in the San Diego market with the remainder serviced via SMATV systems. As of February 28, 1997, the Company had 21,628 units passed for cable television in the San Diego market and had 14,853 cable subscribers for a penetration rate of 68.7%. This penetration rate is low when compared to the overall cable television penetration rate for the San Diego market of 79% as reported in the Factbook. The Company believes that the low penetration rate is largely the result of the limited channel line ups offered by the acquired operator and that as SMATV systems are converted to 18GHz networks thereby improving the picture quality and channel line up, the penetration rate will increase. As of February 28, 1997, the Company had 768 units passed for telecommunications and had 247 telecommunications subscribers for a penetration rate of 32.2%. The Company intends to install a central office switch in the San Diego market by the end of fiscal 1998. SAN FRANCISCO The Company entered the San Francisco market in August 1996 through an acquisition and completed another acquisition in November 1996. In the San Francisco market, the Company currently services all of its units passed for cable television via SMATV systems. The Company intends to convert substantially all of these SMATV systems to 18GHz networks by the end of fiscal 1999. As of February 28, 1997, the Company had 22,643 units passed for cable television and had 16,196 cable subscribers for a penetration rate of 71.5%. This penetration rate is comparable to the overall cable television penetration rate for the San Francisco market of 68% as reported in the Factbook. Approximately 41% of the units passed for cable television represent subscribers served via bulk sales agreements and, as a result, the revenue per subscriber is relatively low. The Company believes that as new Rights of Entry are signed and activated and as the SMATV systems are converted to 18GHz networks revenue per subscriber will increase. The Company intends to commence telecommunications service offerings and install a central office switch in the San Francisco market by the end of fiscal 1999. DENVER The Company entered the Denver market in July 1995 through an acquisition. Since that date the Company has increased its market share by entering into additional Rights of Entry. The Company utilizes 18GHz networks to service approximately 68% of its units passed for cable television in the Denver market with the remainder serviced via SMATV systems. As of February 28, 1997, the Company had 15,804 units passed for cable television and had 8,876 cable subscribers for a penetration rate of 56.2%. This penetration rate is comparable to the overall cable television penetration rate for the Denver market of 58% as reported in the Factbook. As of February 28, 1997, the Company had 877 units passed for telecommunications and had 143 telecommunications subscribers for a penetration rate of 16.3%. The Company intends to install a central office switch in the Denver market by the end of fiscal 1998. LOS ANGELES The Company entered the Los Angeles market in May 1994 by entering into certain Rights of Entry. Since that date the Company has increased its market share by entering into additional Rights of Entry. The Company utilizes 18GHz networks to service approximately 71% of its units passed for cable television in the Los Angeles market with the remainder serviced via SMATV systems. As of February 28, 1997, the Company had 8,531 units passed for cable television and had 6,095 cable subscribers for a penetration rate of 71.4%. This penetration rate is high compared to the overall 53 cable television penetration rate for the Los Angeles market of 60% as reported in the Factbook. The Company believes that this is the result of the quality demographics of the MDUs served. The Company will determine the timing of its offering of telecommunications services and the installation of a central office switch based on its success in entering into a sufficient number of Rights of Entry in the Los Angeles Market. The Company may install a single switch to serve both the Los Angeles and San Diego markets. The Company has recently entered into a letter of intent to acquire certain Rights of Entry in the Los Angeles Market. MIAMI-FT. LAUDERDALE The Company entered the Miami-Ft. Lauderdale market in June 1995 through an acquisition. Since that date the Company has increased its market share by entering into additional Rights of Entry. The Company utilizes 18GHz networks to service approximately 76% of its units passed for cable television in the Miami-Ft. Lauderdale market, with the remainder serviced via SMATV systems. As of February 28, 1997, the Company had 10,559 units passed for cable television and had 9,142 cable subscribers for a penetration rate of 86.6%. This penetration rate is high compared to the overall cable television penetration rate for the Miami-Ft. Lauderdale market of 66% as reported in the Factbook due to the high proportion of units served under bulk sales agreements. The Company began telecommunications operations in the Miami-Ft. Lauderdale market in November 1996 and intends to install a central office switch in this market by the end of fiscal 1998. TAMPA The Company entered the Tampa market in August 1996 through an acquisition. The Company currently services all of its units passed for cable television in the Tampa market via either SMATV or coaxial cable systems. The Company intends to convert substantially all of these systems to 18GHz networks by the end of fiscal 1999. As of February 28, 1997, the Company had 2,777 units passed for cable television and had 1.435 cable subscribers for a penetration rate of 51.7%. This penetration rate is low when compared to the overall cable television penetration rate for the Tampa market of 69% as reported in the Factbook. The Company believes that this is primarily because approximately 1,200 of the units passed for cable television are situated within mobile home parks where penetration rates are typically low. The Company will determine the timing of its offering of telecommunications services and the installation of a central office switch based on its success in entering into a sufficient number of Rights of Entry in the Tampa market. AUSTIN The Company entered the Austin market in July 1994 by entering into certain Rights of Entry. Since that date the Company has increased its market share by entering into additional Rights of Entry. The Company currently services all of its units passed for cable television in the Austin market via SMATV systems. As of February 28, 1997, the Company had 654 units passed for cable television and had 566 cable subscribers for a penetration rate of 86.5%. As of February 28, 1997, the Company had 1,000 units passed for telecommunications and had 1,312 telecommunications subscribers for a penetration rate of 131.2%. The penetration rate is greater than 100% due to one property which is a college residence which has more than one tenant in each unit with separate telephone lines. If this property were excluded, the penetration rate would be 58.8%. The Company will determine the timing of the installation of a central office switch based on its success in entering into a sufficient number of Rights of Entry in the Austin market. 54 NETWORK ARCHITECTURE The Company's networks use technologies that are capable of bi-directional transmission. MDU residents receive service through internal wiring to conventional wall-mounted cable outlets and telephone jacks. The diagram below depicts the Company's network architecture for a typical 18GHz cable television network as it might be enhanced to support telecommunications services: [PICTURE OF NETWORK ARCHITECTURE] CABLE TELEVISION ARCHITECTURE An integral part of the Company's strategy is to link properties to master headends through microwave and fiber optic networks, to the maximum extent practicable. In substantially all markets except Houston, the Company transports video programming to MDUs in one of two ways: (i) by transmitting video programming from a master earth station and headend to the MDU using point-to-point microwave conveyance, generally in the 18GHz frequency range; or (ii) by receiving video programming at a self-contained SMATV headend located at the MDU. In Houston, video programming reaches a majority of the MDUs served by the Company through a fiber optic network that the Company operates pursuant to a franchise from the City of Houston. In certain limited geographic areas, video programming reaches MDUs through a combination of coaxial cable and microwave transmission. 18GHz microwave conveyance requires the operator to install small microwave dishes at each MDU. These dishes receive video programming from a centrally located master headend which must be within the line of sight of the receiving dish. The FCC licenses paths between two points at specific frequency ranges. The video programming may, within limits, be retransmitted at repeater sites. To insure a high quality picture, the Company generally limits the number of repeater sites. For the same reason, the Company generally limits the radius of each microwave link to between three and eight miles, depending on topographic and climatic conditions. 55 The Company intends to convert substantially all of its SMATV systems to 18GHz or fiber optic networks by the end of fiscal 1999. As of February 28, 1997, the Company had 35 18GHz networks and one fiber optic network in service in 11 metropolitan areas and, on average, 54% of the units passed by the Company were served by such networks. Within the MDUs it serves the Company distributes video programming via conventional coaxial cable. In markets where it offers Pay-Per-View channels, the Company uses a combination of traps (electronic filtering devices) and addressable decoder-converter boxes. Where it does not offer Pay-Per-View, the Company uses traps. The Company has recently completed field testing interdiction devices and has begun deploying them in several of its current systems. Interdiction devices will permit the Company to activate and deactivate services or specific channels by remote command from its central office. When implemented, these devices will afford quicker activation and disconnection, eliminate or significantly reduce the need for traps and for decoder-converter boxes in the home, eliminate or significantly reduce service calls and provide better picture quality. The Company believes that these devices will also result in better collection experience, higher levels of penetration and premium service buy-in and greater customer satisfaction. The Company's network design is digital-capable and many of its components are hybrid digital-analog. This will facilitate upgrading to digital compression when economical and required by the marketplace. As well, it will permit integration of video, voice and data into a single signal. TELECOMMUNICATIONS ARCHITECTURE In metropolitan areas where the Company currently offers telecommunications services, the Company uses conventional twisted copper wire pairs to distribute telephone services within an MDU. A PBX switch is installed at the MDU and local traffic from the MDU is transported via leased trunk lines to the LEC central office. From the LEC's central office, local calls are routed through the LEC's network. Long distance traffic is routed via leased trunk lines from the PBX switch to the Company's chosen long distance carrier (currently AT&T). The state regulations for STS operators under which the Company's PBX-based services are provided generally prohibit the aggregation of local telephone traffic between noncontiguous MDUs, and in certain states there are limits or prohibitions on resale of intrastate long distance and local service at a profit. The Company intends to seek certification as a CLEC in each of the states in which it operates. See "-- Regulation." The Company plans to interconnect MDUs to an owned or leased central office switch using its owned fiber optic network and microwave networks and the network facilities of other service providers. The Company plans to offer a high level of reliability by building redundant routes and providing for redundant switches where appropriate. The Company intends to interconnect its central office switch to several long distance carriers' points-of-presence and to the public switched telephone network via the LEC's network. The Company envisions using automatic route selection to connect its subscribers to the most price advantageous long distance provider at any time. The Company's planned telecommunications network architecture includes a national network operations center which will monitor the telecommunications switches and networks in each market. The Company further plans to have its network operations center receive backup monitoring from GVL's planned network operations center once the two centers are in operation. The implementation of the Company's telecommunications roll out plans will depend in some measure on the speed and manner in which states implement (i) the liberalized competition provisions of the Telecommunications Act and (ii) the establishment of the interconnection and tariff requirements that the Telecommunications Act imposes on the incumbent LEC. 56 The Company intends to contract for other ancillary elements of service from the incumbent LEC in each market or from other available carriers. These ancillary services include (i) operator service, (ii) directory listings, (iii) emergency 911 service, and (iv) conveyance where the Company does not have a network. The Company intends to modify its existing networks (currently used to provide video programming) to accommodate two-way digital telecommunications traffic. The Company intends to use its existing network configuration if feasible and to supplement its microwave plant if necessary, including through the use of other available radio spectrum for telecommunications services. The Company currently intends to use 23GHz as its principal frequency to carry telecommunications traffic to and from MDUs from hubs and 6 and 11 Gigahertz as its principal frequencies to carry traffic from hubs to central office switches. However, other than in Dallas, the Company has not yet commenced frequency coordination and there can be no assurance that the Company will be able to obtain licenses for these frequencies on the paths it desires. The Company has selected this frequency because it believes that 23GHz has been used successfully to carry other forms of telecommunications traffic. The Company believes that using 23GHz will enable it to utilize proven equipment manufactured by several vendors. The Company intends to transmit and receive 23GHz signals generally using its existing 18GHz dishes and will be conducting field trials in the near future. The Company may also examine the use of other available frequencies licensed by the FCC for use in telecommunications services, the availability of which cannot be assured. See "Risk Factors -- Risks associated with Telecommunications Strategy." It is also possible that the Company will augment its microwave networks in many markets with fiber optic links between microwave hubs and from hubs to its central switch locations. Particular network architecture in any market will be dependent on, among other factors, bandwith requirements and equipment costs, which are not yet determinable. The Company will use its networks to aggregate MDU long distance and local traffic at its or its selected partners' telecommunications switch. From there, traffic will be delivered to the point of presence of the connecting carrier either through the Company's microwave or fiber networks, or where appropriate, other available means of transport, including those of the interconnecting carriers. NETWORK SERVICES CABLE TELEVISION SERVICES The Company seeks to offer its subscribers a full range of popular cable television programming at competitive prices. The Company's 18GHz networks are capable of delivering up to 72 channels of programming to each MDU. In addition, the programming selections available at an MDU can be tailored to the demographics of each MDU and, unlike franchise cable television operators which may be required to carry all local broadcast channels and public access channels, the Company can utilize all of its available channels to provide popular programming. The Company offers various programming packages to its cable television subscribers. The Company's basic programming package offered to MDUs served by its 18GHz and fiber optic networks typically includes 60 to 72 channels and is generally priced below the rate charged by the incumbent franchise cable television operator for a comparable package. The Company also offers premium television services and regional sports channels. These often feature uninterrupted, full-length motion pictures, sporting events, concerts and other entertainment programming. Premium services are offered individually or in discounted packages with basic or other services. Certain of the Company's systems are capable of offering movies, sporting events, concerts and other special events on a Pay-Per-View basis. 57 The following table lists, as of February 28, 1997, the programming line-up on one of the Company's Phoenix networks which is typical of the programming line-up available on the Company's networks (except that Pay-Per-View services are not offered in all of the Company's markets). 2 PREVUE GUIDE 31 COURT TV 55 E! ENTERTAINMENT TV 3 KTVK (IND) 32 INTERNATIONAL CHANNEL 56 TURNER CLASSIC MOVIES 4 KNXV (ABC) 33 THE WEATHER CHANNEL 57 BRAVO 5 KPHO (CBS) 34 ESPN 58 BET 6 KPAZ (TBN) 35 ESPN 2 59 HOME & GARDEN 7 KTVW (UNIVISION) 36 ARIZONA SPORTS TELEVISION 8 KAET (PBS) NETWORK 60 FXM 9 KUPN (IND) 37 THE GOLF CHANNEL 61 THE DISCOVERY 10 KSAZ (FOX) 38 TNT CHANNEL 11 KASW (IND) 39 WGN/CHICAGO 62 THE LEARNING CHANNEL 12 KPNX (NBC) 40 WTBS/ATLANTA 63 THE HISTORY CHANNEL 13 PROPERTY INFORMATION 41 WWOR/NEW YORK 64 NOSTALGIA CHANNEL 14 HBO* 42 MTV 65 TV FOOD NETWORK 15 HBO 2* 43 VH-1 66 GALAVISION 16 HBO 3* 44 THE NASHVILLE 67 PAY-PER-VIEW 17 CINEMAX* NETWORK (REQUEST 1) 18 CINEMAX 2* 45 COUNTRY MUSIC 68 PAY-PER-VIEW 19 QVC TELEVISION (REQUEST 4) 20 ADVERTISING CHANNEL 46 USA 95 PAY-PER-VIEW 21 SHOWTIME* 47 TV LAND (REQUEST 2) 22 SHOWTIME 2* 48 NICKELODEON 96 PAY-PER-VIEW (VC 1) 23 THE MOVIE CHANNEL* 49 LIFETIME 97 PAY-PER-VIEW 24 THE DISNEY CHANNEL* 50 A&E (ACTION PPV) 25 ENCORE* 51 THE FAMILY CHANNEL 98 ADULT PAY-PER-VIEW 26 CNN 52 COMEDY CENTRAL (ADAM & EVE) 28 CNBC 53 SCI-FI CHANNEL 99 ADULT PAY-PER-VIEW 29 C-SPAN 54 CARTOON NETWORK (SPICE) 30 C-SPAN 2 - ------ * Premium Service The Company purchases copyrighted programming from program suppliers, pursuant to private, negotiated multi-year license agreements. The average term of such contracts is four years and such contracts are typically renewed upon expiration. Generally, the Company pays its programming suppliers a fixed monthly fee per subscriber, subject to volume discounts and reduced rates for MDUs where the Company's services are supplied via bulk sale agreements. The Company is not subject to any material minimum subscriber requirements under its programming license agreements. The video programming broadcast on local television broadcast stations is subject to compulsory copyright license requirements from the copyright owners. The Company is required to obtain retransmission consents from off-air broadcasters but has had little difficulty in obtaining retransmission consent agreements. Non-broadcast programming, often referred to as cable programming, is not subject to the compulsory copyright license. However, federal regulations prohibit (i) cable television operators, satellite cable programming vendors in which a cable television operator has an attributable interest and satellite broadcast programming vendors from charging unfair, unreasonable or discriminatory prices for programming and (ii) most exclusive dealing arrangements whereby cable systems have procured programming that is unavailable to their competition. See "-- Regulation." Although the Company has generally been able to obtain the programming it requires, the Company has been denied certain programming in limited markets by certain providers who claim that the programming is not required to be licensed to the Company. These denials have, and any future denials could have, a material adverse impact on the Company's activities in the affected market. In addition, the prohibition on exclusive distribution arrangements is scheduled to expire on October 5, 2002, unless the FCC finds, during a proceeding to be conducted in 2001, that the prohibition continues to be necessary. The Company plans to take advantage of several industry developments which it believes will enable it to stay competitive with franchise cable television operators. Interdiction. The Company has recently completed field testing interdiction devices and has begun deploying them in several of its current systems. With interdiction devices, basic service, Pay-Per-View and premium channel services can be activated at a subscriber's residence without a service call. Without such devices, each time a customer requests activation or adds a premium channel, a service representative must visit the customer's residence to activate the service or channel. 58 Compression. The Company's network design is digital-capable and many of its components are hybrid digital-analog. The Company currently utilizes digital compression to provide telecommunication services, however, the Company does not currently compress its video programming. The Company intends to implement digital compression of its video programming when economical and required by the marketplace. Pay-Per-View. Pay-Per-View service allows subscribers to select programming, consisting primarily of professional boxing matches, movies, concerts and certain special sporting events, for a separate charge per event. The Company anticipates adding Pay-Per-View services to additional networks over the next few years. It is anticipated that Pay-Per-View subscriptions will increase in the future as additional exclusive events become available for distribution. Advertising. In recent years, there has been an increase in advertising direct to cable television subscribers. Previously, advertising was generally provided by program suppliers, who sell national advertising time which then is included in the video programming they deliver to operators. However, cable networks have begun placing advertisements on channels dedicated exclusively to advertising, as well as in "avails," i.e. time (typically two minutes each hour) set aside by program suppliers for local advertisement insertions. Use of advertising "avails" requires automatic "spot insertion" equipment, which is readily available today at a minimal capital cost. The Company is currently selling advertising time on its Houston and Miami-Ft. Lauderdale systems, and management anticipates the Company will offer advertising on its other systems at a later date. Management does not expect the revenue generated by the sale of advertising on its networks to be material. TELECOMMUNICATIONS SERVICES The Company currently provides its telecommunications services as an STS operator through PBX switches. The Company offers customers access to services provided by regulated telecommunications companies, such as local, long distance, international and "800" telephone services and telephone calling cards. The Company's basic telephone service package includes voice mail, three-way calling and call forwarding. The Company typically provides services at rates which are competitive with or lower than those which customers could otherwise obtain from the LEC. The Company currently provides telecommunications services in Houston, Dallas-Fort Worth, Austin, Denver and Miami-Ft. Lauderdale. The Company is expanding the telecommunications component of its business both by increasing the number of MDUs to which it provides telecommunications services and by expanding the number of services offered. As part of its ongoing telecommunications roll out, the Company intends to replace its PBX switches located at the MDUs with networked central office switches. The Company intends to deploy its first central office switch in the Houston market by mid-1997 and to have installed central office switches in substantially all of its markets by the end of calendar 1999. Commencing in the first half of fiscal 1998, the Company intends to offer high speed Internet access services to MDU residents then receiving the Company's telecommunications services in markets where the Company delivers telecommunication services using the Company's central office switches. The Company also intends to introduce various mobile telecommunications offerings, including paging, cellular and PCS, over the next several years. The Company believes that the offering of these services will not require the Company to incur significant capital or operating costs. The Company plans to explore the possibility of providing additional network-based services to the residents, owners and managers of the MDUs it serves. These may include utility management and intrusion alarm signal transmission. STRATEGIC RELATIONSHIPS WITH MDU OWNERS A critical aspect of the Company's growth strategy is the development of strategic relationships with owners of MDU portfolios. These relationships encourage the MDU owner to promote and sell the Company's cable television and telecommunications services to MDU residents. 59 The Company solicits and negotiates Rights of Entry with owners of national, regional and local portfolios of MDUs, as well as with institutions such as hospitals, universities and hotels. The Company's Rights of Entry typically have original terms of ten to fifteen years (five years for Rights of Entry with condominium associations). The weighted average unexpired term of the Company's cable television Rights of Entry was approximately seven years as of February 28, 1997 (assuming the Company's exercise of available renewal options). Many Rights of Entry provide MDU owners with financial incentives to work closely with the Company to promote its products and services. Financial incentives include revenue sharing and payment of up-front inducements to MDU owners. In addition, the Company believes that the delivery of special services tailored to MDU owners and residents provides marketing advantages to the MDU owner in leasing its units. The Rights of Entry acquired by the Company through its various acquisitions (which represent approximately 74% of the Company's Rights of Entry as of February 28, 1997) have not always contained all of the foregoing terms and provisions. The long-term Rights of Entry negotiated with MDU owners effectively make the Company the exclusive multichannel television provider, leaving MDU residents with the option of receiving multichannel television from the Company or receiving off-air programming from local broadcasters. Rights of Entry covering telecommunications services effectively make the Company the only wire-line alternative to the LEC for telecommunications services. The Company believes that the development of strategic relationships with MDU owners will enable the Company to maintain its preferred competitive position even if the exclusivity of the Rights of Entry becomes limited by future developments. However, statutory limitations on exclusivity could adversely effect the Company's ability to form new strategic relationships with MDU owners and associations and could increase the capital costs associated therewith. See "Risk Factors -- Risks Associated with Rights of Entry." SALES, MARKETING AND CUSTOMER SERVICE Consistent with its business strategy, the Company's marketing goals are to (i) increase market share in existing markets by entering into additional Rights of Entry, (ii) increase penetration at each MDU served by the Company, and (iii) market additional services, such as premium cable services, Pay-Per-View, Internet access, intrusion alarm, utility monitoring and PCS, cellular and paging services, to its subscribers. The Company focuses its marketing efforts on large MDUs located in clusters within its markets and then attempts to obtain Rights of Entry for additional MDUs within the coverage of its existing networks. The Company tailors its marketing efforts to two different constituencies: (i) owners of MDUs who may enter into Rights of Entry and (ii) actual and potential cable television and telecommunications subscribers at MDUs for which the Company has entered into Rights of Entry. Each constituency is served by separate sales and marketing teams that promote the Company's advantages over its competitors in the marketplace. To market to owners of MDUs, the Company maintains a full-time professional sales force which as of February 28, 1997 included 37 sales representatives. Many of the Company's sales representatives have previous experience in commercial real estate sales and leasing. Sales personnel receive incentive compensation in the form of commissions, the level of which is determined by the size of the MDU, the term of the Rights of Entry and the expected revenue per subscriber. Marketing to MDU owners is conducted primarily by (i) using established relationships with property developers, owners and management companies, (ii) direct mail campaigns to owners and apartment managers, (iii) door-to-door canvassing within the coverage of the Company's existing networks, and (iv) attendance at and participation in trade shows, conventions and seminars targeted to the MDU industry. The Company recently has commenced additional marketing activities including compiling a detailed database of potential clients and sales efforts. 60 When marketing to MDUs, the Company emphasizes its advantages over competing multichannel television services including: New Revenue Source for MDU Owner. An MDU owner who enters into Rights of Entry with the Company often receives a percentage of the revenue generated by the MDU. The percentage generally ranges between 6 and 10 percent of such revenue based on penetration. The Company sometimes advances all or part of the revenue participation at the time the Rights of Entry is executed and, in the case of MDUs with strategic significance, may from time to time pay up-front "key-money" in lieu of or in addition to the revenue participation. Property Enhancements. The Company often installs a package of telecommunications and security enhancements at the MDUs it serves, at a nominal cost or at no cost to the MDU owner. For example, the Company can install a monitoring camera at the main entrance that permits MDU residents to identify guests by tuning his or her television set to the building's security channel. In addition, the Company often provides a dedicated information channel that permits the building's management to send messages to the MDU residents over the private cable television system. At current prices, these enhancements are relatively inexpensive for the Company to provide and can be important to MDU owners and property managers concerned with security and emergency communications. New Marketing Tool and Amenity to Rent Apartments. The principal concern of an MDU owner is to rent apartments. The Company's services and property enhancements can serve as an important marketing tool for prospective tenants because such services are generally provided at a lower price than those charged by the franchise cable television operator and the incumbent LEC and long distance carriers. The Company works with on-site managers to emphasize the benefits of the Company's services and the added value and convenience provided by the Company. Once an MDU owner executes Rights of Entry, the Company aggressively markets its services to actual and potential subscribers within the MDU in order to increase penetration rates for basic and additional services. The Company believes that its best opportunity for a sale arises when a subscriber first signs a lease and takes occupancy in an MDU. The Company has therefore developed orientation and incentive programs for on-site property managers and leasing agents, with the objective of enlisting them as the Company's subscriber sales force. In addition, the Company markets to MDU residents through (i) direct mail campaigns, (ii) special promotions and sign-up parties, (iii) establishment of a physical presence at a building (e.g., by setting up a small booth) and (iv) distribution of point-of-sale marketing materials. The Company stresses the following themes when marketing its services to MDU tenants: Simplicity and Convenience. In general, a subscriber can order any of the Company's services through the MDU's leasing agent at the time of lease signing. In addition, in certain of its markets, the Company is able to provide one stop shopping for both cable television and telecommunications services. Superior Channel Capacity and Customized Programming. The number of channels provided by the Company at an MDU generally equals or exceeds that of the local franchise operator in that market. In addition, the programming selections available at an MDU can be tailored to the demographics of the MDU and, unlike franchise cable television operators which may be required to carry all local broadcast channels and public access channels, the Company can utilize all of its available channels to provide popular programming. Lower Price. The Company offers a competitive channel line-up (often including Pay-Per View and premium services) at prices that are generally below those charged by the local franchise cable television operator. Better Service and Picture Quality. The Company seeks to distinguish itself by providing better and more convenient service to its customers. The Company also emphasizes the generally better picture quality and reliability of its microwave delivery system. 61 The Company is committed to providing excellent customer service to MDU owners and subscribers in the home, in the field and on the telephone. The Company believes the most effective means of attracting and retaining MDU owners and subscribers is by providing high quality subscriber service, including: (i) 24-hour-a-day, seven-day-a-week subscriber telephone support; (ii) direct lines to facilitate rapid response to calls initiated by MDU owners and managers; (iii) computerized tracking of all incoming calls to minimize waiting times; (iv) service calls generally made the same day the subscriber indicates a service problem; (v) flexible, seven-day-a-week installation and service appointments; (vi) follow-up calls and on-site inspections to verify subscriber satisfaction; and (vii) 80% of installations completed within 3 business days of receiving the initial installation request, often within 24 hours. The Company also uses focus groups and subscriber surveys to monitor subscriber satisfaction. The Company has developed operational excellence standards for virtually every aspect of the Company's interaction with MDU owners and subscribers. The Company's standards of subscriber service and satisfaction meet or exceed the published standards of the National Cable Television Association. The Company's Operational Excellence Director reports directly to the Chief Operating Officer and has the authority to cross organizational boundaries to achieve results. COMPETITION The multichannel television and telecommunications industries are highly competitive. The Company presently competes with companies that specialize in the provision of multichannel television or telecommunication services and, increasingly, with companies that offer bundled multichannel television and telecommunications services. Many of these competitors are larger companies with greater access to capital, technology and other competitive resources. The Company's private cable television service competes with traditional franchise cable television operators as well as wireless cable television operators, other private cable television operators, DBS, stand-alone satellite service providers and, to a lesser extent, off-air broadcasters. The Company's local telephone service competes with other STS operators, the incumbent LEC, CLECs and CAPs. In addition, future telecommunications offerings, including PCS, may increase competition in the telecommunications industry. Recent and future legislative, regulatory and technological developments will likely result in additional competition, as telecommunications companies enter the cable television market and as franchise cable television operators and interexchange carriers begin to enter the local telephone market. See "-- Regulation." Similarly, mergers, joint ventures and alliances among franchise, wireless or private cable television operators and RBOCs may result in providers capable of offering bundled cable television and telecommunications services in direct competition with the Company. The Company competes with multichannel television operators and telecommunications service providers to obtain Rights of Entry and to enroll subscribers. In most markets serviced by the Company, franchise cable television operators now offer revenue sharing and access fee arrangements to MDU owners. There can be no assurance that these payments will not increase in the future as competition increases for access to the higher quality MDUs. Another basis of competition is the breadth of programming and range of services offered. Although the Company as a matter of course investigates new sources of programming and technologies that may increase its range of services, other larger and more diversified competitors may attract the targeted MDUs based on their increased menu of services. Consequently, the Company may be compelled to reduce its prices and improve its range of services under its existing Rights of Entry which generally require the Company to remain competitive with the market in general. At present, the Company believes that its existing Rights of Entry give it a competitive advantage within its present markets; however, these advantages may deteriorate with changes in regulations, the types of competitors and with technological advances. See "Risk Factors -- Risks Associated with Rights of Entry." 62 Certain of the Company's current and potential competitors are described below. Traditional Franchise Cable Systems. The Company's major competition for Rights of Entry and subscribers in each market comes from the traditional franchise cable television operator. The Company competes with such operators by (i) focusing exclusively on MDUs, (ii) sharing profits with MDU owners, (iii) offering customized programming, and (iv) charging lower rates to subscribers. Multipoint Multichannel Distribution Systems. MMDS systems are similar to the Company's 18GHz networks in that they use microwave transmitting and receiving equipment. MMDS differs from 18GHz in that (i) it "broadcasts" its video programming direct to individual subscribers and not to an MDU's receiver and (ii) its systems transmit in an omni-directional manner, while 18GHz systems are point-to-point. As a result, MMDS wireless cable can provide service to all households within a wireless operator's "line-of-sight." The 2.5GHz spectrum utilized by MMDS wireless cable was initially allocated by the FCC to applicants other than MMDS operators within a given market, with 20 of the available channels generally allocated to educational institutions. As a result, MMDS wireless operators have had difficulty acquiring or leasing the critical mass of channels required to offer a diverse programming lineup. Moreover, absent digital compression technology, channel capacity is limited to 33 analog channels. Local Multipoint Distribution Service. The FCC has recently issued rules reallocating the 28GHz band to create a new video programming delivery service referred to as local multipoint distribution service ("LMDS"). The FCC also has issued a license for the New York City market for one operator that is developing a system to utilize the 28GHz frequency for pay television. As currently proposed, LMDS would provide a single licensee up to 1000 MHz of spectrum for the distribution of programming in each prescribed geographic area. LMDS systems, like MMDS, will use point-to-multipoint microwave distribution for wireless cable services. Unlike MMDS, however, LMDS systems, using the proposed allocation in the 28 GHz band will be able to provide channel capacity equal or greater to that of most cable systems, including the Company's. In addition, LMDS systems that would allow subscriber-to-hub transmissions to facilitate the provision of interactive services and telecommunications have been proposed. However, due to the experimental nature of the technology and the capital costs of building a system, LMDS licensing and system construction in the Company's markets are not expected by the Company to occur in the near term. SMATV Systems. The largest number of private cable companies are operators of SMATV systems. Like the Company, these systems offer a multichannel television service pursuant to rights of entry with MDU owners. Where the Company has introduced or will introduce 18GHz systems, the Company competes with SMATV systems on the basis of (i) larger channel offerings (typically SMATV offers 20 to 40 channels), (ii) the quality of its video programming delivery, (iii) customer service, and (iv) the perceived high price of SMATV relative to the programming package provided. The Company may acquire additional SMATV operations with a view to converting them, where feasible, to 18GHz technology, adding channels and upgrading customer and field service. Direct Broadcast Satellite. DBS systems involve the transmission of encoded video programming direct from a satellite to the home user without any intermediate processing or retransmission by a terrestrial operator. Although prices have been decreasing, DBS service typically requires the purchase of equipment and installation fees which are a significant cost to the subscriber. In addition, subscribers generally pay a monthly programming fee to receive DBS service. Some of these fees are lower than those charged by the Company before consideration of the equipment costs. DBS systems generally offer a significantly larger number of channels and broader programming line-up than offered by the Company. However, the Company believes that it can effectively compete with DBS systems in the MDU marketplace for the following reasons. First, DBS line-of-sight problems are significant (unless an entire MDU is connected to the service) because a DBS antenna must be pointed in the right direction to receive video programming from the satellite. Perhaps more important, other than in so-called "white areas" of the country (generally rural locations without either cable television service or good reception of over-the-air broadcast programming), DBS operators are presently not permitted to retransmit network or local broadcasting programming. Certain DBS operators have announced "MDU programs" which generally consist of either (i) paying commissions to a local satellite dish dealer who has, at its own expense, overbuilt an MDU or (ii) billing MDU owners for the service on a bulk basis. The Company's Rights of Entry currently prohibit an MDU owner from allowing a DBS system to be installed at the MDU. 63 There is considerable debate in the cable industry as to the ultimate market share that DBS systems will achieve and there can be no assurance as to the Company's ability to compete with DBS. The Company has been involved in discussions with several DBS providers regarding the possibility of distributing DBS programming on the Company's cable television networks. No assurance can be given as to the outcome of any such discussions. Telephone Companies. The Telecommunications Act repealed the telecommunications-cable television cross-ownership restriction, which prohibited telecommunications companies from providing video programming directly to subscribers in their telecommunications service areas. Several of the RBOCs have acquired MMDS or other private cable television operators in an effort to begin providing cable television services and several other LECs have indicated their intent to enter the cable television market. Similarly, the Telecommunications Act will in all likelihood result in a significant increase in the number of companies, including CLECs, long distance carriers and wireless telephone operators, offering local telephone service. Many of the Company's telecommunications services compete directly with services offered by the incumbent LECs which currently dominate their local telecommunications markets. These companies all have long-standing relationships with their subscribers and have financial, personnel and technical resources substantially greater than the Company. The Company expects to compete in this market by (i) establishing strategic relationships with MDU owners so as to allow the Company to market effectively to MDU residents, (ii) providing value added, enhanced services to MDU residents, (iii) bundling its telecommunications and cable television services, (iv) providing a high level of customer service and responsiveness, and (v) competitively pricing its products. Wireless Telecommunications. The Company's telecommunications services will also compete with current and future wireless telecommunications offerings, including those of cellular and PCS providers. Wireless telecommunications can be sold to MDU residents without violating the Company's Rights of Entry since wireless telecommunications do not require the use of the Company's network or the MDUs internal wiring. The Company intends to offer all or certain of these services, on a resale basis, directly to its subscribers and to bundle wireless communications with the Company's other offerings. Video Stores. Retail stores rent video cassette recorders ("VCRs") and/or video tapes, and are a major participant in the entertainment video program delivery industry. Videocassette rentals do not compete with cable television operators' news, information, education and public affairs programming. Although management does not believe that video rentals and sales have a material competitive impact on the basic services provided by franchise, private or wireless cable systems, the availability of movies and other programming on videocassette has a competitive impact on the penetration rates for the Company's premium channels and Pay-Per-View programming. The Pay-Per-View window (i.e., the time period after which a theatrical film is released in the Pay-Per-View market) is generally later than the corresponding home video window. Management believes that until this Pay-Per-View window is shortened to coincide with or precede the home video window, any rise in Pay-Per-View penetration rates would be unlikely to come for studio produced feature films. Rather, it would more likely come from sporting events, concerts and cable-exclusive movies not released through theaters. Off-Air Local Broadcasts. Off-air local broadcasts (e.g., ABC, NBC, CBS, Fox and PBS affiliates and independent local stations) provide a free programming alternative to the public. This programming generally offers MDU residents less variety and does not include the specialized entertainment and news programming available only on cable television. Customers who choose it over cable television usually do so on the basis of cost. The Company currently retransmits off-air local broadcasts to its private cable television subscribers, but its ability to do so in the future is generally dependent upon receipt of retransmission consents. See "-- Regulation." 64 REGULATION The multichannel television and telecommunication industries are subject to extensive regulation at the federal, state and local levels. The following summary does not purport to describe all present and proposed federal, state and local regulations and legislation relating to the multichannel television and telecommunications industry. Legislative and regulatory proposals under consideration from time to time by Congress and various federal agencies, as well as state and local franchise requirements, have in the past, and may in the future, materially affect the Company and the multichannel television and telecommunications industries. Additionally, many aspects of regulation at the federal, state and local levels currently are subject to judicial review or are the subject of administrative or legislative proposals to modify, repeal or adopt new laws and administrative regulations and policies. Neither the outcome of these proceedings nor their impact on the Company can be predicted at this time. The Company believes that it is in compliance in all material respects with all federal, state and local regulations applicable to it. In some instances, the Company has acquired businesses that do not comply with all regulations applicable to them and it undertakes to remediate such matters as soon as practicable and in a manner that does not materially adversely impact it. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." Telecommunications Act of 1996 On February 8, 1996, the President signed into law the Telecommunications Act which amended the Communications Act of 1934 (the "Communications Act"). The Telecommunications Act has altered, and will continue to alter, federal, state and local laws and regulations regarding telecommunications providers and services. The law is intended, in part, to promote substantial competition in the marketplace for local telephone service and in the delivery of video and other services. Although the Company believes that certain provisions of the Telecommunications Act will help the Company compete with LECs, it is premature to predict the effect of the Telecommunications Act on the multichannel television and telecommunications industries in general or the Company in particular. In large part, the impact of the Telecommunications Act will depend upon the outcome of various FCC rule making proceedings to interpret and implement the Telecommunications Act, including the FCC's first report and order regarding the interconnection obligations of telecommunications carriers, which currently is under review by the United States Court of Appeals for the Eighth Circuit. Regulation of Cable Television Certain of the Company's networks are, for regulatory purposes, deemed to be "Cable Systems". To constitute a Cable System, a multichannel television system must use hard-wire or fiber optic cable that makes a tangible physical crossing or use of a public right-of-way. As a result, all Cable Systems are required to obtain a local franchise and are subject to state and local regulation as well as federal Cable System regulation. The Company's 18GHz networks and SMATV systems are not considered Cable Systems and thus are not subject to local franchising requirements and are free from most Cable System regulation. The Company's Houston, Texas system, a portion of its Fort Worth, Texas system and certain other small systems are regulated as Cable Systems. However, the Company's Houston, Fort Worth and other small franchise cable television systems are exempt from federal rate regulation and the universal service obligation, even though they are Cable Systems, because they are subject to "effective competition" as discussed in greater detail below. Set forth below is a discussion of the principal laws and regulations governing the Company's private and franchise cable television operations. Federal "Cable System" Regulation The Communications Act, as amended, governs the regulation of Cable Systems. The regulations imposed on Cable Systems include requirements to (i) obtain a local franchise (which may require the franchisee to pay franchise fees to local governments of up to 5% of yearly gross 65 revenues), (ii) delete certain programs from cablecasts, (iii) comply with customer service standards, (iv) retransmit certain broadcast television programming, (v) in most circumstances, conform subscriber service and equipment rates to applicable federal regulations, (vi) comply with federal rate regulations, (vii) comply with FCC equal employment opportunity ("EEO") rules and policies, (viii) make available channels for leased-access programmers at rates that are to be calculated on a formula established by the FCC, and (ix) offer customer service to all buildings passed by its network. Copyright Licensing. Cable Systems and private cable television systems, are entitled to federal compulsory copyright licensing privileges. In order to obtain a compulsory copyright, such systems must make semi-annual payments to a copyright royalty pool administered by the Library of Congress. A compulsory copyright provides a blanket license to retransmit the programming carried on television broadcast stations. Non-broadcast programming, often referred to as cable channel programming, is not subject to the compulsory copyright license. The Company purchases this copyrighted programming from program suppliers (e.g., ESPN), which in turn obtain rights to the programming directly from the program copyright owner pursuant to a private negotiated agreement. Bills have been introduced in Congress over the past several years that would eliminate or modify the cable compulsory license. The need to negotiate with the copyright owners for each program carried on each broadcast station in the channel lineup could increase the cost of carrying broadcast signals or could impair the Company's ability to obtain programming. Must-Carry and Retransmission Consent. The Communications Act grants local television stations the right to elect to either force local Cable Systems to "carry" the television station free of charge (a "must carry" right) or to prohibit Cable Systems and private cable television systems from carrying the local television station (a "retransmission consent" right). Under the must-carry rules, a Cable System, subject to certain restrictions, generally must carry, upon request by the station and depending on the number of usable activated channels on the system, all commercial television stations with adequate signals that are licensed to the same market as the Cable System. Under the retransmission consent rules, Cable Systems and private cable television systems are precluded from carrying commercial broadcast stations that choose not to exercise their must-carry rights, all "distant" commercial broadcast stations (except for "superstations", i.e., commercial satellite-delivered independent stations such as WTBS), commercial radio stations and certain low-powered television stations, without obtaining those stations' explicit written consent for the retransmission of their programming. Retransmission consent agreements do not obviate the need to obtain a copyright license for the programming carried on the broadcaster's signal. However, Cable Systems and private cable television systems may obtain a compulsory copyright license for broadcast programming as described above. To date, the "must carry/retransmission consent" regulations have not had a significant impact on either the operations or profitability of the Company. The Company has had little difficulty obtaining retransmission consent agreements with local broadcasters. Nonetheless, there can be no assurance that broadcasters, in some circumstances, will not withhold retransmission consent, require excessive compensation for that consent or impose onerous conditions thereon. Recent changes in federal law and regulation will likely affect the conduct of the Company's private and franchise cable television business. Changes in the Definition of a "Cable System." Formerly, to avoid being classified as a Cable System, private cable television systems were limited to linking with hard wire only commonly owned or managed MDUs without crossing a public right-of-way. The Telecommunications Act amended the definition of Cable System such that systems which make no use of public streets or public rights-of-way no longer are deemed to be Cable Systems, regardless of the type or ownership of properties served by the system. Thus, for example, the Company's private cable television systems now may serve mobile home parks and private communities without a local franchise and free of most federal Cable System regulations. Elimination of the Telco-Cable Cross-Ownership Restriction. The Telecommunications Act repealed the telecommunications-cable television cross-ownership restriction, which prohibited telecommunications companies from providing multichannel television directly to subscribers in their 66 telecommunications service areas. Telecommunications companies now have several options for entering and competing in the multichannel television marketplace. Telecommunications companies now may: (i) provide video programming to subscribers through radio communications under Title III of the Communications Act; (ii) provide transmission of video programming on a common carrier basis under Title II of the Communications Act (i.e., provide a common carrier video platform); (iii) provide video programming as a Cable System under Title VI of the Communications Act (franchise cable); or (iv) provide video programming by means of an "open video system." Open video systems are not required to comply with the full panoply of federal Cable System regulation, but they are subject to certain additional programming selection limitations. These changes likely will increase the level of competition in the multichannel programming market. Effective Competition. A Cable System subject to "effective competition" is exempt from rate regulation. At present, the Company believes that all of its Cable Systems are subject to "effective competition." Prior to the enactment of the Telecommunications Act, Cable Systems were deemed to be subject to "effective competition" if either: (1) fewer than 30% of the households in the franchise area subscribe to the service of the Cable System; (2) the area is served by at least two unaffiliated multichannel television operators, both of which are able to provide service to at least 50% of the households in the franchise area, and the number of households actually subscribing to all but the largest multichannel television operator exceeds 15%; or (3) the local franchising authority itself offers multichannel television to at least 50% of the households in the franchise area. The Telecommunications Act expanded the definition of "effective competition" to include situations in which a LEC or its affiliate offers multichannel television directly to subscribers by any means (other than direct-to-home satellite services) in the franchise area. It is expected that this change will provide franchise cable television operators with increased pricing flexibility as LECs begin to provide multichannel television services. No assurance can be given that the Company does not, or will not in the future, constitute "effective competition" to any franchise cable television operator with which it competes. Cable Rate Regulation. Rates for basic cable service on Cable Systems not subject to effective competition are regulated by local franchising authorities. Rates for upper tier or "cable programming services" on such systems are regulated by the FCC. The Telecommunications Act eliminates cable programming service tier rate regulation effective March 31, 1999, for all Cable System operators. Rate Relief for Small Cable Operators. The Telecommunications Act deregulated the rates charged for cable programming services in any Cable System operated by a "small cable operator" that serves 50,000 or fewer subscribers. The law defines a "small cable operator" as one which, in the aggregate, serves fewer than one percent of all subscribers in the United States and which is not affiliated with any entity with gross annual revenues in excess of $250 million. This provision may provide increased pricing flexibility for certain of the Company's competitors who qualify as "small cable operators." The Uniform Rate Requirement. Prior to enactment of the Telecommunications Act, the Communications Act generally provided that a Cable System should have a rate structure for the provision of cable service that is uniform throughout its geographic area. The Telecommunications Act provides that this requirement is applicable only where "effective competition" is absent. Further the Telecommunications Act exempts non-predatory bulk discounts offered to MDUs from the uniform rate requirement. Consequently, the franchise cable television operators with which the Company competes now have increased pricing flexibility with respect to MDU bulk discounts. Program Access. The program access provisions of the Communications Act were intended to eliminate unfair competitive practices and facilitate competition by providing competitive access to certain defined categories of programming. Generally, these restrictions are applicable to Cable System operators, satellite cable programming vendors in which a Cable System operator has an attributable interest and satellite broadcast programming vendors. The programming access provisions prohibit these entities from charging unfair, unreasonable or discriminatory prices for programming. Further, the programming access provisions prohibit most exclusive dealing 67 arrangements pursuant to which Cable Systems obtain the exclusive right to distribute the subject programming within their franchise areas. Such exclusive distribution arrangements have been found to inhibit the ability of new entrants to compete in the multichannel television market. The prohibition on exclusive contracts, however, is scheduled to expire on October 5, 2002 unless the FCC determines, during a proceeding that is to be conducted in 2001, that the prohibition continues to be necessary to promote competition in the multichannel television market. The Telecommunications Act amended the program access provisions by adding that the provisions shall also apply to common carriers and their affiliates. Thus, telecommunications companies entering the market will find it more difficult to limit their competitors access to programming. The FCC is in the process of implementing these statutory changes. There can be no assurance that the FCC will not promulgate implementing regulations that will further expand the ability of franchise cable television operators or others to compete with the Company. In addition, the FCC has initiated a review of the rights of various multichannel television service providers to obtain access to MDUs and other private property. The FCC has indicated that it seeks to ensure a level competitive playing field in the emerging multichannel television market. One possibility raised by the FCC is the establishment of a federal mandatory access requirement, which would require property owners to open their property to any number of service providers. In another proceeding, the FCC is contemplating an order preempting state, local and private restrictions on over-the-air reception antennas placed on rental properties or properties not within the exclusive control of the viewer. Although it is open to question whether the FCC has statutory and constitutional authority to compel mandatory access or preempt private restrictions on antennas located on property owned or controlled by others, there can be no assurance that it will not attempt to do so. Either such action would tend to undermine the exclusivity provisions of the Company's Rights of Entry with MDU owners. State and Local "Cable System" Regulation Because Cable Systems use public rights-of-way, they are subject to state and local regulation, typically imposed through the franchising process. State and/or local officials often are involved in the franchisee selection, system design and construction, safety, consumer relations, billing, and community-related programming and services among other matters. Cable Systems generally are operated pursuant to nonexclusive franchises, permits, or licenses granted by a municipality or other state or local government entity. Franchises generally are granted for fixed terms and in many cases are terminable if the franchise operator fails to comply with material provisions of the franchise. Franchising authorities are immune from monetary damage awards arising out of regulation of Cable Systems or decisions made on franchise grants, renewals, transfers and amendments. Cable franchises typically contain provisions governing fees to be paid to the franchising authority, length of the franchise term, renewal, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public rights-of-way and types of cable services provided. Although federal law contains certain procedural safeguards to protect incumbent Cable Systems from arbitrary denials of franchise renewal, the renewal of a cable franchise cannot be assured unless the franchisee has met certain statutory standards. Moreover, even if a franchise is renewed, a franchising authority may impose new requirements, such as the upgrading of facilities and equipment or higher franchise fees. At least two states, Massachusetts and Connecticut, have adopted legislation subjecting Cable Systems to regulation by a centralized state government agency. There can be no assurance that other states will not similarly adopt state level regulation. The Company's Houston cable television franchise and its other limited cable television franchises are subject to state and local franchise laws. Moreover, although 18GHz private cable systems are not subject to local franchise laws, state and local property tax and environmental laws are applicable to the Company's business. For example, the Company has to comply with local zoning laws and applicable covenants, conditions and restrictions when installing its antennae and other microwave equipment. 68 In addition, although regulation in each state differs in some respects, a number of states require that, in exchange for just compensation (typically set by statute or regulation to be as low as $1.00), the owners of rental apartments (and, in some instances, the owners of condominiums and manufactured housing parks) must allow the local franchise cable television operator to have access to the property to install its equipment and provide cable service to residents of the MDU. Such state laws effectively eliminate the ability of the property owner to enter into exclusive Rights of Entry. To the best of the Company's knowledge, the states which have enacted cable mandatory access statutes in some form are: Connecticut, Delaware, Illinois, Kansas, Maine, Minnesota, Nevada, New Jersey, New York, Pennsylvania, Rhode Island and Wisconsin. The District of Columbia and the cities of Scottsdale and Glendale, Arizona, and Lewisville, Texas also have adopted municipal ordinances requiring mandatory access, however, the Company believes that the enforceability of such ordinances is doubtful under existing judicial precedent. Florida currently has a condominium mandatory access statute, but the validity of that statute has been called into question because an identical provision of Florida law that applied to rental properties has been held to be unconstitutional. Virginia's statute on its face permits property owners to exclude whomever they wish as long as the owner accepts no compensation from whomever is permitted to serve the property. The constitutionality of these statutes has been and is being challenged in various states. The Company does not operate in any mandatory access state other than Florida (with respect to condominiums) and Illinois. The Company has recently entered into Rights of Entry in Nevada which is also a mandatory access state. When operating in Illinois, the Company generally enters into bulk sales agreements with MDU owners, whereby the MDU owner agrees to purchase cable television, at a discount, for each unit in the MDU and provides the service to the MDU resident as one of the amenities included in their rent. The Company's business in Illinois to date has not been affected adversely by the mandatory access right of the franchise operators. Individual cities and counties also have the authority to enact cable mandatory access ordinances. To the Company's knowledge, other than as noted above, there are no cities or counties in its markets which have such ordinances. 18GHz and Private Cable Regulation In February of 1991, the FCC made 18GHz frequencies available for the point-to-point delivery of multichannel television. The FCC exercises jurisdiction over 18GHz microwave and other transport technologies using the radio frequency spectrum pursuant to Title III of the Communications Act, which vests authority in the FCC to regulate radio transmissions and to issue licenses for radio stations. The scope, content, and meaning of existing laws, rules and regulations governing 18GHz technology are subject to legislative, judicial and administrative changes. The Company's 18GHz networks must comply with the FCC's licensing procedures and rules governing a licensee's operations. Application to use 18GHz microwave "paths" and frequencies is made to the FCC and is subject to certain technical requirements and eligibility qualifications. After 18GHz paths are licensed to an applicant, the facilities must be constructed and fully operational within 18 months of the grant. The facilities must be built in strict accordance with the terms of the granted application. Most of the Company's licenses are valid for a period of five years from the grant date, however, new licenses are valid for ten years from the date of grant, after which the licensee must apply to the FCC for license renewal. License renewal is not an automatic right, although it is routinely granted if the licensee is in substantial compliance with the FCC rules. Licensing procedures include (i) obtaining an engineering report confirming that the proposed path does not interfere with existing paths and (ii) filing FCC Form 402 which includes a statement of eligibility and use, a system diagram and a statement regarding compliance with the frequency coordination requirement. The entire licensing procedure requires approximately 120 days. The Company does not "own" the paths and frequencies granted by the FCC. Rather, the Company is merely licensed or permitted to "use" the frequencies. Moreover, the rights granted to the Company to use 18GHz frequencies are not to the complete exclusion of other potential licensees. 69 First, the Company's rights only extend to the 18GHz paths identified in its application as connecting the various points in its video distribution system. Other 18GHz microwave users are permitted to file applications and serve the same buildings as the Company (in so far as the 18GHz licensing is concerned), but they may not interfere with an incumbent user's licensed microwave paths. Second, the Company has no right to the airspace over which the programming is transmitted. Obstructions could be constructed in the line-of-sight of the microwave paths, precluding connection of the satellite earth station with the various reception points to be served. The 18GHz band also is authorized for use by other kinds of users, including non-video, point-to-point microwave, mobile communications and satellite down-link transmissions. Although sharing these frequencies is technically feasible, it is possible that the Company will be unable to obtain licenses for these frequencies on the paths it desires, or that it will be able to use only a portion of the frequencies at certain locations because of pre-existing users. Private cable television operators are also subject to certain other federal regulations. First, private cable television operators are entitled to the compulsory copyright license described above. Second, private cable television operators benefit from the federal laws and regulations that require certain programming providers to make cable programming available to all multichannel video programming distributors on fair, reasonable and nondiscriminatory terms. Third, as noted above, private cable television operators are required to obtain retransmission consent from local broadcasters in order to retransmit their signals. Finally, private cable television systems are required to comply with the FCC's EEO rules and policies. The FCC's EEO rules and policies require multichannel television operators to establish and disseminate an EEO program that includes the use of recruiting sources that serve minorities and women, and to evaluate its hiring and promotion practices in comparison to the local labor pool. In addition, the FCC requires systems with six or more full time employees to file an annual EEO report detailing the system's EEO performance. With the exception of local zoning laws and regulations, state and local authorities generally have no jurisdiction over private cable television operators. 23GHz Microwave Regulation The Company anticipates that in the future it will use 23GHz microwave frequencies, which are available for both private or common carrier communications, to provide bi-directional telecommunications services. The application and licensing procedures for authorizations to use the 23GHz frequencies are substantially the same as those applicable at 18GHz. Although the Company expects that 23GHz frequencies will be available on its current paths and to meet its future needs, the Company has not commenced frequency coordination and there can be no assurance that the Company will be able to obtain licenses for these frequencies on the paths it desires. Telecommunications Regulation The Telecommunications services provided by the Company are subject to regulation by federal, state and local government agencies. The Company currently provides its telecommunications services as an STS operator through PBX switches. As the Company implements its telecommunications strategy, which includes replacing its PBX switches with networked central office switches, the Company will increasingly become regulated as a CLEC. The FCC has jurisdiction over interstate services, and state regulatory commissions exercise jurisdiction over intrastate services. Additionally, local authorities may regulate limited aspects of the Company's business, such as the use of public rights-of-way. Shared Tenant Services The Company currently offers telecommunications services as an STS operator to subscribers in Houston, Dallas-Ft. Worth, Austin, Denver and Miami-Ft. Lauderdale. The Company offers STS services to residents of MDUs using conventional twisted copper wire pairs to distribute telephone services within an MDU. A PBX switch is installed at the MDU and traffic from the MDU is transported via leased trunk lines to the LEC central office. From the LEC's central office, local calls 70 are routed through the LEC's network and long distance traffic is routed to the Company's chosen long distance carrier (currently AT&T). By providing MDU tenants with interconnection in this manner, the STS provider (rather than the tenant) subscribes to local exchange service from the telecommunications company, then "resells" service to the MDU tenant. The resale of STS is subject to the terms and conditions in the tariffs of the telecommunications company whose services it resells and to regulation by the states in which the Company resells such services. Historically, virtually all such telecommunications company tariffs flatly prohibited resale of local exchange service. However, in recent years several state legislatures and Public Utility Commissions ("PUCs") have determined that resale of local exchange service is in the public interest and have directed telecommunications companies within their jurisdictions to allow for resale of local exchange service, opening the way for STS operations. In some states, PUCs have issued detailed regulations governing the provision of STS and other resale services. In other jurisdictions where no formal requirements have been adopted, most telecommunications companies have nonetheless modified their tariffs to provide for resale of local exchange services. Although resale of local exchange service is now permitted in most states, the precise terms and conditions under which such resale services may be provided varies from state to state, and from LEC to LEC, and may include significant restrictions and limitations. These include: (i) a requirement to be certified by the state PUC; (ii) restrictions with respect to the location and ownership of MDUs to which STS service may be provided and the crossing of public rights-of-way by STS operator facilities; (iii) regulations allowing telecommunications companies to apply different local service rate structures (e.g., measured use vs. flat rate) to STS providers and other subscribers, in some cases lessening or even eliminating efficiencies which might otherwise be realized through the use of the LECs' trunking facilities; (iv) regulations providing for LEC access or rights-of-way to directly service individual customers within an MDU; and (v) in certain states, limits or prohibitions on resale of intrastate long distance and local service at a profit. Of the six states in which the Company operates, none have adopted regulations governing the provision of STS services. The California PUC has however adopted informal STS "guidelines." In addition, Florida requires providers of STS services to be certified to resell local exchange services. The Company has applied for such certification. Other than the California "guidelines" and Florida's certification requirement, the Company may provide STS services in each of these six states, subject only to individual telecommunications company tariff provisions. The tariffs of all major LECs serving these jurisdictions provide for resale of local exchange service pursuant to varying terms and conditions. Provision of STS service in these states in the future will be subject to any regulations that ultimately may be adopted by state authorities, and to changes in telephone company tariffs. Competitive Local Exchange Carrier Regulation Recent and impending changes in federal law and regulation likely will affect the conduct of the Company's telecommunication service business. The FCC historically has left the regulation of the intrastate aspects of local exchange service to the states. It has, however, exercised its jurisdiction over interstate matters and jurisdictionally mixed matters respecting local telephone service. The Telecommunications Act expands the FCC's authority to regulate local exchange service and there can be no assurance that the FCC will not exercise this authority aggressively. State regulation of local exchange service traditionally has favored the incumbent monopoly LECs (principally the RBOCs and GTE). The state laws have, with the exception of STS, generally prohibited competition in the local exchange. The Telecommunications Act expressly preempts such prohibitions. The Telecommunication Act declares that no state or local laws or regulations may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service. States may, however, impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality and consumer protection. Local authorities may also require reasonable, competitively neutral compensation for use of the public rights-of-way. 71 As a result of these changes, the Company anticipates that it will, in the future, increasingly compete in the telecommunications market as a CLEC. For purposes of the Telecommunications Act, CLECs are subject to all requirements applicable to LECs. However, certain additional obligations imposed on incumbent LECs are not applicable to CLECs. Although the Company does not believe that the regulatory burdens applicable to CLECs will have a material effect on its business, no assurance can be given at this time regarding the extent or impact of such regulation. The Telecommunications Act requires LECs and CLECs to provide interconnection to their networks as well as wholesale rates to resellers of services so that others may compete in the local exchange markets. In addition, LECs and CLECs must provide competing carriers with access to poles, conduits, and rights-of-way and, to the extent feasible, number portability (the ability of a customer switching service providers to retain his or her telephone number). Federal, state and local authorities will share responsibility for regulating the terms and conditions under which CLECs may enter the local exchange markets. For example, the FCC recently issued a series of guidelines that will provide the basis for interconnection agreements between CLECs and the facilities of the incumbent LECs. Among other things, the Telecommunications Act and the FCC's first implementing order require the following: Interconnection. Each telecommunications carrier is now required to interconnect directly or indirectly with the facilities and equipment of other telecommunications carriers. Incumbent LECs are further required to provide interconnection, which is of a quality at least equal to that provided by the incumbent LEC to itself or its affiliates, to any requesting carrier at any technically feasible point in the incumbent LEC's network, on rates, terms and conditions that are just, reasonable and nondiscriminatory. The Telecommunications Act contemplates that interconnection agreements will be negotiated by the parties and submitted to state regulatory authorities for approval. In addition, state authorities may become involved, at the request of either party, if negotiations fail. If the state regulator refuses to act, the FCC may act on the matter. Resale. LECs and CLECs are prohibited from imposing unreasonable or discriminatory conditions or limitations on the resale of their telecommunications services. Number Portability. LECs and CLECs are required to provide, to the extent technically feasible, number portability that will allow customers switching among and between service providers to retain their telephone number. Dialing Parity. LECs and CLECs are required to provide dialing parity to competing providers of local exchange service and toll service, and to permit all such providers to have nondiscriminatory access to telephone numbers, operator services, directory assistance, and directory listing, with no unreasonable delay. Dialing parity means an equal number of digits is required for access to all providers. Access to Rights-of-Way. LECs and CLECs are required to afford access to the poles, ducts, conduits, and rights-of-way to competing carriers of telecommunications services on rates, terms, and conditions that are not unreasonable or unreasonably discriminatory. Reciprocal Compensation. LECs and CLECs are required to establish reciprocal compensation arrangements with other carriers for the transport and termination of traffic. Unbundled Access. In addition to the above, incumbent LECs are required to provide, to any requesting carrier, nondiscriminatory access to network elements on an unbundled basis at any technically feasible point in the incumbent LECs network on rates, terms and conditions that are just, reasonable and nondiscriminatory. Universal Service. All telecommunications carriers are required to contribute to a universal service fund to be established by the FCC. Utility Companies. Finally, the Telecommunications Act provided that registered utility holding companies may provide telecommunications services (including cable television) notwithstanding the 72 Public Utility Holding Company Act. Utilities must establish separate subsidiaries and must apply to the FCC for operating authority. It is anticipated that large utility holding companies will become significant competitors both to cable television and other telecommunications companies. The FCC and various state PUCs are in the process of defining the precise contours of these requirements which will govern local exchange service in the future. Although the Telecommunications Act sets forth certain standards, it also authorizes the states to adopt additional regulations provided that such regulations do not conflict with the federal standards. It is unclear at this time how the states will respond to the new federal legislation, and what additional regulations they may adopt. In addition, several parties have sought reconsideration of the FCC's first implementing order and a number of parties have petitioned for review of the order in several federal courts of appeal. Those petitions have been consolidated before the United States Court of Appeals for the Eighth Circuit, which on October 15, 1996, stayed substantial portions of the FCC's order pending judicial review. It is not possible for the Company to predict the outcome of these proceedings. Nonetheless, at this time it is clear that an increasing number of service providers will be seeking to compete as CLECs in the local exchange markets and that state and federal regulations will, to some extent, allow for such market entry. Although jurisdictional lines of authority and basic implementation issues are being determined by the FCC and the federal courts in accordance with the statutory provisions outlined above, several states already have begun the process of opening the local exchange market to competition. Most states require companies seeking to compete in intrastate telecommunications services to be certified to provide such services. These certifications generally require a showing that the carrier has the financial, managerial and technical resources to offer the proposed services consistent with the public interest. State regulation of telecommunications services may impose upon the Company additional regulatory burdens, including quality of service obligations and universal service contributions. Long Distance Resale Regulation Non-dominant interexchange carriers, such as the Company, are subject to limited federal regulation. Nonetheless, carriers are required by statute to offer their services under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory, and to file tariffs for their international and interexchange services. The Telecommunications Act grants the FCC explicit authority to forbear from regulating any telecommunications service provider if the agency determines that it would be in the public interest to do so. Pursuant to this authority, the FCC previously determined that it would forbear from requiring that non-dominant interexchange carriers file tariffs for their domestic services. The U.S. Court of Appeals for the District of Columbia Circuit, however, has stayed that decision pending court review. As a non-dominant carrier, the Company is permitted to make tariff filings on a single day's notice and without cost support to justify specific rates. The FCC generally does not exercise direct oversight over cost justification and the level of charges for service of non-dominant carriers, although it has the statutory power to do so. The FCC has jurisdiction to act upon complaints brought by third parties, or on the FCC's own motion, against a carrier for failure to comply with its statutory obligations. Foreign Ownership Restrictions Section 301(b) of the Communications Act prohibits foreign controlled companies from holding common carrier radio licenses. To allow the Company to provide common carrier telecommunications services using its networks, in the event that the Company decides it desires to provide such services, the Company has agreed to assign substantially all of its frequency licenses to THI, an entity controlled by United States citizens. To establish the terms of the Company's continued and unencumbered use of the Assigned Licenses, the Company has entered into a license and services agreement pursuant to which THI has agreed to provide to the Company all the transmission capacity it requires or may in the future require and the Company has granted THI a non-exclusive 73 license to use all of the Company's facilities and related equipment, such as microwave transmitting and receiving equipment, required to provide transmission capacity. The Company has also obtained an option to acquire the assets or equity of THI, subject to FCC approval. See "Certain Transactions - -- License Holding Company." EMPLOYEES As of February 28, 1997, the Company employed a total of 452 full-time employees. The Company believes that its continued success will depend in large part on its ability to attract and retain highly skilled and qualified personnel. The Company has nondisclosure agreements with all of its senior executive officers. The Company also regularly uses the services of contract technicians for the installation and maintenance of its networks. None of the Company's employees are currently represented by a collective bargaining agreement. The Company believes that its relationships with its employees are good. PROPERTIES The Company's national call center and its executive, administrative and sales offices are located in Dallas, Texas. The premises lease has a ten year term expiring November 30, 2005, and, as of February 28, 1997, requires monthly rental payments of approximately $50,000. The Company, by exercising an option, can lease additional space at its current location at comparable rates. The Company leases additional space in the cities in which it operates for its regional offices and warehouse operations. The Company is negotiating for the purchase of a building proximate to its executive offices. The Company intends to relocate certain administrative functions to the new facility and to install a central office switch in the building. The Company owns substantially all of the cable television and telecommunications equipment essential to its operations. The Company's major fixed assets are cable television headends, microwave transmitters, SMATV receivers, PBX switches and fiber optic cable. Such properties do not lend themselves to description by character and location of principal units. Substantially all of this equipment (other than fiber optic cable laid under public rights of way) resides on or under the MDUs served by the Company or in leased facilities in various locations throughout the metropolitan areas served by the Company. LEGAL PROCEEDINGS The Company is not a party to any pending material legal proceedings except for those arising in the ordinary course of business. The Company does not believe that these will have a material adverse impact on the Company's financial condition or results of operations. See "Risk Factors -- Use of the Name OpTel" regarding an administrative proceeding before the PTO contesting the Company's right to register the name OpTel. 74 MANAGEMENT The following table sets forth certain information regarding the directors and executive officers of OpTel at February 28, 1997:
Directors Age Position with OpTel - --------------------------- ------- --------------------------------------------------- Claude Chagnon ............ 42 Chairman of the Board and Director Louis Brunel .............. 55 Director; President and Chief Executive Officer Christian Chagnon ......... 41 Director Pierre Collins ............ 40 Director Barry Porter .............. 39 Director Gary Winnick .............. 49 Director Executive Officers Age Position with OpTel - --------------------------- ------- -------------------------------------------------- Louis Brunel .............. 55 President, Chief Executive Officer and Director Rory O. Cole .............. 37 Chief Operating Officer Bertrand Blanchette ....... 39 Chief Financial Officer Vinod Batra ............... 53 Vice President Engineering and Construction Stephen Dube .............. 41 Vice President Acquisitions and Strategic Planning Michael E. Katzenstein .... 37 Vice President Legal Affairs and General Counsel Missy Orr-Ryan ............ 42 Vice President Marketing and Customer Operations William Shepherd .......... 44 Vice President New Business and Product Development Lynn Zera ................. 49 Vice President Human Resources Randy Hughes .............. 42 Vice President Eastern Region William O'Neil ............ 41 Vice President Western Region Thomas Watson ............. 41 Vice President Information Services John Czapko ............... 56 Vice President Sales
Claude Chagnon has served as a Director since August 1996. Since October 1996, he has served as President and Chief Operating Officer of GVL. From January 1994 to October 1996, Mr. Chagnon was Vice Chairman of GVL. Prior to 1994, Mr. Chagnon has held various positions at GVL and its subsidiaries including, from May 1988 to January 1994, President of Videotron Ltee, a Canadian cable television company and wholly-owned subsidiary of GVL. Mr. Chagnon also serves as a Director of GVL, Tele-Metropole Inc., a Canadian broadcaster and subsidiary of GVL, and Provigo Inc., a Canadian food retailer. Louis Brunel has served as a Director since March 1995 and as President and Chief Executive Officer since April 1996. Since 1988, Mr. Brunel has held various positions at GVL and its subsidiaries, including, immediately prior to joining OpTel, Director, Chief Executive Officer and Group Managing Director of Videotron Holdings Plc ("VHP"), a UK cable television/telecommunications company and recently divested subsidiary of GVL. While at VHP, Mr. Brunel was responsible for launching VHP's cable television/telecommunications business. From 1988 to 1990, he served as Vice President-Corporate Development of GVL. In addition, he served as President of Videotron International Ltee ("VIL"), from September 1994 through December 1996. Christian Chagnon has served as a Director since March 1997 and as Senior Vice President Strategic Planning and Technology of GVL since September 1993. Prior to August 1994, Mr. Chagnon was also President of Videotron Services Informatiques Ltee. Mr. Chagnon also serves as a Director of GVL. Pierre Collins has served as a Director since December 1995. Mr. Collins is also the President of Capital Communications CDPQ Inc. ("CDPQ"), a wholly-owned subsidiary of Caisse. From October 1994 to November 1995, Mr. Collins was Executive Vice President of CF Telecom Inc. a Canadian 75 telecommunications company. From March 1994 to October 1994, he was Vice President of Telesysteme Enterprise Ltee. Prior to February 1994, Mr. Collins was Executive Vice President and General Manager of Optinet Telecommunications Inc. Mr. Collins also serves as a Director of GVL. Mr. Collins serves on the board of Teleglobe Inc., a company which is publicly traded in Canada, and on the board of several private companies. Stephen Dube served as Vice President Acquisitions and Strategic Planning for OpTel since July 1995 and as a Vice President of VIL since May 1995. From July 1995 to March 1997, Mr. Dube served as a Director of Optel. From January 1992 to April 1995, Mr. Dube was Senior Vice President of Laurentian Financial Inc., a financial services company. From June 1986 to January 1992, he was Vice President of Alexis Nihon Group, a real estate and venture capital company. Barry Porter has served as a Director since July 1994. Since December 1993, Mr Porter has served as a Managing Director of Pacific Capital Group, Inc., an affiliate of Vanguard Communications, Inc., the general partner of Vanguard. Prior to that, Mr. Porter was Senior Managing Director at Bear, Stearns & Co. Inc. in the investment banking group. In addition, Mr. Porter serves as a Director of Vanguard, Campuslink Communications Systems, Inc., Dycam Inc. and Styles on Video, Inc. Gary Winnick has served as a Director since March 1994. Mr Winnick serves as the Chairman of Pacific Capital Group, Inc. He is a Director of Veritas Holdings GmbH and Campuslink Communications Systems, Inc. Mr. Winnick serves on the Board of Directors of the United States Holocaust Museum and the Simon Wiesenthal Center for Humanitarian Studies, and also serves on the Board of Trustees of Tufts University, the International Board of Governors of Hillel and the Board of Directors of the Sherry-Netherland, Inc. Rory O. Cole was appointed Chief Operating Officer in March 1995. From September 1994 to March 1995, Mr. Cole was Vice President New Market Development of VIL. From September 1990 to September 1994, he was Chief Financial Officer of VHP. From February 1990 to August 1990, he was Corporate Controller of VHP. Prior to this, Mr. Cole held various management positions with Cox Cable, Time Warner and Ernst & Young. Bertrand Blanchette was appointed Chief Financial Officer in September 1996. From September 1995 to December 1996, Mr. Blanchette served as Chief Financial Officer of VHP. From June 1994 to December 1995, he was Vice President Control of GVL. From October 1986 to June 1994, Mr. Blanchette was Vice President Finance of Heroux, Inc., a public manufacturer of airplane parts. Vinod Batra was appointed Vice President Engineering and Construction in June 1996. From March 1995 to June 1996, he was President of and a Senior Consultant at Advanced Communication Consultants, a provider of consulting services relating to business and technical issues for clients in the cable television and telecommunications industries. From August 1986 to March 1995, Mr. Batra was President of American Communication Consultants. Mr. Batra also formerly served as Chairman and CEO of American Communication Consultants. Michael E. Katzenstein was appointed Vice President Legal Affairs, General Counsel and Secretary in November 1995. Prior to joining OpTel, Mr. Katzenstein was a partner (and, prior to January 1993, an associate) at Kronish, Lieb, Weiner and Hellman LLP. Mr. Katzenstein received his J.D. from Boston University School of Law in 1985. Missy Orr-Ryan was appointed Vice President Customer Operations in September 1995 and was given the additional title of Vice President Marketing in August 1996. From September 1991 to August 1995, she was General Manager of Times Mirror Cable Television, Inc. From June 1988 to September 1991, Ms. Orr-Ryan was Director of Corporate Marketing for Times Mirror Cable Television, Inc. William Shepherd was appointed Vice President New Business and Product Development in June 1996. From September 1994 to December 1995, Mr. Shepherd was Vice President Sales and Marketing of Great Lakes Telecommunications Corporation ("Great Lakes"). From December 1995 to February 1996, Mr. Shepherd was Chief Operating Officer of Great Lakes. Great Lakes filed for 76 Chapter 11 Bankruptcy in April, 1996. From January 1992 to September 1994, Mr. Shepherd was President of Continental Communications Corporation, a provider of communications consulting and international transmission resale. From June 1990 to January 1992, Mr. Shepherd was President of North American Telecommunications Corp., a Texas based long distance telephone company. Lynn Zera was appointed Vice President Human Resources in November 1995. From July 1994 to October 1995 Ms. Zera was Executive Director of Keystone Consulting. From July 1993 to July 1994, she was Executive Director of Human Resources of Intellicall, Inc., a telecommunications company. From March 1978 to January 1993, she held various management and marketing positions with Oryx Energy, a company involved with the production and exploration of oil and gas. Randy Hughes was appointed Vice President Eastern Region in September 1995. From May 1994 to September 1995, he was District General Manager of Charter Communications, a cable television Company. From March 1993 to May 1994, Mr. Hughes was Regional Operation Manager of McDonald Investments and, from September 1988 to March 1993, he was District Manager of United Video Cablevision, both cable television companies. William O'Neil was appointed Vice President Western Region in February 1995. From January 1990 to January 1995, he was Director of Operations of Cable London, Plc a cable television and telecommunications company. Thomas Watson was appointed Vice President Information Services in September 1996. From January 1992 to September 1996, Mr. Watson held various positions at GTE Telephone Operations, a local exchange carrier, including, Group Product Manager, Group Manager Engineering and Senior Program Manager. From June 1990 to January 1992, he was Group Engineer Manager for GTE Government Systems Corporation, a software developer. John Czapko was appointed Vice President Sales in March 1997. From September 1993 to February 1997, Mr. Czapko was Director of Indirect Distribution of Metrocel Cellular Telephone Company ("Metrocel"). From June 1991 to September 1993, he was Director of Direct Distribution of Metrocel. Prior to that, Mr. Czapko was Director of Spectrum Management of Primeco Personal Communications where he helped develop and launch their new wireless PCS networks. BOARD OF DIRECTORS Number and Term of Office. All of the Issuer's directors have been elected by VPC and Vanguard pursuant to a Stockholders' Agreement, dated as of December 22, 1994, between VPC, Vanguard, Vanguard Communications, Inc., the general partner of Vanguard (the "General Partner"), and the Issuer, as amended to date (the "Stockholders' Agreement"). Pursuant to the Stockholders' Agreement, the Board of Directors ("Board") shall consist of at least seven members which shall be designated as follows: (i) for so long as Vanguard's owns at least 30% of the outstanding Common Stock, VPC shall designate at least four nominees and Vanguard shall designate three nominees (the "Vanguard Nominees") and (ii) for so long as Vanguard's owns at least 10% of the outstanding Common Stock, VPC shall designate at least five nominees and Vanguard shall designate two nominees. For so long as Pacific Capital Group, Inc. ("Pacific"), an affiliate of the General Partner, has an economic interest in Vanguard, Pacific shall be entitled to designate the Vanguard Nominees. In addition the Stockholders' Agreement provides that no action of the Board shall be taken without the affirmative vote or consent of at least two of VPC's nominees. Messrs. Chagnon, Brunel, Collins and Dube were appointed by VPC and Messrs. Porter and Winnick were appointed by Vanguard. Mr. Collins was appointed as the nominee of Caisse pursuant to the GVL Shareholders' Agreement. There is currently one vacancy on the Board. Powers of the Directors. The directors may exercise all of the powers which may be exercised by the Issuer and which are not by law, the Certificate of Incorporation, or the Bylaws reserved or required to be performed by Stockholders. A majority of the directors then in office shall constitute a quorum and an act of a majority of the directors present at a meeting at which there is a quorum shall be an act of the Board with respect to any matter, provided, however, that no action of the Board shall be taken without the affirmative vote or consent of at least two of the members nominated by VPC. 77 Committees. The Board may delegate any of its powers and authority to one or more committees. Each committee shall consist of one or more of the directors of the Issuer. The Board may designate one or more directors as alternate members of any committee to replace any absent or disqualified member at any meeting of any such committee. The Stockholders' Agreement, provides for an Executive Committee but none has been formed to date. To the extent permitted by law, the Executive Committee has all of the powers and may exercise all of the authority of the Board in the management of the business and affairs of the Issuer. The Board has an Audit Committee and a Compensation Committee. The functions of the Audit Committee include recommending to the Board the retention of independent public accountants, reviewing the scope of the annual audit undertaken by the independent public accountants and the progress and results of their work and reviewing the financial statements of the Company and its internal accounting and auditing procedures. The Audit Committee is composed of Messrs. Claude Chagnon, Collins and Porter. The functions of the Compensation Committee are to supervise the Company's compensation policies, administer the employee incentive plans, review officers' salaries and bonuses, approve significant changes in employee benefits and consider other matters referred to it by the Board. The Compensation Committee is composed of Messrs. Claude Chagnon, Collins, Brunel and Winnick. EXECUTIVE COMPENSATION The following table sets forth certain information concerning compensation awarded to or paid to the Company's Chief Executive Officer and the four most highly compensated executive officers for the fiscal year ended August 31, 1996 and the eight months ended August 31, 1995. None of the named executive officers were employed by the Company prior to December 31, 1994. SUMMARY COMPENSATION TABLE
Annual Compensation ----------------------------------------------- Name and Principal Year/Period Salary Bonus Other Annual All Other Position(1) Compensation Compensation(2) Louis Brunel 1996 $ 35,095(3) $ -- $ -- $ -- President and Chief 1995 $ -- $ -- $ -- $ -- Executive Officer Rory Cole 1996 $175,000 $36,500 $ 19,394(9) $4,750 Chief Operating Officer 1995 $102,980(4) $ -- $ 22,405(10) $ -- Michael Katzenstein 1996 $135,346(5) $40,000(8) $103,756(11) $3,334 Vice President Legal 1995 $ -- $ -- $ -- $ -- Affairs and General Counsel Julian Riches 1996 $130,000 $ -- $ 21,450(12) $ -- Treasurer 1995 $ 36,006(6) $ -- $ 33,099(13) $ -- William O'Neil 1996 $120,000 $12,000 $ 7,056(14) $4,620 Vice President Western 1995 $ 69,230(7) $ -- $ 13,757(15) $ -- Region Harry Nicholls(16) 1996 $150,000 $18,750 $ 21,461(17) $4,500 Vice President Marketing 1995 $ 71,875 $ -- $ 34,994(18) $ --
- ------ (1) Mr. Bertrand Blanchette commenced employment with the Company as Chief Financial Officer in September 1996. During the period September 1996 through December 1996, Mr. Blanchette continued to act as Chief Financial Officer of Videotron Holdings Plc. ("VHP"), a subsidiary of GVL which was divested in December 1996. During such period, Mr. Blanchette's salary was paid by VHP and a portion of such salary was allocated to the Company. Mr. Blanchette commenced full-time employment with the Company effective January 1, 1997, at an annual salary of $150,000. During the fiscal year ended August 31, 1996, Mr. Dube was paid primarily by GVL. Beginning June 1, 1996, a portion of Mr. Dube's salary was allocated to the Company. Effective January 1, 1997, Mr. Dube accepted the position of Vice President Acquisitions and Strategic Planning on a full-time basis at an annual salary of $145,000. 78 (2) Represents 401(k) matching funds. (3) During the fiscal year ended August 31, 1996, Mr. Brunel was paid primarily by GVL. Beginning June 1, 1996, a portion of Mr. Brunel's salary was allocated to the Company. Effective November 1, 1996, Mr. Brunel accepted the position of President and Chief Executive Officer on a full-time basis at an annual salary of $275,000. (4) Mr. Cole commenced employment with the Company in February 1995, at an annual salary of $175,000. (5) Mr. Katzenstein commenced employment with the Company in November 1995, at an annual salary of $170,000. (6) Mr. Riches commenced employment with the Company in April 1995, at an annual salary of $130,000. (7) Mr. O'Neil commenced employment with the Company in February 1995, at an annual salary of $120,000. (8) Represents a signing bonus paid to Mr. Katzenstein. (9) $10,076 represents an automobile allowance, $8,313 represents tax reimbursements resulting from relocation and the remainder represents relocation payments. (10) The entire amount represents relocation payments. (11) $93,706 represents relocation payments and the remainder represents a Company automobile. (12) $11,550 represents tax reimbursements resulting from relocation, $6,000 represents an automobile allowance and the remainder represents relocation payments. (13) $31,600 represents relocation payments and the remainder represents an automobile allowance. (14) $6,000 represents an automobile allowance and the remainder represents tax reimbursements resulting from relocation. (15) The entire amount represents relocation payments. (16) Mr. Nicholls is no longer employed by the Company. (17) $11,640 represents tax reimbursements resulting from relocation, $6,000 represents an automobile allowance and the remainder represents relocation payments. (18) $32,494 represents relocation payments and the remainder represents an automobile allowance. COMPENSATION OF DIRECTORS None of the Directors of the Company are compensated for their service as directors of the Company. However, all directors are reimbursed for actual out-of-pocket expenses incurred by them in connection with their attending meetings of the Board or any committees of the Board. EMPLOYMENT AGREEMENTS Louis Brunel is employed as President and Chief Executive Officer of the Company pursuant to an at will employment agreement. Under the employment agreement, Mr. Brunel currently receives an annual base salary of $275,000, a Company automobile and a housing allowance. In addition, Mr. Brunel is entitled to participate in the Company's Incentive Stock Plan, Bonus Plan (as defined) and Performance Plan (as defined). If Mr. Brunel's employment is terminated by the Company for other than cause, Mr. Brunel will receive a severance payment equal to two year's base salary. Rory Cole is employed as Chief Operating Officer of the Company pursuant to an at will employment agreement. Under the employment agreement, Mr. Cole currently receives a base salary of $185,000 and a Company automobile. In addition, Mr. Cole is entitled to participate in the Company's Incentive Stock Plan, Bonus Plan and Performance Plan. If Mr. Cole's employment is terminated for any reason, Mr. Cole will receive a severance payment equal to one year's base salary. Michael Katzenstein is employed as Vice President Legal Affairs, General Counsel and Secretary of the Company pursuant to an employment agreement expiring in November 1998. Under the employment agreement, Mr. Katzenstein currently receives an annual base salary of $170,000 and a Company automobile. Mr. Katzenstein received a signing bonus of $40,000 in 1996. In addition, Mr. Katzenstein is entitled to participate in the Company's Incentive Stock Plan, Bonus Plan and Performance Plan. Julian Riches is employed as Treasurer of the Company pursuant to an employment agreement expiring May 1998. Under the employment agreement, Mr. Riches currently receives an annual base salary of $130,000 and an automobile allowance. In addition, Mr. Riches is entitled to participate in the Company's Incentive Stock Plan and Bonus Plan. If Mr. Riches' employment is terminated by the Company for other than cause, Mr. Riches will receive a severance payment equal to one year's base salary and reimbursement of expenses relating to his relocation to the United Kingdom. 79 INCENTIVE STOCK PLAN In fiscal 1997, the Company adopted an Incentive Stock Plan (the "Plan"), pursuant to which options to acquire a maximum of 95,137 shares of Class A Common may be granted to certain executives of the Company. The Plan authorizes the Board to issue incentive stock options, as defined in Section 422A(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and stock options which do not conform to the requirements of that Code section. The Board has discretionary authority to determine the types of options to be granted, the persons to whom options shall be granted, the number of shares to be subject to each option granted and the terms of the stock option agreements. Unless otherwise specifically provided in the option agreement, (i) the exercise price of an option will not be less than the fair market value, as determined by the Board, of the Class A Common on the date of the grant and (ii) the options will vest in equal installments on each of the second, third, fourth and fifth anniversaries of the date of grant. In the event of a "change of control," all options shall vest and become immediately exercisable. The exercise price may be paid in cash, certified or bank check, through the delivery of shares of Class A Common pursuant to a broker-assisted "cashless exercise" program if established by the Company or by such other method as the Committee may deem appropriate. Subject to certain exceptions, during the period of 45 days after the termination of an executive's employment with the Company, the Company shall have the right to purchase all, but not less than all, of the shares of Class A Common acquired by such executive pursuant to the exercise of options issued under the Plan at the fair market value of such shares as of the date on which such executive's employment was terminated (the "Call") and the executive shall have the right to sell to the Company all, but not less than all, of the shares of Class A Common acquired by such executive pursuant to the exercise of options issued under the Plan at the fair market value of such shares as of the date on which such executive's employment was terminated (the "Put"). Both the Call and the Put shall expire on the date of an initial public offering of the equity securities of OpTel (the "IPO Date"). Prior to the IPO Date, holders of Class A Common shares issued upon the exercise of options issued under the Plan may not transfer or sell any of such shares except pursuant to a bona fide written offer to purchase such shares for an all cash purchase price ("third party offer") and only after such shares have first been offered to the Company. The Company shall have the option to purchase all (but not less than all) of the Class A Common shares subject to the third party offer at the price per share set forth in the third party offer. ANNUAL BONUS PLAN AND MEDIUM TERM PERFORMANCE PLAN The Company has adopted an Annual Bonus Plan (the "Bonus Plan") and a Medium Term Performance Plan (the "Performance Plan") pursuant to which the Board is authorized to grant cash bonuses to certain officers of the Company. Bonuses are payable only if the Company achieves certain performance targets approved by the Compensation Committee at the beginning of the fiscal year, in the case of the Bonus Plan, or three year period, in the case of the Performance Plan. LIMITATION OF DIRECTOR'S LIABILITY; INDEMNIFICATION; INSURANCE The Issuer's Certificate of Incorporation provides that the Issuer shall, to the fullest extent permitted by the General Corporation Law of the State of Delaware, as amended from time to time (the "DGCL"), indemnify all persons whom it may indemnify pursuant thereto (i.e., directors and officers) and shall advance expenses incurred in defending any proceeding for which such right to indemnification is applicable, provided that, if the DGCL so requires, the indemnitee provides the Issuer with an undertaking to repay all amounts advanced if it is determined by a final judicial decision that such person is not entitled to indemnification pursuant to this provision. The Issuer's Certificate of Incorporation also contains a provision eliminating, to the fullest extent permitted by Delaware law, the personal liability of the Issuer's directors for monetary damages for breach of any fiduciary duty. By virtue of this provision, under current Delaware law, a director of the Issuer will not 80 be personally liable for monetary damages for breach of his fiduciary duty as a director, except for liability for (i) any breach of the director's duty of loyalty to the Issuer or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) dividends or stock purchases or redemptions that are unlawful under Delaware law, and (iv) any transaction from which a director derives an improper personal benefit. However, this provision of the Issuer's Certificate of Incorporation pertains only to breaches of duty by directors as directors and not in any other corporate capacity such as officers, and limits liability only for breaches of fiduciary duties under Delaware corporate law and not for violations of other laws, such as the federal securities laws. As a result of the inclusion of such provision, stockholders may be unable to recover monetary damages against directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. The inclusion of this provision in the Issuer's Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Issuer and its stockholders. The directors and officers of the Company are insured (subject to certain exceptions and deductions) against liabilities that they may incur in their capacity as such, including liabilities under the Securities Act, under a liability insurance policy carried by GVL. Such policy provides coverage in an aggregate amount of $50 million (subject to a $250,000 retention) and expires on October 24, 1997. 81 PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of February 28, 1997 regarding the beneficial ownership of OpTel's Common Stock by the owners of 5% or more of the Common Stock and by all directors and executive officers of the Company as a group. As of February 28, 1997, securities convertible into, or exercisable for, approximately 1,970,434 shares of Common Stock were outstanding, of which 1,801,367 were underlying the Convertible Notes (assuming the conversion of the Convertible Notes on April 30, 1999 at a formula provide in the terms of the Convertible Notes if no initial public offering were to occur by such date).
Number of Shares Percentage of Common Stock Name and Address of Beneficial Owner Beneficially Owned Beneficially Owned - ------------------------------------------ ------------------- -------------------------------- Voting Rights Equity Interest ------------- -------------- Le Groupe Videotron Ltee(1) ................... 1,923,977 83.49 76.06 300 Viger Avenue East Class B Common Montreal, Quebec H2X3W4 Vanguard Communications, Inc.(2) .............. 429,521(3) 18.25(3) 16.66(3) 150 El Camino Drive, Suite 204 Class B Common Beverly Hills, California 90212 All directors and executive officers as a group 0 0 0 (17 persons)
- ------ (1) Such shares are owned by the VPC, an indirect wholly-owned subsidiary of GVL. As described below, VPC has agreed to certain restrictions on its abilities to transfer or otherwise dispose of such shares. Andre Chagnon, the founder of GVL, indirectly controls approximately 68% of GVL's outstanding voting rights. Pursuant to the terms of the GVL Shareholders' Agreement for as long as GVL controls the Company, Caisse will have certain rights with respect to the Company as described below. (2) Such shares are owned by Vanguard for which Vanguard Communications, Inc. is the general partner. As described below, Vanguard has agreed to certain restrictions on its ability to transfer or otherwise dispose of such shares. Gary Winnick, the Chairman of the Board of Directors of Vanguard Communications, Inc. and its President and Chief Executive Officer has a controlling interest in Vanguard Communications, Inc. Prior to VPC acquiring control of the Company, Pacific and its affiliates, including Vanguard Communications, Inc. founded, controlled and financially sponsored the Company. The Company has been advised that Vanguard has reached an agreement in principle for the sale of its interest to an affiliate of Caisse and that GVL, VPC and Caisse have reached an agreement in principle with respect to certain changes to the Issuer's Certificate of Incorporation and the Stockholders' Agreement, including the possible conversion of certain outstanding Convertible Notes. No assurance can be given as to when, or if, such sale will be consummated or the terms of any such sale. (3) Includes 48,937 shares of Class B Common issuable upon exercise of the Vanguard Option (as defined). Without giving effect to the Vanguard Option, Vanguard beneficially owns 16.51% of the voting rights and 15.05% of the outstanding equity interest. See "Certain Transactions." STOCKHOLDERS' AGREEMENT Transfer Restrictions/Rights of First Refusal. Pursuant to the terms of the Stockholders' Agreement, the holders of the Issuer's Common Stock are prohibited from transferring any shares of Common Stock, other than transfers to affiliates of such holder with the consent of the Board. In addition, except to the extent required by law, Vanguard and the General Partner are prohibited from transferring or distributing any of the Common Stock owned by Vanguard to Vanguard's partners prior to the IPO Date. Prior to the IPO Date, Vanguard may, subject to certain conditions, solicit offers from Institutional Investors (as defined in the Stockholders' Agreement) to purchase all, but not less than all, of the shares of Common Stock held by Vanguard. Any such offer, however, is subject to a right of first refusal, in favor of VPC and the Issuer, pursuant to which VPC or the Issuer may purchase the Common Stock offered on the same terms and conditions. The Company has been advised that Vanguard has reached an agreement in principle for the sale of its interest to an affiliate of Caisse and that GVL, VPC and Caisse have reached an agreement in principle with respect to certain 82 changes to the Issuer's Certificate of Incorporation and the Stockholders' Agreement, including the possible conversion of certain outstanding Convertible Notes. No assurance can be given as to when, or if, such sale will be consummated or the terms of any such sale. In addition, certain holders of partnership interests in Vanguard have agreed not to transfer their interests, subject to limited exceptions. If a holder of an interest in Vanguard who is not subject to this restriction, proposes to dispose of their interest in Vanguard, the General Partner shall provide notice to the Issuer and VPC of such proposed transfer, and VPC, or at VPC's election, the Issuer shall have the right to purchase such interest at the price and terms provided for in Vanguard's Partnership Agreement, dated as of April 15, 1993, as amended to date. If VPC or the Issuer acquires any interest in Vanguard pursuant to these agreements, if VPC or the Issuer, as the case may be, so elects, Vanguard will redeem or purchase the partnership interests in exchange for shares of Common Stock which would be distributed with respect to such partnership interests if Vanguard were then liquidated. Preemptive Rights. Until the earlier of the IPO Date and July 31, 1999, the Issuer shall not issue or sell to VPC or Vanguard or any of their respective affiliates any additional shares of capital stock of the Issuer, or any options or other rights to acquire any such capital stock, except with the consent of both VPC and Vanguard in each instance. All investments during such period by VPC or Vanguard are expected to be generally in the form of the Convertible Notes, except they will include subordination terms that will cause them to be "Deeply Subordinated Shareholders Loans" for purposes of the Indenture. Subject to the foregoing, if the Board requests as necessary for the financing of the Company and VPC so elects, VPC may purchase from the Issuer one or more convertible promissory notes on substantially the same terms as the outstanding Convertible Notes (except they will include subordination terms that will cause them to be "Deeply Subordinated Shareholders Loans" for purposes of the Indenture), subject to Vanguard's right to participate, after providing written notice to Vanguard (the "Purchase Notice"). Within 60 days after receipt of a Purchase Notice, Vanguard may elect to participate in such financing in proportion to its ownership interest in the Issuer at the time of the Purchase Notice, except that Vanguard may not exercise such right in any instance as to less than 10% of the aggregate principal amount of the convertible promissory notes to be sold. If, prior to the IPO Date but after July 31, 1999, the Board determines to issue additional shares of Common Stock, VPC may require that such shares be Class B Common and, subject to Vanguard's right to participate, VPC may purchase, after providing a Purchase Notice to the Issuer and Vanguard, any or all of such additional shares at the Valuation Price (as defined in the Stockholders' Agreement). Within sixty days after receipt of a Purchase Notice, Vanguard may elect to participate in such financing in proportion to its ownership interest in the Issuer at the time of the Purchase Notice, in which event the number of additional shares to be purchased by VPC shall be reduced by the number of shares purchased by Vanguard. Drag Along/Tag Along Rights. If, prior to the IPO Date, VPC elects to sell a controlling interest in the Issuer, VPC may require Vanguard to join in such a sale in the same proportion and on the same terms. If VPC elects to sell ten percent or more of the Common Stock owned by it (other than in a public offering), Vanguard has the right to join in such sale in the same proportion and on the same terms. If VPC elects to sell fifty percent or more of the Common Stock owned by it (other than in a public offering), Vanguard has the right to join in such sale and may sell all of its shares on the same terms. If, prior to the IPO Date, VPC ceases to be an affiliate of GVL, then for a period of 120 days after such change in control, Vanguard may sell all or any part of the Common Stock owned by it to the entity then controlling VPC on terms no less favorable than those in the transaction which resulted in such entity acquiring control of VPC. TAG ALONG/DRAG ALONG RIGHTS OF NON-VOTING COMMON Subject to certain exceptions, until the consummation of a public offering of the Common Stock, as a result of which at least 15% of the outstanding shares of Common Stock are listed on a national 83 securities exchange or on the Nasdaq National Market (a "Qualified Offering"), and provided that GVL beneficially owns more shares of Common Stock (assuming the conversion of the Convertible Notes on April 30, 1999 at a formula provided for in the terms of the Convertible Notes if no initial public offering were to occur by such date) than any other person, then in the event of any transfer of beneficial ownership of Common Stock or Convertible Notes by GVL to any person (a "Proposed Purchaser"), each holder on Non-Voting Common or securities issued or issuable with respect to the Non-Voting Common ("Registrable Securities") may require the Proposed Purchaser to purchase on the same terms the proportion of the Registrable Securities held by such holder equal to the number of shares of Common Stock (and, in the case of Convertible Notes, the number of shares of Common Stock then represented thereby) that GVL proposes to transfer divided by the total number of shares of Common Stock beneficially owned by GVL. If the transfer by GVL results in GVL owning less than a majority of the Common Stock (assuming the conversion of the Convertible Notes on April 30, 1999 at a formula provided for in the terms of the Convertible Notes if no initial public offering were to occur by such date), each holder of Registrable Securities has the right to require the Proposed Purchaser to purchase all of the Registrable Securities owned by such holder. Until the consummation of a Qualified Offering, and provided that GVL beneficially owns a majority of the outstanding Common Stock (assuming the conversion of the Convertible Notes on April 30, 1999 at a formula provided for in the terms of the Convertible Notes if no initial public offering were to occur by such date), if GVL determines to sell all of the Common Stock and Convertible Notes beneficially owned by GVL to any person other than an affiliate or a Permitted Holder, GVL has the right to require the holders of Registrable Securities to sell all of the Registrable Securities to the purchaser at the same price per share paid by the purchaser to GVL. GVL SHAREHOLDERS' AGREEMENT Caisse, CDPQ, Sojecci Ltee and Sojecci (1995) Ltee, the principal shareholders of GVL, and Andre Chagnon are parties to the GVL Shareholders' Agreement, which provides, among other things, that for so long as GVL controls the Issuer, Caisse will be allowed to select one of GVL's nominees to the Board of Directors of the Issuer and to have one representative on the Audit Committee of the Issuer, subject to any prior commitments made by GVL to other stockholders of the Issuer and certain other conditions. In addition, the principal shareholders of GVL have agreed they shall not allow the Company to take certain actions without the consent of Caisse, including the incurrence of additional indebtedness or any acquisition or merger, each outside the normal course of business, or the issuance of additional capital stock of the Issuer. REGISTRATION RIGHTS Vanguard has the right, subject to certain conditions, to cause the Issuer to register under the Securities Act not more than one-half of the shares of Class A Common issuable upon conversion of the Class B Common then owned by Vanguard. This demand right may be exercised at any time on or after the earlier of (i) September 30, 1997 or (ii) one year after the IPO Date. If Vanguard exercises its demand registration right, VPC has the option to purchase all of the securities proposed to be offered by Vanguard in such registration (the "Purchase Option"). In the event that VPC exercises the Purchase Option, Vanguard will be entitled to one additional demand registration right, exercisable not earlier than one year after the exercise of the Purchase Option, which demand right shall permit Vanguard to register all of the Class A Common issuable upon conversion of the Class B Common then owned by Vanguard. In the event that the Issuer proposes to register any of its equity securities under the Securities Act, including in connection with an initial public offering, Vanguard will be entitled to notice of such registration and to include therein the shares of Class A Common issuable upon conversion of the Class B Common held by them, provided that Vanguard may not exercise this right with respect to less than 20% of the securities held by it. Vanguard shall be entitled to such "piggyback" 84 registration rights in the Issuer's initial public offering and in each of the two subsequent Issuer offerings. The managing underwriter of any such offering, however, may limit the number of shares to be included in such registration by Vanguard if, in the opinion of the managing underwriter, the distribution of all or a portion of the securities requested to be included in the registration by Vanguard would materially adversely affect the distribution of securities by the Issuer. Notwithstanding the foregoing, Vanguard will have priority over the Issuer with respect to the inclusion of any such cutback securities in the registration for the purpose of satisfying any exercise of an underwriters' over-allotment option. In addition, in the event that the Issuer proposes to register any of its equity securities under the Securities Act, including in connection with an initial public offering, Mr. Kofalt, a former director and Chairman of the Board of the Company, will be entitled to notice of such registration and to include therein the shares of Class A Common issuable upon exercise of the Kofalt Warrant. Mr. Kofalt shall be entitled to one such "piggyback" registration. The managing underwriter of any such offering, however, may limit the number of shares to be included in such registration by Mr. Kofalt if in the opinion of the managing underwriter the distribution of all or a portion of the securities requested to be included in the registration by Mr. Kofalt would materially adversely affect the distribution of securities by the Issuer. Generally, the Issuer is required to bear the expenses of all requested registrations, provided that any selling stockholder will be required to bear their pro rata share of the underwriting discounts and commissions and certain other specified expenses. The holders of one-third or more of the Registrable Securities have the right, subject to certain conditions, to cause the Issuer to effect one registration under the Securities Act of the Registrable Securities. This demand right may be exercised at any time after the earlier to occur of (i) February 15, 2002, (ii) the date immediately prior to a Change of Control, (iii) the 90th day after a primary public offering of Common Stock or (iv) other than as a result of an initial public offering, the date on which a class of common equity securities of the Issuer is listed on a national securities exchange, is authorized for quotation on the Nasdaq National Market or is otherwise subject to registration under the Exchange Act. In the event that the demand right is exercised, the Issuer may satisfy its obligations with respect to such demand by making and consummating an offer to purchase all Registrable Securities at a price at least equal to the current market value of the Registrable Securities. In the event that the Issuer proposes to register Common Stock under the Securities Act, the holders of Registrable Securities are entitled to notice of such registration and to include such Registrable Securities therein, subject to certain exceptions. The number of Registrable Securities to be included therein is subject to the terms of certain other existing registration rights agreements and to a pro rata reduction to the extent that the Issuer is advised by the managing underwriter therefor that the total number or type of Registrable Securities and other securities proposed to be included therein is such as to materially and adversely affect the success of the offering. 85 CERTAIN TRANSACTIONS CONVERTIBLE NOTES The Company has financed a large portion of its capital needs by borrowing from its majority stockholder, VPC. As of February 28, 1997, the Issuer had outstanding $121.0 million of Convertible Notes (including accrued interest). The Convertible Notes bear interest at a rate of 15% per annum, payable concurrently with the payment of principal. Interest not paid gets added to principal on an annual basis. In connection with the Offering, the maturity of the Convertible Notes was extended to six months after the final maturity of the Notes and the Convertible Notes were subordinated in right of payment to the Notes in the manner described below. The principal of and interest on the Convertible Notes may be converted, in whole but not in part, at the election of VPC, into shares of Class B Common, during the period of (i) 180 days commencing on the IPO Date and (ii) if such 180-day period shall not previously have commenced and expired, the period of 90 days commencing on April 30, 1999 (the "Conversion Date"). Subject to customary anti-dilution adjustments, the conversion price of the Convertible Notes will be (1) the price at which Common Stock is first sold to the public in a public offering, provided that the product of such price and the number of shares of Common Stock outstanding, on a fully-diluted basis (excluding shares sold in the offering and shares issuable upon conversion of outstanding Convertible Notes) equals or exceeds $225.0 million, or (2) if no such sale of Common Stock has taken place on or before the Conversion Date, a price equal to the quotient of $225.0 million divided by the number of shares of Common Stock outstanding on that date, on a fully diluted basis (excluding shares issuable upon conversion of outstanding Convertible Notes). The Convertible Notes are not subject to prepayment without the consent of VPC. Subject to the terms of the Indenture, the Convertible Notes must be prepaid out of proceeds of any sale of debt or equity securities of OpTel to the extent that VPC, in its sole discretion, shall require. In the event of a liquidation, dissolution, reorganization, receivership or winding-up of the Issuer, the holders of the Notes and the Trustee will be entitled to the prior payment in full of all obligations owing under the Indenture and the Notes before any payment whatsoever is made on account of the Convertible Notes. In addition, no payment on account of the Convertible Notes may be made at a time when (x) any Default or Event of Default (each as defined under the Indenture) has occurred or is continuing or will occur as a result of such action or (y) the maturity of the Notes has been accelerated. Accordingly, the prepayment of the Convertible Notes and the payment of any interest on account of the Convertible Notes will at all times be subject to the covenants of the Indenture, particularly the covenant "Limitation on Restricted Payments." See "Description of the Notes -- Certain Covenants." RICHEY WARRANT In connection with the acquisition by the Company (as the assignee of Vanguard) of certain subsidiaries of International Richey Pacific Cablevision, Ltd. ("Richey"), Vanguard granted to Richey a warrant (the "Richey Warrant") to purchase certain limited partnership interests in Vanguard at an exercise price of $1.25 million, subject to adjustment. The Richey Warrant is exercisable, in whole or in part, at any time prior to December 28, 1997. If the Richey Warrant is not exercised, Richey may, during the 90 day period commencing on December 28, 1997, require the Issuer to purchase the Richey Warrant for $1.0 million, subject to reduction (the "Put Price"). Vanguard may, at its option, repurchase the Richey Warrant for $4.0 million, subject to adjustment. The Issuer has agreed to pay Vanguard, in the event that the Richey Warrant is exercised, or Richey, in the event that Vanguard opts to repurchase the Richey Warrant, the Put Price. VANGUARD-RELATED TRANSACTIONS In August 1996, the Issuer granted Vanguard a non-transferable option (the "Vanguard Option") to purchase 48,937 shares of Class B Common at an exercise price of $53.55 per share, subject to adjustment. The Vanguard Option is exercisable at any time after August 31, 1996 and expires on the earlier to occur of (i) July 31, 1999 or (ii) 180 days after the IPO Date. 86 In September 1996, the Company entered into a consulting agreement with James A. Kofalt, a former director of the Issuer and a limited partner of Vanguard, pursuant to which the Company agreed to compensate Mr. Kofalt with a one time payment of $70,000 and a per diem consulting fee of $3,500 (if such consulting services are requested by the Company). In connection therewith, the Issuer also granted Mr. Kofalt a warrant (the "Kofalt Warrant") to purchase up to 24,992 shares of Class A Common at an exercise price of $53.55 per share, subject to adjustment. The Kofalt Warrant is presently exercisable and expires on August 31, 1999. In the event that the Kofalt Warrant is exercised prior to the IPO Date, the shares of Class A Common held by Mr. Kofalt will become subject to transfer restrictions, rights of first refusal and drag along rights comparable to those applicable to the Common Stock held by Vanguard. See "Principal Stockholders -- Stockholders' Agreement." MANAGEMENT FEES VPC and Pacific have agreed to provide, at the specific request of the Board, such reasonable consultant, advisory and management services as the Company may reasonably require. This arrangement terminates on the earlier to occur of (i) the IPO Date or (ii) the date on which any public or institutional financing obtained by the Company restricts the payment of fees or charges to affiliates of the Company. The Company pays each of VPC and Pacific $350,000 per annum (plus travel expenses) for such services. LICENSE HOLDING COMPANY The Company has agreed to assign substantially all of its frequency licenses (the "Assigned Licenses") to THI in exchange for a $1.0 million principal amount (subject to adjustment as described below) 8% secured promissory note due on February 14, 2007 (the "License Note"). The License Note contains covenants which restrict THI from, among other things, incurring indebtedness other than to the Company or in the ordinary course of business, and merging or consolidating with another entity. THI, which is controlled by United States citizens, was created to permit the Company to use the Assigned Licenses, modified as necessary, to provide "common carrier" telecommunications services in the event that the Company should desire to do so in the future. To establish the terms of the Company's continued and unencumbered use of the Assigned Licenses, the Company and THI entered into a license and services agreement (the "THI Agreement") pursuant to which THI has agreed to provide to the Company all the transmission capacity it requires or may in the future require and the Company has granted THI a non-exclusive license to use all of the Company's facilities and related equipment, such as microwave transmitting and receiving equipment, required to provide such transmission capacity. THI will secure future licenses necessary to provide the Company with the transmission capacity it requires. The THI Agreement provides for payments from the Company to THI which are expected to approximate the monthly interest due on the License Note plus an allowance for the anticipated expenses of THI. The Company may also advance funds to THI to the extent necessary to enable THI to fulfill its obligations under the THI Agreement. All amounts of such advances will be added to the principal amount of the License Note. It is not expected that payments made by the Company to THI will have a material impact on the Company's cash flows or results of operations. In connection with the above described transaction, the Company has received an option from THI (the "THI Option") to purchase all or, in certain circumstances, some of the assets of THI and a separate option from each stockholder of THI (each, an "Individual Option") to purchase all of such person's shares of capital stock of THI. The exercise price of the THI Option is equal to the current principal amount of, plus the accrued interest on, the License Note on the closing date, which amount may be paid by tendering the License Note to THI plus an amount equal to the lesser of (i) book value of the assets being purchased or (ii) the initial capitalization of THI plus 10% premium compounded annually. The exercise price of each Individual Option is equal to the lesser of (x) the book value of the shares being purchased and (y) the price paid for such shares plus 10% premium compounded annually. The THI Option and the Individual Options are exercisable at any time prior to February 14, 2007, subject to FCC approval. 87 POSSIBLE SALE OF VANGUARD INTEREST The Company has been advised that Vanguard has reached an agreement in principle for the sale of its interest to an affiliate of Caisse and that GVL, VPC and Caisse have reached an agreement in principle with respect to certain changes to the Issuer's Certificate of Incorporation and the Stockholders' Agreement, including the possible conversion of certain outstanding Convertible Notes. No assurance can be given as to when, or if, such sale will be consummated or the terms of any such sale. 88 DESCRIPTION OF THE NOTES Set forth below is a summary of certain provisions of the Notes. The New Notes, like the Old Notes, will be issued under the Indenture dated as of February 14, 1997 between the Issuer and U.S. Trust Company of Texas, N.A., as trustee (the "Trustee"), a copy of the form of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The terms of the New Notes are substantially identical in all material respects (including interest rate and maturity) to the Old Notes except for certain transfer restrictions and registration rights relating to the Old Notes. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), and to all of the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part of the Indenture by reference to the Trust Indenture Act, as in effect on the date of the Indenture. The definitions of certain capitalized terms used in the following summary are set forth below under "Certain Definitions." As of the date of this Prospectus, $225,000,000 principal amount of Old Notes were outstanding. GENERAL The Notes are general senior obligations of the Issuer. The Notes are collateralized by a first priority security interest in the Escrow Account described under "--Disbursement of Funds; Escrow Account." Like the Old Notes, the New Notes will be issued only in fully registered form without coupons, in denominations of $1,000 principal amount and integral multiples thereof. Principal of, premium, if any, and interest on the Notes are payable, and the Notes are exchangeable and transferable, at the office or agency of the Issuer in the City of New York maintained for such purposes (which initially will be the corporate trust office of the Trustee). See " -- Book-Entry; Delivery and Form." No service charge will be made for any registration of transfer, exchange or redemption of the Notes, except in certain circumstances for any tax or other governmental charge that may be imposed in connection therewith. MATURITY, INTEREST AND PRINCIPAL The Notes are limited to $225,000,000 aggregate principal amount and mature on February 15, 2005. Interest on the Notes accrues at a rate of 13% per annum and is payable semi-annually in arrears on each February 15 and August 15 (each, an "Interest Payment Date"), commencing August 15, 1997 to registered holders of Notes, on the February 1 or August 1, as the case may be, immediately preceding such Interest Payment Date. Interest accrues from the most recent Interest Payment Date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the Issue Date. Cash interest is computed on the basis of a 360-day year of twelve 30-day months. If the Issuer defaults on any payment of principal and/or premium (whether upon redemption or otherwise), cash interest will accrue on the amount in default at the rate of interest borne by the Notes. Interest on overdue principal and premium and, to the extent permitted by law, on overdue installments of interest will accrue at the rate of interest borne by the Notes. As discussed under "Exchange Offer; Registration Rights," pursuant to the Registration Rights Agreement, the Issuer has agreed, for the benefit of the holders of Notes, to effect at its expense a registered exchange offer under the Securities Act to exchange the Old Notes for New Notes. The failure to comply with such agreement in certain respects may result in an increase in the interest rate applicable to the Notes. REDEMPTION Optional Redemption. The Notes are redeemable, at the option of the Issuer, in whole or in part, at any time on or after February 15, 2002, upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued 89 and unpaid interest to the redemption date, if redeemed during the 12-month period beginning February 15 of the years indicated below: Year Redemption Price ------------------- ---------------- 2002 .................................................... 110% 2003 .................................................... 107 2004 and thereafter ...................................... 100 Notwithstanding the foregoing, in the event prior to February 15, 2000 of (i) one or more Equity Offerings and/or (ii) a sale or series of related sales by the Issuer of its Common Stock to one or more Strategic Equity Investors for aggregate gross proceeds of $100.0 million or more, the Issuer may redeem, at its option, up to a maximum of 35% of the initially outstanding aggregate principal amount of Notes from the net proceeds thereof at a redemption price equal to 113% of the principal amount of the Notes (determined at the redemption date), together with accrued and unpaid interest to the date of redemption; provided that not less than $145.0 million aggregate principal amount of Notes are outstanding following such redemption. Any such redemption may only be effected once and must be effected upon not less than 30 nor more than 60 days' notice given within 30 days after the last such Equity Offering or sale to a Strategic Equity Investor, as the case may be, resulting in gross proceeds of $100.0 million or more. Mandatory Redemption. The Issuer is not required to make any mandatory sinking fund payments in respect of the Notes. However, (i) upon the occurrence of a Change of Control, each holder of the Notes will have the right to require the Issuer to make an offer to purchase all outstanding Notes at a price of 101% of the principal amount thereof (determined at the date of purchase), plus accrued interest thereon, if any, to the date of purchase, and (ii) upon the occurrence of an Asset Sale, the Issuer may be obligated to make an offer to purchase all or a portion of the outstanding Notes at a price of 100% of the principal amount, thereof (determined at the date of purchase), plus accrued and unpaid interest, if any, to the date of purchase. See " -- Certain Covenants -- Change of Control" and "-- Disposition of Proceeds of Asset Sales," respectively. Selection; Effect of Redemption Notice. In the case of a partial redemption, selection of the Notes for redemption will be made pro rata, by lot or such other method as the Trustee in its sole discretion deems appropriate and just; provided that any redemption pursuant to the provisions relating to one or more Equity Offerings and/or sales to a Strategic Equity Investor shall be made on a pro rata basis or on as nearly a pro rata basis as practicable (subject to DTC procedures). No Notes of a principal amount of $1,000 or less shall be redeemed in part. Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon surrender for cancellation of the original Note. Upon giving of a redemption notice, interest on Notes called for redemption will cease to accrue from and after the date fixed for redemption (unless the Issuer defaults in providing the funds for such redemption) and such Notes will cease to be outstanding. DISBURSEMENT OF FUNDS; ESCROW ACCOUNT The Notes are collateralized, pending disbursement pursuant to the Escrow Agreement dated as of February 14, 1997, among the Issuer, the Trustee and U.S. Trust Company of Texas, N.A., as Escrow Agent (the "Escrow Agreement"), by a pledge of the Escrow Account (as defined in the Escrow Agreement), into which the Issuer deposited $79.6 million of the net proceeds from the Offering (the "Escrow Collateral"), representing funds that, together with the proceeds from the investment thereof, will be sufficient to pay interest on the Notes for six scheduled interest payments. The Issuer entered into the Escrow Agreement which provided for the grant by the Issuer to the Trustee, for the benefit of the holders, of security interests in the Escrow Collateral. All such security interests collateralize the payment and performance when due of all obligations of the Issuer under 90 the Indenture and the Notes, as provided in the Escrow Agreement. The Liens created by the Escrow Agreement are first priority security interests in the Escrow Collateral. The ability of holders to realize upon any such funds or securities may be subject to certain bankruptcy law limitations in the event of the bankruptcy of the Issuer. Pursuant to the Escrow Agreement, funds may be disbursed from the Escrow Account only to pay interest on the Notes (or, if a portion of the Notes has been retired by the Issuer, funds representing the lesser of (i) the excess of the amount sufficient to pay interest through and including February 15, 2000 on the Notes not so retired and (ii) the interest payments which have not previously been made on such retired Notes for each Interest Payment Date through the Interest Payment Date to occur on February 15, 2000 shall be paid to the Issuer if no Default then exists under the Indenture). Pending such disbursements, all funds contained in the Escrow Account have been invested in U.S. Government Securities. Interest earned on the U.S. Government Securities will be placed in the Escrow Account. Upon the acceleration of the maturity of the Notes, the Escrow Agreement will provide for the foreclosure by the Trustee upon the net proceeds of the Escrow Account. Under the terms of the Indenture, the proceeds of the Escrow Account shall be applied, first, to amounts owing to the Trustee in respect of fees and expenses of the Trustee and, second, to all obligations under the Notes and the Indenture. Under the Escrow Agreement, assuming that the Issuer makes the first six scheduled interest payments on the Notes in a timely manner with funds or U.S. Government Securities held in the Escrow Account, all of the U.S. Government Securities will be released from the Escrow Account. RANKING The indebtedness of the Issuer evidenced by the Notes ranks senior in right of payment to all subordinated indebtedness of the Issuer and pari passu in right of payment with all other existing and future unsubordinated indebtedness of the Issuer. The Issuer is a holding company with limited assets and no business operations of its own. The Issuer operates its business through its subsidiaries. Any right of the Issuer and its creditors, including holders of the Notes, to participate in the assets of any of the Issuer's subsidiaries upon any liquidation or administration of any such subsidiary will be subject to the prior claims of the subsidiary's creditors, including trade creditors. For a discussion of certain adverse consequences of the Issuer being a holding company and of the terms of potential future indebtedness of the Issuer and its subsidiaries, see "Risk Factors -- Holding Company Structure and Need to Access Subsidiaries' Cash Flow." CERTAIN COVENANTS Set forth below are certain covenants that are contained in the Indenture. Limitation on Additional Indebtedness. The Indenture provides that the Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume, issue, guarantee or in any manner become directly or indirectly liable for or with respect to, contingently or otherwise, the payment of (collectively, to "incur") any Indebtedness (including any Acquired Indebtedness), except for Permitted Indebtedness; provided that (i) the Issuer will be permitted to incur Indebtedness and (ii) a Restricted Subsidiary will be permitted to incur Acquired Indebtedness, if, in either case, after giving pro forma effect to such incurrence (including the application of the net proceeds therefrom), the ratio of (x) Total Consolidated Indebtedness (as of the date of incurrence) to (y) Annualized Pro Forma Consolidated Operating Cash Flow (based upon the two most recent fiscal quarters for which consolidated financial statements of the Issuer are available preceding the date of such incurrence) would be less than or equal to (A) 8.0 to 1.0 if such incurrence is prior to August 31, 2000 or (B) 7.0 to 1.0 if such incurrence is on or after August 31, 2000 and prior to August 31, 2002 or (C) 6.0 to 1.0 if such incurrence is on or after August 31, 2002. 91 Limitation on Restricted Payments. The Indenture provides that the Issuer will not, and will not permit any of the Restricted Subsidiaries to, make, directly or indirectly, any Restricted Payment unless: (i) no Default shall have occurred and be continuing at the time of or upon giving effect to such Restricted Payment; (ii) immediately after giving effect to such Restricted Payment, the Issuer would be able to incur $1.00 of Indebtedness under the proviso of the covenant "Limitation on Additional Indebtedness"; and (iii) immediately after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments declared or made on or after the Issue Date and all Designation Amounts does not exceed an amount equal to the sum of (a) the difference between (x) the Cumulative Available Cash Flow determined at the time of such Restricted Payment and (y) Cumulative Consolidated Interest Expense determined at the time of such Restricted Payment, plus (b) the aggregate net cash proceeds received by the Issuer either (x) as capital contributions to the Issuer after the Issue Date or (y) from the issue and sale (other than to a Restricted Subsidiary of the Issuer) of its Capital Stock (other than Disqualified Stock) on or after the Issue Date, plus (c) the aggregate net proceeds received by the Issuer from the issuance (other than to a Restricted Subsidiary of the Issuer) on or after the Issue Date of its Capital Stock (other than Disqualified Stock) upon the conversion of, or in exchange for, Indebtedness of the Issuer (other than the Convertible Notes), plus (d) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the Issue Date (other than an Investment made pursuant to clause (v), (vi), (vii) or (xii) of the following paragraph), an amount equal to the lesser of the return of capital with respect to such Investment and the cost of such Investment, in either case, less the cost of the disposition of such Investment, plus (e) in the case of any Revocation with respect to a Subsidiary of the Issuer that was made subject to a Designation after the Issue Date, an amount equal to the lesser of the Designation Amount with respect to such Subsidiary or the Fair Market Value of the Investment of the Issuer and the Restricted Subsidiaries in such Subsidiary at the time of Revocation. For purposes of the preceding clauses (b)(y) and (c), as applicable, the value of the aggregate net proceeds received by the Issuer upon the issuance of Capital Stock either upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of options, warrants or rights will be the net cash proceeds received upon the issuance of such Indebtedness, options, warrants or rights plus the incremental amount received, if any, by the Issuer upon the conversion, exchange or exercise thereof. For purposes of determining the amount expended for Restricted Payments, cash distributed shall be valued at the face amount thereof and property other than cash shall be valued at its Fair Market Value. The provisions of this covenant shall not prohibit (i) the payment of any dividend or other distribution within 60 days after the date of declaration thereof if at such date of declaration such payment would be permitted by the provisions of the Indenture; (ii) the purchase, redemption, retirement or other acquisition of any shares of Capital Stock of the Issuer in exchange for, or out of the net cash proceeds of the substantially concurrent issue and sale (other than to a Restricted Subsidiary of the Issuer) of, shares of Capital Stock of the Issuer (other than Disqualified Stock); provided that any such net cash proceeds are excluded from clause (iii)(b) of the preceding paragraph; (iii) so long as no Default shall have occurred and be continuing, the purchase, redemption, retirement, defeasance or other acquisition of Subordinated Indebtedness (other than the Convertible Notes and Deeply Subordinated Shareholders Loans) made by exchange for, or out of the net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary of the Issuer) of (x) Capital Stock (other than Disqualified Stock) of the Issuer or (y) other Subordinated Indebtedness to the extent that its stated maturity for the payment of principal thereof is not prior to the 180th day after the final stated maturity of the Notes; provided that any such net cash proceeds are excluded from clause (iii)(b) of the preceding paragraph; (iv) the purchase, redemption, retirement or other acquisition of the Convertible Notes or Deeply Subordinated 92 Shareholders Loans to the extent made by exchange for (upon conversion in accordance with their terms or otherwise), or out of the net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary of the Issuer) of Capital Stock (other than Disqualified Stock) of the Issuer; provided that any such net proceeds or net cash proceeds, as applicable, shall be excluded from clause (iii)(b) of the preceding paragraph; (v) so long as no Default shall have occurred and be continuing, Investments by the Issuer or any Restricted Subsidiary in a person (including any Unrestricted Subsidiary) in an amount, at any time outstanding, not to exceed $25.0 million less the amount of Investments then outstanding under clause (xii) of this paragraph; (vi) the extension by the Issuer and the Restricted Subsidiaries of trade credit to Unrestricted Subsidiaries, represented by accounts receivable, extended on usual and customary terms in the ordinary course of business; (vii) any renewal or reclassification of any Investment in any Unrestricted Subsidiary outstanding on the Issue Date or subsequently made in accordance with the provisions described herein; (viii) purchases or redemptions of Capital Stock (including cash settlements of stock options) held by employees, officers or directors upon or following termination of their employment with the Issuer or one of its Subsidiaries, subject to any put arrangements, provided that payments not subject to such puts shall not exceed $1.0 million in any fiscal year in the aggregate; (ix) so long as no Default shall have occurred and be continuing, Investments in Unrestricted Subsidiaries to the extent promptly made with the proceeds of a substantially concurrent (1) capital contribution to the Issuer or (2) issue or sale of Capital Stock (other than Disqualified Stock) of the Issuer (other than to a Restricted Subsidiary of the Issuer); provided that any such proceeds are excluded from clause (iii)(b) of the preceding paragraph; (x) the redemption or purchase of the Richey Warrant for an amount not to exceed $1.0 million; (xi) the payment of management fees to each of VPC and Pacific in an amount not to exceed $350,000 (plus out-of-pocket travel expenses relating to the management of the Issuer) in any fiscal year; (xii) Investments in an amount at any time outstanding not to exceed $25.0 million less the amount of Investments then outstanding under clause (v) of this paragraph so long as such investment is in the form of senior loans having a maturity of not more than one year made in any person ("target") engaged in a Cable/Telecommunications Business with respect to which the Issuer or a Restricted Subsidiary has entered into a definitive acquisition agreement for the acquisition by the Issuer or a Restricted Subsidiary of target such that target will become a Restricted Subsidiary as a result of such acquisition; provided any such acquisition is consummated or such Investment is repaid within one year of the making of any such Investment; and (xiii) the use of proceeds from the issue and sale of the Notes to repay up to $10.0 million aggregate principal amount of Convertible Notes as described under "Use of Proceeds." In determining the amount of Restricted Payments permissible under this covenant, amounts expended pursuant to clauses (i), (v), (viii), (xii) and, to the extent not deducted in arriving at Cumulative Available Cash Flow, (xi) above shall be included as Restricted Payments. Limitation on Liens Securing Certain Indebtedness. The Issuer will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Liens of any kind against or upon (i) any of property or assets of the Issuer or any Restricted Subsidiary, whether now owned or hereafter acquired, or any proceeds therefrom, which secure either (x) Subordinated Indebtedness unless the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to the Liens securing such Subordinated Indebtedness or (y) Indebtedness of the Issuer that is not Subordinated Indebtedness, unless the Notes are equally and ratably secured with the Liens securing such other Indebtedness, except, in the case of this clause (y), Permitted Liens or (ii) the Escrow Account. Limitation on Certain Guarantees and Indebtedness of Restricted Subsidiaries. The Indenture provides that the Issuer will not permit any Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to (i) any Subordinated Indebtedness or (ii) any Indebtedness of the Issuer that is not Subordinated Indebtedness (other than, in the case of this clause (ii), (x) Indebtedness under any Senior Bank Facility to the extent constituting Permitted Indebtedness or (y) Indebtedness under any Vendor Credit Facility to the extent constituting Permitted Indebtedness), unless such Restricted Subsidiary simultaneously executes and delivers a 93 supplemental indenture providing for the guarantee of payment of the Notes by such Restricted Subsidiary on a basis senior to any such Subordinated Indebtedness or pari passu with any such other Indebtedness referred to in clause (ii), as the case may be. Each guarantee created pursuant to such provisions is referred to as a "Guarantee" and the issuer of each such Guarantee, so long as the Guarantee remains outstanding, is referred to as a "Guarantor." Notwithstanding the foregoing, in the event of the unconditional release of any Guarantor from its obligations in respect of the Indebtedness which gave rise to the requirement that a Guarantee be given, such Guarantor shall be released from all obligations under its Guarantee. In addition, upon any sale or disposition (by merger or otherwise) of any Guarantor by the Issuer or a Restricted Subsidiary of the Issuer to any person that is not an Affiliate of the Issuer or any of its Restricted Subsidiaries which is otherwise in compliance with the terms of the Indenture and as a result of which such Guarantor ceases to be a Subsidiary of the Issuer, such Guarantor will be deemed to be released from all obligations under its Guarantee; provided that each such Guarantor is sold or disposed of in accordance with the "Disposition of Proceeds of Asset Sales" covenant. Change of Control. Upon the occurrence of a Change of Control (the date of such occurrence being the "Change of Control Date"), the Issuer shall make an offer to purchase (the "Change of Control Offer"), on a business day (the "Change of Control Payment Date") not later than 60 days following the Change of Control Date, all Notes then outstanding at a purchase price equal to 101% of the principal amount thereof on any Change of Control Payment Date, plus accrued and unpaid interest, if any, to such Change of Control Payment Date. Notice of a Change of Control Offer shall be given to holders of Notes, not less than 25 days nor more than 45 days before the Change of Control Payment Date. The Change of Control Offer is required to remain open for at least 20 business days and until the close of business on the Change of Control Payment Date. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar transaction which may be highly leveraged. The occurrence of the events constituting a Change of Control under the Indenture may result in an event of default in respect of other Indebtedness of the Issuer and its subsidiaries and, consequently, the lenders or holders thereof may have the right to require repayment of such Indebtedness in full or, as permitted by the covenant "Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries," to prevent the distribution, advance or transfer of funds by the Restricted Subsidiaries to the Issuer. See "Risk Factors -- Holding Company Structure and Need to Access Subsidiaries' Cash Flow." If a Change of Control Offer is made, there can be no assurance that the Issuer will have available funds sufficient to pay for all of the Notes that might be delivered by holders of Notes seeking to accept the Change of Control Offer. The Issuer shall not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements applicable to a Change of Control Offer made by the Issuer and purchases all Notes validly tendered and not withdrawn under such Change of Control Offer. If the Issuer is required to make a Change of Control Offer, the Issuer will comply with all applicable tender offer laws and regulations, including, to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Indenture provides that the Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise enter into or cause to become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on its Capital Stock or any other interest or participation in, or measured by, its profits to the extent owned by the Issuer or any Restricted Subsidiary, (b) pay any Indebtedness owed to the Issuer or any Restricted Subsidiary, (c) make any Investment in the 94 Issuer or any Restricted Subsidiary or (d) transfer any of its properties or assets to the Issuer or to any Restricted Subsidiary, except for (i) any encumbrance or restriction existing on the Issue Date, (ii) any encumbrance or restriction applicable to a Restricted Subsidiary at the time that it becomes a Restricted Subsidiary that is not created in contemplation thereof, (iii) any encumbrance or restriction existing under any agreement that refinances or replaces an agreement containing a restriction permitted by clause (i) or (ii) above; provided that the terms and conditions of any such encumbrance or restriction are not materially less favorable to the holders of Notes than those under or pursuant to the agreement being replaced or the agreement evidencing the Indebtedness refinanced, (iv) any encumbrance or restriction imposed upon a Restricted Subsidiary pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary and (v) any customary encumbrance or restriction applicable to a Restricted Subsidiary that is contained in an agreement or instrument governing or relating to Indebtedness contained in any Senior Bank Facility or Vendor Credit Facility provided that the provisions of such agreement permit the payment of interest and principal and mandatory repurchases pursuant to the terms of the Indenture and the Notes and other indebtedness that is solely an obligation of the Issuer, but provided further that such agreement may nevertheless contain customary net worth, leverage, invested capital and other financial covenants, customary covenants regarding the merger of or sale of all or any substantial part of the assets of the Issuer or any Restricted Subsidiary, customary restrictions on transactions with affiliates, and customary subordination provisions governing indebtedness owed to the Issuer or any Restricted Subsidiary. Disposition of Proceeds of Asset Sales. The Issuer will not, and will not permit any Restricted Subsidiary to, make any Asset Sale unless (a) the Issuer or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets sold or otherwise disposed of and (b) at least 80% of such consideration consists of cash or Cash Equivalents; provided that the following shall be treated as cash for purposes of this covenant: (x) the amount of any liabilities (other than Subordinated Indebtedness or Indebtedness of a Restricted Subsidiary that would not constitute Restricted Subsidiary Indebtedness) that are assumed by the transferee of any such assets pursuant to an agreement that unconditionally releases the Issuer or such Restricted Subsidiary from further liability ("assumed liabilities"), (y) the amount of any notes or other obligations that within 30 days of receipt, are converted into cash (to the extent of the cash received) and (z) the amount (valued based upon the reported closing sale price or average of the closing bid and ask prices, as the case may be, on the principal securities or trading market on the date of the Asset Sale) of any Publicly Traded Stock received as consideration in such Asset Sale. The Issuer or the applicable Restricted Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds from such Asset Sale within 365 days of the receipt thereof to repay an amount of Indebtedness (other than Subordinated Indebtedness) of the Issuer or any Guarantor in an amount not exceeding the Other Senior Debt Pro Rata Share and elect to permanently reduce the amount of the commitments thereunder by the amount of the Indebtedness so repaid, (ii) apply the Net Cash Proceeds from such Asset Sale to repay any Restricted Subsidiary Indebtedness and elect to permanently reduce the commitments by the amount of the Indebtedness so repaid or (iii) apply such Net Cash Proceeds within 365 days thereof, to an investment in properties and assets that will be used in a Cable/Telecommunications Business (or in Capital Stock and other securities of any person that will become a Restricted Subsidiary as a result of such investment to the extent such person owns properties and assets that will be used in a Cable/Telecommunications Business) of the Issuer or any Restricted Subsidiary ("Replacement Assets"). Any Net Cash Proceeds from any Asset Sale that are neither used to repay, and permanently reduce the commitments under, any Restricted Subsidiary Indebtedness as set forth in clause (ii) of the preceding sentence or invested in Replacement Assets within the 365-day period as set forth in clause (iii) shall constitute "Excess Proceeds." Any Excess Proceeds not used as set forth in clause (i) of the second preceding sentence shall constitute "Offer Excess Proceeds" subject to disposition as provided below. When the aggregate amount of Offer Excess Proceeds equals or exceeds $10.0 million, the Issuer shall make an offer to purchase (an "Asset Sale Offer"), from all holders of the Notes, that 95 aggregate principal amount of Notes as can be purchased by application of such Offer Excess Proceeds at a price in cash equal to 100% of the principal amount thereof on any purchase date, plus accrued and unpaid interest, if any, to any purchase date. Each Asset Sale Offer shall remain open for a period of 20 business days or such longer period as may be required by law. To the extent that the principal amount of Notes tendered pursuant to an Asset Sale Offer is less than the Offer Excess Proceeds, the Issuer or any Restricted Subsidiary may use such deficiency for general corporate purposes. If the principal amount of Notes validly tendered and not withdrawn by holders thereof exceeds the amount of Notes which can be purchased with the Offer Excess Proceeds, Notes to be purchased will be selected on a pro rata basis. Upon completion of such Asset Sale Offer, the amount of Offer Excess Proceeds shall be reset to zero. Notwithstanding the two immediately preceding paragraphs, the Issuer and the Restricted Subsidiaries will be permitted to consummate an Asset Sale without complying with such paragraphs to the extent (i) at least 80% of the consideration for such Asset Sale constitutes Replacement Assets, cash or Cash Equivalents (including obligations deemed to be cash under this covenant) and (ii) such Asset Sale is for Fair Market Value; provided that any consideration constituting (or deemed to constitute) cash or Cash Equivalents received by the Issuer or any of the Restricted Subsidiaries in connection with any Asset Sale permitted to be consummated under this paragraph shall constitute Net Cash Proceeds subject to the provisions of the two preceding paragraphs. If the Issuer is required to make an Asset Sale Offer, the Issuer will comply with all applicable tender offer rules, including, to the extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other applicable securities laws and regulations. Limitation on Issuances and Sales of Preferred Stock by Restricted Subsidiaries. The Indenture provides that the Issuer (i) will not permit any Restricted Subsidiary to issue any Preferred Stock (other than to the Issuer or a Restricted Subsidiary) and (ii) will not permit any person (other than the Issuer or a Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary. Limitation on Transactions with Affiliates. The Indenture provides that the Issuer will not, and will not permit, cause or suffer any Restricted Subsidiary to, conduct any business or enter into any transaction (or series of related transactions which are similar or part of a common plan) with or for the benefit of any of their respective Affiliates or any beneficial holder of 10% or more of the Common Stock of the Issuer or any officer or director of the Issuer or any Restricted Subsidiary (each an "Affiliate Transaction"), unless the terms of the Affiliate Transaction are set forth in writing, and are fair and reasonable to the Issuer or such Restricted Subsidiary, as the case may be. Each Affiliate Transaction (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other Fair Market Value in excess of $500,000 shall be approved by a majority of the Board, such approval to be evidenced by a Board Resolution stating that the Board has determined that such transaction or transactions comply with the foregoing provisions. In addition to the foregoing, each Affiliate Transaction involving aggregate consideration of $5.0 million or more shall be approved by a majority of the Disinterested Directors; provided that, in lieu of such approval by the Disinterested Directors, the Issuer may obtain a written opinion from an Independent Financial Advisor stating that the terms of such Affiliate Transaction to the Issuer or the Restricted Subsidiary, as the case may be, are fair from a financial point of view. For purposes of this covenant, any Affiliate Transaction approved by a majority of the Disinterested Directors or as to which a written opinion has been obtained from an Independent Financial Advisor, on the basis set forth in the preceding sentence, shall be deemed to be on terms that are fair and reasonable to the Issuer and the Restricted Subsidiaries, as the case may be, and, therefore, shall be permitted under this covenant. Notwithstanding the foregoing, the restrictions set forth in this covenant shall not apply to (i) transactions with or among, or solely for the benefit of, the Issuer and/or any of the Restricted Subsidiaries, (ii) transactions pursuant to agreements and arrangements existing on the Issue Date, including payments of management fees to each of VPC and Pacific in an aggregate amount not to exceed $350,000 (plus travel expenses incurred in providing management services) in any fiscal year 96 of the Issuer, (iii) the making of Deeply Subordinated Shareholders Loans pursuant to and in compliance with the covenant "Limitation on Additional Indebtedness," (iv) dividends paid by the Issuer pursuant to and in compliance with the covenant "Limitation on Restricted Payments," (v) customary directors' fees, indemnification and similar arrangements, consulting fees, employee salaries, loans and bonuses or legal fees and (vi) transactions contemplated by the License Co. Documents. Notwithstanding any provision of the Indenture to the contrary, the Issuer will not, and will not permit any Restricted Subsidiary to, amend, modify or waive any provision of the License Co. Documents in a manner that is adverse, from the perspective of creditors of the Issuer and the Restricted Subsidiaries, in any material respect. Reports. Whether or not the Issuer has a class of securities registered under the Exchange Act, the Issuer shall furnish without cost to each holder of Notes and file with the Trustee and (following the effective date of the Registered Exchange Offer or Shelf Registration Statement, as applicable) file with the SEC (i) within 135 days after the end of each fiscal year of the Issuer, the information required by Form 10-K (or any successor form thereto) under the Securities Act of 1933, as amended, with respect to such period, (ii) within 60 days after the end of each of the first three fiscal quarters of each fiscal year of the Issuer, the information required by Form 10-Q (or any successor form thereto) under the Securities Act with respect to such period and (iii) within 15 days after it would be required to be filed with the SEC, the information required by Form 8-K (or any successor form thereto). Limitation on Designations of Unrestricted Subsidiaries. The Indenture provides that the Issuer will not designate any Subsidiary of the Issuer (other than a newly created Subsidiary in which no Investment has previously been made) as an "Unrestricted Subsidiary" under the Indenture (a "Designation") unless: (a) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (b) immediately after giving effect to such Designation, the Issuer would be able to incur $1.00 of Indebtedness under the proviso of the covenant "Limitation on Additional Indebtedness"; and (c) the Issuer would not be prohibited under the Indenture from making an Investment at the time of Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the Fair Market Value of the net Investment of the Issuer or any other Restricted Subsidiary in such Restricted Subsidiary on such date. In the event of any such Designation, the Issuer shall be deemed to have made an Investment constituting a Restricted Payment pursuant to the covenant "Limitation on Restricted Payments" for all purposes of the Indenture in the Designation Amount. The Indenture further provides that neither the Issuer nor any Restricted Subsidiary shall at any time (x) provide credit support for, or a guarantee of, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness); provided that the Issuer may pledge Capital Stock or Indebtedness of any Unrestricted Subsidiary on a nonrecourse basis such that the pledgee has no claim whatsoever against the Issuer other than to obtain such pledged property, (y) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z) be directly or indirectly liable for any Indebtedness which provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity upon the occurrence of a default with respect to any Indebtedness of any Unrestricted Subsidiary (including any right to take enforcement action against such Unrestricted Subsidiary), except in the case of clause (x) or (y) to the extent permitted under the covenants "Limitation on Restricted Payments", and "Limitation on Transactions with Affiliates." The Indenture further provides that the Issuer will not revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") unless: 97 (a) no Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and (b) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of the Indenture. All Designations and Revocations must be evidenced by Board Resolutions delivered to the Trustee certifying compliance with the foregoing provisions. CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. The Indenture provides that the Issuer will not consolidate or combine with or merge with or into or, directly or indirectly, sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of its properties and assets to any person or persons in a single transaction or through a series of transactions, or permit any of the Restricted Subsidiaries to enter into any such transaction or series of transactions if it would result in the disposition of all or substantially all of the properties or assets of the Issuer and the Restricted Subsidiaries on a consolidated basis, unless (a) the Issuer shall be the continuing person or, if the Issuer is not the continuing person, the resulting, surviving or transferee person (the "surviving entity") shall be a company organized and existing under the laws of the United States or any State or territory thereof; (b) the surviving entity shall expressly assume all of the obligations of the Issuer under the Notes and the Indenture, and shall, if required by law to effectuate such assumption, execute a supplemental indenture to effect such assumption which supplemental indenture shall be delivered to the Trustee and shall be in form and substance reasonably satisfactory to the Trustee; (c) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), the Issuer or the surviving entity (assuming such surviving entity's assumption of the Issuer's obligations under the Notes and the Indenture), as the case may be, would be able to incur $1.00 of Indebtedness under the proviso of the covenant "Limitation on Additional Indebtedness"; provided that, in addition to the foregoing, (1) if immediately prior to such transaction or series of transactions the ratio of Total Consolidated Indebtedness of the Issuer to Annualized Pro Forma Consolidated Operating Cash Flow of the Issuer (based upon the two most recent quarters for which consolidated financial statements are available immediately preceding the date of such transaction or series of transactions) (the "Pre-Transaction Ratio") equals or exceeds 6.0:1.0, then, after giving pro forma effect to such transaction or series of transactions, the ratio of Total Consolidated Indebtedness of the Issuer or the surviving entity on a pro forma basis to Annualized Pro Forma Consolidated Operating Cash Flow of the Issuer or the surviving entity (based upon the two most recent quarters for which consolidated financial statements are available immediately preceding the date of such transaction or series of transactions) (the "Post-Transaction Ratio") must not be any higher than the Pre-Transaction Ratio or (2) if the Pre-Transaction Ratio is less than 6.0:1.0, then (x) the Post-Transaction Ratio must be less than 6.0:1.0 and (y) the Annualized Pro Forma Consolidated Coverage after giving pro forma effect to such transaction or series of transactions must be greater than or equal to 1.75:1.0; (d) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Default shall have occurred and be continuing; and (e) the Issuer or the surviving entity, as the case may be, shall have delivered to the Trustee an Officers' Certificate stating that such transaction or series of transactions, and, if a supplemental indenture is required in connection with such transaction or series of transactions to effectuate such assumption, such supplemental indenture complies with this covenant and that all conditions precedent in the Indenture relating to the transaction or series of transactions have been satisfied. Upon any consolidation or merger or any transfer of all or substantially all of the assets of the Issuer in accordance with the foregoing in which the Issuer or the Restricted Subsidiary, as the case may be, is not the continuing corporation, the successor corporation formed by such a consolidation or into which the Issuer or such Restricted Subsidiary is merged or to which such transfer is made, 98 will succeed to, and be substituted for, and may exercise every right and power of, the Issuer or such Restricted Subsidiary, as the case may be, under the Indenture with the same effect as if such successor corporation had been named as the Issuer or such Restricted Subsidiary therein; and thereafter, except in the case of (i) a lease or (ii) any sale, assignment, conveyance, transfer, lease or other disposition to a Restricted Subsidiary of the Issuer, the Issuer shall be discharged from all obligations and covenants under the Indenture and the Notes. The Indenture provides that for all purposes of the Indenture and the Notes (including the provision of this covenant and the covenants "Limitation on Additional Indebtedness," "Limitation on Restricted Payments" and "Limitation on Liens"), Subsidiaries of any Surviving Entity will, upon such transaction or series of related transactions, become Restricted Subsidiaries or Unrestricted Subsidiaries as provided pursuant to the covenant "Limitation on Designations of Unrestricted Subsidiaries" and all Indebtedness, and all Liens on property or assets, of the Issuer and the Restricted Subsidiaries in existence immediately prior to such transaction or series of related transactions will be deemed to have been incurred upon such transaction or series of related transactions. EVENTS OF DEFAULT The following are "Events of Default" under the Indenture: (i) default in the payment of interest on the Notes when it becomes due and payable and continuance of such default for a period of 30 days or more (provided such 30 day grace period shall be inapplicable for the first six interest payments due on the Notes); or (ii) default in the payment of the principal of, or premium, if any, on the Notes when due; or (iii) default in the performance, or breach, of any covenant described under " -- Certain Covenants -- Change of Control," " -- Disposition of Proceeds of Asset Sales" or " -- Consolidation, Merger, Sale of Assets, Etc."; or (iv) default in the performance, or breach, of any covenant in the Indenture (other than defaults specified in clause (i), (ii) or (iii) above), and continuance of such default or breach for a period of 30 days or more after written notice to the Issuer by the Trustee or to the Issuer and the Trustee by the holders of at least 25% in aggregate principal amount of the outstanding Notes (in each case, when such notice is deemed received in accordance with the Indenture); or (v) failure to perform any term, covenant, condition or provision of one or more classes or issues of Indebtedness in an aggregate principal amount of $5.0 million or more under which the Issuer or a Material Restricted Subsidiary is obligated, and either (a) such Indebtedness is already due and payable in full or (b) such failure results in the acceleration of the maturity of such Indebtedness; provided that, in the case of a termination or expiration of an Interest Rate Obligation requiring that the monetary liability thereunder be paid, no Event of Default shall occur if such payment is made within 30 days after such payment is due; or (vi) any holder of at least $5.0 million in aggregate principal amount of Indebtedness of the Issuer or any Material Restricted Subsidiary shall commence judicial proceedings or take any other action to foreclose upon, or dispose of assets of the Issuer or any Material Restricted Subsidiary having an aggregate Fair Market Value, individually or in the aggregate, of $5.0 million or more or shall have exercised any right under applicable law or applicable security documents to take ownership of any such assets in lieu of foreclosure provided that, in any such case, the Issuer or any Material Restricted Subsidiary shall not have obtained, prior to any such foreclosure or disposition of assets, a stay of all such actions that remains in effect; or (vii) one or more judgments, orders or decrees for the payment of money of $5.0 million or more, either individually or in the aggregate, shall be entered into against the Issuer or any 99 Material Restricted Subsidiary or any of their respective properties and shall not be discharged and there shall have been a period of 60 days or more during which a stay of enforcement of such judgment or order, by reason of pending appeal or otherwise, shall not be in effect; or (viii) certain events of bankruptcy, dissolution (in the case of the Issuer or License Co. only), insolvency, reorganization, administration or similar proceedings with respect to the Issuer or any Material Restricted Subsidiary or License Co. shall have occurred; or (ix) failure by License Co. or its shareholders to perform any material term, covenant, condition or provision of the License Co. Documents; or (x) the Issuer shall assert or acknowledge in writing that the Escrow Agreement is invalid or unenforceable. If an Event of Default (other than an Event of Default specified in clause (viii) above with respect to the Issuer) occurs and is continuing, then the Trustee or the holders of at least 25% in principal amount of the outstanding Notes may, by written notice, and the Trustee upon the request of the holders of not less than 25% in principal amount of the outstanding Notes shall, declare the principal amount of, premium (if any) on, and any accrued and unpaid interest on, all outstanding Notes to be immediately due and payable and upon any such declaration such amounts shall become immediately due and payable. If an Event of Default specified in clause (viii) above with respect to the Issuer occurs and is continuing, then the principal amount of, premium (if any) on, and any accrued and unpaid interest on, all outstanding Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder. After a declaration of acceleration, the holders of a majority in aggregate principal amount of outstanding Notes may, by notice to the Trustee, rescind such declaration of acceleration if all existing Events of Default, other than nonpayment of the principal of, premium (if any) on, and any accrued and unpaid interest on, the Notes that has become due solely as a result of such acceleration, have been cured or waived and if the rescission of acceleration would not conflict with any judgment or decree. The holders of a majority in principal amount of the outstanding Notes also have the right to waive past defaults under the Indenture, except a default in the payment of principal of, premium (if any) on, or any interest on, any outstanding Note, or in respect of a covenant or a provision that cannot be modified or amended without the consent of all holders of Notes. No holder of any of the Notes has any right to institute any proceeding with respect to the Indenture or any remedy thereunder, unless the holders of at least 25% in principal amount of the outstanding Notes have made written request, and offered reasonable security or indemnity, to the Trustee to institute such proceeding as Trustee, the Trustee has failed to institute such proceeding within 60 days after receipt of such notice and the Trustee has not within such 60-day period received directions inconsistent with such written request by holders of a majority in principal amount of the outstanding Notes. Such limitations do not apply, however, to a suit instituted by a holder of a Note for the enforcement of the payment of the principal of, preimum (if any) on, or any accrued and unpaid interest on, such Note on or after the respective due dates expressed in such Note. During the existence of an Event of Default, the Trustee is required to exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise thereof as a prudent person would exercise under the circumstances in the conduct of such person's own affairs. Subject to the provisions of the Indenture relating to the duties of the Trustee, if an Event of Default shall occur and be continuing, the Trustee is not under any obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the holders unless such holders shall have offered to such Trustee reasonable security or indemnity. Subject to certain provisions concerning the rights of the Trustee, the holders of a majority in principal amount of the outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. 100 The Indenture provides that the Trustee will, within 45 days after the occurrence of any Default, give to the holders of the Notes notice of such Default known to it, unless such Default shall have been cured or waived; provided that the Trustee shall be protected in withholding such notice if it determines in good faith that the withholding of such notice is in the interest of such holders. The Issuer is required to furnish to the Trustee annually a statement as to its compliance with all conditions and covenants under the Indenture. DEFEASANCE The Issuer may at any time terminate all of its obligations with respect to the Notes ("defeasance"), except for certain obligations, including those regarding any trust established for a defeasance and obligations to register the transfer or exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes as required by the Indenture and to maintain agencies in respect of Notes. The Issuer may at any time terminate its obligations under certain covenants set forth in the Indenture, some of which are described under " -- Certain Covenants" above, and any omission to comply with such obligations shall not constitute a Default with respect to the Notes ("covenant defeasance"). To exercise either defeasance or covenant defeasance, the Issuer must irrevocably deposit in trust, for the benefit of the holders of the Notes, with the Trustee money (in United States dollars) or U.S. government obligations (denominated in United States dollars), or a combination thereof, in such amounts as will be sufficient to pay the principal of, and premium, if any, and interest on the Notes to redemption or maturity and comply with certain other conditions, including the delivery of a legal opinion as to certain tax matters. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of Notes) as to all outstanding Notes when either (a) all such Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes that have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Issuer and thereafter repaid to the Issuer or discharged from such trust) have been delivered to the Trustee for cancellation; or (b)(i) all such Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Issuer has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount of money sufficient to pay and discharge the entire indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal amount, premium, if any, and accrued interest to the date of such deposit; (ii) the Issuer has paid all sums payable by it under the Indenture; and (iii) the Issuer has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity or on the redemption date, as the case may be. In addition, the Issuer must deliver an Officers' Certificate and an Opinion of Counsel stating that all conditions precedent to satisfaction and discharge have been complied with. AMENDMENT AND WAIVERS From time to time, the Issuer, when authorized by resolutions of the Board, and the Trustee, without the consent of the holders of the Notes, may amend, waive or supplement the Indenture or the Notes for certain specified purposes, including, among other things, curing ambiguities, defects or inconsistencies, maintaining the qualification of the Indenture under the Trust Indenture Act or making any change that does not adversely affect the rights of any holder. Other amendments and modifications of the Indenture and the Notes may be made by the Issuer and the Trustee by supplemental indenture with the consent of the holders of not less than a majority of the aggregate principal amount of the outstanding Notes; provided that no such modification or amendment may, without the consent of the holder of each outstanding Note affected thereby, (i) reduce the principal amount of, extend the fixed maturity of, or alter the redemption provisions of, the Notes, (ii) change the currency in which any Notes or any premium or the accrued interest thereon is payable, (iii) 101 reduce the percentage of the aggregate principal amount outstanding of Notes which must consent to an amendment, supplement or waiver or consent to take any action under the Indenture or the Notes, (iv) impair the right to institute suit for the enforcement of any payment on or with respect to the Notes, (v) waive a default in payment with respect to the Notes, (vi) reduce the rate or extend the time for payment of interest on the Notes, (vii) following the occurrence of a Change of Control or an Asset Sale, alter the Issuer's obligation to purchase the Notes in accordance with the Indenture or waive any default in the performance thereof, (viii) affect the ranking of the Notes in a manner adverse to the holder of the Notes, (ix) release any Guarantee except in compliance with the terms of the Indenture or (x) release any Liens created by the Escrow Agreement except in strict accordance with the terms of the Escrow Agreement. REGARDING THE TRUSTEE AND ESCROW AGENT U.S. Trust Company of Texas, N.A. is serving as Trustee under the Indenture and Escrow Agent under the Escrow Agreement. GOVERNING LAW The Indenture and the Escrow Agreement provide that the Indenture and the Notes and the Escrow Agreement, respectively, will be governed by and construed in accordance with laws of the State of New York without giving effect to principles of conflicts of law. CERTAIN DEFINITIONS Set forth below is a summary of certain defined terms used in the Indenture or the Escrow Agreement. Reference is made to the Indenture for the full definition of all such terms, as well as any other capitalized terms used herein for which no definition is provided. "Acquired Indebtedness" means Indebtedness of a person existing at the time such person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition by such person and not incurred in connection with, or in anticipation of, such person becoming a Restricted Subsidiary or such Asset Acquisition. "Affiliate" of any specified person means any other person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Annualized Pro Forma Consolidated Coverage" means, as of any date of determination, the ratio of (1) Annualized Pro Forma Operating Cash Flow to (2) Consolidated Interest Expense for the four quarter period immediately preceding the date of determination for which financial statements are available; provided, that (1) if the Issuer or any of the Restricted Subsidiaries has incurred any Indebtedness (whether through an Asset Acquisition, Asset Sale or otherwise) since the beginning of such period and through the date of determination that remains outstanding or if the transaction or series of transactions giving rise to the need to calculate such ratio involves an incurrence of Indebtedness, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to (A) such Indebtedness as if such Indebtedness had been incurred on the first day of such period (provided that if such Indebtedness is incurred under a revolving credit facility (or similar arrangement or under any predecessor revolving credit or similar arrangement) only that portion of such Indebtedness that constitutes the one year projected average balance of such Indebtedness (as determined in good faith by senior management of the Issuer shall be deemed outstanding for purposes of this calculation), and (B) the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtednes as if such discharge had occurred on the first day of such period and (2) if since the beginning of such 102 period any Indebtedness of the Issuer or any of the Restricted Subsidiaries has been repaid, repurchased, defeased or otherwise discharged (whether through an Asset Acquisition, Asset Sale or otherwise) (other than Indebtedness under a revolving credit or similar arrangement unless such revolving credit Indebtedness has been permanently repaid and has not been replaced), Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Indebtedness had been repaid, repurchased, defeased or otherwise discharged on the first day of such period. "Annualized Pro Forma Consolidated Operating Cash Flow" means Consolidated Operating Cash Flow for the latest two fiscal quarters for which consolidated financial statements of the Issuer are available multiplied by two. For purposes of calculating "Consolidated Operating Cash Flow" for any two fiscal quarter period for purposes of this definition, (i) any Subsidiary of the Issuer that is a Restricted Subsidiary on the date of the transaction (the "Transaction Date") giving rise to the need to calculate "Annualized Pro Forma Consolidated Operating Cash Flow" shall be deemed to have been a Restricted Subsidiary at all times during such two fiscal quarter period and (ii) any Subsidiary of the Issuer that is not a Restricted Subsidiary on the Transaction Date shall be deemed not to have been a Restricted Subsidiary at any time during such two fiscal quarter period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated Operating Cash Flow" shall be calculated after giving effect on a pro forma basis for the applicable two fiscal quarter period to, without duplication, any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Issuer or one of the Restricted Subsidiaries (including any person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness) occurring during the period commencing on the first day of such two fiscal quarter period to and including the Transaction Date (the "Reference Period"), as if such Asset Sale or Asset Acquisition occurred on the first day of the Reference Period. "Asset Acquisition" means (i) any capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) by the Issuer or any Restricted Subsidiary in any other person, or any acquisition or purchase of Capital Stock of any other person by the Issuer or any Restricted Subsidiary, in either case pursuant to which such person shall become a Restricted Subsidiary or shall be merged with or into the Issuer or any Restricted Subsidiary or (ii) any acquisition by the Issuer or any Restricted Subsidiary of the assets of any person which constitute substantially all of an operating unit or line of business of such person or which is otherwise outside of the ordinary course of business. "Asset Sale" means any direct or indirect sale, conveyance, transfer or lease (that has the effect of a disposition and is not for security purposes) or other disposition (that is not for security purposes) to any person other than the Issuer or a Restricted Subsidiary, in one transaction or a series of related transactions, of (i) any Capital Stock of any Restricted Subsidiary, (ii) any material license or other authorization of the Issuer or any Restricted Subsidiary pertaining to a Cable/Telecommunications Business (other than the disposition to License Co. of the licenses and authorizations on terms identical to or at least as favorable to the Issuer and the Restricted Subsidiaries as those set forth in the License Co. Documents (provided such new documents shall also constitute License Co. Documents for all purposes hereunder) so long as the Issuer or a Restricted Subsidiary has the ability (pursuant to contract or otherwise) to fully exploit such license or authorization in a Cable/Telecommunications Business), (iii) any assets of the Issuer or any Restricted Subsidiary which constitute substantially all of an operating unit or line of business of the Issuer and the Restricted Subsidiaries or (iv) any other property or asset of the Issuer or any Restricted Subsidiary outside of the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (i) any disposition of properties and assets of the Issuer that is governed under " - -- Consolidation, Merger, Sale of Assets, Etc." above, (ii) sales of property or equipment that have become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Issuer or any Restricted Subsidiary, as the case may be, and (iii) for purposes of the covenant "Disposition of Proceeds of Asset Sales," any sale, conveyance, transfer, lease or other disposition of any property or asset, whether in one transaction or a series of related transactions occurring within one year, either (x) involving assets with a Fair Market Value not in excess of $250,000 or (y) which constitutes the incurrence of a Capitalized Lease Obligation. 103 "Average Life to Stated Maturity" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund requirements) of such Indebtedness multiplied by (b) the amount of each such principal payment by (ii) the sum of all such principal payments; provided that, in the case of any Capitalized Lease Obligation, all calculations hereunder shall give effect to any applicable options to renew in favor of the Issuer or any Restricted Subsidiary. "Board" means the Board of Directors of the Issuer. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Issuer to have been duly adopted by the Board and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Cable Subscriber" means, as of any determination date, any individual customer or bulk or commercial account (computed on an equivalent customer basis) to whom the Issuer or any Restricted Subsidiary provides subscription basic video programming services as well as accounts to whom the Issuer or any Restricted Subsidiary provides other video services for a fee (computed on an equivalent customer basis based on the basic programming service subscriber fee), in each case as of such date. "Cable/Telecommunications Business" means any business operating a cable and/or telephone and/or telecommunications system (delivered by any means, including, without limitation, cable, microwave, satellite or radio frequency) in the United States or otherwise delivering or expected to deliver services over the networks or systems of the Issuer and the Restricted Subsidiaries (including, without limitation, any business conducted by the Issuer or any Restricted Subsidiary on the Issue Date) and, for all purposes of the Indenture other than clauses (c) and (d) of the definition "Permitted Indebtedness," any business reasonably related to the foregoing (including, without limitation, any television programming, production and/or licensing business and any programming guide or telephone directory business). Any company holding a license or licenses to conduct any of the foregoing businesses that is not conducting any material business other than a Cable/Telecommunications Business shall also be considered a Cable/Telecommunications Business. A good faith determination by a majority of the Board as to whether a business meets the requirements of this definition shall be conclusive, absent manifest error. "Capital Stock" means, with respect to any person, any and all shares, interests, participations, rights in, or other equivalents (however designated and whether voting and/or non-voting) of, such person's capital stock, whether outstanding on the Issue Date or issued after the Issue Date, and any and all rights (other than any evidence of Indebtedness), warrants or options exchangeable for or convertible into such capital stock. "Capitalized Lease Obligation" means any obligation to pay rent or other amounts under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed, immovable or movable) that is required to be classified and accounted for as a capitalized lease obligation under GAAP, and, for the purpose of the Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of 365 days or less issued or directly and fully guaranteed or insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof or such Indebtedness constitutes a general obligation of such country); (ii) deposits, certificates of deposit or acceptances with a maturity of 365 days or less of any financial institution that is a member of the Federal Reserve System, in each case having combined capital and surplus and undivided profits (or any similar capital concept) of not less than $500.0 million and whose senior unsecured debt is rated at least "A-1" by S&P or "P-1" by Moody's; (iii) commercial paper with a maturity of 365 days or less issued by a corporation (other than an Affiliate of the Issuer) organized under the laws of the United States or any State thereof and rated at least "A-1" by S&P or "P-1" by 104 Moody's; and (iv) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States Government maturing within 365 days from the date of acquisition. "Change of Control" is defined to mean the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the Issuer; or (b) the Issuer consolidates with, or merges with or into, another person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person, or any person consolidates with, or merges with or into, the Issuer, in any such event pursuant to a transaction in which the outstanding Voting Stock of the Issuer is converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Stock of the Issuer is converted into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the surviving or transferee corporation and/or (2) cash, securities and other property in an amount which could be paid by the Issuer as a Restricted Payment under the Indenture and (ii) immediately after such transaction no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding the Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the surviving or transferee corporation; or (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors whose election by the Board or whose nomination for election by the stockholders of the Issuer was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason (other than by action of the Permitted Holders) to constitute a majority of the Board then in office; provided that (i) to the extent that either (x) one or more regulatory approvals are required for the consummation of one or more of the events or circumstances described in clauses (a) through (c) above to become effective under applicable law or (y) in the good faith judgment of the Board, one or more regulatory approvals are desirable prior to making one or more of the events or circumstances described in clauses (a) through (c) above to become effective under applicable law (provided, in the case of this clause (y), such approvals are sought on a reasonably prompt basis), then such events or circumstances shall be deemed to have occurred at the time such approvals have been obtained and become effective under applicable law, and (ii) any event or circumstance which would constitute a Change of Control solely by reason of the acquisition of "beneficial ownership" of securities of GVL shall not constitute a Change of Control with respect to the Issuer, unless it would result in a mandatory prepayment (by tender offer or otherwise) of Indebtedness, or an event of default under Indebtedness, of GVL or any of its Subsidiaries (other than the Issuer and its Subsidiaries). The good faith determination by the Board, based upon advice of outside counsel, of the beneficial ownership of securities of the Issuer within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent contrary controlling judicial precedent or contrary written interpretation published by the SEC. "Common Stock" means, with respect to any person, any and all shares, interest or other participations in, and other equivalents (however designated and whether voting or nonvoting) of such person's common stock whether outstanding at the Issue Date, and includes, without limitation, all series and classes of such common stock. "Consolidated Income Tax Expense" means, with respect to any period, the provision for United States corporation, local, foreign and other income taxes of the Issuer and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. 105 "Consolidated Interest Expense" means without duplication, the sum of (i) the interest expense of the Issuer and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, (a) any amortization of debt discount, (b) the net cost under Interest Rate Obligations (including any amortization of discounts), (c) the interest portion of any deferred payment obligation, (d) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and (e) all accrued interest, (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Issuer and the Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP and (iii) the amount of dividends in respect of Disqualified Stock paid by the Issuer and the Restricted Subsidiaries during such period. Notwithstanding the foregoing, in no event shall Consolidated Interest Expense include interest expense arising under the Convertible Notes or any Deeply Subordinated Shareholders' Loans to the extent incurred prior to the Termination Date. "Consolidated Net Income" means, with respect to any period, the consolidated net income of the Issuer and the Restricted Subsidiaries for such period, adjusted, to the extent included in calculating such consolidated net income, by excluding, without duplication, (i) all extraordinary, unusual or nonrecurring gains or losses of such person (net of fees and expenses relating to the transaction giving rise thereto) for such period, (ii) income of the Issuer and the Restricted Subsidiaries derived from or in respect of all Investments in persons other than Subsidiaries of the Issuer or any Restricted Subsidiary, (iii) the portion of net income (or loss) of such person allocable to minority interests in unconsolidated persons for such period, except to the extent actually received by the Issuer or any Restricted Subsidiary, (iv) net income (or loss) of any other person combined with such person on a "pooling of interests" basis attributable to any period prior to the date of combination, (v) any gain or loss, net of taxes, realized by such person upon the termination of any employee pension benefit plan during such period, (vi) gains or losses in respect of any Asset Sales (net of fees and expenses relating to the transaction giving rise thereto) during such period and (vii) except in the case of any restriction or encumbrance permitted under clause (v) of the covenant "Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries," the net income of any Restricted Subsidiary for such period to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its stockholders. "Consolidated Operating Cash Flow" means, with respect to any period, the Consolidated Net Income of the Issuer and the Restricted Subsidiaries for such period increased, to the extent deducted in arriving at Consolidated Net Income for such period, by the sum of (i) the Consolidated Income Tax Expense of the Issuer and the Restricted Subsidiaries accrued according to GAAP for such period (other than taxes attributable to extraordinary gains or losses and gains and losses from Asset Sales); (ii) Consolidated Interest Expense for such period; (iii) depreciation of the Issuer and the Restricted Subsidiaries for such period; (iv) amortization of the Issuer and the Restricted Subsidiaries for such period, including, without limitation, amortization of capitalized debt issuance costs for such period, all determined on a consolidated basis in accordance with GAAP; and (v) for purposes of the covenant "Limitation on Additional Indebtedness" only, other non-cash charges decreasing Consolidated Net Income. "consolidation" means, with respect to the Issuer, the consolidation of the accounts of the Restricted Subsidiaries with those of the Issuer, all in accordance with GAAP; provided that "consolidation" will not include consolidation of the accounts of any Unrestricted Subsidiary with the accounts of the Issuer. The term "consolidated" has a correlative meaning to the foregoing. "Convertible Notes" means all 15% convertible subordinated promissory notes of the Issuer due six months after the final maturity of the Notes that are outstanding on the Issue Date (after giving effect to the application of proceeds of the Offering). 106 "Cumulative Available Cash Flow" means, as at any date of determination, the positive cumulative Consolidated Operating Cash Flow realized during the period commencing on the Issue Date and ending on the last day of the most recent fiscal quarter immediately preceding the date of determination for which consolidated financial information of the Issuer is available or, if such cumulative Consolidated Operating Cash Flow for such period is negative, the amount by which cumulative Consolidated Operating Cash Flow is less than zero. "Cumulative Consolidated Interest Expense" means, at any date on which a Restricted Payment is proposed to be made, the sum of the Quarterly Consolidated Interest Expense Amounts for each quarter after the Issue Date (with the first quarter commencing on the Issue Date and ending on May 31, 1997) through the most recent quarter immediately preceding such Restricted Payment for which consolidated financial statements of the Issuer are available. The "Quarterly Consolidated Interest Expense Amount" for any quarter (the "Subject Quarter") will be the product of (a) Consolidated Interest Expense for the Subject Quarter times (b) the Applicable Percentage for the Subject Quarter, where the "Applicable Percentage" for the Subject Quarter will be (1) 150% of the Consolidated Interest Expense of the Issuer for the Subject Quarter if Total Consolidated Indebtedness for each day of the Subject Quarter is less than 6.0 times the Annualized Pro Forma Consolidated Operating Cash Flow of the Issuer (based upon the two most recent quarters for which consolidated financial statements of the Issuer are available immediately preceding the Subject Quarter) or (2) 200% of the Consolidated Interest Expense of the Issuer for the Subject Quarter if Total Consolidated Indebtedness for any day of the Subject Quarter is equal to or greater than 6.0 times the Annualized Pro Forma Consolidated Operating Cash Flow of the Issuer (based upon the two most recent quarters for which consolidated financial statements of the Issuer are available immediately preceding the Subject Quarter). "Deeply Subordinated Shareholders Loans" means any Indebtedness of the Issuer for money borrowed from either (x) a Permitted Holder or (y) another person whose obligations have been guaranteed by a Permitted Holder, provided such Indebtedness of the Issuer (i) has been expressly subordinated in right of payment and postponed as to all payments of interest and principal to the Notes, (ii) provides for no payments of interest or principal prior to the earlier of (a) the end of the sixth month after the final maturity of the Notes and (b) the indefeasible payment in full in cash of all Notes (or due provision therefor which results in the discharge of all Obligations under the Indenture); provided that the terms of the subordination agreement are in the form annexed to the Indenture and the Issuer has received one or more Opinions of Counsel as to the validity and enforceability of such subordination agreement. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Designation" has the meaning set forth under " -- Certain Covenants -- Limitation on Designations of Unrestricted Subsidiaries." "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Board of Directors of the Issuer other than a director who (i) has any material direct or indirect financial interest in or with respect to such transaction or series of related transactions or (ii) is an employee or officer of the Issuer or an Affiliate that is itself a party to such transaction or series of transactions or an Affiliate of a party to such transaction or series of related transactions. "Disqualified Stock" means, with respect to any person, any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is exchangeable for Indebtedness at the option of the holder thereof, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the final maturity date of the Notes; provided such Capital Stock shall only constitute Disqualified Stock to the extent it so matures or is redeemable or exchangeable on or prior to the final maturity date of the Notes. "Equity Offering" means an underwritten public offering of Common Stock of the Issuer which has been registered under the Securities Act. 107 "Existing Market Asset Acquisition" means an Asset Acquisition of a Cable/Telecommunications Business (other than the Phonoscope Acquisition) to the extent subscribers or customers are located in the metropolitan areas of Houston, Texas; Dallas-Fort Worth, Texas; San Diego, California; Phoenix, Arizona; Chicago, Illinois; Denver, Colorado; San Francisco, California; Los Angeles, California; Miami-Ft. Lauderdale, Florida; Tampa, Florida; or Austin, Texas (it being understood that where a Cable/Telecommunications Business subject to an Asset Acquisition is conducted in more than one market, an allocation of Indebtedness being incurred pursuant to clause (c) of the definition of Permitted Indebtedness may be made on the basis of the latest 12 months of revenues of the Cable/Telecommunications Business immediately preceding the date of incurrence in a particular metropolitan area). "Fair Market Value" means, with respect to any asset or property, the price that could be negotiated in an arms-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under pressure or compulsion to complete the transaction. Unless otherwise specified in the Indenture, Fair Market Value shall be determined by the Board acting in good faith and shall be evidenced by a Board Resolution delivered to the Trustee. "GAAP" means, at any date of determination, generally accepted accounting principles in effect in the United States and which are applicable as of the date of determination and which are consistently applied for all applicable periods. "guarantee" means, as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. "GVL" means Le Groupe Videotron Ltee. "Incremental Qualifying Cable Subscribers" means, as of any date of determination, the aggregate number of Qualifying Cable Subscribers of the Issuer and the Restricted Subsidiaries minus (i) the number of Qualifying Cable Subscribers of the Issuer and the Restricted Subsidiaries as of the Issue Date (94,944) and minus (ii) the number of Qualifying Cable Subscribers acquired pursuant to the Phonoscope Acquisition to the extent and only to the extent Indebtedness is incurred under clause (d) of the definition of "Permitted Indebtedness" to finance the Phonoscope Acquisition. "Indebtedness" means, with respect to any person, without duplication, (i) any liability, contingent or otherwise, of such person (A) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof) or (B) evidenced by a note, debenture or similar instrument or letter of credit (including a purchase money obligation) or (C) for the payment of money relating to a Capitalized Lease Obligation or other obligation relating to the deferred purchase price of property or (D) in respect of an Interest Rate Obligation or currency agreement; or (ii) any liability of others of the kind described in the preceding clause (i) which the person has guaranteed or which is otherwise its legal liability; or (iii) any obligation secured by a Lien (other than (x) Permitted Liens of the type described in clauses (b), (d) or (e) of the definition of Permitted Liens; provided that the obligations secured would not constitute Indebtedness under clauses (i) or (ii) or (iii) of this definition, and (y) Liens on Capital Stock or Indebtedness of any Unrestricted Subsidiary) to which the property or assets of such person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such person's legal liability (the amount of such obligation being deemed to be the lesser of the value of such property or asset or the amount of the obligation so secured); (iv) all Disqualified Stock valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends; and (v) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (i), 108 (ii), (iii) or (iv). In no event shall "Indebtedness" include trade payables and accrued liabilities that are current liabilities incurred in the ordinary course of business, excluding the current maturity of any obligation which would otherwise constitute Indebtedness. For purposes of the covenants "Limitation on Additional Indebtedness" and "Limitation on Restricted Payments" and the definition of "Events of Default," in determining the principal amount of any Indebtedness to be incurred by the Issuer or a Restricted Subsidiary or which is outstanding at any date, (x) the principal amount of any Indebtedness which provides that an amount less than the principal amount at maturity thereof shall be due upon any declaration of acceleration thereof shall be the accreted value thereof at the date of determination and (y) the principal amount of any Indebtedness shall be reduced by any amount of cash or Cash Equivalent collateral securing on a perfected basis, and dedicated for disbursement exclusively to the payment of principal of and interest on, such Indebtedness. "Independent Financial Advisor" means a United States investment banking firm of national standing in the United States (i) which does not, and whose directors, officers and employees or Affiliates do not have, a direct or indirect financial interest in the Issuer and (ii) which, in the judgment of the Board, is otherwise independent and qualified to perform the task for which it is to be engaged. "Interest Rate Obligations" means the obligations of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount and shall include without limitation, interest rate swaps, caps, floors, collars, forward interest rate agreements and similar agreements. "Investment" means, with respect to any person, any advance, loan, account receivable (other than an account receivable arising in the ordinary course of business), or other extension of credit (including, without limitation, by means of any guarantee) or any capital contribution to (by means of transfers of property to others, payments for property or services for the account or use of others, or otherwise), or any purchase or ownership of any stocks, bonds, notes, debentures or other securities of, any other person. Notwithstanding the foregoing, in no event shall any issuance of Capital Stock (other than Disqualified Stock) of the Issuer in exchange for Capital Stock, property or assets of another person constitute an Investment by the Issuer in such other person. "Issue Date" means February 14, 1997. "License Co." means Transmission Holdings, Inc., a Delaware corporation. "License Co. Documents" means, collectively, (i) the Assignment Agreement dated as of the Issue Date among TVMAX Telecommunications, Inc. ("TVMAX"), Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc. and IRPC Arizona, Inc., as assignors, and License Co., as assignee, (ii) the Equipment License and Services Agreement dated as of the Issue Date between TVMAX and License Co. and the Promissory Note of License Co. in favor of TVMAX annexed thereto, (iii) the Option Agreement dated as of the Issue Date between TVMAX and License Co., (iv) each Shareholders Option Agreement dated as of the Issue Date between TVMAX and a License Co. Shareholders (as defined below), (v) the Subscription and Shareholders Agreement dated as of the Issue Date among Rory O. Cole, Henry Goldberg and Russell B. Berman (collectively, the "License Co. Shareholders") and License Co. and (vi) any other agreements identical to the foregoing in all material respects and entered into for the same purposes that the Issuer or any Restricted Subsidiary may enter into in the future, as each of the foregoing documents referred to in clauses (i) through (v) may be amended, modified or supplemented in compliance with the covenant "Limitation on Transactions with Affiliates." "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind. A person shall be deemed to own subject to a Lien any property which such person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. 109 "Material Restricted Subsidiary" means any Restricted Subsidiary of the Issuer, which, at any date of determination, is a "Significant Subsidiary" (as that term is defined in Regulation S-X issued under the Securities Act), but shall, in any event, include (x) any Guarantor, (y) TVMAX or (z) any Restricted Subsidiary of the Issuer which, at any date of determination, is an obligor under any Indebtedness in an aggregate principal amount equal to or exceeding $10.0 million if another Material Restricted Subsidiary is also obligated in respect of such Indebtedness. "Maturity Date" means, with respect to any Note, the date specified in such Note as the fixed date on which the principal of such Note is due and payable. "Moody's" means Moody's Investors Service. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash (including assumed liabilities and other items deemed to be cash under the proviso to the first sentence of the covenant "Disposition of Proceeds of Asset Sales") or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Issuer or any Restricted Subsidiary) net of (i) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale, (iii) amounts required to be paid to any person (other than the Issuer or any Restricted Subsidiary) owning a beneficial interest in or having a Permitted Lien on the assets subject to the Asset Sale and (iv) appropriate amounts to be provided by the Issuer or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Issuer or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, all as reflected in an Officers' Certificate delivered to the Trustee. "Other Senior Debt Pro Rata Share" means the amount of the applicable Excess Proceeds obtained by multiplying the amount of such Excess Proceeds by a fraction, (i) the numerator of which is the aggregate accreted value and/or principal amount, as the case may be, of all Indebtedness (other than (x) the Notes and (y) Subordinated Indebtedness) of the Issuer outstanding at the time of the applicable Asset Sale with respect to which the Issuer is required to use Excess Proceeds to repay or make an offer to purchase or repay and (ii) the denominator of which is the sum of (a) the aggregate principal amount of all Notes outstanding at the time of the applicable Asset Sale and (b) the aggregate principal amount or the aggregate accreted value, as the case may be, of all other Indebtedness (other than Subordinated Indebtedness) of the Issuer outstanding at the time of the applicable Asset Sale Offer with respect to which the Issuer is required to use the applicable Excess Proceeds to offer to repay or make an offer to purchase or repay. "Pacific" means Pacific Capital Group, Inc. "Permitted Holder" means (i) any of GVL, Caisse de depot et placement du Quebec or any of their respective controlled Affiliates, (ii) a Strategic Equity Investor that, prior to August 31, 1999, invests on a primary basis in Capital Stock (other than Disqualified Stock) representing not less than 15% of the fully diluted Common Stock of the Issuer at the time of issuance by the Issuer; provided that only the first such Strategic Equity Investor shall be a Permitted Holder, or (iii) Andre Chagnon, his spouse or any of his lineal descendants and their respective spouses (collectively, the "Chagnon Family"), whether acting in their own name or as one or as a majority of persons having the power to exercise the voting rights attached to, or having investment power over, shares of Capital Stock held by others, or (iv) any controlled Affiliate of any member of the Chagnon Family or (v) any trust principally for the benefit of one or more members of the Chagnon Family (whether or not any member of the Chagnon Family is a trustee of such trust) or (vi) any charitable foundation a majority of whose members, trustees or directors, as the case may be, are persons referred to in (iii) above. For purposes of this definition, "lineal descendant" shall include at any time any person that is treated as being adopted or is in the process of being adopted by any member of the Chagnon Family at such time. 110 "Permitted Indebtedness" means the following Indebtedness (each of which shall be given independent effect): (a) Indebtedness under the Notes and the Indenture; (b) Indebtedness of the Issuer and/or any Restricted Subsidiary outstanding on the Issue Date; (c) Indebtedness, including under any Senior Bank Facility or Vendor Credit Facility, of the Issuer and/or any Restricted Subsidiary to the extent that the proceeds of such Indebtedness are used to finance or support working capital (including to fund operating losses) for, or the construction of, a Cable/Telecommunications Business of the Issuer or any of the Restricted Subsidiaries or the acquisition of properties or assets (tangible or intangible) to be used in a Cable/Telecommunications Business of the Issuer or any of its Restricted Subsidiaries (other than for an Asset Acquisition to the extent that it is not an Existing Market Asset Acquisition) or for an Existing Market Asset Acquisition; provided that, after giving effect to the incurrence of any such Indebtedness, the aggregate outstanding Indebtedness incurred under this clause (c) and incurred pursuant to any Refinancings (whether the initial Refinancing or any successive Refinancing) thereof incurred under clause (h) below does not exceed the sum of (i) $100.0 million, plus (ii) the product of the number of Incremental Qualifying Cable Subscribers times $1,200; provided that no Indebtedness may be incurred under this clause (c) in reliance on the immediately preceding clause (ii) on any date on or after February 15, 2001; (d) to the extent not funded with the net proceeds from the sale of the Notes, Indebtedness incurred by the Issuer or any Restricted Subsidiary to finance the Phonoscope Acquisition; (e) (i) Indebtedness of any Restricted Subsidiary owed to and held by the Issuer or a Restricted Subsidiary and (ii) Indebtedness of the Issuer owed to and held by any Restricted Subsidiary; provided that an incurrence of Indebtedness shall be deemed to have occurred upon (x) any sale or other disposition (excluding assignments as security to financial institutions) of any Indebtedness of the Issuer or a Restricted Subsidiary referred to in this clause (f) to a person (other than the Issuer or a Restricted Subsidiary) or (y) any sale or other disposition of Capital Stock of a Restricted Subsidiary, or Designation of a Restricted Subsidiary, which holds Indebtedness of the Issuer or another Restricted Subsidiary such that such Restricted Subsidiary, in any such case, ceases to be a Restricted Subsidiary; (f) Interest Rate Obligations of the Issuer and/or any Restricted Subsidiary relating to (i) Indebtedness of the Issuer and/or such Restricted Subsidiary, as the case may be (which Indebtedness (x) bears interest at fluctuating interest rates and (y) is otherwise permitted to be incurred under the "Limitation on Additional Indebtedness" covenant), and/or (ii) Indebtedness (which Indebtedness would bear interest at fluctuating interest rates) for which a lender has provided a commitment (subject to customary conditions) in an amount reasonably anticipated to be incurred by the Issuer and/or a Restricted Subsidiary in the following 12 months after such Interest Rate Obligation has been incurred, but only to the extent, in the case of either subclause (i) or (ii), that the notional principal amount of such Interest Rate Obligations does not exceed the principal amount of the Indebtedness (and/or Indebtedness subject to commitments) to which such Interest Rate Obligations relate; (g) Indebtedness of the Issuer and/or any Restricted Subsidiary in respect of performance bonds of the Issuer or any Restricted Subsidiary or surety bonds provided by the Issuer or any Restricted Subsidiary incurred in the ordinary course of business in connection with the construction, implementation or operation of a Cable/Telecommunications Business; (h) Indebtedness of the Issuer and/or any Restricted Subsidiary to the extent it represents a replacement, renewal, refinancing or extension (a "Refinancing") of outstanding Indebtedness of the Issuer and/or of any Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b) (other than the Convertible Notes), (c) or (d) of this definition or the proviso of the covenant 111 "Limitation on Additional Indebtedness"; provided that (1) Indebtedness of the Issuer may not be Refinanced to such extent under this clause (h) with Indebtedness of any Restricted Subsidiary and (2) any such Refinancing shall only be permitted under this clause (h) to the extent that (x) it does not result in a lower Average Life to Stated Maturity of such Indebtedness as compared with the Indebtedness being Refinanced and (y) it does not exceed the sum of the principal amount (or, if such Indebtedness provides for a lesser amount to be due and payable upon a declaration of acceleration thereof, an amount no greater than such lesser amount) of the Indebtedness being Refinanced plus the amount of accrued interest thereon and the amount of any reasonably determined prepayment premium necessary to accomplish such Refinancing and such reasonable fees and expenses incurred in connection therewith; (i) Indebtedness of the Issuer under Deeply Subordinated Shareholders Loans to the extent incurred prior to the Termination Date; and (j) in addition to the items referred to in clauses (a) through (i) above, Indebtedness of the Issuer and any Acquired Indebtedness of any Restricted Subsidiary having an aggregate principal amount not to exceed $50.0 million at any time outstanding. "Permitted Investments" means (a) Cash Equivalents; (b) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits; (c) loans and advances to employees made in the ordinary course of business; (d) Interest Rate Obligations; (e) bonds, notes, debentures or other securities received as a result of Asset Sales pursuant to and in compliance with the covenant "Disposition of Proceeds of Asset Sales"; (f) Investments made in the ordinary course of business as partial payment for constructing a network relating principally to a Cable/Telecommunications Business; (g) Investments in License Co. contemplated by the License Co. Documents; and (h) Investments in companies owning or managing multiple dwelling units (or an Affiliate thereof) with which the Issuer or any Restricted Subsidiary have Rights of Entry in the ordinary course of business in lieu of (in whole or in part) other customary financial inducements to property owners. "Permitted Liens" means (a) Liens on property of a person existing at the time such person is merged into or consolidated with the Issuer or any Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such Liens were in existence prior to the contemplation of such merger, consolidation or acquisition and do not secure any property or assets of the Issuer or any Restricted Subsidiary other than the property or assets subject to the Liens prior to such merger or consolidation; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens and other similar Liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or are being contested in good faith and by appropriate proceedings; (c) Liens existing on the Issue Date, including to secure the note in the amount of $1.0 million in favor of International Richey Pacific Cablevision Ltd.; (d) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (e) easements, rights of way, restrictions and other similar easements, licenses, restrictions on the use of properties, or minor imperfections of title that, in the aggregate, are not material in amount and do not in any case materially detract from the properties subject thereto or interfere with the ordinary conduct of the business of the Issuer or the Restricted Subsidiaries; (f) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (g) Liens securing any Senior Bank Facility or Vendor Credit Facility to the extent it would constitute "Permitted Indebtedness"; (h) Liens to secure any Refinancing of any Indebtedness secured by Liens referred to in the foregoing clauses (a) or (c), but only to the extent that such Liens do not extend to any other property or assets and the principal amount of the Indebtedness secured by such Liens is not increased; (i) Liens to secure the Notes; and (j) Liens on real property incurred in connection with the financing of the purchase of such real property (or incurred within 60 days of purchase) by the Issuer or any Restricted Subsidiary. 112 "Preferred Stock" means, with respect to any person, any and all shares, interests, participations or other equivalents (however designated) of such person's preferred or preference stock whether now outstanding, or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "Publicly Traded Stock" means any Common Stock of an issuer that is listed and traded on either the New York Stock Exchange or the American Stock Exchange or the Nasdaq National Market System. "Qualifying Cable Subscribers" means, as of any date of determination, the aggregate number of Cable Subscribers for the Issuer and the Restricted Subsidiaries as of the last day of the most recent month ending not more than 45 days prior to the date of determination. "Refinancing" has the meaning set forth in clause (h) of the definition of "Permitted "Indebtedness." "Restricted Payment" means any of the following: (i) the declaration or payment of any dividend or any other distribution on Capital Stock of the Issuer or any payment made to the direct or indirect holders (in their capacities as such) of Capital Stock of the Issuer (other than dividends or distributions payable solely in Capital Stock (other than Disqualified Stock) of the Issuer or in options, warrants or other rights to purchase Capital Stock (other than Disqualified Stock) of the Issuer); (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Issuer (other than any such Capital Stock owned by the Issuer or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness (other than any Subordinated Indebtedness held by a Restricted Subsidiary); (iv) the making of any payment (whether of principal or interest (other than the payment of interest in the form of additional Deeply Subordinated Shareholders Loans) in respect of the Convertible Notes or the Deeply Subordinated Shareholders Loans; or (v) the making of any Investment (other than a Permitted Investment) in any person (other than an Investment by a Restricted Subsidiary in the Issuer or an Investment by the Issuer or a Restricted Subsidiary in either (x) a Restricted Subsidiary engaged principally in a Cable/Telecommunications Business or (y) a person engaged principally in a Cable/Telecommunications Business that becomes a Restricted Subsidiary as a result of such Investment). Notwithstanding the foregoing, the payment of compensation to Le Groupe Videotron Ltee, Pacific or any of their respective Subsidiaries pursuant to the Settlement Agreement dated as of August 1, 1996 between Vanguard Communications, L.P., Pacific, VPC, the Issuer and Le Groupe Videotron Ltee, as in effect on the Issue Date, shall not constitute a Restricted Payment to the extent, and only to the extent, that such amounts are deducted in arriving at Cumulative Available Cash Flow of the Issuer. "Restricted Subsidiary" means any Subsidiary of the Issuer that has not been designated by the Board, by a Board Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with the covenant "Limitation on Designations of Unrestricted Subsidiaries." Any such designation may be revoked by a Board Resolution delivered to the Trustee, subject to the provisions of such covenant. "Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted Subsidiary (i) which is not subordinated to any other Indebtedness of such Restricted Subsidiary and (ii) in respect of which the Issuer is not also obligated (by means of a guarantee or otherwise) other than, in the case of this clause (ii), Indebtedness under any Senior Bank Facility or Vendor Credit Facility to the extent constituting "Permitted Indebtedness." "Revocation" has the meaning set forth under " -- Certain Covenants -- Limitation on Designations of Unrestricted Subsidiaries." "Richey Warrant" means the Warrant dated December 29, 1994 to purchase B Units of Limited Partnership Interest of Vanguard Communications, L.P. "S&P" means Standard & Poor's Corporation. 113 "Senior Bank Facility" means any senior commercial term loan and/or revolving credit facility (including any letter of credit subfacility) entered into principally with commercial banks and/or other financial institutions typically party to commercial loan agreements. "Strategic Equity Investor" means (i) any company (other than GVL and its affiliates) which is engaged principally in a Cable/Telecommunications Business and which has a rating from Moody's of Baa3 (or the equivalent thereof) or higher or from S&P of BBB- (or the equivalent thereof) or higher or (ii) any controlled Affiliate of any company referred to in the preceding clause (i). "Subordinated Indebtedness" means any Indebtedness of the Issuer or any Guarantor which is expressly subordinated in right of payment to any other Indebtedness of the Issuer or such Guarantor. "Subsidiary" means, with respect to any person, (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors shall at the time be owned, directly or indirectly, by such person, or (ii) any other person of which at least a majority of voting interest is at the time, directly or indirectly, owned by such person. "Termination Date" means the earlier to occur of (i) July 31, 1999 and (ii) an Equity Offering. "Total Consolidated Indebtedness" means, at any date of determination, an amount equal to the aggregate amount of all Indebtedness of the Issuer and the Restricted Subsidiaries outstanding as of the date of determination, provided that Total Consolidated Indebtedness shall exclude the Convertible Notes and any Deeply Subordinated Shareholders Loans to the extent incurred prior to the Termination Date. "Unrestricted Subsidiary" means any Subsidiary of the Issuer designated as such pursuant to and in compliance with the covenant "Limitation on Designations of Unrestricted Subsidiaries." Any such designation may be revoked by a Board Resolution delivered to the Trustee, subject to the provisions of such covenant. "U.S. Government Securities" means securities that are direct obligations of the United States of America for the payment of which its full faith and credit is pledged. "Vendor Credit Facility" means, collectively, any credit facility entered into with any vendor or supplier (or any financial institution acting on behalf of or for the purpose of directly financing purchases from such vendor or supplier) to the extent the Indebtedness thereunder is incurred for the purpose of financing the cost (including the cost of design, development, site acquisition, construction, integration, manufacture or acquisition) of personal property (tangible or intangible) used, or to be used, in a Cable/Telecommunications Business. "VPC" means VPC Corporation. 114 BOOK-ENTRY, DELIVERY AND FORM Except as set forth in the next paragraph, the New Notes sold will be issued in the form of one or more registered notes in global form (the "New Global Note," together with the Global Note representing the Old Notes, the "Global Note"). On the Exchange Date, the New Global Note will be deposited with, or on behalf of, the Depository and registered in the name of the Depository or its nominee. Except as set forth below, the Global Note may be transferred, in whole and not in part, only to the Depository or another nominee of the Depository. Investors may hold their beneficial interests in the Global Note directly through the Depository if they have an account with the Depository or indirectly through organizations which have accounts with the Depository. New Notes that were (i) originally issued to or transferred to institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who are not qualified institutional buyers ("QIBs") or (ii) issued as described below under "--Certificated Notes" will be issued in definitive form. Upon the transfer of a Note in definitive form, such Note will, unless the applicable Global Note has previously been exchanged for Notes in definitive form, be exchanged for an interest in the Global Note representing the principal amount of Notes being transferred. The Depository has advised the Issuer as follows: The Depository is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and "a clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depository was created to hold securities of institutions that have accounts with the Depository ("participants") and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. The Depository's participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Access to the Depository's book-entry system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, whether directly or indirectly. Upon the issuance of the New Global Note, the Depository will credit, on its book-entry registration and transfer system, the principal amount of the Notes represented by such New Global Note to the accounts of participants. Ownership of beneficial interests in the Global Note will be limited to participants or persons that may hold interests through participants. Ownership of beneficial interests in the Global Note will be shown on, and the transfer of those ownership interests will be effected only through, records maintained by the Depository (with respect to participants' interest) and such participants (with respect to the owners of beneficial interests in the Global Notes other than participants). The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and laws may impair the ability to transfer or pledge beneficial interests in the Global Notes. So long as the Depository, or its nominee, is the registered holder and owner of the Global Note, the Depository or such nominee, as the case may be, will be considered the sole legal owner and holder of the Notes for all purposes of such Notes and the Indenture . Except as set forth below, owners of beneficial interests in the Global Note will not be entitled to have the Notes represented by the Global Note registered in their names, will not receive or be entitled to receive physical delivery of certificated Notes in definitive form and will not be considered to be the owners or holders of any Notes under the Global Note. The Issuer understands that under existing industry practice, in the event an owner of a beneficial interest in the Global Note desires to take any action that the Depository, as the holder of the applicable Global Note, is entitled to take, the Depository would authorize the participants to take such action, and that the participants would authorize beneficial owners owning through such participants to take such action or would otherwise act upon the instructions of beneficial owners owning through them. Payments in respect of the Notes represented by the Global Note registered in the name of and held by the Depository or its nominee will be made to the Depository or its nominee, as the case may be, as the registered owner and holder of the Global Note. 115 The Issuer expects that the Depository or its nominee, upon receipt of any payment in respect of the Notes will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the Global Note as shown on the records of the Depository or its nominee. The Issuer also expects that payments by participants to owners of beneficial interests in the Global Note held through such participants will be governed by standing instructions and customary practices and will be the responsibility of such participants. The Issuer will not have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between the Depository and its participants or the relationship between such participants and the owners of beneficial interests in the Global Note owning through such participants. Unless and until it is exchanged in whole or in part for certificated Notes in definitive form, the Global Note may not be transferred except as a whole by the Depository to a nominee of such Depository or by a nominee of such Depository to such Depository or another nominee of such Depository. Although the Depository has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Note among participants of the Depository, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Trustee nor the Issuer will have any responsibility for the performance by the Depository or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations. CERTIFICATED SECURITIES The Notes represented by the Global Note are exchangeable for certificated Notes in definitive form of like tenor as such Notes in denominations of $1,000 and integral multiples thereof if (i) the Depository notifies the Issuer that it is unwilling or unable to continue as Depository for the Global Notes or if at any time the Depository ceases to be a clearing agency registered under the Exchange Act and a successor depository is not appointed by the Issuer within 90 days, (ii) the Issuer in its discretion at any time determines not to have all of the Notes represented by the Global Note or (iii) a default entitling the holders of the Notes to accelerate the maturity thereof has occurred and is continuing. Any Note that is exchangeable pursuant to the preceding sentence is exchangeable for certificated Notes issuable in authorized denominations and registered in such names as the Depository shall direct. 116 EXCHANGE OFFER; REGISTRATION RIGHTS The Issuer has entered into the Registration Agreement pursuant to which it agreed to file the registration statement of which this Prospectus forms a part (the "Exchange Offer Registration Statement") and to use its best efforts to cause the Exchange Offer Registration Statement to be declared effective under the Securities Act not later than June 13, 1997. Upon the effectiveness of the Exchange Offer Registration Statement, the Issuer will promptly offer the New Notes in exchange for surrender of the Old Notes. See "The Exchange Offer." Under existing SEC interpretations, the New Notes would be freely transferable by holders other than affiliates of the Issuer after the Exchange Offer without further registration under the Securities Act if the holder of the New Notes represents that it is acquiring the New Notes in the ordinary course of its business, that it has no arrangement or understanding with any person to participate in the distribution of the New Notes and that it is not an affiliate of the Issuer, as such terms are interpreted by the SEC; provided that broker-dealers ("Participating Broker-Dealers") receiving New Notes in the Exchange Offer will have a prospectus delivery requirement with respect to resales of such New Notes. The SEC has taken the position that Participating Brokers-Dealers may fulfill their prospectus delivery requirements with respect to New Notes (other than a resale of an unsold allotment from the original sale of the Notes) with the prospectus contained in the Exchange Offer Registration Statement. Under the Registration Agreement, the Issuer is required to allow Participating Broker-Dealers and other persons, if any, with similar prospectus delivery requirements to use the prospectus contained in the Exchange Offer Registration Statement in connection with the resale of such New Notes for a specified period of time. A holder of Old Notes (other than certain specified holders of Old Notes) who wishes to exchange such Notes for New Notes in the Exchange Offer is required to represent that any New Notes to be received by it will be acquired in the ordinary course of its business and that at the time of the commencement of the Registered Exchange Offer it has no arrangement or understanding with any person to participate in the distribution (within the meaning of the Securities Act) of the New Notes and that is not an "affiliate" of the Company, as defined in Rule 405 of the Securities Act, or if it is an affiliate, that it will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. In the event that applicable interpretations of the staff of the SEC do not permit the Issuer to effect the Exchange Offer, or if for any other reason the Exchange Offer is not consummated by July 13, 1997, or if Salomon Brothers Inc. or Merrill Lynch, Pierce, Fenner & Smith Incorporated, the initial purchasers of the Offering, so request with respect to Old Notes not eligible to be exchanged for New Notes in the Exchange Offer, or if any holder of Old Notes is not eligible to participate in the Exchange Offer or participates in but does not receive freely tradeable (except for prospectus delivery requirements) New Notes in the Exchange Offer the Issuer will, at its cost, (a) as promptly as practicable, file a shelf registration statement (the "Shelf Registration Statement") covering resales of the Old Notes or the New Notes, as the case may be, (b) use its best efforts to cause the Shelf Registration Statement to be declared effective under the Securities Act by August 12, 1997 and (c) keep the Shelf Registration Statement effective until three years after its effective date (or shorter period that will terminate when all Old Notes or New Notes, as the case may be, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement). The Issuer will, in the event a Shelf Registration Statement is filed, among other things, provide to each holder for whom such Shelf Registration Statement was filed copies of the prospectus which is a part of the Shelf Registration Statement, notify each such holder when the Shelf Registration Statement has become effective and take certain other actions as are required to permit unrestricted resales of the Old Notes or the New Notes, as the case may be. A holder selling such Old Notes or New Notes pursuant to the Shelf Registration Statement generally would be required to be named as a selling security holder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the Registration Agreement which are applicable to such holder (including certain indemnification obligations). 117 If (i) by June 13, 1997, the Exchange Offer Registration Statement has not been declared effective; (ii) by July 13, 1997, the Exchange Offer has not been consummated or by August 12, 1997, the Shelf Registration Statement has not been declared effective; or (iii) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared effective such Registration Statement thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of Old Notes or New Notes in accordance with and during the periods specified in the Registration Agreement (each such event referred to in clauses (i) through (iii), a "Registration Default"), additional interest ("Liquidated Damages") will accrue on the Old Notes and the New Notes (in addition to the stated interest on the Old Notes and the New Notes) from and including the date on which any such Registration Default shall occur but excluding the date on which all Registration Defaults have been cured. Liquidated Damages will be payable in cash semi-annually in arrears each February 15 and August 15, commencing August 15, at a rate per annum equal to 0.50% of the principal amount of the Notes during the 90-day period immediately following the occurrence of any Registration Default and shall increase by 0.25% per annum of the principal amount of the Notes at the end of each subsequent 90-day period, but in no event shall such rate exceed 2.00% per annum in the aggregate regardless of the number of Registration Defaults. The summary herein of certain provisions of the Registration Agreement does not purport to be complete and is subject to and is qualified in its entirety by reference to all the provisions of the Registration Agreement, a copy of which has been filed as an exhibit to the Exchange Offer Registration Statement. 118 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The exchange of New Notes for Old Notes will not constitute a recognition event for federal income tax purposes. Consequently, no gain or loss will be recognized by holders upon receipt of the New Notes. For purposes of determining gain or loss upon the subsequent sale or exchange of New Notes, a holder's basis in the New Notes will be the same as the holder's basis in the Old Notes exchanged therefor. Holders will be considered to have held the New Notes from the time of their original acquisition of the Old Notes. PLAN OF DISTRIBUTION Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of the New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Notes were acquired as a result of market-making activities or other trading activities. The Issuer has agreed that, starting on the Exchange Date (as defined) and ending on the close of business on the earlier of the first anniversary of the Exchange Date or the date upon which all such New Notes have been sold by such participating broker-dealer (the "Registration Period"), it will make this Prospectus available to any broker-dealer for use in connection with any such resale. In addition, until , 1997, all dealers effecting transactions in the New Notes may be required to deliver a Prospectus. The Issuer will not receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker-dealer that participates in a distribution of New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. During the Registration Period, the Issuer will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Issuer has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Notes) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Notes (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. The Issuer has not entered into any arrangement or understanding with any person to distribute the New Notes to be received in the Exchange Offer and to the best of the Issuer's information and belief, each person participating in the Exchange Offer is acquiring the New Notes in its ordinary course of business and has no arrangement or understanding with any person to participate in the distribution of the New Notes to be received in the Exchange Offer. 119 LEGAL MATTERS The validity of the New Notes offered hereby will be passed upon and certain other legal matters in connection with the sale of securities offered hereby will be passed upon for the Issuer by Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036-7798. In rendering their opinion Kronish, Lieb, Weiner & Hellman LLP will rely upon the opinion of Goldberg, Godles, Weiner & Wright, the Company's FCC Counsel, as to FCC matters. Russell S. Berman of Kronish, Lieb, Weiner & Hellman LLP and Henry Goldberg of Goldberg, Godles, Weiner & Wright each hold one-third of the outstanding equity interests in THI (see "Certain Transactions -- License Holding Company"). EXPERTS The Consolidated Financial Statements of the Company for the year ended August 31, 1996, for the period January 1, 1995 to August 31, 1995, the year ended December 31, 1994 and the period April 20, 1993 (inception) to December 31, 1993, the Combined Statements of Operations and Cash Flows of Richey Pacific Cablevision for the years ended December 31, 1993 and December 28, 1994, the Statements of Revenues and Expenses and Statements of Cash Flows of EagleVision for the years ended December 31, 1993 and 1994, and the Statement of Operations and Cash Flows of Triax Associates V, L.P. for the year ended August 31, 1995 have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports included herein and have been so included in reliance upon their authority as experts in accounting and auditing. 120 INDEX TO FINANCIAL STATEMENTS OPTEL, INC. AND SUBSIDIARIES:
Independent Auditors' Report ..................................................................... F-2 Consolidated Balance Sheets as of August 31, 1995 and 1996 and February 28, 1997 (Unaudited) ................................................................... F-3 Consolidated Statements of Operations for the period from April 20, 1993 (Date of Inception) to December 31, 1993, the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995, and the year ended August 31, 1996 and the six month periods ended February 29, 1996 and February 28, 1997 (Unaudited) ............................................................... F-4 Consolidated Statements of Stockholders' Equity for the period from April 30, 1993 (Date of Inception) to December 31, 1993, the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995, and the year ended August 31, 1996 and the six month period ended February 28, 1997 (Unaudited) ................................................................... F-5 Consolidated Statements of Cash Flows for the period from April 20, 1993 (Date of Inception) to December 31, 1993, the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995, and the year ended August 31, 1996 and the six month periods ended February 29, 1996 and February 28, 1997 (Unaudited) ............................................................... F-6 Notes to Consolidated Financial Statements ....................................................... F-7 ACQUIRED COMPANIES: Richey Pacific Cablevision: Independent Auditors' Report ................................................................... F-17 Combined Statements of Operations for the years ended December 31, 1993 and December 28, 1994 .. F-18 Combined Statements of Cash Flows for the years ended December 31, 1993 and December 28, 1994 .. F-19 Notes to Combined Financial Statements ......................................................... F-20 EagleVision: Independent Auditors' Report ................................................................... F-22 Statements of Revenues and Expenses for the years ended December 31, 1993 and 1994 ............. F-23 Statements of Cash Flows for the years ended December 31, 1993 and 1994 ........................ F-24 Notes to Financial Statements .................................................................. F-25 Triax Associates V, L.P.: Independent Auditors' Report ................................................................... F-27 Statement of Operations for the year ended August 31, 1995 ..................................... F-28 Statement of Cash Flows for the year ended August 31, 1995 ..................................... F-29 Notes to Financial Statements .................................................................. F-30
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc.: We have audited the accompanying consolidated balance sheets of OpTel, Inc. and subsidiaries (the "Company") as of August 31, 1995 and 1996 and the related consolidated statements of operations, stockholders' equity and cash flows for the period from April 20, 1993 (date of inception) to December 31, 1993, the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995, and the year ended August 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of OpTel, Inc. and subsidiaries as of August 31, 1995 and 1996 and the results of their operations and their cash flows for the period from April 20, 1993 (date of inception) to December 31, 1993, the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995, and the year ended August 31, 1996, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Dallas, Texas November 7, 1996 (February 7, 1997 as to Note 13) F-2 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------- August 31, ---------------------------------- February 28, 1995 1996 1997 --------------- --------------- -------------- (Unaudited) ASSETS Cash and cash equivalents ........................ $ 2,035,980 $ 1,677,332 $135,015,397 Restricted investments (Note 14) ................. -- -- 79,803,740 Accounts receivable (net of allowance for doubtful accounts of $473,218, $542,134 and $819,999 (unaudited), respectively) ...................... 1,594,110 3,063,719 3,639,963 Prepaid expenses, deposits and other assets ...... 939,119 1,020,055 1,574,323 Amounts due from stockholder, net (Note 9) ....... -- 541,586 136,702 Property and equipment, net (Note 4) ............. 48,059,601 103,799,650 122,040,687 Intangible assets, net (Note 5) .................. 55,443,266 65,876,003 75,470,578 --------------- --------------- -------------- TOTAL ............................................ $108,072,076 $175,978,345 $417,681,390 =============== =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable ................................. $ 2,370,976 $ 5,647,024 $ 3,276,664 Accrued expenses and other liabilities ........... 8,925,009 10,506,586 13,643,562 Deferred revenues and customer deposits .......... 1,258,120 2,167,253 2,436,370 Convertible notes payable to stockholder (Notes 6 and 9) ..................... 17,949,690 89,414,364 121,006,370 Notes payable and long-term obligations (Notes 6 and 14) .................... 2,849,423 2,443,341 220,615,287 Deferred acquisition liabilities (Notes 3 and 6) . 6,174,295 6,520,022 6,715,733 --------------- --------------- -------------- Total liabilities ...................... 39,527,513 116,698,590 367,693,986 COMMITMENTS AND CONTINGENCIES (Notes 3 and 7) STOCKHOLDERS' EQUITY (Notes 9, 10, 13 and 14): Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding ............................... -- -- -- Class A common stock, $.01 par value; 8,000,000 shares authorized; none issued and outstanding ........................... -- -- -- Class B common stock, $.01 par value; 6,000,000 shares authorized; 2,149,332, 2,304,561 and 2,304,561 (unaudited) issued and outstanding, respectively ............. 21,493 23,046 23,046 Class C common stock, $.01 par value; 300,000 shares authorized; 225,000 (unaudited) issued and outstanding .................... -- -- 2,250 Additional paid-in capital .................. 78,902,382 88,065,805 95,063,555 Accumulated deficit ......................... (10,379,312) (28,809,096) (45,101,447) --------------- --------------- -------------- Total stockholders' equity ............. 68,544,563 59,279,755 49,987,404 --------------- --------------- -------------- TOTAL ............................................ $108,072,076 $175,978,345 $417,681,390 =============== =============== ==============
See notes to consolidated financial statements. F-3 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------- Period From April 20, 1993 (Date Of Period From Inception) To Year Ended January 1, 1995 Six Month Period Ended December 31, December 31, To August 31, Year Ended February 29, February 28, 1993 1994 1995 August 31, 1996 1996 1997 -------------- --------------- --------------- --------------- -------------- -------------- (Unaudited) REVENUES: Cable television .... $ 12,106 $ 240,193 $ 8,782,610 $ 25,893,401 $11,569,880 $ 17,208,297 Telecommunications.... -- 201,467 787,788 1,711,446 718,232 1,413,420 -------------- --------------- --------------- --------------- -------------- --------------- Total revenues ...... 12,106 441,660 9,570,398 27,604,847 12,288,112 18,621,717 -------------- --------------- --------------- --------------- -------------- --------------- OPERATING EXPENSES: Cost of services .... 5,662 469,952 4,557,609 11,867,960 5,265,797 8,701,471 Customer support, general and administrative ..... 303,814 7,732,610 8,234,755 17,317,890 7,499,115 12,266,597 Depreciation and amortization ....... 8,224 117,020 2,420,397 8,676,262 3,804,088 5,820,354 Nonrecurring reorganization costs (Note 1) ..... -- -- 3,819,916 2,318,383 825,741 -- -------------- --------------- --------------- --------------- -------------- --------------- Total operating expenses ........... 317,700 8,319,582 19,032,677 40,180,495 17,394,741 26,788,422 -------------- --------------- --------------- --------------- -------------- --------------- LOSS FROM OPERATIONS ... (305,594) (7,877,922) (9,462,279) (12,575,648) (5,106,629) (8,166,705) OTHER INCOME (EXPENSE): Interest expense on convertible notes payable to stockholder (Notes 4 and 9) -- -- (918,501) (5,342,208) (1,889,955) (6,907,852) Other interest expense ............ (2,658) (76,367) (349,297) (656,925) (321,008) (1,693,910) Interest income and other, net ..... 1,408 10,112 99,936 144,997 75,426 476,116 -------------- --------------- --------------- --------------- -------------- --------------- LOSS BEFORE INCOME TAXES ............... (306,844) (7,944,177) (10,630,141) (18,429,784) (7,242,166) (16,292,351) INCOME TAX BENEFIT (Note 8) ............ -- -- 469,502 -- -- -- -------------- --------------- --------------- --------------- -------------- --------------- NET LOSS .............. $(306,844) $(7,944,177) $ (10,160,639) $(18,429,784) $(7,242,166) $(16,292,351) ============== =============== =============== =============== ============== =============== NET LOSS PER COMMON SHARE (Notes 2, 13 and 14) ............. $ (6.89) $ (8.30) $ (3.37) $ (7.01) =============== =============== ============== =============== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (Notes 2, 13 and 14). 1,474,554 2,219,770 2,149,332 2,323,207 =============== =============== ============== ===============
See notes to consolidated financial statements. F-4 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------------------- Class B Class C Common Stock Common Stock (Note 13) (Notes 13 and 14) ------------------------ ----------------------- Additional Partnership Shares Par Shares Par Paid-In Accumulated Capital Outstanding Value Outstanding Value Capital Deficit -------------- ------------- --------- ------------- -------- ------------- --------------- BALANCE, INCEPTION (APRIL 20, 1993) ...................... $ -- -- $ -- -- $ -- $ -- $ -- Contributions .......... 688,582 -- -- -- -- -- -- Net loss ............... -- -- -- -- -- -- (306,844) -------------- ------------- --------- ------------- -------- ------------- --------------- BALANCE, DECEMBER 31, 1993 .. 688,582 -- -- -- -- -- (306,844) Contributions .......... 10,375,012 -- -- -- -- -- -- Net Loss of Partnership . -- -- -- -- -- -- (7,725,504) Reorganization from partnership .......... (11,063,594) 716,695 7,167 -- -- 3,024,079 8,032,348 Net loss ............... -- -- -- -- -- -- (218,673) -------------- ------------- --------- ------------- -------- ------------- --------------- BALANCE, DECEMBER 31, 1994 .. -- 716,695 7,167 -- -- 3,024,079 (218,673) Issuance of stock upon debt conversion, net of transaction costs .... -- 1,120,985 11,210 -- -- 59,193,763 -- Sale and issuance of stock -- 311,652 3,116 -- -- 16,684,540 -- Net loss ............... -- -- -- -- -- -- (10,160,639) -------------- ------------- --------- ------------- -------- ------------- --------------- BALANCE, AUGUST 31, 1995 .... -- 2,149,332 21,493 -- -- 78,902,382 (10,379,312) Issuance of stock upon debt conversion ........... -- 171,162 1,712 -- -- 9,163,264 -- Contribution and cancellation of shares . -- (15,933) (159) -- -- 159 -- Net loss ............... -- -- -- -- -- -- (18,429,784) -------------- ------------- --------- ------------- -------- ------------- --------------- BALANCE, AUGUST 31, 1996 .... -- 2,304,561 23,046 -- -- 88,065,805 (28,809,096) Issuance of stock (unaudited) .......... -- -- -- 225,000 2,250 6,997,750 -- Net loss (unaudited) ... -- -- -- -- -- -- (16,292,351) -------------- ------------- --------- ------------- -------- ------------- --------------- BALANCE, FEBRUARY 28, 1997 (unaudited) ............... $ -- 2,304,561 $23,046 225,000 $2,250 $95,063,555 $(45,101,447) ============== ============= ========= ============= ======== ============= ===============
See notes to consolidated financial statements. F-5 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------------------ Period From April 20, 1993 (Date Of Period From Inception) To Year Ended January 1, 1995 Six Month Period Ended December 31, December 31, To August 31, Year Ended February 29, February 28, 1993 1994 1995 August 31, 1996 1996 1997 ------------- ------------- --------------- --------------- ------------ ------------- (Unaudited) OPERATING ACTIVITIES: Net loss ............................. $ (306,844) $ (7,944,177) $ (10,160,639) $ (18,429,784) $ (7,242,166) $(16,292,351) Adjustments to reconcile net loss to net cash flow used in operating activities: Depreciation and amortization ..... 8,224 117,020 2,420,397 8,676,262 3,804,088 5,820,354 Deferred tax benefit .............. -- -- (488,402) -- -- -- Noncash interest expense .......... -- -- 1,146,713 5,661,026 2,069,323 7,103,593 Increase (decrease) in cash from changes in operating assets and liabilities, net of effect of business combinations: Accounts receivable ............. (19,657) (58,300) (1,004,576) (1,369,646) (638,345) (566,244) Prepaid expenses, deposits and other assets ................. (19,025) (1,007,641) 180,363 (126,370) (369,387) (554,268) Deferred revenue and other liabilities .................. 11,059 164,106 894,993 906,413 565,957 269,117 Accounts payable and accrued expenses ..................... 142,863 5,397,128 3,517,250 4,229,678 (2,550,085) 1,171,500 ----------- ------------ ------------ ------------ ------------ ------------ Net cash flows used in operating activities ....... (183,380) (3,331,864) (3,493,901) (452,421) (4,360,615) (3,048,299) ----------- ------------ ------------ ------------ ------------ ------------ INVESTING ACTIVITIES: Purchases of businesses .............. -- (1,297,818) (49,974,397) (9,916,038) (5,793,484) (2,500,000) Acquisition of intangible assets ..... -- (3,210,994) (608,345) (7,903,979) (3,994,366) (4,830,086) Purchases and construction of property and equipment ..................... (516,894) (6,067,215) (21,561,505) (54,217,352) (19,127,978) (20,095,260) Purchase of restricted investments (Note 14) ......................... -- -- -- -- -- (79,803,740) ----------- ------------ ------------ ------------ ------------ ------------ Net cash flows used in investing activities ....... (516,894) (10,576,027) (72,144,247) (72,037,369) (28,915,828) (107,229,086) ----------- ------------ ------------ ------------ ------------ ------------ FINANCING ACTIVITIES: Proceeds from convertible notes payable ........................... -- 15,000,000 62,823,304 73,437,817 32,523,994 23,700,000 Proceeds from issuance of common stock ...................... -- -- 16,687,656 84 -- -- Payment on notes payable and long-term obligations ............. -- (6,488,888) (6,855,767) (1,306,759) (464,393) (308,081) Contributions received from partners .......................... 688,582 10,375,012 -- -- -- -- Proceeds from notes payable and long-term obligations ............. 52,394 -- -- -- -- -- Net proceeds from issuance of Senior Notes and common stock (Note 14) .. -- -- -- -- -- 220,223,531 ----------- ------------ ------------ ------------ ------------ ------------ Net cash flows provided by financing activities ....... 740,976 18,886,124 72,655,193 72,131,142 32,059,601 243,615,450 ----------- ------------ ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .......................... 40,702 4,978,233 (2,982,955) (358,648) (1,216,842) 133,338,065 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................ -- 40,702 5,018,935 2,035,980 2,035,980 1,677,332 ----------- ------------ ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 40,702 $ 5,018,935 $ 2,035,980 $ 1,677,332 $ 819,138 $135,015,397 =========== ============ ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Notes 3 and 9): Cash paid during the period for: Interest .......................... $ 2,658 $ 38,836 $ 119,725 $ 289,509 $ 141,190 $ 161,735 =========== ============ ============ ============ ============ ============ Taxes ............................. $ -- $ -- $ 18,900 $ -- $ -- $ -- =========== ============ ============ ============ ============ ============ Increase in capital lease obligations $ -- $ -- $ -- $ (878,988) $ 286,400 $ 480,026 =========== ============ ============ ============ ============ ============ Conversion of convertible debt and partnership capital to common stock: Partnership capital ................. $ -- $ (3,031,246) $ -- $ -- $ -- $ -- =========== ============ ============ ============ ============ ============ Convertible debt and accrued interest ........................ $ -- $ -- $(60,792,115) $ (9,165,805) $ -- $ -- =========== ============ ============ ============ ============ ============ Common stock ...................... $ -- $ 7,167 $ 11,210 $ 1,712 $ -- $ -- =========== ============ ============ ============ ============ ============ Additional paid-in capital, net of transaction costs ............... $ -- $ 3,024,079 $ 59,193,763 $ 9,163,264 $ -- $ -- =========== ============ ============ ============ ============ ============
See notes to consolidated financial statements. F-6 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS OpTel, Inc., a Delaware corporation, and subsidiaries (the "Company" or "OpTel") is the successor of the cable television operations of Vanguard Communications, L.P. ("Vanguard"). Vanguard commenced operations in April 1993. On December 20, 1994, Vanguard contributed its cable television operations to its wholly owned subsidiary, OpTel. The contribution to OpTel was recorded at Vanguard's historical cost. OpTel is a developer, operator and owner of private cable television and telecommunications systems that utilize advanced technologies to deliver cable television and telecommunications service to customers in multiple dwelling units ("MDU"). The Company negotiates long-term, generally exclusive cable television service agreements and nonexclusive telecommunications service agreements with owners and managers of MDUs, generally for terms of up to 15 years. The company's primary markets are major metropolitan areas in Arizona, California, Colorado, Florida, Illinois and Texas. During the period from April 20, 1993 (date of inception) to March 31, 1995, the Company was wholly owned by Vanguard. On March 31, 1995, VPC Corporation ("VPC") (a wholly owned subsidiary of Le Groupe Videotron Ltee ("Videotron") - a Quebec corporation), acquired a 66.75% interest in the Company. VPC has contributed additional capital and acquired OpTel's stock from Vanguard which has increased its interest in the Company to 83.49% at August 31, 1996 (see Note 9). During 1995 and 1996, the Company relocated its corporate headquarters, began relocating its customer service centers and completed several acquisitions. As a result of these actions, significant nonrecurring costs were incurred primarily relating to severance costs of former employees at the previous locations and relocation and recruiting costs of employees at the new location. In 1995, the Company elected to change its year-end to August 31 from December 31 to conform to that of its new majority stockholder. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of OpTel and its wholly owned and majority-owned subsidiaries and limited partnerships. All significant intercompany accounts and transactions have been eliminated. Amounts due to minority limited partners are included in notes payable and long-term obligations. Cash and Cash Equivalents -- Cash and cash equivalents of the Company are composed of demand deposits with banks and short-term investments with maturities of three months or less when purchased. Property and Equipment -- Property and equipment are stated at cost, which includes amounts for construction materials, direct labor and overhead, and capitalized interest. When assets are disposed of, the costs and related accumulated depreciation are removed, and any resulting gain or loss is reflected in income for the period. Cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. Depreciation is calculated using the straight-line method over the estimated useful lives of the various classes of property and equipment as follows: F-7 Headends............................................15 years Telephone switches..................................10 years Distribution systems and enhancements...............15 years Computer software and equipment......................4 years Other..........................................5 to 10 years Intangible Assets -- Costs associated with licensing fees, commissions and other direct costs incurred in connection with the execution of rights-of-entry agreements to provide cable television and telecommunications service to MDUs, the excess of purchase price over the fair value of tangible assets acquired and other intangible assets are amortized using the straight-line method over the following estimated useful lives: Goodwill............................................20 years Licensing fees and rights-of-entry costs....Life of contract Deferred financing costs................Term of indebtedness Other...........................................1 to 5 years Management routinely evaluates its recorded investments for impairment based on projected undiscounted cash flows and believes the investments to be recoverable. Federal and State Income Taxes -- Prior to August 2, 1996 the Company and its corporate subsidiaries filed a consolidated federal income tax return. Beginning August 2, 1996, in connection with VPC acquiring additional stock from Vanguard, the Company will be included in VPC's consolidated federal income tax return. For purposes of financial reporting, the Company records federal and state income tax as if it were filing a separate return. Deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Provision is made or benefit recognized for deferred taxes relating to temporary differences in the recognition of expense and income for financial reporting purposes. To the extent a deferred tax asset does not meet the criterion of "more likely than not" for realization, a valuation allowance is recorded. Revenue Recognition and Deferred Revenue -- The Company recognizes revenue upon delivery of cable television programming and telecommunications service to subscribers. OpTel typically bills customers in advance for monthly cable television services, which results in the deferral of revenue until those services are provided. Cost of Services -- System operating costs include programming, telecommunications service costs and revenue sharing with owners of MDUs for which OpTel provides cable television and/or telecommunications service. Net Loss Per Common Share -- The computation of net loss per common share is based on the weighted average number of common shares outstanding during the period. No loss per share information is presented for the period the Company was organized as a partnership. The net loss per common share, assuming full dilution, is considered to be the same as primary since the effect of the convertible notes payable to stockholder and common stock equivalents outstanding for each period presented would be antidilutive. (See Note 13). Acquisitions -- Acquisitions accounted for using the purchase method of accounting include results of operations of the acquired businesses in the accompanying consolidated financial statements from the dates of acquisition. Identifiable tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair value at the date of acquisition. The excess of the purchase price over the net assets acquired is recorded as goodwill. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reporting amounts of certain assets, liabilities, revenues and expenses. Actual results may differ from such estimates. F-8 Interim Financial Statements (Unaudited) -- The accompanying financial statements for the interim periods ended February 29, 1996, and February 28, 1997 and related disclosures are unaudited and have been prepared in accordance with generally accepted accounting principles for condensed interim financial statements and pursuant to the rules and requirements of the Securities and Exchange Commission. In the opinion of the Company, the unaudited information reflects all adjustments that are of a normal recurring nature and that are necessary to fairly present the financial position, results of operations, and cash flows for the periods ended February 29, 1996, and February 28, 1997. Reclassifications -- Certain reclassifications of prior year amounts have been made to conform to the current year presentation. New Accounting Pronouncements -- SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which is effective for fiscal years beginning after December 15, 1995, requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. SFAS No. 121 also requires that long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less cost to sell. The Company adopted SFAS No. 121 effective September 1, 1996, and the impact of such adoption is expected to be insignificant to its financial condition and results of operations. 3. ACQUISITIONS On December 28, 1994, the Company acquired the stock of the operating subsidiaries of International Richey Pacific Cablevision, Ltd. ("IRPC") by assuming approximately $15,500,000 of liabilities, issuance of a note for $1,000,000, payment of approximately $1,300,000 in cash and issuance of a warrant for the right to purchase an ownership interest in Vanguard. IRPC may exercise the warrant through December 28, 1997, at a price of $1,250,000. Upon IRPC exercising the warrant, OpTel would be required to pay Vanguard $1,000,000. Within the exercise period, Vanguard may call the warrant at a price of $4,000,000. Upon Vanguard calling the warrant, OpTel would be required to pay IRPC $1,000,000. If the warrant is neither exercised by IRPC nor called by Vanguard, within 90 days of the expiration of the exercise period, IRPC may put the warrant to OpTel at a price of $1,000,000. The warrant is recorded by OpTel at its obligation under either situation of $1,000,000 at August 31, 1996. Additionally, the $1,000,000 secured note payable was due to IRPC one year after closing and is subject to adjustment based on the actual amount of assumed liabilities. Based on the Company's current estimate of adjustments, no amount has been paid as of August 31, 1996. The combined amounts due to IRPC are included on the accompanying consolidated balance sheets in deferred acquisition liabilities. The Company, as a result of the acquisition from IRPC, is a general partner in limited partnership investments (the "Partnerships"). The operations of these Partnerships have been consolidated with those of the Company. The Company has the option to purchase the interest of each limited partner at defined amounts ranging from 110% to 140% of each limited partner's initial capital contribution for the first four years of the partnership agreements and is required to purchase the interests at the end of the fifth year at 150% of the initial capital contribution. From the date of initial capital contribution until the date the Company purchases the interest of a limited partner, each limited partner receives a guaranteed return equal to 10% per annum of their initial capital contribution paid quarterly. During the period from January 1, 1995 to August 31, 1995 and the year ended August 31, 1996, OpTel paid $2,114,431 and $392,403, respectively, to repurchase certain partnership obligations. On January 11, 1995, the Company purchased the assets of EagleVision, a division of Nationwide Communications, Inc. ("NCI"). The purchase price consisted of $15,200,000 in cash, the assumption of approximately $110,000 of liabilities and a deferred payment due to NCI of not less than $6,000,000 and not more than $10,000,000 based on the profitability of OpTel's assets in the Houston, Texas market with certain adjustments. This deferred payment shall be payable at NCI's option, either (a) following the sale of all or substantially all of the EagleVision assets or the sale of a F-9 majority of the outstanding voting capital of the OpTel subsidiary which acquired EagleVision assets to a third party who is not an affiliate or (b) at the conclusion of the fifth or sixth year following the acquisition. This deferred payment is carried on the balance sheets in deferred acquisition liabilities at the net present value of the estimated final payment with an accretion of interest recorded to operations. As of the date of acquisition and as of August 31, 1996, the estimated payment due was $6,000,000 with a net present value at August 31, 1995 and 1996 of $3,928,500 and $4,502,770, respectively. EagleVision's operations are located in the Houston, Texas, area. On June 30, 1995, the Company purchased the stock of Sunshine Television Entertainment, Inc. ("Sunshine") for $5,500,000 in cash and the assumption of approximately $350,000 of liabilities. Sunshine's operations are located in the Miami, Florida, area. On July 31, 1995, the Company purchased the assets of Interface Communications Group, Inc. and certain related entities ("Interface") for $8,900,000 in cash and the assumption of approximately $30,000 of liabilities. The operations of Interface are located in the Denver, Colorado, area. On August 31, 1995, the Company purchased the general and limited partnership interests of Triax Associates V L.P. ("Triax"), for $15,200,000 cash and the assumption of approximately $100,000 of liabilities. The operations of Triax are located in the Chicago, Illinois, area. On January 30, 1996, the Company purchased the assets of Telecom Master L.P. and Telecom Satellite Systems Corporation ("Telecom") for approximately $5,700,000 in cash and the assumption of $100,000 of liabilities. The operations of Telecom are located in the Dallas, Texas, area. On August 2, 1996, the Company purchased certain assets of certain subsidiaries of Wireless Holdings, Inc., and Videotron (Bay Area), Inc., companies that are 50% and 80% owned and controlled by Videotron, respectively, for approximately $3,880,000. The amount paid represents the sellers' historical cost which also approximates the acquired assets' estimated fair market value. The operations of the acquired assets are located in the San Francisco, California, and Tampa, Florida, areas. The purchase price of certain of the above acquisitions are subject to final adjustments for such items as working capital balances and number of subscribers (see Note 6). The pro forma effect of the acquisitions of Telecom, Wireless Holdings, Inc., and Videotron (Bay Area), Inc. would have an insignificant impact on the consolidated results of operations of the Company for the eight months ended August 31, 1995 and the year ended August 31, 1996. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
August 31, --------------------------- February 28, 1995 1996 1997 ---- ---- ---- (Unaudited) Headends ...................... $18,281,508 $ 32,115,973 $ 39,839,545 Telephone switches ............ 2,535,497 4,976,699 6,163,888 Distribution systems and enhancements ............... 15,337,808 36,372,848 42,819,704 Computer software and equipment 1,205,405 4,957,123 6,491,098 Other ......................... 2,183,117 5,813,345 6,792,364 Construction in progress ...... 9,903,862 25,434,861 29,360,714 ----------- ------------ ------------ 49,447,197 109,670,849 131,467,313 Less accumulated depreciation . (1,387,596) (5,871,199) (9,426,626) ----------- ------------ ------------ $48,059,601 $103,799,650 $122,040,687 =========== ============ ============
Total interest expense for 1995 and 1996 was $1,267,798 and $7,848,674, respectively. Interest expense of $1,849,541 was capitalized during 1996. F-10 5. INTANGIBLE ASSETS Intangible assets consisted of the following:
August 31, ----------------------------- February 28, 1995 1996 1997 ---- ---- ---- (Unaudited) Goodwill ......................... $41,907,574 $47,344,322 $49,504,464 Licensing fees and rights-of-entry costs ......................... 13,378,382 22,173,500 26,538,544 Deferred financing costs ......... -- -- 4,776,469 Other ............................ 1,322,382 1,649,989 2,129,529 ----------- ------------ ----------- 56,608,338 71,167,811 82,949,006 Less accumulated amortization .... (1,165,072) (5,291,808) (7,478,428) ----------- ------------ ----------- $55,443,266 $65,876,003 $75,470,578 =========== ============ ============
6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS Notes payable and long-term obligations consisted of the following:
August 31, ---------------------------- February 28, 1995 1996 1997 ---- ---- ---- (Unaudited) Installment notes payable bearing interest at rates ranging from 7.75% to 13% per annum, substantially all collateralized by certain transportation equipment or private cable television systems ............................ $1,022,408 $ 511,145 $ 359,265 Limited Partner Obligations (Note 3) ........... 991,071 633,134 671,362 Obligations under capital leases, net of amounts representing interest of $273,455, 355,236 and $402,242 (unaudited) for 1995, 1996 and February 28, 1997, respectively ............... 835,944 1,299,062 1,548,202 13% Senior Notes due 2005 (unaudited) (Note 14) ..................................... -- -- 218,036,458 ----------- ----------- ------------ $2,849,423 $2,443,341 $220,615,287 ========== ========== ============
Aggregate maturities of the Company's indebtedness are as follows as of August 31, 1996:
Notes Payable Convertible Deferred and Notes Payable Acquisition Long-term to Stockholder Liabilities Obligations (Note 11) (Note 3) Total --------------- -------------- ------------- -------------- Fiscal year ending: 1997 ......... $1,288,992 $89,414,364 $1,017,252 $91,720,608 1998 ......... 510,444 -- 1,000,000 1,510,444 1999 ......... 455,523 -- -- 455,523 2000 ......... 169,191 -- 4,502,770 4,671,961 2001 ......... 17,802 -- -- 17,802 Thereafter ... 1,389 -- -- 1,389 --------------- -------------- ------------- -------------- Totals ....... $2,443,341 $89,414,364 $6,520,022 $98,377,727 =============== ============== ============= ==============
Convertible notes payable to stockholder includes $6,436,131 of accrued but unpaid interest at August 31, 1996. F-11 The Company leases office space and certain equipment under operating and capital leases. The leases generally have initial terms of 3 to 20 years. Equipment acquired under capital leases consists of the following:
August 31, ------------------------------ 1995 1996 ---- ---- Amount of equipment under capital leases ........................ $925,105 $1,717,161 Less accumulated amortization ................................... (93,962) (297,548) ----------- ------------- $831,143 $1,419,613 =========== =============
Minimum future obligations on operating leases at August 31, 1996, consist of the following: Operating Leases -------- Fiscal year ending: 1997 ..................................................... $ 1,546,033 1998 ..................................................... 1,481,102 1999 ..................................................... 1,359,637 2000 ..................................................... 1,086,160 2001 ..................................................... 896,703 Thereafter ............................................... 4,051,377 ----------- Total minimum lease payments .............................. $10,421,012 =========== Rental expense under operating leases for the periods ending August 31, 1995 and 1996 was $616,000 and $1,208,000, respectively. 7. COMMITMENTS AND CONTINGENCIES Employment and Consulting Agreements -- Employment agreements with certain executive employees provide for separation payments equal to 3 to 12 months of the employee's annual salary if employment is terminated due to change of control or without cause. However, stipulations for termination payment and payment terms vary. The Company paid or accrued approximately $1,590,000 and $297,000 in severance during 1995 and 1996, respectively, related to such employment agreements. The severance costs are substantially the result of the Company's acquisitions and the acquisition of the Company by VPC (see Notes 1 and 3). Legal -- The Company is a defendant in certain lawsuits incurred in the ordinary course of business. It is the opinion of the Company's management that the outcome of the suits now pending will not have a material, adverse effect on the operations, cash flows or the consolidated financial position of the Company. 8. INCOME TAXES The cumulative losses of Vanguard incurred prior to the transfer of its assets to the Company on December 20, 1994, have been reported in the individual income tax returns of Vanguard's partners. Upon transfer, the Company recorded deferred taxes for the difference between the tax and book basis of the assets, which was not material. Upon acquisition of the stock of the IRPC subsidiaries, a deferred tax liability of $488,402 was recorded to recognize the excess of the basis in the assets for financial reporting purposes over the tax basis of the net assets acquired. During the period from January 1, 1995, to August 31, 1995, the Company accumulated losses sufficient to offset these deferred liabilities; accordingly, a tax benefit was recorded in the statement of operations. Additionally, during the period ended August 31, 1995, the Company incurred $18,900 of federal and state income tax expense. F-12 Income tax expense (benefit) consists of the following for the period from January 1, 1995 to August 31, 1995 and the year ended August 31, 1996: 1995 1996 ------------- ------------- Current: Federal ........................ $ -- $ -- State .......................... 18,900 -- ------------ ------------- Total current tax expense ..... 18,900 -- Net deferred tax expense (benefit) (3,451,805) (4,470,008) Change in deferred tax valuation allowance ...................... 2,963,343 4,470,008 ------------ ------------- Total income tax expense (benefit) $ (469,562) $ -- ============ ============= A reconciliation of income taxes on reported pretax loss at statutory rates to actual income tax expense (benefit) for the period from January 1, 1995 to August 31, 1995 and the year ended August 31, 1996, is as follows:
1995 Rate 1996 Rate --------------- ------- --------------- ------- Income tax at statutory rates ........... $(3,614,248) (34)% $(6,266,127) (34)% State income taxes, net of federal tax benefit ................................ 12,474 0 (833) 0 Valuation allowance ..................... 2,963,343 28 4,470,008 24 Expenses not deductible for tax purposes 168,869 2 1,796,952 10 --------------- ------- --------------- ------- Total income tax benefit ................ $ (469,562) (4)% $ -- 0% =============== ======= =============== =======
The net deferred tax assets consist of the tax effects of temporary differences related to the following: August 31, ----------------------------- 1995 1996 ------------- ------------ Allowance for uncollectible accounts receivable $ 160,894 $ 184,326 Equipment, furniture and fixtures .............. (742,900) (4,539,736) Intangible assets .............................. (35,814) 105,249 Accrued employee compensation .................. 102,340 182,676 Net operating loss carryforwards ............... 4,374,934 12,371,690 IRPC deferred tax liability .................... (488,402) (488,402) Other .......................................... (41,691) (16,434) ------------- ------------ Deferred tax asset before valuation allowance ............................... 3,329,361 7,799,369 Valuation allowance ....................... (3,329,361) (7,799,369) ------------- ------------ Net deferred tax asset .................... $ -- $ -- ============= ============ The following are the expiration dates and the approximate net operating loss carryforwards at August 31, 1996: Expiration Dates Through: 2010 .................................................. $ 1,346,252 2011 .................................................. 11,521,202 2012 .................................................. 23,519,870 F-13 Realization of deferred tax assets is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company is unable to determine whether these accumulated losses will be utilized; accordingly, a valuation allowance has been provided. 9. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER, STOCK ISSUANCE AND OTHER TRANSACTIONS WITH STOCKHOLDERS (SEE NOTE 13) From December 22, 1994 through March 31, 1995, the Company borrowed $60,000,000 from VPC under a Senior Secured Convertible Note Agreement. The note, with an original maturity of June 30, 1996, and the accrued interest of $792,115 for the period from December 22, 1994 until conversion on March 31, 1995, was converted to 1,120,985 shares of common stock of OpTel on March 31, 1995. Concurrently, VPC purchased 105,667 shares of OpTel's common stock from Vanguard. As a result of these transactions, VPC owned 66.75% of OpTel common stock. Additionally, the Company incurred $1,587,142 of costs related to this conversion of debt which was charged to additional paid-in capital. On July 26, 1995, VPC invested $24,999,504 in the Company, of which $16,687,656 represented VPC's purchase of an additional 311,652 shares of OpTel common stock, and $8,311,848 represented a convertible note payable that bore interest at 15% and was convertible to 155,229 shares of common stock at the option of VPC on November 15, 1995 (extended to January 29, 1996). In connection with the July 26, 1995, equity call, Vanguard had the option to fund its portion to maintain its ownership interest at 33.25% by November 15, 1995 (extended to January 29, 1996). The Company was required to use the proceeds from any Vanguard contribution to repay the convertible note. On January 29, 1996, Vanguard elected to let the option expire without funding its portion of the equity call. On April 1, 1996, VPC converted the $8,311,848 note and accrued interest of $853,957 into 155,229 shares of common stock. During fiscal 1996, the Company issued $79,900,000 in convertible notes to VPC all of which bear interest at 15%, compounded annually, generally with principal and interest due on demand. As of August 31, 1996, $73,466,776 was advanced to OpTel under these notes. The principal and interest on convertible notes may be converted, subject to anti-dilution adjustments and other terms, into Class B Common Stock (see Note 10) at the price at which common stock is first sold to the public in a public offering ("IPO Date") or, after April 30, 1999, at a price equal to the quotient of $225 million divided by the number of shares of common stock outstanding at the conversion date. Amounts due from stockholder of $541,586 as of August 31, 1996, represent amounts paid by the Company on behalf of VPC. Such amounts were repaid by VPC in October 1996. In August 1996, the Company granted Vanguard a non-transferable option to purchase 48,937 shares of Class B Common Stock at an exercise price of $53.55 per share, subject to adjustment. The option is exercisable at any time after August 31, 1996 and expires on the earlier to occur of July 31, 1999 or 180 days after the IPO Date. In September 1996, the Company entered into a consulting agreement with a former director of the Company who is a limited partner of Vanguard. In connection therewith, the Company granted him a warrant to purchase up to 24,992 shares of Class A Common at an exercise price of $53.55 per share, subject to adjustment, that is presently exercisable and expires on August 31, 1999. VPC and an affiliate of Vanguard have each agreed to provide consultant, advisory and management services for $350,000 per annum (plus travel expenses) per party. This arrangement terminates on the earlier to occur of the IPO Date or the date on which any public or institutional financing obtained by the Company restricts the payment of fees or charges to affiliates of the Company. F-14 10. STOCKHOLDERS' EQUITY At August 31, 1996, the Class A Common Stock ("Class A stock") and Class B Common Stock ("Class B stock") of the Company are identical in all respects and have equal powers, preferences, rights and privileges except that each holder of Class A stock is entitled to one vote for each share of Class A stock held, and each holder of Class B stock is entitled to ten votes for each share of Class B stock held. VPC and Vanguard (and their affiliates) are the only permitted holders of Class B stock. Any Class B stock that is either sold or transferred to any party other than the permitted holders automatically converts to a like number of shares of Class A stock. 11. EMPLOYEE BENEFIT PLAN 401(k) Plan -- The OpTel 401(k) Plan (the "Plan"), established January 1, 1995, conforms to the provisions of the Employee Retirement Income Security Act of 1974. It is a contributory tax deferred 401(k) plan. All employees are eligible and may enter the Plan on the first day of the first full month of employment, provided that they have attained the age of 21. Each participant my elect to defer up to 15% of annual compensation up to the annual contribution limit of the Internal Revenue Code. The Company matching contribution is a discretionary amount to be annually determined by the Board of Directors of the Company. The Company determined that, for the plan years ended December 31, 1996 and 1995, it would match 50% of its employees' elective contribution (to a maximum Company contribution of 3% of the employees' compensation). For the years ended August 31, 1996 and 1995, the Company's match of its employees' elective contributions were $187,577 and $80,886, respectively. 12. FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirement of SFAS No. 107, "Disclosure About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
August 31, 1995 August 31, 1996 ------------------------------ ------------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------- ------------- ------------- ------------- Assets: Cash and cash equivalents .. $ 2,035,980 $ 2,035,980 $ 1,677,332 $ 1,677,332 Accounts receivable ........ 1,594,110 1,594,110 3,063,719 3,063,719 Liabilities: Accounts payable ........... 2,370,976 2,370,976 5,647,024 5,647,024 Customer deposits and deferred revenue ......... 1,258,120 1,258,120 2,167,253 2,167,253 Convertible notes payable to stockholder .............. 17,949,690 17,950,000 89,414,364 89,415,000 Notes payable and long-term obligations .............. 2,849,423 2,850,000 2,443,341 2,445,000 Deferred acquisition liabilities .............. 6,174,295 6,175,000 6,520,022 6,525,000
F-15 The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and customer deposits and deferred revenue approximates fair value. The fair values of convertible notes payable to stockholder, notes payable and long-term obligations and deferred acquisition liabilities are estimated based on present values using applicable market discount rates or rates that approximate what the Company could obtain from the open market. The fair value estimates presented herein are based on pertinent information available to management as of August 31, 1995 and 1996. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the date presented, and therefore, current estimates of fair value may differ significantly from the amounts presented herein. 13. SUBSEQUENT EVENTS On February 7, 1997 the Company approved a stock split effected in the form of a stock dividend. Each share of outstanding Class B stock will receive 17.3768 additional shares. The number of authorized shares of Class A stock and Class B stock was increased to 8,000,000 and 6,000,000, respectively. The financial statements have been restated to reflect the stock split as if it had occurred on December 20, 1994, the date the Company reorganized as a corporation. Additionally, the Company authorized the issuance of 300,000 shares of non-voting Class C Common Stock ("Class C stock"). 14. ISSUANCE OF NOTES PAYABLE AND COMMON STOCK (UNAUDITED) On February 14, 1997, the Company issued $225.0 million of 13% Senior Notes Due 2005 ("Senior Notes"). The Senior Notes require semiannual interest payments due on August 15 and February 15 of each year until their maturity on February 15, 2005. The Senior Notes are redeemable at the option of the Company generally at a premium at any time after February 15, 2002 and can be redeemed, in part, also at a premium, earlier upon the occurrence of certain defined events. The Senior Notes are unsecured. In connection with the issuance of the Senior Notes, the Company issued 225,000 shares of Class C stock. The portion of the net proceeds allocated to the Class C stock is $7 million. Such amount has been recorded as stockholders' equity and as a discount to the Senior Notes. As a result of issuing the Class C stock, the Company will no longer be included in VPC's consolidated federal income tax return. Concurrent with the issuance of the Senior Notes, the Company was required to deposit in an escrow account $79.6 million in cash that, together with the proceeds from the investment thereof, will be sufficient to pay when due the first six interest payments on the Senior Notes. Such amount is reflected as restricted investments on the accompanying consolidated balance sheet. F-16 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc.: We have audited the accompanying combined statements of operations and cash flows of Richey Pacific Cablevision (the "Company") for the years ended December 31, 1993 and December 28, 1994. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements present fairly, in all material respects, the results of operations and cash flows of Richey Pacific Cablevision for the years ended December 31, 1993 and December 28, 1994, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Dallas, Texas January 27, 1997 F-17 RICHEY PACIFIC CABLEVISION COMBINED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1993 AND DECEMBER 28, 1994
- --------------------------------------------------------------------------------------- 1993 1994 -------------- ------------- REVENUES .............................................. $ 3,913,967 $ 4,299,257 -------------- ------------- OPERATING EXPENSES: Cost of services ...................................... 1,120,101 1,648,389 Customer support, general and administrative (Note 3).. 2,396,781 3,215,081 Depreciation and amortization ......................... 1,345,007 1,743,497 -------------- ------------- Total operating expenses ....................... 4,861,889 6,606,967 -------------- ------------- LOSS FROM OPERATIONS .................................. (947,922) (2,307,710) INTEREST EXPENSE ...................................... (769,548) (1,218,719) -------------- ------------- NET LOSS .............................................. $(1,717,470) $(3,526,429) ============== =============
See notes to combined financial statements. F-18 RICHEY PACIFIC CABLEVISION COMBINED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993 AND DECEMBER 28, 1994
- ------------------------------------------------------------------------------------------------- 1993 1994 -------------- -------------- OPERATING ACTIVITIES: Net loss ................................................... $(1,717,470) $(3,526,429) Adjustments to reconcile net loss to cash flow provided by operating activities: Depreciation and amortization ........................... 1,345,007 1,743,497 Gain on sale of assets .................................. (6,889) (33,559) Limited partners' interest .............................. 16,399 42,709 Increase (decrease) in cash from changes in operating assets: Accounts receivable ..................................... 14,880 (47,817) Inventory ............................................... 10,812 23,020 Advances, deposits, and other ........................... 18,385 33,105 Advances -- officers .................................... (28,439) 65,210 Accounts payable and accrued liabilities ................ 819,665 1,138,870 Advance payments and deposits ........................... (27,264) 1,359 -------------- -------------- Net cash flows from operating activities ........... 445,086 (560,035) -------------- -------------- INVESTING ACTIVITIES: Purchases of cable systems, property, plant and equipment .. (1,349,954) (1,154,165) Cable systems, property, plant and equipment sales ......... 714,594 137,633 Notes receivable ........................................... (14,414) -- -------------- -------------- Net cash flows from investing activities ........... (649,774) (1,016,532) -------------- -------------- FINANCING ACTIVITIES: Net borrowings under advances from related company ......... 49,826 (10,358) Net changes to notes payable ............................... (16,325) 2,000,746 Additions to long-term debt ................................ 79,328 -- Principal payments on long-term debt ....................... (304,580) (282,640) Additions to long-term debt -- related parties ............. 423,438 (63,657) Other ...................................................... (16,396) (86,717) -------------- -------------- Net cash flows from financing activities ........... 215,291 1,557,374 -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................................ 10,603 (19,193) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............... 8,590 19,193 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR ..................... $ 19,193 $ -- ============== ============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Conversion of accrued interest to long-term debt ........ $ 126,500 $ -- Conversion of trade payables to long-term debt .......... 290,221 -- Notes payable obligation assumed in acquisition of cable systems, property, plant and equipment ................ 1,211,899 -- Additions to property by increase in limited partner obligation ............................................ 150,962 512,672 Decrease in limited partnership interest by increase in limited partner obligation ............................ 85,449 -- Long-term debt assumed in acquisition of cable systems, property, plant and equipment ......................... -- -- Conversion of long-term debt to common stock ............ -- 2,958,112
See notes to combined financial statements. F-19 RICHEY PACIFIC CABLEVISION NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1993 AND DECEMBER 28, 1994 - -------------------------------------------------------------------------------- 1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The combined financial statements of RICHEY PACIFIC CABLEVISION (the Company) combine the accounts of Richey Pacific Cablevision, Inc., IRPC-Texas, Inc., IRPC Texas-Ventana Inc. and IRPC-Arizona, Inc. all of which are subsidiaries of International Richey Pacific Cablevision, Ltd. (the Parent). All significant intercompany accounts and transactions have been eliminated, except for transactions between RPC and the Parent. On December 28, 1994 all of the common stock of these entities was purchased by OpTel, Inc. Results of operations for the period December 29, 1994 through December 31, 1994 are not material for comparative purposes. Operations -- The Company's principal business operations include constructing, purchasing, and operating private cable television systems in California, Arizona and Texas. Revenue Recognition -- Subscriber revenue is recognized on the accrual basis and is recorded when the cable service has been received by its customers. Included in subscriber revenue for the year ended December 31, 1993 is $100,000 of nonrecurring consulting services provided by the Company. Depreciation and amortization -- Depreciation and amortization on cable systems, property, plant and equipment is calculated using the straight-line method over the estimated useful lives of the assets which range from three to ten years. Cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. Income Taxes -- The Company adopted the provisions of the Financial Accounting Standard Board's Statement No. 109, "Accounting for Income Taxes" effective January 1, 1993. The effect of adopting this statement did not have any impact on the results of operations or the Company's financial position. No benefit of tax loss carryforwards has been recognized as realization is uncertain. Additionally, the acquisition of the Company by OpTel will restrict the utilization of tax loss carryforwards. Investments in Limited Partnerships -- Investments in limited partnerships have been consolidated with one of the combined companies and, accordingly, the results of operations of the partnerships have been included in the combined financial statements. (See Note 2). F-20 2. INVESTMENTS The Company, through Richey Pacific Cablevision, Inc. (RPCV), is a general partner in limited partnership investments (the partnerships) and, as the general partner, is to provide the management, technical and accounting support for the partnerships. Compensation to be paid to RPCV for providing these services includes receiving installation revenue, converter revenue, and predetermined revenue per customer served, all as stated in the partnership agreements. The operations and cash flows of the partnerships have been included with those of the Company. The partnership agreements prescribe that losses are shared in proportion to the partnership capital balances. Income is shared as follows: for all, but one of the partnerships, 50% to RPCV and 50% to the limited partners; for the other partnership, 75% to RPCV and 25% to the limited partners. RPCV has the option to purchase the interest of each limited partner at defined amounts ranging from 110% to 140% of each limited partner's initial capital contribution for the first four years of the partnership agreements and is required to purchase the interests at the end of the fifth year at 150% of the initial capital contribution. From the date of initial capital contribution until the date RPCV purchases the interest of a limited partner, each limited partner receives a guaranteed return equal to 10% per annum of their initial capital contribution paid quarterly. RPCV has agreed to provide the agent for the limited partners with a carried interest in each partnership. This interest takes two forms; an annual return equal to 5% of the funds invested by the limited partners and a payment upon the sale of the systems equal to the proceeds received net of the purchase cost of the limited partners' interest. The Company has agreed to pay a broker dealer an annual fee equal to one percent of the total capital raised for the partnerships. 3. RELATED PARTY TRANSACTIONS Certain officers and shareholders of the Parent are owners of Richey Construction Company which has advanced funds to the Company as needed for its operations. Advances bear interest at 2% in excess of the prime rate, and are unsecured. Additionally, Richey Construction Company provides accounting and management services to the Company for which they were paid $48,000 per year. 4. COMMITMENTS AND CONTINGENCIES At December 28, 1994, the Company had no material operating or capital leases that extend beyond one year. The Company leases its office and warehouse facilities in California on a month to month basis. Rental expense under operating leases during the years ended December 31, 1993 and December 28, 1994, was approximately, $84,000 and $139,251, respectively. The Company is involved in certain claims and litigation. While the final outcome with respect to these claims and litigation cannot be predicted with certainty, it is the opinion of management, after consulting with its legal counsel, that any ultimate liability will not have a material effect on the combined financial statements of the Company. F-21 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc.: We have audited the accompanying statements of revenues and expenses and statements of cash flows of EagleVision (the "Company") for the years ended December 31, 1993 and 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the revenues and expenses and cash flows of EagleVision for the years ended December 31, 1993 and 1994, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Dallas, Texas January 27, 1997 F-22 EAGLEVISION STATEMENTS OF REVENUES AND EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994 - ------------------------------------------------------------------------------ 1993 1994 -------------- -------------- REVENUES .................................. $ 6,098,202 $ 6,616,392 -------------- -------------- EXPENSES: Cost of services ........................ 1,793,644 2,085,753 Customer support, general and administrative ....................... 3,815,106 3,543,252 Depreciation and amortization ........... 3,683,843 3,287,674 Loss on disposal of assets .............. 1,072,591 417,652 -------------- -------------- Total expenses .................. 10,365,184 9,334,331 -------------- -------------- EXCESS OF EXPENSES OVER REVENUES .......... $(4,266,982) $(2,717,939) ============== ============== See notes to financial statements. F-23 EAGLEVISION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1994
- ---------------------------------------------------------------------------------------------- 1993 1994 -------------- -------------- OPERATING ACTIVITIES: Excess of expenses over revenues ........................ $(4,266,982) $(2,717,939) Adjustments to reconcile excess of expenses over revenues to net cash flows provided by operations: Depreciation and amortization ........................ 3,683,843 3,287,674 Loss on disposal of assets ........................... 1,072,591 417,652 Increase (decrease) in cash from changes in operating assets: Accounts receivable, net ........................... (20,128) (53,794) Inventory .......................................... 194,518 (18,618) Prepaid expenses ................................... (14,688) 9,591 Accounts payable ................................... (119,499) (152,153) Accrued expenses and deferred revenues ............. 71,052 (66,398) -------------- -------------- Net cash flows provided by operating activities . 600,707 706,015 -------------- -------------- INVESTING ACTIVITIES: Purchases and construction of property and equipment .... (1,649,078) (474,315) Other investing activities .............................. (102,745) 30,979 -------------- -------------- Net cash flows used for investing activities .... (1,751,823) (443,336) -------------- -------------- FINANCING ACTIVITIES: Net investment from Owner ............................... 1,229,719 (317,363) -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................................. 78,603 (54,684) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............ -- 78,603 -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR .................. $ 78,603 $ 23,919 ============== ==============
See notes to financial statements. F-24 EAGLEVISION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1993 AND 1994 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Related Information -- The accompanying financial statements include the accounts of EagleVision (the Company), a division of Nationwide Communications Inc. (NCI). The Company is a cable television system operator serving the Metropolitan Houston, Texas area through franchise cable and satellite master antenna television (SMATV) systems. On January 11, 1995, OpTel, Inc. acquired the assets of the Company from NCI. Depreciation and amortization -- Depreciation is calculated using the Modified Accelerated Cost Recovery System (MACRS), an accelerated depreciation method. When assets are disposed or retired, the costs and related accumulated depreciation are removed and any resulting gain or loss is reflected in operations for the period. Cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. Life ---------- Buildings and improvements .................... 31.5 years Cable TV plant and equipment .................. 10 years Headend equipment ............................. 10 years Office furniture and equipment ................ 5-10 years Vehicles ...................................... 5 years Intangibles -- Intangible assets represent an allocation of the excess purchase price over the fair value of certain operating assets and a franchise agreement with the city of Houston acquired in connection with the purchase in July 1990. These costs are amortized on a straight-line basis over approximately eight years. Operating Agreements -- The Company has obtained operating rights in Houston and other markets through the purchase of these rights from others or by entering into renewable operating agreements. Acquisitions of operating rights are capitalized and amortized over the terms of the agreements which range from 3 to 18 years. When an MDU terminates an operating agreement, the cost and related accumulated amortization are removed and any resulting gain or loss is reflected in income for the period. Revenue Recognition -- The Company recognizes subscriber revenue upon delivery of programming. The Company bills customers in advance for monthly services, which results in the deferral of revenue until those services are provided. Income Taxes -- The Company is included in a consolidated tax return filed by NCI with its parent for federal tax purposes. The Company is not subject to state and local income taxes. Since EagleVision is a division of NCI, NCI does not allocate a tax provision or benefit to the Company. As such, the accompanying financial statements do not reflect a benefit for taxes or any current or deferred tax balances. F-25 2. RELATED PARTY TRANSACTIONS NCI has provided services to the Company, including legal, accounting, general management, data processing, administration of benefit and insurance programs and treasury services. In connection with these services, NCI charged the Company $38,052 and $58,299 in 1993 and 1994 respectively. These charges have been made based on a reasonable method of allocation, however, they are not necessarily indicative of the level of expenses which might have been incurred by the Company on a stand-alone basis. No charges for capital used to finance the business are allocated to the Company. Included in total expenses in the accompanying statements of revenues and expenses is $360,000 and $343,000 for 1993 and 1994, respectively, relating to noncompete agreements held by NCI which were obtained in connection with the acquisition of EagleVision. 3. EMPLOYEE BENEFITS The Company is a participant, together with other affiliated companies, (collectively, Nationwide Enterprise), in a defined benefit pension plan covering all employees who have completed at least 1,000 hours of service within a 12-month period and who have met certain age requirements. The Company also participates in the Nationwide Enterprise 401(k) savings plan which covers substantially all employees. The Company recognizes amounts allocated by NCI based on the number of employees as its net pension and retirement cost. The annual pension and retirement expense allocated to the Company for 1993 and 1994 were $91,788 and $104,645 respectively. 4. LEASE COMMITMENTS Effective September 1994, the Company entered into new lease agreements for the use of certain office and warehouse space. The leases will expire January 31, 1997. The Company also leases certain office and phone equipment. Total rent expense for all leases of the Company were approximately $67,000 and $112,000 for 1993 and 1994 respectively. 5. LEGAL MATTERS NCI and EagleVision are involved in various legal actions in the ordinary course of their business. These actions generally involve such matters as property ownership and royalty payments. NCI believes these proceedings are incidental to its business and will not result in adverse judgements that would materially impact operating revenues and expenses. The primary responsibility for such legal actions related to EagleVision (during NCI's ownership) remains NCI's. F-26 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc.: We have audited the accompanying statement of operations and cash flows of Triax Associates V, L.P., (the "Company") for the year ended August 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the results of operations and cash flows of Triax Associates V, L.P., for the year August 31, 1995, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Dallas, Texas January 27, 1997 F-27 TRIAX ASSOCIATES V, L.P. STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 1995 - ------------------------------------------------------------------------------ 1995 ------ REVENUES ........................................................ $3,342,134 ---------- OPERATING EXPENSES: Cost of services .............................................. 923,597 Customer support, general and administrative (Note 3) ......... 1,155,866 Depreciation and amortization ................................. 1,181,753 ---------- Total operating expenses .............................. 3,261,216 ---------- INCOME FROM OPERATIONS .......................................... 80,918 INTEREST EXPENSE ................................................ (620,527) ---------- NET LOSS ........................................................ $ (539,609) ========== See notes to financial statements. F-28 TRIAX ASSOCIATES V, L.P. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED AUGUST 31, 1995 - ----------------------------------------------------------------------------- 1995 ---- OPERATING ACTIVITIES: Net loss ................................................... $ (539,609) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization ......................... 1,181,753 Increase (decrease) in cash from changes in operating assets: Accounts receivable ................................. (4,316) Prepaid expenses .................................... (13,342) Accounts payable and other accrued expenses ......... 80,649 Subscriber prepayments and deposits ................. 13,855 ------------- Net cash flows from operating activities ......... 718,990 ------------- INVESTING ACTIVITIES: Acquisition of intangibles ............................... (977,190) Purchase of property, plant and equipment ................ (1,025,476) ------------- Net cash flows from investing activities .............. (2,002,666) ------------- FINANCING ACTIVITIES: Proceeds from debt ....................................... 1,200,400 Advances from affiliate .................................. 48,038 ------------- Net cash flows from financing activities ............ 1,248,438 ------------- NET DECREASE IN CASH AND CASH EQUIVALENTS .................. (35,238) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 76,650 ------------- CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 41,412 ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest ................... $ 659,338 ============= See notes to financial statements. F-29 TRIAX ASSOCIATES V, L.P. NOTES TO FINANCIAL STATEMENTS - ----------------------------------------------------------------------------- 1. THE PARTNERSHIP Triax Associates, V, L.P. (the "Partnership") is a Colorado limited partnership formed for the purpose of owning, constructing and operating cable television systems and satellite master antenna television ("SMATV") systems. The Partnership allocates profits, losses, gains from capital events and cash distributions among the partners in accordance with their "sharing fractions." 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition -- Revenues are recognized in the period the related services are provided to the subscribers. Income Taxes -- No provision has been made for federal, state or local income taxes because they are the responsibility of the individual partners. The principal difference between tax and financial reporting net income (loss) results primarily from the use of accelerated depreciation for tax purposes. Depreciation and amortization -- Replacement, renewals and improvements are capitalized and costs for repairs and maintenance are charged to operations when incurred. Depreciation and amortization are calculated using the straight-line method over the following estimated useful lives: Life ---- Cable plant ......................... 5-10 years Equipment ........................... 5 years Leasehold improvements .............. 5 years Vehicles ............................ 4 years Intangible Assets -- Intangible assets are amortized using the straight-line method over the following estimated useful lives: Life ---- Operating rights .................... 15 years Franchise costs ..................... 6-11 years Noncompete agreements ............... 5 years 3. RELATED PARTY TRANSACTIONS Triax Communications Corporation ("TCC"), a limited partner, has advanced funds to the Partnership for working capital needs. TCC provides management services to the Partnership for a fee equal to 7% of gross revenues. Charges for such services amounted to $233,949. Additionally, TCC allocated to the Partnership certain indirect costs incurred by TCC on behalf of the Partnership which amounted to $40,516. The Partnership purchases programming through TCC at rates which would be available to the Partnership if purchased directly from the program suppliers. 4. LEASES The Partnership leases office facilities, headend sites and other equipment under noncancelable operating lease agreements, some of which contain renewal options. Total rental expenses, including month-to-month rental arrangements, was $34,961. 5. ACQUISITIONS On December 30, 1994, the Partnership acquired certain assets of Diversified Cable, Ltd., totalling 15 SMATV systems for $1,414,123, including closing costs. The acquisition was accounted for under the purchase method of accounting. F-30 No dealer, salesperson, or other person has been authorized to give any information or to make any representation other than those contained in this Prospectus in connection with the offer made hereby, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the information set forth herein or in the affairs of the Company since the date as of which information is given in this Prospectus. This Prospectus does not constitute an offer or a solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer or solicitation. ------ TABLE OF CONTENTS Page ------ Prospectus Summary ...................... 3 Risk Factors ............................ 14 The Exchange Offer ...................... 25 Use of Proceeds ......................... 33 Capitalization .......................... 33 Selected Consolidated Financial and Operating Data ......................... 34 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 37 Business ................................ 47 Management .............................. 75 Principal Stockholders .................. 82 Certain Transactions .................... 86 Description of the Notes ................ 89 Book-Entry, Delivery and Form ........... 115 Exchange Offer; Registration Rights ..... 117 Certain Federal Income Tax Considerations . 119 Plan of Distribution .................... 119 Legal Matters ........................... 120 Experts ................................. 120 Index to Financial Statements ........... F-1 Until [25 days after effective date] all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. OPTEL, INC. $225,000,000 OF 13% SENIOR NOTES DUE 2005, SERIES B The Multi-Family Telecommunications Specialist [LOGO] VIDEO o VOICE o DATA PROSPECTUS DATED , 1997 OPTEL, Inc. FINANCIAL STATEMENT SCHEDULES
Allowance for doubtful accounts Balance at Charged to Deductions- beginning of costs and bad debt Balance at end period expenses write-offs of period ----------------------------------------------------------------- Period from April 20, 1993 (Date of Inception) to December 31, 1993 - 238 - 238 Year Ended December 31, 1994 238 147,615 - 147,853 Eight Month Period Ended August 31, 1995 147,853 372,339 46,974 473,218 Year Ended August 31, 1996 473,218 1,376,835 1,307,919 542,134 Six Month Period Ended February 28, 1997 542,134 838,662 580,797 819,999
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation provides that the Company will to the fullest extent permitted by the DGCL, indemnify all persons whom it may indemnify pursuant thereto. The Company's By-laws contain a similar provision requiring indemnification of the Company's directors and officers to the fullest extent authorized by the DGCL. The DGCL permits a corporation to indemnify its directors and officers (among others) against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by them in connection with any action, suit or proceeding brought (or threatened to be brought) by third parties, if such directors or officers acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe their conduct was unlawful. In a derivative action, i.e., one by or in the right of the corporation, indemnification may be made for expenses (including attorneys' fees) actually and reasonably incurred by directors and officers in connection with the defense or settlement of such action if they had acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged liable to the Company unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses. The DGCL further provides that, to the extent any director or officer has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in this paragraph, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. The Company has indemnification insurance under which directors and officers are insured against certain liability that may occur in their capacity as such. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. II-1 ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits ------------- 1.1 Purchase Agreement, dated February 7, 1997, between the Issuer and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith. 3.1 Restated Certificate of Incorporation of the Issuer, together with all amendments thereto. 3.2 Bylaws of the Issuer. 4.1 Indenture, dated as of February 14, 1997, between the Issuer and U.S. Trust Company of Texas, N.A., as Trustee 4.2 Form of Senior Note (included in Exhibit 4.1) 4.3 Escrow Agreement, dated as of February 14, 1997, between the Issuer and U.S. Trust Company of Texas, N.A., as Trustee and as Escrow Agent. 4.4 Registration Agreement, dated as of February 14, 1997, between the Issuer, Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith. 4.5 Common Stock Registration Rights Agreement, dated as of February 14, 1997, between the Issuer, VPC, GVL, Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith. 5.1 Opinion of Kronish, Lieb, Weiner & Hellman LLP re: legality of securities offered. 10.1 Stockholders' Agreement, dated as of December 22, 1994, between VPC, Vanguard, the General Partner and the Issuer. 10.2 Registration Rights Agreement, dated as of December 22, 1994, between the Issuer and Vanguard. 10.3 Settlement Agreement, dated as of August 1, 1996, between Vanguard, the General Partner, Pacific, VPC, the Issuer and GVL. 10.4 Amendment, dated as of February 17, 1997, between Vanguard, the General Partner, Pacific, VPC, GVL and the Issuer. 10.5 Form of Convertible Note (included as Exhibit B to the Amendment filed as Exhibit 10.4 hereto) and a list of the issue dates and principal amounts of all outstanding Convertible Notes (included as Schedule 1 to the Amendment filed as Exhibit 10.4 hereto). 10.6 Warrant, dated as of December 29, 1994, between International Richey Pacific Capital Corporation and Vanguard. 10.7 Lease Agreement dated July 25, 1995 between Space Center Dallas, Inc. and the Issuer. 10.8 First Amendment to Lease Agreement dated August 8, 1996 between Space Center Dallas, Inc. and the Issuer. 10.9 Restated Stock Incentive Plan. 10.10 Annual Bonus Plan. 10.11 Medium Term Performance Plan. 10.12 Employment Agreement between Louis Brunel and the Issuer dated November 15, 1996. 10.13 Employment Agreement between Rory Cole and the Issuer dated January 3, 1997. 10.14 Employment Agreement between Michael Katzenstein and the Issuer dated September 18, 1995. 10.15 Employment Agreement between Julian Riches and the Issuer dated January 31, 1995. 10.16 Employment Agreement between William O'Neil and the Issuer dated February 8, 1995. 10.17 Separation and Consulting Agreement, dated as of September 1, 1996, between the Issuer and James A. Kofalt. 10.18 Warrant Agreement, dated as of September 1, 1997, between the Issuer and James A. Kofalt. 10.19 Assignment Agreement, dated as of February 14, 1997, among TVMAX Telecommunications, Inc. (TVMAX), Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc., IRPC Arizona, Inc. and THI. 10.20 Equipment License and Services Agreement, dated as of February 14, 1997, between TVMAX and THI. 10.21 Form of Shareholders Option Agreement, dated as of February 14, 1997, between TVMAX and each of the shareholders of THI, together with a list of the shareholders of THI. 10.22 Option Agreement, dated as of February 14, 1997, between TVMAX and THI. 10.23 City of Houston, Texas, Ordinance No. 97-285 dated March 19, 1997, granting TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network.
II-2
(a) Exhibits ------------- 10.24 City of Houston, Texas, Ordinance No. 89-338 dated March 29, 1989 granting to PrimeTime Cable Partners I, Ltd. the right to operate for 15 years a Community Antenna Television System, and subsequent ordinances consenting to assignment of rights to Eaglevision and to TVMAX Communications (Texas), Inc. 12.1 Statement re: computation of ratio of earnings to fixed charges 21.1 List of subsidiaries of the Issuer. 23.1 Consent of Kronish, Lieb, Weiner & Hellman LLP is included in the opinion filed as Exhibit 5.1 to this Registration Statement. 23.2 Consent of Goldberg, Godles, Weiner & Wright. 23.3 Consent of Deloitte & Touche LLP. 24.1 Power of Attorney is set forth on the signature page of this Registration Statement. 25.1 Statement of Eligibility Under the Trust Indenture Act of 1939 on Form T-1. 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal.
(b) Financial Statement Schedule The following Financial Statement Schedule is filed as part of the Registration Statement. ALLOWANCE FOR DOUBTFUL ACCOUNTS All other financial statement schedules have been omitted because the required information is not present or not present in amounts to require submission of the schedules, or because the information required is included in the financial statements. ITEM 22. UNDERTAKINGS. The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the Prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement; provided, however, that paragraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the Issuer pursuant to Section 13 or Section 15(d) of the Exchange Act, that are incorporated by reference in this Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-3 (4) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of this Registration Statement through the date of responding to the request. (5) To file an application for the purpose of determining eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of the Trust Indenture Act of 1939, as amended. (6) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this Registration Statement when it became effective. (7) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (8) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, on this 10th day of April, 1997. OPTEL, INC. By: /s/ Louis Brunel -------------------------------------- Louis Brunel President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Each person whose signature appears below under the heading "Signature" constitutes and appoints Louis Brunel and Michael E. Katzenstein or either of them, as true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any or all amendments to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, including, without limitation, any registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, with the Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, each acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Signature Title Date ----------- ------- ------ Principal Executive Officer: /s/ Louis Brunel President and Chief Executive Officer April 10, 1997 - ---------------------------- Louis Brunel Principal Financial and Accounting Officers: /s/ Bertrand Blanchette Chief Financial Officer April 10, 1997 - ---------------------------- Bertrand Blanchette /s/ Craig Milacek Controller April 10, 1997 - ---------------------------- Craig Milacek Directors: /s/ Claude Chagnon Chairman of the Board and Director April 10, 1997 - ---------------------------- Claude Chagnon /s/ Louis Brunel Director April 10, 1997 - ---------------------------- Louis Brunel /s/ Christian Chagnon Director April 10, 1997 - ---------------------------- Christian Chagnon /s/ Pierre Collins Director April 10, 1997 - ---------------------------- Pierre Collins /s/ Barry Porter Director April 10, 1997 - ---------------------------- Barry Porter /s/ Gary Winnick Director April 10, 1997 - ---------------------------- Gary Winnick
II-5 EXHIBIT INDEX
Exhibit Number Description Page -------- ------------- 1.1 Purchase Agreement, dated February 7, 1997, between the Issuer and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith. 3.1 Restated Certificate of Incorporation of the Issuer, together with all amendments thereto. 3.2 Bylaws of the Issuer. 4.1 Indenture, dated as of February 14, 1997, between the Issuer and U.S. Trust Company of Texas, N.A., as Trustee 4.2 Form of Senior Note (included in Exhibit 4.1) 4.3 Escrow Agreement, dated as of February 14, 1997, between the Issuer and U.S. Trust Company of Texas, N.A., as Trustee and as Escrow Agent. 4.4 Registration Agreement, dated as of February 14, 1997, between the Issuer, Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith. 4.5 Common Stock Registration Rights Agreement, dated as of February 14, 1997, between the Issuer, VPC, GVL, Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith. 5.1 Opinion of Kronish, Lieb, Weiner & Hellman LLP re: legality of securities offered. 10.1 Stockholders' Agreement, dated as of December 22, 1994, between VPC, Vanguard, the General Partner and the Issuer. 10.2 Registration Rights Agreement, dated as of December 22, 1994, between the Issuer and Vanguard. 10.3 Settlement Agreement, dated as of August 1, 1996, between Vanguard, the General Partner, Pacific, VPC, the Issuer and GVL. 10.4 Amendment, dated as of February 17, 1997, between Vanguard, the General Partner, Pacific, VPC, GVL and the Issuer. 10.5 Form of Convertible Note (included as Exhibit B to the Amendment filed as Exhibit 10.4 hereto) and a list of the issue dates and principal amounts of all outstanding Convertible Notes (included as Schedule 1 to the Amendment filed as Exhibit 10.4 hereto). 10.6 Warrant, dated as of December 29, 1994, between International Richey Pacific Capital Corporation and Vanguard. 10.7 Lease Agreement dated July 25, 1995 between Space Center Dallas, Inc. and the Issuer. 10.8 First Amendment to Lease Agreement dated August 8, 1996 between Space Center Dallas, Inc. and the Issuer. 10.9 Restated Stock Incentive Plan. 10.10 Annual Bonus Plan. 10.11 Medium Term Performance Plan. 10.12 Employment Agreement between Louis Brunel and the Issuer dated November 15, 1996. 10.13 Employment Agreement between Rory Cole and the Issuer dated January 3, 1997. 10.14 Employment Agreement between Michael Katzenstein and the Issuer dated September 18, 1995. 10.15 Employment Agreement between Julian Riches and the Issuer dated January 31, 1995. 10.16 Employment Agreement between William O'Neil and the Issuer dated February 8, 1995. 10.17 Separation and Consulting Agreement, dated as of September 1, 1996, between the Issuer and James A. Kofalt. 10.18 Warrant Agreement, dated as of September 1, 1997, between the Issuer and James A. Kofalt. Exhibit Number Description Page -------- ------------- 10.19 Assignment Agreement, dated as of February 14, 1997, among TVMAX Telecommunications, Inc. (TVMAX), Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc., IRPC Arizona, Inc. and THI. 10.20 Equipment License and Services Agreement, dated as of February 14, 1997, between TVMAX and THI. 10.21 Form of Shareholders Option Agreement, dated as of February 14, 1997, between TVMAX and each of the shareholders of THI, together with a list of the shareholders of THI. 10.22 Option Agreement, dated as of February 14, 1997, between TVMAX and THI. 10.23 City of Houston, Texas, Ordinance No. 97-285 dated March 19, 1997, granting TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network. 10.24 City of Houston, Texas, Ordinance No. 89-338 dated March 29, 1989 granting to PrimeTime Cable Partners I, Ltd. the right to operate for 15 years a Community Antenna Television System, and subsequent ordinances consenting to assignment of rights to Eaglevision and to TVMAX Communications (Texas), Inc. 12.1 Statement re: computation of ratio of earnings to fixed charges 21.1 List of subsidiaries of the Issuer. 23.1 Consent of Kronish, Lieb, Weiner & Hellman LLP is included in the opinion filed as Exhibit 5.1 to this Registration Statement. 23.2 Consent of Goldberg, Godles, Weiner & Wright. 23.3 Consent of Deloitte & Touche LLP. 24.1 Power of Attorney is set forth on the signature page of this Registration Statement. 25.1 Statement of Eligibility Under the Trust Indenture Act of 1939 on Form T-1. 27.1 Financial Data Schedule. 99.1 Form of Letter of Transmittal.
EX-1 2 EXHIBIT 1.1 Exhibit 1.1 =============================================================================== OPTEL, INC. 225,000 Units consisting of $225,000,000 13% Senior Notes Due 2005 and 225,000 Shares of Class C Common Stock PURCHASE AGREEMENT Dated: February 7, 1997 =============================================================================== OPTEL, INC. 225,000 Units consisting of $225,000,000 13% Senior Notes Due 2005 and 225,000 Shares of Class C Common Stock PURCHASE AGREEMENT New York, New York February 7, 1997 SALOMON BROTHERS INC MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED c/o Salomon Brothers Inc Seven World Trade Center New York, New York 10048 Ladies and Gentlemen: OpTel, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to Salomon Brothers Inc and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (collectively, the "Initial Purchasers") 225,000 Units (the "Units") consisting of $225,000,000 principal amount of its 13% Senior Notes Due 2005 (the "Notes") and 225,000 shares of Class C Common Stock, par value $.01 per share (the "Shares" and, together with the Notes and the Units, the "Securities"). The Notes are to be issued under an indenture (the "Indenture") dated as of February 14, 1997 between the Company and U.S. Trust Company of Texas, N.A., as trustee (the "Trustee"). The holders of Notes, including the Initial Purchasers, will be entitled to the benefits of a Registration Agreement (the "Registration Agreement") dated as of February 14, 1997 between the Company and the Initial Purchasers. The holders of Shares, including the Initial Purchasers, will be entitled to the benefits of a Common Stock Registration Rights Agreement (the "Common Stock Registration Rights Agreement") dated as of February 14, 1997 between the Company, VPC Corporation, Le Groupe Videotron Ltee, the Initial Purchasers and U.S. Trust Company of Texas, N.A. Approximately $80,000,000 of the net proceeds from the sale of the Units (the "Initial Escrow Amount"), representing funds that, together with the proceeds from the investment thereof, will be sufficient to pay the first six interest payments on the Notes, are to be placed in a collateral account and pledged to the Trustee, for the benefit of the holders of the Notes and the Trustee (in its capacity as such under the Indenture) pursuant to the Escrow Agreement, dated as of February 14, 1997 (the "Escrow Agreement") among the Company, U.S. Trust Company of Texas, N.A., as Escrow Agent (the "Escrow Agent"), and the Trustee. The sale of the Units to the Initial Purchasers will be made without registration of the Units under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon exemptions from the registration requirements of the Securities Act. You have advised the Company that the Initial Purchasers will offer and sell the Units purchased by them hereunder in accordance with Section 4 hereof as soon as you deem advisable. In connection with the sale of the Units, the Company has prepared a preliminary offering memorandum, dated January 16, 1997 (including any and all exhibits thereto, the "Preliminary Memorandum") and a final offering memorandum, dated February 7, 1997 (including any and all exhibits thereto, the "Final Memorandum"). Each of the Preliminary Memorandum and the Final Memorandum sets forth certain information concerning the Company and the Securities. The Company hereby confirms that it has authorized the use of the Preliminary Memorandum and the Final Memorandum, and any amendment or supplement thereto, in connection with the offer and sale of the Units by the Initial Purchasers. Unless stated to the contrary, all references herein to the Final Memorandum are to the Final Memorandum at the Execution Time (as defined below) and are not meant to include any amendment or supplement subsequent to the Execution Time. 1. Representations and Warranties. The Company represents and warrants to each Initial Purchaser as set forth below in this Section 1. (a) The Preliminary Memorandum, at the date thereof, did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Final Memorandum, at the date hereof, does not, and at the Closing Date (as defined below) will not (and any amendment or supplement thereto, at the date thereof and at the Closing Date, will not), contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to the information contained in or omitted from the Preliminary Memorandum or the Final Memorandum, or any amendment or supplement thereto, in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of the Initial Purchasers specifically for inclusion therein. (b) Neither the Company, nor any of its Affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")), nor any person acting on its or their behalf has, directly or indirectly, made offers or sales of any security, or solicited offers to buy any security, under circumstances that would require the registration of the Securities under the Securities Act. (c) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Securities in the United States. (d) Assuming that the representations and warranties of the Initial Purchasers contained in Section 4 are true, correct and complete, and assuming that the representations and warranties contained in the Accredited Investor Letters (the "Accredited Investor Letters") (substantially in the form of Exhibit A hereto) completed by Accredited Investors or deemed to be made by non-U.S. persons and "qualified institutional buyers" (as defined in Rule 144A(a)(1) under the Securities Act) purchasing Units are true and correct as of the Closing Date, and assuming compliance by such persons with their agreements made in the Accredited Investor Letters or deemed made by the Final Memorandum, it is not necessary in connection with the offer, sale and delivery of the Units to the Initial Purchasers in the manner contemplated by, or in connection with the initial resale of such Units by the Initial Purchasers in accordance with, this Agreement to register the Units under the Securities Act or to qualify any indenture in respect of the Units under the Trust Indenture Act of 1939 (the "TIA"). (e) The Company and each subsidiary of the Company (a "Subsidiary") and Transmission Holdings, Inc., a Delaware corporation (the "LHC"), has been duly incorporated and each is validly existing as a corporation under the laws of its jurisdiction of incorporation, with all requisite power and authority to own or lease its properties and to conduct its business as described in the Final Memorandum. Each of the Company and the Subsidiaries and the LHC (x) has all necessary authorizations, approvals, orders, licenses and permits of and from regulatory or governmental officials, bodies and tribunals, to own or lease its properties and to conduct its businesses as now conducted as described in the Final Memorandum and (y) is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions where the ownership or leasing of its properties or the conduct of its businesses requires such qualification, except, in the case of clauses (x) and (y), where the failure to have such authorizations, approvals, orders, licenses and permits or to be so qualified could not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), assets, results of operations or prospects of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"). (f) The Units, Notes and the Exchange Securities (as defined in the Registration Agreement) have been duly authorized by the Company and the Company has all requisite corporate power and authority to execute, issue and deliver the Units, Notes and the Exchange Securities and to incur and perform its obligations provided for therein. The Notes, when executed, authenticated and issued in accordance with the terms of the Indenture (assuming the due authorization, execution and delivery of the Indenture by the Trustee) and when delivered against payment of the purchase price therefor as provided in this Agreement, will constitute the valid and binding obligations of the Company, entitled to the benefits of the Indenture, enforceable against the Company in accordance with the terms thereof; and the Exchange Securities, when executed, authenticated, issued and delivered by the Company in exchange for the Securities pursuant to the terms of the Registration Agreement, will constitute valid and binding obligations of the Company, entitled to the benefits of the Indenture, enforceable against the Company in accordance with the terms thereof; subject, in the case of each of the foregoing, to (a) applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and (b) general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) (clauses (a) and (b) being referred to herein as the "Enforceability Limitations"). (g) At the Closing Date, the Shares will have been duly authorized by the Company and the Company will have all requisite corporate power and authority to issue and deliver the Shares and to incur and perform its obligations provided for therein. When issued, the Shares will be duly authorized, validly issued, fully paid and non-assessable and will not be subject to any preemptive or similar rights. The number of Shares to be sold will, at the Closing Date, represent, 5% of the shares of Common Stock of the Company on a fully diluted basis (assuming conversion of the Convertible Notes (as defined in the Final Memorandum) on April 30, 1999 as though no initial public offering had occurred). (h) This Agreement has been, and, as of the Closing Date, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement and the Indenture will have been, duly authorized, executed and delivered by the Company, and upon such execution by the Company (assuming the due authorization, execution and delivery by parties thereto other than the Company) this Agreement constitutes, and, as of the Closing Date, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement and the Indenture will constitute, the valid and binding obligations of the Company, enforceable against the Company in accordance with the terms hereof or thereof, subject only to the Enforceability Limitations. (i) At the time of deposit with the Escrow Agent of the Initial Escrow Amount (as such term is defined in the Escrow Agreement) no Lien (as such term is defined in the Indenture) exists upon such Collateral (as such term is defined in the Escrow Agreement) and no right or option to acquire the same exists in favor of any other person or entity, except for the pledge and security interest in favor of the Trustee for the benefit of the holders of the Notes and the Trustee (in its capacity as such under the Indenture) to be created or provided for in the Escrow Agreement, which pledge and security interest shall constitute a first priority perfected pledge and security interest in and to all of the Collateral. (j) No consent, authorization, approval, license or order of, or filing, registration or qualification with, any court or governmental or regulatory agency or body, domestic or foreign, is required for the performance by the Company of its obligations under this Agreement, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement and the Indenture, or for the consummation of the transactions contemplated hereby or thereby except such as may be required (A) in connection with the registration under the Act of the Notes or the Exchange Securities pursuant to the Registration Agreement (including any filing with the NASD), (B) in connection with the registration under the Act of the Shares pursuant to the Common Stock Registration Rights Agreement (including any filing with the NASD), (C) the qualification of the Indenture under the TIA pursuant to the Registration Agreement or (D) by state securities or "blue sky" laws in connection with the offer and sale of the Securities or the registration thereof or of the Exchange Securities pursuant to the Registration Agreement. (k) The issuance, sale and delivery of the Securities and the Exchange Securities, the execution, delivery and performance by the Company of this Agreement, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement and the Indenture, the consummation by the Company of the transactions contemplated hereby, thereby, and as described in the Offering Memorandum and the compliance by the Company with the terms of the foregoing do not, and, at the Closing Date, will not conflict with or constitute or result in a breach or violation by the Company or the Subsidiaries of (A) any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) by any of the Company or the Subsidiaries or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or the Subsidiaries under any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, authorization, permit, certificate, any material Rights of Entry (as defined in the Final Memorandum) or other agreement or document to which any of the Company or the Subsidiaries is a party or by which any of them may be bound, or to which any of them or any of their respective assets or businesses is subject (and the Company has no knowledge of any conflict, breach or violation of such terms or provisions or of any such default, in any such case, which has occurred or will so result), (B) the articles or by-laws (each, an "Organizational Document") of each of the Company and the Subsidiaries or (C) any law, statute, rule or regulation, or any judgment, decree or order, in any such case, of any domestic or foreign court or governmental or regulatory agency or other body having jurisdiction over the Company or any of the Subsidiaries or any of their respective properties or assets. (l) The Securities, the Exchange Securities, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement and the Indenture will each conform in all material respects to the descriptions thereof in the Final Memorandum. (m) The audited consolidated financial statements (and the related notes) and schedules of the Company and the Subsidiaries included in the Final Memorandum present fairly the consolidated financial position, results of operations and cash flows of the Company and the Subsidiaries, at the dates and for the periods to which they relate, and have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis, and the unaudited historical consolidated financial statements (and the related notes) of the Company and the Subsidiaries included in the Final Memorandum present fairly the consolidated financial position, results of operations and cash flows of the Company and the Subsidiaries, at the dates and for the periods to which they relate, and have been prepared in accordance with GAAP. To the knowledge of the Company, Deloitte & Touche LLP, which has examined certain of such financial statements and schedules as set forth in its report included in the Final Memorandum, is an independent public accounting firm with respect to the Company and the Subsidiaries as required by the Securities Act and the rules and regulations of the Securities Exchange Commission ("SEC") thereunder (the "Act Regulations"). (n) Since the respective dates as of which information is given in the Final Memorandum, except as otherwise specifically stated therein, there has been no significant change in or material adverse change in the condition (financial or otherwise), assets, results of operations or prospects of the Company or of the Company and the Subsidiaries considered as one enterprise or of the LHC, whether or not arising in the ordinary course of business. (o) At the Closing Date, the Company will have the authorized and issued and outstanding capitalization set forth in the Final Memorandum under the caption "Capitalization"; the outstanding capital stock of the Company and each Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and were not issued in violation of any preemptive or similar rights (whether provided contractually or pursuant to Organizational Documents); and except as set forth on Schedule II, all of the outstanding shares of the Subsidiaries are owned beneficially and of record by the Company or by another Subsidiary, in each case, free and clear of all liens, encumbrances, equities or claims of any kind whatsoever or restrictions on transferability or voting. (p) Neither the Company nor any of the Subsidiaries nor the LHC is (A) in violation of its Organizational Documents, (B) in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, authorization, permit, certificate or other agreement or document to which the Company or any Subsidiary or the LHC is a party or by which it or any of them may be bound, or to which any of the assets or businesses of the Company or any Subsidiary or the LHC is subject, or (C) in violation of any applicable law, rule or regulation, or any judgment, order or decree of any domestic or foreign court with jurisdiction over the Company or any Subsidiary or the LHC, or other governmental or regulatory authority with jurisdiction over the Company or any Subsidiary or the LHC which, in the case of (B) or (C), could have a Material Adverse Effect. (q) Except as described or reflected in the Final Memorandum and for matters not required to be described in the Final Memorandum, there is not pending or, to the knowledge of the Company, threatened, any action, suit, proceeding, inquiry or investigation to which the Company or any Subsidiary or the LHC is a party, or to which the rights of entry or assets of the Company or any of the Subsidiaries or the LHC is subject, before, or brought by, any court or governmental or regulatory agency or body with jurisdiction over the Company or any Subsidiary or the LHC. (r) Each of the Company and the Subsidiaries and the LHC owns or possesses, or can acquire on reasonable terms, adequate patents, patent rights, licenses, trademarks, inventions, service marks, trade names, copyrights and know-how (including trade secrets and other proprietary or confidential information, systems or procedures, whether patented or unpatented) (collectively, "intellectual property") necessary to conduct the business now or, to its belief, proposed to be operated by it as described in the Final Memorandum, except as described in the Final Memorandum and where the failure to own, possess or have the ability to acquire any such intellectual property could not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect; and, except as disclosed in the Final Memorandum, neither the Company nor any of the Subsidiaries has received any notice of infringement of or conflict with (or knows of any such infringement of or conflict with) asserted rights of others with respect to any of such intellectual property which, if such assertion of infringement or conflict were sustained, would result in any Material Adverse Effect. (s) Each of the Company and the Subsidiaries has obtained all consents, approvals, orders, certificates, licenses, permits, franchises and other authorizations (collectively, the "Licenses") of and from, and has made all declarations and filings with, all governmental or regulatory authorities, including, without limitation, the Federal Communications Commission (the "FCC"), and all courts and other tribunals necessary to own, lease, license and use its assets and to conduct its businesses in the manner described in the Final Memorandum except where the failure to obtain such Licenses and make such declarations and filings would not have a Material Adverse Effect. Neither the Company nor any of the Subsidiaries nor the LHC, has received any notice of proceedings relating to the revocation or modification of, or denial of any application for, any License which, if the subject of an unfavorable decision, ruling or finding, would, singly or in the aggregate, have a Material Adverse Effect; the Company and each of the Subsidiaries and the LHC, have fulfilled and performed all of their obligations with respect to all Licenses possessed by any of them, except where the failure to so fulfill and perform would not, singly or in the aggregate, have a Material Adverse Effect; and no event has occurred which allows, or after notice or lapse of time, or both, would allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such License, except where such revocation or termination would not, singly or in the aggregate, have a Material Adverse Effect; and the Licenses referred to above, including, to the actual knowledge of the Company, those held by the LHC, contain no restrictions on the Company or any of the Subsidiaries or the LHC that are not described in the Final Memorandum, except where such restrictions would not, singly or in the aggregate, have a Material Adverse Effect. (t) There are no legal, governmental or regulatory proceedings affecting the business of the Company or any Subsidiary or the LHC, including, without limitation, before the FCC, actions, suits, inquiries or investigations which, if applicable, would be required to be described in the Final Memorandum were the Final Memorandum a registration statement on Form S-1 filed under the Act and the Act Regulations that are not described, nor any laws, rules, regulations, contracts or other documents which, under such circumstances, would be required to be described in the Final Memorandum by the Act or by the Act Regulations that have not been so described. (u) Each of the Company and the Subsidiaries and the LHC has filed all necessary income, franchise and other tax returns, and has paid any taxes assessed by the due date for payment thereof, except where such taxes are being contested in good faith or where the failure to file and pay such taxes would not have a Material Adverse Effect. (v) Except as disclosed in the Final Memorandum, there are no mortgages, charges or security arrangements nor any consensual encumbrances or other arrangements which restrict the ability of any Subsidiary (i) to pay dividends or make any other distributions on such Subsidiary's shares or to pay any indebtedness owed to the Company or any other Subsidiary, (ii) to make any loans or advances to, or investments in, the Company or any other Subsidiary or (iii) to transfer any of its property or assets to the Company or any other Subsidiary. (w) To the knowledge of the Company, there are no defaults under any Rights of Entry (as defined in the Final Memorandum) by any party thereunder or notices of termination or non-renewal with respect thereto, except for such defaults or notices as, individually or in the aggregate, cannot reasonably be expected to have a Material Adverse Effect. (x) The market-related data and estimates included in the Final Memorandum are based on or derived from independent sources which the Company believes to be reliable and accurate. (y) The Securities satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. (z) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf has engaged in any directed selling efforts with respect to the Securities, and each of them has complied with the offering restrictions requirement of Regulation S ("Regulation S") under the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S. (aa) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), without taking account of any exemption arising out of the number of holders of the Company's securities. (ab) The Company has not paid or agreed to pay to any person any compensation for soliciting another to purchase the Securities or Exchange Securities of the Company (except as contemplated by this Agreement). (ac) The information provided by the Company pursuant to Section 5(h) hereof will not, at the date thereof, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In regards to the foregoing representations and warranties of the Company, it is understood that (i) all necessary applications, authorizations and organizational procedures are being conducted with regard to the LHC and will be completed prior to the Closing Date and (ii) an amendment to the Company's Certificate of Incorporation creating the Class C Common Stock of the Company and making certain other changes thereto will be authorized and filed prior to the Closing Date, and, accordingly, all such representations and warranties pertaining to the LHC, the Class C Common Stock and the Company's capitalization will only be given as of the Closing Date. Any certificate signed by any two or more members of the Board of Directors or two or more officers of the Company and delivered to an Initial Purchaser or to counsel for the Initial Purchasers pursuant to the terms of this Agreement shall be deemed a representation and warranty by such Company to each Initial Purchaser as to the matters covered thereby. 2. Purchase and Sale. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company agrees to sell to each Initial Purchaser, and each Initial Purchaser agrees, severally and not jointly, to purchase from the Company, at a purchase price of $980.67 per Unit, the number of Units set forth opposite such Initial Purchaser's name in Schedule I hereto. 3. Delivery and Payment. Delivery of the Units, Notes and Shares and payment for the Units shall be made at 10:00 AM, New York City time, on February 14, 1997, or such later date (not later than February 17, 1997) as the Initial Purchasers shall designate, which date and time may be postponed by agreement between the Initial Purchasers and the Company or as provided in Section 9 hereof (such date and time of delivery and payment for the Units, Notes and Shares being herein called the "Closing Date"). Delivery of the Units, Notes and Shares shall be made to the Initial Purchasers for the respective accounts of the Initial Purchasers against payment by the Initial Purchasers of the purchase price thereof to or upon the order of the Company by federal funds check or checks or wire transfer payable in same day funds or such other manner of payment as may be agreed by the Company and the Initial Purchasers. Delivery of the Units, Notes and Shares shall be made at such location as the Initial Purchasers shall reasonably designate at least one business day in advance of the Closing Date and payment for the Units shall be made at the office of Cahill Gordon & Reindel ("Counsel for the Initial Purchasers"), Eighty Pine Street, New York, New York 10005. Certificates for the Units, Notes and Shares shall be registered in such names and in such denominations as the Initial Purchasers may request not less than three full business days in advance of the Closing Date. The Company agrees to have the Units, Notes and Shares available for inspection, checking and packaging by the Initial Purchasers in New York, New York, not later than 1:00 PM on the business day prior to the Closing Date. 4. Offering of Securities. Each Initial Purchaser, severally and not jointly, represents and warrants to and agrees with the Company that: (a) It has not offered or sold, and will not offer or sell, any Securities except (i) to those it reasonably believes to be qualified institutional buyers (as defined in Rule 144A under the Securities Act) and that, in connection with each such sale, it has taken or will take reasonable steps to ensure that the purchaser of such Securities is aware that such sale is being made in reliance on Rule 144A, or (ii) to other institutional "accredited investors" (as defined in Rule 501(a)(1),(2), (3) or (7) of Regulation D) who provide to it and to the Company a letter in the form of Exhibit A hereto or (iii) in accordance with the restrictions set forth in Exhibit B hereto. (b) Neither it nor any person acting on its behalf has made or will make offers or sales of the Securities in the United States by means of any form of general solicitation or general advertising (within the meaning of Regulation D) in the United States. (c) Such Initial Purchaser is a QIB, with such knowledge and experience in financial and business matters as are necessary in order to evaluate the merits and risks of an investment in the Securities. (d) Each of the Initial Purchasers understands that the Company and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 6 hereof, counsel to the Company and counsel to the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 5. Agreements. The Company agrees with each Initial Purchaser that: (a) The Company will furnish to each Initial Purchaser and to Counsel for the Initial Purchasers, without charge, during the period referred to in paragraph (c) below, as many copies of the Final Memorandum and any amendments and supplements thereto as it may reasonably request. The Company will pay the expenses of printing or other production of all documents relating to the offering. (b) The Company will not amend or supplement the Final Memorandum without the prior written consent of the Initial Purchasers. (c) If at any time prior to the completion of the sale of the Securities by the Initial Purchasers (as determined by the Initial Purchasers), any event occurs as a result of which the Final Memorandum, as then amended or supplemented, would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it should be necessary to amend or supplement the Final Memorandum to comply with applicable law, the Company will promptly notify the Initial Purchasers of the same and, subject to the requirements of paragraph (b) of this Section 5, will prepare and provide to the Representatives pursuant to paragraph (a) of this Section 5 an amendment or supplement which will correct such statement or omission or effect such compliance. (d) The Company will arrange for the qualification of the Securities for sale by the Initial Purchasers under the laws of such jurisdictions as the Initial Purchasers may designate and will maintain such qualifications in effect so long as required for the sale of the Securities. The Company will promptly advise the Initial Purchasers of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. (e) The Company will not, and will not permit any of its Affiliates to, resell any Securities that have been acquired by any of them. (f) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf will, directly or indirectly, make offers or sales of any security, or solicit offers to buy any security, under circumstances that would require the registration of the Securities under the Securities Act. (g) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf will engage in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Securities or the Exchange Securities in the United States. (h) So long as any of the Securities are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company will, unless it becomes subject to and complies with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser, any information required to be provided by Rule 144A(d)(4) under the Securities Act. This covenant is intended to be for the benefit of the holders, and the prospective purchasers designated by such holders, from time to time of such restricted securities. (i) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf will engage in any directed selling efforts with respect to the Securities, and each of them will comply with the offering restrictions requirement of Regulation S. Terms used in this paragraph have the meanings given to them by Regulation S. (j) The Company will not, until 90 days following the Closing Date, without the prior written consent of the Initial Purchasers, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, any debt securities (excluding commercial loans and securities issued to the seller of any business to the Company or any of its Subsidiaries as consideration for such sale) issued or guaranteed by the Company (other than the Securities), other than in connection with the Exchange Offer (as defined in the Final Memorandum). (k) In connection with any disposition of Securities pursuant to a transaction made in compliance with paragraph 6 of Exhibit A, the Company will reissue certificates evidencing such Securities without the legend referred to in paragraph 5 of Exhibit A (provided, in the case of a transaction made in compliance with paragraph 6(f) of Exhibit A, that the legal opinion referred to therein so permits). (l) Pursuant to the Escrow Agreement, the Company will deposit the Initial Escrow Amount into a collateral account, representing funds that together with the proceeds from the investment thereof will be sufficient to pay the first six interest payments on the Notes, and will take all actions necessary to pledge, assign and set over to the Trustee, for the benefit of the holders of the Notes and the Trustee (in its capacity as such under the Indenture), and irrevocably grant to the Trustee for the benefit of the holders of the Notes and the Trustee (in its capacity as such under the Indenture) a first priority perfected security interest in, all of its respective right, title and interest in such collateral account, all funds held therein and all other Collateral (as such term is defined in the Escrow Agreement) held by the Escrow Agent or on its behalf, in order to secure the obligations and indebtedness of the Company under the Indenture, the Escrow Agreement and the Notes. 6. Conditions to the Obligations of the Initial Purchasers. The obligations of the Initial Purchasers to purchase the Units shall be subject to the accuracy of the representations and warranties on the part of the Company contained herein at the date and time that this Agreement is executed and delivered by the parties hereto (the "Execution Time") and the Closing Date, to the accuracy of the statements of the Company made in any certificates pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Company shall have furnished to the Initial Purchasers the opinion of Kronish, Lieb, Weiner & Hellman LLP, counsel for the Company, dated the Closing Date, in form and substance reasonably acceptable to the Initial Purchasers to the effect that: (i) The Company has been duly incorporated and is validly existing under the laws of the State of Delaware, with corporate power and authority to own, lease and operate its assets and properties and conduct its business as described in the Final Memorandum and to enter into and perform its obligations under this Agreement, the Indenture, the Registration Agreement and the Escrow Agreement; (ii) The Company has all requisite corporate power and authority to issue the Securities; (iii) The authorized, and to the knowledge of such counsel based solely upon a review of the Company's stock ledger and corporate records, the issued and outstanding capital stock of the Company is as set forth in the Final Memorandum under the caption "Capitalization"; (iv) Each of this Agreement, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement, the Securities, the Exchange Securities and the Indenture has been duly authorized by the Company; (v) No consent, approval, authorization, license, qualification or order of or filing or registration with, any court or governmental or regulatory agency or body of the United States or the State of New York or the General Corporation Law of the State of Delaware is required for the execution and delivery by the Company of this Agreement, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement or the Indenture or for the issue and sale of the Securities or the Exchange Securities or the consummation by the Company of any of the transactions contemplated herein or therein, except such as may be required (A) in connection with the registration under the Securities Act of the Notes or the Exchange Securities, pursuant to the Registration Agreement, and the registration under the Securities Act of the Shares, pursuant to the Common Stock Registration Rights Agreement, (B) the qualification of the Indenture under the TIA in connection with the registration of the Securities or the Exchange Securities pursuant to the Registration Agreement, and the registration under the Securities Act of the Shares, pursuant to the Common Stock Registration Rights Agreement, (C) under the "blue sky" laws of any jurisdiction in connection with the purchase and distribution of the Units by the Initial Purchasers (as to which such counsel need express no opinion), (D) under the Rules and Regulations of the FCC ("FCC Rules") or under any rules or regulations of any State regulatory commissions ("State Rules") responsible for the regulation of cable/telecommunications services (as to which counsel need express no opinion) and (E) such as have been obtained or made, as the case may be; (vi) The issuance, sale and delivery of the Securities and the Exchange Securities, the execution, delivery and performance by the Company of this Agreement, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement and the Indenture (in each case assuming due authorization and execution by each party other than the Company) and the consummation by the Company of the transactions contemplated hereby and thereby and the compliance by the Company with the terms of the foregoing do not, and, at the Closing Date, will not, conflict with or constitute or result in a breach or violation by the Company or any of the Subsidiaries of (A) any provision of the Certificate of Incorporation or By-laws of the Company, (B) any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) by the Company, or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary under any material agreements or instruments known to such counsel or (C) any law, statute, rule, or regulation (except for the FCC Rules and State Rules to which counsel need express no opinion) of the United States or the State of New York or under the General Corporation Law of the State of Delaware or any order, decree or judgment known to such counsel to be applicable to the Company or any Subsidiary, of any court or governmental or regulatory agency or body or arbitrator in the United States or the States of New York or Delaware. (vii) The statements in the Offering Memorandum under the headings "Summary - The Offering," "Description of the Units," "Description of the Notes," "Description of Common Stock Registration and Other Rights" and "Exchange Offer; Registration Rights," insofar as such statements purport to summarize certain provisions of the Securities, the Exchange Securities, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement and the Indenture provide a fair summary of such provisions of such agreements and instruments; (viii) Each of the Indenture, the Registration Agreement, the Escrow Agreement and the Common Stock Registration Rights Agreement (assuming due authorization and execution by each party thereto other than the Company) constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except (a) with respect to the Indenture, the Common Stock Registration Rights Agreement and the Registration Agreement, the Enforceability Limitations, and (b) with respect to the Registration Agreement, the Common Stock Registration Rights Agreement and the Escrow Agreement, that such counsel expresses no opinion regarding the validity and enforceability of the indemnification and contribution provisions contained in Sections 7, 5 and 5, respectively, thereof; (ix) Each of the Notes, when executed and authenticated in accordance with the provisions of the Indenture and delivered and paid for in accordance with the terms of this Agreement, and the Exchange Securities when executed, authenticated and delivered in exchange for the Securities in accordance with the terms of the Registration Agreement, will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Company, enforceable in accordance with its terms except as the enforceability thereof may be limited by the Enforceability Limitations; the Shares when executed, authenticated and delivered, will be entitled to the benefits of the Common Stock Registration Rights Agreement and will be valid and binding obligations of the Company, enforceable in accordance with its terms except as the enforceability thereof may be limited by the Enforceability Limitations; (x) The issuance of the Shares has been duly and validly authorized, and the Shares, when paid for and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable, and no holder of any securities of the Company has preemptive or similar rights applicable to the Shares; (xi) The Escrow Agreement has been duly authorized, executed and delivered by the Company; (xii) The Escrow Agreement creates a valid security interest in favor of the Trustee in all right, title and interest of the Company in and to the Escrow Account and the Collateral (such counsel need not express an opinion as to the perfection or priority of the security interest in the Collateral created by the Escrow Agreement); (xiii) Assuming that the representations and warranties of the Initial Purchasers contained in Section 4 of this Agreement are true, correct and complete, and assuming compliance by the Initial Purchasers with their covenants in Section 4 hereof, and assuming that the representations and warranties contained in the Accredited Investor Letters completed by Accredited Investors and deemed made by "qualified institutional buyers" and non-U.S. persons purchasing Units from the Initial Purchasers are true and correct as of the Closing Date, it is not necessary in connection with the offer, sale and delivery of the Units to the Initial Purchasers under, or in connection with the initial resale of the Units by the Initial Purchasers in accordance with, this Agreement for the Company to register the Units under the Securities Act or to qualify the Indenture under the TIA; (xiv) Neither the Company nor any of the Subsidiaries is an "investment company" or a company "controlled by" or required to register as an investment company as such terms are defined in the Investment Company Act of 1940, as amended, and the rules and regulations thereunder; (xv) When the Securities are issued and delivered pursuant to this Agreement, such Securities will not be of the same class (within the meaning of Rule 144A) as securities of the Company which are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system; and (xvi) The statements in the Final Memorandum under the caption "Certain Federal Income Tax Considerations" provide a fair summary of the material tax consequences of owning Securities. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent certified public accountants of the Company and the Initial Purchasers and their representatives at which the contents of the Final Memorandum and related matters were discussed and, although we have not undertaken to investigate or verify independently, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Final Memorandum (except as indicated above), on the basis of the foregoing, they have no reason to believe that at the Execution Time and the Closing Date the Final Memorandum contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein, in the light of the circumstances under which they were made, not misleading or that the Final Memorandum includes an untrue statement of a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the laws of the State of New York, the general corporate laws of the State of Delaware or the laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to Counsel for the Initial Purchasers, including Goldberg, Godles, Weiner & Wright and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. All references in this Section 6(a) to the Final Memorandum shall be deemed to include any amendment or supplement thereto at the Closing Date. (b) The Company shall have furnished to the Initial Purchasers the opinion of Michael Katzenstein, Vice President, Legal Affairs and General Counsel of the Company, dated the Closing Date, in form and substance reasonably satisfactory to the Initial Purchasers, to the effect that: (i) Each of the Company and the Subsidiaries and the LHC has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is organized, with full corporate power and authority to own its properties and conduct its business as described in the Final Memorandum, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases material properties or conducts material business, except where the failure to so qualify would not have a Material Adverse Effect; (ii) All the outstanding shares of capital stock of the Company and the LHC and each Subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in Schedule II to the Purchase Agreement, all outstanding shares of capital stock of the Subsidiaries are owned by the Company either directly or through other Subsidiaries free and clear of any security interests, liens or encumbrances; (iii) The issuance, sale and delivery of the Securities and the Exchange Securities, the execution, delivery and performance by the Company of this Agreement, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement and the Indenture (in each case assuming due authorization and execution by each party other than the Company) and the consummation by the Company of the transactions contemplated hereby and thereby and the compliance by the Company with the terms of the foregoing do not, and, at the Closing Date, will not, conflict with or constitute or result in a breach or violation by the Company or any of the Subsidiaries of (A) any provision of the Certificate of Incorporation or By-laws of the Company or any of the Subsidiaries, (B) any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) by the Company or any of the Subsidiaries, or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness under, or result in the creation of imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries under any material agreements or instruments known to such counsel or (C) any order, decree or judgment known to such counsel to be applicable to the Company or any Subsidiary, of any court or governmental or regulatory agency or body or arbitrator in the United States or the States of New York or Delaware; (iv) The statements in the Final Memorandum under the headings "Risk Factors - Risks Associated with Rights of Entry," and "-- Use of the Name OpTel" fairly summarizes the legal matters therein described; (v) To the knowledge of such counsel (no search of court or administrative records having been made), no material legal or governmental or regulatory proceedings (including proceedings by or before the FCC) are pending to which the Company or any of the Subsidiaries or the LHC is a party or to which the business of the Company or any of the Subsidiaries or the LHC are subject that are not described or reflected therein as required, and no such proceedings have been threatened against the Company or any of the Subsidiaries or the LHC or with respect to any of their assets; and there is no material contract, agreement or other document not described or referred to in the Final Memorandum; (vi) To counsel's knowledge, (i) no application, action, complaint, investigation or proceeding is pending or directly threatened that is likely to result in the denial of any pending application for the renewal, modification or assignment of any of the licenses, special temporary authorizations, conditional licenses, construction permits and other authorizations issued by the FCC in favor of the Company and the Subsidiaries and the LHC (collectively, "FCC Authorizations") for the conduct of their business as described in the Final Memorandum, and (ii) except for proceedings of general applicability, there are no proceedings or actions pending that could result in the revocation, materially adverse modification or suspension of any of the FCC Authorizations, the issuance of a cease and desist order, or the imposition of any administrative or judicial sanction, including but not limited to a monetary forfeiture; and (vii) To counsel's knowledge, each FCC report, registration, certification and notice required to be filed at the FCC and relating to any of the FCC Authorizations or the Company and the Subsidiaries, including but not limited to annual Equal Employment Opportunity Reports, has been timely filed, except as disclosed in the Final Memorandum or for such reports the non-filing or failure to timely file of which individually or in the aggregate would not have a Material Adverse Effect. In addition, such counsel shall state that they have no reason to believe that at the Execution Time and the Closing Date the Final Memorandum contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein, in the light of the circumstances under which they were made, not misleading or that the Final Memorandum includes an untrue statement of a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters involving the application of laws of any jurisdiction other than the laws of the State of New York or the laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to Counsel for the Initial Purchasers. (c) The Company shall have furnished to the Initial Purchasers the opinion of Goldberg, Godles, Weiner & Wright, FCC counsel for the Issuers, dated the Closing Date, in form and substance reasonably satisfactory to the Initial Purchasers, to the effect that: (i) To counsel's knowledge, the Company and the Subsidiaries and the LHC are in compliance in all material respects with each of the FCC Authorizations for the conduct of their business as described in the Final Memorandum and all such FCC Authorizations represent all FCC Authorizations necessary for the conduct of the business of the Company and the Subsidiaries as presently conducted and described in the Final Memorandum; (ii) To counsel's knowledge, (i) except as set forth on a Schedule to such opinion letter, no application, action or proceeding is pending for the renewal, modification or assignment of any of the FCC Authorizations, (ii) no application, action, complaint, investigation or proceeding is pending or directly threatened that is likely to result in the denial of any such application and (iii) except for proceedings of general applicability, there are no proceedings or actions pending that are likely to result in the revocation, materially adverse modification or suspension of any of the FCC Authorizations, the issuance of a cease and desist order, or the imposition of any administrative or judicial sanction, including but not limited to a monetary forfeiture; and all renewal applications required to be filed by the FCC's Rules have been filed; (iii) To counsel's knowledge, each FCC report, registration, certification and notice required to be filed at the FCC and relating to any of the FCC Authorizations or the Company and the Subsidiaries, including but not limited to annual Equal Employment Opportunity Reports, has been timely filed, except for such reports the non-filing of which individually or in the aggregate would not have a Material Adverse Effect; (iv) The execution, delivery and performance by the Company of its obligations under this Agreement, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement, the Indenture, the Securities, the Exchange Securities and the transactions contemplated therein, did not or will not result in a violation of the Communications Act, the Cable Acts and the Telecommunications Act or any order, rule or regulation of the FCC; (v) No consent, approval, authorization, order or registration of or with the FCC is required under the Communications Act, the Cable Acts, the Telecommunications Act or the rules and regulations of the FCC for the execution and delivery by the Company of, and the the performance by the Company of its obligations under this Agreement, the Registration Agreement, the Escrow Agreement, the Common Stock Registration Rights Agreement, the Indenture, the Securities or the Exchange Securities; (vi) Other than matters described in the Final Memorandum and except as to any other matters relating to the multichannel television and telecommunications industries in general, such counsel does not know of any proceedings threatened or pending before the FCC against or involving the properties, businesses or franchises of the Company which could reasonably be expected to have a Material Adverse Effect; and (vii) The statements in the Final Memorandum under the captions "Risk Factors - Regulation," and "-- Risks Associated with Rights of Entry" and "Business - Regulation" insofar as such statements summarize applicable provisions of the Communications Act, the Cable Acts and the Telecommunications Act and the published orders, rules and regulations of the FCC promulgated thereunder are accurate summaries in all material respects of the provisions purported to be summarized under such captions in the Final Memorandum; and the statutes and regulations summarized in such captions are statutes and regulations enforced or promulgated by the FCC that are material to the Company's business as described in the Final Memorandum. In rendering such opinion, counsel may state that it expresses no opinion with respect to any matters other than those arising under the Communications Act, the Telecommunications Act and the Cable Acts and the published rules and regulations promulgated thereunder by the FCC, and may rely as to all matters of fact relevant to such opinion on certificates and written statements of officers and employees of the Company; provided, however, that all such certificates and statements shall be satisfactory to the Initial Purchasers in all material respects and attached to such counsel's opinion. In addition, counsel may note that item (v) above is qualified by the requirement to file certain corporate and loan instruments with the FCC within 30 days of the Closing Date. (d) The Initial Purchasers shall have received from Counsel for the Initial Purchasers such opinion or opinions, dated the Closing Date, with respect to the issuance and sale of the Securities, the Final Memorandum and other related matters as the Initial Purchasers may reasonably require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (e) The Company shall have furnished to the Initial Purchasers a certificate of the Company, signed by the Chairman of the Board or the President and the principal financial or accounting officer of the Company, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Final Memorandum, any amendment or supplement to the Final Memorandum and this Agreement and that: (i) the representations and warranties of the Company in this Agreement are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date; and (ii) since the date of the most recent financial statements included in the Final Memorandum, there has been no material adverse change in the condition (financial or other), assets, results of operations, business or prospects of the Company and the Subsidiaries, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated by the Final Memorandum (exclusive of any amendment or supplement thereto). (f) At the Execution Time and at the Closing Date, Deloitte & Touche LLP shall have furnished to the Initial Purchasers a letter or letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Initial Purchasers, confirming that they are independent accountants within the meaning of the Securities Act and the Exchange Act and the applicable rules and regulations thereunder and Rule 101 of the Code of Professional Conduct of the American Institute of Certified Public Accountants (the "AICPA") and stating in effect that: (i) in their opinion the audited financial statements included in the Final Memorandum and reported on by them comply in form in all material respects with the applicable accounting requirements of the Exchange Act and the related published rules and regulations thereunder; (ii) on the basis of a reading of the latest unaudited financial statements made available by the Company and the Subsidiaries; their limited review in accordance with the standards established by the AICPA of the unaudited interim financial information as indicated in their report included in the Final Memorandum; carrying out certain specified procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter; a reading of the minutes of the meetings of the stockholders, directors and the audit and compensation committees of the Company and the Subsidiaries; and inquiries of certain officials of the Company who have responsibility for financial and accountings matters of the Company and the Subsidiaries as to transactions and events subsequent to August 31, 1996, nothing came to their attention which caused them to believe that: (1) any unaudited financial statements included in the Final Memorandum do not comply in form in all material respects with applicable accounting requirements and with the published rules and regulations of the Securities and Exchange Commission with respect to financial statements included or incorporated in quarterly reports on Form 10-Q under the Exchange Act; and said unaudited financial statements are not, in all material respects, in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Final Memorandum; or (2) with respect to the period subsequent to November 30, 1996, there were any changes, at a specified date not more than five business days prior to the date of the letter, in the long-term debt of the Company and the Subsidiaries or capital stock of the Company or decreases in the stockholders' equity of the Company as compared with the amounts shown on the November 30, 1996 consolidated balance sheet included in the Final Memorandum, or for the period from December 1, 1996 to such specified date there were any decreases, as compared with the period from comparable period of fiscal 1996, in net revenues or increases in loss before income taxes or in total net loss of the Company and the Subsidiaries, except in all instances for changes or decreases set forth in such letter, in which case the letter shall be accompanied by an explanation by the Company as to the significance thereof unless said explanation is not deemed necessary by the Initial Purchasers; or (3) the information included under the headings "Selected Consolidated Financial and Other Operating Data" is not in conformity with the disclosure requirements of Regulation S-K; and (iii) they have performed certain other specified procedures as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company and the Subsidiaries) set forth in the Final Memorandum, including the information set forth under the captions "Summary Consolidated Financial and Operating Data," "Capitalization" and "Selected Consolidated Financial and Other Operating Data" in the Final Memorandum, agrees with the accounting records of the Company and the Subsidiaries, excluding any questions of legal interpretation; (iv) in addition, they shall provide such additional statements with respect to any unaudited financial statements included in the Final Memorandum of persons other than the Company as shall reasonably be requested by the Initial Purchasers. All references in Section 6(f) to the Final Memorandum shall be deemed to include any amendment or supplement thereto at the date of the letter. (g) Subsequent to the Execution Time, or if earlier, the dates as of which information is given in the Final Memorandum, there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (d) of this Section 6 or (ii) any change, or any development involving a prospective change, in or affecting the business or properties of the Company and the Subsidiaries or the LHC the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Initial Purchasers, so material and adverse as to make it impractical or inadvisable to market the Units as contemplated by the Final Memorandum. (h) Each of the Indenture, the Escrow Agreement, the Registration Agreement and the Common Stock Registration Rights Agreement shall have been executed and delivered by each of the parties thereto. (i) The Company shall have taken any and all actions reasonably required to establish the Escrow Account with the Escrow Agent and to prepare to file appropriate financing statements in each of the offices where such filing is necessary or, in the opinion of the Initial Purchasers, desirable to perfect the lien in favor of the Trustee created by the Escrow Agreement. (j) Prior to the Closing Date, the maturity of the Convertible Notes (as defined in the Final Memorandum) shall have been extended to the earlier of August 15, 2005 or 6 months after the indefeasible payment in full of the Notes and the Convertible Notes shall be subordinated in right of payment to the Securities as will be set forth in Exhibit F-1 to the Indenture. (k) Prior to the Closing Date, the Company shall have authorized and filed an amendment to its Certificate of Incorporation that creates the Class C Common Stock to be issued as part of the Units and reflects the other changes to the Company's Certificate of Incorporation contemplated to be made by the Final Memorandum. (l) Prior to the Closing Date, the Company shall have received all necessary authorizations, made all necessary filings and shall have established the LHC in form and function as described in the Final Memorandum. (m) Prior to the Closing Date, the Company shall have furnished to the Initial Purchasers such further information, certificates and documents as the Representatives may reasonably request. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Initial Purchasers and Counsel for the Initial Purchasers, this Agreement and all obligations of the Initial Purchasers hereunder may be cancelled at, or at any time prior to, the Closing Date by the Initial Purchasers. Notice of such cancellation shall be given to the Company in writing or by telephone or telegraph confirmed in writing. The documents required to be delivered by this Section 6 will be delivered at the office of Counsel for the Initial Purchasers, at Eighty Pine Street, New York, New York 10005, on the Closing Date. 7. Reimbursement of Expenses. If the sale of the Units provided for herein is not consummated because any condition to the obligations of the Initial Purchasers set forth in Section 6 hereof is not satisfied, because of any termination pursuant to Section 10 hereof or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof other than by reason of a default by any of the Initial Purchasers in payment for the Units on the Closing Date, the Company will reimburse the Initial Purchasers severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Units. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Initial Purchaser, the directors, officers, employees and agents of each Initial Purchaser and each person who controls any Initial Purchaser within the meaning of either the Securities Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Memorandum, the Final Memorandum or any information provided by the Company to any holder or prospective purchaser of Securities pursuant to Section 5(h), or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Initial Purchasers specifically for inclusion therein; and provided further, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Memorandum which is corrected or contained, as the case may be, in the Final Memorandum and the Initial Purchaser fails to deliver the Final Memorandum. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Initial Purchaser severally agrees to indemnify and hold harmless the Company, its directors, its officers, and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Initial Purchaser, but only with reference to written information relating to such Initial Purchaser furnished to the Company by or on behalf of such Initial Purchaser specifically for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any amendment or supplement thereto). This indemnity agreement will be in addition to any liability which any Initial Purchaser may otherwise have. The Company acknowledges that the statements set forth in the last paragraph of the cover page and in the sixth paragraph under the heading "Plan of Distribution" in the Preliminary Memorandum and the Final Memorandum constitute the only information furnished in writing by or on behalf of the Initial Purchasers for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any amendment or supplement thereto). (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ one additional and separate counsel (and one additional and separate local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company and the Initial Purchasers agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company and one or more of the Initial Purchases may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company and by the Initial Purchasers from the offering of the Units; provided, however, that in no case shall any Initial Purchaser (except as may be provided in any agreement among the Initial Purchasers relating to the offering of the Units) be responsible for any amount in excess of the purchase discount or commission applicable to the Units purchased by such Initial Purchaser hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company and the Initial Purchasers shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and of the Initial Purchasers in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses), and benefits received by the Initial Purchasers shall be deemed to be equal to the total purchase discounts and commissions received by the Initial Purchasers from the Company in connection with the purchase of the Units hereunder. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or the Initial Purchasers. The Company and the Initial Purchasers agree that it would not be just and equitable if contributions were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls an Initial Purchaser within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee and agent of an Initial Purchaser shall have the same rights to contribution as such Initial Purchaser, and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act and each officer and director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). 9. Default by an Initial Purchaser. If any one or more Initial Purchasers shall fail to purchase and pay for any of the Units agreed to be purchased by such Initial Purchaser hereunder and such failure to purchase shall constitute a default in the performance of its or their obligations under this Agreement, the remaining Initial Purchasers shall be obligated severally to take up and pay for (in the respective proportions which the number of Units set forth opposite their names in Schedule I hereto bears to the number of Units set forth opposite the names of all the remaining Initial Purchasers) the Units which the defaulting Initial Purchaser or Initial Purchasers agreed but failed to purchase; provided, however, that in the event that the number of Units which the defaulting Initial Purchaser or Initial Purchasers agreed but failed to purchase shall exceed 10% of the Units set forth in Schedule I hereto, the remaining Initial Purchasers shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Units, and if such non-defaulting Initial Purchasers do not purchase all the Units, this Agreement will terminate without liability to any non-defaulting Initial Purchaser or the Company. In the event of a default by any Initial Purchaser as set forth in this Section 9, the Closing Date shall be postponed for such period, not exceeding seven days, as the Initial Purchasers shall determine in order that the required changes in the Final Memorandum or in any other documents or arrangements may be effected. Nothing contained in this Agreement shall relieve any defaulting Initial Purchaser of its liability, if any, to the Company or any non-defaulting Initial Purchaser for damages occasioned by its default hereunder. 10. Termination. This Agreement shall be subject to termination in the absolute discretion of the Initial Purchasers, by notice given to the Company prior to delivery of and payment for the Units, if prior to such time (i) trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such Exchange, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war or other calamity or crisis the effect of which on financial markets is such as to make it, in the judgment of the Initial Purchasers, impracticable or inadvisable to proceed with the offering or delivery of the Units as contemplated by the Final Memorandum. 11. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of the Initial Purchasers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Initial Purchasers or the Company or any of the officers, directors or controlling persons referred to in Section 8 hereof, and will survive delivery of and payment for the Units. The provisions of Sections 7 and 8 hereof shall survive the termination or cancellation of this Agreement. 12. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Initial Purchasers, will be mailed, delivered or telegraphed and confirmed to them, care of Salomon Brothers Inc, at Seven World Trade Center, New York, New York, 10048; or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 1111 W. Mockingbird Lane, Dallas, Texas 75247, attention: Michael Katzenstein, Vice President, Legal Affairs and General Counsel. 13. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 8 hereof, and, except as expressly set forth in Section 5(h) hereof, no other person will have any right or obligation hereunder. 14. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York. 15. Business Day. For purposes of this Agreement, "business day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in The City of New York, New York are authorized or obligated by law, executive order or regulation to close. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original, but all such counterparts will together constitute one and the same instrument. If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this Agreement and your acceptance shall represent a binding agreement between the Company and the Initial Purchasers. Very truly yours, OPTEL, INC. By: /s/ Micheal Katzenstein ------------------------------------- Name: Micheal Katzenstein Title: VP and General Counsel By: /s/ Louis Brunel ------------------------------------- Name: Louis Brunel Title: President and CEO The foregoing Agreement is hereby confirmed and accepted as of the date first above written. Salomon Brothers Inc Merrill, Lynch, Pierce, Fenner & Smith Incorporated By: Salomon Brothers Inc By: /s/ Patrick B. Meneley --------------------------------- Name: Patrick B. Meneley Title: Vice President SCHEDULE I Number of Units Initial Purchasers to be Purchased ------------------ --------------- Salomon Brothers Inc ................. 112,500 Merrill Lynch, Pierce, Fenner & Smith Incorporated ............. 112,500 --------- Total ................. 225,000 SCHEDULE II The following is a list of all subsidiaries that are not wholly owned by OpTel, Inc.: 1. Richey Pacific Cable Partners VI, L.P.: 100% of the general partnership interest is owned by OpTel, Inc., but none of the limited partnership interest is owned by OpTel, Inc. 2. Richey Pacific Cable Partners VII, L.P.: 100% of the general partnership interest is owned by OpTel, Inc., but none of the limited partnership interest is owned by OpTel, Inc. EXHIBIT A Non-Distribution Letter for U.S. Purchasers __________, 199_ Salomon Brothers Inc Merrill Lynch, Pierce, Fenner & Smith Incorporated c/o Salomon Brothers Inc Seven World Trade Center New York, New York 10048 OpTel, Inc. 1111 W. Mockingbird Lane Dallas, Texas 75247 Re: Purchase of Units (the "Units"), of OpTel, Inc. (the "Company") Ladies and Gentlemen: In connection with our purchase of the Units we confirm that: 1. We understand that the Units are not being and will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and are being sold to us in a transaction that is exempt from the registration requirements of the Securities Act. 2. We acknowledge that (a) neither the Company, nor the Initial Purchasers (as defined in the Offering Memorandum dated February 7, 1997 relating to the Units (the "Final Memorandum")) nor any person acting on behalf of the Company or the Initial Purchasers has made any representation to us with respect to the Company or the offer or sale of any Units and (b) any information we desire concerning the Company and the Units or any other matter relevant to our decision to purchase the Units (including a copy of the Final Memorandum) is or has been made available to us. 3. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Units, and we are (or any account for which we are purchasing under paragraph 4 below is) an institutional "accredited investor" (within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) able to bear the economic risk of investment in the Units. A-1 4. We are acquiring the Units for our own account (or for accounts as to which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this letter) and not with a view to any distribution of the Units, subject, nevertheless, to the understanding that the disposition of our property will at all times be and remain within our control. 5. We understand that (a) the Units will be in registered form only and that any certificates delivered to us in respect of the Units will bear a legend substantially to the following effect: THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN "ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS THREE YEARS (OR SUCH SHORTER PERIOD AS MAY BE PRESCRIBED BY RULE 144(K) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY OR (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE A-2 IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, (E) TO AN ACCREDITED INVESTOR THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. and (b) the Company has agreed to reissue such certificates without the foregoing legend only in the event of a disposition of the Units in accordance with the provisions of paragraph 6 below (provided, in the case of a disposition of the Units in accordance with paragraph 6(f) below, that the legal opinion referred to in such paragraph so permits), or at our request at such time as we would be permitted to dispose of them in accordance with paragraph 6(a) below. 6. We agree that in the event that at some future time we wish to dispose of any of the Units, we will not do so unless such disposition is made in accordance with any applicable securities laws of any state of the United States and: (a) the Units are sold in compliance with Rule 144(k) under the Securities Act; or (b) the Units are sold in compliance with Rule 144A under the Securities Act; or (c) the Units are sold in compliance with Rule 904 of Regulation S under the Securities Act; or (d) the Units are sold pursuant to an effective registration statement under the Securities Act; or (e) the Units are sold to the Company or an affiliate (as defined in Rule 501(b) of Regulation D) of the Company; or A-3 (f) the Units are disposed of in any other transaction that does not require registration under the Securities Act, and we theretofore have furnished to the Company or its designee an opinion of counsel experienced in securities law matters to such effect or such other documentation as the Company or its designee may reasonably request. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Very truly yours, By:_________________________________ (Authorized Officer) A-4 EXHIBIT B Selling Restrictions for Offers and Sales outside the United States (1)(a) The Units have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. Each Initial Purchaser represents and agrees that, except as otherwise permitted by Section 4(a)(i) or (ii) of the Agreement to which this is an exhibit, it has offered and sold the Units, and will offer and sell the Units, (i) as part of their distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, only in accordance with Rule 903 of Regulation S under the Securities Act. Accordingly, each Initial Purchaser represents and agrees that neither it, nor any of its affiliates nor any person acting on its or their behalf has engaged or will engage in any directed selling efforts with respect to the Units, and that it and they have compiled and will comply with the offering restrictions requirement of Regulation S. Each Initial Purchaser agrees that, at or prior to the confirmation of sale of Units (other than a sale of Units pursuant to Section 4(a)(i) or (ii) of the Agreement to which this is an exhibit), it shall have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Units from it during the restricted period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the "Securities Act") and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and February 14, 1997, except in either case in accordance with Regulation S or Rule 144A under the Securities Act. Terms used above have the meanings given to them by Regulation S." (b) Each Initial Purchaser also represents and agrees that it has not entered and will not enter into any contractual arrangement with any distributor with respect to the distribution of the Units, except with its affiliates or with the prior written consent of the Company. B-1 (c) Terms used in this section have the meanings given to them by Regulation S. (2) Each Initial Purchaser represents and agrees that (i) it has not offered or sold, and will not offer or sell, in the United Kingdom, by means of any document, any Units other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or as agent (except in circumstances which do not constitute an offer to the public within the meaning of the Companies Act 1985 of Great Britain), (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 of the United Kingdom with respect to anything done by it in relation to the Units in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Units to a person who is of a kind described in Article 9(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988 or is a person to whom the document may otherwise lawfully be issued or passed on. B-2 Annex 1 [SALOMON BROTHERS INC LETTERHEAD] February 7, 1997 Deloitte & Touche LLP 2200 Ross Avenue Suite 1600 Dallas, Texas 75201 Ladies and Gentlemen: Reference is hereby made to the Purchase Agreement (the "Purchase Agreement") dated February 7, 1997 among the undersigned and the other parties named in Schedule I thereto (the "Initial Purchasers"), and OpTel, Inc. (the "Company") pursuant to which the Company will sell to the Initial Purchasers, and the Initial Purchasers will purchase from the Company, 225,000 Units consisting of $225,000,000 principal amount of the Company's 13% Senior Notes Due 2005 and 225,000 Shares of Class C Common Stock (the "Securities"). Pursuant to Section 6(f) of the Purchase Agreement, you are required to deliver certain letters, in form and substance satisfactory to us, setting forth the matters described in such Section (the "Auditor's Letters"). In connection with your delivery of the Auditor's Letters, we confirm to you that: (i) we are knowledgeable with respect to the due diligence review process that would be performed if this placement of Securities were being registered pursuant to the Securities Act of 1933, as amended (the "Act"); and (ii) we will be reviewing certain information relating to the Company that will be included or incorporated by reference in the Final Memorandum (as defined in the Purchase Agreement) and this review process, applied to the information relating to the Company, will be substantially consistent with the due diligence review process that we would perform if this placement of Securities were being registered pursuant to the Act. In accordance with the foregoing, we hereby request that you deliver to us the Auditor's Letters. ANNEX 1-1 This letter is being furnished to you solely for the purpose of obtaining the Auditor's Letters and may not be relied upon or used by you for any other purpose, or given or shown to any other person, without our prior written consent. Very truly yours, SALOMON BROTHERS INC By: ---------------------------------- Name: Title: ANNEX 1-2 EX-3.1 3 EXHIBIT 3.1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF OPTEL, INC. a Delaware corporation OpTel, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. That the name of the corporation is OpTel, Inc. The corporation was originally incorporated under the same name in the State of Delaware on July 1, 1994. 2. That this corporation has not received any payment for any of its stock. 3. That the Certificate of Incorporation of this corporation is amended and restated as set forth in the Restated Certificate of Incorporation attached hereto as Exhibit A. 4. That the Restated Certificate of Incorporation was duly adopted by resolution of the Board of Directors as of December 19, 1994, in accordance with Sections 241 and 245 of the Delaware General Corporation Law. IN WITNESS WHEREOF, OpTel, Inc. has caused this Restated Certificate of Incorporation to be signed by its President this 19th day of December, 1994. OpTel, Inc. By: /s/ Jonathan D. Lloyd --------------------------------------- Jonathan D. Lloyd, President EXHIBIT A RESTATED CERTIFICATE OF INCORPORATION OF OPTEL, INC. a Delaware corporation ONE: The name of this corporation is: OpTel, Inc. TWO: The address of this corporation's registered office in the State of Delaware is 1050 S. State Street in the City of Dover, County of Kent. The name of its registered agent at such address is CorpAmerica, Inc. THREE: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law (the "DGCL"). FOUR: The total number of shares of all classes of stock which the corporation shall have authority to issue is four million (4,000,000), divided into the following classes: (i) two million (2,000,000) shares of Class A Common Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class A Common Stock"); (ii) one million (1,000,000) shares of Class B Common Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class B Common Stock"); and (iii) one million (1,000,000) shares of Preferred Stock, par value of one cent ($.01) per share (hereinafter referred to as "Preferred Stock"). The corporation's Class A Common Stock and Class B Common Stock are referred to hereinafter collectively as the "Common Stock". A. Powers and Rights of Holders of Class A Common Stock and Class B Common Stock. 1. Except as stated in Section 4 of this Article FOUR, the Class A Common Stock and Class B Common Stock shall be identical in all respects and shall have equal powers, preferences, rights and privileges; 2. The holders of the Class A Common Stock and the Class B Common Stock issued and outstanding shall have and possess the exclusive right to notice of stockholders' meetings and the exclusive voting rights and powers; 3. Any purported transfer of shares of Class B Common Stock other than to a Permitted Transferee (as defined herein) shall result in the conversion of the shares of Class B Common Stock being transferred into the like number of shares of Class A Common Stock. No such transfer shall be effective unless and until the transferor has surrendered to the corporation, at its office or agency maintained for that purpose, the Certificates representing the shares of Class B Common Stock to be transferred, which certificates shall be duly endorsed or accompanied by executed stock powers, with the signatures appropriately guaranteed. All such certificates shall be accompanied by written notice of the holder's intention to transfer the shares, including a statement of the number of shares of Class B Common Stock to be transferred and the name or name(s) and addresses in which the certificate or certificates for shares of Class A Common Stock issuable upon such conversion shall be issued and, if required, funds for the payment of any applicable transfer taxes. The corporation will, as soon as practicable thereafter, deliver at said office to the transferee of converted shares of Class A Common Stock, or to any nominee or designee of such transferee, a certificate or certificates for the number of full shares of Class A Common Stock issuable upon such conversion and, in the event that the transferor is transferring less than the aggregate number of shares represented by the Certificates surrendered, a certificate or certificates for the number of full shares of Class B Common Stock not being transferred. Shares of Class B Common Stock shall be deemed to have been converted as of the date of the surrender of the shares for conversion as hereinbefore provided, and the person or persons in whose name Class A Common Stock is issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class A Common Stock on such date. Shares of Class B Common Stock so converted shall be returned to the status of authorized and unissued shares of Class B Common Stock. The corporation, may, as a condition to the transfer or the registration of transfer of shares of Class B Common Stock to a purported Permitted Transferee, require the furnishing of such affidavits or other proof as it deems necessary to establish that such transferee is a Permitted Transferee. For purposes hereof, (i) "Permitted Transferee" shall mean Vanguard Communications, L.P., a California limited partnership, Vanguard Communications, Inc., a California corporation and VPC Corporation, a Delaware corporation and each of their respective Affiliates, (ii) "Affiliate" shall mean, with respect to any Person, another Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person, provided, however, that no employee of this corporation or any of its subsidiaries shall be deemed to be an Affiliate solely by reason of his capacity as an employee, or by reason of any employment agreement, and (iii) "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof; 4. Each holder of the Class A Common Stock issued and outstanding shall be entitled to one (1) vote for each share of Class A Common Stock standing in such holder's name on the books of the corporation, and each holder of the Class B Common Stock issued and outstanding shall be entitled to ten (10) votes for each share of Class B Common Stock standing in such holder's name on the books of the corporation. The holders of the Class A Common Stock and Class B Common Stock shall vote together as a single class; 5. Dividends may be paid to the holders of the Class A Common Stock and Class B Common Stock, as and when declared by the Board of Directors, out of any funds of the corporation legally available for the payment of such dividends. If and when dividends on the Class A Common Stock and Class B Common Stock are declared from time to time by the Board of Directors, whether payable in cash, in property or in shares of stock of the corporation, the holders of the Class A Common Stock and Class B Common Stock shall be entitled to share equally, on a per share basis, in such dividends; 6. Upon liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, the net assets of the corporation shall be distributed pro rata to the holders of the Class A Common Stock and Class B Common Stock; and 7. If the corporation shall in any manner split, subdivide or combine the outstanding shares of Class A Common Stock or Class B Common Stock, the outstanding shares of the other such class of Common Stock shall be proportionately split, subdivided or combined in the same manner and on the same basis as the outstanding shares of the class of Common Stock that have been split, subdivided or combined, unless a different basis has been consented to by the holders of a majority of the outstanding shares of the class of Common Stock that would be adversely affected by such action. B. Preferred Stock. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the approval of a majority of the votes entitled to be cast by the holders of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. FIVE: The following provisions are inserted for the management of the business and the conduct of the affairs of this corporation, and for further definition, limitation and regulation of the powers of this corporation and of its directors and stockholders: A. The business and affairs of this corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by the DGCL or by this Restated Certificate of Incorporation or the Bylaws of this corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by this corporation. B. The Board of Directors may adopt, amend or repeal the Bylaws of this corporation. C. Election of directors need not be by written ballot. SIX: The officers of this corporation shall be chosen in such a manner, shall hold their offices for such terms and shall carry out such duties as are determined solely by the Board of Directors, subject to the right of the Board of Directors to remove any officer or officers at any time with or without cause. SEVEN: No director of this corporation shall be personally liable to this corporation or its stockholders for monetary damages for any breach of fiduciary duty by such a director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to this corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL or (iv) for any transaction from which such director derived an improper personal benefit. This Article SEVEN is also contained in Article VIII, Section 1 of this corporation's Bylaws. No amendment to or repeal of this Article SEVEN shall apply to or have any effect on the liability or alleged liability of any director of this corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the DGCL is amended hereafter to further eliminate or limit the personal liability of directors, the liability of a director of this corporation shall be limited or eliminated to the fullest extent permitted by the DGCL, as amended. EIGHT: A. Right to Indemnification. Each person who was or is made a party to or is threatened to be made a party to or is involuntarily involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was a director or officer of this corporation, or is or was serving (during his or her tenure as director and/or officer) at the request of this corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, whether the basis of such Proceeding is an alleged action or inaction in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by this corporation to the fullest extent authorized by the DGCL (or other applicable law), as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection with such Proceeding. Such director or officer shall have the right to be paid by this corporation for expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if the DGCL (or other applicable law) requires, the payment of such expenses in advance of the final disposition of any such Proceeding shall be made only upon receipt by this corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it should be determined ultimately that he or she is not entitled to be indemnified under this Article EIGHT or otherwise. B. Right of Claimant to Bring Suit. If a claim under paragraph A of this Article EIGHT is not paid in full by this corporation within ninety (90) days after a written claim has been received by this corporation, the claimant may at any time thereafter bring suit against this corporation to recover the unpaid amount of the claim, together with interest thereon, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim, including reasonable attorneys' fees incurred in connection therewith. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to this corporation) that the claimant has not met the standards of conduct which make it permissible under the DGCL (or other applicable law) for this corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on this corporation. Neither the failure of this corporation (or of its full Board of Directors, its directors who are not parties to the Proceeding with respect to which indemnification is claimed, its stockholders, or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the DGCL (or other applicable law), nor an actual determination by any such person or persons that such claimant has not met such applicable standard of conduct, shall be a defense to such action or create a presumption that the claimant has not met the applicable standard of conduct. C. Non-Exclusivity of Rights. The rights conferred by this Article EIGHT shall not be exclusive of any other right which any director, officer, representative, employee or other agent may have or hereafter acquire under the DGCL or any other statute, or any provision contained in this corporation's Restated Certificate of Incorporation or Bylaws, or any agreement, or pursuant to a vote of stockholders or disinterested directors, or otherwise. D. Insurance and Trust Fund. In furtherance and not in limitation of the powers conferred by statute: (1) this corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of this corporation, or is serving at the request of this corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not this corporation would have the power to indemnify him or her against such liability under the provisions of law; and (2) this corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the fullest extent permitted by law and including as part thereof provisions with respect to any or all of the foregoing, to ensure the payment of such amount as may become necessary to effect indemnification as provided therein, or elsewhere. E. Indemnification of Employees and Agents of this Corporation. This corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, including the right to be paid by this corporation the expenses incurred in defending any Proceeding in advance of its final disposition, to any employee or agent of this corporation to the fullest extent of the provisions of this Article or otherwise with respect to the indemnification and advancement of expenses of directors and officers of this corporation. F. Amendment. This Article EIGHT is also contained in Article VIII, Sections 2 through 7, of this corporation's Bylaws. Any repeal or modification of this Article EIGHT shall not change the rights of any officer or director to indemnification with respect to any action or omission occurring prior to such repeal or modification. NINE: This corporation reserves the right to alter, amend, rescind or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. CERTIFICATE OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF OPTEL, INC. ---------------------------------------------- Under Section 242 of the Delaware General Corporation Law ---------------------------------------------- Pursuant to the provisions of Section 242 of the General Corporation Law of the State of Delaware, the undersigned, being authorized officers of OpTel, Inc. do hereby certify that: FIRST: The name of the corporation is OpTel, Inc. (hereinafter referred to as the "Corporation"). SECOND: The Certificate of Incorporation of the Corporation was filed with the Office of the Secretary of State of the State of Delaware on July 1, 1994 and restated by Restated Certificate of Incorporation, filed with the Office of the Secretary of State of Delaware on December 19, 1994. THIRD: The Restated Certificate of Incorporation of the Corporation is hereby amended by deleting Article FOUR in its entirety and replacing it with the following: "FOUR: The total number of shares of all classes of stock which the Corporation shall have authority to issue is fifteen million three hundred thousand (15,300,000) shares divided into the following classes: (i) Eight million (8,000,000) shares of Class A Common Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class A Common Stock"); (ii) Six million (6,000,000) shares of Class B Common Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class B Common Stock"); (iii) Three hundred thousand (300,000) shares of Class C Common Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class C Common Stock"); and (iv) One million (1,000,000) shares of Preferred Stock, par value of one cent ($.01) per share (hereinafter referred to as "Preferred Stock"). The Corporation's Class A Common Stock, Class B Common Stock and Class C Common Stock are referred to hereinafter collectively as the "Common Stock". A. Powers and Rights of Holders of Class A Common Stock, Class B Common Stock and Class C Common Stock. 1. Except as stated in Sections 2 and 3 of this Article FOUR, the Class A Common Stock, Class B Common Stock and Class C Common Stock shall be identical in all respects and shall have equal powers, preferences, rights and privileges; 2. Except as may be otherwise required by law, and subject to the provisions of any series of Preferred Stock at the time outstanding, the holders of the Class A Common Stock and the Class B Common Stock issued and outstanding shall have and possess the exclusive right to notice of stockholders' meetings and the exclusive voting rights and powers, whether at a meeting of stockholders or in connection with any action taken by written consent; except as otherwise may be required by law, the holders of Class C Common Stock are not entitled to notice of, or to vote at, stockholders' meetings or in connection with any action taken by written consent; 3. Each holder of the Class A Common Stock issued and outstanding shall be entitled to one (1) vote for each share of Class A Common Stock standing in such holder's name on the books of the Corporation, and each holder of the Class B Common Stock issued and outstanding shall be entitled to ten (10) votes for each share of Class B Common Stock standing in such holder's name on the books of the Corporation. Except as may be otherwise required by law, the holders of the Class A Common Stock and Class B Common Stock shall vote together as a single class; 4. Any purported transfer of shares of Class B Common Stock other than to a Permitted Transferee (as defined herein) shall result in the conversion of the shares of Class B Common Stock being transferred into the like number of shares of Class A Common Stock. No such transfer shall be effective unless and until the transferor has surrendered to the Corporation, at its office or agency maintained for that purpose, the certificates representing the shares of Class B Common Stock to be transferred, which certificates shall be duly endorsed or accompanied by executed stock powers, with the signatures appropriately guaranteed. All such certificates shall be accompanied by written notice of the holder's intention to transfer the shares, including a statement of the number of shares of Class B Common Stock to be transferred and the name or name(s) and addresses in which the certificate or certificates for shares of Class A Common Stock issuable upon such conversion shall be issued and, if required, funds for the payment of any applicable transfer taxes. The Corporation will, as soon as practicable thereafter, deliver at said office to the transferee of converted shares of Class B Common Stock, or to any nominee or designee of such transferee, a certificate or certificates for the number of full shares of Class A Common Stock issuable upon such conversion and, in the event that the transferor is transferring less than the aggregate number of shares represented by the certificates surrendered, a certificate or certificates for the number of full shares of Class B Common Stock not being transferred. Shares of Class B Common Stock shall be deemed to have been converted as of the date of the surrender of the shares for conversion as hereinbefore provided, and the person or persons in whose name Class A Common Stock is issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class A Common Stock on such date. Shares of Class B Common Stock so converted shall be returned to the status of authorized and unissued shares of Class B Common Stock. The Corporation shall at all times reserve for issuance sufficient shares of Class A Common Stock (which may include Class A Common Stock held by the Corporation as treasury stock), for issuance upon conversion of the Class B Common Stock. The Corporation, may, as a condition to the transfer or the registration of transfer of shares of Class B Common Stock to a purported Permitted Transferee, require the furnishing of such affidavits or other proof as it deems necessary to establish that such transferee is a Permitted Transferee. For purposes hereof (i) "Permitted Transferee" shall mean Vanguard Communications, L.P., a California limited partnership, Vanguard Communications, Inc., a California corporation and VPC Corporation, a Delaware corporation and each of their respective Affiliates, (ii) "Affiliate" shall mean, with respect to any Person, another Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person provided, however, that no employee of this corporation or any of its subsidiaries shall be deemed to be an Affiliate solely by reason of his capacity as an employee, or by reason of any employment agreement, and (iii) "Person" shall mean and include an individual, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof; 5. Upon any sale of Common Stock of the Corporation pursuant to a registration statement under the securities Act of 1933 (or any successor statute) or any registration of Common Stock of the Corporation pursuant to the Securities Exchange Act of 1934 (or any successor statute) ("the "Exchange Act"), the shares of Class C Common Stock will automatically be converted into an equal number of shares of Class A Common Stock or such other class of common equity securities of the Corporation that is registered with the Securities and Exchange Commission or is listed on a national securities exchange or otherwise subject to registration under the Exchange Act (the "Conversion Shares"), provided the terms thereof are no less favorable to holders thereof than were the shares of Class C Common Stock. The Corporation shall at all times reserve for issuance sufficient shares of Class A Common Stock (which may include Class A Common Stock held by the Corporation as treasury stock) or such other common equity securities, for issuance upon conversion of the Class C Common Stock. The Corporation will, as soon as practicable thereafter, deliver to the holder of the Class C Common Stock converted into the Conversion Shares a certificate or certificates for the Conversion Shares against receipt from such holder of the certificate theretofore representing an equal number of shares of Class C Common Stock. Shares of Class C Common Stock so converted shall be returned to the status of authorized and unissued shares of Class C Common Stock; 6. Dividends may be paid to the holders of the Class A Common Stock, Class B Common Stock and Class C Common Stock, as and when declared by the Board of Directors, out of any funds of the Corporation legally available for the payment of such dividends. If and when dividends on the Class A Common Stock, Class B Common Stock and Class C Common Stock are declared from time to time by the Board of Directors, whether payable in cash, in property or in shares of stock of the Corporation, the holders of the Class A Common Stock, Class B Common Stock and Class C Common Stock shall be entitled to share equally, on a per share basis, in such dividends. If shares of Class B Common Stock are paid on Class B Common Stock and shares of Class A Common Stock are paid on Class A Common Stock and shares of Class C Common Stock are paid on Class C Common Stock, in an equal amount per share of Class B Common and Class A Common and Class C Common Stock in proportionate amounts, such payment will be deemed to be a like dividend or other distribution. 7. Subject to the provisions of any series of Preferred Stock at the time outstanding, upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the net assets of the Corporation shall be distributed pro rata to the holders of the Class A Common Stock, Class B Common Stock and Class C Common Stock, without regard to class; and 8. If the Corporation shall in any manner split, subdivide, combine or reclassify any outstanding shares of a class of Common Stock, the outstanding shares of the other such classes of Common Stock shall be proportionately split, subdivided, combined or reclassified in the same manner and on the same basis as the outstanding shares of the class of Common Stock that have been split, subdivided, combined or reclassified, unless a different basis has been consented to by the holders of a majority of the outstanding shares of the Class A Common Stock or Class B Common Stock, as applicable, or two-thirds of the outstanding shares of Class C Common Stock to the extent any such class would be adversely affected by such action. Subject to the conversion rights of holders of Class C Common Stock, in the event of any corporate merger, consolidation, purchase or acquisition of property or stock or other reorganization in which any consideration is to be received by the holders of Class B Common Stock or the holders of Class A Common Stock, the holders of Class C Common Stock will receive the same consideration on a per share basis, except that, if such consideration shall consist in any part of voting securities (or of options or warrants to purchase voting securities, or of securities convertible into or exchangeable for voting securities), (i) the holders of Class B Common Stock may receive, on a per share basis, voting securities with ten times the number of votes per share as those voting securities to be received by the holders of Class A Common Stock (or options or warrants to purchase, or securities convertible into or exchangeable for voting securities with ten times the number of votes per share as those voting securities issuable upon the exercise of the options or warrants, or into which the convertible or exchangeable securities may be converted or exchanged, received by the holders of Class A Common Stock) and (ii) the holders of the Class C Common Stock may receive, on a per share basis, non-voting securities (or options or warrants to purchase non-voting securities or securities convertible into or exchangeable for non-voting securities). B. Preferred Stock. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the approval of a majority of the votes entitled to be cast by the holders of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock." FOURTH: This Amendment to the Restated Certificate of Incorporation of the Corporation was authorized by Unanimous Written Consent of the Board of Directors and by Unanimous Written Consent of the Shareholders of the Corporation. IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment to the Certificate of Incorporation of the Corporation as of this 10th day of February, 1997 and affirm that the statements set forth herein are true and correct under the penalties of perjury. By: /s/ Michael E. Katzenstein -------------------------------- Name: Michael E. Katzenstein Title: Vice President & General Counsel By: /s/ Bertrand Blanchette ------------------------------- Name: Bertrand Blanchette Title: Chief Financial Officer EX-3.2 4 EXHIBIT 3.2 Exhibit 3.2 - -------------------------------------------------------------------------------- OPTEL, INC. BYLAWS - -------------------------------------------------------------------------------- (Restated as of July 1, 1994) Exhibit "B" TABLE OF CONTENTS ----------------- Page ---- ARTICLE I OFFICES ................................................ 1 Section 1. Registered Office.......................... 1 Section 2. Other Offices ............................. 1 ARTICLE II MEETINGS OF STOCKHOLDERS ............................... 1 Section 1. Place of Meetings ......................... 1 Section 2. Annual Meetings ........................... 1 Section 3. Special Meetings .......................... 1 Section 4. Notice of Meetings ........................ 2 Section 5. Quorum; Adjournment ....................... 2 Section 6. Proxies and Voting ........................ 2 Section 7. Stock List ................................ 3 Section 8. Actions by Stockholders ................... 3 ARTICLE III BOARD OF DIRECTORS ..................................... 3 Section 1. Duties and Powers ......................... 3 Section 2. Number and Term of Office.................. 4 Section 3. Vacancies ................................. 4 Section 4. Meetings .................................. 4 Section 5. Quorum .................................... 5 Section 6. Actions of Board Without a Meeting ........ 5 Section 7. Meetings by Means of Conference Telephone.. 5 Section 8. Committees ................................ 5 Section 9. Compensation .............................. 6 Section 10. Removal ................................... 6 ARTICLE IV OFFICERS ............................................... 6 Section 1. General ................................... 6 Section 2. Election; Term of Office .................. 6 Section 3. Chairman of the Board ..................... 7 Section 4. President ................................. 7 Section 5. Vice President ............................ 7 Section 6. Secretary ................................. 7 Section 7. Assistant Secretaries...................... 8 Section 8. Treasurer ................................. 8 Section 9. Assistant Treasurers....................... 8 Section 10. Other Officers ............................ 8 -i- Page ---- ARTICLE V STOCK .................................................. 9 Section 1. Form of Certificates....................... 9 Section 2. Signatures ................................ 9 Section 3. Lost Certificates ......................... 9 Section 4. Transfers ................................. 9 Section 5. Record Date ............................... 9 Section 6. Beneficial Owners ......................... 10 Section 7. Voting Securities Owned by the Corporation................................ 10 ARTICLE VI NOTICES ................................................ 10 Section 1. Notices ................................... 10 Section 2. Waiver of Notice .......................... 10 ARTICLE VII GENERAL PROVISIONS ..................................... 11 Section 1. Dividends ................................. 10 Section 2. Disbursements ............................. 11 Section 3. Corporation Seal .......................... 11 ARTICLE VIII DIRECTORS' LIABILITY AND INDEMNIFICATION ............... 11 Section 1. Directors' Liability....................... 11 Section 2. Right to Indemnification .................. 12 Section 3. Right of Claimant to Bring Suit............ 12 Section 4. Non-Exclusivity of Rights ................. 13 Section 5. Insurance and Trust Fund................... 13 Section 6. Indemnification of Employees and Agents of the Corporation ........................ 13 Section 7. Amendment ................................. 14 ARTICLE IX AMENDMENTS ............................................. 14 -ii- BYLAWS OF OPTEL, INC. ----------- (hereinafter called the "Corporation") ARTICLE I OFFICES ------- Section 1. Registered Office. The registered office of the Corporation shall be in the City of Dover, County of Kent, State of Delaware. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ Section 1. Place of Meetings. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. The Annual Meetings of Stockholders shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which meetings the stockholders shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. Section 3. Special Meetings. Special meetings of the stockholders may be called by the Board of Directors, the Chairman of the Board, the President, or by the holders of shares entitled to cast not less than 10% of the votes at the meeting. Upon request in writing to the Chairman of the Board, the President, any Vice President or the Secretary by any person (other than the board) entitled to call a special meeting of stockholders, the officer forthwith shall cause notice to be given to the stockholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within 20 days after receipt of the request, the persons entitled to call the meeting may give the notice. -1- Section 4. Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation. Section 5. Quorum; Adjournment. At any meeting of the stockholders, the holders of a majority of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law or the Certificate of Incorporation. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time without notice other than announcement at the meeting, until a quorum shall be present or represented. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 6. Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedure established for the meeting. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his name on the record date for the meeting, except as otherwise provided herein or required by law or the Certificate of Incorporation. All voting, including on the election of directors but excepting where otherwise provided herein or required by law or the Certificate of Incorporation, may be by a voice vote; provided, however, that upon demand therefor by a stockholder entitled to vote or such stockholder's proxy, a stock vote shall be taken. Every stock vote shall be taken by ballots, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the -2- procedure established for the meeting. Every vote taken by ballots shall be counted by an inspector or inspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or the Certificate of Incorporation, all other matters shall be determined by a majority of the votes cast. Section 7. Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in such stockholder's name, shall be open to the examination of any such stockholder, for any purpose germane to the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. Section 8. Actions by Stockholders. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III BOARD OF DIRECTORS Section 1. Duties and Powers. The business of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate of Incorporation or by these -3- Bylaws directed or required to be exercised or done by the stockholders. Section 2. Number and Term of Office. The Board of Directors shall consist of one (1) or more members. The number of directors shall be fixed and may be changed from time to time by resolution duly adopted by the Board of Directors or the shareholders, except as otherwise provided by law or the Certificate of Incorporation. Except as provided in Section 3 of this Article, directors shall be elected by the holders of record of a plurality of the votes cast at Annual Meetings of Stockholders, and each director so elected shall hold office until the next Annual Meeting and until his or her successor is duly elected and qualified, or until his or her earlier resignation or removal. Any director may resign at any time upon written notice to the Corporation. Directors need not be stockholders. Section 3. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director or by the stockholders entitled to vote at any Annual or Special Meeting held in accordance with Article II, and the directors so chosen shall hold office until the next Annual or Special Meeting duly called for that purpose and until their successors are duly elected and qualified, or until their earlier resignation or removal. Section 4. Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. The first meeting of each newly-elected Board of Directors shall be held immediately following the Annual Meeting of Stockholders and no notice of such meeting shall be necessary to be given the newly-elected directors in order legally to constitute the meeting, provided a quorum shall be present. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or a majority of the directors then in office. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone, facsimile or telegram on twenty-four (24) hours' notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Meetings may be held at any time without notice if all the directors are present or if all those not present waive such notice in accordance with Section 2 of Article VI of these Bylaws. -4- Section 5. Quorum. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws, at all meetings of the Board of Directors, a majority of the directors then in office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 6. Actions of Board Without a Meeting. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 7. Meetings by Means of Conference Telephone. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 7 shall constitute presence in person at such meeting. Section 8. Committees. The Board of Directors may, by resolution passed by a majority of the directors then in office, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any committee, to the extent allowed by law and provided in the Bylaw or resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each committee shall keep regular minutes and report to the Board of Directors when required. -5- Section 9. Compensation. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 10. Removal. Unless otherwise restricted by the Certificate of Incorporation or Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of shares entitled to vote at an election of directors. ARTICLE IV OFFICERS -------- Section 1. General. The officers of the Corporation shall be appointed by the Board of Directors and shall consist of a Chairman of the Board or a President, or both, a Secretary and a Treasurer (or a position with the duties and responsibilities of a Treasurer). The Board of Directors may also appoint one or more vice presidents, assistant secretaries or assistant treasurers, and such other officers as the Board of Directors, in its discretion, shall deem necessary or appropriate from time to time. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. Section 2. Election; Term of Office. The Board of Directors at its first meeting held after each Annual Meeting of Stockholders shall elect a Chairman of the Board or a President, or both, a Secretary and a Treasurer (or a position with the duties and responsibilities of a Treasurer), and may also elect at that meeting or any other meeting, such other officers and agents as it shall deem necessary or appropriate. Each officer of the Corporation shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors together with the powers and duties customarily exercised by such officer; and each officer of the Corporation shall hold office until such officer's successor is elected and qualified or until such officer's earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The Board of Directors may at any time, with or without cause, by the affirmative vote of a majority of directors then in office, remove any officer. -6- Section 3. Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall preside at all meetings of the stockholders and the Board of Directors and shall have such other duties and powers as may be prescribed by the Board of Directors from time to time. Section 4. President. The President shall have general and active mangement of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall have and exercise such further powers and duties as may be specifically delegated to or vested in the President from time to time by these Bylaws or the Board of Directors. In the absence of the Chairman of the Board or in the event of his inability or refusal to act, or if the Board has not designated a Chairman, the President shall perform the duties of the chairman of the Board, and when so acting, shall have all of the powers and be subject to all of the restrictions upon the Chairman of the Board. Section 5. Vice President. In the absence of the President or in the event of his inability or refusal to act, the Vice President (or in the event there be more than one vice president, the vice presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The vice presidents shall perform such other duties and have such other powers as the Board of Directors or the President may from time to time prescribe. Section 6. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the President. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his or her signature. The secretary shall see that all books, reports, -7- statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be. Section 7. Assistant Secretaries. Except as may be otherwise provided in these Bylaws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, or the Secretary, and shall have the authority to perform all functions of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. Section 8. Treasurer. The Treasurer shall be the Chief Financial Officer, shall have the custody of the corporate funds and securities, shall keep complete and accurate accounts of all receipts and disbursements of the Corporation, and shall deposit all monies and other valuable effects of the Corporation in its name and to its credit in such banks and other depositories as may be designated from time to time by the Board of Directors. The Treasurer shall disburse the funds of the Corporation, taking proper vouchers and receipts for such disbursements, and shall render to the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. The Treasurer shall, when and if required by the Board of Directors, give and file with the Corporation a bond, in such form and amount and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of his or her duties as Treasurer. The Treasurer shall have such other powers and perform such other duties as the Board of Directors or the President shall from time to time prescribe. Section 9. Assistant Treasurers. Except as may be otherwise provided in these Bylaws, Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, or the Treasurer, and shall have the authority to perform all functions of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. Section 10. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. -8- ARTICLE V STOCK ----- Section 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board or the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such holder in the Corporation. Section 2. Signatures. Any or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or such owner's legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by such person's attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be cancelled before a new certificate shall be issued. Section 5. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less -9- than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 6. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. Section 7. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chairman of the Board, the President, any Vice President or the Secretary and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. ARTICLE VI NOTICES ------- Section 1. Notices. Whenever written notice is required by law, the Certificate of Incorporation or these Bylaws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at such person's address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Written notice may also be given personally or by telegram, telex, facsimile or cable and such notice shall be deemed to be given at the time of receipt thereof if given personally or at the time of transmission thereof if given by telegram, telex, facsimile or cable. Section 2. Waiver of Notice. Whenever any notice is required by law, the Certificate of Incorporation or these Bylaws to be given to any director, -10- member or a committee or stockholder, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to notice. ARTICLE VII GENERAL PROVISIONS ------------------ Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting or by any Committee of the Board of Directors having such authority at any meeting thereof, and may be paid in cash, in property, in shares of the capital stock or in any combination thereof. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or or any proper purpose, and the Board of Directors may modify or abolish any such reserve. Section 2. Disbursements. All notes, checks, drafts and orders for the payment of money issued by the Corporation shall be signed in the name of the Corporation by such officers or such other persons as the Board of Directors may from time to time designate. Section 3. Corporation Seal. The corporate seal, if the Corporation shall have a corporate seal, shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII DIRECTORS' LIABILITY AND INDEMNIFICATION ---------------------------------------- Section 1. Directors' Liability. No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such a director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which such director derived an improper personal benefit. No amendment to or repeal of this Article shall apply -11- to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the Delaware General Corporation Law is amended hereafter to further eliminate or limit the personal liability of directors, the liability of a director of this Corporation shall be limited or eliminated to the fullest extent permitted by the Delaware General Corporation Law, as amended. Section 2. Right to Indemnification. Each person who was or is made a party to or is threatened to be made a party to or is involuntarily involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation, or is or was serving (during his or her tenure as director and/or officer) at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, whether the basis of such Proceeding is an alleged action or inaction in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law (or other applicable law), as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection with such Proceeding. Such director or officer shall have the right to be paid by the Corporation for expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law (or other applicable law) requires, the payment of such expenses in advance of the final disposition of any such Proceeding shall be made only upon receipt by the Corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it should be determined ultimately that he or she is not entitled to be indemnified under this Article or otherwise. Section 3. Right of Claimant to Bring Suit. If a claim under Section 2 of this Article is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, together with interest thereon, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim, including reasonable attorneys' fees incurred in connection therewith. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, -12- if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law (or other applicable law) for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (or of its full Board of Directors, its directors who are not parties to the Proceeding with respect to which indemnification is claimed, its stockholders, or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law (or other applicable law), nor an actual determination by any such person or persons that such claimant has not met such applicable standard of conduct, shall be a defense to such action or create a presumption that the claimant has not met the applicable standard of conduct. Section 4. Non-Exclusivity of Rights. The rights conferred by this Article shall not be exclusive of any other right which any director, officer, representative, employee or other agent may have or hereafter acquire under the Delaware General Corporation Law or any other statute, or any provision contained in the Corporation's Certificate of Incorporation or Bylaws, or any agreement, or pursuant to a vote of stockholders or disinterested directors, or otherwise. Section 5. Insurance and Trust Fund. In furtherance and not in limitation of the powers conferred by statute: (1) the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of law; and (2) the Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the fullest extent permitted by law and including as part thereof provisions with respect to any or all of the foregoing, to ensure the payment of such amount as may become necessary to effect indemnification as provided therein, or elsewhere. Section 6. Indemnification of Employees and Agents of the Corporation. The corporation may, to the extent authorized from time to time by the Board of -13- Directors, grant rights to indemnification, including the right to be paid by the Corporation the expenses incurred in defending any Proceeding in advance of its final disposition, to any employee or agent of the Corporation to the fullest extent of the provisions of this Article VIII or otherwise with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. Section 7. Amendment. This Article VIII is also contained in Articles SEVEN and EIGHT of the Corporation's Certificate of Incorporation, and accordingly, may be altered, amended or repealed only to the extent and at the time the comparable Certificate Article is altered, amended or repealed. Any repeal or modification of this Article VIII shall not change the rights of an officer or director to indemnification with respect to any action or omission occurring prior to such repeal or modification. ARTICLE IX AMENDMENTS ---------- Except as otherwise specifically stated within an Article to be altered, amended or repealed, these Bylaws may be altered, amended or repealed and new Bylaws may be adopted at any meeting of the Board of Directors or of the stockholders, provided that with respect to a meeting of the stockholders, notice of the proposed change was given in the notice of such stockholders' meeting. -14- EX-4.1 5 EXHIBIT 4.1 Exhibit 4.1 =============================================================================== OPTEL, INC., as Issuer and U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee -------------------- INDENTURE Dated as of February 14, 1997 -------------------- $225,000,000 13% Senior Notes Due 2005 13% Senior Notes Due 2005, Series B =============================================================================== Reconciliation and tie between Trust Indenture Act of 1939, as amended, and Indenture, dated as of February 14, 1997 Trust Indenture Indenture Act Section Section - --------------- --------- Section 310(a)(1) .................................... 6.09 (a)(2) .................................... 6.09 (a)(3) .................................... Not Applicable (a)(4) .................................... Not Applicable (b) .................................... 6.08, 6.10 Section 311(a) .................................... 6.05 (b) .................................... 6.05 (c) .................................... Not Applicable Section 312(a) .................................... 7.01 (b) .................................... 7.02 (c) .................................... 7.02 Section 313(a) .................................... 7.03 (b) .................................... 7.03 (c) .................................... 7.03 (d) .................................... 7.03 Section 314(a) .................................... 7.04 (a)(4) .................................... 10.11 (b) .................................... Not Applicable (c)(1) .................................... 1.04, 4.04 (c)(2) .................................... 1.04, 4.04 (c)(3) .................................... Not Applicable (d) .................................... 12.03(d) (e) .................................... 1.04 Section 315(a) .................................... 6.01(a) (b) .................................... 6.02 (c) .................................... 6.01(b) (d) .................................... 6.01(c) (e) .................................... 5.14 Section 316(a) (last sentence) .................................... 1.01 (a)(1)(A) .................................... 5.12, 5.13 (a)(1)(B) .................................... 5.13 (a)(2) .................................... Not Applicable (b) .................................... 5.08 Section 317(a)(1) .................................... 5.03 (a)(2) .................................... 5.04 (b) .................................... 10.03 Section 318(a) .................................... 1.08 - ------------------------ Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of this Indenture. TABLE OF CONTENTS Page ---- PARTIES ............................................................ 1 RECITALS ........................................................... 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions ..................................... 1 Section 1.02. Other Definitions ............................... 32 Section 1.03. Rules of Construction ........................... 33 Section 1.04. Form of Documents Delivered to Trustee ....................................... 34 Section 1.05. Acts of Holders ................................. 34 Section 1.06. Notices, etc., to the Trustee and the Company ....................................... 35 Section 1.07. Notice to Holders; Waiver ....................... 36 Section 1.08. Conflict with Trust Indenture Act ............... 36 Section 1.09. Effect of Headings and Table of Contents ...................................... 37 Section 1.10. Successors and Assigns .......................... 37 Section 1.11. Separability Clause ............................. 37 Section 1.12. Benefits of Indenture ........................... 37 Section 1.13. GOVERNING LAW ................................... 37 Section 1.14. No Recourse Against Others ...................... 37 Section 1.15. Independence of Covenants ....................... 38 Section 1.16. Exhibits ........................................ 38 Section 1.17. Counterparts .................................... 38 Section 1.18. Duplicate Originals ............................. 38 ARTICLE TWO SECURITY FORMS Section 2.01. Form and Dating.................................. 38 ARTICLE THREE THE SECURITIES Section 3.01. Title and Terms ................................. 39 Section 3.02. Registrar and Paying Agent ...................... 40 Section 3.03. Execution and Authentication .................... 41 Section 3.04. Temporary Securities ............................ 43 Section 3.05. Transfer and Exchange ........................... 44 Section 3.06. Mutilated, Destroyed, Lost and Stolen Securities .................................... 45 - ------------ Note: This table of contents shall not, for any purpose, be deemed to be a part of this Indenture. Section 3.07. Payment of Interest; Interest Rights Preserved ..................................... 46 Section 3.08. Persons Deemed Owners ........................... 47 Section 3.09. Cancellation .................................... 47 Section 3.10. Computation of Interest ......................... 48 Section 3.11. Legal Holidays .................................. 48 Section 3.12. CUSIP Number .................................... 48 Section 3.13. Paying Agent to Hold Money in Trust ............. 49 Section 3.14. Book Entry Provisions for Global Securities .................................... 49 Section 3.15. Special Transfer Provisions ..................... 51 ARTICLE FOUR DEFEASANCE AND COVENANT DEFEASANCE Section 4.01. Company's Option To Effect Defeasance or Covenant Defeasance ........................ 54 Section 4.02. Defeasance and Discharge ........................ 54 Section 4.03. Covenant Defeasance ............................. 55 Section 4.04. Conditions to Defeasance or Covenant Defeasance .................................... 55 Section 4.05. Deposited Money and U.S. Government Obligations To Be Held in Trust; Other Miscellaneous Provisions ................ 58 Section 4.06. Reinstatement ................................... 59 ARTICLE FIVE REMEDIES Section 5.01. Events of Default ............................... 59 Section 5.02. Acceleration of Maturity; Rescission and Annulment ................................. 62 Section 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee .................... 64 Section 5.04. Trustee May File Proofs of Claims ............... 65 Section 5.05. Trustee May Enforce Claims Without Possession of Securities ...................... 66 Section 5.06. Application of Money Collected .................. 66 Section 5.07. Limitation on Suits ............................. 67 Section 5.08. Unconditional Right of Holders to Receive Principal, Premium and Interest ...................................... 68 Section 5.09. Restoration of Rights and Remedies .............. 68 Section 5.10. Rights and Remedies Cumulative .................. 68 Section 5.11. Delay or Omission Not Waiver .................... 68 Section 5.12. Control by Majority ............................. 69 Section 5.13. Waiver of Past Defaults ......................... 69 Section 5.14. Undertaking for Costs ........................... 70 Section 5.15. Waiver of Stay, Extension or Usury Laws .......................................... 70 Section 5.16. Unconditional Right of Holders to Institute Certain Suits ....................... 70 ARTICLE SIX THE TRUSTEE Section 6.01. Certain Duties and Responsibilities ............. 71 Section 6.02. Notice of Defaults .............................. 72 Section 6.03. Certain Rights of Trustee ....................... 72 Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof ............... 75 Section 6.05. Trustee and Agents May Hold Securities; Collections; Etc. ................. 75 Section 6.06. Money Held in Trust ............................. 75 Section 6.07. Compensation and Indemnification of Trustee and its Prior Claim ................... 75 Section 6.08. Conflicting Interests ........................... 77 Section 6.09. Corporate Trustee Required; Eligibility ................................... 77 Section 6.10. Resignation and Removal; Appointment of Successor Trustee .......................... 77 Section 6.11. Acceptance of Appointment by Successor ..................................... 79 Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession to Business ...................................... 80 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 7.01. Preservation and Information; Company to Furnish Trustee Names and Addresses of Holders .......................... 81 Section 7.02. Communications of Holders ....................... 82 Section 7.03. Reports by Trustee .............................. 82 Section 7.04. Reports by Company .............................. 82 ARTICLE EIGHT CONSOLIDATION, MERGER, SALE OF ASSETS, ETC., Section 8.01. Company May Consolidate, Etc., Only on Certain Terms .............................. 83 Section 8.02. Successor Substituted ........................... 85 ARTICLE NINE SUPPLEMENTAL INDENTURES AND WAIVERS Section 9.01. Supplemental Indentures, Agreements and Waivers Without Consent of Holders ....................................... 86 Section 9.02. Supplemental Indentures, Agreements and Waivers with Consent of Holders............ 87 Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers ........................ 89 Section 9.04. Effect of Supplemental Indentures ............... 89 Section 9.05. Conformity with Trust Indenture Act ............. 90 Section 9.06. Reference in Securities to Supplemental Indentures ....................... 90 Section 9.07. Record Date ..................................... 90 Section 9.08. Revocation and Effect of Consents ............... 90 ARTICLE TEN COVENANTS Section 10.01. Payment of Principal, Premium and Interest ...................................... 91 Section 10.02. Maintenance of Office or Agency ................. 91 Section 10.03. Money for Security Payments To Be Held in Trust ................................. 92 Section 10.04. Corporate Existence ............................. 93 Section 10.05. Payment of Taxes and Other Claims ............... 94 Section 10.06. Maintenance of Properties ....................... 94 Section 10.07. Insurance ....................................... 94 Section 10.08. Books and Records ............................... 95 Section 10.09. Compliance Certificates and Opinions ............ 95 Section 10.10. Provision of Financial Statements ............... 96 Section 10.11. Change of Control ............................... 96 Section 10.12. Limitation on Indebtedness ...................... 99 Section 10.13. Statement by Officers as to Default ............. 99 Section 10.14. Limitation on Restricted Payments ............... 100 Section 10.15. Limitation on Transactions with Affiliates .................................... 104 Section 10.16. Disposition of Proceeds of Asset Sales ......................................... 105 Section 10.17. Limitation on Liens Securing Certain Indebtedness .................................. 110 Section 10.18. Escrow Account .................................. 110 Section 10.19. Limitation on Certain Guarantees and Indebtedness by Restricted Subsidiaries .................................. 110 Section 10.20. Limitation on Issuances and Sales of Preferred Stock of Restricted Subsidiaries .................................. 111 Section 10.21. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries ....................... 111 Section 10.22. Limitation on Designations of Unrestricted Subsidiaries ..................... 112 ARTICLE ELEVEN REDEMPTION OF SECURITIES Section 11.01. Right of Redemption ............................. 114 Section 11.02. Applicability of Article ........................ 114 Section 11.03. Election to Redeem; Notice to Trustee ....................................... 114 Section 11.04. Selection by Trustee of Securities to Be Redeemed ................................... 114 Section 11.05. Notice of Redemption ............................ 115 Section 11.06. Deposit of Redemption Price ..................... 116 Section 11.07. Securities Payable on Redemption Date .......................................... 116 Section 11.08. Securities Redeemed or Purchased in Part .......................................... 117 ARTICLE TWELVE COLLATERAL AND SECURITY Section 12.01. Escrow Agent..................................... 117 Section 12.02. Recording and Opinions........................... 119 Section 12.03. Release of Collateral............................ 119 Section 12.04. Certificates of the Company...................... 120 Section 12.05. Authorization of Actions to Be Taken by the Trustee Under the Escrow Agreement...................................... 121 Section 12.06. Authorization of Receipt of Funds by the Trustee Under the Escrow Agreement...................................... 121 Section 12.07. Termination of Security Interest................. 121 ARTICLE THIRTEEN SATISFACTION AND DISCHARGE Section 13.01. Satisfaction and Discharge of Indenture...................................... 122 Section 13.02. Application of Trust Money ...................... 123 SIGNATURES ......................................................... 124 Exhibit A-1 - Form of Series A Security Exhibit A-2 - Form of Series B Security Exhibit B - Form of Legend for Book-Entry Securities Exhibit C - Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors Exhibit D - Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S Exhibit E - Form of Escrow Agreement Exhibit F - Form of Subordination Provisions for Deeply Subordinated Shareholder Loans INDENTURE, dated as of February 14, 1997, among OpTel, Inc., a corporation incorporated under the laws of the State of Delaware (the "Company"), as issuer and U.S. Trust Company of Texas, N.A., a national banking association, as trustee (the "Trustee"). RECITALS The Company has duly authorized the creation of an issue of 13% Senior Notes Due 2005 (the "Series A Securities"), and an issue of 13% Senior Notes Due 2005, Series B (the "Series B Securities," and together with the Series A Securities, the "Securities"), of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary have been done to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligation of the Company and to make this Indenture a valid agreement of each of the Company and the Trustee in accordance with the terms hereof. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders (as hereinafter defined) of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions. "Acquired Indebtedness" means Indebtedness of a person existing at the time such person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition of such person and not incurred in connection with, or in anticipation of, such person becoming a Restricted Subsidiary or such Asset Acquisition. "Affiliate" of any specified person means any other person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Member" has the meaning set forth in Section 3.14. "Annualized Pro Forma Consolidated Coverage" means, as of any date of determination, the ratio of (1) Annualized Pro Forma Operating Cash Flow to (2) Consolidated Interest Expense for the four-quarter period immediately preceding the date of determination for which financial statements are available; provided, that (1) if the Company or any of the Restricted Subsidiaries has incurred any Indebtedness (whether through an Asset Acquisition, Asset Sale or otherwise) since the beginning of such period and through the date of determination that remains outstanding or if the transaction or series of transactions giving rise to the need to calculate such ratio involves an incurrence of Indebtedness, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to (A) such Indebtedness as if such Indebtedness had been incurred on the first day of such period (provided that if such Indebtedness is incurred under a revolving credit facility (or similar arrangement or under any predecessor revolving credit or similar arrangement) only that portion of such Indebtedness that constitutes the one-year projected average balance of such Indebtedness (as determined in good faith by senior management of the Company shall be deemed outstanding for purposes of this calculation), and (B) the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period and (2) if since the beginning of such period any Indebtedness of the Company or any of the Restricted Subsidiaries has been repaid, repurchased, defeased or otherwise discharged (whether through an Asset Acquisition, Asset Sale or otherwise) (other than Indebtedness under a revolving credit or similar arrangement unless such revolving credit Indebtedness has been permanently repaid and has not been replaced), Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Indebtedness had been repaid, repurchased, defeased or otherwise discharged on the first day of such period. "Annualized Pro Forma Consolidated Operating Cash Flow" means Consolidated Operating Cash Flow for the latest two fiscal quarters for which consolidated financial statements of the Company are available multiplied by two. For purposes of calculating "Consolidated Operating Cash Flow" for any two fiscal quarter period for purposes of this definition, (i) any Subsidiary of the Company that is a Restricted Subsidiary on the date of the transaction (the "Transaction Date") giving rise to the need to calculate "Annualized Pro Forma Consolidated Operating Cash Flow" shall be deemed to have been a Restricted Subsidiary at all times during such two fiscal quarter period and (ii) any Subsidiary of the Company that is not a Restricted Subsidiary on the Transaction Date shall be deemed not to have been a Restricted Subsidiary at all times during such two fiscal quarter period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated Operating Cash Flow" shall be calculated after giving effect on a pro forma basis for the applicable two fiscal quarter period to, without duplication, any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Company or one of the Restricted Subsidiaries (including any person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness) occurring during the period commencing on the first day of such two fiscal quarter period to and including the Transaction Date (the "Reference Period"), as if such Asset Sale or Asset Acquisition occurred on the first day of the Reference Period. "Asset Acquisition" means (i) any capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) by the Company or any Restricted Subsidiary in any other person, or any acquisition or purchase of Capital Stock of any other person by the Company or any Restricted Subsidiary, in either case pursuant to which such person shall become a Restricted Subsidiary or shall be merged with or into the Company or any Restricted Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary of the assets of any person which constitute substantially all of an operating unit or line of business of such person or which is otherwise outside of the ordinary course of business. "Asset Sale" means any direct or indirect sale, conveyance, transfer or lease (that has the effect of a disposition and is not for security purposes) or other disposition (that is not for security purposes) to any person other than the Company or a Restricted Subsidiary, in one transaction or a series of related transactions, of (i) any Capital Stock of any Restricted Subsidiary, (ii) any material license or other authorization of the Company or any Restricted Subsidiary pertaining to a Cable/Telecommunications Business (other than the disposition to License Co. of the licenses and authorizations on terms identical to or at least as favorable to the Company and the Restricted Subsidiaries as those set forth in the License Co. Documents (provided such new documents shall also constitute License Co. Documents for all purposes hereunder) so long as the Company or a Restricted Subsidiary has the ability (pursuant to contract or otherwise) to fully exploit such license or authorization in a Cable/Telecommunications Business), (iii) any assets of the Company or any Restricted Subsidiary which constitute substantially all of an operating unit or line of business of the Company and the Restricted Subsidiaries or (iv) any other property or asset of the Company or any Restricted Subsidiary outside of the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (i) any disposition of properties and assets of the Company that is governed under Article Eight hereof, (ii) sales of property or equipment that have become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Company or any Restricted Subsidiary, as the case may be, and (iii) for purposes of Section 10.16, any sale, conveyance, transfer, lease or other disposition of any property or asset, whether in one transaction or a series of related transactions occurring within one year, either (x) involving assets with a Fair Market Value not in excess of $250,000 or (y) which constitutes the incurrence of a Capitalized Lease Obligation. "Average Life to Stated Maturity" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund requirements) of such Indebtedness multiplied by (b) the amount of each such principal payment by (ii) the sum of all such principal payments; provided that, in the case of any Capitalized Lease Obligation, all calculations hereunder shall give effect to any applicable options to renew in favor of the Company or any Restricted Security. "Bankruptcy Law" means Title 11, United States Code or any similar federal or state law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or the law of any other jurisdiction relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Bankruptcy Order" means any court order made in a proceeding pursuant to or within the meaning of any Bankruptcy Law, containing an adjudication of bankruptcy or insolvency, or providing for liquidation, receivership, winding-up, dissolution, "concordate" or reorganization, or appointing a Custodian of a debtor or of all or any substantial part of a debtor's property, or providing for the staying, arrangement, adjustment or composition of indebtedness or other relief of a debtor. "Board" or "Board of Directors" means the board of directors of the Company or any duly authorized committee of such board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York, State of New York are authorized or obligated by law, regulation or executive order to close. "Cable Subscriber" means, as of any determination date, any individual customer or bulk or commercial account (computed on an equivalent customer basis) to whom the Company or any Restricted Subsidiary provides subscription basic video programming services as well as accounts to whom the Company or any Restricted Subsidiary provides other video services for a fee (computed on an equivalent customer basis based on the basic programming service subscriber fee), in each case as of such date. "Cable/Telecommunications Business" means any business operating a cable and/or telephone and/or telecommunications system (delivered by any means, including, without limitation, cable, microwave, satellite or radio frequency) in the United States or otherwise delivering or expected to deliver services over the networks or systems of the Company and the Restricted Subsidiaries (including, without limitation, any business conducted by the Company or any Restricted Subsidiary on the Issue Date) and, for all purposes of this Indenture other than clauses (c) and (d) of the definition "Permitted Indebtedness," any business reasonably related to the foregoing (including, without limitation, any television programming, production and/or licensing business and any programming guide or telephone directory business). Any company holding a license or licenses to conduct any of the foregoing businesses that is not conducting any material business other than a Cable/Telecommunications Business shall also be considered a Cable/Telecommunications Business. A good faith determination by a majority of the Board as to whether a business meets the requirements of this definition shall be conclusive, absent manifest error. "Capital Stock" means, with respect to any person, any and all shares, interests, participations, rights in or other equivalents (however designated and whether voting and/or non-voting) of, such person's capital stock, whether outstanding on the Issue Date or issued after the Issue Date, and any and all rights (other than evidence of Indebtedness), warrants or options exchangeable for or convertible into such capital stock. "Capitalized Lease Obligation" means any obligation to pay rent or other amounts under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed, immovable or movable) that is required to be classified and accounted for as a capitalized lease obligation under GAAP, and, for the purpose of this Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of 365 days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof or such Indebtedness constitutes a general obligation of such country); (ii) deposits, certificates of deposit or acceptances with a maturity of 365 days or less of any financial institution that is a member of the Federal Reserve System, in each case, having combined capital and surplus and undivided profits (or any similar capital concept) of not less than $500,000,000 and whose senior unsecured debt is rated at least "A-1" by S&P or "P-1" by Moody's; (iii) commercial paper with a maturity of 365 days or less issued by a corporation (other than an Affiliate of the Company) organized under the laws of the United States or any State thereof and rated at least "A-1" by S&P or "P-1" by Moody's; and (iv) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the government of the United States of America or issued by any agency thereof and backed by the full faith and credit of the United States of America, in each case, maturing within 365 days from the date of acquisition. "Change of Control" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) other than the Permitted Holders is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person will be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the Company; or (b) the Company consolidates with, or merges with or into, another person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person, or any person consolidates with, or merges with or into, the Company in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Stock of the Company is converted into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the surviving or transferee corporation and/or (2) cash, securities and other property in an amount which could be paid by the Company as a Restricted Payment under this Indenture and (ii) immediately after such transaction no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding the Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the surviving or transferee corporation; or (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors whose election to the Board or whose nomination for election by the stockholders of the Company was approved by a Permitted Holder or by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason (other than by action of the Permitted Holders) to constitute a majority of the Board then in office; provided that (i) to the extent that either (x) one or more regulatory approvals are required for the consummation of one or more of the events or circumstances described in clauses (a) through (c) above to become effective under applicable law or (y) in the good faith judgment of the Board, one or more regulatory approvals are desirable prior to making one or more of the events or circumstances described in clauses (a) through (c) above to become effective under applicable law (provided, in the case of this clause (y), such approvals are sought on a reasonably prompt basis), then such events or circumstances shall be deemed to have occurred at the time such approvals have been obtained and become effective under applicable law, and (ii) any event or circumstance which would constitute a Change of Control solely by reason of the acquisition of "beneficial ownership" of securities of GVL shall not constitute a Change of Control with respect to the Company, unless it would result in a mandatory prepayment (by tender offer or otherwise) of Indebtedness, or an event of default under Indebtedness, of GVL or any of its Subsidiaries (other than the Company and its Subsidiaries). The good faith determination by the Board, based upon advice of outside counsel, of the beneficial ownership of securities of the Company within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent contrary controlling judicial precedent or contrary written interpretation published by the Commission. "Collateral" shall have the meaning ascribed to such term in the Escrow Agreement. "Commission" means the Securities and Exchange Commission, as from time to time constituted, or if at any time after the execution of this Indenture such Commission is not existing and performing the applicable duties now assigned to it, then the body or bodies performing such duties at such time. "Common Stock" means, with respect to any person, any and all shares, interest or other participations in, and other equivalents (however designated and whether voting or nonvoting) of such person's common stock whether outstanding at the Issue Date, and includes, without limitation, all series and classes of such common stock. "Company" means the person named as the "Company" in the first paragraph of this Indenture, until a successor person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any one of its Chairman of the Board, its Vice-Chairman, its Chief Executive Officer, its President or a Vice President, and by its Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and delivered to the Trustee. "Consolidated Income Tax Expense" means, with respect to any period, the provision for United States corporation, local, foreign and other income taxes of the Company and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, for any period, without duplication, the sum of (i) the interest expense of the Company and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, (a) any amortization of debt discount attributable to such period, (b) the net cost under Interest Rate Obligations (including any amortization of discounts), (c) the interest portion of any deferred payment obligation, (d) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and (e) all accrued interest, (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Company and the Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP and (iii) the amount of dividends in respect of Disqualified Stock paid by the Company and the Restricted Subsidiaries during such period. Notwithstanding the foregoing, in no event shall Consolidated Interest Expense include interest expense arising under the Convertible Notes or any Deeply Subordinated Shareholder Loans to the extent incurred prior to the Termination Date. "Consolidated Net Income" means, with respect to any period, the consolidated net income of the Company and the Restricted Subsidiaries for such period, adjusted, to the extent included in calculating such consolidated net income, by excluding, without duplication, (i) all extraordinary, unusual or nonrecurring gains or losses of such person (net of fees and expenses relating to the transaction giving rise thereto) for such period, (ii) income of the Company and the Restricted Subsidiaries derived from or in respect of all Investments in persons other than Subsidiaries of the Company or any Restricted Subsidiary, (iii) the portion of net income (or loss) of such person allocable to minority interests in unconsolidated persons for such period, except to the extent actually received by the Company or any Restricted Subsidiary, (iv) net income (or loss) of any other person combined with such person on a "pooling of interests" basis attributable to any period prior to the date of combination, (v) any gain or loss, net of taxes, realized by such person upon the termination of any employee pension benefit plan during such period, (vi) gains or losses in respect of any Asset Sales (net of fees and expenses relating to the transaction giving rise thereto) during such period and (vii) except in the case of any restriction or encumbrance permitted under clause (v) of the covenant "Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries," the net income of any Restricted Subsidiary for such period to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its stockholders. "Consolidated Operating Cash Flow" means, with respect to any period, the Consolidated Net Income of the Company and the Restricted Subsidiaries for such period increased, to the extent deducted in arriving at Consolidated Net Income for such period, by the sum of (i) the Consolidated Income Tax Expense of the Company and the Restricted Subsidiaries accrued according to GAAP for such period (other than taxes attributable to extraordinary gains or losses and gains and losses from Asset Sales); (ii) Consolidated Interest Expense for such period; (iii) depreciation of the Company and the Restricted Subsidiaries for such period; (iv) amortization of the Company and the Restricted Subsidiaries for such period, including, without limitation, amortization of capitalized debt issuance costs for such period, all determined on a consolidated basis in accordance with GAAP; and (v) for purposes of Section 10.12 only, other non-cash charges decreasing Consolidated Net Income. "consolidation" means, with respect to the Company, the consolidation of the accounts of the Restricted Subsidiaries with those of the Company, all in accordance with GAAP; provided that "consolidation" will not include consolidation of the accounts of any Unrestricted Subsidiary with the accounts of the Company. The term "consolidated" has a correlative meaning to the foregoing. "Convertible Notes" means all 15% convertible subordinated promissory notes of the Company due six months after the final maturity of the Securities that are outstanding on the Issue Date (after giving effect to the use of proceeds from the issuance of the Securities). "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 2001 Ross Avenue, Suite 2700, Dallas, Texas 75201, Attention: Corporate Trust Department. "Cumulative Available Cash Flow" means, as at any date of determination, the positive cumulative Consolidated Operating Cash Flow realized during the period commencing on the Issue Date and ending on the last day of the most recent fiscal quarter immediately preceding the date of determination for which consolidated financial information of the Company is available or, if such cumulative Consolidated Operating Cash Flow for such period is negative, the amount by which cumulative Consolidated Operating Cash Flow is less than zero. "Cumulative Consolidated Interest Expense" means, at any date on which a Restricted Payment is proposed to be made, the sum of the Quarterly Consolidated Interest Expense Amounts for each quarter after the Issue Date (with the first quarter commencing on the Issue Date and ending on May 31, 1997) through the most recent quarter immediately preceding such Restricted Payment for which consolidated financial statements of the Company are available. The "Quarterly Consolidated Interest Expense Amount" for any quarter (the "Subject Quarter") will be the product of (a) Consolidated Interest Expense for the Subject Quarter times (b) the Applicable Percentage for the Subject Quarter, where the "Applicable Percentage" for the Subject Quarter will be (1) 150% of the Consolidated Interest Expense of the Company for the Subject Quarter if Total Consolidated Indebtedness for each day of the Subject Quarter is less than 6.0 times the Annualized Pro Forma Consolidated Operating Cash Flow of the Company (based upon the two most recent quarters for which consolidated financial statements of the Company are available immediately preceding the Subject Quarter) or (2) 200% of the Consolidated Interest Expense of the Company for the Subject Quarter if Total Consolidated Indebtedness for any day of the Subject Quarter is equal to or greater than 6.0 times the Annualized Pro Forma Consolidated Operating Cash Flow of the Company (based upon the two most recent quarters for which consolidated financial statements of the Company are available immediately preceding the Subject Quarter). "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company against fluctuations in currency values. "Custodian" means any receiver, interim receiver, receiver and manager, receiver-manager, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law or any other law respecting secured creditors and the enforcement of their security or any other person with like powers whether appointed judicially or out of court and whether pursuant to an interim or final appointment. "Deeply Subordinated Shareholder Loans" means any Indebtedness of the Company for money borrowed from either (x) a Permitted Holder or (y) another person whose obligations have been guaranteed by a Permitted Holder, provided such Indebtedness of the Company (i) has been expressly subordinated in right of payment and postponed as to all payments of interest (other than payment-in-kind interest) and principal (other than payment-in-kind interest) to the Securities, (ii) provides for no payments of interest or principal prior to the earlier of (a) the end of the sixth month after the final maturity of the Securities and (b) the indefeasible payment in full in cash of all Securities (or due provision therefor which results in the discharge of all Obligations under this Indenture); provided that the terms of the subordination agreement are in the form annexed to this Indenture as Exhibit F and the Company has received one or more Opinions of Counsel as to the validity and enforceability of such subordination agreement. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Depository" means The Depository Trust Company, its nominees and successors. "Designation" shall have the meaning specified in Section 10.22 hereof. "Designation Amount" has the meaning specified in Section 10.22 hereof. "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Board of Directors of the Company other than a director who (i) has any material direct or indirect financial interest in or with respect to such transaction or series of related transactions or (ii) is an employee or officer of the Company or an Affiliate that is itself a party to such transaction or series of transactions or an Affiliate of a party (other than the Company or any Subsidiary) to such transaction or series of related transactions. "Disqualified Stock" means, with respect to any person, any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is exchangeable for Indebtedness at the option of the holder thereof, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the final maturity date of the Securities; provided such Capital Stock shall only constitute Disqualified Stock to the extent it so matures or is redeemable or exchangeable on or prior to the final maturity date of the Securities. "Equity Offering" means an underwritten public offering of Common Stock of the Company which has been registered under the Securities Act. "Escrow Account" means an escrow account established under the Escrow Agreement for the deposit of a portion of the net proceeds from the sale of the Securities (the "Initial Escrow Amount"), and the proceeds from the investment thereof. "Escrow Agent" means U.S. Trust Company of Texas, N.A., as Escrow Agent pursuant to the Escrow Agreement until a successor escrow agent replaces it in accordance with the provisions of the Escrow Agreement and thereafter means such successor. "Escrow Agreement" means the Escrow Agreement dated as of February 14, 1997, among the Company, the Escrow Agent and the Trustee, in substantially the form set forth as Exhibit E hereto. "Event of Default" shall have the meaning specified in Section 5.01 hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Securities" means the Series B Securities (the terms of which are identical to the Series A Securities except that the Exchange Securities shall be registered under the Securities Act, and shall not contain the restrictive legend on the face of the form of Series A Securities) issued pursuant to this Indenture. "Existing Market Asset Acquisition" means an Asset Acquisition of a Cable/Telecommunications Business (other than the Phonoscope Acquisition) to the extent subscribers or customers are located in the metropolitan areas of Houston, Texas; Dallas-Fort Worth, Texas; San Diego, California; Phoenix, Arizona; Chicago, Illinois; Denver, Colorado; San Francisco, California; Los Angeles, California; Miami-Ft. Lauderdale, Florida; Tampa, Florida; or Austin, Texas (it being understood that where a Cable/Telecommunications Business subject to an Asset Acquisition is conducted in more than one market, an allocation of Indebtedness being incurred pursuant to clause (c) of the definition of Permitted Indebtedness may be made on the basis of the latest 12 months of revenues of the Cable/Telecommunications Business immediately preceding the date of incurrence in a particular metropolitan area). "Fair Market Value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of which is under pressure or compulsion to complete the transaction. Unless otherwise specified in this Indenture, Fair Market Value will be determined by the Board of Directors of the Company acting in good faith evidenced by a Board Resolution thereof delivered to the Trustee. "Fiscal Year" shall mean the fiscal year of the Company, which ends on August 31 of each year. "GAAP" means, at any date of determination, generally accepted accounting principles in effect in the United States which are applicable as of the date of determination and which are consistently applied for all applicable periods. "Global Security" has the meaning provided in Section 3.03 hereof. "guarantee" means, as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. "GVL" means Le Groupe Videotron Ltee. "Holder" or "Securityholder" means a person in whose name a Security is registered in the Security Register. "Incremental Qualifying Cable Subscribers" means, as of any date of determination, the aggregate number of Qualifying Cable Subscribers of the Company and the Restricted Subsidiaries minus (i) the number of Qualifying Cable Subscribers of the Company and the Restricted Subsidiaries as of the Issue Date and minus (ii) the number of Qualifying Cable Subscribers acquired pursuant to the Phonoscope Acquisition to the extent and only to the extent Indebtedness is incurred under clause (d) of the definition of "Permitted Indebtedness" to finance the Phonoscope Acquisition. "Indebtedness" means, with respect to any person, without duplication, (i) any liability, contingent or otherwise, of such person (A) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof) or (B) evidenced by a note, debenture or similar instrument or letter of credit (including a purchase money obligation) or (C) for the payment of money relating to a Capitalized Lease Obligation or other obligation relating to the deferred purchase price of property or (D) in respect of an Interest Rate Obligation or Currency Agreement; or (ii) any liability of others of the kind described in the preceding clause (i) which the person has guaranteed or which is otherwise its legal liability; or (iii) any obligation secured by a Lien (other than (x) Permitted Liens of the type described in clauses (b), (d), or (e) of the definition of the Permitted Liens; provided that the obligations secured would not constitute Indebtedness under clauses (i) or (ii) or (iii) of this definition, and (y) Liens on Capital Stock or Indebtedness of any Unrestricted Subsidiary) to which the property or assets of such person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such person's legal liability (the amount of such obligation being deemed to be the lesser of the value of such property or asset or the amount of the obligation so secured); (iv) all Disqualified Stock valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends; and (v) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade payables and accrued liabilities that are current liabilities incurred in the ordinary course of business, excluding the current maturity of any obligation which would otherwise constitute Indebtedness. For purposes of Sections 10.12 and 10.14 and the definition of "Events of Default," in determining the principal amount of any Indebtedness to be incurred by the Company or a Restricted Subsidiary or which is outstanding at any date, (x) the principal amount of any Indebtedness which provides that an amount less than the principal amount at maturity thereof shall be due upon any declaration of acceleration thereof shall be the accreted value thereof at the date of determination and (y) the principal amount of any Indebtedness shall be reduced by any amount of cash or Cash Equivalent collateral securing on a perfected basis, and dedicated for disbursement exclusively to the payment of principal of and interest on, such Indebtedness. "Indenture" means this instrument as originally executed (including all exhibits and schedules hereto) and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Indenture Obligations" means the obligations of the Company and any other obligor under this Indenture or under the Securities to pay principal of, premium, if any, and interest on the Securities when due and payable, whether at maturity, by acceleration, call for redemption or repurchase or otherwise, and all other amounts due or to become due under or in connection with this Indenture or the Securities and the performance of all other obligations to the Trustee (including, but not limited to, payment of all amounts due the Trustee under Section 6.07 hereof), Paying Agent, Registrar, Escrow Agent and the Holders of the Securities under this Indenture, the Escrow Agreement and the Securities according to the terms thereof. "Independent Financial Advisor" means a United States investment banking firm of national standing in the United States (i) which does not, and whose directors, officers and employees or Affiliates do not have, a direct or indirect financial interest in the Company and (ii) which, in the judgment of the Board, is otherwise independent and qualified to perform the task for which it is to be engaged. "Initial Purchasers" means Salomon and Merrill Lynch. "Institutional Accredited Investor" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "interest," when used with respect to any Security, means the amount of all interest accruing on such Security, including all additional interest payable on the Securities pursuant to the Registration Agreement and all interest accruing subsequent to the occurrence of any events specified in Sections 5.01(h), (i), (j) and (k) or which would have accrued but for any such event, whether or not such claims are allowable under applicable law. "Interest Payment Date" means, when used with respect to any Security, the Stated Maturity of an installment of interest on such Security, as set forth in such Security. "Interest Rate Obligations" means the obligations of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount and shall include without limitation, interest rate swaps, caps, floors, collars, forward interest rate agreements and similar agreements. "Investment" means, with respect to any person, any advance, loan, account receivable (other than an account receivable arising in the ordinary course of business), or other extension of credit (including, without limitation, by means of any guarantee) or any capital contribution to (by means of transfers of property to others, payments for property or services for the account or use of others, or otherwise), or any purchase or ownership of any stocks, bonds, notes, debentures or other securities of, any other person. Notwithstanding the foregoing, in no event shall any issuance of Capital Stock (other than Disqualified Stock) of the Company in exchange for Capital Stock, property or assets of another person constitute an Investment by the Company in such other person. "Issue Date" means the original date of issuance of the Securities. "License Co." means Transmission Holdings, Inc., a Delaware corporation. "License Co. Documents" means, collectively, (i) the Assignment Agreement dated as of the Issue Date among TVMAX Telecommunications, Inc. ("TVMAX"), Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc. and IRPC Arizona, Inc., as assignors, and License Co., as assignee, (ii) the Equipment License and Services Agreement dated as of the Issue Date between TVMAX and License Co. and the Promissory Note of License Co. in favor of TVMAX annexed thereto, (iii) the Option Agreement dated as of the Issue Date between TVMAX and License Co., (iv) each Shareholder Option Agreement dated as of the Issue Date between TVMAX and a License Co. Shareholder (as defined below), (v) the Subscription and Shareholders Agreement dated as of the Issue Date among Rory O. Cole, Henry Goldberg and Russell B. Berman (collectively, the "License Co. Shareholders") and License Co. and (vi) any other agreements identical to the foregoing in all material respects and entered into for the same purposes that the Company or any Restricted Subsidiary may enter into in the future, as each of the foregoing documents referred to in clauses (i) through (v) may be amended, modified or supplemented in compliance with Section 10.15. "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind. A person shall be deemed to own subject to a Lien any property which such person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Material Restricted Subsidiary" means any Restricted Subsidiary of the Company, which, at any date of determination, is a "Significant Subsidiary" (as that term is defined in Regulation S-X issued under the Securities Act), but shall, in any event, include (x) any Guarantor, (y) TVMAX or (z) any Restricted Subsidiary of the Company which, at any date of determination, is an obligor under any Indebtedness in an aggregate principal amount equal to or exceeding $10.0 million if another Material Restricted Subsidiary is also obligated in respect of such Indebtedness. "Maturity Date" means, with respect to any Security, the date specified in such Security as the fixed date on which the principal of such Security is due and payable. "Merrill Lynch" means Merrill Lynch, Pierce, Fenner & Smith Incorporated. "Moody's" means Moody's Investors Service. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash (including assumed liabilities and other items deemed to be cash under the proviso to the first sentence of Section 10.16) or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) net of (i) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale, (iii) amounts required to be paid to any person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in or having a Permitted Lien on the assets subject to the Asset Sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale all as reflected in an Officer's Certificate delivered to the Trustee. "Non-Global Purchasers" shall have the meaning specified in Section 3.03 hereof. "Offering Memorandum" means the Offering Memorandum dated February 7, 1997 pursuant to which the Series A Securities were offered, and any supplement thereto. "Officer" means, with respect to the Company, the Chairman of the Board, a Vice Chairman, the President, a Vice President, the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer. "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman, the President or a Vice President, and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer, of the Company and delivered to the Trustee. "Offshore Physical Securities" shall have the meaning specified in Section 3.03 hereof. "Opinion of Counsel" means a written opinion of counsel who may be counsel for the Company or the Trustee, and who shall be reasonably acceptable to the Trustee. "Other Senior Debt Pro Rata Share" means the amount of the applicable Excess Proceeds obtained by multiplying the amount of such Excess Proceeds by a fraction, (i) the numerator of which is the aggregate accreted value and/or principal amount, as the case may be, of all Indebtedness (other than (x) the Securities and (y) Subordinated Indebtedness) of the Company outstanding at the time of the applicable Asset Sale with respect to which the Company is required to use Excess Proceeds to repay or make an offer to purchase or repay and (ii) the denominator of which is the sum of (a) the aggregate principal amount of all Securities outstanding at the time of the applicable Asset Sale and (b) the aggregate principal amount or the aggregate accreted value, as the case may be, of all other Indebtedness (other than Subordinated Indebtedness) of the Company outstanding at the time of the applicable Asset Sale Offer with respect to which the Company is required to use the applicable Excess Proceeds to offer to repay or make an offer to purchase or repay. "Outstanding" means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company or any Affiliate thereof) in trust or set aside and segregated in trust by the Company or any Affiliate thereof (if the Company or Affiliate shall act as Paying Agent) for the Holders of such Securities; provided, however, that if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (iii) Securities with respect to which the Company has effected defeasance or covenant defeasance as provided in Article Four, to the extent provided in Sections 4.02 and 4.03; and (iv) Securities in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands the Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities that a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. The Company shall notify the Trustee, in writing, when it repurchases or otherwise acquires Securities, of the aggregate principal amount of such Securities so repurchased or otherwise acquired. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. If the Paying Agent holds, in its capacity as such, on any Maturity Date or on any optional redemption date money sufficient to pay all accrued interest and principal with respect to such Securities payable on that date and is not prohibited from paying such money to the Holders thereof pursuant to the terms of this Indenture, then on and after that date such Securities cease to be Outstanding and interest on them ceases to accrue. Securities may also cease to be outstanding to the extent expressly provided in Article Eight. "Pacific" means Pacific Capital Group, Inc. "Pari Passu Indebtedness" means any Indebtedness of the Company or any Subsidiary Guarantor ranking pari passu in right of payment with the Securities. "Paying Agent" shall have the meaning specified in Section 3.02 hereof. "Permitted Holder" means (i) any of GVL, Caisse de depot placement du Quebec or any of their respective controlled Affiliates, (ii) a Strategic Equity Investor that, prior to August 31, 1999, invests on a primary basis in Capital Stock (other than Disqualified Stock) representing not less than 15% of the fully diluted Common Stock of the Company at the time of issuance by the Company; provided that only the first such Strategic Equity Investor shall be a Permitted Holder, or (iii) Andre Chagnon, his spouse or any of his lineal descendants and their respective spouses (collectively, the "Chagnon Family"), whether acting in their own name or as one or as a majority of persons having the power to exercise the voting rights attached to, or having investment power over, shares of Capital Stock held by others, or (iv) any controlled Affiliate of any member of the Chagnon Family or (v) any trust principally for the benefit of one or more members of the Chagnon Family (whether or not any member of the Chagnon Family is a trustee of such trust ) or (vi) any charitable foundation a majority of whose members, trustees or directors, as the case may be, are persons referred to in (iii) above. For purposes of this definition, "lineal descendant" shall include at any time any person that is treated as being adopted or is in the process of being adopted by any member of the Chagnon Family at such time. "Permitted Indebtedness" means the following Indebtedness (each of which shall be given independent effect): (a) Indebtedness under the Securities and this Indenture; (b) Indebtedness of the Company and/or any Restricted Subsidiary outstanding on the Issue Date; (c) Indebtedness, including under any Senior Bank Facility or Vendor Credit Facility, of the Company and/or any Restricted Subsidiary to the extent that the proceeds of such Indebtedness are used to finance or support working capital (including to fund operating losses) for, or the construction of, a Cable/Telecommunications Business of the Company or any of the Restricted Subsidiaries or the acquisition of properties or assets (tangible or intangible) to be used in a Cable/Telecommunications Business of the Company or any of its Restricted Subsidiaries (other than for an Asset Acquisition to the extent that it is not an Existing Market Asset Acquisition) or for an Existing Market Asset Acquisition; provided that, after giving effect to the incurrence of any such Indebtedness, the aggregate outstanding Indebtedness incurred under this clause (c) and incurred pursuant to any Refinancings (whether the initial Refinancing or any successive Refinancing) thereof incurred under clause (h) below does not exceed the sum of (i) $100.0 million, plus (ii) the product of the number of Incremental Qualifying Cable Subscribers times $1,200; provided that no Indebtedness may be incurred under this clause (c) in reliance on the immediately preceding clause (ii) on any date on or after February 15, 2001; (d) to the extent not funded with the net proceeds from the sale of the Securities, Indebtedness incurred by the Company or any Restricted Subsidiary to finance the Phonoscope Acquisition; (e) (i) Indebtedness of any Restricted Subsidiary owed to and held by the Company or a Restricted Subsidiary and (ii) Indebtedness of the Company owed to and held by any Restricted Subsidiary; provided that an incurrence of Indebtedness shall be deemed to have occurred upon (x) any sale or other disposition (excluding assignments as security to financial institutions) of any Indebtedness of the Company or a Restricted Subsidiary referred to in this clause (e) to a person (other than the Company or a Restricted Subsidiary) or (y) any sale or other disposition of Capital Stock of a Restricted Subsidiary, or Designation of a Restricted Subsidiary, which holds Indebtedness of the Company or any Restricted Subsidiary such that such Restricted Subsidiary, in any such case, ceases to be a Restricted Subsidiary; (f) Interest Rate Obligations of the Company and/or any Restricted Subsidiary relating to (i) Indebtedness of the Company and/or such Restricted Subsidiary, as the case may be (which Indebtedness (x) bears interest at fluctuating interest rates and (y) is otherwise permitted to be incurred under the "Limitation on Additional Indebtedness" covenant), and/or (ii) Indebtedness (which Indebtedness would bear interest at fluctuating interest rates) for which a lender has provided a commitment (subject to customary conditions) in an amount reasonably anticipated to be incurred by the Company and/or a Restricted Subsidiary in the following 12 months after such Interest Rate Obligation has been incurred, but only to the extent, in the case of either subclause (i) or (ii), that the notional principal amount of such Interest Rate Obligations does not exceed the principal amount of the Indebtedness (and/or Indebtedness subject to commitments) to which such Interest Rate Obligations relate; (g) Indebtedness of the Company and/or any Restricted Subsidiary in respect of performance bonds of the Company or any Restricted Subsidiary or surety bonds provided by the Company or any Restricted Subsidiary incurred in the ordinary course of business in connection with the construction, implementation or operation of a Cable/Telecommunications Business; (h) Indebtedness of the Company and/or any Restricted Subsidiary to the extent it represents a replacement, renewal, refinancing or extension (a "Refinancing") of outstanding Indebtedness of the Company and/or of any Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b) (other than the Convertible Notes), (c) or (d) of this definition or the proviso of Section 10.12; provided that (1) Indebtedness of the Company may not be Refinanced to such extent under this clause (h) with Indebtedness of any Restricted Subsidiary and (2) any such Refinancing shall only be permitted under this clause (h) to the extent that (x) it does not result in a lower Average Life to Stated Maturity of such Indebtedness as compared with the Indebtedness being Refinanced and (y) it does not exceed the sum of the principal amount (or, if such Indebtedness provides for a lesser amount to be due and payable upon a declaration of acceleration thereof, an amount no greater than such lesser amount) of the Indebtedness being Refinanced plus the amount of accrued interest thereon and the amount of any reasonably determined prepayment premium necessary to accomplish such Refinancing and such reasonable fees and expenses incurred in connection therewith; (i) Indebtedness of the Company under Deeply Subordinated Shareholder Loans to the extent incurred prior to the Termination Date; and (j) in addition to the items referred to in clauses (a) through (i) above, Indebtedness of the Company and any Acquired Indebtedness of any Restricted Subsidiary having an aggregate principal amount not to exceed $50.0 million at any time outstanding. "Permitted Investments" means (a) Cash Equivalents; (b) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits; (c) loans and advances to employees made in the ordinary course of business; (d) Interest Rate Obligations; (e) bonds, notes, debentures or other securities received as a result of Asset Sales pursuant to and in compliance with the covenant "Disposition of Proceeds of Assets Sales"; (f) Investments made in the ordinary course of business as partial payment for constructing a network relating principally to a Cable/Telecommunications Business; (g) Investments in License Co. contemplated by the License Co. Documents; and (h) Investments in companies owning or managing multiple dwelling units (or an Affiliate thereof) with which the Company or any Restricted Subsidiary have Rights of Entry in the ordinary course of business in lieu of (in whole or in part) other customary financial inducements to property owners. "Permitted Liens" means (a) Liens on property of a person existing at the time such person is merged into or consolidated with the Company or any Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such Liens were in existence prior to the contemplation of such merger, consolidation or acquisition and do not secure any property or assets of the Company or any Restricted Subsidiary other than the property or assets subject to the Liens prior to such merger or consolidation; (b) Liens imposed by law, such as Carriers', warehousemen's and mechanics' Liens and other similar Liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or are being contested in good faith and by appropriate proceedings; (c) Liens existing on the Issue Date, including to secure the note in the amount of $1.0 million in favor of International Richey Pacific Cablevision Ltd.; (d) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (e) easements, rights of way, restrictions and other similar easements, licenses, restrictions on the use of properties, or minor imperfections of title that, in the aggregate, are not material in amount and do not in any case materially detract from the properties subject thereto or interfere with the ordinary conduct of the business of the Company or the Restricted Subsidiaries; (f) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (g) Liens securing any Senior Bank Facility or Vendor Credit Facility to the extent it would constitute "Permitted Indebtedness"; (h) Liens to secure any Refinancing of any Indebtedness secured by Liens referred to in the foregoing clauses (a), (c) or (j), but only to the extent that such Liens do not extend to any other property or assets and the principal amount of the Indebtedness secured by such Liens is not increased; (i) Liens to secure the Securities; (j) Liens on real property incurred in connection with the financing of the purchase of such real property (or incurred within 60 days of purchase) by the Company or any Restricted Subsidiary; and (k) Liens on the Escrow Account and all funds and securities therein securing only the Securities equally and ratably (other than as provided in clause (k) of this definition, Permitted Liens may not extend to the Escrow Account or the Escrow Agreement). "person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Physical Security" shall have the meaning specified in Section 3.03 hereof. "Predecessor Security" means, with respect to any particular Security, every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 hereof in exchange for a mutilated Security or in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security. "Preferred Stock" means, with respect to any person, any and all shares, interests, participation or other equivalents (however designated) of such person's preferred or preference stock whether now outstanding, or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "Private Exchange Securities" shall have the meaning specified in Section 3.03 hereof. "Private Placement Legend" shall mean the first paragraph of the legend initially set forth in the Securities in the form set forth on Exhibit A-1. "Publicly Traded Stock" means any Common Stock of an issuer that is listed and traded on either the New York Stock Exchange or the American Stock Exchange or the Nasdaq National Market System. "Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule 144A under the Securities Act. "Qualifying Cable Subscribers" means, as of any date of determination, the aggregate number of Cable Subscribers for the Company and the Restricted Subsidiaries as of the last day of the most recent month ending not more than 45 days prior to the date of determination. "Redemption Date" means, with respect to any Security to be redeemed, any date fixed for such redemption by or pursuant to this Indenture and the terms of the Securities. "Redemption Price" means, with respect to any Security to be redeemed, the price at which it is to be redeemed pursuant to this Indenture and the terms of the Securities. "Refinancing" has the meaning set forth in clause (h) of the definition of "Permitted Indebtedness." "Registered Exchange Offer" means the registration by the Company under the Securities Act of all Series B Securities pursuant to a registration statement under which the Company offers each Holder of Series A Securities the opportunity to exchange all Series A Securities held by such Holder for Series B Securities in an aggregate principal amount equal to the aggregate principal amount of Series A Securities held by such Holder, all in accordance with the terms and conditions of the Registration Agreement. "Registrable Securities" shall have the meaning specified in the Registration Agreement. "Registration Agreement" means the Registration Agreement dated as of February 14, 1997 by and among the Company and the Initial Purchasers, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof. "Regular Record Date" means the Regular Record Date specified in the Securities. "Regulation S" means Regulation S under the Securities Act. "Responsible Officer" means, with respect to the Trustee, any officer with the Corporate Trust Office of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer of the Trustee to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Payment" means any of the following: (i) the declaration or payment of any dividend or any other distribution on Capital Stock of the Company or any payment made to the direct or indirect holders (in their capacities as such) of Capital Stock of the Company (other than dividends or distributions payable solely in Capital Stock (other than Disqualified Stock) of the Company or in options, warrants or other rights to purchase Capital Stock (other than Disqualified Stock) of the Company); (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company (other than any such Capital Stock owned by the Company or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness (other than any Subordinated Indebtedness held by a Restricted Subsidiary); (iv) the making of any payment (whether of principal or interest (other than the payment of interest in the form of additional Deeply Subordinated Shareholder Loans)) in respect of the Convertible Notes or the Deeply Subordinated Shareholder Loans; or (v) the making of any Investment (other than a Permitted Investment) in any person (other than an Investment by a Restricted Subsidiary in the Company or an Investment by the Company or a Restricted Subsidiary in either (x) a Restricted Subsidiary engaged principally in a Cable/Telecommunications Business or (y) a person engaged principally in a Cable/Telecommunications Business that becomes a Restricted Subsidiary as a result of such Investment). Notwithstanding the foregoing, the payment of compensation to Le Groupe Vide'otron Lte'e, Pacific or any of their respective Subsidiaries pursuant to the Settlement Agreement dated as of August 1, 1996 between Vanguard Communications, L.P., Pacific, VPC, the Company and Le Groupe Vide'otron Lte'e, as in effect on the Issue Date, shall not constitute a Restricted Payment to the extent, and only to the extent, that such amounts are deducted in arriving at Cumulative Available Cash Flow of the Company. "Restricted Security" shall have the meaning specified in Rule 144(a)(3) under the Securities Act; provided that the Trustee shall be entitled to request and conclusively rely upon an Opinion of Counsel with respect to whether a Security is a Restricted Security. "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated by the Board of Directors of the Company, by a Board Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with Section 10.22 hereof. Any such Designation may be revoked by a Board Resolution of the Company delivered to the Trustee, subject to the provisions of Section 10.22 hereof. "Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted Subsidiary (i) which is not subordinated to any other Indebtedness of such Restricted Subsidiary and (ii) in respect of which the Company is not also obligated (by means of a guarantee or otherwise) other than, in the case of this clause (ii), Indebtedness under any Senior Bank Facility or Vendor Credit Facility to the extent constituting "Permitted Indebtedness." "Revocation" shall have the meaning specified in Section 10.22 hereof. "Richey Warrant" means the Warrant dated December 29, 1994 to purchase B Units of Limited Partnership Interest of Vanguard Communications, L.P. "Rule 144A" means Rule 144A under the Securities Act. "S&P" means Standard & Poor's Corporation. "Salomon" means Salomon Brothers Inc. "Securities" shall have the meaning specified in the recitals of this Indenture. "Securities Act" means the Securities Act of 1933, as amended. "Securities Register" shall have the respective meanings specified in Section 3.05 hereof. "Security Registrar" or "Registrar" shall have the meaning specified in Section 3.02 hereof. "Senior Bank Facility" means any senior commercial term loan and/or revolving credit facility (including any letter of credit subfacility) entered into principally with commercial banks and/or other financial institutions typically party to commercial loan agreements. "Series A Securities" has the meaning specified in the first recital of this Indenture. "Series B Securities" has the meaning specified in the first recital of this Indenture. "Special Record Date" means, with respect to the payment of any Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07 hereof. "Stated Maturity" means, with respect to any Security or any installment of interest thereon, the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable, and when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness, or any installment of interest thereon, is due and payable. "Strategic Equity Investor" means (i) any company (other than GVL and its affiliates) which is engaged principally in a Cable/Telecommunications Business and which has a rating from Moody's of Baa3 (or the equivalent thereof) or higher or from S&P of BBB- (or the equivalent thereof) or higher or (ii) any controlled Affiliate of any company referred to in the preceding clause (i). "Subordinated Indebtedness" means any Indebtedness of the Company which is expressly subordinated in right of payment to any other Indebtedness of the Company. "Subsidiary" means, with respect to any person, (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors shall at the time be owned, directly or indirectly, by such person, or (ii) any other person of which at least a majority of voting interest is at the time, directly or indirectly, owned by such person. "Termination Date" means the earlier to occur of (i) July 31, 1999 and (ii) an Equity Offering. "Total Consolidated Indebtedness" means, at any date of determination, an amount equal to the aggregate amount of all Indebtedness of the Company and the Restricted Subsidiaries outstanding as of the date of determination; provided that Total Consolidated Indebtedness shall exclude the Convertible Notes and any Deeply Subordinated Shareholder Loans to the extent incurred prior to the Termination Date. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended. "Trustee" means the person named as the "Trustee" in the first paragraph of this Indenture, until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unrestricted Subsidiary" means any Subsidiary of the Company designated as such pursuant to and in compliance with Section 10.22 hereof. Any such Designation may be revoked by a Board Resolution of the Company delivered to the Trustee, subject to the provisions of Section 10.22 hereof. "Vendor Credit Facility" means, collectively, any credit facility entered into with any vendor or supplier (or any financial institution acting on behalf of or for the purpose of directly financing purchases from such vendor or supplier) to the extent the Indebtedness thereunder is incurred for the purpose of financing the cost (including the cost of design, development, site acquisition, construction, integration, manufacture or acquisition) of personal property (tangible or intangible) used, or to be used, in a Cable/ Telecommunications Business. "VPC" means VPC Corporation. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of any persons (irrespective of whether or not, at the time, stock of any other class or classes will have, or might have, voting power by reason of the happening of any contingency). Section 1.02. Other Definitions. Defined in Term Section ---- ---------- "Act" 1.05 "Asset Sale Offer" 10.16 "Asset Sale Offer Price" 10.16 "Asset Sale Purchase Date" 10.16 "Change of Control Date" 10.11 "Change of Control Offer" 10.11 "Change of Control Purchase Date" 10.11 "covenant defeasance" 4.03 "Defaulted Interest" 3.07 "defeasance" 4.02 "Defeased Securities" 4.01 "Excess Proceeds" 10.16 "incur" 10.12 "insolvent person" 4.04 "Offer Excess Proceeds" 10.16 "Replacement Assets" 10.16 "Surviving Entity" 8.01 Section 1.03. Rules of Construction. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (e) all references to "$" or "dollars" shall refer to the lawful currency of the United States of America; and (f) the words "include," "included" and "including" as used herein shall be deemed in each case to be followed by the phrase "without limitation." Section 1.04. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such person, or that they be so certified or covered by only one document, but one such person may certify or give an opinion with respect to some matters and one or more other persons as to other matters, and any such person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated, with proper identification of each matter covered therein, and form one instrument. Section 1.05. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution (as provided below in subsection (b) of this Section 1.05) of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01 hereof) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any manner which the Trustee deems sufficient, including the execution of such instrument or writing without more. (c) The ownership of Securities shall be proved by the Security Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind every future Holder of the same Security or the Holder of every Security issued upon the transfer thereof or in exchange therefor or in lieu thereof to the same extent as the original Holder, in respect of anything done, suffered or omitted to be done by the Trustee, any Paying Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Security. Section 1.06. Notices, etc., to the Trustee and the Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (a) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed, in writing and mailed, first-class postage prepaid, to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department or at any other address previously furnished in writing to the Holders and the Company by the Trustee and shall be effective upon actual receipt at such address; or (b) the Company by the Trustee or by any Holder shall be sufficient for every purpose (except as otherwise expressly provided herein) hereunder if in writing and mailed, first-class postage prepaid, delivered in person or sent by facsimile transmission to the Company addressed to it at Optel, Inc., 1111 W. Mockingbird Lane, Dallas, Texas 75247, Attention: Chief Executive Officer, or at any other address previously furnished in writing to the Trustee by the Company. Section 1.07. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise expressly provided herein) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at the address of such Holder as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice when mailed to a Holder in the aforesaid manner shall be conclusively deemed to have been received by such Holder whether or not actually received by such Holder. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event as required by any provision of this Indenture, then any method of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. Section 1.08. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with any provision of the Trust Indenture Act or another provision which is required or deemed to be included in this Indenture by any of the provisions of the Trust Indenture Act, such provision or requirement of the Trust Indenture Act shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be. Section 1.09. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 1.10. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its respective successors and assigns, whether so expressed or not. Section 1.11. Separability Clause. In case any provision in this Indenture or in the Securities issued pursuant hereto shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 1.12. Benefits of Indenture. Nothing in this Indenture or in the Securities issued pursuant hereto, express or implied, shall give to any person (other than the parties hereto and their predecessors and successors hereunder, any Paying Agent, any Registrar and the Holders) any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 1.13. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 1.14. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Section 1.15. Independence of Covenants. All covenants and agreements in this Indenture shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or condition exists. Section 1.16. Exhibits. All exhibits attached hereto are by this reference made a part hereof with the same effect as if herein set forth in full. Section 1.17. Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. Section 1.18. Duplicate Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. ARTICLE TWO SECURITY FORMS Section 2.01. Form and Dating. The Securities and the Trustee's certificate of authentication with respect thereto shall be in substantially the forms set forth, or referenced, in Exhibit A-1 and Exhibit A-2, respectively, annexed hereto, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with any applicable law or with the rules of the Depository, any clearing agency or any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. The definitive Securities shall be printed, typewritten, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. Each Security shall be dated the date of its issuance and shall show the date of its authentication. The terms and provisions contained in the Securities shall constitute, and are expressly made, a part of this Indenture. ARTICLE THREE THE SECURITIES Section 3.01. Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $225,000,000 in aggregate principal amount of Series A Securities and Series B Securities, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 3.03, 3.04, 3.05, 3.06, 9.06, 10.11, 10.16 or 11.08. The Series A Securities shall be known and designated as the "13% Senior Notes Due 2005" of the Company. The Series B Securities shall be known and designated as the "13% Senior Notes Due 2005, Series B" of the Company. The final Stated Maturity of the Series A Securities and the Series B Securities shall be February 15, 2005, and the Series A Securities and Series B Securities shall each bear interest at the rate of 13% per annum from the Issue Date or from the most recent Interest Payment Date to which interest has been paid, as the case may be, payable on August 15, 1997 and semi-annually thereafter on February 15 and August 15, in each year, until the principal thereof is paid or duly provided for. Interest on any overdue principal, interest (to the extent lawful) or premium, if any, shall be payable on demand. Series B Securities may be issued only in exchange for a like principal amount of Series A Securities pursuant to a Registered Exchange Offer. The Securities shall be redeemable as provided in Article Eleven and paragraph 3 of the Series A Securities and paragraph 2 of the Series B Securities. At the election of the Company, the entire Indebtedness on the Securities or certain of the Company's obligations and covenants and certain Events of Default thereunder may be defeased as provided in Article Four. The Securities will rank pari passu in right of payment with all present and future senior unsecured obligations of the Company and will rank senior in right of payment to all present and future subordinated indebtedness of the Company. The Securities will be effectively subordinated to all existing and future indebtedness and liabilities of the Company's subsidiaries. Section 3.02. Registrar and Paying Agent. The Company shall maintain an office or agency (which shall be located in the Borough of Manhattan in The City of New York, State of New York) where Securities may be presented for registration of transfer or for exchange (the "Security Registrar" or "Registrar"), an office or agency (which shall be located in the Borough of Manhattan in The City of New York, State of New York) where Securities may be presented for payment (the "Paying Agent" or "Agent") and an office or agency where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" or "Agent" includes any additional paying agent. The Company may act as its own Paying Agent, except for the purposes of payments on account of principal on the Securities pursuant to Sections 10.11 and 10.16 hereof. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall incorporate the provisions of the Trust Indenture Act. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such and shall be entitled to appropriate compensation in accordance with Section 6.07 hereof. The Company initially appoints the Trustee as the Registrar and Paying Agent and agent for service of notices and demands in connection with the Securities. Section 3.03. Execution and Authentication. Two Officers shall execute the Securities on behalf of the Company by either manual or facsimile signature. Securities bearing the manual or facsimile signature of individuals who were at any time the proper Officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices on the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company many deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as provided in this Indenture and not otherwise. A Security shall not be entitled to any benefit under this Indenture or be valid or obligatory for any purpose until the Trustee manually signs the certificate of authentication on the Security. The Trustee's signature on such certificate shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Series A Securities for original issue in an aggregate principal amount at maturity not to exceed $225,000,000, upon receipt of a Company Order. In addition, on or prior to the date of the Registered Exchange Offer, the Trustee or an authenticating agent shall authenticate Exchange Securities (including any Private Exchange Securities which will be in the form of Exhibit A-2 but which shall have the restrictive legend contained in Exhibit A-1) to be issued at the time of the Registered Exchange Offer in the aggregate principal amount at maturity of up to $225,000,000 upon receipt of a Company Order of the Company. In each case, the Company Order shall specify the amount of Securities to be authenticated, the names of the persons in which such Securities shall be registered and the date on which such Securities are to be authenticated and direct the Trustee to authenticate such Securities together with an Officer's Certificate certifying that all conditions precedent to the issuance of such Securities contained herein have been complied with. The aggregate principal amount at maturity of Securities Outstanding at any time may not exceed $225,000,000, except as provided in Section 3.04 hereof. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate Securities on behalf of the Trustee. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. Such authenticating agent shall have the same authenticating rights and duties as the Trustee in any dealings hereunder with the Company or with any Affiliate of the Company. The certificates representing the Securities will be issued in fully registered form, without coupons and only in denominations of $1,000 and any integral multiple thereof. Except as described below, the Series A Securities will be deposited with, or on behalf of, the Depository, and registered in the name of Cede & Co. as the Depository's nominee in the form of a global note certificate substantially in the form of Exhibit A-1 (the "Global Security") or will remain in the custody of the Trustee pursuant to the FAST Balance Certificate Agreement between the Depository and the Trustee. Series A Securities purchased by or transferred to (i) Institutional Accredited Investors who are not Qualified Institutional Buyers, (ii) except as described below, persons outside the United States pursuant to sales in accordance with Regulation S under the Securities Act or (iii) any other persons who are not Qualified Institutional Buyers (collectively, "Non-Global Purchasers") will be issued in registered form without coupons substantially in the form of Exhibit A-1 (the "U.S. Physical Securities"). Upon the transfer to a Qualified Institutional Buyer of U.S. Physical Securities initially issued to a Non-Global Purchaser, such U.S. Physical Security will be exchanged for an interest in the Global Security or in the Securities in the custody of the Trustee representing the principal amount of Securities being transferred. Series A Securities purchased by persons outside the United States pursuant to sales in accordance with Regulation S under the Securities Act will be represented upon issuance by a temporary global note certificate substantially in the form of Exhibit A-1 (the "Offshore Physical Securities" and, together with the U.S. Physical Securities, the "Physical Securities") which will not be exchangeable for U.S. Physical Securities until the expiration of the "40-day restricted period" within the meaning of Rule 903(c)(3) of Regulation S under the Securities Act. The Offshore Physical Securities will be registered in the name of, and be held by, an offshore physical security holder (the "Offshore Physical Security Holder") until the expiration of such 40-day period, at which time the Offshore Physical Securities will be delivered to the Trustee in exchange for Securities registered in the names requested by the Offshore Physical Security Holder. In addition, until the expiration of such 40-day period, transfers of interests in the Offshore Physical Securities can only be effected through the Offshore Physical Security Holder in accordance with the requirements of Section 3.15 hereof. Section 3.04. Temporary Securities. Until definitive Securities are prepared and ready for delivery, the Company may execute and upon a Company Order the Trustee shall authenticate and deliver temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities, in any authorized denominations, but may have variations that the Company reasonably considers appropriate for temporary Securities as conclusively evidenced by the Company's execution of such temporary Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay but in no event later than the date that the Registered Exchange Offer is consummated. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 10.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall in accordance with a Company Order authenticate and deliver in exchange therefor a like principal amount of definitive Securities of like tenor and of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 3.05. Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.02 being sometimes referred to herein as the "Securities Register") in which, subject to such reasonable regulations as the Securities Registrar may prescribe, the Company shall provide for the registration of Securities and of transfers and exchanges of Securities. The Trustee is hereby initially appointed Security Registrar for the purpose of registering Securities and transfers of Securities as herein provided. When Securities are presented to the Registrar or a co-Registrar with a request from the Holder of such Securities to register the transfer or exchange for an equal principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested; provided that every Security presented or surrendered for registration of transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer or exchange in form satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. Whenever any Securities are so presented for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. No service charge shall be made to the Securityholder for any registration of transfer or exchange. The Company may require from the Securityholder payment of a sum sufficient to cover any transfer taxes or other governmental charge that may be imposed in relation to a transfer or exchange, but this provision shall not apply to any exchange pursuant to Section 3.09, 10.11, 10.16 or 9.06 hereof (in which events the Company will be responsible for the payment of all such taxes which arise solely as a result of the transfer or exchange and do not depend on the tax status of the Holder). The Trustee shall not be required to exchange or register the transfer of any Security for a period of 15 days immediately preceding the first mailing of notice of redemption of Securities to be redeemed or of any Security selected, called or being called for redemption except, in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not to be redeemed. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same Indebtedness, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Section 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If a mutilated Security is surrendered to the Trustee or if the Holder of a Security of any series claims that the Security has been lost, destroyed or wrongfully taken, the Company shall execute and upon a Company Order, the Trustee shall authenticate and deliver a replacement Security of like tenor and principal amount, bearing a number not contemporane ously outstanding, if the Holder of such Security furnishes to the Company and to the Trustee evidence acceptable to them of the ownership and the destruction, loss or theft of such Security and an indemnity bond shall be posted, sufficient in the judgment of both the Company and the Trustee, to protect the Company, the Trustee or any Agent from any loss that any of them may suffer if such Security is replaced. The Company may charge such Holder for the Company's expenses in replacing such Security (including expenses of the Trustee charged to the Company) and the Trustee may charge the Company for the Trustee's expenses in replacing such Security. Every replacement Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. Section 3.07. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the Regular Record Date; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in subsection (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this subsection (a) provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company in writing of such Special Record Date. In the name and at the expense of the Company, the Trustee shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at its address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the persons in whose names the Securities (or their respective Predecessor Securities) are registered on such Special Record Date and shall no longer be payable pursuant to the following subsection (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this subsection (b), such payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. Section 3.08. Persons Deemed Owners. Prior to and at the time of due presentment for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name any Security is registered in the Security Register as the owner of such Security for the purpose of receiving payment of principal of, premium, if any, and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security shall be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Section 3.09. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange shall be delivered to the Trustee and, if not already cancelled, shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer or exchange, redemption or payment. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section 3.09, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by the Company in writing to the Trustee or in accordance with the Trustee's customary practice. The Trustee shall provide the Company a list of all Securities that have been cancelled from time to time as requested by the Company. Section 3.10. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. Section 3.11. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of principal, premium, if any, or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or at the Stated Maturity, as the case may be, and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or Stated Maturity, as the case may be, to the next succeeding Business Day. Section 3.12. CUSIP Number. The Company in issuing the Securities may use a "CUSIP" number (if then generally in use), and if so, the Trustee may use the CUSIP numbers in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. The Company shall promptly notify the Trustee in writing of any change in the CUSIP number of either series of Securities. Section 3.13. Paying Agent to Hold Money in Trust. Each Paying Agent shall hold in trust for the benefit of the Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, or interest on the Securities, and shall notify the Trustee of any default by the Company in making any such payment. Money held in trust by the Paying Agent need not be segregated except as required by law and in no event shall the Paying Agent be liable for any interest on any money received by it hereunder. The Company at any time may require the Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed and the Trustee may at any time during the continuance of any Event of Default, upon a Company Order to the Paying Agent, require such Paying Agent to pay forthwith all money so held by it to the Trustee and to account for any funds disbursed. Upon making such payment, the Paying Agent shall have no further liability for the money delivered to the Trustee. Section 3.14. Book-Entry Provisions for Global Securities. (a) The Global Securities initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends as set forth in Exhibit B. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Security, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Security. (b) Transfers of Global Securities shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Securities may be transferred or exchanged for Physical Securities in accordance with the rules and procedures of the Depository and the provisions of Section 3.15. In addition, Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in Global Securities if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for any Global Security and a successor Depository is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a written request from the Depository to issue Physical Securities. (c) In connection with any transfer or exchange of a portion of the beneficial interest in any Global Security to beneficial owners pursuant to paragraph (b), the Registrar shall (if one or more Physical Securities are to be issued) reflect on its books and records the date and a decrease in the principal amount at maturity of the Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Securities of like tenor and principal amount of authorized denominations. (d) In connection with the transfer of Global Securities as an entirety to beneficial owners pursuant to paragraph (b), the Global Securities shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in the Global Securities, an equal aggregate principal amount at maturity of Physical Securities of like tenor of authorized denominations. (e) Any Physical Security constituting a Restricted Security delivered in exchange for an interest in a Global Security pursuant to subparagraphs (b) or (c) of this Section 3.14 shall, except as otherwise provided by paragraphs (a)(l)(x) and (c) of Section 3.15, bear the legend regarding transfer restrictions applicable to the Physical Securities set forth in Exhibit A-1. (f) The Holder of any Global Security may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. Section 3.15. Special Transfer Provisions. (a) Transfers to Non-QIB Institutional Accredited Investors and Non-U.S. persons. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to any Institutional Accredited Investor which is not a QIB or to any non-U.S. person: (1) the Registrar shall register the transfer of any Security constituting a Restricted Security, whether or not such Security bears the Private Placement Legend, if (x) the requested transfer is not prior to the date which is three years (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act or any successor provision thereunder) after the later of the original Issue Date of such Security (or of any Predecessor Security) or the last day on which the Company or any Affiliate of the Company was the owner of such Security or any Predecessor Security or (y) (1) in the case of a transfer to a person purporting to be an Institutional Accredited Investor which is not a QIB (excluding non-U.S. persons), the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit C hereto or (2) in the case of a transfer to a person purporting to be a non-U.S. person, the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit D hereto; and (2) if the proposed transferor is an Agent Member holding a beneficial interest in a Global Security, upon receipt by the Registrar of (x) the certificate, if any, required by paragraph (1) above and (y) instructions given in accordance with the Depository's and the Registrar's procedures; whereupon (a) the Registrar shall reflect on its books and records the date and (if the transfer does not involve a transfer of Outstanding Physical Securities) a decrease in the principal amount at maturity of a Global Security in an amount equal to the principal amount at maturity of the beneficial interest in a Global Security to be transferred, and (b) the Company shall execute and the Trustee shall authenticate and deliver one or more Physical Securities of like tenor and principal amount of authorized denominations. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to a person purporting to be a QIB (excluding transfers to non-U.S. persons): (1) the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that the transfer has been made in compliance with the exemption from registration under the Securities Act provided under Rule 144A to a transferee who has signed the certification provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that such transferee represents and warrants that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; and (2) if the proposed transferee is an Agent Member, and the Securities to be transferred consist of Physical Securities which after transfer are to be evidenced by an interest in the Global Security, upon receipt by the Registrar of instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall reflect on the Security Register the date and an increase in the principal amount at maturity of the Global Security in an amount equal to the principal amount at maturity of the Physical Securities to be transferred, and the Trustee shall cancel the Physical Securities so transferred. (c) Private Placement Legend. Upon the registration of transfer, exchange or replacement of Securities not bearing the Private Placement Legend, the Registrar shall deliver Securities that do not bear the Private Placement Legend. Upon the registration of transfer, exchange or replacement of Securities bearing the Private Placement Legend, the Registrar shall deliver only Securities that bear the Private Placement Legend unless (i)(x) the circumstances contemplated by paragraph (a)(l)(x) of this Section 3.15 exist or (y) such Security has been sold pursuant to an effective registration statement under the Securities Act and (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (d) Other Transfers. If a Holder proposes to transfer a Security constituting a Restricted Security pursuant to any exemption from the registration requirements of the Securities Act other than as provided for by Section 3.15(a) and (b), the Registrar shall only register such transfer or exchange if such transferor delivers an Opinion of Counsel satisfactory to the Company and the Registrar that such transfer is in compliance with the Securities Act and the terms of this Indenture; provided that the Company may, based upon the opinion of its counsel, instruct the Registrar by a Company Order not to register such transfer in any case where the proposed transferee is not a QIB, non-U.S. person or Institutional Accredited Investor. (e) General. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 3.14 or this Section 3.15 for a period of two years at which time such letters, notices and other written communications shall be delivered to the Company. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable prior written notice to the Registrar. ARTICLE FOUR DEFEASANCE OR COVENANT DEFEASANCE Section 4.01. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time, with respect to the Securities, elect to have either Section 4.02 or Section 4.03 be applied to all of the Outstanding Securities (the "Defeased Securities"), upon compliance with the conditions set forth below in this Article Four. Section 4.02. Defeasance and Discharge. Upon the Company's exercise under Section 4.01 of the option applicable to this Section 4.02, the Company shall be deemed to have been discharged from its obligations with respect to the Defeased Securities on the date the conditions set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Defeased Securities, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 4.05 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, and, upon Company Request, shall execute proper instruments acknowledging the same), except for the following, which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Defeased Securities to receive, solely from the trust fund described in Section 4.04 and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest on such Securities when such payments are due, (b) the Company's obligations with respect to such Defeased Securities under Sections 3.04, 3.05, 3.06, 10.02 and 10.03, (c) the rights, powers, trusts, duties and immunities of the Trustee, the Paying Agent and the Registrar hereunder, including, without limitation, the Trustee's rights under Section 6.07, and (d) this Article Four. Subject to compliance with this Article Four, the Company may exercise its option under this Section 4.02 notwithstanding the prior exercise of its option under Section 4.03 with respect to the Securities. Section 4.03. Covenant Defeasance. Upon the Company's exercise under Section 4.01 of the option applicable to this Section 4.03, the Company shall be released from its obligations under any covenant or provision contained in Sections 10.06 through 10.22 (except Sections 10.09, the last sentence of 10.10, 10.13(b) and 10.18) and the provisions of Articles Eight and Eleven shall not apply, with respect to the Defeased Securities on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Defeased Securities shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Defeased Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or Article, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 5.01(c) or (d), but, except as specified above, the remainder of this Indenture and such Defeased Securities shall be unaffected thereby. Section 4.04. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 4.02 or Section 4.03 to the Defeased Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 who shall agree to comply with the provisions of this Article Four applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (a) money in an amount, or (b) U.S. Government Securities which through the scheduled payment of principal, premium, if any, and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (c) a combination thereof, in any such case, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of, premium, if any, and interest on the Defeased Securities upon redemption or at the Stated Maturity of such principal or installment of principal, premium, if any, or interest; provided, however, that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Securities to said payments with respect to the Securities; (2) No Default shall have occurred and be continuing on the date of such deposit or, insofar as Sections 5.01(h), (i) or (j) are concerned, at any time during the period ending on the ninety-first day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (3) Neither the Company nor any Subsidiary of the Company is an "insolvent person" within the meaning of any applicable Bankruptcy Law on the date of such deposit or at any time during the period ending on the ninety-first day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (4) Such defeasance or covenant defeasance shall not cause the Trustee for the Securities to have a conflicting interest in violation of Section 6.08 and for purposes of the Trust Indenture Act with respect to any securities of the Company; (5) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (6) In the case of an election under Section 4.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date hereof, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; (7) In the case of an election under Section 4.03, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (8) The Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, immediately following the ninety-first day after the deposit, the trust funds established pursuant to this Article will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally (for the limited purpose of the Opinion of Counsel referred to in this clause (8), such Opinion of Counsel may contain an assumption that the conclusions contained in a customary solvency letter by a nationally recognized appraisal firm, dated as of the date of the deposit and taking into account such deposit, are accurate as of such date, provided, however, that such solvency letter is also delivered to the Trustee); (9) The Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit made by the Company pursuant to its election under Section 4.02 or 4.03 was not made by the Company with the intent of preferring the Holders over the other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (10) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that (i) all conditions precedent (other than conditions requiring the passage of time) provided for relating to either the defeasance under Section 4.02 or the covenant defeasance under Section 4.03 (as the case may be) have been complied with as contemplated by this Section 4.04 and (ii) if any other Indebtedness of the Company shall then be outstanding or committed, such defeasance or covenant defeasance will not violate the provisions of the agreements or instruments evidencing such Indebtedness. Opinions required to be delivered under this Section may have such qualifications as are customary for opinions of the type required and acceptable to the Trustee. Section 4.05. Deposited Money and U.S. Government Obligations To Be Held in Trust; Other Miscellaneous Provisions. Subject to the proviso of the last paragraph of Section 10.03, all money and U.S. Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 4.05, the "Trustee") pursuant to Section 4.04 in respect of the Defeased Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (other than the Company) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee and hold it harmless against any tax, fee or other charge imposed on or assessed against the U.S. Government Securities deposited pursuant to Section 4.04 or the principal, premium, if any, and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Defeased Securities. Anything in this Article Four to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Securities held by it as provided in Section 4.04 which, in the opinion of an internationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. Section 4.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Securities in accordance with Section 4.02 or 4.03, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 4.02 or 4.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money and U.S. Government Securities in accordance with Section 4.02 or 4.03, as the case may be; provided, however, that if the Company makes any payment of principal, premium, if any, or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money and U.S. Government Securities held by the Trustee or Paying Agent. ARTICLE FIVE REMEDIES Section 5.01. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of an installment of interest on any of the Securities, when due and payable, and continuance of such default for a period of 30 days or more (provided such 30 day grace period shall be inapplicable to the first six Interest Payment Dates); or (b) default in the payment of the principal of or premium, if any, when due and payable, on any of the Securities (at its Stated Maturity, upon optional redemption, required purchase, scheduled principal payment or otherwise); or (c) the Company fails to comply with any of its obligations described under Article Eight or Sections 10.11 or 10.16 hereof; or (d) the Company fails to perform or observe any other term, covenant or agreement contained in the Securities, this Indenture or the Escrow Agreement (other than a default specified in (a), (b) or (c) above) for a period of 30 days after written notice of such failure requiring the Company to remedy the same and stating that such notice is a "Notice of Default" hereunder shall have been given (x) to the Company by the Trustee or (y) to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Securities then Outstanding; or (e) failure to perform any term, covenant, condition or provision of one or more classes or issues of Indebtedness in an aggregate principal amount of $5,000,000 or more under which the Company or a Material Restricted Subsidiary is obligated, and either (a) such Indebtedness is already due and payable in full or (b) such failure results in the acceleration of the maturity of such Indebtedness; provided that, in the case of a termination or expiration of an Interest Rate Obligation requiring that the monetary liability thereunder be paid, no Event of Default shall occur if such payment is made within 30 days after such payment is due; or (f) any holder of at least $5,000,000 in aggregate principal amount of Indebtedness of the Company or any Material Restricted Subsidiary shall commence judicial proceedings or take any other action to foreclose upon or dispose of assets of the Company or any Material Restricted Subsidiary having an aggregate Fair Market Value, individually or in the aggregate, of $5,000,000 or more or shall have exercised any right under applicable law or applicable security documents to take ownership of any such assets in lieu of foreclosure; provided that, in any such case, the Company or any Material Restricted Subsidiary shall not have obtained, prior to any such foreclosure or disposition of assets, a stay of all such actions that remains in effect; or (g) one or more judgments, orders or decrees of any court or regulatory or administrative agency for the payment of money of $5,000,000 or more, either individually or in the aggregate, shall have been entered against the Company or any Material Restricted Subsidiary or any of their respective properties and shall not have been discharged and there shall have been a period of 60 consecutive days during which a stay of enforcement of such judgment, order or decree, by reason of pending appeal or otherwise, shall not be in effect; or (h) the Company, any Material Restricted Subsidiary or License Co. pursuant to or under or within the meaning of any Bankruptcy Law: (i) commences a voluntary case or proceeding; (ii) consents to the making of a Bankruptcy Order in an involuntary case or proceeding or the commencement of any case against it; (iii) consents to the appointment of a Custodian of it or for any substantial part of its property; (iv) makes a general assignment for the benefit of its creditors; (v) files an answer or consent seeking reorganization or relief; (vi) shall admit in writing its inability to pay its debts generally; or (vii) consents to the filing of a petition in bankruptcy; or (i) a court of competent jurisdiction in any involuntary case or proceeding enters a Bankruptcy Order against the Company, any Material Restricted Subsidiary or License Co., and such Bankruptcy Order remains unstayed and in effect for 60 consecutive days; or (j) a Custodian shall be appointed out of court with respect to the Company, any Material Restricted Subsidiary or License Co. or with respect to all or any substantial part of the assets or properties of the Company, any Material Restricted Subsidiary or License Co.; or (k) the Company or License Co. is subject, voluntarily or involuntarily, to dissolution proceedings; or (l) failure by License Co. or its shareholders to perform any material term, covenant, condition or provision of the License Co. Documents; or (m) the Company shall have failed on the Issue Date to enter into the Escrow Agreement or pursuant thereto fail to place the Initial Escrow Amount (as defined in the Escrow Agreement) in the Escrow Account held by the Escrow Agent for the benefit of the Holders of the Securities and the Trustee, or the Company shall assert or acknowledge in writing that the Escrow Agreement is invalid or unenforceable. Section 5.02. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 5.01(h), (i), (j) or (k) with respect to the Company) occurs and is continuing then and in every such case the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then Outstanding may, and the Trustee upon the request of the Holders of not less than 25% in aggregate principal amount of the Securities then Outstanding shall, declare all principal of all the Securities to be due and payable immediately in an amount equal to the principal amount of the Securities, premium, if any, thereon plus accrued and unpaid interest, if any, to the date the Securities become due and payable by a notice in writing to the Company (and to the Trustee, if given by the Holders) and upon any such declaration such principal, premium, if any, and interest, shall become immediately due and payable. If an Event of Default specified in Section 5.01(h), (i), (j) or (k) with respect to the Company occurs and is continuing, then the principal of, premium, if any, and accrued and unpaid interest, if any, on all the Securities then Outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article, the Holders of a majority in aggregate principal amount of the Securities then Outstanding, by written notice to the Company and the Trustee, may rescind and annul such declaration of acceleration and its consequences if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay (i) all amounts due the Trustee under Section 6.07, including the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Securities, (iii) the principal of and premium, if any, on any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate then borne by the Securities, and (iv) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate then borne by the Securities; and (b) all existing Events of Default, other than the non-payment of principal of, premium, if any, and any accrued and unpaid interest on, the Securities which have become due solely as a result of such declaration of acceleration, have been cured or waived as provided in Section 5.13 and if the rescission of the acceleration would not conflict with any judgment or decree. No such rescission shall affect any subsequent Default or impair any right consequent thereon. Notwithstanding the foregoing, in the event of a declaration of acceleration in respect of the Securities because an Event of Default specified in Section 5.01(e) shall have occurred and be continuing, such declaration of acceleration shall be automatically annulled if the Indebtedness that is the subject of such Event of Default has been discharged or paid or the requisite Holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness and written notice of such discharge or rescission, as the case may be, shall have been given to the Trustee by the Company and by the requisite holders of such Indebtedness or a trustee, fiduciary or agent for such holders, within 60 days after such declaration of acceleration in respect of the Securities and no other Event of Default has occurred which has not been cured or waived during such 60-day period. Section 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if: (a) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days or more (provided such 30 day grace period shall be inapplicable to the first six Interest Payment Dates), or (b) default is made in the payment of the principal of or premium, if any, on any Security when due and payable, including, when applicable, purchases made pursuant to Section 10.11 and 10.16 hereof, the Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal, premium, if any, and interest, with interest upon the overdue principal, premium, if any, and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the rate then borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may, but is not obligated under this paragraph to, institute a judicial proceeding for the collection of the sums so due and unpaid and may, but is not obligated under this paragraph to, prosecute such proceeding to judgment or final decree, and may, but is not obligated under this paragraph to, enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion, but is not obligated under this paragraph to, (i) proceed to protect and enforce its rights and the rights of the Holders under this Indenture by such appropriate private or judicial proceedings as the Trustee shall deem most effectual to protect and enforce such rights, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted herein, or (ii) proceed to protect and enforce any other proper remedy. No recovery of any such judgment upon any property of the Company shall affect or impair any rights, powers or remedies of the Trustee or the Holders. Section 5.04. Trustee May File Proofs of Claims. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities, or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any Custodian, in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 5.05. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture, the Escrow Agreement or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. Section 5.06. Application of Money Collected. Any money collected by the Trustee pursuant to this Article, including such amounts held pursuant to the Escrow Agreement, shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: First: to the Trustee and any predecessor thereof for amounts due under Section 6.07; Second: to Holders for interest accrued on the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for interest; Third: to Holders for principal and premium, if any, amounts owing under the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and premium, if any; and Fourth: the balance, if any, to the Company. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Securityholders pursuant to this Section 5.06. Section 5.07. Limitation on Suits. No Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee within 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture or any Security to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture or any Security, except in the manner provided in this Indenture and for the equal and ratable benefit of all the Holders. Section 5.08. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive cash payment of the principal of, premium, if any, and (subject to Section 3.07 hereof) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the respective Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. Section 5.09. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or any Security and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 5.10. Rights and Remedies Cumulative. Except as provided in Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 5.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Five or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. Section 5.12. Control by Majority. The Holders of a majority in aggregate principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided, however, that: (a) such direction shall not be in conflict with any rule of law or with this Indenture or the Escrow Agreement or any Security or expose the Trustee to personal liability; and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 5.13. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past Default hereunder and its consequences, except a Default (a) in the payment of the principal of, premium, if any, or interest on any Outstanding Security or (b) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. Section 5.14. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of, premium, if any, or interest on any Security on or after the respective Stated Maturities expressed in such Security (or, in the case of redemption, on or after the respective Redemption Dates). Section 5.15. Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on the Securities contemplated herein or in the Securities or which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 5.16. Unconditional Right of Holders to Institute Certain Suits. Notwithstanding any other provision in this Indenture or the Escrow Agreement and any other provision of any Security, the right of any Holder of any Security to receive payment of the principal of, premium, if any, and interest on such Security on or after the respective Stated Maturities (or the respective Redemption Dates, in the case of redemption) expressed in such Security, or after such respective dates, shall not be impaired or affected without the consent of such Holder. ARTICLE SIX THE TRUSTEE Section 6.01. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and the Escrow Agreement, and no implied covenants or obligations shall be read into this Indenture and the Escrow Agreement against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture or the Escrow Agreement; but in the case of any such certificates or opinions which by provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture or the Escrow Agreement. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and the Escrow Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that (i) no provision of this Indenture or the Escrow Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it and (ii) the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it with respect to the Securities in good faith in accordance with the direction of the Holders of a majority of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture or the Escrow Agreement. (d) Whether or not therein expressly so provided, every provision of this Indenture and the Escrow Agreement relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 6.01. Section 6.02. Notice of Defaults. Within 60 days after the occurrence of any Default, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Security Register, notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of, premium, if any, or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as a trust committee of Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders. Section 6.03. Certain Rights of Trustee. Subject to Section 6.01 hereof and the provisions of Section 315 of the Trust Indenture Act: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors of the Company may be sufficiently evidenced by a Board Resolution thereof; (c) the Trustee may consult with counsel and any written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture or the Escrow Agreement at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by the Trustee in compliance with such request or direction; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture or Escrow Agreement other than any liabilities arising out of its own negligence; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, approval, appraisal, bond, debenture, note, coupon, security, other evidence of indebtedness or other paper or document unless requested in writing so to do by the Holders of not less than a majority in aggregate principal amount of the Securities then Outstanding; provided, however, that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such investigation shall be paid by the Company or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Company upon demand; provided, further, the Trustee in its discretion may make such further inquiry or investigation into such facts or matters as it may deem fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the permissive right of the Trustee to act hereunder shall not be construed as a duty; (i) the Trustee shall not be required to take notice or deemed to have notice of any Event of Default hereunder, except failure by the Company to make any of the payments to the Trustee pursuant to Section 5.01(a) or Section 5.01(b) hereof, unless the Trustee shall be specifically notified in writing of such Event of Default by the Company or by one or more of the Holders; (j) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; and (k) except as specifically provided for in the provisions of this Indenture or the Escrow Agreement, the Trustee shall not be deemed to have notice or knowledge of any matter unless a Responsible Officer has actual knowledge thereof or unless written notice thereof is received by the Trustee at its Corporate Trust Office and such notice references the Securities generally, the Company or this Indenture. Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof. The recitals contained herein, in the Securities and in the Escrow Agreement, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities except that the Trustee represents that it is duly authorized to execute and deliver this Indenture and the Escrow Agreement, authenticate the Securities and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility and Qualification on Form T-1, if any, to be supplied to the Company are true and accurate subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. Section 6.05. Trustee and Agents May Hold Securities; Collections; Etc. The Trustee, any Paying Agent, Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities, with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent and, subject to Section 6.08 hereof and Sections 310 and 311 of the Trust Indenture Act, may otherwise deal with the Company and receive, collect, hold and retain collections from the Company with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent. Section 6.06. Money Held in Trust. All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required herein or by law. The Trustee shall not be under any liability for interest on or to invest any moneys received by it hereunder. Section 6.07. Compensation and Indemnification of Trustee and its Prior Claim. The Company covenants and agrees: (a) to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) to reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, fees, disbursements and advances incurred or made by or on behalf of it in the administration of the trusts and the performance of its duties and obligations hereunder (including the reasonable compensation, fees, and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ), except any such expense, disbursement or advance as may arise from its negligence or bad faith; and (c) to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or in respect of the Escrow Agreement or the trusts hereunder and its duties hereunder, including enforcement of this Section 6.07. The Trustee shall promptly notify the Company of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel; provided that the Company will not be required to pay such fees and expenses if it assumes the Trustee's defense with counsel acceptable to and approved by the Trustee (such approval not to be unreasonably withheld) and there is no conflict of interest between the Company and the Trustee in connection with such defense. The Company need not pay for any settlement made without its written consent, which consent shall not be unreasonably withheld. The Company need not reimburse the Trustee for any expense or indemnify against any liability or loss of the Trustee to the extent such expense, liability or loss is attributable to the negligence, bad faith or willful misconduct of the Trustee. The obligations of the Company under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, fees, disbursements and advances shall constitute an additional obligation hereunder and shall survive the satisfaction and discharge of this Indenture. To secure the obligations of the Company to the Trustee and each predecessor Trustee under this Section 6.07, the Trustee and each predecessor Trustee shall have a prior Lien upon all property and funds held or collected by the Trustee as such, except funds and property paid by the Company and held in trust for the benefit of the Holders of the Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 5.01(h) or (i) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. Section 6.08. Conflicting Interests. The Trustee shall be subject to and comply with the provisions of Section 310(b) of the Trust Indenture Act. Section 6.09. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under Trust Indenture Act Sections 310(a)(1) and (2) and which shall have, or in the case of a corporation included in a bank holding company system the related bank holding company shall have, a combined capital and surplus of at least $100,000,000, and have a Corporate Trust Office in the Borough of Manhattan in The City of New York, State of New York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of any Federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 6.10. Resignation and Removal; Appointment of Successor Trustee. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. (b) The Trustee, or any trustee or trustees hereinafter appointed, may at any time resign by giving written notice thereof to the Company at least 20 Business Days prior to the date of such proposed resignation. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument executed by authority of the Board of Directors of the Company, a copy of which shall be delivered to the resigning Trustee and a copy to the successor Trustee. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 20 Business Days after the giving of such notice of resignation, the resigning Trustee may, or any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper, appoint a successor Trustee. (c) The Trustee may be removed at any time by an Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act in accordance with Section 6.08 hereof after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 6.09 hereof and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose or rehabilitation, conservation or liquidation, then, in any case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 5.14, the Holder of any Security who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution of its Board of Directors, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders of the Securities and accepted appointment in the manner hereinafter provided, the Holder of any Security who has been a bona fide Holder for at least six months may, subject to Section 5.14, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Securities as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Section 6.11. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee as if originally named as Trustee hereunder; but, nevertheless, on the written request of the Company or the successor Trustee, upon payment of amounts due it pursuant to Section 6.07, such retiring Trustee shall duly assign, transfer and deliver to the successor Trustee all moneys and property at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor Trustee all the rights, powers, duties and obligations of the retiring Trustee. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.07. No successor Trustee with respect to the Securities shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor Trustee shall be eligible to act as Trustee under this Article. Upon acceptance of appointment by any successor Trustee as provided in this Section 6.11, the successor shall give notice thereof to the Holders of the Securities, by mailing such notice to such Holders at their addresses as they shall appear on the Security Register. If the acceptance of appointment is substantially contemporaneous with the resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 6.10. If the Company fails to give such notice within 10 days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be given at the expense of the Company. Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated or amalgamated, or any corporation resulting from any merger, conversion, amalgamation or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided such corporation shall be eligible under this Article to serve as Trustee hereunder. In case at the time such successor to the Trustee under this Section 6.12 shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee under this Section 6.12 may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have been authenticated. ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 7.01. Preservation of Information; Company to Furnish Trustee Names and Addresses of Holders. (a) The Trustee shall preserve the names and addresses of the Securityholders and otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company shall furnish or cause the Registrar to furnish to the Trustee before each Interest Payment Date, and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Securityholders. Neither the Company nor the Trustee shall be under any responsibility with regard to the accuracy of such list. (b) The Company will furnish or cause to be furnished to the Trustee (i) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date; and (ii) at such other times as the Trustee may request in writing, within 30 days after receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, that if and so long as the Trustee shall be the Security Registrar, no such list need be furnished pursuant to this Subsection 7.01(b). Section 7.02. Communications of Holders. Holders may communicate with other Holders with respect to their rights under this Indenture or under the Securities pursuant to Section 312(b) of the Trust Indenture Act. The Company and the Trustee and any and all other persons benefited by this Indenture shall have the protection afforded by Section 312(c) of the Trust Indenture Act. Section 7.03. Reports by Trustee. Within 60 days after May 15 of each year commencing with the first May 15 following the date of this Indenture, the Trustee shall mail to all Holders, as their names and addresses appear in the Security Register, a brief report dated as of such May 15, in accordance with, and to the extent required under Section 313 of the Trust Indenture Act. At the time of its mailing to Holders, a copy of each such report shall be filed by the Trustee with the Company, the Commission and with each stock exchange on which the Securities are listed. The Company shall notify the Trustee when the Securities are listed on any stock exchange. Section 7.04. Reports by Company. (a) The Company shall mail to each Holder of the Securities, and shall file with the Trustee within 15 days after it is required to file the same with the Commission, copies of the annual reports and quarterly reports and of the information, documents and other reports which it may be required to file with the Commission pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act. The Company shall also comply with the other provisions of TIA Section 314(a). (b) Whether or not the Company is required to file with the Commission such reports and other information referred to in Section 7.04(a), the Company shall furnish without cost to each Holder of the Securities and the Trustee and (following the effective date of the Registered Exchange Offer or Shelf Registration Statement (as defined in the Registration Agreement), as applicable) file with the Commission (i) within 135 days after the end of each Fiscal Year of the Company, the information required by Form 10-K (or any successor form thereto) under the Securities Act with respect to such period, (ii) within 60 days after the end of each of the first three fiscal quarters of each Fiscal Year of the Company, the information required by Form 10-Q (or any successor form thereto) under the Securities Act with respect to such period and (iii) within 15 days after it would be required to be filed with the Commission, the information required by Form 8-K (or any successor form thereto). ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 8.01. Company May Consolidate, Etc., Only on Certain Terms. The Company will not, in a single transaction or through a series of transactions, consolidate or combine with or merge with or into any other person or, directly or indirectly, sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets to any other person or persons, or permit any of the Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in the sale, assignment, conveyance, lease, transfer or disposition of all or substantially all of the properties or assets of the Company and the Restricted Subsidiaries, on a consolidated basis, to any person or persons, unless: (i) either (A) (1) if the transaction or transactions is a merger or consolidation involving the Company, the Company shall be the person surviving such merger or consolidation or (2) if the transaction or transactions is a merger or consolidation involving a Restricted Subsidiary, such Restricted Subsidiary shall be the person surviving such merger or consolidation and such person surviving shall be a Restricted Subsidiary, or (B) (1) the person formed by such consolidation or into which the Company or such Restricted Subsidiary is merged or to which the properties and assets of the Company or such Restricted Subsidiary, as the case may be, are transferred (any such surviving person or transferee person being the "Surviving Entity") shall be a corporation organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia, and (2) in the case of a transaction involving the Company, the Surviving Entity shall expressly assume, by a supplemental indenture, executed and delivered to the Trustee, in form and substance reasonably satisfactory to the Trustee, all the obligations under this Indenture, the Escrow Agreement and the Securities, and in each case, this Indenture and the Escrow Agreement shall remain in full force and effect; (ii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Default shall have occurred and be continuing and the Company or the Surviving Entity (assuming such Surviving Entity's assumption of the Company's obligations under the Securities and this Indenture), as the case may be, after giving effect to such transaction or series of transactions on a pro forma basis, could incur $1.00 of additional Indebtedness under Section 10.12 hereof; provided that, in addition to the foregoing, (1) if immediately prior to such transaction or series of transactions the ratio of Total Consolidated Indebtedness of the Company to Annualized Pro Forma Consolidated Operating Cash Flow of the Company (based upon the two most recent quarters for which consolidated financial statements are available immediately preceding the date of such transaction or series of transactions) (the "Pre-Transaction Ratio") equals or exceeds 6.0:1.0, then, after giving pro forma effect to such transaction or series of transactions, the ratio of Total Consolidated Indebtedness of the Company or the surviving entity on a pro forma basis to Annualized Pro Forma Consolidated Operating Cash Flow of the Issuer or the surviving entity (based upon the two most recent quarters for which consolidated financial statements are available immediately preceding the date of such transaction or series of transactions) (the "Post-Transaction Ratio") must not be any higher than the Pre-Transaction Ratio or (2) if the Pre-Transaction Ratio is less than 6.0:1.0, then (x) the Post-Transaction Ratio must be less than 6.0:1.0 and (y) the Annualized Pro Forma Consolidated Coverage after giving pro forma effect to such transaction or series of transactions must be greater than or equal to 1.75:1.0; (iii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Default shall have occurred and be continuing; and (iv) the Company or the Surviving Entity, as the case may be, shall have delivered to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate stating that such transaction or series of transactions and, if a supplemental indenture is required in connection with such transaction or series of transactions to effectuate such assumption, such supplemental indenture complies with this Indenture and that all conditions precedent provided for in this Indenture relating to such transaction or series of transactions have been satisfied. Section 8.02. Successor Substituted. Upon any consolidation, combination or merger, or any sale, assignment, conveyance, transfer, lease or other disposition of all or substantially all of the properties and assets of the Company or a Restricted Subsidiary in accordance with Section 8.01 hereof in which the Company or such Restricted Subsidiary, as the case may be, is not the Surviving Entity, such Surviving Entity shall succeed to, and be substituted for, and may exercise every right and power of, the Company or such Restricted Subsidiary, as the case may be, under this Indenture, the Escrow Agreement and the Securities with the same effect as if such successor had been named as the Company or such Restricted Subsidiary, as the case may be, herein, in the Escrow Agreement and in the Securities and, thereafter, except in the case of (a) a lease or (b) any sale, assignment, conveyance, transfer, lease or other disposition to a Restricted Subsidiary of the Company, the Company shall be discharged from all obligations and covenants under this Indenture, the Escrow Agreement and the Securities. For all purposes of this Indenture and the Securities (including this Article Eight and Sections 10.12, 10.14 and 10.17 hereof) Subsidiaries of any Surviving Entity will, upon such transaction or series of related transactions described in this Article Eight, become Restricted Subsidiaries or Unrestricted Subsidiaries as provided pursuant to Section 10.22 and all Indebtedness, and all Liens on property or assets, of the Company and the Restricted Subsidiaries in existence immediately prior to such transaction or series of related transactions will be deemed to have been incurred upon such transaction or series of related transactions. ARTICLE NINE SUPPLEMENTAL INDENTURES AND WAIVERS Section 9.01. Supplemental Indentures, Agreements and Waivers Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution of the Board of Directors of the Company, and the Trustee, at any time and from time to time, may amend, waive or enter into one or more indentures supplemental hereto, in form and substance satisfactory to the Trustee, for any of the following purposes: (a) to the extent permitted herein, to evidence the succession of another person to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Securities; (b) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company, herein or in the Securities; (c) to cure any ambiguity or to correct or supplement any provision herein or in the Securities which may be defective or inconsistent with any other provision herein or to make any other provisions with respect to matters or questions arising under this Indenture or the Securities; provided, however, that, in each case, such provisions shall not materially adversely affect the interests or legal rights of any Holder and the Company has delivered to the Trustee an Opinion of Counsel stating that such change, agreement or waiver does not materially adversely affect the interests or legal rights of any Holders; (d) to comply with the requirements of the Commission in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act, as contemplated by Section 9.05 hereof or otherwise; (e) to add a Guarantor pursuant to the requirements of Section 10.19 hereof; (f) to evidence and provide the acceptance of the appointment of a successor Trustee hereunder; or (g) to mortgage, pledge, hypothecate or grant a security interest in any property or assets in favor of the Trustee for the benefit of the Holders as security for the payment and performance of this Indenture Obligations; provided, however, that the Company has delivered to the Trustee an Opinion of Counsel stating that such change, agreement or waiver does not materially adversely affect the interests or legal rights of any Holders. Section 9.02. Supplemental Indentures, Agreements and Waivers with Consent of Holders. With the written consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto satisfactory to the Trustee for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or the Securities or of modifying in any manner the rights of the Holders under this Indenture or the Securities. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may waive compliance by the Company with any provision of this Indenture or the Securities. However, no such supplemental indenture, agreement or instrument, including any waiver pursuant to Section 5.13, shall, without the written consent or waiver of the Holder of each Outstanding Security affected thereby: (a) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, alter the redemption provisions of the Securities or this Indenture, or change the coin or currency in which any Security or any premium or the accrued interest thereon is payable, or impair the right to institute suit for the enforcement of any payment after the Stated Maturity thereof (or, in the case of either a redemption or a purchase pursuant to Sections 10.11 or 10.16 of this Indenture, on or after the applicable Redemption Date or purchase date, as the case may be); (b) reduce the percentage of the aggregate principal amount of the Outstanding Securities, the consent of whose Holders is required for any amendment or supplemental indenture, or the consent of whose Holders is required for any waiver or consent provided for in this Indenture, the Escrow Agreement or with respect to any Security; (c) modify any of the provisions of this Section 9.02 or Sections 5.13 and 5.16, except to increase any such percentage, if applicable thereto, or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Security affected thereby; (d) consent to the assignment or transfer by the Company of any of its rights and obligations under this Indenture or the Securities; (e) release any Liens created by the Escrow Agreement except in strict accordance with the terms of the Escrow Agreement; (f) following (i) either (x) the mailing of a notice of a Change of Control Offer or (y) the failure to mail such notice prior to the date set forth in the second paragraph of Section 10.11, in either case, following satisfaction of the condition precedent to the mailing of such notice set forth in the first paragraph of Section 10.11, or (ii) the occurrence of an Asset Sale, alter the Company's obligation to repurchase Securities in accordance with the provisions of Sections 10.11 or 10.16, as the case may be, or waive any default in the performance thereof; (g) adversely affect the ranking of the Securities in a manner adverse to any Holder; (h) release any Guarantee except in compliance with the terms of this Indenture; (i) waive a default in payment with respect to the Securities or impair the right to institute suit for the enforcement of any payment on or with respect to the Securities; or (j) amend or modify the provisions of Section 10.08. Upon the written request of the Company accompanied by a copy of a Board Resolution of the Board of Directors authorizing the execution of any such supplemental indenture or other agreement, instrument or waiver, and upon the filing with the Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture or other agreement, instrument or waiver. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture or other agreement, instrument or waiver, but it shall be sufficient if such Act shall approve the substance thereof. Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers. In executing, or accepting the additional trusts created by, any supplemental indenture, agreement, instrument or waiver permitted by this Article Nine or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01 hereof) shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate from each obligor under the Securities entering into such supplemental indenture, agreement, instrument or waiver, each stating that the execution of such supplemental indenture, agreement, instrument or waiver (a) is authorized or permitted by this Indenture and (b) does not violate the provisions of any agreement or instrument evidencing any other Indebtedness of the Company or any Subsidiary of the Company. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture, agreement, instrument or waiver which affects the Trustee's own rights, duties or immunities under this Indenture, the Securities or otherwise. Section 9.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article Nine, this Indenture and the Securities, if applicable, shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture and the Securities, if applicable, for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 9.05. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the Trust Indenture Act as then in effect. Section 9.06. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors of the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee upon a Company Order in exchange for Outstanding Securities. Section 9.07. Record Date. The Company may, but shall not be obligated to, fix, a record date for the purpose of determining the Holders entitled to consent to any supplemental indenture, agreement or instrument or any waiver, and shall promptly notify the Trustee of any such record date. If a record date is fixed those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to consent to such supplemental indenture, agreement or instrument or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. Section 9.08. Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if a notation of the consent is not made on any Security. However, any such Holder, or subsequent Holder, may revoke the consent as to his Security or portion of a Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. An amendment or waiver shall become effective in accordance with its terms and thereafter bind every Holder. ARTICLE TEN COVENANTS Section 10.01. Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of, premium, if any, and interest on the Securities in accordance with the terms of the Securities and this Indenture. Section 10.02. Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan in The City of New York, State of New York, an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The office of the Trustee at its Corporate Trust Office will be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York, State of New York) where the Securities may be presented or surrendered for any or all such purposes, and may from time to time rescind such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York, State of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. Section 10.03. Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of, premium, if any, or interest on any of the Securities, segregate and hold in trust for the benefit of the Holders entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. If the Company is not acting as Paying Agent, the Company will, on or before each due date of the principal of, premium, if any, or interest on, any Securities, deposit with a Paying Agent a sum in same day funds sufficient to pay the principal, premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the Holders entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. If the Company is not acting as Paying Agent, the Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent will agree with the Trustee, subject to the provisions of this Section 10.03, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of, premium, if any, or interest on Securities in trust for the benefit of the Holders entitled thereto until such sums shall be paid to such Holders or otherwise disposed of as herein provided; (b) give the Trustee notice of any Default by the Company (or any other obligor upon the Securities) in the making of any payment of principal of, premium, if any, or interest on the Securities; (c) at any time during the continuance of any such Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (d) acknowledge, accept and agree to comply in all aspects with the provisions of this Indenture relating to the duties, rights and liabilities of such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent will be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable shall be paid to the Company upon receipt of a Company Request therefor, or (if then held by the Company) will be discharged from such trust; and the Holder of such Security will thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, will thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and the Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining shall be repaid to the Company. Section 10.04. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory), licenses and franchises of the Company and each of the Restricted Subsidiaries; provided, however, that the Company will not be required to preserve any such right, license or franchise if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and the Restricted Subsidiaries as a whole and that the loss thereof is not adverse in any material respect to the Holders; provided, further, that the foregoing will not prohibit a sale, transfer or conveyance of a Subsidiary of the Company or any of its assets in compliance with the terms of this Indenture. Section 10.05. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed (i) upon the Company or any of its Subsidiaries or (ii) upon the income, profits or property of the Company or any of the Restricted Subsidiaries and (b) all material lawful claims for labor, materials and supplies, which, if unpaid, could reasonably be expected to become a Lien upon the property of the Company or any of the Restricted Subsidiaries; provided, however, that the Company will not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings properly instituted and diligently conducted. Section 10.06. Maintenance of Properties. The Company will cause all material properties owned by the Company or any of the Restricted Subsidiaries or used or held for use in the conduct of their respective businesses to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 10.06 will prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any of the Restricted Subsidiaries and is not disadvantageous in any material respect to the Holders. Section 10.07. Insurance. The Company will at all times keep all of its and the Restricted Subsidiaries' properties which are of an insurable nature insured, either with insurers believed by the Company in good faith to be financially sound and responsible or by maintaining reserves in amounts customarily maintained by corporations similarly situated, against loss or damage to the extent that property of similar character is usually and customarily so insured by corporations similarly situated and owning like properties. Section 10.08. Books and Records. The Company will, and will cause each of the Restricted Subsidiaries to, keep proper books of record and account, in which full and correct entries will be made of all financial transactions and the assets and business of the Company and each Restricted Subsidiary of the Company in accordance with GAAP. Section 10.09. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company and any other obligor on the Securities will furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenants compliance with which constitutes a condition precedent) relating to the proposed action have been complied with, and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents, certificates and/or opinions is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture will include: (i) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether such covenant or condition has been complied with; and (iv) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 10.10. Provision of Financial Statements. Whether or not the Company has a class of securities registered under the Exchange Act, the Company will supply, at its own expense, to each Holder of the Securities and file with the Trustee and (following the effective date of the Registered Exchange Offer or Shelf Registration Statement, as applicable, with the Commission) within fifteen days after the Company is required to file the same with the Commission, copies of the annual reports and quarterly reports and of the information, documents and other reports which the Company may be required to file with the Commission pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act. The Company will also comply with the other provisions of Section 314(a) of the Trust Indenture Act. Section 10.11. Change of Control. In the event of a Change of Control (the date of such occurrence, the "Change of Control Date"), the Company will notify the Holders of Securities in writing of such occurrence and will make an offer to purchase (the "Change of Control Offer") on a Business Day (the "Change of Control Purchase Date") not more than 60 days following the Change of Control Date, all Securities then Outstanding at a purchase price equal to 101% of the principal amount thereof on any Change of Control Payment Date, plus accrued and unpaid interest, if any, to such Change of Control Purchase Date. Failure to mail the notice of a Change of Control Offer on the date specified below by the date that such notice is required to be mailed will constitute a covenant Default under Section 5.01(c). Notice of a Change of Control Offer shall be mailed by the Company not less than 25 days nor more than 45 days before the Change of Control Purchase Date to the Holders of Securities at their last registered addresses with a copy to the Trustee and the Paying Agent. The Change of Control Offer shall remain open from the time of mailing for at least 20 Business Days and until 5:00 p.m., New York City time, on the Change of Control Purchase Date. The notice, which shall govern the terms of the Change of Control Offer, shall include such disclosures as are required by law and shall state: (a) that the Change of Control Offer is being made pursuant to this Section 10.11 and that all Securities tendered into the Change of Control Offer will be accepted for payment; (b) the purchase price (including the amount of accrued interest, if any) for each Security, the Change of Control Purchase Date and the date on which the Change of Control Offer expires; (c) that any Security not tendered for payment will continue to accrue interest in accordance with the terms thereof; (d) that, unless the Company shall default in the payment of the purchase price, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date; (e) that Holders electing to have Securities purchased pursuant to a Change of Control Offer will be required to surrender their Securities to the Paying Agent at the address specified in the notice prior to 5:00 p.m., New York City time, on the Change of Control Purchase Date and must complete any form letter of transmittal proposed by the Company and acceptable to the Trustee and the Paying Agent; (f) that Holders of Securities will be entitled to withdraw their election if the Paying Agent receives, not later than 5:00 p.m., New York City time, on the Change of Control Purchase Date, a facsimile transmission or letter setting forth the name of the Holders, the principal amount of Securities the Holders delivered for purchase, the Security certificate number (if any) and a statement that such Holder is withdrawing his election to have such Securities purchased; (g) that Holders whose Securities are purchased only in part will be issued Securities of like tenor equal in principal amount to the unpurchased portion of the Securities surrendered; (h) the instructions that Holders must follow in order to tender their Securities; and (i) information concerning the business of the Company, the most recent annual and quarterly reports of the Company filed with the Commission pursuant to the Exchange Act (or, if the Company is not required to file any such reports with the Commission, the comparable reports prepared pursuant to Section 10.10), a description of material developments in the Company's business, information with respect to pro forma historical financial information after giving effect to such Change of Control and such other information concerning the circumstances and relevant facts regarding such Change of Control and Change of Control Offer as would, in the good faith judgment of the Company, be material to a Holder of Securities in connection with the decision of such Holder as to whether or not it should tender Securities pursuant to the Change of Control Offer. On the Change of Control Purchase Date, the Company will (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent money, in immediately available funds, sufficient to pay the purchase price of all Securities or portions thereof so tendered and accepted and (iii) deliver to the Trustee the Securities so accepted together with an Officers' Certificate setting forth the Securities or portions thereof tendered to and accepted for payment by the Company. The Paying Agent will promptly mail or deliver to the Holders of Securities so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security of like tenor equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Change of Control Offer not later than the first Business Day following the Change of Control Purchase Date. The Company will comply with all applicable tender offer laws and regulations, including, to the extent applicable, with the requirements of Section 14(e) and Rule 14e-1 of the Exchange Act, and any other securities laws or regulations in connection with the repurchase of Securities pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 10.11, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 10.11 by virtue thereof. Any provision of this Section 10.11 to the contrary notwithstanding, if following any Change of Control, another Person makes the Change of Control Offer in compliance with the provisions of this Section 10.11 and purchases all Securities validly tendered and not withdrawn under such Change of Control Offer, the Company shall not be required to make a Change of Control Offer following such Change of Control. Section 10.12. Limitation on Indebtedness. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly create, incur, assume, issue, guarantee or in any manner become directly or indirectly liable for or with respect to, contingently or otherwise, the payment of (collectively, to "incur") any Indebtedness (including any Acquired Indebtedness), except for Permitted Indebtedness; provided that (i) the Company may incur any Indebtedness and (ii) a Restricted Subsidiary may incur Acquired Indebtedness if, in either case, after giving pro forma effect to such incurrence (including the application of the net proceeds therefrom), the ratio of (x) Total Consolidated Indebtedness (as of the date of incurrence) to (y) Annualized Pro Forma Consolidated Operating Cash Flow (based upon the two most recent fiscal quarters for which consolidated financial statements of the Company are available preceding the date of such incurrence) would be less than or equal to (A) 8.0 to 1.0 if such incurrence is prior to August 31, 2000 or (B) 7.0 to 1.0 if such incurrence is on or after August 31, 2000 and prior to August 31, 2002 or (C) 6.0 to 1.0 if such incurrence is on or after August 31, 2002. Section 10.13. Statement by Officers as to Default. (a) The Company will deliver to the Trustee, within 120 days after the end of each Fiscal Year of the Company ending after the date hereof, a written statement signed by the chairman or a chief executive officer, the principal financial officer or principal accounting officer of the Company, stating (i) that a review of the activities of the Company during the preceding Fiscal Year has been made under the supervision of the signing officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture and the Escrow Agreement, and (ii) that, to the knowledge of each officer signing such certificate, the Company has kept, observed, performed and fulfilled each and every covenant and condition contained in this Indenture and the Escrow Agreement and is not in default in the performance or observance of any of the terms, provisions, conditions and covenants hereof or thereof (or, if a Default shall have occurred, describing all such Defaults of which such officers may have knowledge, their status and what action the Company is taking or proposes to take with respect thereto). (b) When any Default under this Indenture or a default under the Escrow Agreement has occurred and is continuing, or if the Trustee or any Holder or the trustee for or the holder of any other evidence of Indebtedness of the Company or any Restricted Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness (other than Indebtedness evidenced by the Securities) in the principal amount of less than $10,000,000), the Company will promptly notify the Trustee of such Default, notice or action and will deliver to the Trustee by registered or certified mail or by telegram, or facsimile transmission followed by hard copy by registered or certified mail an Officers' Certificate specifying such event, notice or other action within five Business Days after the Company becomes aware of such occurrence and what action the Company is taking or proposes to take with respect thereto. Section 10.14. Limitation on Restricted Payments. (a) The Company will not, and will not permit any of the Restricted Subsidiaries to, make, directly or indirectly, any Restricted Payment unless: (i) no Default shall have occurred and be continuing at the time of or upon giving effect to such Restricted Payment; (ii) immediately after giving effect to such Restricted Payment, the Company would be able to incur $1.00 of Indebtedness under the proviso of Section 10.12; and (iii) immediately after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments declared or made on or after the Issue Date and all Designation Amounts does not exceed an amount equal to the sum of (A) the difference between (x) the Cumulative Available Cash Flow determined at the time of such Restricted Payment and (y) Cumulative Consolidated Interest Expense determined at the time of such Restricted Payment, plus (B) the aggregate net cash proceeds received by the Company either (x) as capital contributions to the Company after the Issue Date or (y) from the issue and sale (other than to a Restricted Subsidiary of the Company) of its Capital Stock (other than Disqualified Stock) on or after the Issue Date, plus (C) the aggregate net proceeds received by the Company from the issuance (other than to a Restricted Subsidiary of the Company) on or after the Issue Date of its Capital Stock (other than Disqualified Stock) upon the conversion of, or in exchange for, Indebtedness of the Company (other than the Convertible Notes), plus (D) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the Issue Date (other than an Investment made pursuant to clause (v), (vi), (vii) or (xii) of the following paragraph), an amount equal to the lesser of the return of capital with respect to such Investment and the cost of such Investment, in either case, less the cost of the disposition of such Investment, plus (E) in the case of any Revocation with respect to a Subsidiary of the Company that was made subject to a Designation after the Issue Date, an amount equal to the lesser of the Designation Amount with respect to such Subsidiary or the Fair Market Value of the Investment of the Company and the Restricted Subsidiaries in such Subsidiary at the time of Revocation. For purposes of the preceding clauses (B)(y) and (C), as applicable, the value of the aggregate net proceeds received by the Company upon the issuance of Capital Stock either upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of options, warrants or rights will be the net cash proceeds received upon the issuance of such Indebtedness, options, warrants or rights plus the incremental amount received, if any, by the Company upon the conversion, exchange or exercise thereof. For purposes of determining the amount expended for Restricted Payments, cash distributed shall be valued at the face amount thereof and property other than cash shall be valued at its Fair Market Value. (b) The provisions of Section 10.14(a) shall not prohibit: (i) the payment of any dividend or other distribution within 60 days after the date of declaration thereof if at such date of declaration such payment would be permitted by the provisions of this Indenture; (ii) the purchase, redemption, retirement or other acquisition of any shares of Capital Stock of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent issue and sale (other than to a Restricted Subsidiary of the Company) of, shares of Capital Stock of the Company (other than Disqualified Stock); provided that any such net cash proceeds are excluded from clause (iii)(b) of Section 10.14(a); (iii) so long as no Default shall have occurred and be continuing, the purchase, redemption, retirement, defeasance or other acquisition of Subordinated Indebtedness (other than the Convertible Notes and Deeply Subordinated Shareholder Loans) made by exchange for, or out of the net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary of the Company) of (x) Capital Stock (other than Disqualified Stock) of the Company or (y) other Subordinated Indebtedness to the extent that its stated maturity for the payment of principal thereof is not prior to the 180th day after the final stated maturity of the Securities; provided that any such net cash proceeds are excluded from clause (iii)(b) of Section 10.14(a); (iv) the purchase, redemption, retirement or other acquisition of the Convertible Notes or Deeply Subordinated Shareholder Loans to the extent made by exchange for (upon conversion in accordance with their terms or otherwise), or out of the net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary of the Company) of Capital Stock (other than Disqualified Stock) of the Company; provided that any such net proceeds or net cash proceeds, as applicable, shall be excluded from clause (iii)(b) of Section 10.14(a); (v) so long as no Default shall have occurred and be continuing, Investments by the Company or any Restricted Subsidiary in a person (including any Unrestricted Subsidiary) in an amount, at any time outstanding, not to exceed $25.0 million less the amount of Investments then outstanding under clause (xii) of this Section 10.14(b); (vi) the extension by the Company and the Restricted Subsidiaries of trade credit to Unrestricted Subsidiaries, represented by accounts receivable, extended on usual and customary terms in the ordinary course of business; (vii) any renewal or reclassification of any Investment in any Unrestricted Subsidiary outstanding on the Issue Date or subsequently made in accordance with the provisions described herein; (viii) purchases or redemptions of Capital Stock (including cash settlements of stock options) held by employees, officers or directors upon or following termination of their employment with the Company or one of its Subsidiaries, subject to any put arrangements, provided that payments not subject to such puts shall not exceed $1.0 million in any Fiscal Year in the aggregate; (ix) so long as no Default shall have occurred and be continuing, Investments in Unrestricted Subsidiaries to the extent promptly made with the proceeds of a substantially concurrent (1) capital contribution to the Company or (2) issue or sale of Capital Stock (other than Disqualified Stock) of the Company (other than to a Restricted Subsidiary of the Company); provided that any such proceeds are excluded from clause (iii)(b) of Section 10.14(a); (x) the redemption or purchase of the Richey Warrant for an amount not to exceed $1.0 million; (xi) the payment of management fees to each of VPC and Pacific in an amount not to exceed $350,000 (plus out-of-pocket travel expenses relating to the management of the Company) in any Fiscal Year; (xii) Investments in an amount at any time outstanding not to exceed $25.0 million less the amount of Investments then outstanding under clause (v) of this Section 10.14(b) so long as such Investment is in the form of senior loans having a maturity of not more than one year made in any person ("target") engaged in a Cable/Telecommunications Business with respect to which the Company or a Restricted Subsidiary has entered into a definitive acquisition agreement for the acquisition by the Company or a Restricted Subsidiary of target such that target will become a Restricted Subsidiary as a result of such acquisition; provided any such acquisition is consummated or such Investment is repaid within one year of the making of any such Investment; and (xiii) the use of proceeds from the issue and sale of the Securities to repay up to $10.0 million aggregate principal amount of Convertible Notes. In determining the amount of Restricted Payments permissible under this Section 10.14(b), amounts expended pursuant to clauses (i), (v), (viii), (xii) and, to the extent not deducted in arriving at Cumulative Available Cash Flow, (xi) above shall be included as Restricted Payments. Section 10.15. Limitation on Transactions with Affiliates. The Company will not, and will not permit, cause or suffer any Restricted Subsidiary to, conduct any business or enter into any transaction (or series of related transactions which are similar or part of a common plan) with or for the benefit of any of their respective Affiliates or any beneficial holder of 10% or more of the Common Stock of the Company or any officer or director of the Company or any Restricted Subsidiary (each an "Affiliate Transaction"), unless the terms of the Affiliate Transaction are set forth in writing, and are fair and reasonable to the Company or such Restricted Subsidiary, as the case may be. Each Affiliate Transaction (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other Fair Market Value in excess of $500,000 shall be approved by a majority of the Board, such approval to be evidenced by a Board Resolution stating that the Board has determined that such transaction or transactions comply with the foregoing provisions. In addition to the foregoing, each Affiliate Transaction involving aggregate consideration of $5,000,000 or more shall be approved by a majority of the Disinterested Directors; provided that, in lieu of such approval by the Disinterested Directors, the Company may obtain a written opinion from an Independent Financial Advisor stating that the terms of such Affiliate Transaction to the Company or the Restricted Subsidiary, as the case may be, are fair from a financial point of view. For purposes of this Section 10.15, any Affiliate Transaction approved by a majority of the Disinterested Directors or as to which a written opinion has been obtained from an Independent Financial Advisor, on the basis set forth in the preceding sentence, shall be deemed to be on terms that are fair and reasonable to the Company and the Restricted Subsidiaries, as the case may be, and, therefore, shall be permitted under this Section 10.15. Notwithstanding the foregoing, the restrictions set forth in this Section 10.15 shall not apply to (i) transactions with or among, or solely for the benefit of, the Company and/or any of the Restricted Subsidiaries, (ii) transactions pursuant to agreements and arrangements existing on the Issue Date, including payments of management fees to each of VPC and Pacific in an aggregate amount not to exceed $350,000 (plus travel expenses incurred in providing management services) in any Fiscal Year of the Company, (iii) the making of Deeply Subordinated Shareholder Loans pursuant to and in compliance with Section 10.12, (iv) dividends paid by the Company pursuant to and in compliance with Section 10.14, (v) customary directors' fees, indemnification and similar arrangements, consulting fees, employee salaries, loans and bonuses or legal fees and (vi) transactions contemplated by the License Co. Documents. Notwithstanding any provision of this Indenture to the contrary, the Company will not, and will not permit any Restricted Subsidiary to, amend, modify or waive any provision of the License Co., Documents in a manner that is adverse, from the perspective of creditors of the Company and the Restricted Subsidiaries, in any material respect. Section 10.16. Disposition of Proceeds of Asset Sales. (a) The Company will not, and will not permit any Restricted Subsidiary to, make any Asset Sale unless (i) the Company or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets sold or otherwise disposed of and (ii) at least 80% of such consideration for any such Asset Sale is cash and/or Cash Equivalents; provided that the following shall be treated as cash for purposes of this provision: (x) the amount of any liabilities (other than Subordinated Indebtedness or Indebtedness of a Restricted Subsidiary that would not constitute Restricted Subsidiary Indebtedness) that are assumed by the transferee or purchaser of any such assets pursuant to an agreement that unconditionally releases the Company or such Restricted Subsidiary from further liability ("assumed liabilities"), (y) the amount of any notes or other obligations that within 30 days of receipt, are converted into cash (to the extent of the cash received) and (z) the amount (valued based upon the reported closing sale price or average of the closing bid and ask prices, as the case may be, on the principal securities or trading market on the date of the Asset Sale) of any Publicly Traded Stock received as consideration in such Asset Sale. The Company or the applicable Restricted Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds from such Asset Sale within 365 days of the receipt thereof to repay an amount of Indebtedness (other than Subordinated Indebtedness) of the Issuer or Company in an amount not exceeding the Other Senior Debt Pro Rata Share and elect to permanently reduce the amount of the commitments thereunder by the amount of the Indebtedness so repaid, (ii) apply the Net Cash Proceeds from such Asset Sale to repay any Restricted Subsidiary Indebtedness and elect to permanently reduce the commitments by the amount of the Indebtedness so repaid or (iii) apply such Net Cash Proceeds within 365 days thereof, to an investment in properties and assets that will be used in a Cable/Telecommunications Business (or in Capital Stock and other securities of any person that will become a Restricted Subsidiary as a result of such investment to the extent such person owns properties and assets that will be used in a Cable/Telecommunications Business) of the Company or any Restricted Subsidiary ("Replacement Assets"). Any Net Cash Proceeds from any Asset Sale that are neither used to repay, and permanently reduce the commitments under, any Restricted Subsidiary Indebtedness as set forth in clause (ii) of the preceding sentence or invested in Replacement Assets within the 365-day period as set forth in clause (iii) shall constitute "Excess Proceeds". Any Excess Proceeds not used as set forth in clause (i) of the second preceding sentence shall constitute "Offer Excess Proceeds" subject to disposition as provided below. (b) When the aggregate amount of Offer Excess Proceeds equals or exceeds $10,000,000, the Company will be obligated to make an offer to purchase (an "Asset Sale Offer") from all holders of the Securities, on a day not more than 40 Business Days thereafter (the "Asset Sale Purchase Date"), the maximum principal amount (expressed as a multiple of $1,000) of Securities that may be purchased with the aggregate Offer Excess Proceeds at a price, payable in cash, equal to 100% of the principal amount of the Securities plus accrued and unpaid interest, if any, to the date of purchase (the "Asset Sale Offer Price"). An Asset Sale Offer will be required to be kept open for a period of at least 20 Business Days or such longer period as may be required by law. (c) Notwithstanding clauses (a) and (b) of this Section 10.16, the Company and the Restricted Subsidiaries will be permitted to consummate an Asset Sale without complying with such clauses to the extent (i) at least 80% of the consideration for such Asset Sale constitutes Replacement Assets, cash or Cash Equivalents (including obligations deemed to be cash under this Section 10.16) and (ii) such Asset Sale is for Fair Market Value; provided that any consideration constituting (or deemed to constitute) cash or Cash Equivalents received by the Company or any of the Restricted Subsidiaries in connection with any Asset Sale permitted to be consummated under this clause (c) shall constitute Net Cash Proceeds subject to the provisions of the foregoing clauses (a) and (b). (d) Whenever Offer Excess Proceeds received by the Company exceed $10,000,000, such Offer Excess Proceeds will, prior to the purchase of Securities, be set aside by the Company in a separate account pending (i) deposit with the depositary of the amount required to purchase the Securities tendered in an Asset Sale Offer or (ii) delivery by the Company of the Asset Sale Offer Price to the Holders of the Securities validly tendered and not withdrawn pursuant to an Asset Sale Offer. Such Excess Proceeds may be invested in Cash Equivalents, as directed by the Company, having a maturity date which is not later than the earliest possible date for purchase or redemption of Securities pursuant to the Asset Sale Offer. The Company will be entitled to any interest or dividends accrued, earned or paid on such Cash Equivalents. (e) Notice of an Asset Sale Offer will be mailed by the Company to all Holders of Securities not less than 20 Business Days nor more than 40 Business Days before the Asset Sale Purchase Date at their last registered address with a copy to the Trustee and any Paying Agents. The Asset Sale Offer will remain open from the time of mailing for at least 20 Business Days or such longer period as required by law and until at least 5:00 p.m., New York City time, on the Asset Sale Purchase Date. The notice, which will govern the terms of the Asset Sale Offer, will include such disclosures as are required by law and will state: (i) that the Asset Sale Offer is being made pursuant to this Section 10.16; (ii) the Asset Sale Offer Price (including the amount of accrued interest, if any) for each Security, the Asset Sale Purchase Date and the date on which the Asset Sale Offer expires; (iii) that any Security not tendered or accepted for payment shall continue to accrue interest in accordance with the terms thereof; (iv) that, unless the Company shall default in the payment of the Asset Sale Offer Price, any Security accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Asset Sale Purchase Date; (v) that Holders electing to have Securities purchased pursuant to an Asset Sale Offer shall be required to surrender their Securities to the Paying Agent at the address specified in the notice prior to 5:00 p.m., New York City time, on the Asset Sale Purchase Date with the "Option of Holder to Elect Purchase" on the reverse thereof completed; (vi) that Holders shall be entitled to withdraw their election if the Paying Agent receives, not later than 5:00 p.m., New York City time, on the Asset Sale Purchase Date, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Securities the Holder delivered for purchase, the Security certificate number (if any) and a statement that such Holder is withdrawing his election to have such Securities purchased; (vii) that if Securities in a principal amount in excess of the Holder's pro rata share of the amount of Excess Proceeds are tendered pursuant to the Asset Sale Offer, the Company shall purchase Securities on a pro rata basis among the Securities tendered (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000 or integral multiples of $1,000 shall be acquired); (viii) that Holders whose Securities are purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; (ix) the instructions that Holders must follow in order to tender their Securities; and (x) information concerning the business of the Company, the most recent annual and quarterly reports of the Company filed with the Commission pursuant to the Exchange Act (or, if the Company is not required to file any such reports with the Commission, the comparable reports prepared pursuant to Section 10.10), a description of material developments in the Company's business, information with respect to pro forma historical financial information after giving effect to such Asset Sale and Asset Sale Offer and such other information as would be material to a Holder of Securities in connection with the decision of such Holder as to whether or not it should tender Securities pursuant to the Asset Sale Offer. (f) On the Asset Sale Purchase Date, the Company will (i) accept for payment, on a pro rata basis, Securities or portions thereof tendered pursuant to the Asset Sale Offer, (ii) deposit with the Paying Agent money, in immediately available funds, in an amount sufficient to pay the Asset Sale Offer Price of all Securities or portions thereof so tendered and accepted and (iii) deliver to the Trustee the Securities so accepted together with an Officers' Certificate setting forth the Securities or portions thereof tendered to and accepted for payment by the Company. The Paying Agent will promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the Asset Sale Offer Price, and the Trustee will promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted will be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Asset Sale Offer not later than the first Business Day following the Asset Sale Purchase Date. To the extent an Asset Sale Offer is not fully subscribed to by such Holders, the Company or any Restricted Subsidiary may retain such unutilized portion of the Offer Excess Proceeds for application to general corporate purposes. The Paying Agent will promptly deliver to the Company the balance of any such Offer Excess Proceeds held by the Paying Agent after payment to the Holders of Securities as aforesaid. Upon completion of such Asset Sale Offer, the amount of Offer Excess Proceeds shall be reset to zero. For purposes of this Section 10.16, the Trustee will act as Paying Agent. (g) The Company will comply, to the extent applicable, with the requirements of Section 14(e) and Rule 14e-1 of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to the Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section 10.16, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Section 10.16 by virtue thereof. Section 10.17. Limitation on Liens Securing Certain Indebtedness. The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien of any kind, against or upon (i) any property or assets of the Company or any Restricted Subsidiary, whether now owned or acquired after the Issue Date, or any proceeds therefrom, which secures either (x) Subordinated Indebtedness unless the Securities are secured by a Lien on such property, assets or proceeds that is senior in priority to the Liens securing such Subordinated Indebtedness or (y) Indebtedness of the Company that is not Subordinated Indebtedness, unless the Securities are equally and ratably secured with the Liens securing such Subordinated Indebtedness, except, in the case of this clause (y), Permitted Liens or (ii) the Escrow Account. Section 10.18. Escrow Account. The Company shall, on the date of this Indenture, enter into the Escrow Agreement and, pursuant thereto, shall place the Initial Escrow Amount in the Escrow Account held by the Escrow Agent for the benefit of the Holders of the Securities and the Trustee. Section 10.19. Limitation on Certain Guarantees and Indebtedness by Restricted Subsidiaries. (a) The Company will not permit any Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to (i) any Subordinated Indebtedness or (ii) any Indebtedness of the Company that is not Subordinated Indebtedness (other than, in the case of this clause (ii), (x) Indebtedness under any Senior Bank Facility to the extent constituting Permitted Indebtedness or (y) Indebtedness under any Vendor Credit Facility to the extent constituting Permitted Indebtedness), unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture providing for the guarantee of payment of the Securities by such Restricted Subsidiary on a basis senior to any such Subordinated Indebtedness or pari passu with any such other Indebtedness referred to in clause (ii), as the case may be. Each guarantee created pursuant to such provisions is referred to as a "Guarantee" and the issuer of each such Guarantee, so long as the Guarantee remains outstanding, is referred to as a "Guarantor." (b) In the event of the unconditional release of any Guarantor from its obligations in respect of the Indebtedness which gave rise to the requirement that a Guarantee be given, such Guarantor shall be released from all obligations under its Guarantee. In addition, upon any sale or disposition (by merger or otherwise) of any Guarantor by the Company or a Restricted Subsidiary of the Company to any person that is not an Affiliate of the Company or any of its Restricted Subsidiaries which is otherwise in compliance with the terms of this Indenture and as a result of which such Guarantor ceases to be a Subsidiary of the Company, such Guarantor will be deemed to be released from all obligations under its Guarantee; provided that each such Guarantor is sold or disposed of in accordance with Section 10.16. Section 10.20. Limitation on Issuances and Sales of Preferred Stock of Restricted Subsidiaries. The Company (i) will not permit any Restricted Subsidiary to issue any Preferred Stock (other than to the Company or a Restricted Subsidiary) and (ii) will not permit any person (other than the Company or a Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary. Section 10.21. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist, or enter into any agreement with any person that would cause to become effective, any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock or any other interest or participation in, or measured by, its profits to the extent owned by the Company or any Restricted Subsidiary, (b) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make any Investment in the Company or any Restricted Subsidiary or (d) transfer any of its properties or assets to the Company or to any Restricted Subsidiary, except for (i) any encumbrance or restriction existing on the Issue Date, (ii) any encumbrance or restriction applicable to a Restricted Subsidiary at the time that it becomes a Restricted Subsidiary that is not created in contemplation thereof, (iii) any encumbrance or restriction existing under any agreement that refinances or replaces an agreement containing a restriction permitted by clause (i) or (ii) above; provided that the terms and conditions of any such encumbrance or restriction are not materially less favorable to the holders of Securities than those under or pursuant to the agreement being replaced or the agreement evidencing the Indebtedness refinanced, (iv) any encumbrance or restriction imposed upon a Restricted Subsidiary pursuant to an agreement which has been entered into for the sale or disposition of all or substantially of the Capital Stock or assets of such Restricted Subsidiary and (v) any customary encumbrance or restriction applicable to a Restricted Subsidiary that is contained in an agreement or instrument governing or relating to Indebtedness contained in any Senior Bank Facility or Vendor Credit Facility; provided that the provisions of such agreement permit the payment of interest and principal and mandatory repurchases pursuant to the terms of this Indenture and the Securities and other Indebtedness that is solely an obligation of the Company, but provided further that such agreement may nevertheless contain customary net worth, leverage, invested capital and other financial covenants, customary covenants regarding the merger of or sale of all or any substantial part of the assets of the Company or any Restricted Subsidiary, customary restrictions on transactions with affiliates, and customary subordination provisions governing indebtedness owed to the Company or any Restricted Subsidiary. Section 10.22. Limitation on Designations of Unrestricted Subsidiaries. The Company may designate any Subsidiary of the Company (other than a newly created Subsidiary in which no Investment has previously been made) as an "Unrestricted Subsidiary" under this Indenture (a "Designation") unless: (i) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (ii) immediately after giving effect to such Designation, the Company would be permitted under this Indenture to incur $1.00 of additional Indebtedness pursuant to the proviso of Section 10.12 hereof; and (iii) the Company would be permitted under this Indenture to make an Investment at the time of Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the Fair Market Value of the net Investment of the Company or any other Restricted Subsidiary in such Restricted Subsidiary on such date. In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment pursuant to the covenant described in Section 10.14 hereof for all purposes of this Indenture in the Designation Amount. The Company shall not, and shall not permit any Restricted Subsidiary to, at any time, (a) provide credit support for, or a guarantee of, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness); provided that the Company may pledge Capital Stock or Indebtedness of any Unrestricted Subsidiary on a nonrecourse basis such that the pledgee has no claim whatsoever against the Company other than to obtain such pledged property, (b) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (c) be directly or indirectly liable for any Indebtedness which provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity upon the occurrence of a default with respect to any Indebtedness of any Unrestricted Subsidiary (including any right to take enforcement action against such Unrestricted Subsidiary), except in the case of clause (a) or (b) to the extent permitted under the covenant described in Section 10.14 and Section 10.15 hereof. The Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if: (i) no Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of this Indenture. All Designations and Revocations must be evidenced by Board Resolutions of the Company delivered to the Trustee certifying compliance with the foregoing provisions. ARTICLE ELEVEN REDEMPTION OF SECURITIES Section 11.01. Right of Redemption. The Securities may be redeemed at the option of the Company, in whole or in part, on the bases and at the Redemption Prices specified in the forms of Security, together with accrued but unpaid interest to the Redemption Date. Section 11.02. Applicability of Article. Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. Section 11.03. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 11.01 shall be evidenced by a Board Resolution and an Officers' Certificate. In case of any redemption at the election of the Company, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice period shall be satisfactory to the Trustee), notify the Trustee in writing of such Redemption Date and of the principal amount of Securities to be redeemed. Section 11.04. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities are to be redeemed, the particular Securities or portions thereof to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption in compliance with the requirements of the principal national securities exchange, if any, on which the Securities being redeemed are listed, or, if the Securities are not listed on a national exchange, by such method as the Trustee shall deem fair and appropriate; provided that no Securities of a principal amount of $1,000 or less will be redeemed in part; provided, further, that any such redemption pursuant to the provisions relating to an Equity Offering and/or sales to a Strategic Equity Investor shall be made on a pro rata basis or on as nearly a pro rata basis as practicable (subject to the procedures of the Depository or any other depository). The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for partial redemption and the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. Section 11.05. Notice of Redemption. Notice of redemption will be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at the address of such Holder appearing in the Security Register. All notices of redemption will state: (i) the Redemption Date; (ii) the Redemption Price; (iii) if less than all Outstanding Securities are to be redeemed, the identification of the particular Securities to be redeemed; (iv) in the case of a Security to be redeemed in part, the principal amount of such Security to be redeemed and that after the Redemption Date upon surrender of such Security, a new Security or Securities in the aggregate principal amount equal to the unredeemed portion thereof shall be issued; (v) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (vi) that on the Redemption Date the Redemption Price shall become due and payable upon each such Security or portion thereof, and that (unless the Company shall default in payment of the Redemption Price) interest thereon shall cease to accrue on and after said date; (vii) the place or places where such Securities are to be surrendered for payment of the Redemption Price; (viii) the CUSIP number, relating to such Securities; and (ix) the paragraph of the Securities pursuant to which the Securities are being redeemed. Notice of redemption of Securities to be redeemed at the election of the Company will be given by the Company or, at the Company's written request, by the Trustee in the name and at the expense of the Company. The notice if mailed in the manner herein provided will be conclusively presumed to have been given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part will not affect the validity of the proceedings for the redemption of any other Security. Section 11.06. Deposit of Redemption Price. On or prior to any Redemption Date, the Company will deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money in same day funds sufficient to pay the Redemption Price of, and accrued interest on, all the Securities or portions thereof which are to be redeemed on that date. Section 11.07. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed will, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Company shall default in the payment of the Redemption Price) such Securities will cease to bear interest and such Securities will cease to be outstanding. Upon surrender of any such Security for redemption in accordance with said notice, such Security will be paid by the Company at the Redemption Price; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such on the relevant Regular Record Dates according to the terms and the provisions of Section 3.07. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid, bear interest from the Redemption Date at the rate then borne by such Security. Section 11.08. Securities Redeemed or Purchased in Part. Any Security which is to be redeemed or purchased only in part shall be surrendered to the Paying Agent at the office or agency maintained for such purpose pursuant to Section 10.02 (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to, the Company, the Security Registrar or the Trustee duly executed by the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver (at the Company's expense) to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Security so surrendered that is not redeemed or purchased. ARTICLE TWELVE COLLATERAL AND SECURITY Section 12.01. Escrow Agreement. (a) The due and punctual payment of the interest on the Securities when and as the same shall be due and payable on each Interest Payment Date, at maturity or by acceleration, and interest on the overdue principal of and interest (to the extent permitted by law), if any, on the Securities and performance of all other obligations of the Company to the Holders of Securities or the Trustee under this Indenture and the Escrow Agreement with respect to the Securities and the Securities, according to the terms hereunder or thereunder, shall be secured as provided in the Escrow Agreement which the Company, the Escrow Agent and the Trustee have entered into simultaneously with the execution of this Indenture. Upon the acceleration of the maturity of the Securities, the Escrow Agreement will provide for the foreclosure by the Trustee of the net proceeds of the Escrow Account. Each Holder of Securities, by its acceptance thereof, consents and agrees to the terms of the Escrow Agreement (including, without limitation, the provisions providing for foreclosure and disbursement of Collateral) as the same may be in effect or may be amended from time to time in accordance with its terms and authorizes and directs the Escrow Agent and the Trustee to enter into the Escrow Agreement and to perform its obligations and exercise its rights thereunder in accordance therewith. The Company shall deliver to the Trustee copies of the Escrow Agreement, and shall do or cause to be done all such acts and things as may be necessary or proper, or as may be required by the provisions of the Escrow Agreement, to assure and confirm to the Trustee the security interest in the Collateral contemplated by the Escrow Agreement or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture with respect to, and of, the Securities, according to the intent and purposes expressed in the Escrow Agreement. The Company shall take any and all actions reasonably required to cause the Escrow Agreement to create and maintain (to the extent possible under applicable law), as security for the obligations of the Company hereunder, a valid and enforceable perfected first priority Lien in and on all the Collateral, in favor of the Trustee for the benefit of the Trustee, predecessor trustees, and the Holders of Securities, superior to and prior to the rights of all third Persons and subject to no other Liens. The Trustee shall have no responsibility for perfecting or maintaining the perfection of the Trustee's security interest in the Collateral or for filing any instrument, document or notice in any public office at any time or times. (b) The Escrow Agreement shall further provide that in the event a portion of the Securities has been retired by the Company, depending upon the amount available in the Escrow Account, funds representing the interest payments which have not previously been made on such retired Securities shall, upon the written request of the Company to the Escrow Agent and the Trustee, be paid to the Company upon compliance with the release of collateral provisions of the TIA and upon receipt of a notice relating thereto from the Trustee. Section 12.02. Recording and Opinions. (a) The Company shall furnish to the Trustee promptly after the execution and delivery of this Indenture an Opinion of Counsel either (i) stating that in the opinion of such counsel all action has been taken with respect to the recording, registering and filing of this Indenture, financing statements or other instruments necessary to make effective the Lien intended to be created by the Escrow Agreement and reciting with respect to the security interests in the Collateral the details of such action, or (ii) stating that in the opinion of such counsel no such action is necessary to make such Lien effective. (b) The Company shall furnish to the Escrow Agent and the Trustee on February 14, 1998, and on each February 14 thereafter until the date upon which the balance of Available Funds (as defined in the Escrow Agreement) shall have been reduced to zero, an Opinion of Counsel, dated as of such date, either (i) stating that (A) in the opinion of such counsel, action has been taken with respect to the recording, registering, filing, re-recording, re-registering and refiling of all supplemental indentures, financing statements, continuation statements and other instruments of further assurance as is necessary to maintain the Lien of the Escrow Agreement and reciting with respect to the security interests in the Collateral the details of such action or referring to prior Opinions of Counsel in which such details are given and (B) based on relevant laws as in effect on the date of such Opinion of Counsel, all financing statements and continuation statements have been executed and filed that are necessary as of such date and during the succeeding 12 months fully to preserve and protect, to the extent such protection and preservation are possible by filing, the rights of the Holders of Securities and the Trustee hereunder and under the Escrow Agreement with respect to the security interests in the Collateral or (ii) stating that, in the opinion of such counsel, no such action is necessary to maintain such Lien and assignment. Section 12.03. Release of Collateral. (a) Subject to subsections (b), (c) and (d) of this Section 12.03, Collateral may be released from the Lien and security interest created by the Escrow Agreement only in accordance with the provisions of the Escrow Agreement. (b) Except to the extent that any Lien on proceeds of Collateral is automatically released by operation of Section 9-306 of the Uniform Commercial Code or other similar law, no Collateral shall be released from the Lien and security interest created by the Escrow Agreement pursuant to the provisions of the Escrow Agreement, other than to the Holders pursuant to the terms thereof, unless there shall have been delivered to the Trustee the certificate required by Section 12.03(d) and Section 12.04. (c) At any time when a Default shall have occurred and be continuing and the maturity of the Securities issued on the Issue Date shall have been accelerated (whether by declaration or otherwise), no Collateral shall be released pursuant to the provisions of the Escrow Agreement, and no release of Collateral in contravention of this Section 12.03(c) shall be effective as against the Holders of Securities, except for the disbursement of all Available Funds (as defined in the Escrow Agreement) to the Trustee pursuant to Section 6(b) of the Escrow Agreement. (d) The release of any Collateral from the Liens and security interests created by this Indenture and the Escrow Agreement shall not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to the terms hereof or pursuant to the terms of the Escrow Agreement. To the extent applicable, the Company shall cause TIA { 314(d) relating to the release of property or securities from the Lien and security interest of the Escrow Agreement to be complied with. Any certificate or opinion required by TIA { 314(d) may be made by an Officer of the Company except in cases where TIA { 314(d) requires that such certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected or approved by the Trustee in the exercise of reasonable care. Section 12.04. Certificates of the Company. The Company shall furnish to the Trustee, prior to any proposed release of Collateral other than pursuant to the express terms of the Escrow Agreement, (i) all documents required by TIA { 314(d) and (ii) an Opinion of Counsel, which may be rendered by internal counsel to the Company, to the effect that such accompanying documents constitute all documents required by TIA { 314(d). The Trustee may, to the extent permitted by Section 6.01 and Section 6.03, accept as conclusive evidence of compliance with the foregoing provisions the appropriate statements contained in such documents and such Opinion of Counsel. Section 12.05. Authorization of Actions to Be Taken by the Trustee Under the Escrow Agreement. Subject to the provisions of Section 6.01 and Section 6.03, the Trustee may, without the consent of the Holders of Securities, on behalf of the Holders of Securities, take all actions it deems necessary or appropriate in order to (a) enforce any of the terms of the Escrow Agreement and (b) collect and receive any and all amounts payable in respect of the obligations of the Company hereunder. The Trustee shall have power to institute and maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation of the Escrow Agreement or this Indenture, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders of Securities in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Holders of Securities or of the Trustee). Section 12.06. Authorization of Receipt of Funds by the Trustee Under the Escrow Agreement. The Trustee is authorized to receive any funds for the benefit of the Holders of Securities disbursed under the Escrow Agreement, and to make further distributions of such funds to the Holders of Securities according to the provisions of this Indenture. Section 12.07. Termination of Security Interest. Upon the earliest to occur of (i) the date upon which the balance of Available Funds (as defined in the Escrow Agreement) shall have been reduced to zero, (ii) the payment in full of all obligations of the Company under this Indenture and the Securities, (iii) legal defeasance pursuant to Article Four and (iv) covenant defeasance pursuant to Article Four, the Trustee shall, at the written request of the Company, release the Liens pursuant to this Indenture and the Escrow Agreement upon the Company's compliance with the provisions of the TIA pertaining to release of collateral. ARTICLE THIRTEEN SATISFACTION AND DISCHARGE Section 13.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to surviving rights or registration of transfer or exchange of Securities herein expressly provided for) and the Trustee, on written demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when either (a) all Securities theretofore authenticated and delivered (other than (A) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 hereof and (B) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or (b) (i) all such Securities not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee in trust an amount of money in dollars sufficient to pay and discharge the entire Indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for the principal of, premium, if any, and accrued interest to the date of such deposit; (ii) the Company has paid or caused to be paid all other sums payable hereunder; and (iii) the Company has delivered to the Trustee (1) irrevocable instructions to apply the deposited money toward payment of the Securities at the Stated Maturities and the Redemption Dates thereof, and (ii) an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.07 and, if money shall have been deposited with the Trustee pursuant to subclause (a)(ii) of this Section 13.01, the obligations of the Trustee under Section 13.02 and the last paragraph of Section 10.03 shall survive. Section 13.02. Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 13.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the persons entitled thereto, of the principal of, premium, if any, and interest on the Securities for whose payment such money has been deposited with the Trustee. [signatures on following pages] IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. OPTEL, INC. By:__________________________________ Name: Title: By:__________________________________ Name: Title: U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee By:__________________________________ Name: Title: EXHIBIT A-1 [Form of Series A Security]. THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN "ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS THREE YEARS (OR SUCH SHORTER PERIOD AS MAY BE PRESCRIBED BY RULE 144(K) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY OR (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, (E) TO AN ACCREDITED INVESTOR THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS A-1 LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, AND THE RULES AND REGULATIONS THEREUNDER, THIS SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 OF PRINCIPAL AMOUNT (1) THE "ISSUE PRICE" IS $968.89; (2) THE "STATED REDEMPTION PRICE AT MATURITY" IS $1,000; (3) THE AMOUNT OF ORIGINAL ISSUE DISCOUNT (THE EXCESS OF THE "STATED REDEMPTION PRICE AT MATURITY" OVER THE "ISSUE PRICE") IS $31.11; (4) THE ISSUE DATE IS FEBRUARY 14, 1997; AND (5) THE YIELD TO MATURITY (COMPOUNDED SEMI-ANNUALLY) 13.651%. A-2 OPTEL, INC. ----------- 13% SENIOR NOTES DUE 2005 CUSIP No. __________ No. ___________ $ OPTEL, INC., a corporation incorporated under the laws of the State of Delaware (herein called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to _______________ or registered assigns, the principal sum of _______________ Dollars on February 15, 2005, at the office or agency of the Company referred to below, and to pay interest thereon on February 15 and August 15 (each an "Interest Payment Date"), of each year, commencing on August 15, 1997, accruing from the Issue Date or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 13% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on February 1 or August 1 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Security will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States A-3 of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: , OPTEL, INC. By:________________________________ Name: Title: By:________________________________ Name: Title: A-4 TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. Dated: __________________ U.S. Trust Company of Texas, N.A., as Trustee By:__________________________________ Authorized Signatory A-5 [REVERSE OF SERIES A SECURITY] 1. Indenture. This Security is one of a duly authorized issue of Securities of the Company designated as its 13% Senior Notes Due 2005 (herein called the "Series A Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $225,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of February 14, 1997, among the Company and U.S. Trust Company of Texas, N.A., as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. All capitalized terms used in this Series A Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. No reference herein to the Indenture and no provisions of this Series A Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the times, place, and rate, and in the coin or currency, herein prescribed. 2. Registration Rights. Pursuant to the Registration Agreement among the Company and the Holders of the Series A Securities, the Company will be obligated to consummate an exchange offer pursuant to which the Holder of this Security shall have the right to exchange this Security for 13% Senior Notes Due 2005, Series B, of the Company (herein called the "Series B Securities"), which have been registered under the Securities Act, in like principal amount and having identical terms as the Series A Securities (other than as set forth in this paragraph). The Holders of Series A Securities shall be entitled to receive certain additional interest payments in the event such exchange offer is not consummated and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Agreement. The Series A Securities and the Series B Securities are together referred to herein as the "Securities." 3. Redemption. (a) Optional Redemption. The Securities are subject to redemption, at the option of the Company, in whole or in A-6 part, in principal amounts of $1,000 or any integral multiple of $1,000, at any time on or after February 15, 2002 upon not less than 30 nor more than 60 days prior notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month period beginning February 15 of the years indicated below: Year Redemption Price ---- ---------------- 2002 110% 2003 107% 2004 and thereafter 100% (b) Optional Redemption Upon Equity Offering or Sales to Strategic Equity Investors. On or prior to February 15, 2000, in the event that the Company consummates (i) one or more Equity Offerings and/or (ii) a sale or series of related sales of its Common Stock to one or more Strategic Equity Investors for aggregate gross proceeds of $100 million or more, the Company may redeem, at its option, up to a maximum of 35% of the initially outstanding aggregate principal amount of the Securities from the net proceeds thereof on a pro rata basis (or as nearly pro rata as practicable), at a redemption price equal to 113% of the principal amount of the Securities (determined at the redemption date), plus accrued and unpaid interest, if any, to the date of redemption; provided that not less than $145,000,000 in aggregate principal amount of Securities would remain outstanding immediately after such redemption. Any such redemption may only be affected once and must be effected upon not less than 30 nor more than 60 days notice given within 30 days after the last such Equity Offering or sale to a Strategic Equity Investor, as the case may be, resulting in gross proceeds of $100 million or more. (c) Interest Payments. In the case of any redemption of Series A Securities, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. (d) Partial Redemption. In the event of redemption of this Series A Security in part only, a new Series A Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. 4. Offers to Purchase. Sections 10.11 and 10.16 of the Indenture provide that upon the occurrence of a Change of A-7 Control and following certain Asset Sales, and subject to certain conditions and limitations contained therein, the Company shall make an offer to purchase certain amounts of the Securities in accordance with the procedures set forth in the Indenture. 5. Defaults and Remedies. If an Event of Default occurs and is continuing, the principal of all of the Outstanding Securities, plus all accrued and unpaid interest, if any, to and including the date the Securities are paid, may be declared due and payable in the manner and with the effect provided in the Indenture. 6. Defeasance. The Indenture contains provisions (which provisions apply to this Series A Security) for defeasance at any time of (a) the entire indebtedness of the Company on this Series A Security and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. 7. Amendments and Waivers. The Indenture permits, with certain exceptions as provided therein, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and this Series A Security and their consequences. Any such consent or waiver by or on behalf of the Holder of this Series A Security shall be conclusive and binding upon such Holder and upon all future Holders of this Series A Security and of any Series A Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Series A Security. 8. Denominations, Transfer and Exchange. The Series A Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Series A Securities are exchangeable for a like aggregate principal amount of Series A Securities of a different authorized denomination, as requested by the Holder surrendering the same. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Series A Security is registrable on the Security Register of the A-8 Company, upon surrender of this Series A Security for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Series A Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Series A Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 9. Persons Deemed Owners. Prior to and at the time of due presentment of this Series A Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Series A Security is registered as the owner hereof for all purposes, whether or not this Series A Security shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. 10. GOVERNING LAW. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. A-9 ASSIGNMENT FORM If you the holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to - ------------------------------------------------------------------------------- (Insert assignee's social security or tax ID number) __________ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint - ------------------------------------------------------------------------------- agent to transfer this Security on the books of the Company. The agent may substitute another to act for such agent. In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the date three years (or such shorter period of time as permitted by Rule 144(k) under the Securities Act or any successor provision thereunder) after the later of the original issuance date appearing on the face of this Security (or any Predecessor Security) or the last date on which the Company or any Affiliate of the Company was the owner of this Security (or any Predecessor Security), the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: [Check One] [ ] (a) this Security is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. A-10 or [ ] (b) this Security is being transferred other than in accordance with (a) above and documents, including a transferee certificate substantially in the form attached hereto, are being furnished which comply with the conditions of transfer set forth in this Security and the Indenture. If none of the foregoing boxes is checked and, in the case of (b) above, if the appropriate document is not attached or otherwise furnished to the Trustee, the Trustee or Registrar shall not be obligated to register this Security in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 3.15 of the Indenture shall have been satisfied. - ------------------------------------------------------------------------------- Date:______________ Your signature:_____________________________________ (Sign exactly as your name appears on the other side of this Security) By:__________________________________ NOTICE: To be executed by an executive officer Signature Guarantee:____________________ TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A (including the information specified in Rule 144A(d)(4)) or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. A-11 Dated: __________________ ____________________________ NOTICE: To be executed by an executive officer [The Transferee Certificates (Exhibits C and D to the Indenture) will be attached to the Series A Security] A-12 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 10.11 or 10.16 of the Indenture, check the box: [ ] If you wish to have a portion of this Security purchased by the Company pursuant to Section 10.11 or 10.16 of the Indenture, state the amount: $____________________ Date: _____________ Your Signature:____________________________________ (Sign exactly as your name appears on the other side of this Security) A-13 EXHIBIT A-2 [FORM OF SERIES B SECURITY] OPTEL, INC. ---------------- 13% SENIOR NOTES DUE 2005, SERIES B CUSIP No.________ No. _____________ $ OPTEL, INC., a corporation incorporated under the laws of the State of Delaware (herein called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ___________________ or registered assigns, the principal sum of _________________ Dollars on February 15, 2005, at the office or agency of the Company referred to below, and to pay interest thereon on February 15 and August 15 (each an "Interest Payment Date"), of each year, commencing on August 15, 1997, accruing from the Issue Date or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 13% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on February 1 and August 1 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. A2-1 Payment of the principal of, premium, if any, and interest on this Security will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: , OPTEL, INC. By: ________________________ Name: Title: By: ________________________ Name: Title: A2-2 TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. Dated: ____________________ U.S. Trust Company of Texas, N.A., as Trustee By:_____________________________________ Authorized Signatory A2-3 [REVERSE OF SERIES B SECURITY] 1. Indenture. This Security is one of a duly authorized issue of Securities of the Company designated as its 13% Senior Notes Due 2005, Series B (herein called the "Series B Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $225,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of February 14, 1997, among the Company and U.S. Trust Company of Texas, N.A., as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitation of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. All capitalized terms used in this Series B Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. No reference herein to the Indenture and no provision of this Series B Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the times, place, and rate, and in the coin or currency, herein prescribed. The Series B Securities were issued pursuant to an exchange offer pursuant to which 13% Senior Notes Due 2005 of the Company (herein called the "Series A Securities"), in like principal amount and having substantially identical terms as the Series B Securities, were exchanged for the Series B Securities. The Series A Securities and the Series B Securities are together referred to herein as the "Securities." 2. Redemption. (a) Optional Redemption. The Securities are subject to redemption, at the option of the Company, in whole or in part, in principal amounts of $1,000 or any integral multiple of $1,000, at any time on or after February 15, 2002 upon not less than 30 nor more than 60 days prior notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12 month period beginning February 15 of the years indicated below: A2-4 Year Redemption Price ---- ---------------- 2002 110% 2003 107% 2004 and thereafter 100% (b) Optional Redemption upon Equity Offering or Sales to Strategic Equity Investors. On or prior to February 15, 2000, in the event that the Company consummates (i) one or more Equity Offerings and/or (ii) a sale or series of related sales of its Common Stock to one or more Strategic Equity Investors for aggregate gross proceeds of $100 million or more, the Company may redeem, at its option, up to a maximum of 35% of the initially outstanding aggregate principal amount of the Securities from the net proceeds thereof on a pro rata basis (or as nearly pro rata as practicable), at a redemption price equal to 113% of the principal amount of the Securities (determined at the redemption date), plus accrued and unpaid interest, if any, to the date of redemption; provided that not less than $145,000,000 in aggregate principal amount of Securities would remain outstanding immediately after such redemption. Any such redemption may only be affected once and must be effected upon not less than 30 nor more than 60 days notice given within 30 days after the last such Equity Offering or sale to a Strategic Equity Investor, as the case may be, resulting in gross proceeds of $100 million or more. (c) Interest Payments. In the case of any redemption of Series B Securities, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. (d) Partial Redemption. In the event of redemption of this Series B Security in part only, a new Series B Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. 3. Offers to Purchase. Sections 10.11 and 10.16 of the Indenture provide that upon the occurrence of a Change of Control and following any Asset Sale, and subject to further limitations contained therein, the Company shall make an offer to purchase certain amounts of the Securities in accordance with the procedures set forth in the Indenture. 4. Defaults and Remedies. If an Event of Default occurs and is continuing, the principal of all of the Outstanding Securities, plus all accrued and unpaid interest, if any, to and including the date the Securities are paid, may A2-5 be declared due and in the manner and with the effect provided in the Indenture. 5. Defeasance. The Indenture contains provisions (which provisions apply to this Series B Security) for defeasance at any time of (a) the entire indebtedness of the Company on this Series B Security and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. 6. Amendments and Waivers. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indentures and certain past Defaults under the Indenture and this Series B Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and their consequences. Any such consent or waiver by or on behalf of the Holder of this Series B Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Series B Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Series B Security. 7. Denominations, Transfer and Exchange. The Series B Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Series B Securities are exchangeable for a like aggregate principal amount of Series B Securities of a different authorized denomination, as requested by the Holder surrendering the same. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Series B Security is registrable on the Security Register of the Company, upon surrender of this Series B Security for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney A2-6 duly authorized in writing, and thereupon one or more new Series B Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Series B Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 8. Persons Deemed Owners. Prior to and at the time of due presentment of this Series B Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Series B Security is registered as the owner hereof for all purposes, whether or not this Series B Security shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. 9. GOVERNING LAW. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. A2-7 ASSIGNMENT FORM If you the holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to - ------------------------------------------------------------------------------- (Insert assignee's social security or tax ID number) __________ - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint - ------------------------------------------------------------------------------- agent to transfer this Security on the books of the Company. The agent may substitute another to act for such agent. Date:______________ Your signature:_____________________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee:_______________________________ OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 10.11 or 10.16 of the Indenture, check the box: [ ] A2-8 If you wish to have a portion of this Security purchased by the Company, state the amount: $________________ Date: __________________ Your Signature:_____________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: _________________ A2-9 EXHIBIT B FORM OF LEGEND FOR BOOK-ENTRY SECURITIES Any Global Security authenticated and delivered hereunder shall bear a legend (which would be in addition to any other legends required in the case of a Restricted Security) in substantially the following form: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. B-1 EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors -----------, ---- U.S. TRUST COMPANY OF TEXAS, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Re: Optel, Inc. (the "Company") 13% Senior Notes due 2005 (the "Securities") and the related Indenture (the "Indenture") Dear Sirs: In connection with our proposed purchase of the Securities, we confirm that: 1. We have received such information as we deem necessary to make our investment decisions. 2. We understand that any subsequent transfer of the Securities is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Securities except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 3. We understand that the offer and sale of the Securities have not been registered under the Securities Act, and that the Securities may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of each account for which we acquire any Securities, that, prior to (x) the date which is three years after the later of the date of original issuance of the Securities (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act or any successor provision) and (y) such later date, if any, may be required by applicable laws, the Securities may be C-1 offered, resold, pledged or otherwise transferred only (a) to the Company or any of its subsidiaries, (b) inside the United States to a person whom we reasonably believe to be a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in compliance with Rule 144A under the Securities Act, (c) inside the United States to a person we reasonably believe to be an institutional "accredited investor" (as defined below) that, prior to such transfer, furnished to the Trustee a signed letter substantially in the form hereof, (d) outside the United States to persons other than U.S. persons in offshore transactions meeting the requirements of Rule 904 under Regulation S under the Securities Act, (e) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), (f) pursuant to an effective registration statement under the Securities Act or (g) pursuant to another available exemption from the registration requirements of the Securities Act, and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction, and we further agree to provide to any person purchasing Securities from us a notice advising such purchaser that resales of the Securities are restricted as stated herein. 4. We understand that, on any proposed resale of any Securities, we will be required to furnish to you and the Company such certification, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Securities purchased by us will bear a legend to the foregoing effect. 5. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment, as the case may be. 6. We are acquiring the Securities purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. C-2 You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By:_____________________________ Authorized Signature EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S --------------, ---- U.S. TRUST COMPANY OF TEXAS, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Re: Optel, Inc. (the "Company") 13% Senior Notes due 2005 (the "Securities") Dear Sirs: In connection with our proposed sale of $ aggregate principal amount at maturity of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Securities was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been prearranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; D-1 (5) we have advised the transferee of the transfer restrictions applicable to the Securities; and (6) if the circumstances set forth in Rule 904(c) under the Securities Act are applicable, we have complied with the additional conditions therein, including (if applicable) sending a confirmation or other notice stating that the Securities may be offered and sold during the restricted period specified in Rule 903(c)(2) or (3), as applicable; in accordance with the provisions of Regulation S; pursuant to registration of the Securities under the Securities Act; or pursuant to an available exemption from the registration requirements under the Securities Act. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:_________________________________ Authorized Signature D-2 EX-4.3 6 EXHIBIT 4.3 Exhibit 4.3 ESCROW AGREEMENT This ESCROW AGREEMENT (this "Agreement"), dated as of February 14, 1997, among U.S. Trust Company of Texas, N.A., as escrow agent (in such capacity, the "Escrow Agent"), U.S. Trust Company of Texas, N.A., as Trustee (in such capacity, the "Trustee") under the Indenture (as defined herein), and OpTel, Inc., a Delaware corporation (the "Company"). R E C I T A L S : A. Pursuant to the Indenture, dated as of February 14, 1997 (the "Indenture"), between the Company and the Trustee, the Company is issuing $225,000,000 aggregate principal amount of its 13% Senior Notes Due 2005 (the "Series A Securities") and authorizing the issuance of 13% Senior Notes Due 2005, Series B (the "Series B" Securities," and together with the Series A Securities, the "Securities"). B. As security for its obligations under the Securities and the Indenture, the Company hereby grants to the Trustee, for the benefit of the Trustee, any predecessor Trustee under the Indenture and the holders of the Securities, a security interest in and lien upon the Escrow Account (as defined herein). C. The parties have entered into this Agreement in order to set forth the conditions upon which, and the manner in which, funds will be disbursed from the Escrow Account and released from the security interest and lien described above. A G R E E M E N T : NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Defined Terms. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Indenture. In addition to any other defined terms used herein, the following terms shall constitute defined terms for purposes of this Agreement and shall have the meanings set forth below: "Affiliate" of any specified person means any other person which, directly or indirectly, controls, is controlled by or is under common control with such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Applied" means that disbursed funds have been applied (i) to the payment of interest on the Securities, (ii) pursuant to Section 3(c) or (iii) pursuant to Section 6(b)(iii). "Available Funds" means (A) the sum of (i) the Initial Escrow Amount and (ii) interest earned or dividends paid on the funds in the Escrow Account (including holdings of U.S. Government Securities), less (B) the aggregate disbursements previously made pursuant to this Agreement. "Collateral" shall have the meaning given in Section 6(a) hereof. "Escrow Account" shall mean the escrow account established pursuant to Section 2. "Escrow Account Statement" shall have the meaning given in Section 2(f). "Initial Escrow Amount" shall mean $79,609,219. "Interest Payment Date" means February 15 and August 15 of each year, commencing on August 15, 1997 until the Securities are paid in full. "Issue Date" has the meaning set forth in the Indenture. "Payment Notice and Disbursement Request" means a notice sent by the Trustee to the Escrow Agent requesting a disbursement of funds from the Escrow Account, in substantially the form of Exhibit A hereto. Each Payment Notice and Disbursement Request shall be signed by an officer of the Trustee. "U.S. Government Securities" means securities that are direct obligations of the United States of America for the payment of which its full faith and credit is pledged. 2. Escrow Account; Escrow Agent. (a) Appointment of Escrow Agent. The Company and the Trustee hereby appoint the Escrow Agent, and the Escrow Agent hereby accepts appointment, as escrow agent, under the terms and conditions of this Agreement. (b) Establishment of Escrow Account. On the Issue Date, the Escrow Agent shall establish an escrow account entitled the "Escrow Account pledged by OpTel, Inc. to U.S. Trust Company of Texas, N.A., as Trustee" (the "Escrow Account") at its office located at 2001 Ross Avenue, Suite 2700, Dallas, Texas 75201. All funds accepted by the Escrow Agent pursuant to this Agreement shall be held for the exclusive benefit of the Trustee, any predecessor Trustee under the Indenture and holders of the Securities, as secured parties hereunder (collectively, the "Beneficiaries"). All such funds shall be held in the Escrow Account until disbursed or paid in accordance with the terms hereof. The Escrow Account, the funds held therein and any U.S. Government Securities held by the Escrow Agent shall be under the sole dominion and control of the Escrow Agent for the benefit of the Beneficiaries. On the Issue Date, the Company shall deliver the Initial Escrow Amount to the Escrow Agent for deposit into the Escrow Account against the Escrow Agent's written acknowledgment and receipt of the Initial Escrow Amount. (c) Escrow Agent Compensation. The Company shall pay to the Escrow Agent such compensation for services to be performed by it under this Agreement as the Company and the Escrow Agent may agree in writing from time to time. The Escrow Agent shall be paid any compensation owed to it directly by the Company and shall not disburse from the Escrow Account any such amounts. The Company shall reimburse the Escrow Agent upon request for all reasonable expenses, disbursements, and advances incurred or made by the Escrow Agent in implementing any of the provisions of this Agreement, including compensation and the reasonable expenses and disbursements of its counsel. The Escrow Agent shall be paid any such expenses owed to it directly by the Company and shall not disburse from the Escrow Account any such amounts. (d) Investment of Funds in Escrow Account. Funds deposited in the Escrow Account shall be invested and reinvested only upon the following terms and conditions: (i) Acceptable Investments. All funds deposited or held in the Escrow Account at any time shall be invested by the Escrow Agent in U.S. Government Securities in accordance with the Initial Instructions annexed hereto as Schedule A and thereafter, if necessary, the Company's written instructions from time to time to the Escrow Agent; provided, however, that the Company shall only designate investment of funds in U.S. Government Securities maturing in an amount sufficient to and/or generating interest income sufficient to, when added to the balance of funds held in the Escrow Account, provide for the payment of interest on the outstanding Securities on each Interest Payment Date beginning on and including August 15, 1997 and through and including the Interest Payment Date on February 15, 2000; provided, further, however, that any such written instruction shall specify the particular investment to be made, shall state that such investment is authorized to be made hereby and in particular satisfies the requirements of the preceding proviso and Section 2(d)(v), shall contain the certification referred to in Section 2(d)(ii), if required, and shall be executed by an Officer of the Company. All U.S. Government Securities shall be assigned to and held in the possession of, or, in the case of U.S. Government Securities maintained in book entry form with the Federal Reserve Bank (i.e., TRADES), transferred to a book entry account in the name of, the Escrow Agent, for the benefit of the Trustee, with such guarantees as are customary, except that U.S. Government Securities maintained in book entry form with the Federal Reserve Bank shall be transferred to a book entry account in the name of the Escrow Agent at the Federal Reserve Bank that includes only U.S. Government Securities held by the Escrow Agent for its customers and segregated by separate recordation in the books and records of the Escrow Agent. The Escrow Agent shall not be liable for losses on any investments made by it pursuant to and in compliance with such instructions. In the absence of qualifying instructions from the Company that meet the requirements of this Section 2(d)(i), the Escrow Agent shall have no obligation to invest funds held in the Escrow Account. (ii) Security Interest in Investments. No investment of funds in the Escrow Account shall be made unless the Company has certified to the Escrow Agent and the Trustee that, upon such investment, the Trustee will have a first priority perfected security interest in the applicable investment. If a certificate as to a class of investments has been provided to the Escrow Agent, a certificate need not be issued with respect to individual investments in securities in that class if the certificate applicable to the class remains accurate with respect to such individual investments, which continued accuracy the Escrow Agent may conclusively assume. On the Issue Date, and on each thereafter until the date upon which the balance of the Available Funds shall have been reduced to zero, each of the Trustee and the Escrow Agent shall receive an Opinion of Counsel to the Company, dated each such date as applicable, which opinion shall meet the requirements of Section 314(b) of the Trust Indenture Act of 1939, as amended (the "TIA") and shall comply with Section 12.02 of the Indenture. (iii) Interest and Dividends. All interest earned and dividends paid on funds invested in U.S. Government Securities shall be deposited in the Escrow Account as additional Collateral for the exclusive benefit of the Beneficiaries and, if not required to be disbursed in accordance with the terms hereof, shall be reinvested in accordance with the terms hereof at the Company's written instruction. (iv) Limitation on Escrow Agent's Responsibilities. The Escrow Agent's sole responsibilities under this Section 2 shall be (A) to retain possession of certificated U.S. Government Securities (except, however, that the Escrow Agent may surrender possession to the issuer of any such U.S. Government Security for the purposes of effecting assignment, crediting interest, or reinvesting such security or reducing such security to cash) and to be the registered or designated owner of U.S. Government Securities which are not certificated, (B) to follow the Company's written instructions given in accordance with Section 2(d)(i), (C) to invest and reinvest funds pursuant to this Section 2(d) and (D) to use reasonable efforts to reduce to cash such U.S. Government Securities as may be required to fund any disbursement or payment in accordance with Section 3. In connection with clause (A) above, the Escrow Agent will maintain continuous possession in the State of New York of certificated U.S. Government Securities and cash included in the Collateral and will cause uncertificated U.S. Government Securities to be registered in the book-entry system of, and transferred to an account of the Escrow Agent or a sub-agent of the Escrow Agent at, the Federal Reserve Bank of New York. Except as provided in Section 6, the Escrow Agent shall have no other responsibilities with respect to perfecting or maintaining the perfection of the Trustee's security interest in the Collateral and shall not be required to file any instrument, document or notice in any public office at any time or times. In connection with clause (D) above and subject to the following sentence, the Escrow Agent shall not be required to reduce to cash any U.S. Government Securities to fund any disbursement or payment in accordance with Section 3 in the absence of written instructions signed by an Officer of the Company specifying the particular investment to liquidate. If no such written instructions are received, the Escrow Agent may liquidate those U.S. Government Securities having the lowest interest rate per annum or if none such exist, those having the nearest maturity. (v) Manner of Investment. Funds deposited in the Escrow Account shall initially be invested in accordance with the Initial Instructions (attached hereto as Schedule A), which is in a manner such that there will be sufficient funds available without any further investment by the Company to cover all interest due on the outstanding Securities, as such interest becomes due, for each Interest Payment Date occurring from the Issue Date and ending on (and including) February 15, 2000, provided that such investments shall have such maturities and/or interest payment dates such that funds will be available with respect to each such Interest Payment Date no later than the time the Escrow Agent is required to disburse such funds to the Trustee pursuant to Section 3(a). The Escrow Agent shall have no responsibility for determining whether funds held in the Escrow Account shall have been invested in such a manner so as to comply with the requirements of this clause (v). (e) Substitution of Escrow Agent. The Escrow Agent may resign by giving no less than 20 Business Days prior written notice to the Company and the Trustee. Such resignation shall take effect upon the later to occur of (i) delivery of all funds and U.S. Government Securities maintained by the Escrow Agent hereunder and copies of all books, records, plans and other documents in the Escrow Agent's possession relating to such funds or U.S. Government Securities or this Agreement to a successor escrow agent mutually approved by the Company and the Trustee (which approvals shall not be unreasonably withheld or delayed) and (ii) the Company, the Trustee and such successor escrow agent entering into this Agreement or any written successor agreement no less favorable to the interests of the holders of the Securities and the Trustee than this Agreement; and the Escrow Agent shall thereupon be discharged of all obligations under this Agreement and shall have no further duties, obligations or responsibilities in connection herewith, except as set forth in Section 4. If a successor escrow agent has not been appointed or has not accepted such appointment within 20 Business Days after notice of resignation is given to the Company, the Escrow Agent may apply to a court of competent jurisdiction for the appointment of a successor escrow agent. (f) Escrow Account Statement. At least 30 days prior to each Interest Payment Date, the Escrow Agent shall deliver to the Company and the Trustee a statement setting forth with reasonable particularity the balance of funds then in the Escrow Account and the manner in which such funds are invested ("Escrow Account Statement"). The parties hereto irrevocably instruct the Escrow Agent that on the first date upon which the balance in the Escrow Account (including the holdings of all U.S. Government Securities) is reduced to zero, the Escrow Agent shall deliver to the Company and to the Trustee a notice that the balance in the Escrow Account has been reduced to zero. 3. Disbursements. (a) Payment Notice and Disbursement Request; Disbursements. The Trustee shall, at least five business days prior to an Interest Payment Date, submit to the Escrow Agent a completed Payment Notice and Disbursement Request substantially in the form of Exhibit A hereto. The Escrow Agent's disbursement pursuant to any Payment Notice and Disbursement Request shall be subject to the satisfaction of the applicable conditions set forth in Section 3(b). Provided such Payment Notice and Disbursement Request is not rejected by it, the Escrow Agent, as soon as reasonably practicable on the Interest Payment Date, but in no event later than 12:00 Noon (New York City time) on the Interest Payment Date, shall disburse the funds requested in such Payment Notice and Disbursement Request by wire or book-entry transfer of immediately available funds to the account of the Trustee for the benefit of the Beneficiaries. The Escrow Agent shall notify the Trustee as soon as reasonably possible (but not later than two (2) business days from the date of receipt of the Payment Notice and Disbursement Request) if any Payment Notice and Disbursement Request is rejected and the reason(s) therefor. In the event such rejection is based upon nonsatisfaction of the condition in Section 3(b)(I) below, the Trustee shall thereupon resubmit the Payment Notice and Disbursement Request with appropriate changes. (b) Conditions Precedent to Disbursement. The Escrow Agent's payment of any disbursement shall be made only if: (I) the Trustee shall have submitted, in accordance with the provisions of Section 3(a) herein, a completed Payment Notice and Disbursement Request to the Escrow Agent substantially in the form of Exhibit A with blanks appropriately filled in and (II) the Escrow Agent shall not have received any notice from the Trustee that as a result of an Event of Default the indebtedness represented by the Securities has been accelerated and has become due and payable (in which event the Escrow Agent shall apply all Available Funds as required by Section 6(b)(iii)). (c) Retired Securities. In the event a portion of the Securities has been retired by the Company and submitted to the Trustee for cancellation and there is no Default or Event of Default under the Indenture, funds representing the lesser of (A) any funds remaining in the Escrow Account that are in excess of the amount sufficient to pay interest through and including February 15, 2000 on the Securities not so retired and (B) the interest payments which have not previously been made on such retired Securities for each Interest Payment Date through the Interest Payment Date to occur on February 15, 2000 shall, upon the written request of the Company to the Escrow Agent and the Trustee, be paid to the Company upon compliance with the release of collateral provisions of the TIA and upon receipt by the Escrow Agent of a notice relating thereto from the Trustee. 4. Escrow Agent. (a) Limitation of the Escrow Agent's Liability; Responsibilities of the Escrow Agent. The Escrow Agent's responsibility and liability under this Agreement shall be limited as follows: (i) the Escrow Agent does not represent, warrant or guaranty to the holders of the Securities from time to time the performance of the Company; (ii) the Escrow Agent shall have no responsibility to the Company or the holders of the Securities or the Trustee from time to time as a consequence of performance or non-performance by the Escrow Agent hereunder, except for any gross negligence or willful misconduct of the Escrow Agent; (iii) the Company shall remain solely responsible for all aspects of the Company's business and conduct; and (iv) the Escrow Agent is not obligated to supervise, inspect or inform the Company or any third party of any matter referred to above. No implied covenants or obligations shall be inferred from this Agreement against the Escrow Agent, nor shall the Escrow Agent be bound by the provisions of any agreement beyond the specific terms hereof. Specifically and without limiting the foregoing, the Escrow Agent shall in no event have any liability in connection with its investment, reinvestment or liquidation, in good faith and in accordance with the terms hereof, of any funds or U.S. Government Securities held by it hereunder, including without limitation any liability for any delay not resulting from gross negligence or willful misconduct in such investment, reinvestment or liquidation, or for any loss of principal or income incident to any such delay. The Escrow Agent shall be entitled to rely upon any judicial order or judgment, upon any written opinion of counsel or upon any certification, instruction, notice, or other writing delivered to it by the Company or the Trustee in compliance with the provisions of this Agreement without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of service thereof. The Escrow Agent may act in reliance upon any instrument comporting with the provisions of this Agreement or signature believed by it to be genuine and may assume that any person purporting to give notice or receipt or advice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. At any time the Escrow Agent may request in writing an instruction in writing from the Company, and may at its own option include in such request the course of action it proposes to take and the date on which it proposes to act, regarding any matter arising in connection with its duties and obligations hereunder; provided, however, that the Escrow Agent shall state in such request that it believes in good faith that such proposed course of action is consistent with another identified provision of this Agreement. The Escrow Agent shall not be liable to the Company for acting without the Company's consent in accordance with such a proposal on or after the date specified therein if (i) the specified date is at least two business days after the Company receives the Escrow Agent's request for instructions and its proposed course of action, and (ii) prior to so acting, the Escrow Agent has not received the written instructions requested from the Company. The Escrow Agent may act pursuant to the written advice of counsel chosen by it with respect to any matter relating to this Agreement and (subject to clause (ii) of the first paragraph of this Section 4(a)) shall not be liable for any action taken or omitted in accordance with such advice. The Escrow Agent shall not be called upon to advise any party as to selling or retaining, or taking or refraining from taking any action with respect to, any securities or other property deposited hereunder. In the event of any ambiguity in the provisions of this Agreement with respect to any funds or property deposited hereunder, the Escrow Agent shall be entitled to refuse to comply with any and all claims, demands or instructions with respect to such funds or property, and the Escrow Agent shall not be or become liable for its failure or refusal to comply with conflicting claims, demands or instructions. The Escrow Agent shall be entitled to refuse to act until either any conflicting or adverse claims or demands shall have been finally determined by a court of competent jurisdiction or settled by agreement between the conflicting claimants as evidenced in a writing, satisfactory to the Escrow Agent, or the Escrow Agent shall have received security or an indemnity satisfactory to the Escrow Agent sufficient to save the Escrow Agent harmless from and against any and all loss, liability or expense which the Escrow Agent may incur by reason of its acting. The Escrow Agent may in addition elect in its sole option to commence an interpleader action or seek other judicial relief or orders as the Escrow Agent may deem necessary. No provision of this Agreement shall require the Escrow Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. 5. Indemnity. The Company shall indemnify, hold harmless and defend the Escrow Agent and its directors, officers, agents, employees and controlling persons, from and against any and all claims, actions, obligations, liabilities and expenses, including defense costs, investigative fees and costs, legal fees, and claims for damages, arising from the Escrow Agent's performance or non-performance, or in connection with its acceptance or appointment as Escrow Agent, under this Agreement, except to the extent that such liability, expense or claim is solely and directly attributable to the gross negligence or willful misconduct of any of the foregoing persons. The provisions of this Section 5 shall survive any termination, satisfaction or discharge of this Agreement as well as the resignation or removal of the Escrow Agent. 6. Grant of Security Interest; Instructions to Escrow Agent. (a) The Company hereby irrevocably grants a first priority security interest in and lien on, and pledges, assigns and sets over to the Trustee for the ratable benefit of the Beneficiaries, all of the Company's right, title and interest in the Escrow Account, and all property now or hereafter placed or deposited in, or delivered to the Escrow Agent for placement or deposit in, the Escrow Account, including, without limitation, all funds held therein, all U.S. Government Securities held by (or otherwise maintained in the name of) the Escrow Agent pursuant to Section 2, and all proceeds thereof as well as all rights of the Company under this Agreement (collectively, the "Collateral"), in order to secure all obligations and indebtedness of the Company under the Indenture, the Securities and any other obligation, now or hereafter arising, of every kind and nature, owed by the Company under the Indenture to the holders of the Securities or to the Trustee or any predecessor Trustee. The Escrow Agent hereby acknowledges the Trustee's security interest and lien as set forth above. The Company shall take all actions necessary on its part to insure the continuance of a first priority security interest in the Collateral in favor of the Trustee in order to secure all such obligations and indebtedness. (b) The Company and the Trustee hereby irrevocably instruct the Escrow Agent to, and the Escrow Agent shall: (i) (A) maintain sole dominion and control over funds and U.S. Government Securities in the Escrow Account for the benefit of the Trustee to the extent specifically required herein, (B) maintain, or cause its agent within the State of New York to maintain, possession of all certificated U.S. Government Securities purchased hereunder that are physically possessed by the Escrow Agent in order for the Trustee to enjoy a continuous perfected first priority security interest therein under the law of the State of New York (the Company hereby agreeing that in the event any certificated U.S. Government Securities are in the possession of the Company or a third party, the Company shall use its best efforts to deliver all such certificates to the Escrow Agent), (C) take all steps specified by the Company pursuant to paragraph (a) of this Section 6 to cause the Trustee to enjoy a continuous perfected first priority security interest under any applicable Federal and State of New York law in all U.S. Government Securities purchased hereunder that are not certificated and (D) maintain the Collateral free and clear of all liens, security interests, safekeeping or other charges, demands and claims against the Escrow Agent of any nature now or hereafter existing in favor of anyone other than the Trustee; (ii) promptly notify the Trustee if the Escrow Agent receives written notice that any Person other than the Trustee has a lien or security interest upon any portion of the Collateral; and (iii) in addition to disbursing amounts held in escrow pursuant to any Payment Notice and Disbursement Requests given to it by the Trustee pursuant to Section 3, upon receipt of written notice from the Trustee of the acceleration of the maturity of the Securities, and direction from the Trustee to disburse all Available Funds to the Trustee, as promptly as practicable, after following, if it so chooses, the procedures set forth in the fourth paragraph of Section 4(a), disburse all funds held in the Escrow Account to the Trustee and transfer title to all U.S. Government Securities held by the Escrow Agent hereunder to the Trustee. The lien and security interest provided for by this Section 6 shall automatically terminate and cease as to, and shall not extend or apply to, and the Trustee shall have no security interest in, any funds disbursed by the Escrow Agent to the Company pursuant to this Agreement to the extent not inconsistent with the terms hereof. Notwithstanding any other provision contained in this Agreement, the Escrow Agent shall act solely as the Trustee's agent in connection with its duties under this Section 6 or any other duties herein relating to the Escrow Account or any funds or U.S. Government Securities held thereunder. The Escrow Agent shall not have any right to receive compensation from the Trustee and shall have no authority to obligate the Trustee or to compromise or pledge its security interest hereunder. Accordingly, the Escrow Agent is hereby directed to cooperate with the Trustee in the exercise of its rights in the Collateral provided for herein. (c) Any money and U.S. Government Securities collected by the Trustee pursuant to Section 6(b)(iii) shall be applied as provided in Section 5.06 of the Indenture. Any surplus of such cash or cash proceeds held by the Trustee and remaining after indefeasible payment in full of all the obligations under the Indenture shall be paid over to the Company or to whomsoever may be lawfully entitled to receive such surplus or as a court of competent jurisdiction may direct. (d) Upon demand, the Company will execute and deliver to the Trustee such instruments and documents as the Trustee may deem necessary or advisable to confirm or perfect the rights of the Trustee under this Agreement and the Trustee's interest in the Collateral. The Trustee shall be entitled to take all necessary action to preserve and protect the security interest created hereby as a lien and encumbrance upon the Collateral. (e) The Company hereby appoints the Trustee as its attorney-in-fact with full power of substitution to do any act which the Company is obligated hereto to do, and the Trustee may exercise such rights as the Company might exercise with respect to the Collateral and take any action in the Company's name to protect the Trustee's security interest hereunder. In addition to the rights provided under Section 6(b)(iii) hereof, upon an Event of Default as defined in the Indenture and for so long as such Event of Default continues, the Trustee may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the UCC or other applicable law, and the Trustee may also upon obtaining possession of the Collateral as set forth herein, without notice to the Company except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Trustee's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Trustee may deem commercially reasonable. The Company acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale. The Company agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Company of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Trustee shall not be obligated to make any sale regardless of notice of sale having been given. The Trustee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. 7. Termination. This Agreement shall terminate automatically ten (10) days following disbursement of all funds remaining in the Escrow Account (including U.S. Government Securities), unless sooner terminated by agreement of the parties hereto (in accordance with the terms hereof and not in violation of the Indenture; provided, that the Trustee may not agree to terminate unless it has received the consent of 100% of the holders of all of the Securities outstanding); provided, however, that the obligations of the Company under Section 2(c) and Section 5 (and any existing claims thereunder) shall survive termination of this Agreement and the resignation of the Escrow Agent; provided, further, however, that until such tenth day, the Company will cause this Agreement (or any permitted successor agreement) to remain in effect and will cause there to be an escrow agent (including any permitted successor thereto) acting hereunder (or under any such permitted successor agreement). 8. Miscellaneous. (a) Waiver. Any party hereto may specifically waive any breach of this Agreement by any other party, but no such waiver shall be deemed to have been given unless such waiver is in writing, signed by the waiving party and specifically designating the breach waived, nor shall any such waiver constitute a continuing waiver of similar or other breaches. (b) Invalidity. If for any reason whatsoever any one or more of the provisions of this Agreement shall be held or deemed to be inoperative, unenforceable or invalid in a particular case or in all cases, such circumstances shall not have the effect of rendering any of the other provisions of this Agreement inoperative, unenforceable or invalid, and the inoperative, unenforceable or invalid provision shall be construed as if it were written so as to effectuate, to the maximum extent possible, the parties' intent. (c) Assignment. This Agreement is personal to the parties hereto, and the rights and duties of any party hereunder shall not be assignable except with the prior written consent of the other parties. Notwithstanding the foregoing, this Agreement shall inure to and be binding upon the parties and their successors and permitted assigns. (d) Benefit. The parties hereto and their successors and permitted assigns, but no others, shall be bound hereby and entitled to the benefits hereof; provided, however, that the Beneficiaries (including holders of the Securities) and their assigns shall be entitled to the benefits hereof and to enforce this Agreement. (e) Time. Time is of the essence with respect to each provision of this Agreement. (f) Entire Agreement; Amendments. This Agreement and the Indenture contain the entire agreement among the parties with respect to the subject matter hereof and supersede any and all prior agreements, understandings and commitments, whether oral or written. This Agreement may be amended only in accordance with Article Nine of the Indenture and further by a writing signed by a duly authorized representative of each party hereto. (g) Notices. All notices and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been duly given and received when actually received, including: (a) on the day of hand delivery; (b) three business days following the day sent, when sent by United States certified mail, postage and certification fee prepaid, return receipt requested, addressed as set forth below; (c) when transmitted by telecopy with verbal confirmation of receipt by the telecopy operator to the telecopy number set forth below; or (d) one business day following the day timely delivered to a next-day air courier addressed as set forth below: To Escrow Agent: U.S. Trust Company of Texas, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Telecopy: (214) 754-1303 Telephone: (214) 754-1255 Delivery Instructions: The Chase NYC/Trust, ABA number 021000021 UST-NY Account No. 9201073195 Further Credit U.S. Trust of Texas, account number 76510365 To Trustee: U.S. Trust Company of Texas, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Telecopy: (214) 754-1303 Telephone: (214) 754-1255 To the Company: OpTel, Inc. 1111 W. Mockingbird Lane Dallas, Texas 75247 Attention: Chief Executive Officer Telecopy: (214) 634-3820 Telephone: (214) 634-3850 or at such other address as the specified entity most recently may have designated in writing in accordance with this Section. (h) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (i) Captions. Captions in this Agreement are for convenience only and shall not be considered or referred to in resolving questions of interpretation of this Agreement. (j) Choice of Law. The existence, validity, construction, operation and effect of any and all terms and provisions of this Agreement shall be determined in accordance with and governed by the laws of the State of New York, without regard to principles of conflicts of laws, except to the extent United States federal law is applicable to the perfection and priority of security interests in U.S. Government Securities. The parties to this Agreement hereby agree that jurisdiction over such parties and over the subject matter of any action or proceeding arising under this Agreement may be exercised by a competent Court of the State of New York, or by a United States Court, sitting in New York City. The Company hereby submits to the personal jurisdiction of such courts, hereby waives personal service of process upon it and consents that any such service of process may be made by certified or registered mail, return-receipt requested, directed to the Company at its address last specified for notices hereunder, and service so made shall be deemed completed five (5) days after the same shall have been so mailed, and hereby waives the right to a trial by jury in any action or proceeding with the Escrow Agent. All actions and proceedings brought by the Company against the Escrow Agent relating to or arising from, directly or indirectly, this Agreement shall be litigated only in courts within the State of New York. (k) Representations and Warranties. (i) The Company hereby represents and warrants that this Agreement has been duly authorized, executed and delivered on its behalf and constitutes the legal, valid and binding obligation of the Company. The execution, delivery and performance of this Agreement by the Company does not violate any applicable law or regulation to which the Company is subject and does not require the consent of any governmental or other regulatory body to which the Company is subject, except for such consents and approvals as have been obtained and are in full force and effect. (ii) Each of the Escrow Agent and the Trustee hereby represents and warrants that this Agreement has been duly authorized, executed and delivered on its behalf and constitutes its legal, valid and binding obligation. IN WITNESS WHEREOF, the parties have executed and delivered this Escrow Agreement as of the day first above written. ESCROW AGENT: U.S. TRUST COMPANY OF TEXAS, N.A., as Escrow Agent By:________________________________ Name: Title: TRUSTEE: U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee By:________________________________ Name: Title: COMPANY: OPTEL, INC. By:________________________________ Name: Title: By:________________________________ Name: Title: EXHIBIT A Form of Payment Notice and Disbursement Request [Letterhead of the Trustee] [Date] - -------------- - -------------- - -------------- Attention: Corporate Trust Department Re: Disbursement Request No. ____ [indicate whether revised] Ladies and Gentlemen: We refer to the Escrow Agreement, dated as of February 14, 1997 (the "Escrow Agreement") among you (the "Escrow Agent"), the undersigned as Trustee, and OPTEL, INC., a Delaware corporation (the "Company"). Capitalized terms used herein shall have the meaning given in the Escrow Agreement. This letter constitutes a Payment Notice and Disbursement Request under the Escrow Agreement. [choose one of the following, as applicable] [The undersigned hereby notifies you that a scheduled interest payment in the amount of $__________ is due and payable on ____________, ____ and requests a disbursement of funds contained in the Escrow Account in such amount to the Trustee.] [The undersigned hereby notifies you that Securities equalling $__________ in aggregate principal amount have been retired and authorizes you to release $__________ of funds in the Escrow Account to the Company (to an account designated by the Company in writing), which amount represents the amount permitted to be released in accordance with Section 3(c) of the Escrow Agreement.] [The undersigned hereby notifies you that there has been an acceleration of the maturity of the Securities. Accordingly, you are hereby requested to disburse all remaining funds contained in the Escrow Account to the Trustee such that the balance in the Escrow Account is reduced to zero.] In connection with the requested disbursement, the undersigned hereby notifies you that: 1. [The Securities have not, as a result of an Event of Default (as defined in the Indenture), been accelerated and become due and payable.] 2. All prior disbursements from the Escrow Account have been Applied. 3. [add wire instructions] The Escrow Agent is entitled to rely on the foregoing in disbursing funds relating to this Payment Notice and Disbursement Request. , as Trustee By: ___________________________ Name: Title: Schedule A [initial investment instructions] Salomon Brothers Inc. ________________________________________________________________________________ OpTel, Inc. Purchase of Treasury Principal Strips for Escrow Account Transactions Summary: Trade Date: 2/13/97 Settlement Date: 2/14/97 U.S. Trust Company of Texas, N.A. (Escrow Agent) purchases the Treasury Principal Strips noted below on behalf of OpTel as specified in the Escrow Agreement between the Escrow Agent and OpTel. Face Amount Maturity Yield Price Cost CUSIP - -------------------------------------------------------------------------------- 1 $14,707,000 15-Aug-97 5.200% 97.452000% $14,332.266 912820AK3 2 $14,625,000 15-Feb-98 5.515% 94.691007% $13,848,560 912820AM9 3 $14,625,000 15-Aug-98 5.655% 91.962000% $13,449,443 912820AP2 4 $14,625,000 15-Feb-99 5.780% 89.215000% $13,047,694 912820AR8 5 $14,625,000 15-Aug-99 5.855% 86.552000% $12,658,230 912820AT4 6 $14,625,000 15-Feb-00 5.925% 83.918000% $12,273,008 912820AV9 - -------------------------------------------------------------------------------- Total: $79,609,199 =========== EX-4.4 7 EXHIBIT 4.4 Exhibit 4.4 OPTEL, INC. 13% SENIOR NOTES DUE 2005 REGISTRATION AGREEMENT New York, New York February 14, 1997 SALOMON BROTHERS INC MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED c/o Salomon Brothers Inc Seven World Trade Center New York, New York 10048 Ladies and Gentlemen: OpTel, Inc., a Delaware corporation (the "Company"), proposes to issue and sell (such issuance and sale, the "Initial Placement") to you (the "Initial Purchasers"), upon the terms set forth in a purchase agreement of even date herewith (the "Purchase Agreement"), 225,000 Units the ("Units") consisting of $225,000,000 aggregate principal amount of its 13% Senior Notes Due 2005 (the "Securities") and 225,000 shares of its Class C Common Stock (the "Shares"). As an inducement to the Initial Purchasers to enter into the Purchase Agreement and in satisfaction of a condition to your obligations thereunder, the Company agrees with you, (i) for your benefit and the benefit of the other Initial Purchasers and (ii) for the benefit of the holders from time to time of the Securities (including you and the other Initial Purchasers) (each of the foregoing a "Holder" and together the "Holders"), as follows: 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Affiliate" of any specified person means any other person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Closing Date" has the meaning set forth in the Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Exchange Offer Registration Period" means the period ending on the earlier of (x) one (1) year following the consummation of the Registered Exchange Offer, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement or (y) when all Exchange Securities received by Exchanging Dealers have been sold or (z) if there are no Exchange Securities held by Exchanging Dealers on the date of consummation of the Exchange Offer. "Exchange Offer Registration Statement" means a registration statement of the Company on an appropriate form under the Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto-and all material incorporated by reference therein. "Exchange Securities" means debt securities of the Company identical in all material respects to the Securities (except that the cash interest and interest rate step-up provisions and the transfer restrictions will be modified or eliminated, as appropriate), to be issued under the Indenture or the Exchange Securities Indenture. "Exchange Securities Indenture" means an indenture between the Company and the Exchange Securities Trustee, identical in all material respects with the Indenture (except that the cash interest and interest rate step-up provisions will be modified or eliminated, as appropriate). "Exchange Securities Trustee" means U.S. Trust Company of Texas, N.A. or such other bank or trust company reasonably satisfactory to the Initial Purchasers, as trustee with respect to the Exchange Securities under the Exchange Securities Indenture. "Exchanging Dealer" means any Holder (which may include the Initial Purchasers) which is a broker-dealer, electing to exchange Securities acquired for its own account as a result of market-making activities or other trading activities for Exchange Securities. "Final Memorandum" has the meaning set forth in the Purchase Agreement. "Holder" has the meaning set forth in the preamble hereto. "Indenture" means the Indenture relating to the Securities dated as of February 14, 1997, between the Company and U.S. Trust Company of Texas, N.A., as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Initial Placement" has the meaning set forth in the preamble hereto. "Majority Holders" means the Holders of a majority of the aggregate principal amount of securities registered under a Registration Statement. "Managing Underwriters" means the investment banker or investment bankers and manager or managers selected by the Majority Holders to administer an underwritten offering. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Securities or the Exchange Securities, covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "Registered Exchange Offer" means the proposed offer to the Holders to issue and deliver to such Holders, in exchange for the Securities, a like principal amount of the Exchange Securities. "Registration Statement" means any Exchange Offer Registration Statement or Shelf Registration Statement that covers any of the Securities or the Exchange Securities pursuant to the provisions of this Agreement, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Securities" has the meaning set forth in the preamble hereto. "Shelf Registration" means a registration effected pursuant to Section 3 hereof. "Shelf Registration Period" has the meaning set forth in Section 3(b) hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 3 hereof which covers some or all of the Securities or Exchange Securities, as applicable, on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Trustee" means the trustee with respect to the Securities under the Indenture. "Underwriter" means any underwriter of Securities in connection with an offering thereof under a Shelf Registration Statement. "Underwritten Offering" means a registration and offering in which Securities are sold to an Underwriter for reoffering to the public. 2. Registered Exchange Offer; Resales of Exchange Securities by Exchanging Dealers; Private Exchange. (a) The Company shall prepare and, not later than 60 days following the Closing Date, shall file with the Commission the Exchange Offer Registration Statement with respect to the Registered Exchange Offer. The Company shall use its best efforts to cause the Exchange Offer Registration Statement to become effective under the Act not later than 120 days after the Closing Date. (b) Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder electing to exchange Securities for Exchange Securities (assuming that such Holder is not an affiliate of the Company within the meaning of the Act, acquires the Exchange Securities in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the Exchange Securities) to trade such Exchange Securities from and after their receipt without any limitations or restrictions under the Act and without material restrictions under the securities laws of a substantial proportion of the several states of the United States. (c) In connection with the Registered Exchange Offer, the Company shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (ii) keep the Registered Exchange Offer open for not less than 30 days (or longer if required by applicable law) after the date notice thereof is mailed to the Holders; (iii) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York; and (iv) comply in all respects with all applicable laws. (d) As soon as practicable after the close of the Registered Exchange Offer, the Company shall: (i) accept for exchange all Securities tendered and not validly withdrawn pursuant to the Registered Exchange Offer; (ii) deliver to the Trustee for cancellation all Securities so accepted for exchange; and (iii) cause the Trustee or the Exchange Securities Trustee, as the case may be, promptly to authenticate and deliver to each Holder of Securities Exchange Securities equal in principal amount to the Securities of such Holder so accepted for exchange. (e) The Initial Purchasers and the Company acknowledge that, pursuant to interpretations by the Commission's staff of Section 5 of the Act, and in the absence of an applicable exemption therefrom, each Exchanging Dealer is required to deliver a Prospectus in connection with a sale of any Exchange Securities received by such Exchanging Dealer pursuant to the Registered Exchange Offer in exchange for Securities acquired for its own account as a result of market-making activities or other trading activities. Accordingly, the Company shall: (i) include the information set forth in Annex A hereto on the cover of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, and in Annex C hereto in the underwriting or plan of distribution section of the Prospectus forming a part of the Exchange Offer Registration Statement, and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; and (ii) use its best efforts to keep the Exchange Offer Registration Statement continuously effective under the Act during the Exchange Offer Registration Period for delivery by Exchanging Dealers in connection with sales of Exchange Securities received pursuant to the Registered Exchange Offer, as contemplated by Section 5(h) below. (f) In the event that any Initial Purchaser determines that it is not eligible to participate in the Registered Exchange Offer with respect to the exchange of Securities constituting any portion of an unsold allotment, at the request of such Initial Purchaser, the Company shall issue and deliver to such Initial Purchaser or the party purchasing Exchange Securities registered under a Shelf Registration Statement as contemplated by Section 3 hereof from such Initial Purchaser, in exchange for such Securities, a like principal amount of Exchange Securities. The Company shall seek to cause the CUSIP Service Bureau to issue the same CUSIP number for such Exchange Securities as for Exchange Securities issued pursuant to the Registered Exchange Offer. 3. Shelf Registration. If, (i) because of any change in law or applicable interpretations thereof by the Commission's staff, the Company determines upon advice of its outside counsel that it is not permitted to effect the Registered Exchange Offer as contemplated by Section 2 hereof, or (ii) if for any other reason the Registered Exchange Offer is not consummated within 150 days of the Closing Date, or (iii) if any Initial Purchaser so requests with respect to Securities not eligible to be exchanged for Exchange Securities in the Registered Exchange Offer, or (iv) upon request by such Holder, if any Holder (other than an Initial Purchaser) is not eligible to participate in the Registered Exchange Offer or (v) upon request by such Initial Purchaser, in the case of any Initial Purchaser that participates in the Registered Exchange Offer or acquires Exchange Securities pursuant to Section 2(f) hereof, such Initial Purchaser does not receive freely tradeable Exchange Securities in exchange for Securities constituting any portion of an unsold allotment (it being understood that, for purposes of this Section 3, (x) the requirement that an Initial Purchaser deliver a Prospectus containing the information required by Items 507 and/or 508 of Regulation S-K under the Act in connection with sales of Exchange Securities acquired in exchange for such Securities shall result in such Exchange Securities being not "freely tradeable" but (y) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of Exchange Securities acquired in the Registered Exchange Offer in exchange for Securities acquired as a result of market-making activities or other trading activities shall not result in such Exchange Securities being not "freely tradeable"), the following provisions shall apply: (a) The Company shall, as promptly as practicable (but in no event more than 30 days after so required or requested pursuant to this Section 3; it being understood that any delay by a Holder or Initial Purchaser in requesting a shelf registration pursuant to this Section 3 shall not in any way prejudice or impair such Holder's or Initial Purchaser's rights under this Agreement), file with the Commission and thereafter shall use its best efforts to cause to be declared effective under the Act by the 180th day after the Closing Date a Shelf Registration Statement relating to the offer and sale of the Securities or the Exchange Securities, as applicable, by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement; provided that with respect to Exchange Securities received by an Initial Purchaser in exchange for Securities constituting any portion of an unsold allotment, the Company may, if permitted by current interpretations by the Commission's staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Regulation S-K Items 507 and/or 508, as applicable, in satisfaction of its obligations under this paragraph (a) with respect thereto, and any such Exchange Offer Registration Statement, as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement. (b) The Company shall use its best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of three years from the date the Shelf Registration Statement is declared effective by the Commission or such shorter period that will terminate when all the Securities or Exchange Securities, as applicable, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of securities covered thereby not being able to offer and sell such securities during that period, unless (i) such action is required by applicable law, or (ii) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 5(k) hereof, if applicable. (c) The Holders of Securities may elect to sell their Securities pursuant to one or more Underwritten Offerings; provided, however, that in no event shall any Holder commence any such Underwritten Offering if a period of less than 180 days has elapsed since the consummation of the most recent Underwritten Offering hereunder. No Holder may participate in any Underwritten Offering hereunder unless such Holder agrees to sell such Holder's Securities on the basis provided in customary underwriting arrangements entered into in connection therewith and completes and executes all reasonable and customary agreements and documents required under the terms of such underwriting arrangements. 4. Liquidated Damages. (a) The Company and the Initial Purchasers agree that the Holders will suffer damages if the Company fails to fulfill its obligations under Section 2 or Section 3 hereof and that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, the Company agrees to pay, as liquidated damages, additional interest on the Securities ("Liquidated Damages") under the circumstances and to the extent set forth below: (i) if neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed on or prior to the 60th day after the Closing Date, then, commencing on the 61st day after the Closing Date, Liquidated Damages shall accrue on the Securities over and above the stated interest at a rate of 0.50% per annum of the principal amount of the Securities for the first 90 days immediately following the 45th day after the Closing Date, such Liquidated Damages rate increasing by an additional 0.25% per annum of the principal amount of the Securities at the beginning of each subsequent 90-day period; (ii) if the Exchange Offer Registration Statement is not declared effective by the Commission on or prior to the 120th day after the Closing Date, then, commencing on the 121st day after the Closing Date, Liquidated Damages shall accrue on the Securities included or which should have been included in such Registration Statement over and above the stated interest at a rate of 0.50% per annum of the principal amount of the Securities for the first 90 days immediately following the 120th day after the Closing Date, such Liquidated Damages increasing by an additional 0.25% per annum of the principal amount of the Securities at the beginning of each subsequent 90-day period; and (iii) if (A) the Company has not exchanged Exchange Securities for all Securities validly tendered in accordance with the terms of the Registered Exchange Offer prior to the 150th day after the Closing Date or the Shelf Registration Statement has not been declared effective by the Commission on or prior to the 180th day after the Closing Date or (B) the Exchange Offer Registration Statement, or, if applicable, the Shelf Registration Statement, has been declared effective and such Registration Statement ceases to be effective at any time during the period specified in Section 2(c)(ii) hereof (in the case of the Exchange Offer Registration Statement) or during the Shelf Registration Period (in the case of the Shelf Registration Statement) (it being agreed that if such event occurs by reason of a post-effective amendment to such Registration Statement having been filed and not declared effective within 30 days of such Registration Statement ceasing to be effective, Liquidated Damages referred to below shall not be payable for such 30-day period, provided, that if for any reason such post-effective amendment is not declared effective within the requisite 30-day period and Liquidated Damages thereafter become payable, the Liquidated Damages will be payable and calculated from the date the Registration Statement becomes ineffective), unless all the Securities have previously been sold or exchanged thereunder, as the case may be, then Liquidated Damages shall accrue (over and above any interest otherwise payable on the Securities affected thereby) at a rate of 0.50% per annum of the principal amount of such affected Securities for the first 90 days commencing on (x) the 151st day after the Closing Date with respect to the Securities validly tendered and not exchanged by the Company or the 181st day after the Closing Date with respect to the effectiveness of the Shelf Registration Statement, in the case of (A) above or (y) the day such Exchange Offer Registration Statement or Shelf Registration Statement ceases to be effective in the case of (B) above, such Liquidated Damages rate increasing by an additional 0.25% per annum of the principal amount of such affected Securities at the beginning of each such subsequent 90-day period (it being understood and agreed that, in the case of (B) above, so long as any Security is then covered by an effective Shelf Registration Statement, no Liquidated Damages shall accrue on such Security); provided, however, for the purposes of this Section 4(a), that the Liquidated Damages rate on any affected Security may not exceed at any one time in the aggregate 2.0% per annum of the principal amount of such affected Security; and provided, further, that (1) upon the filing of the Exchange Offer Registration Statement or a Shelf Registration Statement (in the case of clause (i) of this Section 4(a)), (2) upon the effectiveness of the Exchange Offer Registration Statement (in the case of clause (ii) of this Section 4(a)), (3) upon the exchange of the Exchange Securities for all Securities tendered or the effectiveness of the Shelf Registration Statement (in the case of clause (iii)(A) of this Section 4(a)), or (4) upon the effectiveness of the Exchange Offer Registration Statement or the Shelf Registration Statement which had ceased to remain effective (in the case of clause (iii)(B) of this Section 4(a)), Liquidated Damages on the affected Securities as a result of such clause (or the relevant subclause thereof), as the case may be, shall cease to accrue. (b) The Company shall notify the Trustee within one business day after each and every date on which an event occurs in respect of which Liquidated Damages are required to be paid (an "Event Date"). Any Liquidated Damages due pursuant to clauses (a)(i), (a)(ii) or (a)(iii) of this Section 4 will be payable to the Holders of affected Securities in cash semi-annually on each February 15 and August 15 (to the holders of record on the February 1 and August 1 immediately preceding such dates), commencing with the first such date occurring after any such Liquidated Damages commence to accrue. The amount of Liquidated Damages will be determined by multiplying the applicable Liquidated Damages rate by the principal amount of the affected Securities of such Holders, multiplied by a fraction, the numerator of which is the number of days such Liquidated Damages rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed), and the denominator of which is 360. 5. Registration Procedures. In connection with any Shelf Registration Statement and, to the extent applicable, any Exchange offer Registration Statement, the following provisions shall apply: (a) The Company shall furnish to you, prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement and any Exchange Offer Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein and shall use its best efforts to reflect in each such document, when so filed with the commission, such comments as you reasonably may propose. (b) The Company shall ensure that (i) any Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto complies in all material respects with the Act and the rules and regulations thereunder, (ii) any Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, if requested by you or any such Holder, confirm such advice in writing: (i) when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus included therein or for additional information. (2) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, in the case of an Exchange Offer Registration Statement, any Exchanging Dealer which has provided in writing to the Company a telephone or facsimile number and address for notices, and, if requested by you or any such Holder or Exchanging Dealer, confirm such advice in writing: (i) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (ii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (iii) of the happening of any event that requires the making of any changes in the Registration Statement or the Prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company shall use its best efforts to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests, in writing, all exhibits (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of securities in connection with the offering and sale of the securities covered by the Prospectus or any amendment or supplement thereto. (g) The Company shall furnish to each Exchanging Dealer which so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, any documents incorporated by reference therein, and, if the Exchanging Dealer so requests in writing, all exhibits (including those incorporated by reference). (h) The Company shall, during the Exchange Offer Registration Period, promptly deliver to each Exchanging Dealer, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as such Exchanging Dealer may reasonably request for delivery by such Exchanging Dealer in connection with a sale of Exchange Securities received by it pursuant to the Registered Exchange Offer; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by any such Exchanging Dealer, as aforesaid. (i) Prior to the Registered Exchange Offer or any other offering of securities pursuant to any Registration Statement, the Company shall register or qualify or cooperate with the Holders of securities included therein and their respective counsel in connection with the registration or qualification of such securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the securities covered by such Registration Statement; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (j) The Company shall cooperate with the Holders of Securities to facilitate the timely preparation and delivery of certificates representing Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request prior to sales of securities pursuant to such Registration Statement. (k) Upon the occurrence of any event contemplated by paragraph (c)(2)(iii) above, the Company shall promptly prepare a post-effective amendment to any Registration Statement or an amendment or supplement to the related Prospectus or file any other required, document so that, as thereafter delivered to purchasers of the securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (l) Not later than the effective date of any such Registration Statement hereunder, the Company shall provide a CUSIP number for the Securities or Exchange Securities, as the case may be, registered under such Registration Statement, and provide the applicable trustee with printed certificates for such Securities or Exchange Securities, in a form eligible for deposit with The Depository Trust Company. (m) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Act. (n) The Company shall cause the Indenture or the Exchange Securities Indenture, as the case may be, to be qualified under the Trust Indenture Act in a timely manner. (o) The Company may require each Holder of securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company in writing, within 20 Business Days after receipt of a request therefor, such information specified in item 507 of Regulation S-K under the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Securities shall be entitled to Liquidated Damages pursuant to Section 4 hereof unless and until such Holder shall have provided all such information required to be provided by such Holder for inclusion therein. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish on a timely basis to the Company, for so long as the Registration Statement is effective, all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. (p) The Company shall, if requested, promptly incorporate in a Prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters and Majority Holders reasonably agree should be included therein and shall make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (q) In the case of any Shelf Registration Statement, the Company shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition of the Securities, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 7 (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any, with respect to all parties to be indemnified pursuant to Section 7 from Holders of Securities to the Company). (r) In the case of any Shelf Registration Statement, the Company shall (i) make reasonably available for inspection by the Holders of securities to be registered thereunder, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by the Holders or any such underwriter, attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holders or any such underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to the Holders of securities registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each selling Holder of securities registered thereunder and the underwriters, if any, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 4(k) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 4(r) shall be performed at (A) the effectiveness of such Registration Statement and each post-effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. (s) In the case of any Exchange Offer Registration Statement, the Company shall (i) make reasonably available for inspection by such Initial Purchaser, and any attorney, accountant or other agent retained by such Initial Purchaser, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by such Initial Purchaser or any such attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by such Initial Purchaser or any such attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to such Initial Purchaser, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to such Initial Purchaser and its counsel, addressed to such Initial Purchaser, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Initial Purchaser or its counsel; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to such Initial Purchaser, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings, or if requested by such Initial Purchaser or its counsel in lieu of a "cold comfort" letter, an agreed-upon procedures letter under Statement on Auditing Standards No. 35, covering matters requested by such Initial Purchaser or its counsel; and (vi) deliver such documents and certificates as may be reasonably requested by such Initial Purchaser or its counsel, including those to evidence compliance with Section 4(k) and with conditions customarily contained in underwriting agreements. The foregoing actions set forth in clauses (iii), (iv), (v), and (vi) of this Section 4(s) shall be performed at the close of the Registered Exchange Offer and the effective date of any post-effective amendment to the Exchange Offer Registration Statement. 6. Registration Expenses. The Company shall bear all expenses incurred in connection with the performance of its obligations under Sections 2, 3, 4 and 5 hereof and, in the event of any Shelf Registration Statement, will reimburse the Holders for the reasonable-fees and disbursements of one firm or counsel designated by the Majority Holders to act as counsel for the Holders in connection therewith. 7. Indemnification and Contribution. (a) In connection with any Registration Statement, the Company agrees to indemnify and hold harmless each Holder of securities covered thereby (including each Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 5(h) hereof, each Exchanging Dealer), the directors, officers, employees and agents of each such Holder and each person who controls any such Holder within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such Holder specifically for inclusion therein; and provided further, that the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Memorandum which is corrected or contained, as the case may be, in the Final Memorandum and the Initial Purchaser fails to deliver the Final Memorandum. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company also agrees to indemnify or contribute to Losses of, as provided in Section 7(d), any underwriters of securities registered under a Shelf Registration Statement, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Initial Purchaser and the selling Holders provided in this Section 7(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 5(q) hereof. (b) Each Holder of securities covered by a Registration Statement (including each Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 5(h) hereof, each Exchanging Dealer) severally agrees to indemnify and hold harmless (i) the Company, (ii) each of its directors, (iii) each of its officers who signs such Registration Statement and (iv) each person who controls the Company within the meaning of either the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company to each such Holder, but only with reference to written information relating to such Holder furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any such Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 7 or notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 6, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ one additional and separate counsel (and one additional and separate local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 7 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Registration Statement which resulted in such Losses; provided, however, that in no case shall any Initial Purchaser or any subsequent Holder of any Security or Exchange Security be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Security, or in the case of a Exchange Security, applicable to the Security which was exchangeable into such Exchange Security, as set forth on the cover page of the Final Memorandum, nor shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the securities purchased by such underwriter under the Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the sum of (x) the total net proceeds from the Initial Placement (before deducting expenses) as set forth on the cover page of the Final Memorandum and (y) the total amount of additional interest which the Company was not required to pay as a result of registering the securities covered by the Registration Statement which resulted in such Losses. Benefits received by the Initial Purchasers shall be deemed to be equal to the total purchase discounts and commissions as set forth on the cover page of the Final Memorandum, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Securities or Exchange Securities, as applicable, registered under the Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 7 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors or controlling persons referred to in Section 7 hereof, and will survive the sale by a Holder of securities covered by a Registration Statement. 8. Miscellaneous. (a) No Inconsistent Agreements. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of at least a majority of the then outstanding aggregate principal amount of Securities (or, after the consummation of any Exchange Offer in accordance with Section 2 hereof, of Exchange Securities); provided that, with respect to any matter that directly or indirectly affects the rights of any Initial Purchaser hereunder, the Company shall obtain the written consent of each such Initial Purchaser against which such amendment, qualification, supplement, waiver or consent is to be effective. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of securities being sold rather than registered under such Registration Statement. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (1) if to a Holder, at the most current address given by such holder to the Company in accordance with the provisions of this Section 7(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, with a copy in like manner to Salomon Brothers Inc; (2) if to you, initially at the respective addresses set forth in the Purchase Agreement; and (3) if to the Company, initially at its address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when received. The Initial Purchasers or the Company by notice to the other may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders of Securities and/or Exchange Securities. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Securities and/or Exchange Securities and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (e) Counterparts. This agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. This agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in said State. (h) Severability. In the event that any one of more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. (i) Securities Held by the Company, etc. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities or Exchange Securities is required hereunder, Securities or Exchange Securities, as applicable, held by the Company or its Affiliates (other than subsequent Holders of Securities or Exchange Securities if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Securities or Exchange Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. Please confirm that the foregoing correctly sets forth the agreement between the Company and you. Very truly yours, OPTEL, INC. By:________________________________ Name: Title: OPTEL, INC. By:________________________________ Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first above written. Salomon Brothers Inc Merrill Lynch, Pierce, Fenner & Smith Incorporated By: SALOMON BROTHERS INC By: _________________________ Name: Title: ANNEX A Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Securities where such Exchange Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date (as defined herein) and ending on the close of business on the earlier of first anniversary of the Expiration Date or the date upon which all such Exchange Securities have been sold by such participating broker-dealer, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." ANNEX B Each broker-dealer that receives Exchange Securities for its own account in exchange for Securities, where such Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. See "Plan of Distribution." ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Securities where such Securities were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the earlier of the close of business on the first anniversary of the Expiration Date or the date upon which all Exchange Securities have been sold by such participating broker-dealer (the "Registration Period"), it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until ________, 199_, all dealers effecting transactions in the Exchange Securities may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of Exchange Securities by broker-dealers. Exchange Securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Securities. Any broker-dealer that resells Exchange Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of Exchange Securities and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For the Registration Period, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange offer (including the expenses of one counsel for the holders of the Securities) other than commissions or concessions of any brokers or dealers and will indemnify the holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. [If applicable, add information required by Regulation S-K Items 507 and/or 508.] ANNEX D Rider A CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: ___________________________ Address: ________________________ ------------------------ Rider B If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Securities. If the undersigned is a broker-dealer that will receive Exchange Securities for its own account in exchange for securities, it represents that the Securities to be exchanged for Exchange Securities were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EX-4.5 8 EXHIBIT 4.5 Exhibit 4.5 COMMON STOCK REGISTRATION RIGHTS AGREEMENT Dated as of February 14, 1997 among OPTEL, INC., VPC CORPORATION, LE GROUPE VIDEOTRON LTEE, SALOMON BROTHERS INC, as an Initial Purchaser, AND MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED, as an Initial Purchaser AND U.S. TRUST COMPANY OF TEXAS, N.A., as Transfer Agent to the limited extent set forth herein THIS COMMON STOCK REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of February 14, 1997, among Optel, Inc., a Delaware corporation (the "Company"), VPC Corporation, a Delaware corporation ("VPC"), Le Groupe Videotron Lte'e, a Quebec corporation ("GVL") and Salomon Brothers Inc ("Salomon") and Merrill Lynch, Pierce, Fenner & Smith, Incorporated (together with Salomon, the "Initial Purchasers") and, as to Sections 3.5 to 3.7 only, U.S. Trust Company of Texas, N.A. ("Transfer Agent"). This Agreement is made pursuant to the Purchase Agreement, dated as of February 7, 1997, among the Company and the Initial Purchasers (the "Purchase Agreement"), relating to the sale by the Company to the Initial Purchasers of an aggregate of 225,000 Units, each Unit consisting of $1,000 principal amount 13% Senior Notes Due 2005 (the "Notes") and one share of Class C Common Stock, par value $0.01 per share, of the Company (the "Non-Voting Common Stock"). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Company has agreed to provide to the Holders (as defined herein) the registration rights for the Registrable Securities (as defined herein) set forth in this Agreement and GVL and VPC, for themselves and their Affiliates, have agreed to provide the Holders, among other things, the tag-along rights for the Shares and Registrable Securities set forth herein. The execution of this Agreement is a condition to the obligations of the Initial Purchasers to purchase the Units under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Advice" shall have the meaning ascribed to that term in the last paragraph of Section 4. "Affiliate" means, when used with reference to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, the referent Person or such other Person, as the case may be. For the purposes of this definition, "control" (including, with correlative meanings, the term "controlling," "controlled by," and "under common control with"), when used with respect to any specified Person, means the power to direct or cause the direction of management or policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Agreement" shall have the meaning ascribed to that term in the preamble hereto. "Blackout Period" shall have the meaning ascribed to that term in Section 2.1. "Business Day" shall mean a day that is not a Legal Holiday. "Capital Stock" shall mean, with respect to any Person, any and all shares or other equivalents (however designated) of capital stock, partnership interests or any other participation, right or other interest in the nature of an equity interest in such Person or any option, warrant or other security convertible into or exercisable or exchangeable for any of the foregoing. "Change of Control" shall have the meaning ascribed to that term in the Indenture dated as of February 14, 1997 among the Company and U.S. Trust Company of Texas, N.A., as Trustee, as in effect on the date hereof. "Common Stock" shall mean the Class A Common Stock, par value $0.01 per share, of the Company, the Class B Common Stock, par value $0.01 per share, of the Company ("Class B Common Stock") the Non-Voting Common Stock of the Company and any common stock equivalents, participations or interests and any options, warrants or security convertible into or exercisable or exchangeable for any of the foregoing. "Company" shall have the meaning ascribed to that term in the preamble hereto and shall also include the Company's successors. "Convertible Notes" means all 15% convertible subordinated promissory notes of the Company that are outstanding on February 14, 1997 (after giving effect to the use of proceeds from the issuance of the Notes) and all other securities convertible into or exercisable or exchangeable for Common Stock of the Company. "Current Market Value" per share of Common Stock of the Company or any other security at any date means (i) if the security is not registered under the Exchange Act, the Fair Market Value of the security as determined by an Independent Financial Expert selected by the Company or (ii)(a) if the security is registered under the Exchange Act, the average of the daily market prices of the securities for the 20 consecutive days immediately preceding such date, or (b) if the securities have been -2- registered under the Exchange Act for less than 20 consecutive trading days before such date, then the average of the closing sales prices for all of the trading days before such date for which closing sales prices are available, in the case of each of (ii)(a) and (ii)(b), as certified to the Holders by the President, any Vice President or the Chief Financial Officer of the Company. The market price for each such trading day shall be: (A) in the case of a security listed or admitted to trading on any United States national securities exchange or quotation system, the closing sales price, regular way on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, (B) in the case of a security not then listed or admitted to trading on any national securities exchange or quotation system, the last reported sale price on such day, or if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reputable quotation source designated by the Company, (C) in the case of a security not then listed or admitted to trading on any national securities exchange or quotation system and as to which no such reported sale price or bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reputable quotation service, or a newspaper of general circulation in the Borough of Manhattan, City and State of New York, customarily published on each Business Day, designated by the Company, or, if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 30 days prior to the date in question) for which prices have been so reported and (D) if there are no bid and asked prices reported during the 30 days prior to the date in question, the Current Market Value shall be determined as if the securities were not registered under the Exchange Act. "Definitive Certificate" refers to Shares that are not represented by the Global Certificate and, instead, are issued in definitive registered form. "Demand Registration" shall have the meaning ascribed to that term in Section 2.1. "Depositary" means The Depository Trust Company, its nominees and successors. "Effectiveness Period" shall have the meaning ascribed to that term in Section 2.1. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. -3- "Excluded Transfer" shall mean (i) a Transfer by GVL or any of its Affiliates to an Affiliate of GVL so long as such Affiliate agrees to be bound by the transferor's obligations under this Agreement to the same extent as GVL, (ii) a Transfer pursuant to a registered public offering, in which holders of Shares and Registrable Securities have available to them (without cut-back) the rights provided under Section 2.2 and (iii) except when the proviso of Section 3.3(c) applies, a Transfer to a Permitted Holder (as defined in the Indenture) and Transfer(s) of up to 10% of the Shares of Common Stock owned by GVL and its Affiliates as of the date hereof. "Fair Market Value" shall mean the value of any securities as determined (without any discount for lack of liquidity, the amount of such securities proposed to be sold or the fact that such securities held by any Holder of such security may represent a minority interest in a private company) by an Independent Financial Expert selected by the Company for the determination of such value. "Fully Diluted Shares" shall mean the outstanding shares of Common Stock of the Company, after giving effect to the exercise of all outstanding options, warrants or other rights or securities to acquire Common Stock; provided, in the case of the Convertible Notes (for so long as they are convertible), that all principal and interest as of the first possible conversion date shall have been converted into Common Stock without giving effect to any contingency, such as the occurrence of an initial public equity offering. "Global Certificate" refers to the initial form of Share certificates which, unless otherwise instructed, will be issued in global form and held by the Depositary. "Holder" shall mean the Initial Purchasers, for so long as the Initial Purchasers own any Registrable Securities, and their successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities. "Included Securities" shall have the meaning ascribed to that term in the Section 3.3. "Independent Financial Expert" means a United States investment banking firm of national standing in the United States (i) which does not, and whose directors, officers and employees or Affiliates do not, have a direct or indirect material financial interest for its proprietary account in the Company or any of its Affiliates and (ii) which, in the judgment of the Board of Directors of the Company, is otherwise independent with respect to the -4- Company and its Affiliates and qualified to perform the task for which it is to be engaged. "Initial Public Equity Offering" means a primary public offering (whether or not underwritten, but excluding any offering pursuant to Form S-8 under the Securities Act or any other publicly registered offering pursuant to the Securities Act pertaining to an issuance of shares of Common Stock or securities exercisable therefor under any benefit plan, employee compensation plan, or employee or director stock purchase plan) of Common Stock of the Company pursuant to an effective registration statement under the Securities Act. "Initial Purchasers" shall have the meaning ascribed to that term in the preamble hereto. "Legal Holiday" shall mean a Saturday, a Sunday or a day on which banking institutions in New York, New York are required by law, regulation or executive order to remain closed. "Lock Up Period" shall have the meaning ascribed to that term in Section 2.1. "Notes" shall have the meaning ascribed to that term in the preamble hereto. "Participating Holder" shall have the meaning ascribed to that term in Section 3.3. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. "Piggy-Back Registration" shall have the meaning ascribed to that term in Section 2.2. "Proposed Purchaser" shall have the meaning ascribed to that term in Section 3.3. "Proposed Transfer Date" shall have the meaning ascribed to that term in Section 3.3. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated pursuant to the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement, and all other amendments and supplements to any -5- such prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference, if any, in such prospectus. "Purchase Agreement" shall have the meaning ascribed to that term in the preamble hereto. "Purchase Election Date" shall have the meaning ascribed to that term in Section 2.1. "Purchase Offer" shall have the meaning ascribed to that term in Section 2.1. "Purchase Offer Payment Date" shall have the meaning ascribed to that term in Section 2.1. "Purchase Offer Securities" shall have the meaning ascribed to that term in Section 2.1. "Registrable Securities" shall mean any of (a) the Shares and (b) any other securities issued or issuable with respect to or in exchange for the Shares by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (a) a Registration Statement with respect to the offering of such securities by the Holder thereof shall have been declared effective under the Securities Act and such securities shall have been disposed of by such Holder pursuant to such Registration Statement, (b) such securities have been sold to the public pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) promulgated under the Securities Act or are eligible for sale to the public without volume or manner of sale restrictions under Rule 144(k) (or any similar provision then in force, but not Rule 144A) promulgated under the Securities Act, (c) such securities shall have been otherwise transferred and new certificates for such securities not bearing a legend restricting further transfer shall have been delivered by the Company or its transfer agent and subsequent disposition of such securities shall not require registration or qualification under the Securities Act or any similar state law then in force or (d) such securities shall have ceased to be outstanding. "Registration Expenses" shall mean all expenses incident to the Company's performance of or compliance with this Agreement, including, without limitation, all SEC and stock exchange or National Association of Securities Dealers, Inc. registration and filing fees and expenses, fees and expenses of compliance with securities -6- or blue sky laws (including, without limitation, in the event of an underwritten offering, reasonable fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Securities), rating agency fees, printing expenses, messenger, telephone and delivery expenses, fees and disbursements of counsel for the Company and all independent certified public accountants, and, in the event of an underwritten offering, the fees and disbursements of underwriters customarily paid by issuers or sellers of securities (but not including any underwriting discounts or commissions or transfer taxes, if any, attributable to the sale of Registrable Securities by Holders of such Registrable Securities). "Registration Statement" shall mean any registration statement of the Company which covers any of the Registrable Securities pursuant to the provisions of this Agreement and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Requisite Shares" shall mean a number of Registrable Securities equivalent to not less than one-third of the Shares originally issued. "Rule 144" shall mean Rule 144 under the Securities Act, as such Rule may be amended from time to time, or any similar rule (other than Rule 144A) or regulation hereafter adopted by the SEC providing for offers and sales of securities made in compliance therewith resulting in offers and sales by subsequent holders that are not affiliates of an issuer of such securities being free of the registration and prospectus delivery requirements of the Securities Act. "Rule 144A" shall mean Rule 144A under the Securities Act, as such Rule may be amended from time to time. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Shares" shall mean (a) the Non-Voting Common Stock sold to the Initial Purchasers as part of the Units pursuant to the Purchase Agreement, whether held by either of them or any subsequent assignee or transferee and (b) any other securities issued or issuable with respect to or in exchange for the Non-Voting Common Stock by way of stock dividend or stock split or in connection with a -7- combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. "Tag-Along Notice" shall have the meaning ascribed to that term in Section 3.3. "Tag-Along Right" shall have the meaning ascribed to that term in Section 3.3. "Transfer" shall mean, with respect to Common Stock, any sale, assignment, gift, transfer, exchange, pledge or other disposition. "Transfer Agent" shall have the meaning ascribed to that term in the preamble hereto. "Transfer Notice" shall have the meaning ascribed to that term in Section 3.3. "Triggering Date" shall mean the day on which a bona fide underwritten public offering of Common Stock is consummated, as a result of which at least 15% of the outstanding shares of Common Stock are listed on a national securities exchange or the Nasdaq National Market System. "Triggering Event" shall mean the occurrence of any of the following: (i) the day immediately prior to a Change of Control, (ii) the 90th day (or such earlier date as determined by the Company in its sole discretion) following an Initial Public Equity Offering or (iii) other than as a result of an Initial Public Equity Offering, a class of common equity securities of the Company is listed on a national securities exchange or authorized for quotation on the Nasdaq National Market System or is otherwise subject to registration under the Exchange Act. "Withdrawal Election" shall have the meaning ascribed to that term in Section 2.3(b). 2. Registration Rights. 2.1 Demand Registration. (a) Request for Registration. At any time on or after the earlier to occur of February 15, 2002 or the occurrence of a Triggering Event, Holders owning, individually or in the aggregate, at least the Requisite Shares may make one written request for registration under the Securities Act of their Registrable Securities (a "Demand Registration"). Any such request will specify the number of Registrable Securities proposed to be sold and will also specify the intended method of disposition thereof. Subject to the other provisions of this Section 2.1, the Company shall give written notice of such registration request within 10 days after the receipt thereof to all other Holders. -8- Within 30 days after receipt of such notice by any Holder, such Holder may request in writing that its Registrable Securities be included in such registration and the Company shall include in the Demand Registration the Registrable Securities of any such selling Holder requested to be so included. Each such request by such other selling Holders shall specify the number of Registrable Securities proposed to be sold and the intended method of disposition thereof. Upon a demand, the Company will (i) prepare, file and use its best efforts to cause to become effective within 120 days of such demand a Registration Statement in respect of all the Registrable Securities which Holders request for inclusion therein; provided that if such demand occurs during a Black Out Period or a period (not to exceed 180 days) during which the Company is prohibited or restricted from issuing or selling Common Stock pursuant to any underwriting or purchase agreement relating to an underwritten public offering of Common Stock or securities convertible into or exchangeable for Common Stock under Rule 144A or registered under the Security Act or any agreement with a securityholder of the Company exercising registration rights pursuant to an agreement in existence on the date hereof (a "Lock Up Period"), the Company shall not be required to notify the Holders of such demand or file such Registration Statement prior to the end of the Black Out Period or Lock Up Period, as the case may be, in which event, the Company will use its best efforts to cause such Registration Statement to become effective no later than 30 days after the end of the Black Out Period or Lock Up Period, as the case may be, and (ii) keep such Registration Statement continuously effective for the shorter of (a) 180 days (the "Effectiveness Period") and (b) such period of time as all of the Registrable Securities included in such Registration Statement have been sold thereunder; provided, however, that the Company may postpone the filing period, suspend the effectiveness of any registration, suspend the use of any Prospectus and shall not be required to amend or supplement the Registration Statement, any related Prospectus or any document incorporated therein by reference (other than an effective registration statement being used for an underwritten offering) in the event that, and for a period, in the case of any particular Demand Registration, not to exceed an aggregate of 45 days ("Black Out Period") if (i) an event or circumstance occurs and is continuing as a result of which the Registration Statement, any related Prospectus or any document incorporated therein by reference as then amended or supplemented would, in the Company's good faith judgment, contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, and (ii)(A) the Company determines in its good faith judgment that the disclosure of such event at such time would have a material adverse effect on the business, operations or prospects of the Company or (B) the disclosure otherwise relates to a material business transaction which has not yet been publicly disclosed; provided, further that the -9- Effectiveness Period shall be extended by the number of days in any Black Out Period. Subject to Section 2.1(b), the Company shall only be required to register Registrable Securities pursuant to this Section 2.1 once. In the event of the occurrence of any Black Out Period during an Effectiveness Period or Lock Up Period, the Company will promptly notify the Holders of Registrable Securities thereof in writing. (b) Effective Registration. Except as specifically provided herein, the Company is only required to effect one registration as a Demand Registration under this Agreement (whether or not all of the holders of Registrable Securities elect to participate in such Demand Registration on the basis set forth herein). A registration will not be deemed to have been effected as a Demand Registration, and thereby satisfy the obligation hereunder, unless it has been declared effective by the SEC and the Company has complied in all material respects with its obligations under this Agreement with respect thereto; provided that if, after it has become effective, the offering of Registrable Securities pursuant to such registration is or becomes the subject of any stop order, injunction or other order or requirement of the SEC or any other governmental or administrative agency, or if any court prevents or otherwise limits the sale of Registrable Securities pursuant to the registration (for any reason other than the act or omissions of the Holders) for the period of time contemplated hereby, such registration will be deemed not to have been effected. If (i) a registration requested pursuant to this Section 2.1 is deemed not to have been effected or (ii) the registration requested pursuant to this Section 2.1 does not remain effective for the Effectiveness Period, then the Company shall continue to be obligated to effect an additional registration pursuant to this Section 2.1. The Holders of Registrable Securities shall be permitted to withdraw all or any part of the Registrable Securities from a Demand Registration at any time prior to the effective date of such Demand Registration. If at any time a Registration Statement is filed pursuant to a Demand Registration, and subsequently a sufficient number of the Registrable Securities are withdrawn from the Demand Registration so that such Registration Statement does not cover that number of Registrable Securities at least equal to one-third of the Shares originally issued, the Holders who have not withdrawn their Registrable Securities shall have the opportunity to include an additional number of Registrable Securities in the Demand Registration so that such Registration Statement covers that number of Registrable Securities at least equal to one-third of the Shares originally issued. If an additional number of Registrable Securities is not so included, the Company may withdraw the Registration Statement. Such withdrawn Registration Statement will not count as a Demand Registration and the Company shall continue to be obligated to effect a registration pursuant to this Section 2.1; provided -10- the Holders that requested withdrawal shall be obligated to reimburse the Company for all customary and reasonable out-of-pocket expenses incurred by it in performing its obligations hereunder with respect to such withdrawn Registration Statement. (c) Priority in Demand Registrations Pursuant to Section 2.1. If a Demand Registration pursuant to this Section 2.1 involves an underwritten offering and the lead managing underwriter advises the Company in writing that, in its view, the number of Registrable Securities requested by the Holders to be included in such registration, together with any other securities permitted to be included in such registration pursuant to Section 8(c) hereof exceeds the number which, in the view of such lead managing underwriter, can be sold: first, the securities other than the Registrable Securities of the Holders included in such registration shall be reduced in their entirety before any reduction of Registrable Securities; and second, to the extent the reduction set forth in the immediately preceding clause is insufficient to reduce the number of securities requested for inclusion in such registration to a number, which, in the view of such lead managing underwriter, can be sold, the number of such Registrable Securities to be included in such registration shall be allocated pro rata among all requesting Holders on the basis of the relative number of Registrable Securities then held by each such Holder (provided that any Registrable Securities thereby allocated to any such Holder that exceed such Holder's request shall be reallocated among the remaining requesting Holders in like manner). In the event that the number of Registrable Securities requested to be included in such registration is less than the number which, in the view of the lead managing underwriter, can be sold, the Company may include in such registration the securities the Company or any other Person proposes to sell up to the number of securities that, in the view of the lead managing underwriter, can be sold. (d) Selection of Underwriter. If the Holders so elect, the offering of such Registrable Securities pursuant to such Demand Registration shall be in the form of an underwritten offering. The Company shall select one or more nationally recognized firms of investment bankers (to whom a majority of Holders making such Demand Registration shall not have reasonably objected) to act as the managing underwriter or underwriters in connection with such offering and shall select any additional investment bankers and managers to be used in connection with the offering. (e) Expenses. The Company will pay all Registration Expenses in connection with the registration requested pursuant to Section 2.1(a). Each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable -11- Securities pursuant to a registration statement requested pursuant to this Section 2.1. (f) Repurchase Elections. (i) Notwithstanding the foregoing provisions of this Section 2.1, the Company shall not be obligated to effect a Demand Registration if the Company has complied with the requirement to give notice of a request for a Demand Registration to the Holders pursuant to clause (a) of this Section 2.1 and elects to make an offer to repurchase (a "Purchase Offer") all of the Registrable Securities requested for inclusion in such Demand Registration (the "Purchase Offer Securities") within 30 days of receipt of such notice from the Company by mailing notice of such Purchase Offer to all Holders of such Registrable Securities on a date (the "Purchase Election Date") not more than 60 days after the receipt of any request for a Demand Registration and indicating in such Purchase Offer that the purchase will be consummated on a Business Day (the "Purchase Offer Payment Date") not more than 60 days after the Purchase Election Date at a price equal to the Current Market Value of such Registrable Securities as of the Purchase Offer Payment Date. (ii) Notice of a Purchase Offer shall be mailed by the Company (or caused to be mailed by the Company), not less than 30 days nor more than 60 days before the Purchase Offer Payment Date to each Holder of Purchase Offer Securities at its last registered address. The Purchase Offer shall remain open from the time of mailing for at least 20 Business Days and until 5:00 p.m., New York City time, on the Business Day next preceding the Purchase Offer Payment Date. The notice, which shall govern the terms of the Purchase Offer, shall include such disclosures as are required by law and shall state: (1) that the Purchase Offer is being made pursuant to this Section 2.1(f) and that all Purchase Offer Securities tendered for repurchase will be accepted for payment; (2) the purchase price of the Purchase Offer Securities (or the manner of calculation thereof) and the Purchase Offer Payment Date; (3) that any Purchase Offer Securities accepted for payment pursuant to the Purchase Offer shall cease to be outstanding after the Purchase Offer Payment Date unless the Company defaults in making payment therefor of the purchase price; (4) that Holders electing to have Purchase Offer Securities purchased pursuant to a Purchase Offer will be required to surrender such Purchase Offer Securities, together with a completed letter of transmittal, to the Company (or its agent as designated by the Company in such notice) at the address specified in the notice no later -12- than 5:00 p.m. New York City time on the Business Day prior to the Purchase Offer Payment Date; (5) that Holders will be entitled to withdraw their election if the Company (or such designated agent) receives, not later than 5:00 p.m. New York City time on the Business Day prior to the Purchase Offer Payment Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the number of Purchase Offer Securities delivered for purchase and a statement that such Holder is withdrawing its election to have such Purchase Offer Securities purchased and promptly thereafter the Company (or such designated agent) shall redeliver the withdrawn Purchase Offer Securities to the Holder; (6) that a Holder electing not to tender such Holder's Purchase Offer Securities for purchase pursuant to such Purchase Offer by 5:00 p.m. New York City time on the Business Day prior to the Purchase Offer Payment Date will have no continuing right to require the Company to repurchase such Holder's Purchase Offer Securities; and (7) that Holders whose Purchase Offer Securities are tendered for purchase in part only will be issued new certificates representing the number of the unpurchased Purchase Offer Securities surrendered. On the Purchase Offer Payment Date, the Company shall (i) accept for payment Purchase Offer Securities or portions thereof tendered pursuant to the Purchase Offer, (ii) promptly deliver to Holders of Purchase Offer Securities so accepted payment of the purchase price therefor and (iii) issue and mail or deliver to such Holders new certificates representing a number of Purchase Offer Securities equal to the unpurchased portion of the Purchase Offer Securities surrendered. Upon payment for all Purchase Offer Securities tendered pursuant to a Purchase Offer the Company shall be deemed to have effected the Demand Registration requested. 2.2 Piggy-Back Registration. If at any time the Company proposes to file a Registration Statement under the Securities Act with respect to an offering by the Company for its own account or for the account of any of its respective securityholders of any class of Common Stock (other than (i) a registration statement on Form S-4 or S-8 (or any substitute form that may be adopted by the SEC), (ii) a registration statement filed in connection with an offer or offering of securities solely to the Company's existing securityholders or (iii) a Demand Registration, then the Company shall give written notice of such proposed filing to the Holders of Registrable Securities as soon as practicable (but in no event less than 20 Business Days before the anticipated filing date), and such notice shall offer such Holders the opportunity to -13- register such number of Registrable Securities as each such Holder may request (which request shall specify the Registrable Securities intended to be disposed of by such Holder and the intended method of distribution thereof) (a "Piggy-Back Registration"). The Company shall use its best efforts to cause the managing underwriter or underwriters of such proposed underwritten offering to permit the Registrable Securities requested to be included in a Piggy-Back Registration to be included on the same terms and conditions as any similar securities of the Company or any other securityholder included therein and to permit the sale or other disposition of such Registrable Securities in accordance with the intended method of distribution thereof, provided, however, in no event shall the Company be required to reduce the number of securities proposed to be sold by the Company or alter the terms of the securities proposed to be sold by the Company in order to induce the managing underwriter or underwriters to permit Registrable Securities to be included. Any Holder shall have the right to withdraw its request for inclusion of its Registrable Securities in any Registration Statement pursuant to this Section 2.2 by giving written notice to the Company of its request to withdraw prior to the effectiveness of the Registration Statement. The Company may withdraw a Piggy-Back Registration at any time prior to the time it becomes effective; provided that the Company shall give prompt notice thereof to participating Holders. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 2.2, and each Holder shall pay all underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to a registration statement effected pursuant to this Section 2.2. No registration effected under this Section 2.2, and no failure to effect a registration under this Section 2.2, shall relieve the Company of its obligation to effect a registration upon the request of Holders pursuant to Section 2.1, and no failure to effect a registration under this Section 2.2 and to complete the sale of Registrable Securities in connection therewith shall relieve the Company of any other obligation under this Agreement. 2.3 Reduction of Offering. (a) Piggy-Back Registration. (i) If the lead managing underwriter of any underwritten offering described in Section 2.2 has informed, in writing, the Holders of the Registrable Securities requesting inclusion in such offering that it is its view that the total number of securities which the Company, the Holders and any other Persons desiring to participate in such registration intend to include in such offering is such as to materially and adversely affect the success of such offering, including the price at which such securities can be sold, then the number of Registrable Securities to be offered for the account of such Holders and the number of such securities to be offered for the -14- account of all such other Persons (other than the Company) participating in such registration shall be reduced or limited pro rata in proportion to the respective number of securities requested to be registered to the extent necessary to reduce the total number of securities requested to be included in such offering to the number of securities, if any, recommended by such lead managing underwriter, subject to the terms of any existing registration rights agreements as in effect on the date hereof; provided that if such offering is effected for the account of any securityholder of the Company other than the Holders, pursuant to the demand registration rights of any such securityholder, then the number of securities to be offered for the account of the Company (if any) and the Holders (but not such securityholders who have exercised their demand registration rights) shall be reduced or limited pro rata in proportion to the respective number of securities requested to be registered to the extent necessary to reduce the total number of securities requested to be included in such offering to the number of securities, if any, recommended by such lead managing underwriter. (ii) If the lead managing underwriter of any underwritten offering described in Section 2.2 notifies the Holders requesting inclusion of Registrable Securities in such offering, that the kind of securities that such Holders, the Company and any other Persons desiring to participate in such registration intend to include in such offering is such as to materially and adversely affect the success of such offering, (x) the Registrable Securities to be included in such offering shall be reduced as described in clause (i) above or (y) if a reduction in the Registrable Securities pursuant to clause (i) above would, in the judgment of the lead managing underwriter, be insufficient to substantially eliminate the adverse effect that inclusion of the Registrable Securities requested to be included would have on such offering, such Registrable Securities will be excluded from such offering. (b) If, as a result of the proration provisions of this Section 2.3, any Holder shall not be entitled to include all Registrable Securities in a Piggy-Back Registration that such Holder has requested to be included, such Holder may elect to withdraw his request to include Registrable Securities in such registration (a "Withdrawal Election"); provided that a Withdrawal Election shall be made prior to the effectiveness of the Registration Statement and shall be irrevocable and, after making a Withdrawal Election, a Holder shall no longer have any right to include Registrable Securities in the registration as to which such Withdrawal Election was made. 2.4 Lock Up of Holders. If the Company has complied with all of its obligations with respect to a Demand Registration or a Piggy-Back Registration that is a firm commitment underwritten public offering, all Holders of Registrable Securities, upon request of the lead managing -15- underwriter with respect to such underwritten public offering, agree not to sell or otherwise dispose of any Registrable Security owned by them for a period not to exceed 180 days from the consummation of such underwritten public offering; provided that Registrable Securities which had been requested for inclusion in a Demand Registration or a Piggy-Back Registration but which were not so included pursuant to Section 2.1(c) or Section 2.3 shall only be subject to the restriction on sale and disposition in this Section 2.4 for a period not to exceed 90 days from the consummation of such underwritten public offering. 3. Transfers. 3.1 Generally. All Shares and Registrable Securities at any time and from time to time outstanding shall be held subject to the conditions and restrictions set forth in this Section 3. All shares of Capital Stock now or hereafter beneficially owned by GVL, VPC and each of their Affiliates shall be held subject to the conditions and restrictions set forth in this Section 3. Each Holder of Shares and Registrable Securities, GVL and VPC by executing this Agreement or by accepting a certificate representing Capital Stock or other indicia of ownership therefor from the Company agree with the Company and with each other Stockholder to such conditions and restrictions. 3.2 Restrictions on Transfer. (a) The Company will keep, at the office or agency maintained by the Company for such purpose, a register or registers in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of, and registration of transfer of, Shares as provided in this Article. Each person designated by the Company from time to time as a person authorized to register the transfer and exchange of the Non-Voting Common Stock is hereinafter called, individually and collectively, the "Transfer Agent." The Company has initially appointed U.S. Trust Company of Texas, N.A., as Transfer Agent. Upon written notice to U.S. Trust Company of Texas, N.A., and any acting Transfer Agent, the Company may appoint a successor Transfer Agent for such purposes. (b) Any Transfer made in violation of this Agreement by GVL or VPC or any of their Affiliates shall be deemed null and void and shall not be recorded as a transfer upon the stock transfer books of the Company. Each certificate representing shares of Common Stock held by GVL, VPC and each of their Affiliates and Convertible Notes shall contain conspicuous notation on such certificate indicating that the transfer of such shares is subject to the terms and restrictions of this Agreement, and each of GVL and VPC hereby consents to the placement of such legend on the certificate or certificates representing the shares of Common Stock and Convertible Notes beneficially owned by such party. -16- 3.3 Tag-Along Rights. (a) For so long as GVL, together with its Affiliates, beneficially owns more shares of Common Stock (treating the Convertible Notes as converted on the basis used to calculate Fully Diluted Shares) than any other Person, together with such Person's Affiliates, in the event of a proposed direct or indirect Transfer of beneficial ownership of Common Stock or Convertible Notes (whether now or hereafter issued) by GVL or any of its Affiliates in any transaction or series of related transactions to any Person (other than an Excluded Transfer) (such other Person being hereinafter referred to as the "Proposed Purchaser") at any time prior to the Triggering Date, the holders of Shares and Registrable Securities shall have the irrevocable and exclusive right, but not the obligation (the "Tag-Along Right"), to require the Proposed Purchaser to purchase from each of them up to such number of Shares and Registrable Securities (the "Included Securities") determined in accordance with Section 3.3(c). GVL shall give written notice (a "Transfer Notice") at least 30 days prior to the date of the proposed Transfer (the "Proposed Transfer Date") to the holders of Shares and Registrable Securities stating (i) the name and address of the Proposed Purchaser, (ii) the proposed amount of consideration, terms and conditions of payment offered by such Proposed Purchaser (if the proposed consideration is not cash, the Transfer Notice shall describe the terms of the proposed consideration) and the time and place of the closing for the proposed Transfer, (iii) the number of shares of Common Stock and other securities proposed to be directly or indirectly Transferred by GVL and/or its Affiliates and (iv) either that the Proposed Purchaser has been informed of the Tag-Along Right and has agreed to purchase Shares and Registrable Securities in accordance with the terms hereof or that GVL or any of its Affiliates will make such purchase. The Tag-Along Right shall be exercised by any or all of the holders of Shares and Registrable Securities by giving written notice to the Company ("Tag-Along Notice"), within ten days of receipt of the Transfer Notice, indicating its election to exercise the Tag-Along Right (the "Participating Holders"). The Tag-Along Notice shall state the amount of Shares and Registrable Securities that such holder proposes to include in such Transfer to the Proposed Purchaser. Failure by any holder to give such notice within the ten day period shall be deemed an election by such holder not to sell its Shares and Registrable Securities pursuant to that Transfer. The closing with respect to any sale to a Proposed Purchaser pursuant to this Section shall be held at the time and place specified in the Transfer Notice but in any event within 60 days of the Proposed Transfer Date; provided that if through the exercise of reasonable efforts GVL or any of its Affiliates is unable to cause such transaction to close within 60 days, such period may be extended for such reasonable period of time as may be necessary to close such transaction. Consummation of the sale of Common Stock or other securities by GVL and/or its Affiliates to a Proposed Purchaser shall be conditioned upon consummation of -17- the sale by each Participating Holder to such Proposed Purchaser (or GVL) of the Included Securities, if any. (b) In the event that the Proposed Purchaser does not purchase Included Securities from the holders on the same terms and conditions as purchased from GVL and its Affiliates, then GVL or such Affiliate shall purchase, or cause another Person to purchase, such Included Securities if the Transfer occurs. (c) Each holder of Shares and Registrable Securities shall have the right to require the Proposed Purchaser to purchase from such holder up to a percentage of the number of Shares and Registrable Securities owned by such holder equalling the percentage derived by dividing the total number of shares of Common Stock (and, in the case of the Convertible Notes, the number of shares of Common Stock then represented thereby) that GVL and its Affiliates propose to directly or indirectly Transfer by the total number of shares of Common Stock (treating the Convertible Notes as converted on the basis used to calculate Fully Diluted Shares) at the time beneficially owned by GVL and its Affiliates; provided that in the event of any proposed Transfer, the result of which is that GVL and its Affiliates would, after giving effect to such Transfer or at the time of such Transfer, beneficially own less than a majority of the Fully Diluted Shares, each holder of Shares and Registrable Securities shall have the right to require the Proposed Purchaser to purchase all of the Shares and Registrable Securities owned by such holder. (d) Any Shares and/or Registrable Securities purchased from the Participating Holders pursuant to this Section 3.3 shall be paid for in the same type of consideration and at the same price per share of Common Stock and upon the same terms and conditions of such proposed Transfer of Common Stock by GVL and/or any of its Affiliates (regardless of whether such shares are Class B Common Stock or Convertible Notes). If the Registrable Securities to be purchased include securities or property other than Common Stock, the price to be paid for such securities or property shall be the same price per share or other denomination paid by the Proposed Purchaser for like securities purchased from GVL and/or its Affiliates or, if like securities are not purchased from GVL and/or its Affiliates by the Proposed Purchaser, the Fair Market Value of such securities. GVL shall arrange for payment directly by the Proposed Purchaser to each Participating Holder, upon delivery of the certificate or certificates representing the Shares and/or Registrable Securities duly endorsed for transfer, together with such other documents as the Proposed Purchaser may reasonably request. (e) If at the end of 60 days following the Proposed Transfer Date, or as otherwise extended pursuant to the provisions of Section 3.3(a), the sale of Common Stock by GVL -18- and/or its Affiliates and the sale of the Included Securities have not been completed in accordance with the terms of the Proposed Purchaser's offer, all certificates representing the Included Securities shall be returned to the Participating Holders, and all the restrictions on Transfer contained in this Agreement with respect to Common Stock beneficially owned by GVL and its Affiliates shall remain in effect. 3.4 Obligation to Sell. For so long as GVL, together with its Affiliates, directly or indirectly beneficially owns a majority of the outstanding shares of Common Stock (treating the Convertible Notes as converted on the basis used to calculate Fully Diluted Shares), if at any time prior to the Triggering Date, GVL, and/or any of its Affiliates, determines to sell all of the Capital Stock and Convertible Notes of the Company beneficially owned by GVL and its Affiliates to a Person other than an Affiliate of GVL or a Permitted Holder, GVL shall have the right to require the Holders of Registrable Securities to sell such Registrable Securities to such transferee; provided that (a) the consideration to be received by the Holders of Registrable Securities shall be the same type of consideration received by GVL and its Affiliates (regardless of whether such Capital Stock is Class B Common Stock or Convertible Notes) and, in any event, shall be cash and/or securities registered under the Securities Act and listed on a national securities exchange or authorized for quotation on the Nasdaq National Market System, (b) after giving effect to such transaction, GVL and its Affiliates shall not beneficially own, directly or indirectly, any Capital Stock or rights to purchase Capital Stock of the Company and (c) the foregoing provisions shall not apply to sales of Common Stock by the Company in a registered public offering under the Securities Act or an offering pursuant to Rule 144A. Any Registrable Securities purchased from the Holders pursuant to this Section 3.4 shall be paid for at the same price per share of Common Stock and upon the same terms and conditions of such proposed transfer of Common Stock by GVL and its Affiliates (regardless of whether such Capital Stock is Class B Common Stock or Convertible Notes). If the Registrable Securities to be purchased include securities other than Common Stock, the price to be paid for such securities shall be the same price per share or other denomination paid by the Proposed Purchaser for like securities purchased from GVL and its Affiliates or, if like securities are not purchased from GVL and its Affiliates, the Fair Market Value of such securities. 3.5 Registration of Transfers or Exchanges. (a) Transfer or Exchange of Definitive Certificates. When Definitive Certificates are presented to the Transfer Agent with a request from the holder: (i) to register the transfer of the Definitive Certificates; or -19- (ii) to exchange such Definitive Certificates for an equal number of Definitive Certificates of other authorized denominations, the Transfer Agent shall register the transfer or make the exchange as requested if the requirements under this Agreement as set forth in this Section 3.5 for such transactions are met; provided, however, that the Definitive Certificates presented or surrendered by a holder for registration of transfer or exchange: (x) shall be duly endorsed or accompanied by a written instruction of transfer or exchange in form satisfactory to the Company and the Transfer Agent, duly executed by such holder or by his attorney, duly authorized in writing; and (y) in the case of Shares the offer and sale of which have not been registered under the Securities Act and are presented for transfer or exchange prior to (X) the date which is three years (or such shorter period as may be prescribed by Rule 144(k) (or any successor provision thereto)) after the later of the date of original issuance of the Shares and the last date on which the Company or any affiliate of the Company was the owner of such Shares, or any predecessor thereto, and (Y) such later date, if any, as may be required by any subsequent change in applicable law (the "Resale Restriction Termination Date"), such Shares shall be accompanied by the following additional information and documents, as applicable: (A) if such Shares are being delivered to the Transfer Agent by a holder for registration in the name of such holder, without transfer, a certification from such holder to that effect (in substantially the form of Exhibit C hereto); or (B) if such Shares are being transferred to a qualified institutional buyer (as defined in Rule 144A under the Securities Act) (a "QIB") in accordance with Rule 144A under the Securities Act, a certification from the transferor to that effect (in substantially the form of Exhibit C hereto); or (C) if such Shares are being transferred to an institutional "accredited investor" within the meaning of subparagraphs (a)(1), (a)(2), (a)(3) or (a)(7) of Rule 501 under the Securities Act (an "Institutional Accredited Investor"), delivery by the transferor of a certification to -20- that effect (in substantially the form of Exhibit C hereto), and delivery by the proposed transferee of a Transferee Certificate for Institutional Accredited Investors (in substantially the form of Exhibit D hereto); or (D) if such Shares are being transferred in reliance on Regulation S under the Securities Act, delivery by the transferor of a certification to that effect (in substantially the form of Exhibit C hereto), and a Certificate for Regulation S Transfers in the form of Exhibit E hereto; or (E) if such Shares are being transferred in reliance on Rule 144 under the Securities Act, delivery by the transferor of (i) a certification from the transferor to that effect (in substantially the form of Exhibit C hereto), and (ii) an opinion of counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or (F) if such Shares are being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification from the transferor to that effect (in substantially the form of Exhibit C hereto) and an opinion of counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; provided that the Company may, based upon the views of its own counsel, instruct the Transfer Agent not to register such transfer in any case where the proposed transferee is not a QIB, Non-U.S. Person (as defined in Regulation S) or Institutional Accredited Investor. (b) Restrictions on Transfer of a Definitive Certificate for a Beneficial Interest in a Global Certificate. A Definitive Certificate may not be transferred by a holder for a beneficial interest in a Global Certificate except upon satisfaction of the requirements set forth below. Upon receipt by the Transfer Agent of a Definitive Certificate, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Transfer Agent, together with: (A) certification from such holder (in substantially the form of Exhibit C hereto) that such Definitive Certificate is being transferred to a QIB in accordance with Rule 144A under the Securities Act; and -21- (B) written instructions directing the Transfer Agent to make, or to direct the Depositary to make, an endorsement on the Global Certificate to reflect an increase in the aggregate amount of the Shares represented by the Global Certificate, then the Transfer Agent shall cancel such Definitive Certificate and cause, or direct the Depositary to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Transfer Agent, the number of Shares represented by the Global Certificate to be increased accordingly. If no Global Certificate is then outstanding, the Company shall issue and the Transfer Agent shall upon written instructions from the Company authenticate a new Global Certificate in the appropriate amount. (c) Transfer or Exchange of Global Certificates. The transfer or exchange of Global Certificates or beneficial interests therein shall be effected through the Depositary, in accordance with this Section 3.5, the Private Placement Legend, this Agreement (including the restrictions on transfer set forth herein) and the procedures of the Depositary therefor. (d) Transfer or Exchange of a Beneficial Interest in a Global Certificate for a Definitive Certificate. (i) Any person having a beneficial interest in a Global Certificate may transfer or exchange such beneficial interest for a Definitive Certificate upon receipt by the Transfer Agent of written instructions or such other form of instructions as is customary for the Depositary from the Depositary or its nominee on behalf of any person having a beneficial interest in a Global Certificate, including a written order containing registration instructions and, in the case of any such transfer or exchange prior to the Resale Restriction Termination Date, the following additional information and documents: (A) if such beneficial interest is being transferred to the person designated by the Depositary as being the beneficial owner, a certification from such person to that effect (in substantially the form of Exhibit C hereto); or (B) if such beneficial interest is being transferred to a QIB in accordance with Rule 144A under the Securities Act, a certification from the transferor to that effect (in substantially the form of Exhibit C hereto); or (C) if such beneficial interest is being transferred to an Institutional Accredited Investor, -22- delivery by the transferor of a certification to that effect (in substantially the form of Exhibit C hereto), and delivery by the proposed transferee of a Transferee Certificate for Institutional Accredited Investors (in substantially the form of Exhibit D hereto); or (D) if such beneficial interest is being transferred in reliance on Regulation S under the Securities Act, delivery by the transferor of (i) a certification to that effect (in substantially in the form of Exhibit C hereto), and (ii) a Certificate for Regulation S Transfers in the form of Exhibit E hereto; or (E) if such beneficial interest is being transferred in reliance on Rule 144 under the Securities Act, delivery by the transferor of (i) a certification to that effect (in substantially the form of Exhibit C hereto) and (ii) an opinion of counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; or (F) if such beneficial interest is being transferred in reliance on another exemption from the registration requirements of the Securities Act, a certification from the transferor to that effect (in substantially the form of Exhibit C hereto) and an opinion of counsel reasonably satisfactory to the Company to the effect that such transfer is in compliance with the Securities Act; provided that the Company may instruct the Transfer Agent not to register such transfer in any case where the proposed transferee is not a QIB, Non-U.S. Person or Institutional Accredited Investor; then the Transfer Agent will cause, in accordance with the standing instructions and procedures existing between the Depositary and the Transfer Agent, the aggregate amount of the Global Certificate to be reduced and, following such reduction, the Company will execute and, upon receipt of an authentication order in the form of an officers' certificate (a certificate signed by two officers of such company, one of whom must be the principal executive officer, principal financial officer or principal accounting officer) (an "Officers' Certificate"), the Transfer Agent will authenticate and deliver to the transferee a Definitive Certificate. -23- (ii) Definitive Certificates issued in exchange for a beneficial interest in a Global Certificate pursuant to this Section 3.5(d) shall be registered in such names and in such authorized denominations as the Depositary, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Transfer Agent in writing. The Transfer Agent shall deliver such Definitive Certificates to the persons in whose names such Shares are so registered and adjust the Global Certificate pursuant to paragraph (h) of this Section 3.5. (e) Restrictions on Transfer or Exchange of Global Certificates. Notwithstanding any other provisions of this Agreement (other than the provisions set forth in subsection (f) of this Section 3.5), a Global Certificate may not be transferred or exchanged as a whole except by the Depositary to a nominee of the Depositary or by a nominee of the Depositary to the Depositary or another nominee of the Depositary or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. (f) Authentication of Definitive Certificates in Absence of Depositary. If at any time: (i) the Depositary for the Global Certificates notifies the Company that the Depositary is unwilling or unable to continue as Depositary for the Global Certificate and a successor Depositary for the Global Certificate is not appointed by the Company within 90 days after delivery of such notice; or (ii) the Company, at its sole discretion, notifies the Transfer Agent in writing that it elects to cause the issuance of Definitive Certificates for all Global Certificates under this Agreement, then the Company will execute, and the Transfer Agent will, upon receipt of an Officers' Certificate requesting the authentication and delivery of Definitive Certificates, authenticate and deliver Definitive Certificates, in an aggregate number equal to the aggregate number of Shares represented by the Global Certificate, in exchange for such Global Certificate. (g) Private Placement Legend. Upon the registration of transfer, exchange or replacement of Share certificates not bearing the legend set forth in the first paragraph of Exhibit A attached hereto (the "Private Placement Legend"), the Transfer Agent shall deliver Share certificates that do not bear the Private Placement Legend. Upon the registration of transfer, exchange or replacement of Share certificates bearing the Private Placement Legend, the Transfer Agent shall deliver Share certificates that bear the Private Placement Legend -24- unless, and the Transfer Agent is hereby authorized to deliver Share certificates without the Private Placement Legend if, (i) the requested transfer is not prior to the date which is three years (or such shorter period as may be prescribed by Rule 144(k) (or any successor provision thereto) under the Securities Act or any successor provision thereunder) after the later of the original Issue Date of the Shares or the last day on which the Company or any of its Affiliates was the owner of the Shares or any predecessor security, (ii) there is delivered to the Transfer Agent an opinion of counsel reasonably satisfactory to the Company and the Transfer Agent to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act or (iii) the Shares to be transferred or exchanged represented by such Share Certificates are being transferred or exchanged pursuant to an effective registration statement under the Securities Act. (h) Cancellation or Adjustment of a Global Certificate. At such time as all beneficial interests in a Global Certificate have either been exchanged for Definitive Certificates, redeemed, repurchased or cancelled, such Global Certificate shall be returned to the Company or, upon written order to the Transfer Agent in the form of an Officers' Certificate from the Company, retained and cancelled by the Transfer Agent. At any time prior to such cancellation, if any beneficial interest in a Global Certificate is exchanged for Definitive Certificates, redeemed, repurchased or cancelled, the number of Shares represented by such Global Certificate shall be reduced and an endorsement shall be made on such Global Certificate by the Transfer Agent to reflect such reduction. (i) Obligations with Respect to Transfers or Exchanges of Definitive Certificates. (i) To permit registrations of transfers or exchanges, the Company shall execute, at the Transfer Agent's request, and the Transfer Agent shall authenticate Definitive Certificates and Global Certificates. (ii) All Definitive Certificates and Global Certificates issued upon any registration, transfer or exchange of Definitive Certificates or Global Certificates shall be the valid obligations of the Company, entitled to the same benefits under this Agreement as the Definitive Certificates or Global Certificates surrendered upon the registration of transfer or exchange. (iii) Prior to due presentment for registration of transfer of any Shares, the Transfer Agent and the Company may deem and treat the person in whose name any Shares are registered as the absolute owner of such Shares, -25- and neither the Transfer Agent nor the Company shall be affected by notice to the contrary. (j) Compliance. Other than following the applicable terms and requirements of this Agreement, the Transfer Agent shall have no additional duty to monitor compliance with federal, state or other securities laws. 3.6 Lost, Stolen, Destroyed, Defaced or Mutilated Share Certificates. Upon receipt by the Company and the Transfer Agent (or any agent of the Company or the Transfer Agent, if requested by the Company) of evidence satisfactory to them of the loss, theft, destruction, defacement, or mutilation of any Share certificate and of an indemnity bond satisfactory to them and, in the case of mutilation or defacement, upon surrender thereof to the Transfer Agent for cancellation, then, in the absence of notice to the Company or the Transfer Agent that such Share certificate has been acquired by a bona fide purchaser or holder in due course, the Company shall execute, and an authorized signatory of the Transfer Agent shall manually authenticate and deliver, in exchange for or in lieu of the lost, stolen, destroyed, defaced or mutilated Share certificate, a new Share certificate representing a like number of Shares, bearing a number or other distinguishing symbol not contemporaneously outstanding. Upon the issuance of any new Share certificate under this Section in a name other than the prior registered holder of the lost, stolen, destroyed, defaced or mutilated Share certificate, the Company may require the payment from the holder of such Share certificate of a sum sufficient to cover any tax, stamp tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Transfer Agent and the Registrar) in connection therewith. Every substitute Share certificate executed and delivered pursuant to this Section in lieu of any lost, stolen or destroyed Share certificate shall constitute an additional contractual obligation of the Company, whether or not the lost, stolen or destroyed Share certificate shall be at any time enforceable by anyone, and shall be entitled to the benefits of (but shall be subject to all the limitations of rights set forth in) this Agreement equally and proportionately with any and all other Share certificates duly executed and delivered hereunder. The provisions of this Section 3.6 are exclusive with respect to the replacement of lost, stolen, destroyed, defaced or mutilated Share certificates and shall preclude (to the extent lawful) any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement of lost, stolen, destroyed, defaced or mutilated Share certificates. 3.7 Separation of Shares and Notes. The Notes and the Shares will not be separately transferable until the Separability Date. "Separability Date" shall mean the earliest to occur of: (i) August 15, 1997, (ii) the date on which a -26- registration statement under the Securities Act, with respect to a registered exchange offer for the Notes or covering the sale by holders of the Notes is declared effective under the Securities Act, (iii) the occurrence of an Event of Default (as defined in the Indenture), (iv) the occurrence of a Change of Control (as defined in the Indenture) or (v) such earlier date as may be determined by Salomon Brothers Inc and specified to the Company, the Trustee, the Transfer Agent and the Unit Agent in writing. Notwithstanding the foregoing, in the event a Change of Control (as defined in the Indenture) is proposed and the Company commences a Change of Control Offer (as defined in the Indenture) prior to the Separability Date, as determined by the preceding sentence, the Separability Date shall be such earlier date of commencement. The separation of the Shares and the Notes is herein referred to as a "Separation." 4. Registration Procedures. In connection with the obligations of the Company with respect to any Registration Statement pursuant to Sections 2.1 and 2.2 hereof, the Company shall: (a) A reasonable period of time prior to the initial filing of a Registration Statement or Prospectus and a reasonable period of time prior to the filing of any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), furnish to the Holders of the Registrable Securities included in such Registration Statement, and the managing underwriters, if any, copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, and such underwriters, if any, and use reasonable commercial efforts to cause the officers and directors of the Company, counsel to the Company and independent certified public accountants to the Company to respond to such reasonable inquiries as shall be necessary, in the opinion of respective counsel to such Holders and such underwriters, to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file any such Registration Statement or related Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities included in such Registration Statement shall reasonably object on a timely basis; (b) Prepare and file with the SEC such amendments, including post-effective amendments, to each Registration Statement as may be necessary to keep such Registration Statement continuously effective for the applicable time period required hereunder; cause the related Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under -27- the Securities Act; and comply with the provisions of the Securities Act and the Exchange Act with respect to the disposition of all securities covered by such Registration Statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented; (c) Notify the holders of Registrable Securities to be sold and the managing underwriters, if any, promptly, and (if requested by any such person), confirm such notice in writing, (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment is proposed to be filed, and (B) with respect to a Registration Statement or any post-effective amendment, when the same has become effective, (ii) of any request by the SEC or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or related Prospectus or for additional information, (iii) of the issuance by the SEC, any state securities commission, any other governmental agency or any court or any stop order, order or injunction suspending or enjoining the use of a Prospectus or the effectiveness of a Registration Statement or the initiation of any proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any proceeding for such purpose, and (v) of the happening of any event or information becoming known that makes any statement made in a Registration Statement or related Prospectus untrue in any material respect or that requires the making of any changes in such Registration Statement or Prospectus so that, in the case of a Registration Statement, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and that in the case of a Prospectus, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (d) Use its best efforts to avoid the issuance of or, if issued, obtain the withdrawal of any order enjoining or suspending the use of a Prospectus or the effectiveness of a Registration Statement or the lifting of any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction described in Section 4(h), at the earliest practicable moment; -28- (e) If requested by the managing underwriters, if any, (i) promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters, if any, reasonably believe should be included therein, and (ii) make all required filings of such Prospectus supplement or such post-effective amendment under the Securities Act as soon as practicable after the Company has received notification of the matters to be incorporated in such Prospectus supplement or post-effective amendment; provided, however, that the Company shall not be required to take any action pursuant to this Section 4(e) that would, in the opinion of counsel for the Company, violate applicable law; (f) Upon written request to the Company, furnish to each Holder of Registrable Securities to be sold pursuant to a Registration Statement and each managing underwriter, if any, without charge, at least one conformed copy of such Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference, and all exhibits to the extent requested (including those previously furnished or incorporated by reference) as soon as practicable after the filing of such documents with the SEC; (g) Deliver to each Holder of Registrable Securities to be sold pursuant to a Registration Statement, and the underwriters, if any, without charge, as many copies of the Prospectus (including each form of prospectus) and each amendment or supplement thereto as such persons reasonably request; and the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto; (h) Prior to any public offering of Registrable Securities, use its best efforts to register or qualify or cooperate with the Holders of Registrable Securities to be sold, the underwriters, if any, and their respective counsel in connection with the registration or qualification (or exemption from such registration or qualification) of such Registrable Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as any such Holder or underwriter reasonably requests in writing; keep each such registration or qualification (or exemption therefrom) effective during the period such Registration Statement is required to be kept effective hereunder and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable Securities covered -29- by the applicable Registration Statement; provided, however, that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it is not then so qualified or (ii) take any action which would subject it to general service of process or to taxation in any jurisdiction where they are not so subject; (i) In connection with any sale or transfer of Registrable Securities that will result in such securities no longer being Registrable Securities, cooperate with the Holders thereof and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold, which certificates shall not bear any restrictive legends and shall be in a form eligible for deposit with The Depository Trust Company and to enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters, if any, or such Holders may request at least two Business Days prior to any sale of Registrable Securities; (j) Upon the occurrence of any event contemplated by Section 4(c)(v), as promptly as practicable, prepare a supplement or amendment, including, if appropriate, a post-effective amendment, to each Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (k) Enter into such agreements (including an underwriting agreement in form, scope and substance as is customary in underwritten offerings) and take all such other reasonable actions in connection therewith (including those reasonably requested by the managing underwriters, if any) in order to expedite or facilitate the disposition of such Registrable Securities, and, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration, (i) make such representations and warranties to the underwriters and selling Holders, if any, with respect to the business of the Company and its subsidiaries (including with respect to businesses or assets acquired or to be acquired by any of them), and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, in form, substance and scope as are customarily made by issuers to underwriters in underwritten offerings, and confirm the same if and when -30- requested; (ii) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters if any, addressed to each of the underwriters, and selling Holders, if any), covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such underwriters or selling Holders; (iii) use their best efforts to obtain customary "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data is, or is required to be, included in the Registration Statement), addressed (where reasonably possible) to each of the underwriters and selling Holders, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings; (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable to the underwriters, if any, than those set forth in Section 5 hereof (or such other provisions and procedures acceptable to the managing underwriters, if any); and (v) deliver such documents and certificates as may be reasonably requested by the managing underwriters, if any, to evidence the continued validity of the representations and warranties made pursuant to clause (i) above and to evidence compliance with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company; (l) Make available for inspection by a representative of any underwriter participating in any such disposition of Registrable Securities, and any attorney, consultant or accountant retained by such selling Holders or underwriter, at the offices where normally kept, during reasonable business hours, all pertinent financial and other records, corporate documents and properties of the Company and its subsidiaries (including with respect to businesses and assets acquired or to be acquired to the extent that such information is available to the Company), and cause the officers, directors, agents and employees of the Company and its subsidiaries (including with respect to businesses and assets acquired or to be acquired to the extent that such information is available to the Company) to supply all information in each case reasonably requested by any such representative, underwriter, attorney, consultant or accountant in connection with such Registration Statement; provided, however, that such persons shall first agree in writing with the Company that any information that is reasonably and in good faith -31- designated by the Company in writing as confidential at the time of delivery of such information shall be kept confidential by such Persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, (ii) disclosure of such information is required by law (including any disclosure requirements pursuant to Federal securities laws in connection with the filing of the Registration Statement or the use of any Prospectus), (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard such information by such Person or (iv) such information becomes available to such Person from a source other than the Company and its subsidiaries and such source is not bound by a confidentiality agreement; (m) Comply with all applicable rules and regulations of the SEC and make generally available to their security-holders earnings statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 under the Securities Act, no later than 45 days after the end of any 12-month period (or 90 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or reasonable efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter after the effective date of a Registration Statement, which statement shall cover said period, consistent with the requirements of Rule 158 under the Securities Act; and (n) Cooperate with each seller of Registrable Securities covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc. The Company may require a Holder of Registrable Securities to be included in a Registration Statement to furnish to the Company such information regarding (i) the intended method of distribution of such Registrable Securities (ii) such Holder and (iii) the Registrable Securities held by such Holder as is required by law to be disclosed in such Registration Statement and the Company may exclude from such Registration Statement the Registrable Securities of any Holder who unreasonably fails to furnish such information within a reasonable time after receiving such request. The Company shall not be required to provide indemnification to any Underwriter or any other person relating to information referred to in clauses (i) and (ii) provided to the Company in -32- writing specifically for inclusion in such Registration Statement. If any such Registration Statement refers to any Holder by name or otherwise as the Holder of any securities of the Company, then such Holder shall have the right to require (i) the insertion therein of language, in form and substance reasonably satisfactory to such Holder, to the effect that the holding by such Holder of such securities is not to be construed as a recommendation by such Holder of the investment quality of the Company's securities covered thereby and that such holding does not imply that such Holder will assist in meeting any future financial requirements of the Company, or (ii) in the event that such reference to such Holder by name or otherwise is not required by the Securities Act, the deletion of the reference to such Holder in any amendment or supplement to the Registration Statement filed or prepared subsequent to the time that such reference ceases to be required. Each Holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 4(c)(ii), 4(c)(iii), 4(c)(iv) or 4(c)(v) hereof, such Holder will forthwith discontinue disposition of such Registrable Securities covered by such Registration Statement or Prospectus until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 4(j) hereof, or until it is advised in writing (the "Advice") by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus. If the Company shall give any such notice, the Effectiveness Period shall be extended by the number of days during such period from and including the date of the giving of such notice to and including the date when each Holder of Registrable Securities covered by such Registration Statement shall have received (x) the copies of the supplemented or amended Prospectus contemplated by Section 4(j) hereof or (y) the Advice, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus. 5. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless each Initial Purchaser, each Holder, each underwriter who participates in an offering of Registrable Securities, their respective Affiliates, each Person, if any, who controls any of such parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each of their respective directors, officers, employees and agents, as follows: -33- (i) from and against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment thereto), covering Registrable Securities, including all documents incorporated therein by reference, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus (or any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) from and against any and all loss, liability, claim, damage and expense whatsoever, joint or several, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, if such settlement is effected with the prior written consent of the Company; and (iii) from and against any and all expenses whatsoever, as incurred (including reasonable fees and disbursements of one counsel chosen by the Initial Purchasers, and one counsel chosen by such Holders or any underwriter (except to the extent otherwise expressly provided in Section 5(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any court or governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 5(a); provided that this indemnity does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission (i) made in reliance upon and in conformity with written information furnished to the Company by an Initial Purchaser, such Holder or any underwriter in writing expressly for use in the Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) or (ii) contained in any preliminary prospectus if such Initial Purchaser, such Holder or such underwriter failed -34- to send or deliver a copy of the Prospectus (in the form it was first provided to such parties for confirmation of sales) to the Person asserting such losses, claims, damages or liabilities on or prior to the delivery of written confirmation of any sale of securities covered thereby to such Person in any case where such delivery is required by the Securities Act and such Prospectus would have corrected such untrue statement or omission. Any amounts advanced by the Company to an indemnified party pursuant to this Section 5 as a result of such losses shall be returned to the Company if it shall be finally determined by such a court in a judgment not subject to appeal or final review that such indemnified party was not entitled to indemnification by the Company. (b) By accepting the benefits of this Agreement, each Holder agrees, severally and not jointly, to indemnify and hold harmless the Company, each Initial Purchaser, each underwriter who participates in an offering of Registrable Securities and the other selling Holders and each of their respective directors, officers (including each officer of the Company who signed the Registration Statement), employees and agents and each Person, if any, who controls the Company, an Initial Purchaser, any underwriter or any other selling Holder within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, from and against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 5(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such selling Holder expressly for use in the Registration Statement (or any amendment thereto), or any such Prospectus (or any amendment or supplement thereto). (c) Each indemnified party shall give prompt notice to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, enclosing a copy of all papers properly served on such indemnified party, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have other than on account of this indemnity agreement. An indemnifying party may participate at its own expense in the defense of any such action. If an indemnifying party so elects within a reasonable time after receipt of such notice, such indemnifying party, jointly with any other indemnifying party, may assume the defense of such action with counsel chosen thereby and approved by the indemnified parties defendant in such action, provided that if any such indemnified party reasonably determines, based on advice of counsel, that there may be legal defenses available to such indemnified party which are different from or in addition to those available to such indemnifying party or that -35- representation of such indemnifying party and any indemnified party by the same counsel would present a conflict of interest, then such indemnifying party or parties shall not be entitled to assume such defense. If an indemnifying party is not entitled to assume the defense of such action as a result of the proviso to the preceding sentence, counsel for such indemnifying party shall be entitled to conduct the defense of such indemnifying party and counsel for each indemnified party or parties shall be entitled to conduct the defense of such indemnified party or parties. If an indemnifying party assumes the defense of an action in accordance with and as permitted by the provisions of this paragraph, such indemnifying party shall not be liable for any fees and expenses of counsel for the indemnified parties incurred thereafter in connection with such action. In no event shall the indemnifying party or parties be liable for the fees and expenses of more than one counsel (in addition to any local counsel), separate from its own counsel, for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. (d) In order to provide for just and equitable contribution in circumstances under which any of the indemnity provisions set forth in this Section 5 is for any reason held to be unavailable to the indemnified parties although applicable in accordance with its terms, the Company, each Initial Purchaser and the Holders shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company, the Initial Purchasers and the Holders, as incurred; provided that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person that was not guilty of such fraudulent misrepresentation. As between the Company, the Initial Purchasers and the Holders, such parties shall contribute to such aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement in such proportion as shall be appropriate to reflect the relative fault of the Company, on the one hand, and the Initial Purchasers and the Holders, on the other hand, with respect to the statements or omissions which resulted in such loss, liability, claim, damage or expense, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault of the Company, on the one hand, and of the Initial Purchasers and the Holders, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, on the one hand, or by or on behalf of an Initial Purchaser or the Holders, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or -36- prevent such statement or omission. The Company, the Initial Purchasers and the Holders of the Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 5 were to be determined by pro rata allocation or by any other method of allocation that does not take into account the relevant equitable considerations. For purposes of this Section 5, each Affiliate of each Initial Purchaser or a Holder, and each director, officer, employee, agent and Person, if any, who controls an Initial Purchaser or Holder or such Affiliate within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Initial Purchaser or Holder, and each director of the Company, each officer of the Company who signed the Registration Statement, and each Person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company. 6. Rule 144A and Future IPOs (a) The Company shall use its best efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act in a timely manner and, if at any time it is not required to file such reports but in the past had been required to or did file such reports, it will, upon the request of any holder or beneficial owner of Registrable Securities, make available other information as required by, and so long as necessary to permit, sales of Registrable Securities pursuant to Rule 144A. Notwithstanding the foregoing, nothing in this Section 6 shall be deemed to require the Company to register any of its securities pursuant to the Exchange Act. (b) The Company will agree not to make an Initial Public Equity Offering of any class of Common Stock without amending, if necessary, the terms of the Issuer's certificate of incorporation to provide that the Non-Voting Common is convertible into such class of Common Stock on a share-for-share basis and that the rights, conditions and privileges attaching to such class of Common Stock are not adverse to holders of the Non-Voting Common as compared with the terms of the shares of Class B Common (except with respect to voting rights). 7. Underwritten Registrations If any of the Registrable Securities covered by any Registration Statement are to be sold in an underwritten offering pursuant to Section 2.1, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the Company; provided that the Holders of a majority of such Registrable Securities shall not have reasonably objected to any such investment banker or manager. -37- No Person may participate in any underwritten registration hereunder unless such person (i) agrees to sell such Registrable Securities on the basis reasonably provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 8. Miscellaneous (a) Remedies. In the event of a breach by the Company, GVL, VPC or by a holder of Shares of any of its obligations under this Agreement, each holder of Shares, GVL, VPC and the Company, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company, GVL, VPC and each holder of Shares agree that monetary damages would not be adequate compensation for any loss incurred by reason of a breach of any of the provisions of this Agreement and each hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate. (b) No Inconsistent Agreements. The Company, GVL and VPC will not enter into any agreement that is inconsistent with the rights granted to the holders of Shares and indemnified persons in this Agreement or otherwise conflicts with the provisions hereof. Without the written consent of the holders of a majority of the outstanding Shares, the Company, GVL and VPC shall not grant to any Person any rights which conflict with or are inconsistent with the provisions of this Agreement. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, otherwise than with the prior written consent of the holders of not less than a majority of the then outstanding Shares and/or Registrable Securities, as applicable. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by Holders of a majority of the Registrable Securities being sold by such Holders pursuant to such Registration Statement; provided, however, that the provisions of this sentence may not be amended, modified or supplemented except in accordance with the provisions of the immediately preceding sentence. Notwithstanding the foregoing, no amendment, modification, supplement, waiver or consent with respect to Section 5 shall -38- be made or given otherwise than with the prior written consent of each Holder or former Holder affected thereby. (d) Notices. All notices and other communications provided for herein shall be made in writing by hand-delivery, next-day air courier, certified first-class mail, return receipt requested, telex or telecopier: (i) if to the Company, as provided in the Purchase Agreement, (ii) if to GVL or VPC c/o Le Groupe Videotron Ltee 300 Viger Avenue East Montreal, Quebec H2X 3W4 Attention: Senior Vice President Legal Affairs (iii) if to the Initial Purchasers, as provided in the Purchase Agreement, or (iv) if to any other Person who is then the registered holder of Shares or Registrable Securities, to the address of such holder as it appears in the register therefor of the Company. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one Business Day after being timely delivered to a next-day air courier; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; and when receipt is acknowledged by the recipient's telecopier machine, if telecopied. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each holder of Shares and Registrable Securities. The Company may not assign any of its rights hereunder without the prior written consent of each holder of Shares and Registrable Securities, provided that a merger or consolidation of the Company with another Person pursuant to which the issuer or issuers of any securities issued to holders of Shares or Registrable Securities in connection with such merger or consolidation becomes obligated under this Agreement and GVL and VPC confirm their agreements with respect to the securities of such issuer or issuers shall not be considered an assignment. Notwithstanding the foregoing, no successor or assignee of the Company shall have any of the rights granted under this Agreement until such Person shall acknowledge its rights and obligations hereunder by a signed written statement of such person's acceptance of such rights and obligations. If any transferee of any holder shall acquire Shares or -39- Registrable Securities, in any manner, whether by operation of law or otherwise, such Shares or Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Shares or Registrable Securities such person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such person shall be entitled to receive the benefits hereof. (f) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. (g) Governing Law; Submission to Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK. THE COMPANY, GVL, VPC AND THE INITIAL PURCHASERS HEREBY IRREVOCABLY SUBMIT TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND EACH IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. (h) Severability. The remedies provided herein are cumulative and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. (i) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. All references made in this Agreement to "Section" and "paragraph" refer to such Section or paragraph of this Agreement, unless expressly stated otherwise. -40- IN WITNESS WHEREOF, the parties have caused this Registration Rights Agreement to be duly executed as of the date first written above. OPTEL, INC. By: _____________________________ Name: Title: By: _____________________________ Name: Title: LE GROUPE VIDEOTRON LTEE. By:______________________________ Name: Title: VPC CORPORATION By:______________________________ Name: Title: SALOMON BROTHERS INC MERRILL LYNCH, PIERCE, FENNER & SMITH, INCORPORATED By: Salomon Brothers Inc ------------------------------ By:_______________________________ Name: Title: U.S. TRUST COMPANY OF TEXAS, N.A., as transfer agent By:_______________________________ Name: Title: -41- EXHIBIT A THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3,) OR (7) UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS THREE YEARS (OR SUCH SHORTER PERIOD AS MAY BE PRESCRIBED BY RULE 144(K) (OR ANY SUCCESSOR PROVISION THEREOF) UNDER THE SECURITIES ACT) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER OR ANY OF ITS SUBSIDIARIES, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A INSIDE THE UNITED STATES, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, (3) AGREES THAT IT SHALL BE BOUND, TO THE EXTENT APPLICABLE, BY THE TERMS OF THE COMMON STOCK REGISTRATION RIGHTS AGREEMENT DATED AS OF FEBRUARY 14, 1997 AND (4) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF A-1 THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. A-2 EXHIBIT B FORM OF LEGEND FOR GLOBAL CERTIFICATE Any Global Certificate authenticated and delivered hereunder shall bear a legend in substantially the following form: THIS SECURITY IS A GLOBAL CERTIFICATE WITHIN THE MEANING OF THE COMMON STOCK REGISTRATION RIGHTS AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE COMMON STOCK REGISTRATION RIGHTS AGREEMENT, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE COMMON STOCK REGISTRATION RIGHTS AGREEMENT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. B-1 EXHIBIT C CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF TRANSFER OF NON-VOTING COMMON STOCK Re: Class C Common Stock (the "Common Stock") of OPTEL, INC. This Certificate relates to ____ Common Stock held in* ___ book-entry or* _______ certificated form by ______ (the "Transferor"). The Transferor:* / / has requested the Transfer Agent by written order to deliver in exchange for its beneficial interest in the Global Certificate held by the Depositary, Common Stock in definitive, registered form of authorized denominations and an aggregate number equal to its beneficial interest in such Global Certificate (or the portion thereof indicated above); or / / has requested the Transfer Agent by written order to exchange or register the transfer of Common Stock. In connection with such request and in respect of such Common Stock, the Transferor does hereby certify that Transferor is familiar with the Common Stock Registration Rights Agreement relating to the above captioned Common Stock and the restrictions on transfers thereof as provided in Section 3.5 of such Common Stock Registration Rights Agreement, and that the transfer of this Common Stock does not require registration under the Securities Act of 1933, as amended (the "Act") because[*]: / / Such Common Stock is being acquired for the Transferor's own account, without transfer (in satisfaction of Section 3.5(_) of the Common Stock Registration Rights Agreement). / / Such Common Stock is being transferred to a qualified institutional buyer (as defined in Rule 144A under the Act), in reliance on Rule 144A. / / Such Common Stock is being transferred to an institutional "accredited investor" (within the meaning of subparagraphs (a)(1), (2), (3) or (7) of Rule 501 under the Act). / / Such Common Stock is being transferred in reliance on Regulation S under the Act. / / Such Common Stock is being transferred in accordance with Rule 144 under the Act. C-1 / / Such Common Stock is being transferred in reliance on and in compliance with an exemption from the registration requirements of the Act. ------------------------------ [INSERT NAME OF TRANSFEROR] By: _________________________ Date: _________________ *Check applicable box. C-2 EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers to Institutional Accredited Investors -------------, ---- U.S. Trust Company of Texas, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Ladies and Gentlemen: In connection with our proposed purchase of Class C Common Stock (the "Common Stock") of Optel, Inc. (the "Company"), we confirm that: (i) We have received such information as we deem necessary in order to make our investment decision. (ii) We understand that any subsequent transfer of the Common Stock is subject to certain restrictions and conditions set forth in the Common Stock Registration Rights Agreement and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Common Stock except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). (iii) We understand that the offer and sale of the Common Stock has not been registered under the Securities Act, and that the Common Stock may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of any accounts for which we are acting as hereinafter stated, that if we should sell any Common Stock prior to (x) the date which is three years after the later of the date of original issuance of the Common Stock (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act or any successor provision thereto) or the last day on which the Company or any affiliate of the Company was owner of such Common Stock, or any predecessor thereto, and (y) such later date, if any, as may be required by applicable laws, we will do so only (A) to the Company, (B) inside the United States in accordance with Rule 144A under the Securities Act to a "qualified institutional buyer" (as defined therein), (C) inside the United States to an institutional "accredited investor" (as defined below) that, prior to such transfer, furnishes (or has furnished on its behalf by a U.S. broker-dealer) to the Transfer Agent a signed letter substantially in the form hereof, (D) outside the United States in accordance with Regulation S under the Securities D-1 Act, (E) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available) or (F) pursuant to an effective registration statement under the Securities Act and (G) pursuant to another available exemption under the Securities Act, and we further agree to provide to any person purchasing Common Stock from us a notice advising such purchaser that resales of the Common Stock is restricted as stated herein. (iv) We understand that, on any proposed resale of Common Stock, we will be required to furnish to the Transfer Agent and the Company, such certification, legal opinions and other information as the Transfer Agent and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Common Stock purchased by us will bear a legend to the foregoing effect. (v) We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Common Stock, and we and any accounts for which we are acting are each able to bear the economic risk of our or their investment, as the case may be. (vi) We are acquiring the Common Stock purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company and any counsel to the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By:____________________________ [Authorized Signatory] Upon transfer the Common Stock would be registered in the name of the new beneficial owner as follows: Name:______________________________ Address:___________________________ Taxpayer ID Number:________________ D-2 EXHIBIT E Form of Certificate to Be Delivered in Connection with Regulation S Transfers ---------------, ---- U.S. Trust Company of Texas, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Ladies and Gentlemen: In connection with our proposed sale of Class C Common Stock ("Common Stock") of Optel, Inc. (the "Company"), we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Common Stock was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S under the Securities Act, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; (5) we have advised the transferee of the transfer restrictions applicable to the Common Stock; and (6) if the circumstances set forth in Rule 904(c) under the Securities Act are applicable, we have complied with the additional conditions therein, including (if applicable) sending a confirmation or other notice stating that the Common Stock may be offered and sold during the restricted period specified in Rule 903(c)(2) or (3), as applicable, in accordance with the provisions of E-1 Regulation S; pursuant to registration of the Common Stock under the Securities Act; or pursuant to an available exemption from the registration requirements under the Act. You and the Company and any counsel to the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Defined terms used herein without definition have the respective meanings provided in Regulation S under the Securities Act. Very truly yours, [Name of Transferor] By:________________________________ [Authorized Signature] Upon transfer the Common Stock would be registered in the name of the new beneficial owner as follows: Name:______________________________ Address:___________________________ Taxpayer ID Number:________________ E-2 EX-5.1 9 EXHIBIT 5.1 [Kronish, Lieb, Weiner & Hellman Letterhead] April 10, 1997 OpTel, Inc. 1111 W. Mockingbird Lane Dallas, Texas 75247 Ladies and Gentlemen: We have acted as counsel to OpTel, Inc., a Delaware corporation (the "Company"), in connection with its Registration Statement on Form S-4 (the "Registration Statement"), filed pursuant to the Securities Act of 1933, as amended (the "Securities Act"), relating to the proposed offer to exchange (the "Exchange Offer") 13% Notes Due 2005, Series B of the Company (the "Series B Notes") for any and all outstanding 13% Senior Notes Due 2005 of the Company (the "Senior Notes"). The Senior Notes were issued and sold on February 14, 1997 pursuant to an indenture (the "Indenture") between the Company and U.S. Trust Company of Texas, N.A., as trustee, in a transaction exempt from registration under the Securities Act in reliance upon Rule 144A and Section 4(2) of the Securities Act. The Series B Notes will also be issued pursuant to the Indenture. In that connection, we have reviewed the Indenture, the Registration Statement and such other documents and instruments as we have deemed appropriate. In such review, we have assumed the genuineness of all signatures, the authenticity of all documents submitted as originals and the conformity to the original documents of all documents submitted to us as copies. On the basis of such review, and having regard to such legal considerations as we have deemed relevant, it is our opinion that the Series B Notes have been duly and validly authorized for issuance by the Company and, when issued and authenticated in accordance with the terms of the Exchange Offer and the Indenture, will be the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms and entitled to the benefits of the Indenture, except that we express no opinion as to the validity or enforceability of rights of indemnity or contribution, or both, and except as such enforceability may be limited by [Kronish, Lieb, Weiner & Hellman Letterhead] April 10, 1997 Page 2 bankruptcy, insolvency, fraudulent conveyance, reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity. We are members of the Bar of the State of New York and do not purport to be experts or give any opinion except as to matters involving the laws of such State, the general corporation law of the State of Delaware and the federal laws of the United States. We hereby consent to the use of our name under the caption "Legal Matters" in the Prospectus included in the Registration Statement and to the use of this opinion as an exhibit to the Registration Statement. Very truly yours, Kronish Lieb Weiner & Hellman EX-10.1 10 STOCKHOLDERS AGREEMENT STOCKHOLDERS AGREEMENT, dated as of December 22, 1994, by and among VPC CORPORATION, a Delaware corporation ("VPC"), VANGUARD COMMUNICATIONS, L.P., a California limited partnership ("Vanguard"), VANGUARD COMMUNICATIONS, INC., a California+ corporation (the "General Partner"), and OPTEL, INC., a Delaware corporation (the "Corporation"). RECITALS Vanguard is the sole stockholder of the Corporation, owning as of the date hereof 39,000 shares of the Corporation's Class B Common Stock ("Class B Stock"). The Corporation, VPC, Vanguard and the General Partner are entering into that certain Note Purchase Agreement (the "Agreement") dated the date hereof, pursuant to which VPC is purchasing a Senior Secured Convertible Note of the Corporation (the "Convertible Note"), dated the date hereof. To induce VPC to enter into the Note Purchase Agreement and to purchase the Convertible Note, the Corporation, Vanguard, and the General Partner have entered into this Stockholders Agreement with VPC, to become effective immediately, upon Conversion of the Convertible Note into shares of Class B Stock. The parties wish to set forth, among other things, certain matters relating to the voting of the shares of the Corporation's Common Stock owned by them (the "Shares") and to provide for certain rights and obligations relating to transfers of Shares, all as set forth herein. In consideration of the foregoing recitals and of the mutual agreements contained herein, IT IS AGREED AS FOLLOWS: 1. Construction. 1.1 Definitions. Except as otherwise defined herein, all capitalized terms used herein shall have the same meanings therein as in the Note Purchase Agreement. As used herein: "Agreed Value" means, with respect to any Valuation Period, the Net Equity Value of the Corporation as of the first day of such Valuation Period, as determined in accordance with Section 6.1. "Board" means the Board of Directors of the Corporation. "Class B Stock" means the Class B Common Stock, par value $.01 per share, of the Corporation. "Common Stock" means and includes the Corporation's Class A Common Stock, par value $.01 per share, and the Class B Stock and any other common stock of the Corporation and, with respect to each Stockholder (however described), includes the shares of capital stock of the Corporation now owned or hereafter acquired beneficially or of record by such Stockholder or any of its Affiliates, irrespective of the time and manner of acquisition, including without limitation any securities resulting from a conversion, split-up, combination, recapitalization, dividend or exchange of Shares. "Director" means any member of the Board. "Executive Committee" means the committee consisting of three Directors selected in accordance with and having the authority specified in Section 2.6. 2 "Initial Valuation Period" means the period commencing on the date this Agreement is executed and ending on August 31, 1995. "Institutional Investor" means a bank, insurance Company, pension fund or other Person that is not an individual and is an accredited investor (within the meaning of the Securities Act of 1933, as amended, and the rules and regulations thereunder) and whose assets are administered or investment decisions made by a bank or insurance company or by a registered investment adviser, or an investment company registered under the Investment Company Act of 1940. "IPO Date" means the date on which the Corporation receives the net proceeds of an underwritten initial public offering for its account of any of its equity securities pursuant to an effective registration statement under the Securities Act of 1933, as amended. "Lapse Date" means the earlier to occur of (i) the date Vanguard first voluntarily relinquishes (expressly or by failure to exercise rights) the right to designate a Director and (ii) the date on which Vanguard first owns less than 10% of the issued and outstanding Common Stock. "Net Equity Value" means the net value of the stockholder's equity in the Corporation determined in accordance with Section 6.7. "Nominee" has the meaning set forth in Section 2.1. "Protected Amount" means an amount equal to $85,000,000 reduced by the Purchase Price Adjustments. 3 "Purchase Price Adjustments" means, with respect to any Valuation Date, the aggregate of any adjustments to the Purchase price described in Section 2C of the Note Purchase Agreement which have actually been made on or prior to the Valuation Date. "Reputable Underwriter" means a nationally or regionally recognized investment banking firm of good repute which regularly acts as the lead underwriter of syndicated public offerings of equity securities having gross offering proceeds in excess of $50,000,000. "Shares" means shares of Common Stock. "Stockholders" means VPC and Vanguard and any permitted Transferee of Shares of either of them. "Transfer" has the meaning set forth in Section 6.1. "Transferee" has the meaning set forth in Section 6.2 "Valuation Date" means the date immediately prior to the date of any proposed investment in or purchase of Shares on which, a Valuation Price is to be determined. "Valuation Period" means the Initial Valuation Period and each one year period commencing on September 1 of 1995 and each subsequent September 1. "Valuation Price" means (i) with respect to any Valuation Date during the Initial Valuation Period as of which the aggregate amount theretofore invested by VPC in the Corporation (the "Previous Investments") does not exceed the Protected Amount (but solely with respect to that portion of the 4 proposed investment which when added to the Previous Investments does not increase the total to an amount in excess of the Unprotected Amount), the quotient of (A) the sum of (1) $98,400,000 and (2) the aggregate amount of all investments made by VPC, Vanguard and any third party in the Company prior to such Valuation Date (including any amounts invested in respect of the Optional Component and the Protected Contribution) excluding payments made in respect of the Mandatory Component and the acquisition of the Vanguard Shares and any purchase transactions between VPC and Vanguard, reduced by (3) the Purchase Price Adjustments, divided by (B) the number of shares of Common Stock outstanding on such Valuation Date; and (ii) with respect to any Valuation Date during the Initial Valuation Period on which the aggregate amount "heretofore invested by VPC in the Corporation exceeds (or as a result of such proposed investment will exceed) the Protected Amount (but solely with respect to that portion of the proposed investment which when added to the Previous Investments exceeds , the Protected Amount), and, with respect to any Valuation Date occurring during any Valuation Period subsequent to the Initial Valuation Period, the quotient of (C) the sum of (1) the Agreed Value and (2) the aggregate amount of all investments by VPC, Vanguard and any third party during such period (but, with respect to the Initial Valuation Period, solely with respect to that portion of the proposed investments which when added to the Previous Investments exceeds the Protected Amount) divided by (D) the number of shares of Common Stock outstanding on such Valuation Date. Notwithstanding the foregoing, if an Agreed Value is determined for a period covering prior to September 1, 1995, such Agreed Value shall be the Agreed Value until August 31, 1996. 1.2 Interpretation. Then the context in which words are Used in this Agreement indicates that such is the intent, 5 singular words include the plural and vice versa and masculine words include the feminine and the neuter and vice versa. References herein to Sections, Exhibits or Schedules are to the appropriate sections, exhibits or schedules of this Agreement unless otherwise expressly so stated. The words "herein", "hereof", and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Section, Exhibit, Schedule or other subdivision. 1.3 Headings. The headings in this Agreement are inserted for convenience of reference only and shall not be construed to define or limit the scope, extent or intent of this Agreement or any of its provisions. 2. Directors. 2.1 Composition of the Board. At all times during the term of this Agreement, the Board shall consist of at least seven members (or, upon approval by the Board, a lesser number, subject to the rights of Vanguard at all times to designate the number of Nominees provided for in Section 2.3). The property, business and affairs of the Corporation shall be managed by the Board which may exercise all of the powers of the Corporation except to the extent that the laws of the State of Delaware or the Corporation's, certificate of incorporation or by-laws require the same to be exercised by the stockholders. 2.2 Voting for Directors. Each Stockholder shall vote all Shares now or hereafter owned by it, at any regular or special meeting of stockholders called for the purpose of, or shall otherwise consent to, the election to the Board of the person or persons nominated (the "Nominees") in accordance with Section 2.3. 6 2.3 Nominees. (a) For so long as Vanguard's percentage ownership of Common Stock computed in accordance with Section 2.4 ("Vanguard's Percentage Ownership") is at least 30%: (i) VPC shall be entitled to designate at least four Nominees; and (ii) Vanguard shall be entitled to designate three Nominees. On the Conversion Date, Vanguard shall cause the Directors of OpTel, other than its nominees, to tender their resignations, effective immediately. (b) For so long as Vanguard's Percentage Ownership is at least 20%, but less than 30%: (i) VPC shall be entitled to designate at least five Nominees; and (ii) Vanguard shall be entitled to designate two Nominees. (c) For so long as Vanguard's Percentage Ownership is at least 10%, but less than 20%: (i) VPC shall be entitled to designate at least six Nominees; and (ii) Vanguard shall be entitled to designate one Nominee. 7 (d) Notwithstanding the foregoing, Vanguard shall not the entitled to designate any Nominee for election to the Board after the Lapse Date. 2.4 Computation of Vanguard's Percentage Ownership. For purposes of determining Vanguard's right to designate Nominees pursuant to Section 2.3 and members of the Executive Committee pursuant to Section 2.6, Vanguard's Percentage Ownership shall be computed as follows: (a) Until June 30, 1996, provided Vanguard shall have exercised all or part of any preemptive right under Section 6.4(b) hereof or Section 8C of the Note Purchase Agreement, by dividing (A) the aggregate number of shares of Common Stock owned of record by Vanguard on the date such calculation is made (a "Calculation Date") by (B) the aggregate number of shares of Common Stock owned by both Vanguard and VPC on such Calculation Date (expressly excluding any number of shares of Common Stock owned by any other Person other than an Affiliate); and (b) At all other times, by dividing (A) the number of shares of Common Stock owned by Vanguard on the Calculation Date by (B) the aggregate number of shares of Common Stock outstanding on such Calculation Date. 2.5 Substitution. If any Nominee designated by VPC or Vanguard shall be unable or unwilling to serve on the Board or shall resign therefrom, VPC or Vanguard, as the case may be, shall be entitled to designate a replacement who then shall be a Nominee for purposes of this Agreement. On the Lapse Date the terms of any Vanguard Nominees then acting as Directors shall terminate, Vanguard shall cause them to tender their resignations effective immediately and VPC shall be entitled to designate their respective successors. 8 2.6 Executive Committee. The Corporation shall have an Executive Committee consisting of three directors. To the full extent permitted by law, the Executive Committee shall have all of the powers and may exercise all authority of the Board in the management of the business and affairs of the Corporation. One Nominee of Vanguard shall serve as a member of the Executive Committee until the earliest to occur of the date (i) Vanguard first voluntarily relinquishes its right (expressly or by failure to exercise such right) to designate a Nominee to the Board or the Executive Committee or (ii) Vanguard's percentage Ownership is less than 25% (irrespective of whether Vanguard's Percentage Ownership is subsequently increased). 2.7 Meetings and Actions of the Board. (a) Meetings of the Board shall be held in accordance with the bylaws and at such locations as VPC shall designate. (b) A simple majority of the Board shall constitute a quorum for the transaction of any business of the Corporation at meetings of the Board. (c) The affirmative vote of a simple majority of the Directors present at a meeting at which a quorum is present, or acting by written consent without a meeting, shall be sufficient to effect Board action with respect to any matter; provided however, that no action of the Board shall be taken without the affirmative vote or consent of at least two of VPC's Nominees. 9 2.8 Meetings and Actions of the Executive Committee. (a) Meetings of the Executive Committee shall be held at such locations as VPC shall designate. (b) A simple majority of the Executive Committee shall constitute a quorum for the transaction of any business of the Corporation at meetings of the Executive Committee. (c) The affirmative vote of a simple majority of members of the Executive Committee shall be sufficient to effect any action of the Executive Committee with respect to any matter. 3. Corporate Name. (a) From and after the date hereof until June 30, 1996 the Corporation shall conduct business under the name and style "OpTel, a Videotron company," and the name of the corporation shall not be changed prior to such date, except with the affirmative approval of all of Vanguard's Nominees. (b) The Stockholders and Board shall take any and all actions which may be necessary or desirable and proper to carry out the provisions of Sections 2 and 3(a). 4. Availability of Financial Statements Under Certain Circumstances. (a) During the period following the Lapse Date and prior to the IPO Date, the Corporation shall make the following financial information available to each of the Stockholders. (i) Within 45 days after the last day of each fiscal quarter, unaudited consolidated financial statements of 10 the Corporation and its consolidated subsidiaries for such fiscal quarter including an unaudited consolidated balance sheet and an unaudited consolidated statement of income and cash flow. (ii) Within 120 days after the last day of the Corporation's fiscal year, audited consolidated financial statements of the Corporation and its consolidated subsidiaries for such fiscal year including an audited consolidated balance sheet and audited consolidated statements of income and cash flow, and accompanied by the report thereon by the independent auditors engaged from time to time by the Corporation. (b) The financial statements shall be prepared in accordance with generally accepted accounting principles consistently applied, and shall fairly present the financial condition, assets, liabilities, results of operations and cash flow of the Corporation and its consolidated subsidiaries, subject in the case of quarterly statements to the omission of certain adjustments. 5. Constituent Documents. The Stockholders and the Board, as the case may be, shall take all necessary actions to cause the certificate of incorporation and bylaws of the Corporation to contain the most favorable provisions in respect of indemnification and director exculpation permitted under the Delaware General Corporation Law and shall, without liability to one another, be entitled to rely on the advice of legal counsel in satisfying such obligation. 6. Restrictions on Transferability of Shares. 6.1 Transfer Defined. For purposes of this Section 6, "Transfer", as to any Shares shall mean any sale, exchange, assignment, the creation of any option or right to purchase, 11 security interest or other encumbrance, and any other disposition Of any kind, whether voluntary or involuntary, affecting title to, possession of or voting rights in respect of such Shares, or any interest therein. 6.2 Transferee to Become a Party to Agreement. As a condition to the effectiveness of any Transfer of Shares that is otherwise permitted hereunder, including without limitation transfers by Vanguard to an Institutional Investor as permitted under Section 6.4, the transferee of such Shares (a "Transferee") shall execute and deliver to the transferring Stockholder (i) for the benefit of the Corporation and the other Stockholders a Confidentiality Agreement in favor of VPC and the Corporation, (ii) a written agreement pursuant to which such Transferee effectively binds itself to the terms of this Agreement with the same force and effect as if such Transferee were originally named a Stockholder hereunder; and (iii) an instrument of adoption or novation whereby such Transferee effectively binds itself to the terms of the Restricted Persons Agreement; provided, however, that any such Transfer shall not have the effect of releasing the transferring Stockholder from any of its obligations or liabilities under this Agreement or the Restricted Persons Agreement. Each Transferee shall be deemed to be a Stockholder for all purposes hereof and shall be entitled to participate on a pro rata basis in all of the rights, and shall be subject to all of the obligations of the transferring Stockholder. 6.3 Transfers to Affiliates. (a) Subject to Section 6.3(b) and to the prior written approval of the Board, which shall not be unreasonably withheld, a Stockholder may transfer all or any of the Shares owned by it to an Affiliate of such Stockholder. 12 (b) Notwithstanding anything to the contrary contained , Vanguard and the General Partner covenant and agree that prior to the IPO Date Vanguard shall not cause, permit or suffer any of the Shares owned by it to be transferred or distributed to any of its partners for any reason, except to the extent required by law. Any purported Transfer of Shares in disregard of this provision shall be void. 6.4 Transfers by Vanguard. (a) Subject to Section 6.3, prior to the earlier of March 31, 1996 or the IPO Date, Vanguard shall not, and shall not cause or permit any of its Affiliates to, Transfer or attempt Transfer any Shares. After March 31, 1996 and prior to the IPO Date Vanguard may solicit offers to purchase all, but not less than all, Shares only from one or more Institutional Investors acceptable to VPC in the reasonable exercise of its discretion, subject in each instance to prior delivery by each prospective such investor of a confidentiality agreement with respect to information to be obtained by it from or about the Corporation, in form and substance acceptable to the Corporation and its counsel in the reasonable exercise of their discretion. Any such offer shall be subject to the right of first refusal provided for in Section 6.4(b). All rights of Vanguard under this Agreement shall terminate upon any Transfer of Shares to an Institutional Investor or otherwise (other than a Transfer Pursuant to Section 6.3(a)) (but nothing herein shall abrogate or restrict the registration rights available to Vanguard under the Registration Rights Agreement referred to herein or the provisions of Section 6.6, which shall survive such Transfer and shall be exercisable as to all or any of the Shares held by Vanguard or such Institutional Investor, subject in each case to to the making by Vanguard and its Transferees of appropriate provision, acceptable to VPC in the reasonable exercise of its 13 discretion for joint action by Vanguard and its Transferees with respect to the exercise of such rights). The restrictions set forth in this Section 6.4 shall terminate on the IPO Date. (b) Upon Vanguard's receipt of an offer from an Institutional Investor to purchase Shares in accordance with Section 6.4(a), Vanguard shall promptly notify VPC and the Corporation (the "Notice of Offer") stating the terms of such offer, including the number of Shares to be sold, the proposed purchase price (the "Offer Price") and the date (not less than 31 days after the giving of such notice) on which the proposed Transfer is to occur (the "Sale Date"). VPC and the Corporation shall have the right exercisable by notice given within 30 days after the Notice of Offer to purchase such Shares for the Offer Price not later than 15 days after the Sale Date. (c) Vanguard shall make all reasonable attempts to prevent issue (other than in connection with the raising of capital) or transfer of partnership interests (the "Partnership Interests") in Vanguard. In no event shall any of the Restricted Persons (as defined in the Restricted Persons Agreement) or their respective family members be permitted to Transfer their interests in the General Partner or Partnership Interests other than to each other, their respective Affiliates, other partners or to trusts established by them or any of them for their respective benefit and/or that of their family members or by operation of law. VPC acknowledges and agrees, however, that Vanguard may be required to issue Partnership Interests to satisfy certain Excluded Obligations. If, pursuant to Vanguard's partnership agreement, dated April 15, 1993, as most recently amended as of December 16, 1994, and, as currently in force (the "Partnership Agreement"), a true and correct copy of which has been delivered to VPC under certificate of an officer of the General Partner concurrently herewith, any partner of Vanguard 14 who not a Restricted Person or a family member of a Restricted Person, exercises any right to dispose of a Partnership Interest, the General Partner shall provide to the Corporation and VPC a notice pursuant to Section 18.2(c) of the Partnership Agreement, and VPC or, at VPC's election, the Corporation shall have the right to exercise a right of first refusal to purchase such Partnership Interest at the price (the "Buy-In Price") and on the terms provided for in the Partnership Agreement. Vanguard and the General Partner shall not cause or permit any amendment of the Partnership Agreement that would have an adverse effect on any of the rights of VPC or the Corporation under any of the Provisions of this Section 6.4. (d) If VPC or the Corporation shall acquire a Partnership Interest pursuant to Section 6.4(c), simultaneously with such acquisition, at the election of VPC or the Corporation, respectively, Vanguard shall redeem or purchase such Interest in exchange for all of the Shares that would be distributed with respect to such Partnership Interest if Vanguard were then liquidated. In determining the number of Shares to be so exchanged, the Shares held by Vanguard shall be valued based on the Buy-In Price, without any deduction or adjustment for costs or benefits associated with a liquidation of Vanguard. 6.5 Preemptive Rights. (a) In the event that the Board determines to raise additional capital for the Corporation prior to the IPO Date by causing the Corporation to issue and sell additional shares (the "Additional Shares"), VPC may require that such shares be Class B Stock and, subject to Vanguard's right to participate in such purchase pursuant to Section 6.5(b), may elect to purchase all or any of such Additional Shares at a price per share equal to the Valuation Price on the Valuation Date with 15 respect to such purchase. If VPC elects to purchase any or all Of the Additional Shares it shall give written notice (the "Purchase Notice") to the Corporation and Vanguard to that effect. The Purchase Notice shall state (i) the number of Additional Shares VPC proposes to purchase and (ii) the date (not later than 30 days after the Purchase Notice) and time at which such purchase will take place (the "Additional Shares Closing Date"). (b) During the 60 days immediately following its receipt of any Purchase Notice (the "Participation Period"), Vanguard shall have the right to participate (the "Participation Right") in such financing with VPC to the extent of some or all of the Additional Shares to be issued in such financing (the "Available Shares") equal to the product of its Percentage Ownership at the time of the Purchase Notice, multiplied by the aggregate number of Additional Shares which VPC commits to purchase in such financing. If Vanguard elects to exercise its Participation Right, Vanguard shall give written notice to that effect to VPC and the Corporation (the "Participation Notice") and shall be entitled prior to the last day of the Participation Period to purchase a number of the Available Shares as specified in the Participation Notice, in which event the number of Additional Shares purchased or to be purchased by VPC shall be reduced by the number of Available Shares purchased by Vanguard. (c) The closing of a purchase of Additional Shares shall be held at the offices of Kronish, Lieb, Weiner & Hellman, on the date and at the time specified in the Purchase Notice. At such closing, (i) VPC and Vanguard shall each pay, in immediately available funds (subject to Section 6.5(b)), the Valuation Price for all of the Additional Shares to be purchased by it, and (ii) the Corporation shall deliver to each of them certificates representing the Additional Shares purchased by it 16 provided, however, that if Vanguard elects to participate in the financing but the Additional Shares Closing Date occurs prior to the end of the Participation Period, then at such closing VPC shall (i) purchase and pay for the Additional Shares it has agreed to purchase, excluding the Available Shares, and (2) purchase and pay for a convertible promissory note (the "Interim Note") of the Corporation in a principal amount equal to the purchase price of the Available Shares, due on the day after the expiration of the Participation Period and bearing interest at the annual rate which is then charged VPC by its banks for short-term loans. Principal of and accrued interest on the Interim Note shall be convertible at its maturity, at the option of VPC, into Class B Shares at the Valuation Price as of the date of the Purchase Notice. Prior to the maturity of the Interim Note, Vanguard may purchase all or any of the Available Shares at a price per share equal to such Valuation Price plus a Pro rata portion of the interest then accrued on an equivalent principal amount outstanding under the Interim Note. Vanguard shall make such payment in immediately available funds, and the Corporation shall immediately apply the proceeds of such payment first to pay accrued interest on the Interim Note and then to pay principal of the Interim Note. 6.6 Drag Along/Tag Along Rights. (a) Prior to the IPO Date, if VPC elects to sell Shares representing a controlling interest in the Corporation, VPC may require Vanguard to join in such sale in the same proportion that the number of Shares held by Vanguard bears to the total number of Shares then owned by VPC and Vanguard, and otherwise at the same price per share and on the same terms. (b) If VPC elects to sell 10% or more of the shares owned by it (otherwise than in a public offering) Vanguard 17 shall have the right to join in such sale in the same proportion that the number of Shares held by Vanguard bears to the total number of Shares then owned by VPC and Vanguard, and otherwise at the same price per share and on the same terms. (c) Without limiting the rights of Vanguard under Sections 6.6(a) and 6.6(b), if VPC elects to sell 50% or more of the Shares owned by it (otherwise than in a public offering), Vanguard shall have the right to join in such sale to the extent of all of the Shares then owned by it, at the same price per share and on the same terms. (d) If prior to the IPO Date, VPC shall cease to be an Affiliate of Le Groupe Videotron Ltee, then Vanguard shall have the option for a period of 120 days after such change in control to sell all or any part of its Shares to the Person then controlling VPC, at a price and on terms no less favorable to Vanguard than those enjoyed by VPC in the transaction that resulted in the change of control, adjusted for any difference in the Net Equity Value of Class B Stock held by Vanguard and the Net Equity Value (excluding any control premiums) of the capital stock of VPC purchased by the Person then controlling VPC. (e) Each of the transactions described in the preceding provisions of this Section 6.6 is referred to herein as a "Disposition." At least 31 days prior to a Disposition, VPC shall provide to Vanguard notice setting forth a description of the terms of such Disposition in reasonable detail and stating (in the case of a transaction described in Section 6.6(a)) whether VPC requires that Vanguards Shares be included in the Disposition. If VPC does not require that Vanguard's Shares be included in the Disposition, Vanguard, to the extent permitted in the applicable provision of this Section 6.6, may nevertheless, 18 by notice to VPC within 30 days after receipt of such notice, require VPC to include Vanguard's Shares in such Disposition. (f) In connection with a Disposition, Vanguard will, if requested by the purchasers, enter into agreements with the purchasers containing (i) terms and conditions relating to the sale that are the same (to the extent practicable) as the terms and conditions of the agreement that VPC and its Affiliates execute in connection with such Disposition and (ii) representations and warranties to the effect that, except as specifically disclosed to the purchasers in writing, Vanguard and its Affiliates do not have actual knowledge (without any obligation to investigate) that any representation or warranty made by the Corporation or VPC in connection with such Disposition was untrue in any material respect when made or is untrue in any material respect as of the closing of the Disposition. 6.7 Agreed Value. Representatives of VPC and Vanguard, acting in good faith and using diligent efforts to reach agreement, shall determine the Net Equity Value as of September 1 of each year (or if the Agreed Value is first to be determined for a period commencing prior to September 1, 1995, on the date it is to be determined and then on the September 1 that falls not less than twelve calendar months after such date, and on each September 1 thereafter). If, after diligent effort, VPC and Vanguard cannot agree on the Net Equity Value, upon the request of VPC or Vanguard they shall each retain a Reputable Underwriter. The two Reputable Underwriters shall be instructed to determine, within 30 days of their engagement, the Net Equity Value (as a firm number and not a range) as of the date in question. If the higher of the Net Equity Values determined by the Reputable Underwriters is not more than 130% of the lower, then the average of the two Net Equity Values shall be the Agreed Value. If the higher of the Net Equity Values is more than 130% 19 of the lower, then the two Reputable Underwriters shall jointly select a third Reputable Underwriter who shall be instructed to select, within 30 days of its engagement, one of the two Net Equity Values previously determined by the two originally selected Reputable Underwriters (without modification). The Net Equity Value selected by such third Reputable Underwriter shall be the Agreed Value. The expenses of all Reputable Underwriters performing duties hereunder shall be borne by the Corporation. Each Reputable Underwriter shall be required to execute a confidentiality agreement acceptable to the Corporation and its counsel in the reasonable exercise of their discretion. The parties shall each use their best efforts to facilitate agreement and no party shall unreasonably delay or hinder the process. 6.8 Transfers Other Than to Affiliates. Notwithstanding anything to the contrary herein or in the certificate of incorporation of the Corporation, if a share of Class B Stock shall be transferred, voluntarily or involuntarily, to a Person that is not an affiliate of Vanguard or VPC, such share shall automatically be converted into a share of Class A Stock. 7. The Richey Warrant. If and to the extent the Richey Seller exercises the Richey Warrant, Vanguard shall be entitled to retain the full amount of the exercise price thereof and the Corporation shall pay to Vanguard the amount, if any, that the Corporation would have had to pay to the Richey Seller if the Richey Seller had exercised its option to sell the Richey Warrant to the Corporation at such time in accordance with the terms of the Richey Warrant (the "Richey Put Amount"). Upon exercise of the Richey Warrant, Vanguard shall issue to the Richey Seller limited partnership interests of Vanguard in full satisfaction of the Richey Warrant. In the event that the Richey Seller shall exercise its option to sell the Richey Warrant to Vanguard or the Corporation in accordance with the terms of the Richey Warrant, 20 the Corporation shall pay directly to the Richey Seller the Richey Put Amount. In the event that Vanguard shall exercise its Option to purchase the Richey Warrant in accordance with the terms thereof, the Corporation shall pay directly to Richey, upon the Corporation's receipt of evidence of the Richey Warrant's delivery to the Partnership for cancellation, the Richey Put Amount, and the balance of any amounts due to the Richey Seller upon such exercise shall be paid by Vanguard. Without VPC's prior written consent, Vanguard shall not elect to purchase the Richey Warrant other than in accordance with the terms of the Richey Warrant. The Richey Warrant shall not be amended without VPC's prior written consent. 8. Legends. Each certificate representing Shares now or hereafter registered in the name of any Stockholder shall be endorsed with a legend substantially as follows: The shares represented by this certificate are subject to the restrictions contained in a Stockholders Agreement dated as of December 22, 1994, among the Corporation, VPC Corporation and Vanguard Communications, L.P. a copy of which is on file in the offices of the Corporation and will be furnished to the holder of this certificate upon written request and without charge. Ownership, voting and transfer of such shares are subject to the terms of such Agreement. The holder of this certificate, by acceptance hereof, agrees to be bound by all the terms of such Agreement, as the same is in effect from time to time. No vote, sale, assignment, encumbrance, pledge, transfer or other hypothecation or disposition of such shares may be made except in compliance with such Agreement. 9. Confidentiality and Other Covenants. 9.1 Confidential Information. Vanguard acknowledges that, in connection with its relationship with the Corporation, the officers, directors and/or employees of Vanguard will have 21 access to Confidential Information pertaining to the business of VPC and the Corporation. Vanguard has executed and delivered to VPC and the Corporation a Confidentiality Agreement and has used and will continue to use its best efforts to secure a Confidentiality Agreement in favor of VPC and the Corporation from each of its partners, and Affiliates, including without limitation each of the partners of Vanguard and each of the shareholders, directors and executive officers of the General partner and any Nominee of Vanguard. 9.2 Publicity. The Stockholders agree that no public release or announcement concerning the transactions contemplated hereby shall be issued by either Stockholder without the prior consent (which shall not be unreasonably withheld) of the other, except as such release or announcement may be required bylaw or the rules or regulations of any securities exchange, in which case the Stockholder required to make the release or announcement shall allow the other Stockholder reasonable time to comment on such release or announcement in advance of such issuance. 10. Term and Termination. 10.1 Term. Subject to Section 10.2, this Agreement is effective as of the date hereof and, unless earlier terminated as provided herein, shall continue in force until the IPO Date. 10.2 Disposition of all Shares. This Agreement shall automatically terminate upon the acquisition by either Stockholder of all of the issued and outstanding Shares or the disposition in accordance with the terms hereof by either Stockholder of all of the Shares owned by it beneficially or of record to Persons who are not bound as Stockholders hereunder. 22 11. Effect of Termination. Termination of this Agreement pursuant to Section 10 or otherwise shall not affect or impair any rights or obligations that arise prior to or at the time of the termination of this Agreements or which may arise by reason of an event causing the termination of this Agreement, and all such rights and obligations, including the rights and obligations under any provision of this Agreement, which by their terms are to survive termination, shall also survive. The rights and remedies provided in this Agreement and in such other agreements shall be cumulative and not exclusive and shall be in addition to any other remedies which the Stockholders may have under this Agreement or otherwise 12. Miscellaneous. 12.1 Entire Agreement. This Agreement supersedes all prior oral and written agreements between the parties with respect to the subject matter hereof, and this Agreement and the other documents and agreements between the parties which are referred to herein or executed contemporaneously herewith set forth the entire agreement among the parties with respect to the transactions contemplated hereby. 12.2 Amendment. This Agreement may not be modified, amended or terminated, nor may any provision hereof be waived, except by an instrument in writing executed by or on behalf of each party or, in the case of any such waiver, by the party or parties entitled to the benefit of the provision to be waived. 12.3 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted assigns. Neither this Agreement nor any 23 rights or obligations hereunder shall be assignable or otherwise transferrable by any party, voluntarily or by operation of law without the prior written consent of the other parties hereto, and any assignment or transfer without such consent shall be null and void. 12.4 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which taken together shall constitute a single agreement. 12.5 Further Assurances. Each party shall, at any time and from time to time after the date hereof, do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney, receipts, acknowledgments, acceptances and assurances as may be reasonably required to procure for any party, its successors and assigns, its rights as contemplated hereby. 12.6 Severability. If any provision of this Agreement is held to be invalid, unlawful or incapable of being enforced by reason of rule of law or public policy, all other conditions and provisions of this Agreement which can be given effect without such invalid, unlawful or unenforceable provisions shall, nevertheless, remain in full force and effect. 12.7 Notices. All notices, consents, instructions and other communications required or permitted under this Stockholders Agreement (collectively, "Notice") shall be effective only if given in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return 24 receipt requested, postage prepaid, or (iii) received by the addressee if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered mail, return receipt requested, postage prepaid. Notice shall be sent in each case to the appropriate addresses or telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may from time to time designate as to itself by notice similarly given to the other parties in accordance herewith, which shall not be deemed given until received by the addressee). Notice shall be given: (1) If to VPC: VPC Corporation 46th Floor 1114 Avenue of the Americas New York, New York 10036-7798 Attention: Me Suzanne Renault Telecopier: 514-985-8834 copy to: Kronish, Lieb, Weiner & Hellman 1114 Avenue of the Americas New York, New York 10036-7798 Attention: Russell S. Berman, Esq. Telecopier: 212-479-6275 (2) If to the Corporation: OpTel, Inc. 345 N. Maple Dr., Suite 285 Beverly Hills, California 90210 Attention: President Telecopier: 310-273-9453 copy to: Irell & Manella 1800 Avenue of the Stars Suite 900 Los Angeles, California 90067-4276 Attention: Joan L. Lesser, Esq. Telecopier: 310-203-7199 25 (3) If to Vanguard: Vanguard Communications, L.P. 345 N. Maple Dr., Suite 285 Beverly Hills, California 90210 Attention: President Telecopier: 310-273-9453 copy to: Irell & Manella 1800 Avenue of the Stars Suite 900 Los Angeles, California 90067-4276 Attention: Joan L. Lesser. Esq. Telecopier: 310-203-7199 (4) If to the General Partner: Vanguard Communications, Inc. 345 N. Maple Dr., Suite 285 Beverly Hills, California 90210 Attention: President Telecopier: 310-273-9453 copy to: Irell & Manella 1800 Avenue of the Stars Suite 900 Los Angeles, California 90067-4276 Attention: Joan L. Lesser, Esq. Telecopier: 310-203-7199 12.8 GOVERNING LAW; CONSENT TO EXCLUSIVE JURISDICTION. THIS STOCKHOLDERS AGREEMENT IS BEING DELIVERED AND IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES STALL BE GOVERNED BY, THE LAW OF SUCH STATE APPLICABLE TO CONTRACTS ENTERED INTO AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS STOCKHOLDERS AGREEMENT PERMITTED UNDER SECTION 12.9 or 12.10 MAY BE BROUGHT EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS STOCKHOLDERS AGREEMENT, VPC, THE CORPORATION, VANGUARD AND THE GENERAL PARTNER HEREBY 26 ACCEPT FOR THEMSELVES AND IN RESPECT OF THEIR PROPERTY, GENERALLY AND UNCONDITIONALLY, TEE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. EACH OF VPC, THE CORPORATION, THE GENERAL PARTNER, VANGUARD HEREBY WAIVES, AND AGREES NOT TO ASSERT, AS A DEFENSE IN ANY ACTION, SUIT OR PROCEEDING FOR THE INTERPRETATION OR ENFORCEMENT OF THIS STOCKHOLDERS AGREEMENT, THAT IT IS NOT SUBJECT THERETO OR THAT SUCH ACTION, SUIT OR PROCEEDING MAY NOT BE BROUGHT OR IS NOT MAINTAINABLE IN SAID COURTS OR THAT THIS STOCKHOLDERS AGREEMENT MAY NOT BE ENFORCED IN OR BY SAID COURTS OR THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR (PROVIDED THAT PROCESS SHALL BE SERVED IN ANY MANNER REFERRED TO IN THE FOLLOWING SENTENCE) THAT SERVICE OF PROCESS UPON SUCH PARTY IS INEFFECTIVE. EACH OF VANGUARD, THE GENERAL PARTNER, THE CORPORATION AND VPC AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION, SUIT OR PROCEEDING AGAINST THE OTHER PARTY WITH RESPECT TO THIS STOCKHOLDERS AGREEMENT MAY BE MADE UPON IT IN ANY MANNER PERMITTED BY THE LAWS OF THE STATE OF NEW YORK OR THE FEDERAL LAWS OF THE UNITED STATES OR AS FOLLOWS: (I) BY PERSONAL SERVICE OR BY CERTIFIED OR REGISTERED MAIL TO THE PARTY'S DESIGNATED AGENT FOR SUCH SERVICE IN SUCH STATE, OR (II) BY CERTIFIED OR REGISTERED MAIL TO THE PARTY AT ITS ADDRESS SET FORTH HEREIN. SERVICE OF PROCESS IN ANY MANNER REFERRED TO IN THE PRECEDING SENTENCE SHALL BE DEEMED, IN EVERY RESPECT, EFFECTIVE SERVICE OF PROCESS UPON SUCH PARTY. 12.9 Binding Arbitration. (a) Any controversy, claim or dispute arising out of or relating to this Agreement or the breach, termination, enforceability or validity thereof, including without limitation the determination of the scope or applicability of this Agreement to arbitrate, shall be determined exclusively by binding arbitration in New York City before three arbitrators. The arbitration shall be governed by the American 27 Arbitration Association under its Commercial Arbitration Rules and its Supplementary Procedures for large, Complex Disputes, provided that persons eligible to be selected as arbitrators all be limited to attorneys-at-law who (a) are on the AAA's Large, Complex Case Panel or a Center for Public Resources ("CPR") Panel of Distinguished Neutrals, or who have professional credentials similar to the attorneys listed on such AAA and CPR Panels, and (b) who practiced law for at least 15 years as an Attorney in New York specializing in either general commercial litigation or general corporate and commercial matters. (b) No provision of, nor the exercise of any rights under, Section 12.9(a) shall limit the right of any party (i) to foreclose against any real or personal property collateral through judicial foreclosure, by the exercise of a power of sale under a deed of trust, mortgage or other security agreement or instrument, pursuant to applicable provisions of the Uniform Commercial Code, or otherwise pursuant to applicable law, (ii) to exercise self-help remedies including, but not limited to, setoff and repossession, or (iii) to request and obtain from a court having jurisdiction before, during or after the pendency of any arbitration, provisional or ancillary remedies and relief including, but not limited to, injunctive or mandatory relief or the appointment of a receiver. The institution and maintenance of an action or judicial proceeding for, or pursuit of, provisional or ancillary remedies or exercise of self-help remedies shall not constitute a waiver of the right of the Investor, even if the Investor is the plaintiff, to submit the dispute to arbitration in the Investor would otherwise have such right. (c) In any such arbitration proceeding, the arbitrator all not have the power or authority to award punitive damages 28 to any party. Judgment upon the award rendered may be entered in any court having jurisdiction. (d) Each of the parties shall, subject to the award of the arbitrators, pay an equal share of the arbitrators' fees. The arbitrators shall have the power to award recovery of all costs and fees (including attorneys' fees, administrative fees, arbitrators' fees, and court costs) to the prevailing party. 12.10 Equitable Relief. Since the Corporation or a stockholder may sustain irreparable harm in the event there is a breach of the covenants provided in this Agreement (including those contained in a Restricted Persons Agreement or in Section 9), in addition to any other rights or remedies which the Corporation or any Stockholder may have under this Agreement or otherwise, the Corporation or a Stockholder shall be entitled to obtain specific performance or injunctive relief against the breaching or defaulting Stockholder in any court of competent jurisdiction for the purposes of restraining the other Stockholder from any actual or threatened breach of such covenants or to compel such other Stockholder to perform such covenants, without the necessity of proving irreparable injury or the inadequacy of remedies at law or posting bond or other security. 12.11 Consequential Damages. In no event shall any party be liable to the other for any consequential, punitive or speculative damages (including but not limited to damages for lost profits) arising from performance or breach of this Agreement. 29 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. VPC CORPORATION VANGUARD COMMUNICATIONS, L.P.. By: Vanguard Communications, Inc., the general partner By:\s\ Louis Brunel -------------------- Name: Louis Brunel By: Title: President -------------------------- Name: Title: VANGUARD COMMUNICATIONS, INC By: -------------------- Name: Title: OPTEL By: -------------------- Name: Title: IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. VPC CORPORATION VANGUARD COMMUNICATIONS, L.P.. By: Vanguard Communications, Inc., the general partner By: -------------------- Name: By:/s/Jonathan D. Lloyd Title: -------------------------- Name: Jonathan D. Lloyd Title: President VANGUARD COMMUNICATIONS, INC By:/s/Jonathan D. Lloyd -------------------- Name: Jonathan D. Lloyd Title: President OPTEL By: /s/Jonathan D. Lloyd -------------------- Name: Jonathan D. Lloyd Title: President EX-10.2 11 REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT REGISTRATION RIGHTS AGREEMENT, dated as of December 22, 1994, between OPTEL, INC., a Delaware corporation (the "Company") and VANGUARD COMMUNICATIONS, L.P., a California limited partnership (the "Partnership"). RECITALS The Company, the Partnership, Vanguard Communications, Inc., a California corporation and the sole general partner of the Partnership (the "Partner"), and VPC Corporation, a Delaware corporation ("VPC"), are parties to a certain Note Purchase Agreement, dated as of December 22, 1994 (the "Purchase Agreement"), pursuant to which VPC has purchased from the Company at par a senior secured convertible note of the Company (the "Note"). As recited in the Purchase Agreement, the Company has issued to the Partnership 39,000 shares of the Company's Class B Stock, $.01 par value ("Class B Stock"). Concurrently with the execution hereof the Company, VPC and the Partnership have entered into a Stockholders Agreement (the "Stockholders Agreement") providing for, among other things, the management of the Company and the regulation and disposition of stock of the Company. The Company has agreed to grant the Partnership certain rights with respect to registration under the Securities Act of Registrable Securities owned by the Partnership. The parties therefore agree as follows: 1. Registration under Securities Act, etc. 1.1 Registration on Request. (a) Request. At any time on or after the date that is the earlier of (i) 30 months after the earlier of the Conversion Date or June 30, 1995 or (ii) one year after the IPO Date, the Partnership shall have the right to request in writing that the Company effect the registration under the Securities Act of an underwritten public offering of not more than one-half of the Registrable Securities then owned by the Partnership; provided, however, that (i) except as provided in Section 1.2(c), the Company shall not be obligated to effect more than one registration pursuant to this Section 1.1 and (ii) the offering shall be conducted on a firm commitment basis through a syndicate headed by one or more Reputable Underwriters. (b) Registration of Other Securities. Whenever the Company shall effect a registration pursuant to this Section 1.1 no securities other than Registrable Securities shall be included among the securities covered by such registration unless (i) the managing underwriter of such offering shall have advised the Partnership in writing that the inclusion of such other securities would not materially adversely affect such offering or (ii) the Partnership shall have consented in writing (which consent shall be in the sole discretion of the Partnership) to the inclusion of such other securities. (c) Registration Statement Form. Registrations under this Section 1.1 shall be on such registration form of the Commission as shall be selected by the Company (except a form exclusively for the sale or distribution of securities by the Company or to employees of the Company or its subsidiaries or for use exclusively in connection with a business combination). 2 (d) Expenses. The Company will pay promptly all Registration Expenses in connection with the registration request made pursuant to this Section 1.1. (e) Effective Registration Statement. A registration requested pursuant to this Section 1.1 shall not be deemed to have been effected (i) unless (subject to Section 1.1(g)) a registration statement with respect thereto has become effective and the securities covered thereby have been disposed of in accordance with such registration statement, (ii) if after it has become effective, such registration or disposition is interfered with by stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not the fault of the Partnership, and the Registrable Securities covered thereby have not been sold, or (iii) if the conditions to closing specified in the underwriting agreement entered into in connection with such registration are not satisfied or waived to the satisfaction of the parties thereto other than the Partnership. (f) Underwriters. The managing underwriter or underwriters of any registration demanded prior to the IPO Date (a "Pre-IPO Date Demand") pursuant to this Section 1.1 shall be a Reputable Underwriter selected by the Partnership. The managing underwriter or underwriters of any registration demanded after the IPO Date pursuant to this Section 1.1 shall be a Reputable Underwriter selected by the Company. (g) Apportionment in Registrations Requested. If the managing underwriter of any registration effected pursuant to this Section 1.1 shall advise the Partnership in writing (with a copy to the Company) that, in its opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering within a price range acceptable to the Partnership, the Company will include in 3 such registration, the maximum number of Registrable Securities which the Company is so advised can be sold in such offering. (h) Pre-IPO Date Demand. If the Partnership makes a Pre-IPO Date Demand, notice of such demand shall be accompanied by a proposal letter (the "Proposal") issued by and expressing the intention of a Reputable Underwriter to underwrite the public sale of the Registrable Securities included in the demand, setting forth in reasonable detail (i) the number of shares of Common Stock the Reputable Underwriter proposes to sell for the account of the Partnership, (ii) its estimate of the price range within which it believes the Common Stock can be sold to the public and which is to be included in the registration statement at the time of the first public distribution of the preliminary prospectus forming a part thereof and (iii) the underwriting discount it estimates it would charge in connection with such a sale. The Company shall cooperate with such underwriter to enable it to prepare such a proposal, subject to prior delivery by the underwriter of a confidentiality agreement with respect to information to be obtained from the Company, in form and substance acceptable to the Company and its counsel in the reasonable exercise of their discretion. (i) Delays in Registration. The Company may delay the filing of a registration statement for up to 90 days (or such longer period as may be required by law or any rule, regulation or policy of the Commission) if at the time of a request under this Section 1.1: (i) the Company or any subsidiary of the Company is a party to a transaction involving the purchase, sale, conversion or issuance of securities of the Company (other than a transaction which is specifically not prohibited in Rule lOb-6 promulgated by the Commission under the Exchange Act); 4 (ii) there is material undisclosed information concerning the Company or any subsidiary of the Company which has not been disclosed for business reasons; (iii) financial statements required to be included or incorporated in the registration statement have not been prepared or are not otherwise available at the time (provided that the Company shall promptly and diligently prepare such financial statements or cause such financial statements to be prepared); or (iv) the Company is conducting or is about to commence an offering of securities of the Company or any subsidiary of the Company and either (A) the investment banker for the Company shall advise the Company in writing (with a copy to the Partnership) that, in its opinion, the offering being conducted or contemplated by the Company would be materially and adversely affected by the sale of Registrable Securities pursuant to such request or (B) the filing of a registration statement pursuant to such request while such offering is being conducted or contemplated or within a specified period of time after the completion, termination or abandonment of such offering would be contrary to law or any rule, regulation or policy of the Commission; provided, however, that the Company shall in all events have priority to complete any such offering prior to filing such registration statement. 1.2 VPC Purchase Option. (a) Pre-IPO Date Demand. If the Partnership makes a Pre-IPO Date Demand, VPC or an Affiliate shall have the option, exercisable by notice to the Partnership within 21 days after the receipt of the Proposal, to purchase, for payment in immediately available funds, all of the Registrable Securities to be offered by the Partnership pursuant to its Pre-IPO Date Demand, at a price per share equal to the mid point of the price range specified in the Proposal, less an 5 amount equal to the estimated underwriting discount specified in the Proposal. If VPC or an Affiliate does not exercise such right and the price to the public at which the Registrable Securities to be offered as set forth in the pricing amendment or prospectus filed with the Commission at or about the time the registration statement is declared effective (the "Offering Price") is less than 80% of the low point of such price range, the Partnership shall immediately notify VPC of the Offering Price and VPC or an Affiliate shall have the right by notice to the Partnership, exercisable by the close of business on the first day following the day on which the price to the public is established that is a business day in both Montreal, Canada and New York, to purchase all of the Registrable Securities to be offered by the Partnership, at the Offering Price plus any expenses incurred by the Partnership in connection with the registration (including any amount owed to the underwriters in lieu of underwriting discount), less the amount of the applicable underwriting discount. Any engagement letter, underwriting or purchase agreement with respect to such a contemplated public offering shall include provisions whereby the underwriter recognizes and agrees to the foregoing option rights. (b) Post IPO Date Demand. If the Partnership exercises its demand right following the IPO Date, then (in order to save underwriting and other expenses of the requested registration), VPC shall have the option, exercisable by notice to the Partnership within 21 days after the Partnership's notice of such demand, to purchase all of the Partnership's Registrable Securities then proposed to be offered, at a price equal to the Market Price of the Common Stock, less a discount (reflecting the typical underwriting discount for an offering of such type), payable in immediately available funds. (c) Additional Demand Registration Right. If VPC exercises any of the option rights described in the preceding 6 provisions of this Section 1.2, the Partnership shall be entitled to a substitute demand registration right, exercisable not earlier than one year after the purchase of Common Stock pursuant to the exercise of such option, with respect to all or any of the Registrable Securities then held by the Partnership, subject again to all of the conditions, limitations and options described herein (except that there shall be no restriction on the amount of Registrable Securities of which the Partnership may request registration). (d) Closing. The closing of a purchase and sale of Registrable Securities pursuant to this Section 1.2 shall be held at the principal office of the Company at a date and time specified in the notice of exercise of such right given by VPC or an Affiliate, but not more than 7 days after the date on which such notice is given. At such closing, (i) VPC or an Affiliate shall deliver to the Partnership, as payment for the Registrable Securities to be purchased, the purchase price for such by wire transfer of funds to an account in the United States designated by the Partnership, and (ii) the Partnership shall deliver to the purchaser (x) the certificates representing the Registrable Securities to be sold together with such instruments as the purchaser shall reasonably request to effect the transfer of such Registrable Securities, (y) if required by law, all necessary stock transfer tax stamps or funds for the purchase thereof, and (z) a certificate executed by a duly authorized officer of the Partner to the effect that (A) the Partnership owns the Registrable Securities to be sold, free and clear of all restrictions, claims, liens, charges and encumbrances, and (B) the Partnership has duly authorized the sale of such Registrable Securities. l.3 incidental Registration. (a) Right to Include Registrable Securities in Post IPO Offerings. If the Company at 7 any time proposes to register any of its equity securities under the Securities Act (other than for purposes of an IPO and other than pursuant to Section 1.1) in connection with an underwritten public offering for cash of Common Stock or other equity securities for the account of the Company or other stockholders of the Company, the Company will at such time, unless two registrations of Registrable Securities have been effected pursuant to this Section 1.3, give prompt written notice to the Partnership of its intention to register such equity securities and of the Partnership's rights under this Section 1.3. The Partnership shall have the right, exercisable by written request (which request shall specify the Registrable Securities intended to be disposed of by the Partnership) made within 30 days after the receipt of any such notice by the Company, to require some or all of the Registrable Securities, but not less than 20% of the number of Registrable Securities then owned by the Partnership to be included in such registration and as part of the underwritten offering, on the same terms as all other shares of the same class as the Registrable Securities to be included in such offering. The Company will use its best efforts to effect the registration under the Securities Act of all Registrable Securities which the Company has been so requested to register by the Partnership; provided, however, that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason or for no reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to the Partnership and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights, if any, of the Partnership to request that such registration be 8 effected as a registration under Section 1.1, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected under this Section 1.3(a) shall relieve the Company of its obligation to effect any registration upon request under Section 1.1. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 1.3(a). (b) Right to Include Registrable Securities in Initial Public Offering. If the Company at any time proposes to register under the Securities Act any of its equity securities for purposes of an IPO, the Company will at such time give prompt written notice to the Partnership (the "IPO Notice") of its intention to register such equity securities in connection with an IPO and of the Partnership's rights, if any, under this Section 1.3(b) with respect to such registration. The Partnership shall be entitled to include Registrable Securities in such registration only to the extent, if any, that the investment banker for the Company shall advise the Company in writing (with a copy to the Partnership) that, in its opinion, the offering contemplated by the Company would not be adversely affected (as to the price or quantity of securities to be sold for the account of the Company) by the inclusion therein of Registrable Securities pursuant to such request (the quantity, if any, of Registrable Securities that may be included pursuant to this sentence being herein referred to as the "IPO Permitted Registrable Securities"). The IPO Notice shall specify the quantity of IPO Permitted Registrable Securities, if then known. Subject to the foregoing, the Partnership shall have the right exercisable by written notice to the Company within 30 days after receipt of the IPO Notice to require that not less than 20% of the number of shares of Registrable Securities then owned by the Partnership (or such lesser number as constitutes all of the IPO 9 Registrable Securities) be included in such registration and as part of the underwritten offering, on the same terms as all other shares of the same class as the Registrable Securities to be included in such offering for the account of the Company. The Partnerships notice shall specify the quantity of Registrable Securities intended to be disposed of by the Partnership. The Company will use its best efforts to effect the registration under the Securities Act of the Registrable Securities which the Company has been so requested to register by the Partnership, up to the number of IPO Permitted Registrable Securities, to permit the disposition of such securities; provided, however, that if, at any time after giving written notice of its intention to register any securities and prior to the effective date of the registration statement filed in connection with such registration, the Company shall determine for any reason not to register or to delay registration of such securities, the Company may, at its election, give written notice of such determination to the Partnership and, thereupon, (i) in the case of a determination not to register, shall be relieved of its obligation to register any Registrable Securities in connection with such registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights, if any, of the Partnership to request that such registration be effected as a registration under Section 1.1 if then permitted, and (ii) in the case of a determination to delay registering, shall be permitted to delay registering any Registrable Securities, for the same period as the delay in registering such other securities. No registration effected under this Section 1.3(b) shall relieve the Company of its obligation to effect any registration upon request under Section 1.1 if permitted under this Agreement. The Company will pay all Registration Expenses in connection with each registration of Registrable Securities requested pursuant to this Section 1.3(b). 10 (c) Apportionment in Incidental Registrations. Except as specifically limited in Section 1.3(b), if (i) a registration pursuant to this Section 1.3 involves an underwritten offering of the securities being registered, whether or not for sale for the account of the Company, to be distributed by or through one or more underwriters under underwriting terms appropriate for such a transaction, and (ii) the managing underwriter of such underwritten offering shall inform the Company and the Partnership by letter of its belief that the number of securities requested to be included in such registration exceeds the number which can be sold in (or during the time of) such offering or that the inclusion would materially adversely affect the marketing of the securities to be sold by the Company therein, then the Company may include all securities proposed by the Company to be sold for its own account and may decrease the number of Registrable Securities, and securities of other stockholders of the Company so proposed to be sold and so requested to be included in such registration (Pro rata on the basis of the number of Registrable Securities held by the Partnership and the number of shares of Common Stock held by the other stockholders having rights to include equity securities in such registration (excluding VPC and its Affiliates)) to the extent necessary to reduce the number of securities to be included in the registration to the level recommended by the managing underwriter. Notwithstanding the foregoing, the Partnership shall have priority over the Company with respect to the inclusion of Registrable Securities in the registration for purposes of the exercise by the underwriters of any "greenshoe" or overallotment option with respect to the offering, to the extent, but only to the extent, that Registrable Securities were excluded from the firm portion of the offering and, in the case of an IPO, such excluded Registrable Securities were IPO Permitted Registrable Securities. 11 (d) Effective Registration Statement. A registration of Registrable Securities pursuant to this Section 1.3 shall not be deemed to have been effected (i) unless the Partnership is able to include in an offering (either in the firm or "greenshoe" portion) a number of Registrable Securities equal to the least of (x) securities equivalent to 5,850 shares of the shares of Class B Common Stock issued to the Partnership as of or prior to the date hereof, (y) 50% of the Registrable Securities owned by the Partnership immediately prior to the time the registration became effective, or (z) 75% of the Registrable Securities (or in the case of an IPO, the IPO Permitted Registrable Securities) the Partnership requested to be included in such registration, (ii) if after it has become effective, such registration is interfered with by stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not the fault of the Partnership, and the Registrable Securities covered thereby have not been sold, or (iii) if the conditions to closing specified in the selling agreement or underwriting agreement entered into in connection with such registration are not satisfied by the parties thereto other than the Partnership. 1.4 Registration Procedures. If and whenever the Company is required to use its best efforts to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 1.1 and 1.3, the Company will as expeditiously as possible: (a) prepare and (as promptly thereafter as practicable) file with the Commission the requisite registration statement to effect such registration and thereafter use its best efforts to cause such registration statement to become effective, provided, however, that the Company may discontinue any registration of its securities which are not Registrable Securities (and, under the 12 circumstances specified in Section 1.3, its securities which are Registrable Securities) at any time prior to the effective date of the registration statement relating thereto, provided, further that before filing a registration statement or prospectus or any amendments or supplements thereto, including documents incorporated by reference after the initial filing of the registration statement, the Company will furnish to the Partnership copies of all such documents proposed to be filed, which documents will be subject to the review of the Partnership; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition by the seller or sellers thereof set forth in such registration statement; (c) furnish to the Partnership such number of conformed copies of such registration statement and of each such amendment and supplement thereto (in each case including all exhibits), such number of copies of the prospectus contained in such registration statement (including each preliminary prospectus and any summary prospectus) and any other prospectus filed under Rule 424 or Rule 430A under the Securities Act, in conformity with the requirements of the Securities Act, and such other documents (in each case including all exhibits), as the Partnership may reasonably request; 13 (d) use its best efforts to register or qualify all Registrable Securities and other securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the managing underwriter shall reasonably request, to keep such registration or qualification in effect for so long as such registration statement remains in effect, and take any other action which may be reasonably necessary or advisable to enable the underwriters to consummate the disposition in such jurisdictions of the securities owned by the Partnership, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it would not but for the requirements of this subdivision (iv) be obligated to be so qualified or to consent to general service of process in any such jurisdiction; (e) use its best efforts to cause all Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the underwriters to consummate the disposition of such Registrable Securities; (f) furnish to the Partnership a signed counterpart, addressed to the Partnership and the underwriters of: (i) an opinion of counsel for the Company, dated the date of the closing under the underwriting agreement, and (ii) a "comfort" letter, dated the date of the closing under the underwriting agreement, signed by the independent public accountants who have certified the Company's financial statements included in such 14 registration statement, covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of the accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in legal opinions and accountants' letters delivered to the underwriters in underwritten public offerings of securities and, in the case of the accountants' letter, such other financial matters and, in the case of the legal opinion, such other legal matters, as the underwriters may reasonably request; (g) notify the Partnership and the managing underwriters, if any, promptly, and (if requested by any such Person) confirm such advice in writing, (1) when the prospectus or any prospectus supplement or post-effective amendment has been filed, and, with respect to the registration statement or any post-effective amendment, when the same has become effective, (2) of any request by the Commission for amendments or supplements to the registration statement or the prospectus or for additional information, (3) of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose, and (4) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; (h) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the registration statement at the earliest possible moment; 15 (i) notify the Partnership and the underwriters at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and at the request of the underwriters promptly prepare and furnish to the underwriters a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; (j) otherwise use its best efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first full calendar month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act, and will furnish to the Partnership at least two business days prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any thereof which do not comply in all material respects with the requirements of the Securities Act or of the rules or regulations thereunder; 16 (k) provide and cause to be maintained a transfer agent for all Registrable Securities covered by such registration statement from and after a date not later than the effective date of such registration statement; and (l) use its best efforts (A) to list all Registrable Securities covered by such registration statement on any securities exchange on which any of the equity securities of the Company of the same class as the Registrable Securities is then listed, or (B) in the event such securities are not so listed to have such Registrable Securities listed on the NASDAQ Stock Market, if equity securities of the Company of the same class as the Registrable Securities are then so listed, or (C) in the event such securities are not so listed, to have such Registrable Securities qualified for inclusion on the NASDAQ System. The Company may require the Partnership to promptly furnish the Company, as a condition precedent to including the Partnership's Registrable Securities in any registration, such information regarding the Partnership and the distribution of such securities as the Company may from time to time reasonably request in writing. The Partnership agrees that upon receipt of any notice from the Company of the happening of any event of the kind described in Section 1.4(g), the Partnership will forthwith discontinue the Partnership's disposition of Registrable Securities pursuant to the registration statement relating to such Registrable Securities until the underwriters' receipt of the copies of the supplemented or amended prospectus contemplated by Section 1.4(g) and, if so directed by the Company, will deliver to the Company (at the Company's expense) all copies, other than permanent file copies, then in the Partnership's 17 possession of the prospectus relating to such Registrable Securities current at the time of receipt of such notice. 1.5 Underwritten Offerings. (a) Requested Underwritten Offerings. If requested by the underwriters or a qualified independent underwriter for any offering by the Partnership pursuant to a registration requested under Section 1.1, the Company will enter into an underwriting agreement with such underwriters, or an agreement with such qualified independent underwriter, for such offering, such agreement to be satisfactory in substance and form to the Company and the Partnership and the underwriters and to contain such representations and warranties by the Company and such other terms as are generally prevailing in agreements of such type, including, without limitation, indemnities to the effect and to the extent provided in Section 1.8. The Partnership will cooperate with the Company in the negotiation of the underwriting agreement, provided that nothing herein contained shall diminish the foregoing obligations of the Company. The Partnership shall be a party to such underwriting agreement and may, at its option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Partnership and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of the Partnership. The Partnership shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties or agreements regarding the Partnership, the Partnership's Registerable Securities and the Partnership's intended method of distribution, any other information supplied in writing by the Partnership to the Company specifically for use in the Registration Statement and any other representation required by law. 18 (b) Incidental Underwritten Offerings. If the Company at any time proposes to register any of its securities under the Securities Act as contemplated by Section 1.3, then if the Partnership is entitled to include Registrable Securities in such registration, the Company will, if requested by the Partnership as provided in Section 1.3 and subject to the provisions of Sections 1.3(b) and (c), arrange for such underwriters to include all the Registrable Securities to be offered and sold by the Partnership among the securities to be distributed by such underwriters. The Partnership shall be a party to the underwriting agreement between the Company and such underwriters and may, at its option, require that any or all of the representations and warranties by, and the other agreements on the part of, the Company to and for the benefit of such underwriters shall also be made to and for the benefit of the Partnership and that any or all of the conditions precedent to the obligations of such underwriters under such underwriting agreement be conditions precedent to the obligations of the Partnership. The Partnership shall not be required to make any representations or warranties to or agreements with the Company or the underwriters other than representations, warranties, or agreements regarding the Partnership, the Partnership's Registrable Securities and the Partnership's intended method of distribution, any other information supplied in writing by the Partnership to the Company specifically for use in the Registration Statement and any other representation required by law. (c) Holdback Agreements. (i) The Partnership, if so required by the managing underwriter, shall enter into an agreement not to effect any sale or distribution of any equity securities of the Company during the seven days prior to and the 180-day period beginning on the effective date of any underwritten registration pursuant to Section 1 in which its 19 Registrable Securities are included (except as part of such underwritten registration). (ii) The Company agrees (A) not to effect any sale or distribution of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, during the seven days prior to and during the 90-day period beginning on the effective date of any underwritten registration pursuant to Section 1 (except as part of such underwritten registration or pursuant to registrations on Form S-8 or S-4 or any successor form or pursuant to a private placement made pursuant to an exemption under the Securities Act), and (B) to use its best efforts to cause each holder of at least 5% (on a fully-diluted basis) of its equity securities, or any securities convertible into or exchangeable or exercisable for such securities, purchased from the Company at any time after the date of this Agreement (other than in a registered offering) to agree not to effect any sale or distribution of any such securities during such period (except as part of such underwritten registration). 1.6 Preparation: Reasonable Investigation. In connection with the preparation and filing of each registration statement under the Securities Act pursuant to this Agreement, the company will give the Partnership, the underwriters and qualified independent underwriter, if any, and their respective counsel and accountants, the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of the Partnership's and such 20 underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act. 1.7 Rights of Holders of Reqistrable Securities. If any such registration statement refers to the Partnership by name or otherwise as the holder of any securities of the Company, then the Partnership shall have the right to require (a) the insertion therein of language, in form and substance reasonably satisfactory to the Partnership, to the effect that the holding by the Partnership of Registrable Securities does not necessarily make the Partnership a "controlling Person" of the Company within the meaning of the Securities Act and is not to be construed as a recommendation by the Partnership of the investment quality of the Company's debt or equity securities covered thereby and that such holding does not imply that the Partnership will assist in meeting any future financial requirements of the Company, or (b) in the event that such reference to the Partnership by name or otherwise is not required by the Securities Act or any rules and regulations promulgated thereunder, the deletion of the reference to the Partnership. 1.8 Indemnification. (a) Indemnification by the Company. In the event of any registration of any securities of the Company under the Securities Act, the Company will, and hereby does, indemnify and hold harmless (i) in the case of any registration statement filed pursuant to Section 1.1 or 1.3, the seller of any Registrable Securities covered by such registration statement, its directors, officers, partners, employees, agents and affiliates, each other Person who participates as an underwriter or qualified independent underwriter in the offering or sale of such securities and each other Person, if any, who controls such seller or any such underwriter within the meaning of the Securities Act, (ii) in the case of any other registration statement of the Company, the Partnership, its partners, employees, agents and affiliates, and each other Person, if any, 21 who controls such holder within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller or any such partner, employee, agent, affiliate, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims or damages or liabilities (or actions or proceedings, whether commenced or threatened, in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, any such preliminary prospectus, final prospectus, summary prospectus, amendment or supplement in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller or underwriter, as the case may be, specifically stating that it is for use in the preparation thereof; and, provided, further, that the Company shall not be liable to any Person who participates as an underwriter, in the offering or sale of Registrable Securities or any other Person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of such Person's failure to send or give a copy of the final prospectus, as the same may be then supplemented or amended to the Person asserting an untrue 22 statement or alleged untrue statement or omission or alleged omission at or prior to the written confirmation of the sale of Registrable Securities to such Person if such statement or omission was corrected in such final prospectus. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such seller or underwriter or any such director, officer, agent, affiliate or controlling person of such seller or underwriter and shall survive the transfer of such securities by such seller. (b) Indemnification by the Sellers. The Company may require, as a condition to including any Registrable Securities in any registration statement filed pursuant to Section 1.1 or 1.3, that the Company shall have received an undertaking satisfactory to it from the prospective seller of such securities, to indemnify and hold harmless (in the same manner and to the same extent as set forth in Section 1.8(a)) the Company, its directors, officers, employees, agents and affiliates and each other Person, if any, who controls the Company within the meaning of the Securities Act, with respect to any statement or alleged statement in or omission or alleged omission from such registration statement, any preliminary prospectus, final prospectus or summary prospectus contained therein, or any amendment or supplement thereto, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through an instrument duly executed by such seller specifically stating that it is for use in the preparation of such registration statement, preliminary prospectus, final prospectus, summary prospectus, amendment or supplement. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer, employee, agent, affiliate or controlling person and shall survive the transfer of such securities by such seller. 23 (c) Notices of Claims etc. Promptly after receipt by an indemnified party of notice of the commencement of any action or proceeding involving a claim referred to in the preceding paragraphs of this Section 1.8, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party, give written notice to the latter of the commencement of such action; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under the preceding paragraphs of this Section 1.8, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. In case any such action is brought against an indemnified party, unless in the opinion of counsel to such indemnified party a conflict of interest between such indemnified party and indemnifying parties may exist in respect of such claim, the indemnifying party shall be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof other than reasonable costs of investigation. No indemnifying party shall, without the consent of the indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. (d) Other Indemnification. Indemnification similar to that specified in the preceding paragraphs of this Section 1.8 (with appropriate modifications) shall be given by the Company 24 and each seller of Registrable Securities with respect to any required registration or other qualification of securities under any Federal or state law or regulation of any governmental authority other than the Securities Act. (e) Indemnification Payments. The indemnification required by this Section 1.8 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or expense, loss, damage or liability is incurred. (f) Contribution. If the indemnification provided for in this Agreement shall for any reason be unavailable or insufficient to an indemnified party under Section 1.8(a), 1.8(b) or 1.8(d) in respect to any loss, claim, damage or liability, or any action in respect thereof, or referred to therein, then each indemnifying party shall, in lieu of indemnifying such party, contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, in such proportion as shall be appropriate to reflect (i) the relative benefits received by the Company on the one hand and the Partnership on the other hand, from the offering of the Registrable Securities, and (ii) the relative fault of the Company on the one hand and the Partnership on the other, with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Partnership shall be deemed to be in the same proportion as the sum of the total net proceeds from the offering of the securities (before deducting expenses) received by the Company bears to the total net proceeds from the offering of the securities (before deducting expenses) received by the Partnership with respect to such offering, and in each case the net proceeds received from such offering shall be determined as 25 set forth on the table of the cover page of the prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Partnership, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Partnership agree that it would not be just and equitable if contribution pursuant to this Section 1.8(f) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to in this Section 1.8 shall be deemed to include, for purposes of this Section 1.8, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 2. Definitions. As used herein, unless the context otherwise requires, the following terms have the following respective meanings: "Affiliate" shall mean, with respect to any Person, another Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person. No employee of the Company or any of its subsidiaries shall be deemed to be an Affiliate solely by reason of his capacity as an employee, or by reason of any employment agreement. 26 "Class A Stock" shall mean shares of the Company's Class A Stock, par value $.01 per share. "Commission" shall mean the United States Securities and Exchange Commission or any federal agency at the time administering the Securities Act. "Common Stock" shall mean the Class A Stock and the Class B Stock. "Company" shall have the meaning set forth in the Preamble. "Conversion Date" shall mean the date on which the Note is converted into shares of Class B Common Stock. "Exchange Act" shall mean the United States Securities Exchange Act of 1934, as amended, and any successor statute thereto. "IPO" shall mean the first underwritten public offering of Common Stock of the Company for the account of the Company. "IPO Date" shall mean the date of the receipt by the Company of the net proceeds of an IPO effected pursuant to an effective registration statement under the Securities Act. "Market Price" of the Common Stock on any day shall mean the average closing price for the prior ten trading days, as officially reported by the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if the Common Stock is not listed or admitted to trading on any such 27 national securities exchange, the average closing bid price as furnished by the National Association of Securities Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer reporting such information, or if the Common Stock is not quoted on NASDAQ, as determined in good faith by resolution of the Board of Directors of the Company without regard to the minority stockholder position of the Partnership (whose determination shall be conclusive), based on the best information available to it. "Person" shall mean a corporation, an association, a partnership, a limited liability partnership, a limited liability company, a business, an individual, a governmental or political subdivision thereof or a governmental agency. "Purchase Agreement" shall have the meaning set forth in the Recitals. "Registrable Securities" shall mean the shares of Class A Stock issued or issuable upon conversion of (i) the 39,000 shares of Class B Stock delivered to the Partnership pursuant to the Purchase Agreement or (ii) securities issued or issuable with respect to such Class B Stock by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. Registrable Securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the 28 public pursuant to Rule 144, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force and no other restriction on transfer exists, or (d) they shall have ceased to be outstanding. "Registration Expenses" shall mean all expenses incident to the Company's performance of or compliance with Section 1, including, without limitation, all registration, filing and National Association of Securities Dealers, Inc. fees, all fees and expenses of complying with securities or blue sky laws (including fees and disbursements of counsel for the underwriters in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or the Partnership may designate), all word processing, duplicating and printing expenses, messenger and delivery expenses, the fees and independent public accountants, including the expenses of any special audits or "cold comfort" letters required by or incident to such performance and compliance, the fees and disbursements of one counsel selected by the Partnership to represent the Partnership and other costs of policies of insurance obtained by the Company against liabilities arising out of the public offering of the Registrable Securities being registered and any fees and disbursements of underwriters customarily paid by issuers or sellers of securities (including fees paid to a qualified independent underwriter), but 29 excluding underwriting discounts and commissions and transfer taxes, if any. "Reputable Underwriters" shall mean a nationally or regionally recognized investment banking firm of good repute which regularly acts as lead underwriter of syndicated public offerings of equity securities in excess of $50 million. "Rule 144" shall have the meaning set forth in Section 3 hereof. "Securities Act" shall mean the Securities Act of 1933, as amended, and any successor statute thereto. 3. Rule 144. So long as the Common Stock of the Company shall be registered pursuant to the requirements of Section 12 of the Exchange Act, the Company will file the reports required to be filed by it under the Exchange Act and will take such further action as the Partnership may reasonably request, all to the extent required from time to time to enable the Partnership to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 under the Securities Act, as such Rule may be amended from time to time or (b) any similar rule or regulation hereafter adopted by the Commission ("Rule 144"). Upon the request of the Partnership, the Company will deliver to the Partnership a written statement as to whether it has complied with such requirements. 4. Amendments and Waivers. This Agreement may be amended and the Company may take any action herein prohibited or omit to perform any act herein required to be performed by it, only if the Company shall have obtained the written consent to such amendment, action or omission to act, of the Partnership. 30 The Partnership shall be bound by any consent authorized by this Section 4, whether or not such Registrable Securities shall have been marked to indicate such consent. 5. Nominees for Beneficial Owners. In the event that any Registrable Securities are held by a nominee for the beneficial owner thereof, the beneficial owner thereof may, at its election by written notice to the Company effective upon receipt by the Company, be treated as the holder of such Registrable Securities for purposes of any request or other action by any holder or holders of Registrable Securities pursuant to this Agreement or any determination of any number or percentage of shares of Registrable Securities held by any holder or holders of Registrable Securities contemplated by this Agreement. If the beneficial owner of any Registrable Securities so elects, the Company may require assurances reasonably satisfactory to it of such owner's beneficial ownership of such Registrable Securities. Prior to receipt by the Company of written notice contemplated hereby, any action taken by any nominee shall be binding upon any such beneficial owner. 6. Binding Arbitration. 6.1 Any controversy, claim or dispute arising out of or relating to this Agreement or the breach, termination, enforceability or validity thereof, including without limitation the determination of the scope or applicability of this agreement to arbitrate, shall be determined exclusively by binding arbitration in New York City before three arbitrators. The arbitration shall be governed by the American Arbitration Association ("AAA") under its Commercial Arbitration Rules and its Supplementary Procedures for large, Complex Disputes, provided that persons eligible to be selected as arbitrators shall be limited to attorneys-at-law who (a) are on the AAA's Large, Complex Case Panel or a Center for Public Resources ("CPR ") Panel of Distinguished Neutrals, or who have professional 31 credentials similar to the attorneys listed on such ALA and CPR Panels, and (b) who practiced law for at least 15 years as an attorney in New York specializing in either general commercial litigation or general corporate and commercial matters. 6.2 No provision of, nor the exercise of any rights under, Section 6.1 shall limit the right of any party (a) to foreclose against, take possession of or realize upon any real or personal property collateral through judicial foreclosure, by the exercise of a power of sale under a deed of trust, mortgage or other security agreement or instrument, pursuant to applicable provisions of the Uniform Commercial Code, or otherwise pursuant to applicable law, (b) to exercise self-help remedies including, but not limited to, setoff and repossession, or (c) to request and obtain from a court having jurisdiction before, during or after the pendency of any arbitration, provisional or ancillary remedies and relief including, but not limited to, injunctive or mandatory relief or the appointment of a receiver. The institution and maintenance of an action or judicial proceeding for, or pursuit of, provisional or ancillary remedies or exercise of self-help remedies shall not constitute a waiver of the right of the Company, even if the Company is the plaintiff, to submit the dispute to arbitration if the Company would otherwise have such right. 6.3 In any such arbitration proceeding, the arbitrator shall not have the power or authority to award punitive damages to any party. Judgment upon the award rendered may be entered in any court having jurisdiction (which shall not be restricted by Section 10). 6.4 Each of the parties shall, subject to the award of the arbitrators, pay an equal share of the arbitrators' fees. The arbitrators shall have the power to award recovery of all 32 costs and fees (including attorneys fees, administrative fees, arbitrators' fees, and court costs) to the prevailing party. 7. Notices. All notices, consents, instructions and other communications required or permitted under this Agreement (collectively, "Notice") shall be effective only if given in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered mail, return receipt requested, postage prepaid. Notice shall be sent in each case to the appropriate addresses or telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may from time to time designate as to itself by notice similarly given to the other parties in accordance herewith, which shall not be deemed given until received by the addressee). Notice shall be given: (1) to the Company at: OpTel, Inc. 345 N. Maple Drive Suite 285 Beverly Hills, California 90210 Attn: Chief Financial Officer Telecopier: 310-273-9453 copy to: Kronish, Lieb, Weiner & Hellman 1114 Avenue of the Americas New York, New York 10036-7798 Attn: Russell S. Berman, Esq. Telecopier: 212-479-6275 33 (2) to the Partnership: Vanguard Communications, Inc. 345 N. Maple Dr. Suite 285 Beverly Hills, California 90210 Attn: President Telecopier: 310-273-9453 copy to: Irell & Manella 1800 Avenue of the Stars Suite 900 Los Angeles, California 90067-4276 Attn: Joan L. Lesser, Esq. Telecopier: 310-203-7199 8. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the Partnership shall also be for the benefit of and enforceable by any subsequent holder of any Registrable Securities, subject to the provisions respecting the minimum numbers or percentages of shares of Registrable Securities required in order to be entitled to certain rights, or take certain actions, contained herein. 9. Descriptive Headings. The descriptive headings of the several sections and paragraphs of this Agreement are inserted for reference only and shall not limit or otherwise affect the meaning hereof. 10. GOVERNING LAW: CONSENT TO EXCLUSIVE JURISDICTION. THIS REGISTRATION RIGHTS AGREEMENT IS MADE UNDER AND IS INTENDED TO BE PERFORMED IN THE STATE OF NEW YORK, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAW OF SUCH STATE APPLICABLE TO CONTRACTS ENTERED INTO AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE. SUBJECT TO SECTION 6, ANY LEGAL ACTION OR PROCEEDING WITH 34 RESPECT TO THIS REGISTRATION RIGHTS AGREEMENT SHALL BE BROUGHT EXCLUSIVELY IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION AND DELIVERY OF THIS REGISTRATION RIGHTS AGREEMENT, EACH OF THE COMPANY AND THE PARTNERSHIP HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS. EACH OF THE COMPANY AND THE PARTNERSHIP HEREBY WAIVES, AND AGREES NOT TO ASSERT, AS A DEFENSE IN ANY ACTION, SUIT OR PROCEEDING FOR THE INTERPRETATION OR ENFORCEMENT OF THIS REGISTRATION RIGHTS AGREEMENT, THAT IT IS NOT SUBJECT THERETO OR THAT SUCH ACTION, SUIT OR PROCEEDING MAY NOT BE BROUGHT OR IS NOT MAINTAINABLE IN SAID COURTS OR THAT THIS REGISTRATION RIGHTS AGREEMENT MAY NOT BE ENFORCED IN OR BY SAID COURTS OR THAT ITS PROPERTY IS EXEMPT OR IMMUNE FROM EXECUTION, THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER OR (PROVIDED THAT PROCESS SHALL BE SERVED IN ANY MANNER REFERRED TO IN THE FOLLOWING SENTENCE) THAT SERVICE OF PROCESS UPON SUCH PARTY IS INEFFECTIVE. EACH OF THE COMPANY AND THE PARTNERSHIP AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION, SUIT OR PROCEEDING AGAINST IT WITH RESPECT TO THIS REGISTRATION RIGHTS AGREEMENT MAY BE MADE UPON IT IN ANY MANNER PERMITTED BY THE LAWS OF THE STATE OF NEW YORK OR THE FEDERAL LAWS OF THE UNITED STATES OR AS FOLLOWS: (I) BY PERSONAL SERVICE OR BY CERTIFIED OR REGISTERED MAIL TO THE PARTY'S DESIGNATED AGENT FOR SUCH SERVICE IN SUCH STATE, OR (II) BY CERTIFIED OR REGISTERED MAIL TO THE PARTY AT ITS ADDRESS SET FORTH HEREIN. SERVICE OF PROCESS IN ANY MANNER REFERRED TO IN THE PRECEDING SENTENCE SHALL BE DEEMED, IN EVERY RESPECT, EFFECTIVE SERVICE OF PROCESS UPON SUCH PARTY. 11. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts shall together constitute one and the same instrument. 35 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written, OPTEL, INC. By: /s/ JONATHAN D. LLOYD ----------------------------- Name: JONATHAN D. LLOYD Title: PRESIDENT VANGUARD COMMUNICATIONS, L.P. By: VANGUARD COMMUNICATIONS, INC. Its General Partner By: /s/ JONATHAN D. LLOYD ----------------------------- Name: JONATHAN D. LLOYD Title: PRESIDENT EX-10.3 12 SETTLEMENT AGREEMENT SETTLEMENT AGREEMENT (this "Agreement"), dated as of August 1, 1996, between VANGUARD COMMUNICATIONS, L.P., a California limited partnership ("Vanguard"), VANGUARD COMMUNICATIONS, INC., a California corporation (the "General Partner"), PACIFIC CAPITAL GROUP, INC., a California corporation ("Pacific"), VPC CORPORATION, a Delaware corporation ("VPC"), OPTEL, INC., a Delaware corporation "OpTel"), and LE GROUPE VIDEOTRON LTEE, a Quebec corporation ("GVL"). R E C I T A L S Vanguard and VPC are the sole stockholders of OpTel, and they and OpTel are parties to a certain Stockholders Agreement, dated as of December 22, 1994 (the "Stockholders Agreement"), providing; among other things, for certain matters relating to the ownership and voting of shares of OpTel's Common Stock owned by Vanguard and VPC. GVL is the indirect parent of VPC. The General Partner is the sole general partner of Vanguard. Pacific is an Affiliate of the General Partner and holds a substantial economic interest in Vanguard. Vanguard and VPC and certain related persons have engaged in various disputes relating to OpTel and the conduct of its business. In connection with certain of these disputes, on January 29, 1996 Vanguard initiated the pending case described in Schedule I (the "Litigation") in which GVL and various subsidiaries and related persons of GVL are named as defendants and OpTel is named as a nominal defendant. It is the common wish of the parties to settle their disputes and preserve and enhance the value of OpTel. As of the date hereof, Vanguard owns beneficially and of record 33,250 shares of OpTel's Class B Stock, par value $.01 per share ("Class B Stock"). The parties now desire to (i) terminate the Litigation with prejudice, (ii) provide for the sale by Vanguard to VPC of 12,540 shares of the Class B Stock held by Vanguard (the "Designated Shares"), so that the remaining balance of the shares of Class B Stock held by Vanguard will constitute 16.51% of the shares of OpTel's capital stock outstanding immediately following the contribution of Shares by VPC contemplated by Section 5 hereof, (iii) modify the Stockholders Agreement, and (iv) provide for various other matters relating to OpTel and its business, including the delivery of certain releases provided for herein and the other agreements listed on Schedule IA (such releases and other agreements, collectively, the "Related Agreements"). By one or more separate agreements of even date herewith (all of which are Related Agreements), various other parties to or affected by the Litigation are contracting to settle the Litigation in conformity with the terms of this Agreement. In consideration of the foregoing recitals and the mutual agreements set forth herein, the parties agree as follows: 1. Definitions. Except as otherwise defined in this Agreement, all capitalized terms used herein shall have the same meanings herein as in the Stockholders Agreement. -2- 2. Settlement of Dispute. 2.1 Promptly after the execution and delivery hereof, the parties hereto which are parties to the Litigation (the "Litigating Parties") shall execute and deliver and shall promptly cause to be filed with the appropriate authorities all stipulations and other documents necessary to be executed and filed by them so as to discontinue with prejudice and without costs to any party all of the actions, motions and appeals constituting the Litigation. The parties shall immediately cease all activity in connection with the prosecution and defense of the Litigation and take all such actions as may reasonably be necessary to stay further proceedings in the Litigation pending the discontinuation of the Litigation with prejudice. Each party to the Litigation shall pay its own expenses, including attorneys' fees, incident to the Litigation and to the preparation and performance of this Agreement. 2.2 Concurrently herewith, the Persons specified in Schedule II are executing and delivering to the recipients identified in such Schedule releases in the form of Exhibit A (including releases as to the matters described in the schedules provided pursuant to Section 10.1), except that (i) James A. Kofalt and certain other Persons are granting and receiving releases limited to matters affecting the Litigation and (ii) certain of the Persons so specified are not available to provide releases concurrently herewith, but Pacific and Vanguard on the one hand and VPC and GVL on the other hand jointly covenant and agree that they will promptly procure such releases from those of the specified Persons associated with them as indicated in Exhibit A and will thereupon immediately deliver such releases to the Persons entitled to receive the same; provided, however, that no Person entitled to receive releases shall receive any of such releases unless such Person has provided releases as herein required; and provided, further, that the exchange of releases -3- with respect to Pacific Telesis Group and Transworld Telecommunications, Inc. will be effected only as may hereafter be requested by either or both of such entities. 2.3 Neither this Agreement nor any of the terms hereof nor any negotiations, proceedings or agreements in connection herewith shall constitute or be construed as or be deemed to be evidence of an admission on the part of any party to the Litigation of any liability or wrongdoing whatsoever, or of the truth or untruth of any of the claims made by any party in the Litigation, or of the merit or any lack of merit of any of the defenses thereto; nor shall this Agreement or any of the terms hereof or any negotiations or proceedings in connection herewith, be offered or received in evidence or used in any proceeding against any of the parties hereto or to the Litigation or used in any proceeding for any purpose whatsoever except with respect to the effectuation and enforcement of this Agreement and the discontinuance with prejudice of the Litigation. 2.4 (a) Promptly upon the discontinuance with prejudice of the Litigation, each party to the Litigation shall return to the other parties to the Litigation all documents received from them and from non-party witnesses in the course of discovery in the Litigation, or shall provide written notice to the producing party that such documents (including documents in the possession of counsel or experts retained in connection with the Litigation) and all copies thereof have been destroyed. The parties shall also return all the transcripts of all depositions taken by them during the course of the Litigation, or shall provide written notice to the other parties to the Litigation that such transcripts (including transcripts in the possession of counsel or experts retained in connection with the Litigation) have been destroyed. -4- (b) Promptly after the execution and delivery hereof, each party shall use its best efforts to cause any consultant or expert retained by it for the purpose of testifying or assisting in the prosecution or defense of the Litigation ("Expert") to execute a sworn certification providing that the Expert agrees to keep information which it obtained from the documents produced by the other party strictly confidential, upon which the other party shall be entitled to rely. Counsel for the party that disclosed the confidential information shall notify counsel for the party that produced the confidential information that said certifications have been signed (or are not obtainable) and shall retain said certifications for a period of 10 years. Upon a showing of reasonable basis for belief that a certification may have been violated, the certification shall be made available to counsel for the party that produced the confidential information. 2.5 The parties to the Litigation will not hereafter use for their own benefit or any other purpose or disclose to any other Person any of the information obtained by them through discovery in connection with the Litigation and will use their best efforts to prevent any Person to which they have provided such information from doing so. This provision shall not prevent any Person from lawfully using information that was lawfully in its possession prior to receiving that information through discovery in connection with the Litigation or that it lawfully obtains otherwise than through discovery in connection with the Litigation. 3. Sale and Purchase of OpTel Stock. 3.1 Vanguard hereby sells the Designated Shares to VPC, and VPC hereby purchases the Designated Shares from Vanguard for the aggregate purchase price of $20,000,000 (the "Purchase Price"). Payment of the Purchase Price is being effected -5- concurrently herewith by wire transfer of funds in that amount to an account designated by Vanguard, and Vanguard hereby acknowledges receipt of such funds and payment of the Purchase Price in full. Delivery of the Designated Shares is being effected by delivery to VPC of one or more certificates evidencing shares of Class B Stock accompanied by a stock power for the Designated Shares endorsed in favor of VPC. OpTel is herewith issuing and delivering (i) to VPC a new certificate for the Designated Shares and (ii) to Vanguard a new certificate evidencing any excess shares of Class B Stock included in the certificates delivered to VPC. All such certificates are endorsed with the legends provided for in the Stockholders Agreement. 3.2 Approved Resale. Vanguard hereby (i) expressly waives any right under Section 6.6(b) of the Stockholders Agreement or otherwise to join in any sale or resale by VPC within 120 days after the date hereof of a total of not more than 12,540 shares of Class B Stock held by VPC to Caisse de Depot et Placement du Quebec and/or Capital Communications CDPQ Inc. (or one or more Affiliates of such entities) provided such transactions are effected in accordance with Section 6.2 of the Stockholders Agreement and the price per share paid to VPC does not exceed the price per share paid by VPC to purchase the Designated Shares, and (ii) agrees that the shares sold in such transaction may continue to be shares of Class B Stock in the hands of the purchasers and that the certificate of incorporation of OpTel may be amended as set forth in Exhibit B to allow the purchasers and their Affiliates to hold shares of Class B Stock. 4. Grant of Option to Vanguard. Concurrently herewith, OpTel is issuing to Vanguard the non-transferable option (the "Option") to purchase 2,663 shares of Class B Stock at the purchase price of $984 per share during the period commencing 30 -6- days after the date hereof and ending on the date that is the earlier of (i) July 31, 1999 and (ii) 180 days after the IPO Date. A copy of the option is set forth as Exhibit C. Shares issuable upon exercise of the Option shall be included in the "Registrable Securities" for purposes of the Registration Rights Agreement. 5. Contribution of Certain Shares by VPC. Concurrently herewith, VPC is contributing to the capital of OpTel a total of 867 shares of Class B Stock, constituting all of the shares issued in respect of interest accrued on OpTel's promissory note dated July 25, 1995 in the original principal sum of $8,311,848, which was converted into Class B Stock on April 1, 1996. All of such interest shall be deemed contributed to the capital of OpTel as of the date of such conversion. The shares so contributed shall be cancelled and returned to the status of authorized and unissued shares of capital stock. 6. OpTel Financing by VPC. 6.1 The terms of the outstanding grid notes of OpTel issued to VPC as specified on Schedule III are hereby modified as follows (such grid notes and the loans evidenced thereby, as so modified, being herein referred to as the "Pre-Settlement Advances"): (a) prepayment of Pre-Settlement Advances shall be made out of proceeds of any sale of debt or equity securities of OpTel to such extent as VPC, in its sole discretion, shall require, and Pre-Settlement Advances shall not otherwise be subject to prepayment without the consent of VPC; and -7- (b) principal of and interest on Pre-Settlement Advances may be converted, wholly but not in part, at the election of VPC, into shares of Class B Stock, (i) during the period of 180 days commencing on the IPO Date and, if such 180-day period shall not previously have commenced and expired, (ii) the period of 90 days commencing on April 30, 1999 (the earlier of such periods, the "Conversion Period", and the date of exercise of the conversion privilege, the "Conversion Date"). Subject to customary anti-dilution adjustments, the conversion price of Pre-Settlement Advances shall be (1) the price at which Common Stack is first sold to the public in a public offering, provided that the product of such price and the number of shares of Common Stock outstanding, on a Fully-diluted basis (excluding shares sold in the Offering and shares issuable upon conversion of outstanding Pre-Settlement Advances or convertible debt of OpTel issued as contemplated by Section 6.3), equals or exceeds $225 million, or (2) if no such sale of Common Stock has taken place on or before the Conversion Date, a price equal to the quotient of $225 million divided by the number of shares of Common Stock outstanding on that date, on a fully-diluted basis (excluding shares issuable upon conversion of outstanding Pre-Settlement Advances or convertible debt of OpTel issued as contemplated by Section 6.3). The right to convert Pre-Settlement Advances shall expire if not exercised within the Conversion Period. Concurrently herewith, a legend making reference to the foregoing modifications is being endorsed on each of the grid notes -8- representing Pre-Settlement Advances and initialled on behalf of OpTel and VPC. None of OpTel, VPC or Vanguard shall have any obligation to subordinate the indebtedness represented by Pre-Settlement Advances (or any convertible notes purchased pursuant to Section 6.3) or otherwise alter the terms and conditions of the Pre-Settlement Advances (or such notes) in order to facilitate any financing transaction undertaken by OpTel. The foregoing provisions regarding the terms of the Pre-Settlement Advances shall be construed to be in substance equivalent, mutatis mutandis, to the terms set forth in Exhibit D, as provided for in Section 6.3. 6.2 Anything in the Stockholders Agreement to the contrary notwithstanding, except as herein otherwise expressly permitted, from and after the date hereof and until the earlier of the IPO Date and July 31, 1999, OpTel shall not issue or sell to VPC or Vanguard or any of their respective Affiliates any additional shares of capital stock of OpTel of any class, or any options or other rights to acquire any such shares, except with the consent of VPC and Vanguard in each instance. 6.3 (a) From and after the date hereof, neither VPC or Vanguard nor any of their respective Affiliates shall be obligated to provide additional financing to OpTel, pursuant to the Stockholders Agreement or otherwise. Nevertheless, if the Board so requests as necessary for the business of OpTel and VPC so elects, VPC may purchase from OpTel one or more convertible promissory notes of OpTel substantially in the form of Exhibit D and otherwise identical, mutatis mutandis, to the terms of the Pre-Settlement Advances as set forth in Section 6.1. Prior to the earlier of the IPO Date and July 31, 1999, VPC shall not advance funds to OpTel for any purpose on terms less advantageous to OpTel than the terms of Pre-Settlement Advances. -9- (b) Prior to the IPO Date, Vanguard shall have the right to participate in each purchase of such convertible promissory notes, mutatis mutandis, as if the principal amount of the promissory notes to be sold in each instance constituted "Additional Shares" as provided in Section 6.5 of the Stockholders Agreement, except that Vanguard may not exercise such right in any instance as to less than 10% of the aggregate principal amount of the promissory notes to be sold by OpTel to VPC and Vanguard in such instance. Vanguard's election to participate in any such purchase shall be effected by Purchase Notice given during the Participation Period. In the event that Vanguard effects its participation after the date of the related purchase by VPC, then such purchase may be effected by purchase from VPC of a portion of the notes issued to VPC, at principal plus accrued interest, or otherwise in such manner as will fairly compensate VPC for the interim advance of funds for Vanguard's benefit. 6.4 VPC and Vanguard hereby expressly ratify and approve the proposed issuance of options and shares of capital stock of OpTel to officers, directors and employees of OpTel and to James A. Kofalt (it being acknowledged by them, subject to any agreement that may be made between OpTel and Mr. Kofalt, that the number of shares covered by options, exercisable at a price of $984 per share, which may be issued to Mr. Kofalt will not exceed 1,360 shares of capital stock of OpTel), under one or more employee benefit plans or otherwise, to the extent approved by the Board. Vanguard acknowledges that options and/or shares under any such plans may hereafter be granted or issued to persons who serve both as officers of OpTel (provided they render services to OpTel) or directors of OpTel and as officers, directors and/or employees of VPC or other Affiliates of GVL and agrees that the issuance of such options and or/shares pursuant -10- to such plans shall not be deemed to violate the restrictions imposed by Section 6.2. 7. Directors of OpTel. 7.1 Section 2.3(b) of the Stockholders Agreement is amended hereby to read in full as follows: (b) For so long as Vanguard's Percentage Ownership is at least 10%: (i) VPC shall be entitled to designate at least five Nominees; and (ii) Vanguard shall be entitled to designate two Nominees. 7.2 Section 2.3(c) of the Stockholders Agreement is deleted, Section 2.3(d) of the Stockholders Agreement is renumbered as 2.3(c), and the following new provision is inserted as Section 2.3(d): (d) For purposes of this Section 2.3, the right of Vanguard to designate Nominees shall be vested in and exercised exclusively by Pacific, so long as Pacific shall have an economic interest in Vanguard. Notwithstanding such amendment, the Restricted Persons Agreement shall remain in force and the Lapse Date shall not be triggered under clause (i) of the definition contained in Section 1.1 of the Stockholders Agreement unless Pacific shall voluntarily relinquish all rights to designate a Director pursuant to the Stockholders Agreement, whereupon the Lapse Date shall occur and all rights of Vanguard and Pacific under Section 2.3 of the Stockholders Agreement shall forthwith terminate. 8. Certain Activities and Transactions of VPC Affiliates. Anything in the Restricted Persons Agreement to the contrary notwithstanding, OpTel and Vanguard acknowledge that Videotron -11- USA, Inc., a Delaware corporation, Wireless Holdings, Inc., a Delaware corporation, and Videotron (Bay Area) Inc., a Florida corporation, are Affiliates of VPC and are engaged in certain aspects of the Business. OpTel and Vanguard consent and agree to the acquisition and continuing ownership by Affiliates of VPC of interests in such corporations, the continuing conduct and development by such corporations of their respective businesses as presently conducted, and the receipt and retention by Affiliates of VPC of the proceeds of disposition of such corporations and their respective assets and businesses, without accountability or liability therefor to OpTel or Vanguard. Without limitation of the foregoing, OpTel and Vanguard acknowledge that they are familiar with the terms and provisions of that certain Stock Purchase Agreement, dated as of November 9, 1995, to which such corporations and Pacific Telesis Group and certain of its subsidiaries are parties (the "PTG Agreement"). OpTel and Vanguard expressly consent to the PTG Agreement (including any modification or amendment thereof that does not (i) restrict or prohibit OpTel from engaging in the Business in any geographic market in the United States, (ii) purport to bind OpTel as an affiliated person or subsidiary of GVL or Videotron USA, Inc., or (iii) otherwise have a material adverse effect on OpTel) and the transactions contemplated thereby and waive any claim whatsoever to any proceeds of the PTG Agreement and such transactions. 9. Management Fees. 9.1 From and after August 1, 1996, OpTel shall pay management advisory fees to each of VPC and Pacific at the annual rate of $350,000. Such fees shall be payable in equal monthly installments on or before the 15th day of the month in which the fee accrues, and no payment shall be made to either VPC or Pacific in any instance unless an equal payment is made concurrently to the other. In consideration of such fee, VPC and -12- Pacific shall make available to OpTel, at the specific request of the Board, such reasonable consulting, advisory and management services as OpTel may reasonably require. Such services will be provided on a confidential basis and may be provided by officers, directors, employees and agents of VPC and Pacific and their respective Affiliates. To the extent VPC or Pacific shall incur travel expenses in the performance of services at the specific request of the Board, such expenses shall be reimbursed by OpTel in accordance with its normal practices following presentation of proper vouchers or other appropriate evidence of such expenditures. The arrangement described in this Section 9.1 shall terminate on the earlier of the IPO Date and the date when any public or institutional financing obtained by OpTel restricts the payment of fees or charges to Affiliates of OpTel; provided, however, that if and to the extent such arrangement shall be restricted or continued, it shall apply equally to VPC and Pacific. In no event shall any such fee be payable at a time when either VPC or Pacific is not bound by the Restricted Persons Agreement. 9.2 Nothing herein shall be deemed to limit or restrict the right of OpTel to pay to officers, directors, stockholders or Affiliates appropriate compensation and reimbursement at competitive rates for goods or services actually supplied or rendered otherwise than pursuant to the arrangement described in Section 9.1, including interest on funds loaned to OpTel, subject to the limitations set forth in Sections 6.1 and 6.3. 10. Confidential Disclosures. 10.1 Each of VPC and Pacific has provided to the other a separate schedule of plans, proceedings, agreements, commitments and restrictions to or by which it or any of its Affiliates is presently bound or subject or anticipates being -13- bound or subject that is or may reasonably be construed to be relevant in any material way to the conduct of business by OpTel during the foreseeable future. Such schedules have been appropriately identified and delivered, and a copy of each schedule has been initialled on each page and signed on the final page by the recipient and retained by the provider in the exact form in which it was delivered. 10.2 Each of VPC and Pacific hereby represents and warrants to the other that the schedule delivered by it pursuant to Section 10.1 is, to the best of its knowledge and belief, true, complete and correct in all material respects. 10.3 None of the parties hereto or their respective Affiliates, partners and stockholders shall hereafter bring any claim or action, of any nature whatsoever, against any other of such Persons, in any forum, arising out of or relating to any matter or thing affecting OpTel which is disclosed in such schedules, whether occurring prior to or after the date hereof. 11. Representations and Warranties of VPC and GVL. 11.1 VPC hereby represents and warrants to Vanguard as follows: (a) VPC has full corporate power and authority to execute and deliver this Agreement and the Related Agreements to which it is a party and to perform its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the Related Agreements by VPC have been duly authorized by all necessary corporate action of VPC, and this Agreement and each of the Related Agreements to which VPC is a party constitutes a valid and binding obligation of VPC, enforceable against VPC in accordance with its terms. -14- (b) Neither the execution and delivery of this Agreement and the Related Agreements to which VPC is a party nor the consummation of the transactions contemplated hereby or thereby constitutes a violation or breach of the certificate of incorporation or bylaws (or other governing instrument) of VPC or of any provision of any material contract, license or franchise or other instrument to which VPC is a party or by which it is bound. 11.2 GVL hereby represents and warrants to Vanguard as follows: (a) GVL has full corporate power and authority to execute and deliver this Agreement and the Related Agreements to which it is a party and to perform its obligations hereunder and thereunder. The execution, delivery and performance of this Agreement and the Related Agreements by GVL have been duly authorized by all necessary corporate action of GVL, and this Agreement and each of the Related Agreements to which GVL is a party constitutes a valid and binding obligation of GVL, enforceable against GVL in accordance with its terms. (b) Neither the execution and delivery of this Agreement or the Related Agreements to which GVL is a party nor the consummation of the transactions contemplated hereby or thereby constitutes a violation or breach of the certificate of incorporation or bylaws (or other governing instrument) of GVL or of any provision of any material contract, license or franchise or other instrument to which GVL is a party or by which it is bound. -15- 12. Representations and Warranties of Vanguard and Pacific. 12.1 Vanguard hereby represents and warrants to VPC as follows: (a) Vanguard has full power and authority to execute and deliver this Agreement and the Related Agreements to which it is a party and to perform its obligations hereunder and thereunder. The execution, delivery and performance by Vanguard of this Agreement and the Related Agreements have been duly authorized by all necessary partnership action of Vanguard and all necessary corporate or other required action of each of its partners. This Agreement and each of the Related Agreements to which Vanguard is a party constitutes a valid and binding obligation of Vanguard, enforceable against Vanguard in accordance with its terms. (b) Vanguard owns the Designated Shares free and clear of all claims, defects and encumbrances, and upon delivery thereof and payment therefor in accordance with the terms hereof, VPC will acquire ownership thereof free of any claim, defect, encumbrance or restriction arising by reason of anything suffered or done by Vanguard. (c) Neither the execution and delivery of this Agreement or the Related Agreements to which Vanguard is a party nor the consummation of the transactions contemplated hereby or thereby constitutes a violation or breach of the partnership agreement or certificate of partnership of Vanguard or the certificate of incorporation or bylaws (or other governing instrument) of any of its partners or of any provision of any material contract, license or franchise or other instrument to which Vanguard or any of its partners is a party or by which it is bound. -16- 12.2 Pacific hereby represents and warrants to VPC as follows: (a) Pacific has full corporate power and authority to execute and deliver this Agreement and the Related Agreements to which it is a party and to perform its obligations hereunder and thereunder. The execution, delivery and performance by Pacific of this Agreement and the Related Agreements have been duly authorized by all necessary corporate action of Pacific. This Agreement and each of the Related Agreements to which Pacific is a party constitutes a valid and binding obligation of Pacific, enforceable against Pacific in accordance with its terms. (b) Neither the execution and delivery of this Agreement or the Related Agreements to which Pacific is a party nor the consummation of the transactions contemplated hereby or thereby constitutes a violation or breach of the certificate of incorporation or bylaws (or other governing instrument) of Pacific or of any provision of any material contract, license or franchise or other instrument to which Pacific is a party or by which it is bound. 13. Notices. All notices, requests, demands, consents and other communications required or permitted under this Agreement (collectively, "Notice") shall be effective only if given in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered -17- mail, return receipt requested, postage prepaid. Notice shall be sent in each case to the appropriate addresses or telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may from time to time designate as to itself by notice similarly given to the other parties in accordance herewith, which shall not bee deemed given until received by the addressee). Notice shall be given: (i) to VPC and GVL at: 300 Viger Avenue East Montreal, Quebec, Canada H2X3W4 Attention: Vice President--Legal Affairs Telecopier: (514) 985-8834 copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036-7798 Attn: Russell S. Berman, Esq. Telecopier: (212) 479-6275 (ii) to Vanguard and the General Partner at: Mandeville Partners LLC 12100 Wilshire Blvd., Suite 705 Los Angeles, California 90025 Attn: Jonathan D. Lloyd Telecopier: (310) 442-7890 (iii) to Pacific at: 150 El Camino Drive Suite 204 Beverly Hills, California 90212 Telecopier: (310) 281-4942 copy to: Sanders, Barnet, Goldman, Simons & Mosk 1901 Avenue of the Stars, Suite 850 Los Angeles, California 90067 Attn: Michael Sanders, Esq. Telecopier: (310) 553-2435 (iv) to OpTel at: 1111 W. Mockingbird Lane Dallas, Texas 75247 Attn: General Counsel Telecopier: (214) 634-3889 -18- 14. Further Assurances. 14.1 Each of the parties shall, at any time and from time to time after the date hereof, fairly and in good faith, do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney, receipts, acknowledgments, acceptances and assurances as may be reasonably required to procure for each of the parties and their respective successors and assigns, the consideration to be delivered to them as provided for herein or otherwise to carry out the intent and purposes of this Agreement or to consummate any of the transactions contemplated hereby. 14.2 In the event that there shall be outstanding any injunction, order or judgment preventing the consummation of any of the transactions contemplated hereby, any pending lawsuit challenging such transactions, or any claim made by any person challenging such transactions, if such lawsuit or claim if based upon any alleged violation of any law, rule, regulation or order or upon the failure to obtain any allegedly required consent or approval or to abide by an contractual provision, and such lawsuit or claim would be material to any party, the party or parties against whom such lawsuit, claim or other matter is pending will take all such reasonable actions as are appropriate to eliminate the effect of such situation, while endeavoring to complete the transaction as expeditiously as possible. 15. Arbitration. 15.1 Notwithstanding any more extensive or restrictive provision contained in any other agreement, any controversy, claim or dispute arising out of or relating to this Agreement, the Stockholders Agreement, the Restricted Persons Agreement, the Related Agreements, or otherwise having to do with the conduct of business by or governance of OpTel (including any such -19- controversy, claim or dispute relating to actions of the Board or stockholders of OpTel or any of their respective Affiliates), or the making, breach, termination, enforceability or validity of any such agreement, including, without limitation, the determination of the scope or applicability of this agreement to arbitrate, involving Vanguard or any of its Affiliates (including Pacific and each and all of its stockholders and each and all of the partners of Vanguard) on the one hand and OpTel, VPC or GVL or any of their Affiliates on the other hand, shall be determined exclusively by binding arbitration in New York City before three arbitrators. The arbitration shall be governed by the American Arbitration Association under its Commercial Arbitration Rules and its Supplementary Procedures for Large, Complex Disputes, provided that persons eligible to be selected as arbitrators shall be limited to attorneys-at-law who (i) are on the AAA's Large, Complex Case Panel or a Center for Public Resources ("CPR") Panel of Distinguished Neutrals, or who have professional credentials similar to the attorneys listed on such AAA and CPR Panels, and (ii) have practiced law for at least 15 years in New York, New York specializing in either general commercial litigation or general corporate and commercial matters. 15.2 No provision of, nor the exercise of any rights under Section 15.1 shall limit the right of any party to request and obtain from a court having jurisdiction before, during or after the pendency of any arbitration, provisional or ancillary remedies and relief including, but not limited to, injunctive or mandatory relief but not including the appointment of a receiver. The institution and maintenance of an action or judicial proceeding for, or pursuit of, provisional or ancillary remedies shall not constitute a waiver of the right of any person to submit a dispute to arbitration if such person would otherwise have such right. -20- 15.3 In any such arbitration proceeding, the arbitrators shall not have the power or authority to award punitive damages to any party. Judgment upon the award rendered may be entered in any court having jurisdiction. In the event that, notwithstanding the requirements hereof that disputes be arbitrated, any dispute among the parties shall become the subject of a proceeding before a court or other non-arbitral tribunal, each and all of the parties waives trial by jury and any right to punitive damages, to the full extent permitted by law. 15.4 Each of Vanguard and VPC shall, subject to the award of the arbitrators, pay an equal share of the arbitrators' fees. The arbitrators shall have the power to award recovery of all costs and fees (including attorneys' fees, administrative fees, arbitrators' fees, and court costs) to the prevailing party. 16. Integration. This Agreement and the other writings referred to herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the settlement of the Litigation and the disputes relating thereto and supersede all prior and contemporaneous arrangements or understandings with respect thereto including, without limitation, that certain Settlement Term Sheet dated July 22, 1996. Except as modified or amended hereby or by the releases delivered pursuant to Section 2.2, the Stockholders Agreement, the Restricted Persons Agreement, the Pre-Settlement Advances and the other documents and agreements entered into by the parties and their Affiliates on or before July 21, 1996 shall continue in full force and effect. 17. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such -21- jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 18. Confidentiality; Public Disclosure. 18.1 Except for the distribution by GVL and Vanguard of a joint press release in the form of Exhibit E or any subsequent reproduction of part or all of such press release, the filing of documents necessary to discontinue the Litigation, disclosure of the terms of this Agreement by GVL to the parties to the PTG Agreement and to potential purchasers of the Class B Stock from VPC pursuant to Section 3.2, and any other public disclosure contemplated by Section 18.2, none of the parties hereto or their respective Affiliates will disclose to any third party the terms or existence of this Agreement or the transactions contemplated hereby, including, without limitation, the Purchase Price, except to the extent such disclosure is, in the opinion of such party's counsel (which, without limitation, may be based upon the request of any regulatory authority, including a securities exchange), required by law. 18.2 Except as provided in Section 18.1 or as may be necessary to enforce the provisions of this Agreement in a legal proceeding or as and to the extent, in the judgment of the party making the disclosure, required by law, the rules of any exchange on which any of such party's securities are traded, or applicable rules and standards of financial accounting, neither Vanguard nor Pacific, on the one hand, nor VPC nor GVL, on the other hand, will hereafter issue any press release or make any other public statement, filing or report which includes information with respect to this Agreement or the transactions contemplated hereby without submitting such release, statement, filing or report to -22- the other party sufficiently in advance of its issuance to afford the other party a reasonable opportunity to review and comment thereon. Except as provided in the first sentence of this Section 18.2, the parties will consult with each other in good faith with respect to the need for and substance of any such release, statement, filing or report, the timing of its issuance and the means and extent of its dissemination. If a party determines to make public disclosure of information that is subject to this Section 18.2, it shall coordinate the contents and timing of its disclosure with the other party, and the parties shall make such disclosure jointly wherever convenient or appropriate. 19. Miscellaneous Provisions. 19.1 This Agreement may not be amended or modified, nor may the rights of any party hereunder be waived, except by a written document that is executed by each party hereto. No waiver of any provision of this Agreement shall be deemed to constitute a waiver of any other provision hereof, nor shall any waiver constitute a continuing waiver. 19.2 This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 19.3 When the context in which words are used in this Agreement indicates that such is the intent, singular words shall include the plural and vice versa and masculine words shall include the feminine and the neuter genders and vice versa. References to Articles, Sections, Exhibits, Schedules or other subdivisions are to the appropriate subdivisions of this Agreement unless the context otherwise requires. The words "herein", "hereof", and "hereunder" and other words of similar -23- import refer to this Agreement as a whole and not to any particular Article, Section, Exhibit, Schedule or other subdivision. 19.4 The Exhibits and Schedules referred to herein are a part of this Agreement for all purposes. Terms used in this Agreement shall have the same meanings when used in such Exhibits and Schedules. 19.5 Captions and headings are employed herein for convenience of reference only and shall not affect the construction or interpretation of any provision hereof. 19.6 This Agreement is made under and shall be governed by and construed in accordance with the substantive laws of the State of Delaware applicable to contracts made and to be performed entirely within that state. -24- IN WITHERS WHEREOF, the parties have executed thin Agreement as of the day and year first above written. VANGUARD COMMUNICATIONS, L.P. VPC CORPORATION by Vanguard Communications, Inc., its general partner By: /s/ Jonathan Lloyd By: ----------------------------- ----------------------------- Jonathan Lloyd Suzanne Renault Chairman Vice President PACIFIC CAPITAL GROUP, INC. LE GROUPE VIDEOTRON LTEE By: /s/ Abbott Brown By: ----------------------------- ----------------------------- Abbott Brown Suzanne Renault Vice President-Legal Affairs VANGUARD COMMUNICATIONS, INC. OPTEL, INC. By: /s/ Jonathan Lloyd By: ----------------------------- ----------------------------- Jonathan Lloyd Louis Brunel Chairman President and CEO -25- IN WITHERS WHEREOF, the parties have executed thin Agreement as of the day and year first above written. VANGUARD COMMUNICATIONS, L.P. VPC CORPORATION by Vanguard Communications, Inc., its general partner By: By: /s/ Suzanne Renault ----------------------------- ----------------------------- Jonathan Lloyd Suzanne Renault Chairman Vice President PACIFIC CAPITAL GROUP, INC. LE GROUPE VIDEOTRON LTEE By: By: /s/ Suzanne Renault ----------------------------- ----------------------------- Abbott Brown Suzanne Renault Vice President-Legal Affairs VANGUARD COMMUNICATIONS, INC. OPTEL, INC. By: By: /s/ Louis Brunel ----------------------------- ----------------------------- Jonathan Lloyd Louis Brunel Chairman President and CEO -25- IN WITHERS WHEREOF, the parties have executed thin Agreement as of the day and year first above written. VANGUARD COMMUNICATIONS, L.P. VPC CORPORATION by Vanguard Communications, Inc., its general partner By: By: ----------------------------- ----------------------------- Jonathan Lloyd Suzanne Renault Chairman Vice President PACIFIC CAPITAL GROUP, INC. LE GROUPE VIDEOTRON LTEE By: By: ----------------------------- ----------------------------- Abbott Brown Suzanne Renault Vice President-Legal Affairs VANGUARD COMMUNICATIONS, INC. OPTEL, INC. By: By: /s/ Louis Brunel ----------------------------- ----------------------------- Jonathan Lloyd Louis Brunel Chairman President and CEO -25- SCHEDULE I List of Pending Cases Vanguard Communications, L.P.. et al. v. Le Groupe Videotron Ltee. et al., C.A. No. 96-46 (RRM) (D. Del.) SCHEDULE IA Related Agreements: Supplemental Settlement Agreement, dated August 1, 1996, among the parties to the Settlement Agreement and certain of the other Persons named in Schedule II. -26- SCHEDULE II A. Releases Shall Be Executed By: Vanguard Communications, L.P.; Vanguard Communications, Inc.; Pacific Capital Group, Inc.; Abbott Brown; James A. Kofalt; David Lee; Jonathan D. Lloyd; Barry Porter; Paul Savoldelli; and Gary Winnick. In Favor Of: Le Groupe Videotron Ltee; Videotron International Ltee; Videotron U.S.A., Inc.; VPC Corporation; Wireless Holdings, Inc.; Guy Brochu; Louis Brunel; Andre Chagnon; Serge Gouin; Louis Guertin; OpTel, Inc.; Pacific Telesis Group; Transworld Telecommunications, Inc.; and Videotron (Bay Area) Inc. B. Releases Shall Be Executed By: Each of the above named persons who receives a release, except that neither Pacific Telesis Group nor Transworld Telecommunications, Inc. shall receive a release unless it also provides a release. In Favor Of: Vanguard Communications, L.P.; Vanguard Communications, Inc.; Pacific Capital Group, Inc.; Abbott Brown; James A. Kofalt; David Lee; Jonathan D. Lloyd; Barry Porter; Paul Savoldelli; and Gary Winnick. SCHEDULE III SCHEDULE OF 15% CONVERTIBLE GRID NOTES DUE ON DEMAND ISSUED BY OPTEL, INC. TO VPC CORPORATION - -------------------------------------------------------------------------------- Date US Million $ Amount - -------------------------------------------------------------------------------- 1- August 30, 1995 15 - -------------------------------------------------------------------------------- 2- October 16, 1995 14 - -------------------------------------------------------------------------------- 3- January 24, 1996 6 - -------------------------------------------------------------------------------- 4- January 30, 1996 5.7 - -------------------------------------------------------------------------------- 5- January 30, 1996 1.5 - -------------------------------------------------------------------------------- 6- March 5, 1996 4.5 - -------------------------------------------------------------------------------- 7- March 28, 1996 11.7 - -------------------------------------------------------------------------------- 8- May 7, 1996 22.2 - -------------------------------------------------------------------------------- 9- July 26, 1996 12.275 - -------------------------------------------------------------------------------- Sept. 13, 1996 1.0 - -------------------------------------------------------------------------------- Sept. 20, 1996 10.5 - -------------------------------------------------------------------------------- Exhibit A GENERAL RELEASE TO ALL TO WHOM THESE PRESENTS SHALL COME OR MAY CONCERN, KNOW THAT ___________, [a ____________ corporation], (the "Releasor") in consideration of one dollar ($1.00) and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, on behalf of itself, its officers, directors and shareholders [partners] and their respective successors and assigns, hereby unconditionally and irrevocably releases and forever discharges __________, its officers, directors, shareholders [partners], subsidiaries, affiliates and their respective successors and assigns, attorneys and all persons acting by, through, under or in concert with any of them, (collectively, the "Releasees") from any and all claims, causes of action, suits, damages, losses, debts or rights of any kind, known or unknown, absolute or contingent, accrued or unaccrued, determined or speculative, which Releasor, its officers, directors and shareholders [partners] or their respective successors and assigns, if any, may have had, have now or in the future may have, against Releasees ("Claims"), including, but not limited to, Claims arising out of or relating to the matters set forth in the schedules provided pursuant to Section 10.1 of the Settlement Agreement, dated as of August 1, 1996 (the "Settlement Agreement"), among Vanguard Communications, L.P., Vanguard Communications, Inc., Pacific Capital Group, Inc., VPC Corporation, Optel, Inc. and Le Groupe Videotron Ltee, arising from the beginning of the world to and including the date of this Release. Notwithstanding the aforesaid, this Release shall not serve to release or discharge, and shall have no effect whatsoever upon, any Claims arising under the Settlement Agreement. In addition, the Releasor waives all rights and benefits which may be affected by any laws which provide or may provide in substance that a general release does not extend to Claims which a person or entity does not know or suspect to exist in its favor at the time of executing the release which, if known by him, may have materially affected his settlement with another person or entity except for Claims of fraud or fraud in the inducement of the Settlement Agreement, Provided, that any such Claim shall be subject to the arbitration provisions set forth in Section 15 of the Settlement Agreement. The Releasor acknowledges that this Release is not and shall not be construed as an admission of liability by any person or party whomsoever, including the parties to the Settlement Agreement, and shall be binding upon and be effective against the Releasor, its officers, directors and shareholders [partners] and their respective successors and assigns. IN WITNESS WHEREOF, the Releasor has caused this Release to be executed by its duly authorized officer on August 1, 1996. By __________________ Name: Title: EXHIBIT B CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF OPTEL, INC . Pursuant to Section 242 of the General Corporation Law of the State of Delaware OpTel, Inc. (the "Corporation"), a corporation organized under the General Corporation Law of the State of Delaware (the "General Corporation Law") hereby certifies as follows: FIRST: That the Board of Directors of the Corporation, at a meeting of its members, duly adopted a resolution setting forth the following proposed amendment to the Certificate of Incorporation of the Corporation and declaring such amendment to be advisable: 1. Article FOUR, Section A.3 of the Certificate of Incorporation of the Corporation is hereby amended by deleting clause (i) in the eighth sentence of such section and replacing it with the following: (i) "Permitted Transferee" shall mean Vanguard Communications, L.P., a California limited partnership, Vanguard Communications, Inc., a California corporation, VPC Corporation, a Delaware corporation, Caisse de Depot et Placement du Quebec, Capital Communications CDPQ Inc., and each of their respective Affiliates, SECOND: That in lieu of a meeting and vote of the stockholders of the Corporation, the stockholders have by written consent, dated __________ __, ____, approved the adoption of the foregoing amendment in accordance with the provision of Section 228 of the General Corporation Law, and that such consent has been filed with the minutes of the proceedings of the stockholders of the Corporation. THIRD: That the foregoing amendment of the Certificate of Incorporation was duly adopted pursuant to the applicable provisions of Sections 141, 228 and 242 of the General Corporation Law. IN WITNESS WHEREOF, the undersigned, being a duly authorized [Title of Authorized Officer] of the Corporation, for the purpose of amending the Certificate of Incorporation of the Corporation pursuant to Section 242 of the General Corporation Law of the State of Delaware, does make and file this Certificate, hereby declaring and certifying that the facts hereto stated are true, and accordingly has hereunto set his hand, this ____ day of _____, 1996. _____________________________ [Title of Authorized Officer] 2 EXHIBIT C THIS OPTION IS NONTRANSFERABLE. ANY ATTEMPT AT THE TRANSFER OF THIS OPTION SHALL BE NULL AND VOID AND OF NO EFFECT WHATSOEVER. THIS OPTION AND THE SHARES OF CLASS B STOCK AND OTHER SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM SUCH REGISTRATIONS IS AVAILABLE AT THE TIME OF SUCH SALE OR TRANSFER. EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, on the Expiration Date (as defined below) OPTION 1. Grant of Option. (a) For value received, Vanguard Communications, L.P. (the "Holder"), is the registered holder of an Option to purchase, at any time during the Exercise Period (as hereinafter defined), two thousand six hundred sixty three (2,663) fully-paid and nonassessable shares (subject to adjustment in certain events) of Class B Common Stock, $.01 par value per share ("Class B Stock"), of OpTel, Inc., a Delaware corporation (the "Company"), at the exercise price per share of $984.00 in cash, subject to adjustment in certain events (the "Exercise Price"), upon surrender of this Option Certificate, together with the attached Form of Election to Purchase duly executed, and payment of the Exercise Price at an office or agency of the Company, but subject to the terms and conditions set forth herein. Payment of the Exercise Price shall be (i) by certified check or official bank check, payable to the order of the Company, (ii) by wire transfer of immediately available funds to an account designated by the Company, or (iii) by any combination of (i) or (ii). (b) For the purposes hereof, (i) "Exercise Period" means the period commencing on the Commencement Date (as hereinafter defined) and ending at 5:00 P.M., New York time, on the Expiration Date, (ii) "Commencement Date" means the date thirty (30) days after the date hereof, and (iii) "Expiration Date" means the earlier of (x) July 31, 1999 and (y) one hundred eighty (180) days after the IPO Date (as defined in the Stockholders Agreement). (c) If the Option is not exercised on or prior to the Expiration Date, it shall become invalid and all rights thereunder shall cease as of that time. (d) The Company may deem and treat the Holder as the absolute owner of this Option Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, of any distribution to the Holder, and for all other purposes, and the Company shall not be affected by any notice to the contrary. THIS OPTION IS NONTRANSFERABLE. ANY ATTEMPT BY THE HOLDER TO TRANSFER THIS OPTION SHALL BE NULL AND VOID AND OF NO EFFECT WHATSOEVER. 2. Exercise of Option. 2.1 General. Subject to the provisions of this Option, upon valid exercise of this Option as provided in Section 1, the Company shall cause to be issued and delivered promptly to the Holder a certificate or certificates for the shares of Class B Stock thereby purchased, registered in the name of the Holder. Such certificate or certificates shall be deemed to have been issued and the Holder shall be deemed to have become the holder of record of the shares of Class B Stock evidenced thereby as of the date of the surrender of this Option (together with such duly executed Form of Election to Purchase) and payment of the Exercise Price. 2.2 Exercise in Whole. The purchase rights evidenced by this Option shall be exercisable in whole but not in part. 2.3 Execution of Stock Certificates. The certificates representing shares of Class B Stock purchased pursuant to the exercise of this Option shall be executed on behalf of the Company by the manual or facsimile signature of the present or any future Chairman or Vice Chairman of the Board of Directors or President or Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the present or any future Secretary or Assistant Secretary of the Company. 3. Payment of Taxes. The Company shall pay all documentary stamp taxes attributable to the initial issuance of shares of Class B Stock upon the exercise of this Option. 4. Adjustment of Exercise Price and Number of Option Shares. The Exercise Price and the number of shares of Class B Stock issuable upon the exercise of this Option are subject to adjustment from time to time as follows: 4.1 Adjustments for Chance in Capital Stock. (a) The Exercise Price shall be subject to appropriate decrease or increase, as the case may be, if the Company shall at any time after the date of issuance of this Option: 2 (i) declare with respect to the Class B Stock any dividend or distribution payable in shares of Class B Stock or Class A Common Stock, $.01 par value per share, of the Company (the "Class A Stock," and together with the Class B Stock, the "Common Stock") or in securities directly or indirectly convertible into or exchangeable for shares of Common Stock (but only upon the issuance of shares of Common Stock following the conversion or exchange of such securities), or (ii) subdivide or combine outstanding shares of Common Stock. (b) In case of any reclassification, change or exchange of outstanding shares of Common Stock (except for a change as a result of a subdivision or combination of such shares), or in case of any consolidation of the Company with, or merger of the Company into, another corporation (except for a merger or a consolidation in which the Company is the continuing corporation and which does not result in any reclassification, change or exchange of outstanding shares of Common Stock other than a change as a result of a subdivision or combination of such shares), or in case of any transfer to another corporation of the assets of the Company as an entirety or substantially as an entirety, or if the Company shall declare a dividend or distribution (except in shares of Common Stock or in securities directly or indirectly convertible into or exchangeable for shares of Common Stock) upon the shares of Common Stock payable otherwise than in cash out of earned surplus, this Option shall thereafter be exercisable to purchase, at the Exercise Price, the kind and amount of shares and other securities and property that the Holder would have owned or would have been entitled to receive immediately after such reclassification, change, exchange, consolidation, merger, transfer, dividend or distribution, had this Option been exercised immediately prior to the effective date of such reclassification, change, exchange, consolidation, merger or transfer or immediately prior to the date for the determination of security holders of record entitled to receive such dividend or distribution. The Company or the successor corporation, as the case may be, shall execute and deliver to the Holder a written instrument implementing the provisions of this Section 4.1(b), and providing that the successor corporation, if any, in any such consolidation or merger shall assume the obligations of the Company hereunder. The provisions of this Section 4.1(b} shall apply similarly to successive mergers or consolidations or sales or other transfers. (c) Whenever the number of shares of Class B Stock or other securities or assets deliverable upon exercise of this Option or the Exercise Price shall be adjusted as provided in this Section 4, the Company shall forthwith obtain and file with its corporate records a certificate or letter from the firm of independent public accountants then retained by the Company setting forth the adjusted number of shares of Class B Stock or other securities or assets deliverable upon exercise of this Option and/or the adjusted Exercise Price and a copy of such certificate or letter shall be mailed to the Holder. Any such certificate or letter shall be conclusive evidence as to the correctness of the adjustment or adjustments referred to therein and shall be available at the principal office of the Company for inspection by the Holder on any business day during normal business hours. 3 4.2 Adjustment May Be Deferred. No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such Exercise Price, provided that any adjustments which by reason of this Section 4.2 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 4.2 shall be made to the nearest cent. Any adjustment pursuant to this Section 4.2 shall be made no later than the earlier of the date of the exercise of this Option or one year from the date of the transaction which mandates such adjustment. 4.3 Adjustment in Number of Shares. (a) Whenever the number of shares of Class B Stock issuable upon exercise of this Option is adjusted as herein provided (and there is no concomitant adjustment in the Exercise Price), the Exercise Price applicable upon the exercise of this Option shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of shares of Class B Stock issuable upon exercise of this Option immediately prior to such adjustment, and the denominator of which shall be the number of shares of Class B Stock so issuable immediately thereafter. (b) Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 4 (other than pursuant to Section 4.3(a)), the number of shares of Class B Stock issuable upon the exercise of this Option shall be adjusted to equal that number determined by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of shares of Class B Stock issuable upon the exercise of this Option immediately prior to such adjustment and dividing the product so obtained by the Exercise Price as so adjusted. 4.4 No Dilution or Impairment. The Company shall not amend its Certificate of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue, or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company. 4.5 Fractional Shares. No fractional shares of Class B Stock shall be issued upon exercise of this Option. If any fractional interest in a share of Class B Stock would otherwise be deliverable upon exercise of this Option, the Company shall purchase such fractional interest for an amount in cash equal to the fair market value of such fractional interest as determined in good faith by the Company's Board of Directors. 4.6 Reservation of Shares. The Company will at all times reserve and keep available out of its authorized Class B Stock, solely for the purpose of issue upon exercise of this Option, such number of shares of Class B Stock as shall from time to time be issuable upon the exercise of this Option. All shares of Class B Stock that may be issued upon exercise of this Option will, upon issuance, be validly issued, fully paid and nonassessable and free from 4 all taxes, liens, and charges with respect to the issuance thereof, and not subject to preemptive rights of any stockholder. 4.7 Issuance of Purchase Rights. If at any time the Company grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to the record holders of Class B Stock (the "Purchase Rights"), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights that such holder could have acquired if this Option had been exercised immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Class B Stock are to be determined for the grant, issue or sale of such Purchase Rights. 5. Certificates to Bear Legends. The shares of Class B Stock issuable upon exercise of this Option shall be subject to a stop-transfer order and the certificate or certificates evidencing any such shares of Class B Stock shall bear the following legend by which each holder thereof shall be bound: The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws. Such securities may not be sold or transferred unless registered under such Act and all applicable state securities laws or unless an exemption from such registrations is available at the time of such sale or transfer. 6. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered or sent by facsimile transmission, or, if mailed by registered mail, postage prepaid, return receipt requested, five days after the date of deposit in the United States mail, addressed as follows (onto such other place or places as either of the parties shall designate by written notice to the other): (a) If to Holder, to: Vanguard Communications, L.P. c/o Pacific Capital Group, Inc. 150 El Camino Drive Suite 204 Beverly Hills, CA 90212 5 (b) If to the Company, to: OpTel, Inc. 1111 W. Mockingbird Lane Dallas, Texas 75247 Attention: General Counsel with a copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036 Attention: Russell S. Berman, Esq. 7. Governing Law. This Option shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of such State (without regard to the conflicts of law principles thereof). 8. Arbitration. 8.1 Agreement to Arbitrate. Each of the Company and the Holder (by acceptance of this Option) agrees that, any controversy, claim or dispute arising out of or relating to this Option, or the breach, termination, enforceability or validity of this Option, including, without limitation, the determination of the scope or applicability of this requirement to arbitrate, shall be settled exclusively by binding arbitration in New York City before three arbitrators. The arbitration shall be governed by the American Arbitration Association under its Commercial Arbitration Rules and its Supplementary Procedures for Large, Complex Disputes, provided that persons eligible to be selected as arbitrators shall be limited to attorneys-at-law who (i) are on the AAA's Large, Complex Case Panel or a Center for Public Resources ("CPR") Panel of Distinguished Neutrals, or who have professional credentials similar to the attorneys listed on such AAA and CPR Panels, and (ii) have practiced law for at least 15 years in New York, New York specializing in either general commercial litigation or general corporate and commercial matters. 8.2 Provisional Remedies. No provision of, nor the exercise of any rights under, Section 8.1 shall limit the right of any party to request and obtain from a court having jurisdiction before, during or after the pendency of any arbitration, provisional or ancillary remedies and relief including, but not limited to, injunctive or mandatory relief but not including the appointment of a receiver. The institution and maintenance of an action or judicial proceeding for, or pursuit of, provisional or ancillary remedies shall not constitute a waiver of the right of any person to submit a dispute to arbitration if such person would otherwise have such right. 6 8.3 Limitations; Specific Performance. (a) In any such arbitration proceeding, the arbitrators shall not have the power or authority to award punitive damages to any party. Judgment upon the award rendered may be entered in any court having jurisdiction. In the event that, notwithstanding the requirements hereof that disputes be arbitrated, any dispute among the parties shall become the subject of a proceeding before a court or other non-arbitral tribunal, each of the Holder and the Company waives trial by jury and any right to punitive damages, to the full extent permitted by law. (b) Each of the Company and the Holder agrees that monetary damages would not be a sufficient remedy for any breach of this Option, and that in addition to all other remedies available, the Holder shall be entitled to specific performance as a remedy for any such breach. 8.4 Fees: Each of the Holder and the Company subject to the award of the arbitrators, shall pay an equal share of the arbitrators' fees. The arbitrators shall have the power to award recovery of all costs and fees (including attorneys' fees, administrative fees, arbitrators' fees, and court costs) to the prevailing party. 9. Benefits of This Agreement. Nothing in this Option shall be construed to give to any person other than the Company and the Holder any legal or equitable right, remedy or claim under this Option; and this Option shall be for the sole and exclusive benefit of the Company and to Holder. IN WITNESS WHEREOF, the Company has caused this Option to be duly executed. Dated: August 1, 1996 OPTEL, INC. By ______________________ 7 [FORM OF ELECTION TO PURCHASE] The undersigned hereby irrevocably elects to exercise the right, represented by this Option, to purchase 2,663 shares of Common Stock and herewith tenders in payment for such shares a certified or official bank check payable to the order of OPTEL, INC., a Delaware corporation, wire transfer of immediately available funds to an account designated by the Company, or any combination of the foregoing, in the aggregate amount of $2,620,392.00, all in accordance with the terms hereof. The undersigned requests that a certificate for such shares of Common Stock be registered in the name of Vanguard Communications, L.P., whose address is ___________________________ and that such certificate be delivered to ________________________________ whose address is whose address is __________________. Dated: __________________ Signature: __________________ (Signature must conform in all respects to name of holder as specified on the face of the Option Certificate.) -------------------------------- (Insert Tax Identification or Other Identifying Number of Holder) 8 Exhibit D This Note and the securities issuable on conversion hereof have not been registered under the Securities Act of 1933 and may not be transferred or sold in the absence of (i) an effective registration statement with respect thereto under such Act or (ii) an opinion of OpTel, Inc. counsel that such registration and filings are not required. The securities issuable on the conversion of this Note will be subject to the restrictions set forth in the Stockholders Agreement dated as of December 22, 1994, as amended, among VPC Corporation, Vanguard Communications, L.P. and OpTel, Inc., a copy of which is on file in the offices of OpTel, Inc., and certificates representing such securities will bear a restrictive legend to that effect. __________________________________________________ OPTEL, INC. 15% Senior Convertible Grid Note due December 15, 1999 $[ ] New York, New York , 199 FOR VALUE RECEIVED, the undersigned, OPTEL, INC., a Delaware corporation ("OpTel"), hereby promises to pay to the order of VPC Corporation, a Delaware corporation (the "Lender"), the principal sum of ______________________________ DOLLARS ($___________), or so much thereof as shall be advanced by the Lender to OpTel, in the Lender's sole discretion, and not repaid. The principal of this Note to the extent not earlier paid shall be due and payable on December 15, 1999 (or earlier as hereinafter referred to). Interest shall accrue on the unpaid balance of the principal of this Note from time to time outstanding at the rate of 15% per year, until the principal amount of this Note shall be fully paid, and shall be payable simultaneously with the payment of principal hereunder. This Note incorporates the following additional terms: 1. This Note evidences loans made by the Lender to OpTel, in Lender's sole discretion, from time to time, as requested by OpTel. The unpaid principal balance of this Note at any time shall be the total amount advanced by the Lender to OpTel in the Lender's sole discretion, less the total amount of principal payments made hereon by OpTel. The date and amount of each such loan and each payment on account of principal thereof may be endorsed by the Lender on the grid attached to and made a part of this Note, and when so endorsed shall represent evidence thereof binding upon OpTel in the absence of manifest error. Any failure by the Lender to so endorse any such loan shall in no way mitigate or discharge the obligation of OpTel to repay any loans actually made. Requests by OpTel for loans to be made and directions as to the disposition of the proceeds thereof must be given in writing to the Lender by the officers of OpTel or other persons authorized to borrow on OpTel's behalf by borrowing resolutions of OpTel's Board of Directors heretofore delivered to the Lender, as such resolutions may be amended or superseded from time to time, provided that any such amending or superseding resolutions shall have been certified by the Secretary or an Assistant Secretary of OpTel, and a copy thereof, so certified, shall have been delivered to an officer of the Lender at its office for payment. The Lender may conclusively rely on the authorities contained in said resolutions. Any such loan so made shall be conclusively presumed to have been made to or for the benefit of OpTel and OpTel shall be liable in respect thereof when made in accordance with any such request or direction. OpTel shall inform its board of directors of the amount of any borrowings under this Note at the first regularly scheduled board meeting following any such borrowing. 2. Payments of principal of and interest on this Note shall be made in lawful money of the United States of America to the Lender c/o Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036, or at such other place as the Lender shall have designated to OpTel in writing. On December 15 of each year, all interest accrued on this Note shall be capitalized and added to the principal of this Note. 3. OpTel acknowledges that the Lender holds and may hereafter acquire from OpTel one or more notes, debentures or other securities of OpTel that are or may be convertible into shares of Class B Common Stock of OpTel ("OpTel Shares"). All of such convertible securities of OpTel now outstanding or hereafter issued to the Lender are herein referred to as the "Convertible Securities". -2- 4. (a) The Lender by acceptance of this Note covenants and represents to OpTel that this Note and any securities issued on exercise of the conversion privilege contained herein are being acquired by the Lender without a view to distribution and that the Lender will at no time dispose of this Note or such securities except in compliance with the requirements of the Securities Act of 1933, as amended. (b) This Note may not be transferred or assigned except in compliance with applicable federal and state securities laws and subject to the applicable provisions of the Stockholders Agreement, dated as of December 22, 1994, as amended (the "Stockholders Agreement"), to which the Lender, Vanguard Communications, L.P. ("Vanguard") and OpTel are parties. If this Note is validly transferred, the term "Lender" shall include such transferee. 5. This Note may not be prepaid by OpTel at any time prior to the expiration of the Conversion Period (as defined in Section 6), provided that this Note shall be prepaid by OpTel to the extent requested by the Lender out of the net proceeds of any sale of debt or equity securities of OpTel. 6. (a) Subject to and upon compliance with the provisions of this Section 6 and Section 7.(l) during the period commencing on the IPO Date (as defined in the Stockholders Agreement), and ending 180 days after the IPO Date (the "Post-IPO Exercise Period") or (ii) if the Post-IPO Exercise Period shall not previously have commenced and expired, during the period commencing on April 30, 1999 and ending 90 days after such date (the earlier of such periods, the "Conversion Period"), the Lender may, at its option, convert the entire principal balance of this Note together with all accrued interest thereon, into fully paid and nonassessable OpTel Shares at the Conversion Price (as hereinafter defined) in effect at the time of conversion. The date of such conversion shall be the "Conversion Date". The right of the Lender to convert principal of and interest on this Note shall expire if not exercised prior to the expiration of the Conversion Period. (b) Subject to certain adjustments as hereinafter provided, the Conversion Price shall be either (l) the per share price at which Common Stock of OpTel is first sold to the public in a public offering (an "IPO"), provided that the product of such per share price and the number of shares of Common Stock of OpTel outstanding, on a fully diluted basis (excluding shares sold in the IPO and shares issuable upon conversion of this Note or any Convertible Securities (the "Excludable Shares")), equals or exceeds $225 million, or (ii) if no such IPO has taken place, a per share price equal to the quotient of $225 million divided by the number of shares of OpTel Common Stock outstanding on that date, on a fully diluted basis (excluding Excludable Shares). -3- (c) The Conversion Price shall be subject to appropriate decrease or increase, as the case may be, if OpTel shall at any time after the date of issuance of this Note: (i) declare with respect to OpTel Shares any dividend or distribution payable in shares of Common Stock of OpTel or in securities directly or indirectly convertible into or exchangeable for shares of OpTel Common Stock (but only upon the issuance of shares of OpTel Common Stock following the conversion or exchange of such securities), or (ii) subdivide or combine outstanding shares of OpTel Common Stock. (d) In case of any reclassification, change or exchange of outstanding shares of OpTel Common Stock (except for a change as a result of a subdivision or combination of such shares), or in case of any consolidation of OpTel with, or merger of OpTel into, another corporation (except for a merger or a consolidation in which OpTel is the continuing corporation and which does not result in any reclassification, change or exchange of outstanding shares of OpTel Common Stock other than a change as a result of a subdivision or combination of such shares), or in case of any transfer to another corporation of the assets of OpTel as an entirety or substantially as an entirety, or if OpTel shall declare a dividend or distribution (except in shares of OpTel Common Stock or in securities directly or indirectly convertible into or exchangeable for shares of OpTel Common Stock) upon the shares of OpTel Common Stock payable otherwise than in cash out of earned surplus, this Note shall thereafter be convertible pursuant to this Section 6 into the kind and amount of shares and other securities and property that the Lender would have owned or would have been entitled to receive immediately after such reclassification, change, exchange, consolidation, merger, transfer, dividend or distribution, had this Note been converted immediately prior to the effective date of such reclassification, change, exchange, consolidation, merger or transfer or immediately prior to the date for the determination of security holders of record entitled to receive such dividend or distribution. (e) At the option of the Lender, to avoid the issuance of any fractional shares upon any conversion, adjustment therefor may be made in cash in an amount equal to the same fraction of the Conversion Price in effect on the date of such conversion. (f) No adjustment will be made upon conversion of this Note in respect of dividends or distributions previously paid or declared (the date for the determination of security holders of record entitled to receive such dividends or distributions having passed) on the shares of OpTel Common Stock -4- previously outstanding, except as otherwise provided in Section 7(d). (g) Whenever the number of OpTel Shares or other securities or assets deliverable upon conversion of this Note shall be adjusted as provided in this Section 6, OpTel shall forthwith obtain and file with its corporate records a certificate or letter from the firm of independent public accountants then retained by OpTel setting forth the adjusted number of OpTel Shares or other securities or assets deliverable upon conversion of this Note, and a copy of such certificate or letter shall be mailed to the holder hereof. Any such certificate or letter shall be conclusive evidence as to the correctness of the adjustment or adjustments referred to therein and shall be available at the principal office of OpTel for inspection by the holder of this Note on any day during normal business hours. 7. To exercise the conversion privilege described in Section 6(a) at any time when such privilege is exercisable in accordance with the terms of this Note (including, without limitation, whether prier to or after the occurrence of any event referred to in Section 9), the Lender shall surrender this Note, with the attached form of Conversion Notice duly completed, to OpTel at the principal office of OpTel or at such other place as OpTel may designate. As promptly as practicable after surrender of this Note as aforesaid but in no event later than three business days thereafter, OpTel shall issue and deliver to the Lender a certificate or certificates for the number of OpTel Shares and/or other securities issuable or deliverable upon the conversion of this Note in accordance herewith and cash in respect of any fraction of an OpTel Share for which the Lender has elected to receive cash. Such conversion shall be deemed to have been effected at the time when such notice shall have been received by OpTel and this Note shall have been surrendered as aforesaid, and the person in whose name any certificate for OpTel Shares or other securities shall be issuable upon such conversion shall be deemed to have become on such date the holder of record of the shares or other securities represented thereby, subject to the provisions of Section 9. 8. OpTel covenants and agrees that it will at all times reserve and keep available such number of its duly authorized and unissued OpTel Shares and other shares of its Common Stock as shall from time to time be sufficient to effect the conversion of this Note and the exercise or conversion of all other outstanding securities exercisable or convertible with respect to shares of OpTel's Common Stock and that, if at any time the number of authorized but unissued OpTel Shares and other shares of OpTel's Common Stock shall not be sufficient to effect the conversion of this Note and the exercise or conversion of all other outstanding securities exercisable or convertible with -5- respect to shares of OpTel's Common Stock or at the Conversion Price then in effect, OpTel will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued OpTel Shares and other shares of its Common Stock to such number as shall be sufficient for such purpose. 9. If, at any time prior to the payment of this Note upon maturity or any date fixed for redemption, any of the following events shall occur: (a) OpTel shall declare any dividend or other distribution upon the shares of its Common Stock payable otherwise than in cash out of earned surplus; or (b) OpTel shall offer to the holders of shares of its Common Stock any additional shares of OpTel or options or warrants therefor or securities convertible into shares of OpTel or any right to subscribe therefor; or (c) a recapitalization, reclassification, consolidation, merger, transfer of assets, dissolution, liquidation, winding-up of OpTel or other similar action of OpTel requiring approval by its stockholders shall be proposed, then in any one or more of such events, OpTel shall give to the Lender, in accordance with Section 14, not less than 20 days prior notice of the date on which: (i) the books of OpTel shall be closed or a record taken for determination of the stockholders entitled to such dividend, distribution or subscription rights, or (ii) the books of OpTel shall be closed or a record taken for determination of the stockholders entitled to vote on such proposed recapitalization, reclassification, consolidation, merger, transfer of assets, dissolution, liquidation, winding-up or other similar action. Failure to give such notice or any defect therein shall not affect the validity of any action taken. 10. (a) In the case of any Event of Default (as hereinafter defined), the Lender may, by notice to OpTel specifying such Event of Default, declare the principal of and any accrued interest on this Note to be immediately due and payable and thereupon, this Note including both principal and interest, shall become immediately due and payable. This provision is subject to the condition that if, at any time after this Note has been declared due and payable and before any judgment or decree for the payment of the moneys due shall have -6- been obtained or entered, OpTel shall pay all matured installments of interest then due and all payments on account of principal then due (other than by reason of such declaration), then such declaration and its consequences shall be rescinded and annulled, but no such rescission or annulment shall extend to or affect any subsequent default or impair or exhaust any right or power consequent thereon. (b) Notice of any Event of Default shall be given by OpTel to the Lender within five business days after OpTel shall become aware of its existence. (c) For purposes of this Note any one or more of the following shall constitute an "Event of Default": (i) Default in the payment of the principal of this Note when the same shall mature or become due and payable, either by the terms hereof or otherwise; or (ii) Default in the payment of any interest on this Note for more than 15 days after the same has become due and payable: or (iii) Acceleration, by reason of default, of the maturity of a material amount (but in no event less than $200,000) of outstanding indebtedness for money borrowed of OpTel ; or (iv) Any judgment, writ or warrant of attachment or of any similar process in an amount material to OpTel (but in no event less than $200,000) is entered or filed against OpTel or against the property or assets of OpTel and remains unpaid, unvacated, unbonded and unstayed for a period of 60 days. 11. Nothing in this Note shall affect or impair the right, which is absolute and unconditional, of the Lender to receive payment of or to institute suit to enforce this Note at and after the maturity hereof (including maturity by redemption, declaration pursuant to this Note or otherwise) or the obligation of OpTel, which is also absolute and unconditional, to pay the principal of and interest on this Note to the Lender at the time and place expressed herein. Neither OpTel nor the Lender shall have any obligation to subordinate the indebtedness represented by this Note or otherwise alter the terms and conditions of this Note in order to facilitate any financing transaction undertaken by OpTel. -7- 12. In any case where the date of maturity of interest on, or principal of, this Note shall be a Sunday or a legal holiday in the State of New York or a day on which banking institutions doing business in the State of New York are authorized by law to close, then payment of such interest may be made on the next succeeding business day with the same force and effect as if made on the nominal date of maturity (and no interest shall accrue for the period after such nominal date). 13. The agreements, undertakings, representations and warranties contained in this Note shall remain operative and in full force and effect and, subject to payment in full of all principal and interest due hereon, and shall survive the surrender and/or delivery of this Note to OpTel for cancellation or otherwise in connection with the redemption or other transfer hereof. 14. Except as herein otherwise expressly provided, all notices, requests, demands, consents and other communications required or permitted under this Note shall be in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered mail, return receipt requested, postage prepaid, in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a person whose address is herein specified may from time to time designate as to itself by notice similarly given to the other such designees in accordance herewith). A notice of change of address shall not be deemed given until received by the addressee. Notices shall be addressed: (i) if to the Lender: VPC Corporation 1114 Avenue of the Americas 46th Floor New York, New York 10036-7798 Attn: Secretary Telecopier: 514-985-8834 copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036-7798 Attn: Russell S. Berman, Esq. Telecopier: 212-479-6275 -8- (2) to OpTel at: OpTel, Inc. 1111 West Mockingbird Lane Suite 1130 Dallas, TX 75247 Attn: General Counsel Telecopier: 214-634-3800 copy to: Vanguard Communications, L.P. c/o Pacific Capital Group, Inc. 150 El Camino Drive Suite 204 Beverly Hills, California 90212 15. This Note shall be governed by and construed in accordance with the laws of the State of New York (without regard to the conflict of laws principles thereof). 16. All the covenants, stipulations, promises and agreements contained in this Note by or on behalf of OpTel shall bind its successors and assigns, whether or not so expressed. OPTEL, INC. By: ____________________ Name: __________________ Title: _________________ -9- NOTICE OF CONVERSION To be executed by the owner of the attached Note if such owner desires to convert the attached Note pursuant to Section 6(a): The undersigned owner of the attached Note hereby [ ] irrevocably exercises the option to convert such Note into shares of Class B Common Stock of OPTEL, INC. ("OpTel Shares") in accordance with the terms of such Note, [ ] elects to receive payment in cash for any fractional share issuable upon such conversion, and directs that the OpTel Shares issuable and deliverable upon such conversion, together with any check in payment for any fractional share as to which an election to receive cash is made above, be delivered to the undersigned. VPC CORPORATION Dated: By: ____________________ Name: __________________ Title: _________________ -10- LOANS AND PAYMENTS OF PRINCIPAL Amount Loan Amount of of Loan Principal Notation Date No. Loan Paid Balance Made By ---- --- ---- ---- ------- ------- __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ __________ _________ ________ _________ ___________ __________ -11- - -------------------------------------------------------------------------------- EXHIBIT E GROUPE VIDEOTRON AND ITS U.S. PARTNER AGREE TO RESOLVE LAWSUIT - -------------Le Groupe Videotron Ltee, through its American subsidiary VPC Corporation, and Vanguard Communications, L.P. ("Vanguard") jointly announced today that they have agreed to resolve all disputes and pending proceedings between them, including the lawsuit instituted by Vanguard in January 1996 against Le Groupe Videotron Ltee and VPC Corporation pertaining to OpTel, Inc. ("OpTel"), a joint venture owned by VPC Corporation and Vanguard. Under the settlement agreement, VPC Corporation purchased 12,540 shares of OpTel Class B stock from Vanguard for US$ 20,000,000. These shares represent approximately 10% of the outstanding common stock of OpTel. Following this transaction, VPC owns approximately 84% of the outstanding OpTel stock and Vanguard owns the remaining 16%. Vanguard was also granted an option to purchase 2,663 additional Class B Shares of OpTel which could increase its equity position in the company to 18.25%. As part of this agreement, the parties exchanged releases and agreed to take all steps necessary to discontinue the lawsuit with prejudice. In addition, the parties modified the existing stockholders agreement of OpTel concerning the structure of the Board of Directors of OpTel and the terms and conditions of advances made by VPC to OpTel. Both Louis Brunel, President of VPC Corporation, and Jonathan Lloyd Chairman of Vanguard were satisfied with the agreement: "It was our common wish to settle this dispute in order to pave the way for OpTel's continued strong growth and to enhance its value." OpTel is a Dallas based telecommunications company that acquires, develops, and operates systems which provide telephone and cable services to residents and owners of multifamily communities in markets throughout the United States. It presently delivers service to more than 700 muiti-dwelling properties in the country, and its total active cable passings exceed 200,000. Le Groupe Videotron Ltee is an international telecommunications company. It has several subsidiaries active in Canada, mainly in cable television and television broadcasting. It develops and operates cable television and telephone markets in England and private cable television in the United States. Its technological know-how and experience acquired with the Videoway multimedia system enables it to play a leading role in the development of the information highway. -30- - -------------------------------------------------------------------------------- -1- IN WITHERS WHEREOF, the parties have executed this Agreement as of the day and year first above written. VANGUARD COMMUNICATIONS, L.P. VPC CORPORATION by Vanguard Communications, Inc., its general partner By: By: ----------------------------- ----------------------------- Jonathan Lloyd Suzanne Renault Chairman Vice President PACIFIC CAPITAL GROUP, INC. LE GROUPE VIDEOTRON LTEE By: By: ----------------------------- ----------------------------- Abbott Brown Suzanne Renault Vice President-Legal Affairs VANGUARD COMMUNICATIONS, INC. OPTEL, INC. By: By: /s/ Louis Brunel ----------------------------- ----------------------------- Jonathan Lloyd Louis Brunel Chairman President and CEO -25- EX-10.4 13 AGREEMENT BETWEEN VANGUARD & LE GROUPE VIDEOTRON AGREEMENT dated as of February 7, 1997, between Vanguard Communications, L.P. a California limited partnership ("Vanguard"), Vanguard Communications, Inc., a California corporation (the "General Partner"), Pacific Capital Group, Inc., a California corporation ("Pacific"), VPC Corporation, a Delaware corporation ("VPC"), OpTel, Inc., a Delaware corporation ("OpTel") and Le Groupe Videotron Ltee, a Quebec corporation ("GVL"). R E C I T A L S OpTel has issued to VPC convertible promissory notes as specified on Schedule I hereto (the "Convertible Notes"). The parties hereto are party to a Settlement Agreement, dated as of August 1, 1996, (the "Settlement Agreement") which, among other things, (i) modified the terms of the then outstanding Convertible Notes and (ii) set forth the terms of any future loans from VPC to OpTel. OpTel intends to offer units (the "Units") consisting of $225,000,000 aggregate principal amount of 13% Senior Notes Due 2005 (the "Senior Notes") and 225,000 shares of Class C Common Stock, par value $.01 per share (the "Class C Common"), subject to increase if agreed to by the Company and the initial purchasers of the Units, to Qualified Institutional Buyers in compliance with Rule 144A under the Securities Act of 1934, as amended (the "Act"), and to certain other buyers in transactions exempt from registration under the Act (the "Offering"). In connection with the Offering, the initial purchasers of the Units are requiring VPC to (i) subordinate all outstanding Convertible Notes to the Senior Notes and (ii) agree that all future loans from VPC to OpTel will be in the form of Deeply Subordinated Shareholder Loans as such term will be defined in the indenture governing the Senior Notes. In consideration of the foregoing and the mutual agreements contained herein the parties agree as follows: 1. The terms of the outstanding Convertible Notes are hereby modified as follows: "The principal of this Convertible Note to the extent not earlier paid shall be due and payable six months after the earlier to occur of (i) the indefeasible payment in full of the Senior Notes or due provision therefor and (ii) the final maturity of the Senior Notes. Interest shall accrue on the unpaid balance of the principal of this Convertible Note from time to time outstanding at the rate of 15% per year, until the principal amount of this Convertible Note shall be fully paid, and shall be payable simultaneously with the payment of principal hereunder. On August 31 of each year, all interest accrued on this Note shall be capitalized and added to the principal of this Note. In addition, OpTel and VPC hereby acknowledge and agree that the indebtedness evidenced by this Convertible Note is, to the extent and in the manner provided on Exhibit A, attached hereto, subordinated and subject in right of payment to the prior payment in full by OpTel of all Senior Indebtedness, as such term is defined in Exhibit A. The terms and conditions set forth in Exhibit A are hereby incorporated herein and made a part hereof as if set forth in its entirety herein. Further, for the purpose of determining the Conversion Price, the number of shares outstanding on a fully-diluted basis shall exclude shares of Common Stock sold in the initial public offering, shares of Class C Common issued in the Offering and shares of Common Stock issuable upon conversion of this Note or any convertible debt of OpTel due to VPC." Except as modified hereby the terms of the outstanding Convertible Notes shall remain in full force and effect. Concurrently herewith, a legend making reference to the foregoing modifications is being endorsed on each of the outstanding Convertible Notes and initialed on behalf of OpTel and VPC. 2. From and after the date hereof, neither VPC nor Vanguard nor any of their respective Affiliates shall be obligated to provide any additional financing to OpTel. Nevertheless, if the Board so requests as necessary for the business of OpTel and VPC so elects, VPC may purchase from OpTel (subject to Vanguard's right to participate in such purchase) one or more convertible promissory notes substantially in the form attached hereto as Exhibit B. 3. VPC and Vanguard hereby expressly ratify and approve the proposed Offering and waive any and all preemptive rights that they may have had pursuant to the Stockholders Agreement dated as of December 22, 1994, by and among VPC, Vanguard, the General Partner and OpTel, as amended to date (the "Stockholders Agreement"), or otherwise in respect of the Offering. In addition, each of the parties hereto acknowledges and agrees that neither the issuance of the shares of Class C Common nor the registration of the Class C Common by the Company in order to satisfy its obligations to register such shares upon demand of the holders of the Class C Common (a "Demand") shall (i) constitute an "initial public offering" or "IPO" as such term is used in the Settlement Agreement, the Stockholders Agreement, the Registration Rights Agreement, dated as of December 22, 1994, between OpTel and Vanguard (the "Registration Rights Agreement") or any other agreement between the parties hereto or (ii) cause an adjustment to the number of shares for which any outstanding option or warrant may be exercised or the exercise price thereof. The issuance of Class C Common, at any time prior to their conversion into Class A Common or any other class of common equity of the Company, shall not be considered in determining the outstanding Common Stock for the purpose of determining the number of nominees to the Board of Directors of OpTel to be designated by Vanguard or Pacific under the terms of the Stockholders Agreement. 4. OpTel and Vanguard hereby amend the Registration Rights Agreement to provide that, in the event that OpTel files a registration statement in order to satisfy its obligations upon a Demand, the holders of shares of Class C Common shall have priority over Vanguard with respect to the inclusion of their shares in such registration. Specifically, Section 1.3(c) of the Registration Rights Agreement is amended and replaced in its entirety with the following: "(c) Apportionment in Incidental Registrations. Except as specifically limited in Section 1.3(b), if (i) a registration pursuant to this Section 1.3 involves an underwritten offering of the securities being registered, whether or not for sale for the account of the Company, to be distributed by or through one or more underwriters under underwriting terms appropriate for such a transaction, and (ii) the managing underwriter of such underwritten offering shall inform the Company and the Partnership by letter of its belief that the number of securities requested to be included in such registration exceed the number which can be sold in (or during the time of) such offering or that the inclusion would materially adversely affect the marketing of the securities to be sold by the Company therein then (x) if such registration is not a registration effected by the Company in order to satisfy its obligations to register upon demand of the holders of the Class C Common (a "Demand"), the Company may include all securities proposed by the Company to be sold for its own account and may decrease the number of Registrable Securities, and securities of other stockholders of the Company so proposed to be sold and so requested to be included in such registration (pro rata on the basis of the number of Registrable Securities held by the Partnership and the number of shares of Common Stock held by the other stockholders having rights to include equity securities in such registration (excluding VPC and its Affiliates)) to the extent necessary to reduce the number of securities to be included in the registration to the level recommended by the managing underwriter and (y) if such registration is effected pursuant to a Demand, the Company may include all securities required to be registered pursuant to such Demand and all securities proposed by the Company to be sold for its own account and may decrease the number of Registrable Securities, and securities of other stockholders of the Company so proposed to be sold and so requested to be included in such registration (pro rata on the basis of the number of Registrable Securities held by the Partnership and the number of shares of Common Stock held by the other stockholders having rights to include equity securities in such registration (excluding VPC and its Affiliates)) to the extent necessary to reduce the number of securities to be included in the registration to the level recommended by the managing underwriter. Notwithstanding the foregoing, the Partnership shall have priority over the Company (but shall be subordinated to the holders of securities required to be registered pursuant to a Demand, if the registration is being effected pursuant to a Demand), with respect to the inclusion of Registrable Securities in the registration for purposes of the exercise by the underwriters of any "greenshoe" or over-allotment option with respect to the offering, to the extent, but only to the extent, that Registrable Securities were excluded from the firm portion of the offering and, in the case of an IPO, such excluded Registrable Securities were IPO Permitted Registrable Securities." [bold text indicates changes] 5. This Agreement may not be amended or modified, nor may the rights of any party hereunder be waived, except by a written document that is executed by each party hereto. 6. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be an original, but all of which together shall constitute one and the same instrument. 7. The Exhibits and Schedules referred to herein are a part of this Agreement for all purposes. 8. This Agreement is made under and shall be governed by and construed in accordance with the substantive laws of the State of Delaware applicable to contracts made and to be performed entirely within that State. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. VANGUARD COMMUNICATIONS, L.P. VPC CORPORATION by Vanguard Communications, Inc., its general partner By: /s/ Barry Porter By: ------------------------------- ------------------------------- Name: Barry Porter Name: Title: Title: PACIFIC CAPITAL GROUP, INC. LE GROUPE VIDEOTRON LTEE By: /s/ Barry Porter By: ------------------------------- ------------------------------- Name: Barry Porter Name: Title: Managing Director Title VANGUARD COMMUNICATIONS, INC. OPTEL, INC. By: /s/Barry Porter By: ------------------------------- ------------------------------- Name: Barry Porter Name: Title: Title: IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. VANGUARD COMMUNICATIONS, L.P. VPC CORPORATION by Vanguard Communications, Inc., its general partner By: By: /s/ Suzanne Renault ------------------------------- ------------------------------- Name: Name: Suzanne Renault Title: Title: Vice-President Legal Affairs and Secretary PACIFIC CAPITAL GROUP, INC. LE GROUPE VIDEOTRON LTEE By: By: /s/ Claude Chagnon ------------------------------- ------------------------------- Name: Name Claude Chagnon Title: Title: President and Chief Operating Officer VANGUARD COMMUNICATIONS, INC. OPTEL, INC. By: By: ------------------------------- ------------------------------- Name: Name: Title: Title: IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. VANGUARD COMMUNICATIONS, L.P. VPC CORPORATION by Vanguard Communications, Inc., its general partner By: By: ------------------------------- ------------------------------- Name Name: Title: Title: PACIFIC CAPITAL GROUP, INC. BE GROUPE VIDEOTRON LTEE By: By: ------------------------------- ------------------------------- Name: Name: Title: Title: VANGUARD COMMUNICATIONS, INC. OPTEL, INC. By: By: /S/ Michael B. Katzenstein ------------------------------- ------------------------------- Name: Name: Michael B. Katzenstein Title: Vice President & General Counsel By: /s/ Rory Cole ------------------------------- Name: Rory Cole Title: COO Schedule I SCHEDULE OF 15% CONVERTIBLE GRID NOTES ISSUED BY OPTEL, INC. TO VPC CORPORATION ========================================================== U.S. $ Amount Date (In Millions) ========================================================== August 30, 1995 $15.0 - ---------------------------------------------------------- October 16, 1995 14.0 - ---------------------------------------------------------- January 24, 1996 6.0 - ---------------------------------------------------------- January 30, 1996 5.7 - ---------------------------------------------------------- January 30, 1996 1.5 - ---------------------------------------------------------- March 5, 1996 4.5 - ---------------------------------------------------------- March 28, 1996 11.7 - ---------------------------------------------------------- May 7, 1996 22.2 - ---------------------------------------------------------- July 26, 1996 12.275 - ---------------------------------------------------------- August 28, 1996 2.025 - ---------------------------------------------------------- September 13, 1996 1.0 - ---------------------------------------------------------- September 20, 1996 10.5 - ---------------------------------------------------------- November 19, 1996 25.0 ========================================================== EXHIBIT [A] SUBORDINATION PROVISIONS FOR OUTSTANDING CONVERTIBLE NOTES 1. Terms defined in the Indenture dated as of [ ], 1997 (the "Indenture") between Optel, Inc., a company incorporated under the laws of Delaware, as issuer (the "Company"), and [ ], as trustee (the "Trustee"), and used herein and not otherwise defined herein have the meanings attributed to such terms in the Indenture. As used herein, the term "Relevant Obligor" means the Obligor creating, incurring, assuming or suffering to exist the Indebtedness evidenced by this agreement or instrument ("Intercompany Debt"). The term "Obligor" means any of the Company and any Restricted Subsidiary. 2. The indebtedness represented by this Intercompany Debt shall be subordinated as follows: 2.1 Definition of Senior Indebtedness. "Senior Indebtedness" means, at any date, all Indebtedness and other obligations under the Securities and the Indenture (including, without limitation, principal, interest, premium, fees, penalties, indemnities and "post-petition interest" in bankruptcy). 2.2 Agreement to Subordinate. The Relevant Obligor, for itself and its successors and assigns, and the holder of this Intercompany Debt (in such capacity, the "Holder") agree that the indebtedness evidenced by this Intercompany Debt (including, without limitation, principal, interest, premium, fees, penalties, indemnities and "post-petition interest" in bankruptcy) is subordinate and junior in right of payment, to the extent and in the manner provided in this Section 2, to the indefeasible prior payment in United States Dollars in full of Senior Indebtedness or due provision therefor. The provision of this Section 2 are for the benefit of the holders from time to time of Senior Indebtedness, and the Trustee on behalf of such holders, and the Trustee and such holders are hereby made obligees hereunder to the same extent as if their names were written herein as such, and they (collectively or singly) may proceed to enforce such provisions. 2.3 Liquidation; Dissolution; Bankruptcy; (a) Upon any distribution of assets of the Relevant Obligor to creditors -2- or upon a liquidation or dissolution or winding-up of the Relevant Obligor or in a bankruptcy, arrangement with creditors, liquidation, reorganization, insolvency, receivership or similar case or proceeding relating to the Relevant Obligor or its property or other marshalling of property or assets of the Relevant Obligor: (i) the holders of Senior Indebtedness shall be entitled to receive payment in full of all Senior Indebtedness before the Holder shall be entitled to receive any payment of principal of or interest on, or any other amount owing in respect of, this Intercompany Debt; (ii) until payment in full of all Senior Indebtedness, any distribution of assets of any kind or character in respect of this Intercompany Debt to which the Holder would be entitled but for this Section 2 shall be paid by the Relevant Obligor or by any receiver, trustee in bankruptcy, liquidating trustee, assignee, agent or other Person making such payment or distribution to the holders of Senior Indebtedness, as their interests may appear; and (iii) in the event that, notwithstanding the foregoing, any payment or distribution of any kind or character in respect of this Intercompany Debt, whether in cash, property or securities, shall be received by the Holder from the Relevant Obligor or from any other source in respects of this Intercompany Debt or set-off against liabilities of the Holder to the Relevant Obligor before all Senior Indebtedness is paid in full, such payment or distribution shall be held in trust for the benefit of and shall, at the Holder's expense, be paid over to the holders of Senior Indebtedness, as their interests may appear, for application to the payment of all Senior Indebtedness until all Senior Indebtedness shall have been paid in full after giving effect to any concurrent payment or distribution to the holders of Senior Indebtedness in respect of such Senior Indebtedness. For purposes of this Section 2, "payment in full" or "paid in full", with respect to Senior Indebtedness, means the receipt on an irrevocable basis of United States Dollars in an amount equal to the unpaid principal amount of the Senior Indebtedness and premium, if any, and interest thereon to the date of such payment, together with all other amounts owing with respect to such Senior Indebtedness. -3- (b) If the Holder does not file proper claims or proofs of claim in the form required in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Relevant Obligor or its property prior to 45 days before the expiration of the time to file such claims, then (i) upon the request of the Trustee, the Holder shall file such claims and proofs of claim in respect of this Intercompany Debt and execute and deliver such powers of attorney, assignments and proofs of claim as may be directed by the Trustee to enable it to enforce any and all claims upon or in respect of this Intercompany Debt and to collect and receive any and all payments or distributions which may be payable or deliverable at any time upon or in respect of this Intercompany Debt, and (ii) whether or not the Trustee shall take action described in clause (i) above, the Trustee shall nevertheless be deemed to have such powers of attorney as may be necessary to file appropriate claims and proofs of claim and otherwise exercise the powers described above. (c) It is hereby agreed that any provision hereof pursuant to which one party holds assets in trust for the benefit of the other party is not intended to (and shall not) constitute, create or give rise to a security interest of any kind in respect of such assets. (d) If for any reason a trust in favor of, or a holding of property for, the holders of Senior Indebtedness or the Trustee is invalid or unenforceable, the Holder will pay and deliver to the holders of Senior Indebtedness or the Trustee (as the case may be) for application in accordance with Section 2.3(a)(iii) above an amount equal to the payment, receipt or recovery in cash or in kind which it would otherwise have been bound to hold in trust for or as property of the holders of Senior Indebtedness or the Trustee (as the case may be). 2.4 Senior Indebtedness. (a) The Relevant Obligor shall not pay any principal, interest or premium on, or any other amount in respect of, this Intercompany Debt, acquire this Intercompany Debt for cash or property (other than capital stock of the Relevant Obligor) or make any loans, advances or extensions of credit to the Holder with respect to this Intercompany Debt, or pay or acquire any obligation or liability upon which the Holder is the obligor, and the Holder shall not ask for, demand, accept, sue for, claim, prove for or receive howsoever any payment of any principal, interest or premium on, or any other amount in respect of, this Intercompany Debt or any such cash, property (other than capital stock of the Rele- -4- vent Obligor), loans, advances or extensions of credit at any time when (x) a Default or an Event of Default in respect of the payment of any Senior Indebtedness, whether at maturity or at a date fixed for prepayment or by declaration of an acceleration or otherwise, has occurred and is continuing or will occur as a result of such action or (y) the maturity of any Senior Indebtedness has been accelerated. (b) If, notwithstanding the foregoing, any payment of any kind or character, whether in cash, property or otherwise, shall be received by the Holder from the Relevant Obligor or from any other source or set-off against liabilities of the Holder to the Relevant Obligor in respect of this Intercompany Debt before all Senior Indebtedness is paid in full, such payment shall be held in trust in accordance with Section 2.3(a)(iii). 2.5 Subordination May Not Be Impaired. (a) No right of any holder of Senior Indebtedness to enforce the subordination of indebtedness evidenced by this Intercompany Debt shall in any way be prejudiced or impaired or in any way affected by any act or failure to act by the Relevant Obligor or by any act or omission in good faith by any such holder or the Trustee, or by any non-compliance by the Relevant Obligor with the terms, provisions or covenants herein, regardless of any knowledge thereof which any such holder or the Trustee may have or be otherwise charged with, or by any other act, omission, matter or thing which, but for this Section 2.5, would prejudice, impair, reduce, release or otherwise affect the subordination. Neither the subordination of this Intercompany Debt as herein provided nor the rights of the holders of Senior Indebtedness with respect hereto shall be affected by any extension, renewal or modification of the terms of, or the granting of any security in respect of, any Senior Indebtedness or any exercise or non-exercise of any right, power or remedy with respect thereto. (b) The Holder agrees that all indebtedness evidenced by this Intercompany Debt will be unsecured by any Lien upon or with respect to any property of the Relevant Obligor or any Obligor, and that the Holder will not permit to subsist any Liens upon its claim in respect of or upon the proceeds of this Intercompany Debt. (c) The Holder agrees not to exercise any offset or counterclaim or similar right in respect of the indebtedness evidenced by this Intercompany Debt except to the extent payment of such indebtedness is permitted and will not assign or -5- otherwise dispose of this Intercompany Debt or the indebtedness which it evidences unless the assignee or acquirer, as the case may be, agrees to be bound by the terms of this Section 2. (d) The Holder waives any right it might have of first requiring any holder of Senior Indebtedness or the Trustee to proceed against or to enforce any other rights or Lien or claim for payment from any person before claiming the benefit of the subordination therein provided for. 3. Miscellaneous. (a) This Agreement may not be amended or modified in any respect, nor may any of the terms or provisions hereof be waived, except by an instrument signed by the Relevant Obligor, the Holder and the Trustee (with the consent of holders of a majority in aggregate principal amount at maturity of Senior Indebtedness). (b) This Agreement shall be binding upon each of the parties hereto and their respective successors and assigns and shall inure to the benefit of the Trustee and each and every holder of Senior Indebtedness and their respective successors and assigns. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. (d) The Holder and the Relevant Obligor each hereby irrevocably agree that any suits, actions or proceedings arising out of or in connection with this Agreement may be brought in any state or federal court sitting in The City of New York and submit and attorn to the non-exclusive jurisdiction of such courts. (e) Any payment made by the Holder to the holders of Senior Indebtedness may be made to the Trustee under the Indenture. Exhibit B This Note and the securities issuable on conversion hereof have not been registered under the Securities Act of 1933 and may not be transferred or sold in the absence of (i) an effective registration statement with respect thereto under such Act or (ii) an opinion of OpTel, Inc. counsel that such registration and filings are not required. The securities issuable on the conversion of this Note will be subject to the restrictions set forth in the Stockholders Agreement dated as of December 22, 1994, as amended, among VPC Corporation, Vanguard Communications, L.P. and OpTel, Inc., a copy of which is on file in the offices of OpTel, Inc., and certificates representing such securities will bear a restrictive legend to that effect. - -------------------------------------------------------------------------------- OPTEL, INC. 15% Subordinated Convertible Grid Note due_____, 2005 $[ ] New York, New York _______, 199_ FOR VALUE RECEIVED, the undersigned, OPTEL, INC., a Delaware corporation ("OpTel"), hereby promises to pay to the order of VPC Corporation, a Delaware corporation (the "Lender"), the principal sum of _______ DOLLARS ($ ), or so much thereof as shall be advanced by the Lender to OpTel, in the Lender's sole discretion, and not repaid. The principal of this Note to the extent not earlier paid shall be due and payable six months after the earlier to occur of (i) the indefeasible payment in full of the % Senior Notes Due 2005 issued by OpTel (the "Senior Notes") or due provision therefor and (ii) the final maturity of the Senior Notes. Interest shall accrue on the unpaid balance of the principal of this Note from time to time outstanding at the rate of 15% per year, until the principal amount of this Note shall be fully paid, and shall be payable simultaneously with the payment of principal hereunder. OpTel and the Lender hereby acknowledge and agree that the indebtedness evidenced by this Note will be, to the extent and in the manner provided on the exhibit attached hereto ("Exhibit B-1"), subordinated and subject in right of payment to the prior payment in full by OpTel of all Senior Indebtedness, as this term is defined in Exhibit B-1. The terms and conditions set forth in Exhibit B-1 are hereby incorporated herein and made a part hereto as if set forth in its entirety herein. This Note incorporates the following additional terms: 1. This Note evidences loans made by the Lender to OpTel, in Lender's sole discretion, from time to time, as requested by OpTel. The unpaid principal balance of this Note at any time shall be the total amount advanced by the Lender to OpTel in the Lender's sole discretion, less the total amount of principal payments made hereon by OpTel. The date and amount of each such loan and each payment on account of principal thereof may be endorsed by the Lender on the grid attached to and made a part of this Note, and when so endorsed shall represent evidence thereof binding upon OpTel in the absence of manifest error. Any failure by the Lender to so endorse any such loan shall in no way mitigate or discharge the obligation of OpTel to repay any loans actually made. Requests by OpTel for loans to be made and directions as to the disposition of the proceeds thereof must be given in writing to the Lender by the officers of OpTel or other persons authorized to borrow on OpTel's behalf by borrowing resolutions of OpTel's Board of Directors heretofore delivered to the Lender, as such resolutions may be amended or superseded from time to time, provided that any such amending or superseding resolutions shall have been certified by the Secretary or an Assistant Secretary of OpTel, and a copy thereof, so certified, shall have been delivered to an officer of the Lender at its office for payment. The Lender may conclusively rely on the authorities contained in said resolutions. Any such loan so made shall be conclusively presumed to have been made to or for the benefit of OpTel and OpTel shall be liable in respect thereof when made in accordance with any such request or direction. OpTel shall inform its board of directors of the amount of any borrowings under this Note at the first regularly scheduled board meeting following any such borrowing. 2. Payments of principal of and interest on this Note shall be made in lawful money of the United States of America to the Lender c/o Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036, or at such other place as the Lender shall have designated to OpTel in writing. On August 31 of each year, all interest accrued on this Note shall be capitalized and added to the principal of this Note. 3. OpTel acknowledges that the Lender holds and may hereafter acquire from OpTel one or more notes, debentures or other securities of OpTel that are or may be convertible into shares of Class B Common Stock of OpTel ("OpTel Shares"). All of such convertible securities of OpTel now outstanding or hereafter -2- issued to the Lender are herein referred to as the "Convertible Securities". 4. (a) The Lender by acceptance of this Note covenants and represents to OpTel that this Note and any securities issued on exercise of the conversion privilege contained herein are being acquired by the Lender without a view to distribution and that the Lender will at no time dispose of this Note or such securities except in compliance with the requirements of the Securities Act of 1933, as amended. (b) This Note may not be transferred or assigned except in compliance with applicable federal and state securities laws and subject to the applicable provisions of the Stockholders Agreement, dated as of December 22, 1994, as amended (the "Stockholders Agreement"), to which the Lender, Vanguard Communications, L.P. ("Vanguard") and OpTel are parties. If this Note is validly transferred, the term "Lender" shall include such transferee. 5. This Note may not be prepaid by OpTel at any time prior to the expiration of the Conversion Period (as defined in Section 6), provided that to the extent permitted by the indenture governing the Senior Indebtedness, this Note shall be prepaid by OpTel to the extent requested by the Lender out of the net proceeds of any sale of debt or equity securities of OpTel. 6. (a) Subject to and upon compliance with the provisions of this Section 6 and Section 7,(i) during the period commencing on the IPO Date (as defined in the Stockholders Agreement), and ending 180 days after the IPO Date (the "Post-IPO Exercise Period") or (ii) if the Post-IPO Exercise Period shall not previously have commenced and expired, during the period commencing on April 30, 1999 and ending 90 days after such date (the earlier of such periods, the "Conversion Period"), the Lender may, at its option, convert the entire principal balance of this Note together with all accrued interest thereon, into fully paid and nonassessable OpTel Shares at the Conversion Price (as hereinafter defined) in effect at the time of conversion. The right of the Lender to convert principal of and interest on this Note shall expire if not exercised prior to the expiration of the Conversion Period. The date of such conversion shall be the "Conversion Date". (b) Subject to certain adjustments as hereinafter provided, the Conversion Price shall be either (i) the per share price at which Common Stock of OpTel is first sold to the public in a public offering (an "IPO"), provided that the product of such per share price and the number of shares of Common Stock of OpTel outstanding, on a fully diluted basis (excluding shares sold in the IPO, shares issuable upon exercise of the 225,000 warrants each to purchase one share of Class A Common Stock of -3- OpTel which warrants were issued pursuant to a Warrant Agreement dated as of February , 1997 and shares issuable upon conversion of this Note or any Convertible Securities (the "Excludable Shares")), equals or exceeds $225 million, or (ii) if no such IPO has taken place, a per share price equal to the quotient of $225 million divided by the number of shares of OpTel Common Stock outstanding on that date, on a fully diluted basis (excluding Excludable Shares). (c) The Conversion Price shall be subject to appropriate decrease or increase, as the case may be, if OpTel shall at any time after the date of issuance of this Note: (i) declare with respect to OpTel Shares any dividend or distribution payable in shares of Common Stock of OpTel or in securities directly or indirectly convertible into or exchangeable for shares of OpTel Common Stock (but only upon the issuance of shares of OpTel Common Stock following the conversion or exchange of such securities), or (ii) subdivide or combine outstanding shares of OpTel Common Stock. (d) In case of any reclassification, change or exchange of outstanding shares of OpTel Common Stock (except for a change as a result of a subdivision or combination of such shares), or in case of any consolidation of OpTel with, or merger of OpTel into, another corporation (except for a merger or a consolidation in which OpTel is the continuing corporation and which does not result in any reclassification, change or exchange of outstanding shares of OpTel Common Stock other than a change as a result of a subdivision or combination of such shares), or in case of any transfer to another corporation of the assets of OpTel as an entirety or substantially as an entirety, or if OpTel shall declare a dividend or distribution (except in shares of OpTel Common Stock or in securities directly or indirectly convertible into or exchangeable for shares of OpTel Common Stock) upon the shares of OpTel Common Stock payable otherwise than in cash out of earned surplus, this Note shall thereafter be convertible pursuant to this Section 6 into the kind and amount of shares and other securities and property that the Lender would have owned or would have been entitled to receive immediately after such reclassification, change, exchange, consolidation, merger, transfer, dividend or distribution, had this Note been converted immediately prior to the effective date of such reclassification, change, exchange, consolidation, merger or transfer or immediately prior to the date for the determination of security holders of record entitled to receive such dividend or distribution. (e) At the option of the Lender, to avoid the issuance of any fractional shares upon any conversion, adjustment -4- therefor may be made in cash in an amount equal to the same fraction of the Conversion Price in effect on the date of such conversion. (f) No adjustment will be made upon conversion of this Note in respect of dividends or distributions previously paid or declared (the date for the determination of security holders of record entitled to receive such dividends or distributions having passed) on the shares of OpTel Common Stock previously outstanding, except as otherwise provided in Section 7(d). (g) Whenever the number of OpTel Shares or other securities or assets deliverable upon conversion of this Note shall be adjusted as provided in this Section 6, OpTel shall forthwith obtain and file with its corporate records a certificate or letter from the firm of independent public accountants then retained by OpTel setting forth the adjusted number of OpTel Shares or other securities or assets deliverable upon conversion of this Note, and a copy of such certificate or letter shall be mailed to the holder hereof. Any such certificate or letter shall be conclusive evidence as to the correctness of the adjustment or adjustments referred to therein and shall be available at the principal office of OpTel for inspection by the holder of this Note on any day during normal business hours. 7. To exercise the conversion privilege described in Section 6(a) at any time when such privilege is exercisable in accordance with the terms of this Note (including, without limitation, whether prior to or after the occurrence of any event referred to in Section 9), the Lender shall surrender this Note, with the attached form of Conversion Notice duly completed, to OpTel at the principal office of OpTel or at such other place as OpTel may designate. As promptly as practicable after surrender of this Note as aforesaid but in no event later than three business days thereafter, OpTel shall issue and deliver to the Lender a certificate or certificates for the number of OpTel Shares and/or other securities issuable or deliverable upon the conversion of this Note in accordance herewith and cash in respect of any fraction of an OpTel Share for which the Lender has elected to receive cash. Such conversion shall be deemed to have been effected at the time when such notice shall have been received by OpTel and this Note shall have been surrendered as aforesaid, and the person in whose name any certificate for OpTel Shares or other securities shall be issuable upon such conversion shall be deemed to have become on such date the holder of record of the shares or other securities represented thereby, subject to the provisions of Section 9. 8. OpTel covenants and agrees that it will at all times reserve and keep available such number of its duly -5- authorized and unissued OpTel Shares and other shares of its Common Stock as shall from time to time be sufficient to effect the conversion of this Note and the exercise or conversion of all other outstanding securities exercisable or convertible with respect to shares of OpTel's Common Stock and that, if at any time the number of authorized but unissued OpTel Shares and other shares of OpTel's Common Stock shall not be sufficient to effect the conversion of this Note and the exercise or conversion of all other outstanding securities exercisable or convertible with respect to shares of OpTel's Common Stock or at the Conversion Price then in effect, OpTel will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued OpTel Shares and other shares of its Common Stock to such number as shall be sufficient for such purpose. 9. If, at any time prior to the payment of this Note upon maturity or any date fixed for redemption, any of the following events shall occur: (a) OpTel shall declare any dividend or other distribution upon the shares of its Common Stock payable otherwise than in cash out of earned surplus; or (b) OpTel shall offer to the holders of shares of its Common Stock any additional shares of OpTel or options or warrants therefor or securities convertible into shares of OpTel or any right to subscribe therefor; or (c) a recapitalization, reclassification, consolidation, merger, transfer of assets, dissolution, liquidation, winding-up of OpTel or other similar action of OpTel requiring approval by its stockholders shall be proposed, then in any one or more of such events, OpTel shall give to the Lender, in accordance with Section 14, not less than 20 days prior notice of the date on which: (i) the books of OpTel shall be closed or a record taken for determination of the stockholders entitled to such dividend, distribution or subscription rights, or (ii) the books of OpTel shall be closed or a record taken for determination of the stockholders entitled to vote on such proposed recapitalization, reclassification, consolidation, merger, transfer of assets, dissolution, liquidation, winding-up or other similar action. Failure to give such notice or any defect therein shall not affect the validity of any action taken. -6- 10. (a) In the case of any Event of Default (as hereinafter defined), the Lender may, by notice to OpTel specifying such Event of Default, declare the principal of and any accrued interest on this Note to be immediately due and payable and thereupon, this Note including both principal and interest, shall become immediately due and payable. This provision is subject to the condition that if, at any time after this Note has been declared due and payable and before any judgment or decree for the payment of the moneys due shall have been obtained or entered, OpTel shall pay all matured installments of interest then due and all payments on account of principal then due (other than by reason of such declaration), then such declaration and its consequences shall be rescinded and annulled, but no such rescission or annulment shall extend to or affect any subsequent default or impair or exhaust any right or power consequent thereon. (b) Notice of any Event of Default shall be given by OpTel to the Lender within five business days after OpTel shall become aware of its existence. (c) For purposes of this Note any one or more of the following shall constitute an "Event of Default": (i) Default in the payment of the principal of this Note when the same shall mature or become due and payable, either by the terms hereof or otherwise; or (ii) Default in the payment of any interest on this Note for more than 15 days after the same has become due and payable; or (iii) Acceleration, by reason of default, of the maturity of a material amount (but in no event less than $200,000) of outstanding indebtedness for money borrowed of OpTel; or (iv) Any judgment, writ or warrant of attachment or of any similar process in an amount material to OpTel (but in no event less than $200,000) is entered or filed against OpTel or against the property or assets of OpTel and remains unpaid, unvacated, unhanded and unstayed for a period of 60 days. 11. Nothing in this Note shall affect or impair the right, which is absolute and unconditional, of the Lender to receive payment of or to institute suit to enforce this Note at and after the maturity hereof (including maturity by redemption, -7- declaration pursuant to this Note or otherwise) or the obligation of OpTel, which is also absolute and unconditional, to pay the principal of and interest on this Note to the Lender at the time and place expressed herein. 12. In any case where the date of maturity of interest on, or principal of, this Note shall be a Sunday or a legal holiday in the State of New York or a day on which banking institutions doing business in the State of New York are authorized by law to close, then payment of such interest may be made on the next succeeding business day with the same force and effect as if made on the nominal date of maturity (and no interest shall accrue for the period after such nominal date). 13. The agreements, undertakings, representations and warranties contained in this Note shall remain operative and in full force and effect and, subject to payment in full of all principal and interest due hereon, and shall survive the surrender and/or delivery of this Note to OpTel for cancellation or otherwise in connection with the redemption or other transfer hereof. 14. Except as herein otherwise expressly provided, all notices, requests, demands, consents and other communications required or permitted under this Note shall be in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered mail, return receipt requested, postage prepaid, in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a person whose address is herein specified may from time to time designate as to itself by notice similarly given to the other such designees in accordance herewith). A notice of change of address shall not be deemed given until received by the addressee. Notices shall be addressed: (i) if to the Lender: VPC Corporation 1114 Avenue of the Americas 46th Floor New York, New York 10036-7798 Attn: Secretary Telecopier: 514-985-8834 -8- copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036-7798 Attn: Russell S. Berman, Esq. Telecopier: 212-479-6275 (2) to OpTel at: OpTel, Inc. 1111 West Mockingbird Lane Suite 1130 Dallas, TX 75247 Attn: General Counsel Telecopier: 214-634-3800 copy to: Vanguard Communications, L.P. c/o Pacific Capital Group, Inc. 150 El Camino Drive Suite 204 Beverly Hills, California 90212 15. This Note shall be governed by and construed in accordance with the laws of the State of New York (without regard to the conflict of laws principles thereof). 16. All the covenants, stipulations, promises and agreements contained in this Note by or on behalf of OpTel shall bind its successors and assigns, whether or not so expressed. OPTEL, INC. By: ___________________________________ Name: ________________________________ Title: ________________________________ -9- NOTICE OF CONVERSION To be executed by the owner of the attached Note if such owner desires to convert the attached Note pursuant to Section 6(a): The undersigned owner of the attached Note hereby [ ] irrevocably exercises the option to convert such Note into shares of Class B Common Stock of OPTEL, INC. ("OpTel Shares") in accordance with the terms of such Note, [ ] elects to receive payment in cash for any fractional share issuable upon such conversion, and directs that the OpTel Shares issuable and deliverable upon such conversion, together with any check in payment for any fractional share as to which an election to receive cash is made above, be delivered to the undersigned. VPC CORPORATION Dated: By: ___________________________________ Name: ________________________________ Title: ________________________________ -10- LOANS AND PAYMENTS OF PRINCIPAL Amount Loan Amount of of Loan Principal Notation Date No. Loan Paid Balance Made By ---- --- ---- ---- ------- ------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- - ------ ------ ----------- ----------- ------------- ----------- -11- EXHIBIT [B-l] SUBORDINATION PROVISIONS FOR DEEPLY SUBORDINATED SHAREHOLDER LOANS 1. Terms defined in the Indenture dated as of [ ], 1997 (the "Indenture") between Optel, Inc., a company incorporated under the laws of Delaware, as issuer (the "Company"), and [ ], as trustee (the "Trustee"), and used herein and not otherwise defined herein have the meanings attributed to such terms in the Indenture. As used herein, the term "Relevant Obligor." means the Obligor creating, incurring, assuming or suffering to exist the Indebtedness evidenced by this agreement or instrument ("Intercompany Debt"). The term "Obligor" means any of the Company and any Restricted Subsidiary. 2. The indebtedness represented by this Intercompany Debt shall be subordinated as follows: 2.1 Definition of Senior Indebtedness. "Senior Indebtedness" means, at any date, all Indebtedness and other obligations under the Securities and the Indenture (including, without limitation, principal, interest, premium, fees, penalties, indemnities and "post-petition interest" in bankruptcy). 2.2 Agreement to Subordinate. The Relevant Obligor, for itself and its successors and assigns, and the holder of this Intercompany Debt (in such capacity, the "Holder") agree that the indebtedness evidenced by this Intercompany Debt (including, without limitation, principal, interest, premium, fees, penalties, indemnities and "post-petition interest" in bankruptcy) is subordinate and junior in right of payment, to the extent and in the manner provided in this Section 2, to the indefeasible prior payment in United States Dollars in full of Senior Indebtedness or due provision therefor. The provision of this Section 2 are for the benefit of the holders from time to time of Senior Indebtedness, and the Trustee on behalf of such holders, and the Trustee and such holders, are hereby made obligees hereunder to the same extent as if their names were written herein as such, and they (collectively or singly) may proceed to enforce such provisions. 2.3 Liquidation; Dissolution; Bankruptcy. (a) Upon any distribution of assets of the Relevant Obligor to creditors -2- or upon a liquidation or dissolution or winding-up of the Relevant Obligor or in a bankruptcy, arrangement with creditors, liquidation, reorganization, insolvency, receivership or similar case or proceeding relating to the Relevant Obligor or its property or other marshalling of property or assets of the Relevant Obligor: (i) the holders of Senior Indebtedness shall be entitled to receive payment in full of all Senior Indebtedness before the Holder shall be entitled to receive any payment of principal of or interest on, or any other amount owing in respect of, this Intercompany Debt; (ii) until payment in full of all Senior Indebtedness, any distribution of assets of any kind or character in respect of this Intercompany Debt to which the Holder would be entitled but for this Section 2 shall be paid by the Relevant Obligor or by any receiver, trustee in bank ruptcy, liquidating trustee, assignee, agent or other Person making such payment or distribution to the holders of Senior Indebtedness, as their interests may appear; and (iii) in the event that, notwithstanding the foregoing, any payment or distribution of any kind or character in respect of this Intercompany Debt, whether in cash, property or securities, shall be received by the Holder from the Relevant Obligor or from any other source in respect of this Intercompany Debt or set-off against liabilities of the Holder to the Relevant Obligor before all Senior Indebtedness is paid in full, such payment or distribution shall be held in trust for the benefit of and shall, at the Holder's expense, be paid over to the holders of Senior Indebtedness, as their interests may appear, for application to the payment of all Senior Indebtedness until all Senior Indebtedness shall have been paid in full after giving effect to any concurrent payment or distribution to the holders of Senior Indebtedness in respect of such Senior Indebtedness. For purposes of this Section 2, "payment in full" or "paid in full", with respect to Senior Indebtedness, means the receipt on an irrevocable basis of United States Dollars in an amount equal to the unpaid principal amount of the Senior Indebtedness and premium, if any, and interest thereon to the date of such payment, together with all other amounts owing with respect to such Senior Indebtedness. -3- (b) If the Holder does not file proper claims or proofs of claim in the form required in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to the Relevant Obligor or its property prior to 45 days before the expiration of the time to file such claims, then (i) upon the request of the Trustee, the Holder shall file such claims and proofs of claim in respect of this Intercompany Debt and execute and deliver such powers of attorney, assignments and proofs of claim as may be directed by the Trustee to enable it to enforce any and all claims upon or in respect of this Intercompany Debt and to collect and receive any and all payments or distributions which may be payable or deliverable at any time upon or in respect of this Intercompany Debt, and (ii) whether or not the Trustee shall take action described in clause (i) above, the Trustee shall nevertheless be deemed to have such powers of attorney as may be necessary to file appropriate claims and proofs of claim and otherwise exercise the powers described above. (c) It is hereby agreed that any provision hereof pursuant to which one party holds assets in trust for the benefit of the other party is not intended to (and shall not) constitute, create or give rise to a security interest of any kind in respect of such assets. (d) If for any reason a trust in favor of, or a holding of property for, the holders of Senior Indebtedness or the Trustee is invalid or unenforceable, the Holder will pay and deliver to the holders of Senior Indebtedness or the Trustee (as the case may be) for application in accordance with Section 2.3(a)(iii) above an amount equal to the payment, receipt or recovery in cash or in kind which it would otherwise have been bound to hold in trust for or as property of the holders of Senior Indebtedness or the Trustee (as the case may be). 2.4 Senior Indebtedness. (a) The Relevant Obligor shall not pay any principal, interest or premium on, or any other amount in respect of, this Intercompany Debt, acquire this Intercompany Debt for cash or property (other than capital stock of the Relevant Obligor) or make any loans, advances or extensions of credit to the Holder with respect to this Intercompany Debt, or pay or acquire any obligation or liability upon which the Holder is the obligor, and the Holder shall not ask for, demand, accept, sue for, claim, prove for or receive howsoever any payment of any principal, interest or premium on, or any other amount in respect of, this Intercompany Debt or any such cash, property (other than common stock of the Rele- -4- vent Obligor), loans, advances or extensions of credit at any time prior to six months after all Senior Indebtedness has been paid in full. (b) If, notwithstanding the foregoing, any payment of any kind or character, whether in cash, property or otherwise, shall be received by the Holder from the Relevant Obligor or from any other source or set-off against liabilities of the Holder to the Relevant Obligor in respect of this Intercompany Debt before all Senior Indebtedness is paid in full, such payment shall be held in trust in accordance with Section 2.3(a)(iii). 2.5 Subordination May Not Be Impaired. (a) No right of any holder of Senior Indebtedness to enforce the subordination of indebtedness evidenced by this Intercompany Debt shall in any way be prejudiced or impaired or in any way affect by any act or failure to act by the Relevant Obligor or by any act or omission in good faith by any such holder or the Trustee, or by any non-compliance by the Relevant Obligor with the terms, provisions or covenants herein, regardless of any knowledge thereof which any such holder or the Trustee may have or be otherwise charged with, or by any other act, omission, matter or thing which, but for this Section 2.5, would prejudice, impair, reduce, release or otherwise affect the subordination. Neither the subordination of this Intercompany Debt as herein provided nor the rights of the holders of Senior Indebtedness with respect hereto shall be affected by any extension, renewal or modification of the terms of, or the granting of any security in respect of, any Senior Indebtedness or any exercise or non-exercise of any right, power or remedy with respect thereto. (b) The Holder agrees that all indebtedness evidenced by this Intercompany Debt will be unsecured by any Lien upon or with respect to any property of the Relevant Obligor or any Obligor, and that the Holder will not permit to subsist any Liens upon its claim in respect of or upon the proceeds of this Intercompany Debt. (c) The Holder agrees not to exercise any offset or counterclaim or similar right in respect of the indebtedness evidenced by this Intercompany Debt except to the extent payment of such indebtedness is permitted and will not assign or otherwise dispose of this Intercompany Debt or the indebtedness which it evidences unless the assignee or acquirer, as the case may be, agrees to be bound by the terms of this Section 2. -5- (d) The Holder waives any right it might have of first requiring any holder of Senior Indebtedness or the Trustee to proceed against or to enforce any other rights or Lien or claim for payment from any person before claiming the benefit of the subordination therein provided for. 3. Miscellaneous. (a) This Agreement may not be amended or modified in any respect, nor may any of the terms or provisions hereof be waived, except by an instrument signed by the Relevant Obligor, the Holder and the Trustee (with the consent of holders of a majority in aggregate principal amount at maturity of Senior Indebtedness). (b) This Agreement shall be binding upon each of the parties hereto and their respective successors and assigns and shall inure to the benefit of the Trustee and each and every holder of Senior Indebtedness and their respective successors and assigns. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflict of laws. (d) The Holder and the Relevant Obligor each hereby irrevocably agree that any suits, actions or proceedings arising out of or in connection with this Agreement may be brought in any state or federal court sitting in The City of New York and submit and attorn to the non-exclusive jurisdiction of such courts. (e) Any payment made by the Holder to the holders of Senior Indebtedness may be made to the Trustee under the Indenture. EX-10.6 14 B UNIT PURCHASE WARRANT VANGUARD COMMUNICATIONS, L.P. B UNIT PURCHASE WARRANT THE WARRANT EVIDENCED HEREBY AND THE UNITS OF LIMITED PARTNERSHIP INTEREST ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR PURSUANT TO THE SECURITIES OR "BLUE SKY" LAWS OF ANY STATE. THE WARRANT MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED. THE UNITS OF LIMITED PARTNERSHIP INTEREST ISSUABLE UPON EXERCISE OF THE WARRANT (THE "SECURITIES") MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR OTHERWISE ASSIGNED WITHOUT REGISTRATION UNLESS (I) AN EXEMPTION FROM REGISTRATION IS AVAILABLE UNDER THE ACT OR THE RULES OR REGULATIONS PROMULGATED THEREUNDER, AND ANY APPLICABLE STATE LAWS, AND (II) PERMITTED IN ACCORDANCE WITH ALL APPLICABLE RESTRICTIONS SET FORTH HEREIN AND IN THE COMPANY'S AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP. WARRANT TO PURCHASE B UNITS OF LIMITED PARTNERSHIP INTEREST AS DESCRIBED HEREIN Issue Date: December 29, 1994. Expiration Date: December 28, 1997. This certifies that, for value received, International Richey Pacific Cablevision, Ltd., a corporation incorporated under the laws of the Province of British Columbia (the "Holder"), is entitled to purchase from Vanguard Communications, L.P., a California limited partnership (the "Company" or "Vanguard"), for aggregate consideration of $1,250,000, subject to adjustment as set forth herein (the "Exercise Price"), One Hundred Seventy Two (172) units of limited partnership interest (the "Units") of the Company's B Unit. (the "B Units") as defined in the Company's Second Amended and Restated Partnership Agreement dated as of August 12, 1994 (as amended from time to time, the "Partnership Agreement") on the terms set forth herein. The number of Units may be adjusted from time to time as described in this Warrant, and the Exercise Price shall be subject to adjustment pursuant to Section 4. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in Exhibit A attached hereto and incorporated herein by this reference. 1. Exercise. 1.1 Time for Exercise. This Warrant may be exercised at any time, in whole and not in part, during the period commencing on the date that is one hundred eighty-one (181) days after the issue date of this Warrant and expiring on December 28, 1997 (the "Exercise Period"), subject to earlier expiration as provided herein. 1.2 Manner of Exercise. This Warrant shall be exercised by delivering it to the Company with the exercise form duly completed and signed. Simultaneously therewith, the Holder shall deliver to the Company cash or a certified check in an amount equal to the Exercise Price, and, subject to Sections 1.4, 2 and 3, the Holder shall be entitled to receive the Units from the Company in accordance with Section 1.3. 1.3 Further Assurances; Admission as Limited Partner. Upon exercise of this Warrant pursuant to Section 1.2, subject to Sections 1.4 and 3, Holder shall (a) execute, acknowledge and deliver to the Partnership such other instruments as the Company may deem necessary or advisable to consummate the sale of the Units to Holder and, in the case of a Holder who was not a limited partner (a "Limited Partner") of the Company prior to such exercise, to effect the admission of Holder as a Limited Partner, including, without limitation, a Subscription Agreement in a form acceptable to the Company and an executed Partnership Agreement; and (b) if the Holder was not a Limited Partner prior to such exercise, pay a fee to the Partnership in an amount sufficient to cover all reasonable third party or out-of-pocket expenses connected with the admission of Holder as a Limited Partner. Holder shall be deemed to be a Limited Partner with respect to the Units as to which this Warrant is exercised as of the close of business on the date all the actions required in this Section 1 shall have been completed. 1.4 Security Agreement for Certain Exercises. Pursuant to the Stock Purchase Agreement, OpTel, Inc., a Delaware corporation which is the assignee of the Company ("OpTel"), purchased substantially all of the assets of the Holder. This Warrant serves as partial consideration for such purchase. Pursuant to Article 6 of the Stock Purchase Agreement, OpTel has the right to receive indemnification from the Holder, including by means of adjusting the Exercise Price, the Put Price and the Call Price and, if the Warrant has been exercised, to require the Holder to execute the Security Agreement, pursuant to which the Holder shall grant a security interest in the Units until the Outside Date (as defined below), and to require that the proceeds of the sale of any of the Collateral Units or distributions on Collateral Units be deposited and held in the Collateral Account until the Outside Date. -2- 1.4.1 Terms of Security Agreement. In order to implement certain of the rights of OpTel under the Stock Purchase Agreement, the Holder agrees that, notwithstanding any other provision of this Warrant, if the Holder elects to exercise this Warrant prior to the later to occur of (a) the one year anniversary of the date of this Warrant, and (b) the sixtieth (60th) day following the Indemnification Resolution Date (the latest of such dates being referred to herein as the "Outside Date"), prior to the issuance of the Units (i) the Holder and OpTel shall enter into the Security Agreement, and (ii) the Holder shall execute and deliver to OpTel a financing statement (UCC-1 form) and one duplicate original. If at the time of the exercise of this Warrant (i) there is a Public Market for the Units, a number of the Units equal to $2,250,000 at the then-current Market Value will serve as collateral pursuant to the Security Agreement, or (ii) there is not a Public Market for the Units, all of the Units and related proceeds will serve as collateral pursuant to the Security Agreement. The Security Agreement shall remain in full force and effect until the Outside Date. 1.4.2 Distributions on Units. All distributions paid or made with respect to the Collateral Units during the Security Term shall be paid by the General Partner directly to the Collateral Account. All distributions in connection with any reorganization or recapitalization of the Company (including any merger) paid or made with respect to the Collateral Units while the Security Agreement is in effect shall be deposited into such account. 1.4.3 Restrictions. During the Security Term, the Holder shall not pledge, mortgage, hypothecate, encumber or create or suffer to exist a security interest in the Collateral Units or sell, assign or otherwise transfer such Units to or in favor of anyone other than pursuant to Section 2 of the Security Agreement, and the Holder shall not file or permit to be filed any financing statement or other security instrument with respect to the Collateral Units. The securities issuable upon exercise of the Warrant, whether they are Collateral Units or otherwise, may not be sold, transferred or pledged except in accordance with the terms of the Partnership Agreement. 1.5 Further Assurances. Intentionally deleted. 1.6 Representations and Warranties. The Holder agrees that all of the representations and warranties made by it in the Investor Representations Letter are true as of the date hereof and shall be true on and as of the date of exercise of this Warrant, with the same effect as though such representations and warranties had been made on and as of the date of exercise. -3- 2. Holder's Put option. Subject to Section 3, if this Warrant is not exercised during the Exercise Period, then the Holder may, in its sole discretion, within the ninety (90) day period commencing on the date on which the Exercise Period terminates (the "Put Period"), by written notice to the Company and OpTel, require that the Warrant, together with all rights, title and interest herein, be purchased for a price of $1,000,000, subject to adjustment pursuant to Section 4 (the "Put Price"), paid to the Holder (the "Put Option"). After the Holder has delivered to the Company and OpTel written notice of the Holder's exercise of the Put Option, OpTel must pay the Put Price within ninety (90) calendar days following the later to occur of (i) the Company's receipt of such written notice and (ii) the Outside Date (such 90-day period being referred to as the "Put Funding Period"). The Company shall have no liability to pay the Put Price. OpTel's failure to pay the Put Price within the Put Funding Period shall be deemed to be an "Event of Default" under the Closing Note and the Stock Pledge Agreement, unless such failure is due to circumstances beyond OpTel's control. If the Holder does not exercise the Put Option prior to the expiration of the Put Period, the Put Option shall expire and be of no further force and effect. 3. Company 's Call option. 3.1 At any time prior to the issuance to the Holder of the Units, or such later date as is provided in Section 3.2 (the "Call Period"), the Company may, in its sole discretion, repurchase this Warrant, together with all rights, title and interest herein, for a price of $4,000,000, subject to adjustment pursuant to Section 4 (the "Call Price"), paid to the Holder (the "Call Option"). OpTel shall be liable to the Holder to pay that portion of the Call Price that is equal to the Put Price, and the Company shall be liable to pay to the Holder the balance of the Call Price. The Call Option shall be exercised by written notice delivered to the Holder and to OpTel. Upon the Company's delivery of such notice to the Holder and to OpTel, this Warrant, together with all rights, title and interest of the Holder herein, shall terminate and the Holder shall be obligated to deliver this Warrant to the Company within thirty (30) calendar days of the date of such notice; provided, however, that if the Company and OpTel do not pay the Call Price on or before the thirtieth (30th) calendar day following the Company's receipt of this Warrant, or such later date as is provided in Section 3.2 (the "Call Funding Period"), then this Warrant, together with all rights, title and interest herein, shall remain in full force and effect, and thereafter the Company must again provide written notice of its exercise of the Call Option and comply with the provisions of this Section 3 if the Company desires to exercise the Call Option. If the Company exercises the Call option after the Holder has paid the Exercise Price, the -4- Company shall reimburse the Holder for such amount concurrently with the payment of the Call Price. 3.2 If during the Call Period the Outside Date has not occurred, then (i) if the Holder has exercised this Warrant, (a) the Holder shall pay to the Company the Exercise Price (as adjusted pursuant to Section 4) in accordance with Section 1.2 and (b) the Units shall be pledged to OpTel as security pursuant to the Security Agreement in accordance with Section 1.4.1; (ii) regardless of whether the Holder has exercised this Warrant, the Call Period shall be extended so as to terminate on the thirtieth (30th) calendar day following the Outside Date; and (iii) regardless of whether the Holder has exercised this Warrant, the Call Funding Period shall be extended so as to terminate (x) if the Holder has not exercised this Warrant, on the thirtieth (30th) calendar day after the Company's receipt of the Warrant following the Company's exercise of the Call Option, if any, or (y) if the Holder has exercised this Warrant, on the thirtieth (30th) calendar day following the exercise of the Call Option, if any. 3.3 If the Company does not exercise the Call Option prior to the expiration of the Call Period (as extended pursuant to Section 3.2), the Call Option shall expire and be of no further force and effect. 4. Adjustments to Exercise Price, Call Price and Put Price. If at any time during the Call Period, the Put Period or the Put Funding Period there exists any Resolved Indemnification Claim, then OpTel may, without prejudice to any other rights it may have, including without limitation the right to offset against the Closing Note and to seek damages from the Holder, to the extent that the amount of the Resolved Indemnification Claim(s) in not otherwise satisfied, require the following adjustments: (i) decrease the Put Price by the amount of the Resolved Indemnification Claim(s) and (ii) decrease the Call Price by the amount of the Resolved Indemnification Claim(s). In addition to the foregoing, if at any time during the Call Period there exists any Resolved Indemnification Claim, then the Company may, without prejudice to any other rights it may have, including without limitation the right to seek damages from the Holder, to the extent that the amount of the Resolved Indemnification Claim(s) is not otherwise satisfied, require an increase in the Exercise Price by the amount of the Resolved Indemnification Claim(s). Notwithstanding any adjustments made pursuant to this Section 4, the other procedures applicable to exercising this Warrant, the Put -5- option and the Call Option provided in Sections 1, 2 and 3 shall continue to apply. 5. Adjustments for Loss of Ventena. Intentionally Deleted. 6. Transfer of Warrants and Securities. 6.1 No Transfer of Warrant. This Warrant may not be sold, transferred or pledged. The Company may place a legend to that effect on this Warrant and any replacement Warrant. 6.2 Restrictions on Transfers of Securities. In addition to the restrictions on the Escrowed Units pursuant to Section 1.4.3, the Units may not be sold, transferred or pledged unless (a) the Company shall have been supplied with reasonably satisfactory evidence that such transfer is not in violation of the Act and any applicable state securities laws and (b) Holder shall have met the transfer restrictions applicable for Units set forth in the Partnership Agreement. The Company may place a legend to that effect on this Warrant and any replacement Warrant. 6.3 Loss, Destruction of Warrant Certificates. Upon receipt of (i) evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of the Warrant and (ii) except in the case of mutilation, an indemnity or security reasonably satisfactory to the Company, the Company will, within ten (10) business days, execute and deliver a replacement Warrant of like tenor representing the right to purchase the Units for the Exercise Price. 7. Cost of Issuances. The Company shall pay all expenses and other charges payable in connection with the preparation, issuance and delivery of the Units. 8. Anti-Dilution Provisions. If any of the following events occurs at any time hereafter during the Exercise Period, then the number of Units subject to this Warrant immediately prior to such event shall be changed as described in order to prevent dilution: 8.l Stock Splits and Reverse Splits. If at any time (i) the outstanding B Units are subdivided into a greater number of B Units, then the number of Units will be increased proportionately, and conversely, (ii) the outstanding B Units are consolidated into a smaller number of B Units, then the number of Units will be reduced proportionately. 8.2 Effect of Reorganization and Asset Sales. If any Event is effected in such a way that holders of B Units are entitled to receive securities and/or assets as a result of their ownership of B Units, then upon exercise of this Warrant the Holder will have the right to receive in lieu of or in addition to the Units, as the cane may be, the securities -6- and/or assets which it would have received if such rights had been fully exercised as of the record date for such Event. The Company will not effect any Event unless prior to or simultaneously with its consummation the successor business entity resulting from the consolidation or merger (if other than the Company), or the business entity purchasing the Company's assets, assumes the performance of the Company's obligations under this Warrant (as appropriately adjusted to reflect such consolidation, merger or sale such that the Holder' s rights under this Warrant remain, as nearly as practicable, unchanged) by a binding written instrument. 8.3 Other Securities Adjustments. If as a result of this Section 8, the Holder is entitled to receive any securities other than the Units upon exercise of this Warrant, the number of such securities shall thereafter be adjusted from time to time in the same manner as provided pursuant to this Section 8 for the Units. The allocation of purchase price between various securities shall be made in writing by the Board of Directors of the General Partner of the Company in good faith at the time of the event by which the Holder becomes entitled to receive new securities, and a copy shall be sent to the Holder. 8.4 Notices. 8.4.1 Notice of Adjustments. When any adjustment is required to be made under this Section 8, the Company shall promptly (i) determine such adjustments, (ii) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the adjustment; and (iii) cause a copy of such statement, together with any agreement required by Section 8.2, to be promptly mailed to the Holder after the date on which the circumstances giving rise to such adjustment occurred. 8.4.2 Notice of Events. If at any time (i) the Company declares any distribution with respect to the Units payable in securities, (ii) any Event occurs, or (iii) there is a voluntary or involuntary dissolution, liquidation or winding up of the Company, then the Company shall give the Holder at least ten (10) but not more than sixty (60) calendar days written notice of the date on which the books of the Company will close or upon which a record will be taken with regard to such occurrence. Such notice will also specify the date as of which the holders of Units will participate in the distribution or will be entitled to exchange their Units for securities or other property (it being understood that Holder will be deemed to be a holder of Units only if and to the extent he or it was a Limited Partner prior to the exercise of an option hereunder or has become a Limited Partner hereunder). The notice may state that the record date is subject to the effectiveness of a registration statement under -7- the Act or to a favorable vote or determination of shareholders or Unitholders or of any governmental agency. 8.5 Computations and Adjustments. Upon each computation of an adjustment under this Section 8, the number of Units shall be calculated up or down to the nearest whole share. However, the fractional amount of each shall be used in calculating any future adjustments. No fractional Units shall be issued in connection with the exercise of this Warrant, but the Company shall make a cash payment for any fractional Units based on the Market Value of Units on the date of exercise. Notwithstanding any changes in the number of Units, this Warrant, and any Warrants issued in replacement thereof, may continue to state the initial number of Units. Alternatively, the Company may elect to issue a new Warrant or Warrants of like tenor for the additional Units purchasable hereunder or, upon surrender of the existing Warrant, to issue a replacement Warrant, for the same Exercise Price as the existing Warrant, evidencing all the Warrants to which the Holder is entitled after such adjustments. 8.6 Exercise Before Payment Date. In the event that this Warrant is exercised after the record date for any event requiring an adjustment, but prior to the actual event, the Company may elect to defer issuing any applicable payment or other securities to the Holder until the actual event occurs; provided, however, that the Company shall deliver a Due Bill or other appropriate instrument to the Holder, transferrable to the same extent as the other securities issuable on exercise, evidencing the Holder's right to receive such additional payment or other securities upon the occurrence of the event requiring such adjustment. 9. Registration Rights. If the Holder exercises this Warrant, the Holder shall have the right to cause the Company to register the Units on the same terms and conditions as, and only to the extent that, at any time prior to the disposition by the Holder of the Units, the senior management of the Company or the individuals and entities who are Limited Partners of the Company, are accorded such right, if any. Such right is personal to the Holder and is not transferable. 10. Covenants. Intentionally Deleted. 11. Status of Holder. 11.1 Not a Limited Partner. Subject to Section 1.4, until all the actions required in Section 1 of this Warrant shall have been completed, the Holder shall not be entitled to any rights (i) as a Limited Partner with respect to the Units including, without limitation, the right to vote or receive distributions, or (ii) to receive any notice of any proceedings of the Company except as otherwise provided in this Warrant. Without limiting the foregoing, the Partnership -8- Agreement may be amended, and the Company may take any action described in Section 8, without the consent of the Holder. 11.2 Limitation of Liability. Unless the Holder exercises this Warrant in writing, the Holder's rights and privileges hereunder shall not give rise to any liability for the Exercise Price or as a limited partner of the Company, whether to the Company or its creditors. 12. Miscellaneous. 12.1 Complete Instrument; Modifications. This Warrant and any documents referred to herein or executed contemporaneously herewith, including without limitation the Stock Purchase Agreement and the Investor Representations Letter, constitute the parties' entire agreement with respect to the subject matter hereof and supersede all agreements, representations, warranties, statements, promises and understandings, whether oral or written, with respect to the subject matter hereof. This Warrant may not be amended, altered or modified except by a writing signed by the parties. 12.2 Reliance on Representations. All agreements, representations and warranties of each party hereto shall be deemed to be material and to have been relied upon by the other party, notwithstanding any investigation heretofore or hereafter made by such other party or on its behalf. 12.3 Additional Documents. Each party hereto agrees to execute any and all further documents and writings and to perform such other actions which may be or become reasonably necessary or expedient to effectuate and carry out this Warrant. 12.4 Expenses. Except as set forth in Sections 7, 12.9 and 12.10, each party hereto will pay all of its own expenses incurred in connection with this Warrant; provided, however, that each party shall pay one half of the costs of the Collateral Account. 12.5 Notices. All notices, requests, demands and other communications under this Warrant shall be given in writing and shall be: (a) personally delivered; (b) sent by telecopier or facsimile transmission; or (c) delivered by registered or certified U.S. Mail, return receipt requested and postage prepaid, or by private overnight mail courier service, to such address as may be designated from time to time by the relevant party, and which shall initially be: If to the Company: Vanguard Communications, L.P. 345 North Maple Drive, Suite 285 Beverly Hills, CA 90210 -9- Attention: Jonathan D. Lloyd Telephone: (310) 281-2610 Facsimile: (310) 273-9453 With a copy by the same means to: Irell & Manella 1800 Avenue of the Stars Suite 900 Los Angeles, CA 90067 Attention: Joan L. Lesser, Esq. Telephone: (310) 277-1010 Facsimile: (310) 203-7199 If to OpTel: OpTel, Inc. 345 North Maple Drive, Suite 285 Beverly Hills, CA 90210 Attention: President Telephone: (310) 281-2610 Facsimile: (310) 273-9453 With a copy by the same means to: Irell & Manella 1800 Avenue of the Stars Suite 900 Los Angeles, CA 90067 Attention: Joan L. Lesser, Esq. Telephone: (310) 277-1010 Facsimile: (310) 203-7199 If to the Holder: International Richey Pacific Cablevision, Ltd. 1605 Grand Avenue Suite 7 San Marcos, California 92068 Attention: Steven K. Richey, President Telephone: (619) 471-6225 Facsimile: (619) 471-4530 With a copy by the same means to: Brown and Pearson, a P.C. 5962 La Place Court Suite 200 Carlsbad, California 92009 Attention: Floyd R. Brown, Esq. Telephone: (619) 438-5998 Facsimile: (619) 438-7587 -10- and HPC Puckett & Co. 12626 High Bluff Drive Suite 250 San Diego, California 92130 Attention: Thomas F. Puckett Telephone: (619) 793-7008 Facsimile: (619) 793-7223 If personally delivered pursuant to this Section 12.5, such communication shall be deemed delivered upon actual receipt; if sent by telecopier or facsimile transmission pursuant to this Section 12.5, such communication shall be deemed delivered the next business day after transmission (and sender shall bear the burden of proof of delivery); if sent by overnight courier pursuant to this Section 12.5, such communication shall be deemed delivered upon receipt; and if sent by U.S. Mail pursuant to this Section 12.5, such communication shall be deemed delivered as of the date of delivery indicated on the receipt issued by the relevant postal service, or, if the addressee fails or refuses to accept delivery, as of the date of such failure or refusal. No objection may be made to the manner of delivery of any notice actually received in writing by an authorized agent of a party. 12.6 No Third-Party Benefits; Successors and Assigns. None of the provisions of this Warrant shall be for the benefit of, or enforceable by, any third-party beneficiary. Except as provided herein to the contrary, this Warrant and the representations and warranties made by the Holder in the Investor Representations Letter shall be binding upon and inure to the benefit of the parties and, in the case of the Company, its successors and assigns. 12.7 Governing Law; Jurisdiction. This Warrant has been negotiated and entered into in the State of California, concerns a California business and all questions with respect to the Warrant and the rights and liabilities of the parties will be governed by the laws of California applicable to agreements and instruments made and to be performed entirely in that State, regardless of the choice of law provisions of California or any other jurisdiction. Any and all dispute between the parties that may arise pursuant to this Warrant and are not required to be submitted to arbitration under Section 12.10 hereof will be heard and determined before an appropriate federal or state court located in Los Angeles, California. The parties hereto acknowledge that such court has the exclusive jurisdiction to interpret and enforce the provisions of this Warrant and the parties waive any and all objections that they may have as to jurisdiction or venue in any of the above courts. -11- 12.8 Waivers Strictly Construed. With regard to any power, remedy or right provided herein or otherwise available to any party hereunder (i) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party; and (ii) no alteration, waiver, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise, or other indulgence. 12.9 Attorneys' Fees. Should any litigation or arbitration be commenced ("including any proceedings in a bankruptcy court) between the parties hereto or their representatives concerning any provision of this Warrant or the rights and duties of any person or entity hereunder, solely as between the parties hereto or their successors the party or parties prevailing in such proceeding as determined by a court or board of arbitrators shall be entitled, in addition to such other relief as may be granted, to the reasonable attorneys' fees and expenses of counsel and court costs actually incurred by reason of such litigation or arbitration. 12.10 Arbitration of Disputes. 12.10.1 Except for actions seeking injunctive relief or specific performance, which actions may be brought before any court having jurisdiction pursuant to Section 12.7 hereof, any claim arising out of or relating to this Warrant including, but not limited to, its validity, interpretation, enforceability or breach, which is not settled by agreement between the parties, shall be resolved by arbitration in Los Angeles, California before a board of three arbitrators. The arbitration shall be administered by the American Arbitration Association ("AAA") and, to the extent not inconsistent with this Section 12.10, shall be governed by the AAA's Arbitration Rules and the Supplementary Procedures for Large, Complex Disputes. Arbitration shall be commenced by one party serving a notice of intent to arbitrate upon the other party by any of the means set forth in Section 12.5 hereof. The notice of intent to arbitrate shall name one arbitrator, and the party receiving the notice shall name the second arbitrator within ten (10) business days. The two arbitrators so chosen shall mutually agree upon the selection of the third impartial and neutral arbitrator. In the event that the two chosen arbitrators cannot agree upon a third arbitrator within ten (10) business days, then the moving party and the party receiving the notice shall each propose a list of five (5) individuals, including on each of the two lists at least three (3) retired judges who have served on a federal court in California or the California Superior Court or higher court in the State of California. Each party will strike four (4) of the names from the other party's list and the third arbitrator will be drawn from the two names remaining on the combined list. If the party receiving the notice shall fail to -12- designate the second arbitrator, the sole arbitrator appointed shall have the power to appoint, in his or her sole discretion, both the second and third arbitrators. If a party fails to appoint a successor to its appointed arbitrator within ten (10) business days of the death, resignation or other incapacity of such arbitrator, the remaining two arbitrators shall appoint such successor. 12.10.2 The parties hereby (a) consent to the in personam jurisdiction of the Superior Court of the State of California or any federal court, located in Los Angeles County, for purposes of confirming any arbitration award and entering judgment thereon; (b) agree to use their best efforts to keep all matters relating to any arbitration hereunder confidential to the maximum extent permitted by law; and (c) agree that the arbitrators may not assess any remedy other than the awarding of actual out-of-pocket damages suffered and/or an injunctive order (including temporary, preliminary and permanent relief) when appropriate. In any arbitration proceedings hereunder: (i) all testimony of witnesses shall be taken under oath; (ii) discovery shall be conducted only pursuant to an order of the arbitrators, which order may be requested by any party and which order shall permit only the conduct of the deposition of, or the propounding of interrogatories to, such persons who may possess information determined by the arbitrators to be necessary to a determination of the action and who will not be available to testify at the hearing; (iii) upon conclusion of any arbitration, the arbitrators shall render findings of fact and conclusions of law in a written opinion setting forth the basis and reasons for any decision reached and deliver such documents to the Company and the Holder along with a signed copy of the award in accordance with Section 1283.6 of the California Code of Civil Procedure; (iv) any decision of the arbitrators must be reached by majority of the arbitrators; and (v) the rules of evidence as then applicable to civil actions under California law shall be applied in the arbitration. 12.10.3 Except to the extent provided in the first sentence of Section 12.10.1, each party agrees that the arbitration provisions of this Warrant are its exclusive remedies and expressly waives any right to seek redress in another forum. Each party shall bear the fees of the arbitrator appointed by it, and each party hereby agrees to pay one half the costs of the fees of the third arbitrator, during the progress of the arbitration; provided, however, that the prevailing party in any arbitration, which shall be determined by the arbitrators, shall be entitled to an award of attorneys' fees and costs, and the arbitrators' fees and costs and all other costs of the arbitration shall be paid by the losing party. -13- 12.11 Rules of Construction. 12.11.1 Headings. The section and subsection headings in this Warrant are inserted only as a matter of convenience, and in no way define, limit, or extend or interpret the scope of this Warrant or of any particular section or subsection. 12.11.2 Tense and Case. Throughout this Warrant, as the context may require, references to any word used in one tense or case shall include all other appropriate tenses or cases. 12.11.3 Severability. The validity, legality or enforceability of the remainder of this Warrant shall not be affected even if one or more of its provisions shall be held to be invalid, illegal or unenforceable in any respect. 12.11.4 Currency. All currency amounts referred to in this Warrant are in United States dollars. 12.11.5 Warrant Negotiated. The parties hereto are sophisticated and have been represented by lawyers throughout this transaction who have carefully negotiated the provisions hereof. As a consequence, the parties do not believe that the presumptions of California Civil Code section 1654 relating to the interpretation of contracts against the drafter of any particular clause should be applied in this case and therefore waive its effects. -14- IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed effective as of December 29, 1994. VANGUARD COMMUNICATIONS, L.P. By: Vanguard Communications, Inc. Its: General Partner /s/ Paul S Savoldelli ------------------------------- By: Paul S Savoldelli Its: Executive Vice President -15- EXERCISE FORM To Be Executed Upon Exercise of Warrant The undersigned hereby exercises the attached Warrant with regard to the Units, and herewith tenders payment of the Exercise Price of $______________ in full in cash or by certified check, payable to the Company. Dated: _________________ Name of Holder: International Richey Pacific Cablevision, Ltd. By: _____________________________ (Signature) Name:_____________________________ (Please Print) Its: _____________________________ Address:__________________________ __________________________ __________________________ __________________________ Employer Identification Number, Social Security Number or other taxpayer identifying number: __________________________________ -16- EXHIBIT A Definitions "Act" means the Securities Act of 1933, as amended. "Call Funding Period" is defined in Section 3. "Call Option" is defined in Section 3. "Call Period" is defined in Section 3. "Call Price" is defined in Section 3. "Closing Note" means that certain promissory note of even date herewith executed by the Company in favor of the Holder pursuant to section 3.2.2(b) of the Stock Purchase Agreement as partial payment of the purchase price under the Stock Purchase Agreement. "Company" means Vanguard Communications, L.P., a California limited partnership. "Collateral Account" means the account established by the Company pursuant to the Security Agreement into which distributions on the Collateral Units and proceeds of the sale of Collateral Units will be deposited and held following exercise of the Warrant under the circumstances described in Section 1.4 until the Outside Date. "Collateral Units" means the Units that are held pursuant to the Security Agreement from time to time pursuant to Section 1.4. "Event" means a (i) reorganization or reclassification of the Units, (ii) consolidation or merger of the Company with or into another business entity, (iii) sale of all or substantially all of the Company's operating assets to another business entity, or (iv) sale of the Company substantially as a going concern followed by a liquidation of the Company. "Exercise Period" is defined in Section 1.1. "Final Resolution" or "Finally Determined" means, with respect to any claim, that a court of competent jurisdiction has entered a judgment with respect to such claim, and all applicable appeal periods with respect to such judgment have passed with no appeal having been taken or any and all appeals from such judgment having been fully resolved. "General Partner" means Vanguard Communications, Inc., a California corporation and the general partner of Vanguard. "Indemnification Resolution Date" means the date on which all Pending Indemnification Claims made prior to the exercise -17- of the Warrant or during the Security Term have become Resolved Indemnification Claims. "Investor Representations Letter" means that certain Investor Representations Letter of even date herewith executed by Holder. "Market Value" for any security on any given date means (i) the average closing price for the prior ten (10) trading days for such security on the principal stock exchange on which such security is traded or (ii) if not so traded, the closing (or, if no closing price is available, the average of the bid and asked prices) for such period on the NASDAQ if such security is listed on the NASDAQ or (iii) if not listed on any exchange or quoted on the NASDAQ, such value as may be determined in good faith by the Board of Directors of the Company's general partner, which determination shall be conclusively binding on the parties. "OpTel" means OpTel, Inc., a Delaware corporation which is the assignee of all of the rights and obligations, with certain exceptions, of the Company. "Outside Date" is defined in Section 1.4.1. "Pending Indemnification Claim" means a claim by the Company against the Holder for indemnification under Article 6 of the Stock Purchase Agreement. "Public Market" for any security means the security is listed on any national securities exchange or quoted on the NASDAQ. "Put Funding Period" is defined in Section 2. "Put option" is defined in Section 2. "Put Period" is defined in Section 2. "Put Price" is defined in Section 2. "Resolved Indemnification Claim" means that a Pending Indemnification Claim (a) has been Finally Determined, or (b) has been agreed to by the Company and the Holder in writing. "Security Agreement" means the Security Agreement in the form of Exhibit B attached hereto and incorporated herein by reference. "Security Term" means the period during which any of the Collateral Units are held pursuant to the Security Agreement or any amount is held in the Collateral Account. -18- "Stock Pledge Agreement" means that certain Stock Pledge Agreement of even date herewith executed by and between the Holder and OpTel. "Stock Purchase Agreement" means that certain Stock Purchase Agreement dated as of July 6, 1994 by and between the Holder and Vanguard and certain other parties signatory thereto, together with that certain side letter dated as of July 6, 1994 executed concurrently therewith, as amended by Amendment No. 1 to Stock Purchase Agreement dated as of September 30, 1994 and Amendment No. 2 to Stock Purchase Agreement dated as of December 16, 1994. "Vanguard" means Vanguard Communications, L.P., a California limited partnership. -19- Exhibit B SECURITY AGREEMENT This Security Agreement (the "Agreement") is entered into as of this ______________________ day of __________________, 199 _ between INTERNATIONAL RICHEY PACIFIC CABLEVISION, LTD., a corporation incorporated under the laws of the Province of British Columbia (the "Debtor"), and OPTEL, INC., a Delaware corporation (the "Secured Party"). 1. For valuable consideration and to secure the payment and performance by Debtor of all Liabilities (as hereinafter defined) Debtor hereby conveys, assigns, transfers and grants to Secured Party a security interest in (a) all of Debtor's limited partnership interest in Vanguard Communications, L.P., a California limited partnership ("Vanguard"), (b) all of Debtor's rights as a limited partner of Vanguard, (c) all of Debtor's interest in that certain Second Amended and Restated Partnership Agreement dated as of August 12, 1994 (as amended from time to time, the "Partnership Agreement"), (d) all of Debtor's rights, whether now owned or hereafter acquired, to receive its share of profits, income, capital, distributions and surplus from Vanguard in the form of cash, properties or other assets and whether upon dissolution, liquidation or otherwise, and (e) the proceeds of all of the foregoing, all of which shall be collectively referred to herein as "collateral". For purposes hereof, the term "Liabilities" shall include any and all indebtedness, obligations, and liabilities of any kind of Debtor to Secured Party, now existing or hereafter arising, under or pursuant to that certain Stock Purchase Agreement, dated as of July 6, 1994, as amended by that certain Amendment No. 1 to Stock Purchase Agreement dated as of September 29, 1994, and by that certain Amendment No. 2 to Stock Purchase Agreement dated as of December 16, 1994, and any and all amendments, modifications, restatements, substitutions and replacements thereof and thereto, whether prior to or after the date of this Agreement (as so amended, the "Stock Purchase Agreement"). 2. Debtor warrants that it is and will continue to be the absolute and exclusive owner of the collateral; that it has granted no other security interest in the collateral; that no financing statement or other document evidencing a security interest or lien covering the collateral, or any part thereof, or any proceeds thereof, is on file in any public office, except in favor of Secured Party. Debtor hereby agrees to execute on demand and Debtor hereby irrevocably appoints Secured Party its attorney-in-fact to execute, deliver and, if appropriate, file such security agreements, financing statements or other instruments as Secured Party may request or require in order to impose, perfect or continue the perfection of, the security interest created hereby. Debtor will promptly comply with all obligations placed upon it pursuant to the terms of the Partnership Agreement. Debtor shall not, without Secured Party's written consent, sell, contract to sell, encumber or dispose of the collateral, or any interest therein, or alter, modify or amend the collateral until the obligations secured hereby have been paid in full; provided, however, that Secured Party agrees to release its security interest in the collateral upon a sale of the collateral by Debtor if (i) such sale is pursuant to and complies strictly with the provisions of the Partnership Agreement, and (ii) the proceeds of such sale are deposited in an account in which Secured Party shall have a first priority security interest, and (iii) prior to any transfer of the collateral pursuant to such a sale, Debtor shall have executed and delivered to Secured Party such documents and instruments as Secured Party may request to create and perfect Secured Party's security interest in the account referred to in clause (ii) above. 3.(a) Secured Party shall have the right at any time, and from time to time, regardless of whether an Event of Default (as defined herein) has occurred and is continuing hereunder or under the Stock Purchase Agreement, to notify Vanguard and the partners therein that the collateral has been assigned to Secured Party, and that all distributions and payments, in any way related to Vanguard, Debtor's partnership interest in Vanguard, or any or all of the other collateral are to be made directly to Secured Party or to the Collateral Account (as defined herein), and Debtor shall, at Secured Party's request, join in such notification. (b) If Debtor receives any distributions from Vanguard at any time on any of the collateral after Secured Party has notified Debtor that such distributions are to be made directly to Secured Party or after the occurrence of any Event of Default, such distributions will be received by Debtor in trust for Secured Party, and immediately deposited and delivered in kind to Secured Party or into the Collateral Account, as the case may be. (c) Prior to the occurrence of an Event of Default, all distributions and payments made by Vanguard or the partners thereof following the notice from Secured Party referred to in Section 3(a) hereof shall be deposited into the Collateral Account. The notice given by Secured Party pursuant to Section 3(a) shall direct Vanguard and the partners thereof to deposit all such distributions and payments directly into the Collateral Account. If prior to the occurrence of an Event of Default, Secured Party or Debtor shall receive any of the distributions or payments from Vanguard or the partners that are to be deposited in the Collateral Account pursuant to this Section 3(c), Secured 2 Party and Debtor shall promptly deposit such sums in the Collateral Account. For purposes hereof, the term "Collateral Account" means a deposit account solely in the name of Secured Party, established in a bank located in the State of California having unrestricted capital of at least $500,000,000 selected by Secured Party. Debtor shall grant to Secured Party a first priority security interest in such deposit account and Debtor shall have no right to withdraw any of the amount deposited therein without the prior written consent of Secured Party. If Debtor fails to take such actions and execute and deliver such documents as Secured Party may request to establish the Collateral Account pursuant hereto and to create and perfect Secured Party's first priority security interest therein (including without limitation the execution of a UCC-1 form), and until Debtor shall take such actions and execute and deliver such documents, all distributions and payments from Vanguard and the partners thereof that would otherwise have been deposited into the Collateral Account shall be delivered to Secured Party, and Secured Party may so notify Vanguard and the partners thereof pursuant to Section 3(a). (d) Following the occurrence of an Event of Default, all distributions and payments relating to the collateral shall be paid directly to Secured Party and shall be (i) applied to the obligations, including the Liabilities, secured hereby, if and to the extent such obligations and Liabilities are in an amount of money that is determinable at or at any time after the occurrence of the Event of Default, and (ii) to the extent such distributions and payments exceed the amount of obligations and Liabilities that Can be determined in monetary terms, such excess shall be deposited in the Collateral Account until such a determination can be made or until the Liabilities are fully discharged, whichever occurs first. (e) In order to facilitate the terms and provisions of this Security Agreement with respect to the collateral and any distributions and payments made in connection therewith, Secured Party shall have the right to receive, receipt for, endorse, assign, deposit and deliver, in Secured Party's name or in the name of Debtor, any and all checks, notes, drafts and other instruments for the payment of money constituting proceeds of or otherwise relating to the collateral. Debtor hereby authorizes Secured Party to affix, by facsimile signature or otherwise, the general or special endorsement of Debtor, in such manner as Secured Party shall deem advisable, to any such instrument in the event the same has been delivered to Secured Party without appropriate endorsement, and Secured Party and any collecting bank are hereby authorized to consider such endorsement to be a sufficient, valid and effective endorsement by Debtor to the same extent as though it were manually executed by the duly authorized officer of Debtor, regardless of by whom or under what 3 circumstances or by what authority such facsimile signature or other endorsement is actually affixed, without duty of inquiry or responsibility as to such matters, and Debtor hereby waives demand, presentment, protest and notice of protest or dishonor and all other notices of every kind and nature with respect to any such instrument. 4.(a) Upon the occurrence of an Event of Default hereunder, Secured Party shall have, in addition to all other rights and remedies which Secured Party may have at law or in equity, or under any other agreement executed by Debtor in favor of Secured Party and under applicable law all rights and remedies of a secured party under the California Commercial Code. In addition, Secured Party shall have the following rights and remedies, all of which may be exercised with or without further notice to Debtor: to exercise all partnership rights with respect to the collateral as if it were the absolute owner thereof (and Debtor hereby irrevocably constitutes and appoints Secured Party, with full power of substitution, the proxy and attorney-in-fact of Debtor to do so); to directly receive any and all payments and distributions on or in any way related to the collateral or Vanguard; to settle, compromise, or release, on terms acceptable to Secured Party, in whole or in part, any amounts owing on the collateral; to enforce payment and to prosecute any action or proceeding with respect to any and all of the collateral; to foreclose the liens and security interests created under this Agreement or under any other agreement relating to the collateral by any available procedure, with or without judicial process; to sell, assign, or otherwise dispose of the collateral or any part thereof, either at public or private sale or any broker's board, in lots or in bulk, for cash, on credit or otherwise, with or without representations or warranties, and upon such terms as shall be acceptable to Secured Party; all at Secured Party's sole option and as Secured Party in its sole discretion may deem advisable. Debtor shall be given reasonable notice of the time and place of any public sale of the collateral, or of the time on or after which any private sale or other intended disposition is to be made. Secured Party may be the purchaser at any public sale or private sale. Five (5) days notice of such public or private sale or other disposition shall be considered to be reasonable notice. Secured Party shall have no duty to exercise any of the rights, privileges, options or powers or to sell or otherwise realize on any of the collateral, as hereinabove authorized, and Secured Party shall not be responsible for any failure to do so or delay in doing so. (b) Debtor recognizes that Secured Party may be unable to effect (or to do so only after delay which would adversely affect the value that might be realized from the collateral) a public sale of all or part of the collateral by reason of certain prohibitions contained in the Securities Act of 1933, 4 as amended, and may be compelled to resort to one or more private sales to a registered group of purchasers who will be obliged to agree, among other things, to acquire the collateral for their own account, for investment and not with a view to the distribution or resale thereof. Debtor agrees that any such private sale may be at prices and on terms less favorable than if sold at public sales and that such private sales shall be deemed to have been made in a commercially reasonable manner. 5. The net cash proceeds resulting from disposition of the collateral shall be applied first, to the expenses (including all attorneys' fees) of disposition, and then applied to the obligations, including the Liabilities, secured hereby, if and to the extent such obligations and Liabilities are in an amount of money that is determinable at or at any time after the occurrence of the Event of Default, and (ii) to the extent such net cash proceeds exceed the amount of obligations and Liabilities that can be determined in monetary terms, such excess shall be deposited in the Collateral Account until such a determination can be made or until the Liabilities are fully discharged, whichever occurs first. Any such application from time to time shall be in Secured Party's absolute discretion and Secured Party may apply such proceeds in its absolute discretion. In addition to any other rights and remedies that Secured Party may have on an event of default, it may take or bring, in Secured Party's name or in the name of Debtor, all steps, actions, suits or proceedings deemed by Secured Party to be necessary or desirable to realize upon the collateral. Until all indebtedness secured hereby shall have been discharged in full, the power of sale and all other rights, powers and remedies granted to Secured Party hereunder shall continue to exist and may be exercised by Secured Party at any time and from time to time irrespective of the fact that the indebtedness secured hereby or any part thereof may have become barred by a statute of limitations, or that the personal liability of Debtor may have ceased. 6. As used herein, the term "Event of Default" shall mean and refer to the occurrence of any one of the following events: (a) failure of Debtor to pay when due any of the Liabilities; or (b) insolvency of Debtor ("insolvency of Debtor") means that there shall have occurred with respect to that Debtor one or more of the following events: appointment of a receiver of any part of the property of, assignment for the benefit of creditors, or the filing of a petition in bankruptcy or the Commencement of any proceedings under any bankruptcy or insolvency laws, or any laws relating to the relief of debtors, readjustment of indebtedness, reorganization, composition or extension by or against, Debtor), or (c) the breach by Debtor of any covenants or agreements contained herein, or (d) any representation or 5 warranty of the Debtor in the Stock Purchase Agreement proves to be false in any material respect as of and when made. 7. This Agreement may not be altered or amended except with the written consent of each of the parties hereto. This Agreement shall be binding upon and enure to the benefit of the respective successors and assigns of the parties hereto. 8. All notices, requests, demands and other communications under this Agreement shall be given in writing and shall be: (a) personally delivered; (b) sent by telecopier or facsimile transmission; or (c) delivered by registered or certified U.S. Mail, return receipt requested and postage prepaid, or by private overnight mail courier service, to such address as may be designated from time to time by the relevant party, and which shall initially be: To Secured Party: OpTel, Inc. 345 North Maple Drive, Suite 285 Beverly Hills, CA 90210 Attention: Jonathan D. Lloyd, Chairman Telephone: (310) 201-2610 Facsimile: (310) 273-9453 With a copy by the same means to: Irell & Manella 1800 Avenue of the Stare Suite 900 Los Angeles, CA 90067 Attention: Joan L. Lesser, Esq. Telephone: (310) 277-1010 Facsimile: (310) 203-7199 To Debtor: International Richey Pacific Cablevision, Ltd. 1605 Grand Avenue Suite 7 San Marcos, California 92063 Attention: Steven K. Richey Telephone: (619) 471-6225 Facsimile: (619) 471-4530 6 With a copy by the same means to: Brown and Pearson, a P.C. 5962 La Place Court Suite 200 Carlsbad, California 92009 Attention: Floyd R. Brown, Esq. Telephone: (619) 438-5998 Facsimile: (619) 438-7587 and HPC Puckett & Co. 12626 High Bluff Drive Suite 250 San Diego, California 92130 Attention: Thomas F. Puckett Telephone: (619) 793-7008 Facsimile: (619) 793-7223 If personally delivered pursuant to this section 8, such communication shall be deemed delivered upon actual receipt; if sent by telecopier or facsimile transmission pursuant to this section 8, such communication shall be deemed delivered the next business day after transmission (and sender shall bear the burden of proof of delivery); if sent by overnight courier pursuant to this section 8, such communication shall be deemed delivered upon receipt; and if sent by U.S. Mail pursuant to this section 8, such communication shall be deemed delivered as of the date of delivery indicated on the receipt issued by the relevant postal service, or, if the addressee fails or refuses to accept delivery, as of the date of such failure or refusal. No objection may be made to the manner of delivery of any notice actually received in writing by an authorized agent of a party. 9. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Debtor agrees to pay all attorneys' fees incurred by Secured Party in connection with the enforcement or protection of any of Secured Party's rights and remedies hereunder, whether or not any proceeding be commenced to enforce or protect such rights and remedies. 10. All advances, charges, costs and expenses including reasonable attorneys' fees, incurred or paid by Secured Party in exercising any right, power or remedy conferred by this Agreement, or in the enforcement thereof, shall become a part of the indebtedness secured hereby and shall be paid to Secured Party by Debtor immediately upon demand, with interest thereon at a rate of interest equal to ten percent (10%) per annum. 7 12. Debtor waives any right to require Secured Party to (a) proceed against any person, (b) proceed against or exhaust any collateral, or (c) pursue any other remedy in Secured Party's power; and waives any defense arising by reason of any disability or other defense of any other person, or by reason of the cessation from any cause whatsoever of the liability of any other person. Debtor authorizes Secured Party, without notice or demand and without affecting its liability hereunder or on the obligations secured hereby, from time to time to (a) take and hold security, other than the collateral herein described, for the payment of the Liabilities or any part thereof, and exchange, enforce, waive and release the collateral herein described or any part thereof or any such other security; (b) apply such collateral or other security and direct the order or manner of sale thereof as Secured Party in its discretion may determine; and (c) release or substitute any of the endorsers or guarantors of the obligations secured hereby or any part thereof, or any other parties thereto. 13. The rights, powers and remedies given to Secured Party by this Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any statute, rule of law, or any other agreement between the undersigned and Secured Party. Secured Party may exercise its right of set-off with respect to the obligations secured hereby in the same manner as if the obligations secured hereby were unsecured. Any forbearance or failure or delay by Secured Party in exercising any right, power or remedy hereunder shall not preclude the further exercise thereof; and every right, power and remedy of Secured Party shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing executed by Secured Party. 8 IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed as of the day and year first above written. "Debtor" INTERNATIONAL RICHEY PACIFIC CABLEVISION, LTD., a corporation incorporated under the laws of the Province of British Columbia By: ______________________________ Its:______________________________ "Secured Party" OPTEL, INC., a Delaware corporation By: ______________________________ Its:______________________________ 9 EX-10.7 15 EXHIBIT 10.7 LEASE AGREEMENT THIS LEASE is dated July 25th 1995 and is made and executed between Space Center Dallas, Inc., a Minnesota corporation ("Landlord") and OpTel, Inc., a Delaware corporation ("Tenant"). ARTICLE I. BASIC TERMS; DEFINITIONS 1.01. BASIC TERMS. Following is a summary, which shall not limit any of the other terms and provisions of this Lease, of some of the basic terms and provisions of this Lease: (a) PREMISES. That portion of the Building shown on Exhibit A deemed to contain 34,102 rentable square feet of office space on the 9th and 10th floors of the Building (the "Premises"). (b) BUILDING. The building or complex of buildings of which the Premises are a part (the "Building"). (c) PERMITTED USE. General office use and uses incidental thereto. Permitted use shall include kitchen and eating facilities, computer and telecommunication operations and facilities, data processing and transmission, accounting facilities, conference and meeting facilities, customer meeting facilities, copying facilities, and other uses typically made by other office tenants in the Dallas/Fort Worth metropolitan area (the "Permitted Use"). (d) TERM. Ten (10) years starting on the Commencement Date and extending for a period of Ten (10) years from the Commencement Date. (e) COMMENCEMENT DATE. The date (the "Commencement Date") upon which Substantial Completion occurs; provided, however, that if Tenant commences conducting business in any portion of the Premises prior thereto, the Commencement Date shall be the date Tenant so commences conducting business. Provided further, that if Tenant occupies an approximately 600 square foot space designated the headend and computer room prior to occupation of any other portion of the Premises, Tenant shall only pay rent for the headend and computer room on a proportionate basis. (f) ADDITIONAL LEASE TERMS. The additional terms and conditions, if any, set forth in Exhibit D. (g) LANDLORD'S WORK. The work, if any, described as "Landlord's Work" in Section 2.02. (h) TENANT IMPROVEMENT ALLOWANCE. The sum of Six Hundred Twenty Thousand Dollars ($620,000) inclusive of remodel tax which sum shall be applied toward the cost of the architectural, engineering and other work to be undertaken by Tenant in Article II and, if available, for moving expenses. (i) TENANT'S WORK. Except for Landlord's Work, all construction, installations, remodeling or other work at or in the Premises necessary or appropriate for Tenant's use and occupancy of the Premises. (j) BASE RENT. The sum of $12.10 per rentable square foot per annum, payable in equal monthly installments of $34,386.18 per month (the "Base Rent"). (k) TENANT'S PRO RATA SHARE. 13.7%, which is the ratio that the number of rentable square feet of space in the Premises bears to the total rentable square footage of the Building, which is 249,275.("Tenant's Pro Rata Share"). (l) SECURITY DEPOSIT. The sum of $34,386.18 payable by Tenant to Landlord simultaneously with the execution of this Lease, to be maintained and held in accordance with the provisions of Section 4.03 (the "Security Deposit"). (m) BROKERS. CB Commercial Real Estate Group Inc. and Fults Realty Corporation ("Brokers"). (n) NOTICE ADDRESSES. A. LANDLORD'S NOTICE ADDRESS: Fults Realty Corporation 1111 West Mockingbird Lane Suite #180 Dallas, TX 75247 B. WITH A COPY TO: General Counsel Space Center, Inc. 451 Industrial Blvd., East Building Minneapolis, MN 55413-2930 C. TENANT'S NOTICE ADDRESS: OpTel, Inc. 1111 West Mockingbird Lane Suite #1130 Dallas, TX 75247 D. WITH A COPY TO: John Dunlay 2001 Rose Avenue Dallas, TX 75201 as either such address may be changed pursuant to Section 17.02 ("Notice Addresses"). 2 1.02. DEFINITIONS. In addition to the defined terms set forth in Section 1.01, Landlord and Tenant agree that, as used in this Lease, the following words and phrases have the following meanings: (a) ACCESSIBILITY REGULATIONS. The Americans with Disabilities Act of 1990, and any other federal, state or local law, statute, code, ordinance, rule or regulation requiring the provision of access or other accommodations to persons with disabilities, all as amended from time to time during the Term. (b) ADDITIONAL RENT. All payments (other than Base Rent) required to be made by Tenant under this Lease, whether to Landlord or to third parties. (c) ALTERATIONS. Any alterations, improvements or physical additions to the Premises made or proposed to be made by Tenant, including, without limitation, Tenant's Work. (d) AWARD. The award for or proceeds of any Taking less all expenses in connection therewith including reasonable attorneys' fees. (e) BUSINESS DAY. Any date (other than a Saturday, Sunday or legal holiday in the State of Texas) on which national banks are permitted to be open in Dallas, Texas. (f) COMMON AREAS. Those parts of the Project not under lease exclusively to Tenant or to other tenants, including but not limited to parking areas, access roads and facilities, driveways, sidewalks and landscaped areas, which may be provided by Landlord, from time to time, for the common use and benefit of tenants of the Building. (g) DEFAULT. As defined in Section 14.01. (h) ENVIRONMENTAL LAWS. Any law, statute, ordinance, code, rule, regulation, order or decree relating to human health or safety or the environment or governing, regulating or pertaining to the generation, treatment, storage, handling, transportation, use or disposal of Hazardous Substances, presently in effect or that may be enacted, adopted, promulgated or issued in the future, as amended from time to time, including but not limited to the following: (i) Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et seq.; (ii) Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 40 U.S.C. Section 1801 et seq.; (iii) Clean Air Act, 42 U.S.C. Section 7401-7626; (iv) Water Pollution Control Act (Clean Water Act of 1977), 33 U.S.C. Section 1251 et seq.; (v) Insecticide, Fungicide, and Rodenticide Act (Pesticide Act of 1978), 7 U.S.C. Section 135 et seq.; (vi) Toxic Substances Control Act, 15 U.S.C. Section 2601 et. seq; (vii) Safe Drinking Water Act, 42 U.S.C. 300(f) et seq.; (viii) National Environmental Policy Act (NEPA), 42 U.S.C. Section 4321 et seq.; and (ix) Refuse Act of 1899, 33 U.S.C. Section 407 et seq. (i) FORCE MAJEURE. Any period of delay which arises from or through: Acts of God; strikes; contractor delays; shortages or unavailability of labor or materials; lockouts or labor difficulty; explosion; sabotage; accident; riot or civil commotion; act of war; fire or other casualty; legal requirements; or any other causes beyond the reasonable control of Landlord. 3 (j) HAZARDOUS SUBSTANCES. Any petroleum base products, pesticides, paints and solvents, polychlorinated biphenyl, asbestos, asbestos containing materials, lead, cyanide, DDT, acids, ammonium compounds and other chemical products and any substance or material defined or designated as a hazardous or toxic substance, or other similar term, by any Environmental Law. (k) MORTGAGE. Any mortgage, deed to secure debt, trust indenture or deed of trust which may now or later encumber or be a lien upon the Project or any part thereof, or Landlord's interest therein, and any renewals, modifications, consolidations, replacements and extensions of any of the foregoing. (l) MORTGAGEE. The holder or beneficiary of a Mortgage. (m) OPERATING EXPENSES. All costs and expenses incurred by Landlord in owning, operating, managing, policing, protecting, lighting, repairing, replacing and maintaining the Project, including, if the Building is less than ninety five percent (95%)occupied during any calendar year, all additional costs and expenses of operation, management and maintenance of the Building which vary with occupancy and which Landlord determines that it would have paid or incurred during such calendar year if the Building had been ninety five percent (95%) occupied. Such costs and expenses shall include, but not be limited to: cleaning and janitorial services and supplies; window washing; fire protection; security services; snow, ice, and trash removal; striping and restriping and sealing, resurfacing or replacing any parking areas or access roads; gas, water, electricity and other utilities (to the extent not separately metered to Tenant or other tenants); costs and expenses of planting, cutting, trimming, replanting and replacing lawns, flowers and landscaping; premiums for Landlord's liability, property damage, loss of rents, fire, casualty and other insurance Landlord procures, and any deductible amount payable by Landlord in the event of casualty; market management fees; wages and benefits payable to employees whose duties are directly connected with the operation and maintenance of the Project and offsite employees as reasonably allocated based on the time actually spent on the Project as opposed to other projects; fees for required licenses and permits; capital expenditures, the cost of which shall be amortized on a straight-line basis over the useful life thereof, together with interest at the rate or rates per annum paid by Landlord on funds borrowed for the purpose of financing such capital expenditures, or, if Landlord does not borrow funds for such purpose, at the rate per annum equal to the prime rate, as published in The Wall Street Journal on the Business Day on which, or closest to the day on which, the capital improvements in question are substantially completed, plus two percent (2%); but only to the extent such capital expenditure is made for the purpose of (aa) reducing Operating Costs, or (bb) complying with governmental requirements which become effective after the date hereof; all real property taxes and assessments levied against the Project; all personal property taxes levied on personal property of Landlord used in the management, operation, maintenance and repair of the Project; all taxes, assessments and reassessments of every kind and nature whatsoever levied or assessed in lieu of or in substitution for existing or additional real or personal property taxes and assessments; all service payments in lieu of taxes; and all other excises, charges, fees, assessments, reassessments, levies or amounts necessary to be expended because of governmental orders, whether general or special, ordinary or extraordinary, foreseen or unforeseen, which are assessed, levied, charged, confirmed or imposed by any public authority upon the Project, the ownership or operation thereof, or the rent derived therefrom. Real estate taxes and assessments for any calendar year shall be deemed to be the 4 taxes and installments of assessments payable in such calendar year, even though the levy or assessments thereof may be for a different fiscal year. "Operating Expenses" shall not include any franchise, estate, inheritance or succession transfer tax of Landlord, or any tax imposed upon the net income of Landlord from all sources; the cost of any repairs or restoration occasioned by casualties to the extent such costs are fully reimbursed by insurance proceeds; interest or principal payments on any Mortgage; expenses incurred in leasing to or procuring of tenants, leasing commissions, advertising expenses and expenses for renovating space for tenants; depreciation allowance or expenses; or operating expenses which are the direct responsibility of Tenant or any other tenant. Anything in the foregoing provisions hereof to the contrary notwithstanding, Operating Expenses also shall not include the following: (A) Costs of repairs, restoration, replacements or other work occasioned by the exercise by a governmental authority of the right of eminent domain, provided the Landlord is fully reimbursed therefor; (B) Attorney's fees, costs, disbursements and other expenses incurred in connection with negotiations or disputes with tenants, other occupants, prospective tenants, consultants, management agents, purchasers or mortgagees of the Project; (C) Allowances, concessions and other costs and expenses incurred in completing, fixturing, furnishing, renovating or otherwise improving, decorating or redecorating space for tenants, prospective tenants or other occupants and prospective occupants of the Project, or vacant, leasable space in the Project; (D) Any costs that should be capitalized in accordance with generally accepted accounting principles except to the extent such costs are incurred to reduce operating costs or are undertaken to comply with governmental requirements which become effective after the date hereof; (E) Rental payments made under any ground or underlying lease or leases; (F) Costs incurred in connection with the sale, financing, refinancing, mortgaging, selling or change of ownership of the Project, including brokerage commissions, attorneys' and accountants' fees, closing costs, title insurance premiums, transfer taxes, mortgage taxes and interest charges; (G) Costs, fines, interest, penalties, legal fees or costs of litigation incurred due to the late payments of taxes, utility bills and other costs incurred by Landlord's failure to make such payments when due; (H) Costs incurred by Landlord for trustee's fees, partnership organizational expenses and accounting fees except accounting fees relating solely to the management and operation of the Building; 5 (I) Costs or expenses of utilities directly metered to tenants of the Project and payable separately by such tenants, costs or expenses relating to another tenant's or occupant's space, to the extent such costs or expenses are specifically measurable, which were incurred in rendering any service or benefit to such tenant that Landlord was not required, or were for a service in excess of the service that Landlord was required, to provide Tenant hereunder; and the costs of heating, ventilating and air-conditioning services provided to other tenants of the Project during hours other that Project standard hours, whether or not such costs are payable by such other tenants; In no event shall Landlord receive from all tenants of the Project more than one hundred percent (100%) of Operating Expenses, and in no event shall any Operating Expense be included except once. (n) PLANS AND SPECIFICATIONS. The plans, specifications and working drawings for Landlord's Work approved by Landlord and Tenant pursuant to Section 2.02, together with any changes thereto made in accordance with the provisions of Section 2.02. (o) RENT. Collectively, Base Rent and Additional Rent. (p) SUBSTANTIAL COMPLETION. The date on which Landlord's Work has been substantially completed in conformity with the Plans and Specifications (except for normal punch list items) or would have been completed but for Tenant Delays, all as certified by the architect which prepared the Plans and Specifications, and a certificate of occupancy, temporary or permanent, or its equivalent, has been secured or would have been secured but for Tenant Delays. (q) TAKING. The taking of, or damage to, the Premises or the Project or any portion thereof, as the case may be, as the result of the exercise of any power of eminent domain, condemnation or purchase under threat thereof or in lieu thereof. (r) TAKING DATE. The date on which the condemning authority shall take physical possession of the Premises or the Project or any portion thereof, as the case may be. (s) TENANT DELAY. A delay in Landlord's timely performance of an obligation of Landlord under this Lease caused by an act or omission of Tenant, or its directors, officers, employees, agents, contractors and subcontractors. Tenant Delay shall not include delays by Landlord or its contractors in completing Landlord's Work under Section 2.02 but only to the extent such delays are not caused by the acts of omissions of Tenant or its employees, agents, contractors or invitees. ARTICLE II. LEASE AND ACCEPTANCE OF THE DEMISED PREMISES; TENANT IMPROVEMENTS AND ALLOWANCE 2.01. LEASE OF PREMISES. Landlord hereby leases the Premises to Tenant, and Tenant hereby accepts the Premises from Landlord, upon the terms and conditions set forth in this Lease. 6 2.02. LANDLORD'S WORK. (a) Landlord's Work includes all of the improvements to the Premises which Landlord has agreed to make or perform, and Landlord has not agreed to make or perform any other improvements or work to or on the Premises. Landlord will demolish and remove the leasehold improvements currently located in the Premises at its cost without reimbursement from Tenant and not to be paid for out of the Tenant Improvement Allowance, except that the Tenant Improvement Allowance will be applied to pay the applicable remodeling tax. (b) It is agreed that Landlord's Work shall be limited to contracting for and coordinating the "build-out" of the Premises in accord with the plans and specifications prepared by the space planner and/or architect engaged and paid for by Tenant. Tenant shall cause its space planner/architect to prepare detailed space plans for the Premises and provide same for review by Landlord not later than five (5) business days after full execution and delivery of the lease by Tenant and Landlord. Landlord shall have five (5) business days after receipt of the plans to approve or disapprove them which approval shall not be unreasonably withheld or delayed. At such time as the space plans are approved by Landlord, Tenant's architect and engineer shall prepare final working drawings for Landlord's Work. Tenant shall within five (5) days business after receipt of Landlord's comments, submit such working drawing to Landlord for review, and Landlord shall approve or disapprove such drawings within five (5) business days after receipt. The working drawings shall include architectural, mechanical and electrical drawings for all work shown on the approved space plan. Tenant shall be solely responsible for assuring that the plans and working drawings call for building work and materials which are fully in compliance with all federal, state and local building requirements, including but not limited to American Disabilities Act and building code requirements. Tenant shall defend, save and hold Landlord harmless from any claims or causes of action of whatsoever nature arising from the failure of the plans and working drawings to meet such standards. Tenant shall have the right to select any architect, space planner, and engineer it desires subject to Landlord's approval, which shall not be unreasonably withheld. Landlord shall pay, without reimbursement from Tenant, the costs incurred by it to review and approve plans and specifications. Tenant shall not be in default thereunder if Landlord and Tenant fail to agree upon such working drawings and no Tenant Delay shall result from any such failure. However, if Landlord and Tenant do not agree upon such working drawings by August 20, 1995, either Landlord or Tenant shall have the right to terminate this Lease. (c) After approval by Landlord of the working drawings for the Landlord's Work, Landlord shall submit the drawings to the appropriate governmental body for plan checking and a building permit. Landlord, with Tenant's cooperation, shall cause to be made any change in the working drawings necessary to obtain the building permit. After final approval of the working drawings, no further changes thereto may be made without the prior written approval of both Landlord and Tenant which approval shall not be unreasonably withheld or delayed. (d) Landlord shall perform Landlord's Work without any construction management fees, in accordance with the Plans and Specifications, in a good and workmanlike manner, and in compliance with all applicable laws, statutes, ordinances, codes, rules and regulations, including without limitation zoning and building ordinances and codes. Such work shall be completed as soon as reasonably possible, subject to Force Majure. Tenant shall have the right to approve all 7 contractors, which approval shall not be unreasonably withheld, under the following conditions: (1) Tenant must exercise such approval rights within two (2) business days of Landlord's notice to Tenant of the proposed contractors and (2) if Tenant fails to act on Landlord's notice of proposed contractors within two (2) business days, the contractors shall thereby be approved. (e) Landlord shall pay the amount of the Tenant Improvement Allowance toward the total cost (the "Construction Cost") of performing Landlord's Work. In the event the Construction Cost shall exceed the amount of the Tenant Improvement Allowance, such excess shall be paid by Tenant. Prior to commencement of construction and installation of the Landlord's Work, Landlord shall provide Tenant with an estimate of the Construction Cost. If such estimate exceeds the Tenant Improvement Allowance, Tenant shall pay such excess to Landlord in advance and such advance payment shall be used first in paying the Construction Cost. Upon Substantial Completion, and provided that Landlord has provided Tenant with a certificate for payment and a statement of the actual Construction Cost, Tenant, within ten (10) days after its receipt of said certificate for payment and statement of the actual Construction Cost, shall pay Landlord any remaining portion of the Construction Cost to be paid by Tenant. (f) If any change in the Plans and Specifications, other than a change required by Landlord unrelated to building code or other governmental standards, or Tenant's request for any such change or the work required in processing such request, causes a delay in Substantial Completion of Landlord's Work, then notwithstanding anything to the contrary contained in this Lease, a Tenant Delay shall be deemed to have occurred. Any such change shall be evidenced by a written change order to be executed by Landlord and Tenant, which shall indicate the work required, the cost thereof to Tenant, if any (which shall include a $250 change order fee for each change order), and the Tenant Delay, if any, which it is anticipated will be caused by such change or the request for such change or the processing of such request. If any such change results in an increase in the Construction Cost, and as a result thereof the Tenant Improvement Allowance is or will be exceeded, or the amount by which the Tenant Improvement Allowance is already estimated to be exceeded shall be increased, the amount of such excess or increase in estimated excess, as the case may be, shall be paid by Tenant to Landlord in advance. Landlord shall have three (3) business days after its receipt of a change order request within which to approve or disapprove the same. If any change order is disapproved a specific reason shall be given. If Tenant elects to submit a revision to a change order request which was not approved by Landlord, Landlord shall have three (3) business days after its receipt of such revision within which to approve or disapprove the same. 2.03. TENANT'S WORK. In addition to the work set forth in Section 2.02, Tenant shall perform all of Tenant's Work. All of Tenant's Work shall be performed in accordance with and shall be subject to the terms and conditions of Article V. Tenant acknowledges and agrees that neither the Commencement Date nor the payment of Rent shall be delayed for any period of time due to any delay in completing Tenant's Work. Provided that Tenant's activities will not interfere with or cause delay in construction and installation of Landlord's Work (including, without limitation, any delay resulting from any work stoppage, picketing, labor disruption or dispute), Landlord shall permit Tenant, its agents, employees and representatives, access to the Premises for purposes of performing Tenant's Work during the forty five (45))day period prior to the Scheduled Commencement Date. 8 2.04. CONDITION OF DEMISED PREMISES. Tenant agrees that neither Landlord nor any agent, employee or representative of Landlord has made any representations or warranties, express or implied, with respect to the Premises, Landlord's Work, the condition thereof or the fitness thereof for Tenant's use, except as may be expressly set forth in this Lease. By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises "AS IS" and "WITH ALL FAULTS", subject only to defects in Landlord's Work which are specifically identified in a written punch list signed by Landlord and Tenant prior to Tenant's taking possession of the Premises. Notwithstanding the foregoing, Landlord shall assign, if possible, to Tenant all contractor and supplier warranties pertaining to Landlord's Work, which warranties are limited specifically to the Demised Premises. 2.05. USE OF COMMON AREAS. Tenant is hereby granted the nonexclusive license, in common with Landlord and the other tenants of the Building, to use the Common Areas during the Term, subject to the terms and conditions of this Lease. 2.06. RIGHTS RESERVED TO LANDLORD. Landlord reserves the right to do any of the following at any time and from time to time: (a) Close off any of the Common Areas to whatever extent required for maintenance, alteration or improvement thereof, or to prevent a dedication of any of the Common Areas or the accrual of any rights by any person or the public to the Common Areas; (b) Change the size, use, shape, arrangement, location or nature of any such Common Areas, or regulate or eliminate the use thereof; (c) Erect additional buildings or improvements on the Common Areas, or convert rentable areas to Common Areas or Common Areas to rentable areas; (d) Designate reserved parking spaces available only for use by one or more tenants; (e) Change the street address and/or name of the Building or grant to anyone the exclusive right to conduct any particular business or undertaking in the Building; (f) Control the use of the roof and exterior walls of the Building for any purpose; and (g) Enter the Premises from time to time upon reasonable prior notice (except in cases of emergency) to: (i) install, use, maintain, relocate, repair and replace pipes, ducts, conduits, wires and appurtenant meters and equipment for service to other parts of the Building above the ceiling surfaces, below the floor surfaces, within the walls and in the central core areas; (ii) examine, inspect and protect the Premises; (iii) make any repairs, replacements or alterations which Landlord may be required to perform under this Lease, or which Landlord may deem desirable for the Premises; (iv) exhibit the Premises to prospective purchasers or Mortgagees; or (v) exhibit the same to prospective tenants during the last six (6) months of the Term. No exercise of any of the foregoing rights by Landlord shall give rise to any claim for damages against Landlord, entitle Tenant to any abatement of or offset against Rent, or constitute an actual or constructive eviction of Tenant; provided that Landlord shall not exercise any of the foregoing 9 rights in a manner which would materially deprive Tenant of the benefit and enjoyment of the Premises for the Permitted Uses. If Landlord's exercise of the foregoing rights unreasonably and materially interferes with Tenant's use and enjoyment of any portion of the Premises, then Tenant shall have the right to abate all Rent and Additional Rent Attributable to such portion of the Premises for the period of such interference. Landlord shall perform all routine (non-emergency) work and inspections during normal business hours. ARTICLE III. TERM 3.01. TERM. The Term shall commence on the Commencement Date and shall expire on the last day of the Term, unless sooner terminated as herein provided. At the request of Landlord, the parties will sign a certificate setting forth the Commencement Date and the date upon which the Term will expire, in the form of Exhibit B. 3.02. DELAY IN POSSESSION. This Lease shall be deemed a binding obligation of the parties regardless of when the Commencement Date occurs, and the Term shall continue to run for the full length of the Term, unless sooner terminated as herein provided. Landlord shall not be subject to any liability for any delay in completion of Landlord's Work or delivery of possession of the Premises to Tenant, Tenant's sole remedy for any such delay being the abatement of Rent until the Commencement Date. If the Commencement Date does not occur by December 31, 1995, either Landlord or Tenant may terminate this Lease without penalty. ARTICLE IV. RENT 4.01. BASE RENT. Tenant agrees to pay Base Rent to Landlord at Landlord's Notice Address. The first monthly installment of Base Rent shall be payable simultaneously with the execution of this Lease, and each subsequent monthly installment of Base Rent shall be due and payable in advance on the first day of the month during the Term. If the Commencement Date is not the first day of a calendar month, or if the last day of the Term is not the last day of a calendar month, the payment of Base Rent due in the first or last calendar month of the Term, as the case may be, shall be prorated at a daily rate. 4.02. OPERATING EXPENSES. (a) For each calendar year or portion thereof commencing January 1, 1997 and through the remainder of the Term, Tenant shall pay, as Additional Rent, Tenant's Pro Rata Share of all increases in annual Operating Expenses, above and beyond the Operating Expenses of calendar year 1996 which year shall serve as the base for calculating Operating Expense increases, for the calendar year (or portion thereof) in question, which Additional Rent shall be 10 due and payable within ten (10) days after Landlord's invoice therefor, accompanied by the statement described below. Landlord, at its option, may require Tenant to pay monthly, in advance, together with the payment of Base Rent, an amount equal to (i) Landlord's reasonable estimate of Tenant's Pro Rata Share of increases in Operating Expenses for the current calendar year (which estimate may be revised by Landlord from time to time), less the amount of any increases in Operating Expenses previously paid by Tenant for such calendar year, divided by (ii) the number of months remaining in such calendar year as of the date Landlord's estimate (or any revision thereof) is given to Tenant. (b) Within one hundred fifty (150) days after the end of each calendar year (or as soon thereafter as is practicable for Landlord), Landlord will provide Tenant with a statement in reasonable detail of the Operating Expenses payable by Tenant for such previous calendar year (with credit to Tenant for any monthly estimated payments paid by Tenant). Tenant may audit a Landlord's Operating Expenses once each year at Tenant's sole expense. If the total payments made by Tenant exceed Tenant's Pro Rata Share of the actual increases in Operating Expenses, such excess will be credited to the next monthly installments due from Tenant. If Tenant's Pro Rata Share of the actual increases in Operating Expenses exceeds the payments actually made by Tenant, Tenant shall pay such deficiency, within ten (10) days after Landlord's delivery of the statement. Tenant's obligation to pay any deficiency and Landlord's obligation to refund any surplus shall survive the expiration of this Lease. 4.03. SECURITY DEPOSIT. The Security Deposit and, subject to the provisions of Section 17.12, the Additional Security Deposit shall be held by Landlord as security for the performance of Tenant's covenants and obligations under this Lease, and it shall not be considered an advance payment of rental or a measure of Landlord's damages in case of any default by Tenant. The Security Deposit and Additional Security Deposit shall not bear interest to Tenant, and may be commingled with Landlord's other funds. Following any Default, Landlord may, from time to time, at its option, without prejudice to any other remedy, use the Security Deposit to the extent necessary to remedy such Default. If any portion of the Security Deposit is so used or applied, Tenant shall, within ten (10) days after written notice from Landlord, deposit with Landlord an amount sufficient to restore the Security Deposit to its original amount. Any remaining balance of the Security Deposit shall be returned by Landlord to Tenant within thirty (30) days after expiration of this Lease. If Landlord transfers its interest in the Building, Landlord deliver the Security Deposit to the transferee, and Tenant shall look solely to the new landlord for the return of the Security Deposit, and the transferring Landlord shall be released from all liability to Tenant for the return of the Security Deposit. 4.04. ADDITIONAL RENT. All remedies applicable to the nonpayment of Base Rent shall apply to the nonpayment of Additional Rent. 4.05. NO OFFSET. Base Rent and Additional Rent shall be paid without demand, setoff, deduction or counterclaim of any nature whatsoever. Tenant agrees that any claims against Landlord may be pursued only in an independent action against Landlord, subject to the limitations contained in this Lease. 11 4.06. INTEREST/LATE FEE. All payments required to be made by Tenant under this Lease which are not paid within five (5) days after the due date shall bear interest at a rate equal to the lesser of eighteen percent (18%) per annum, or the highest rate allowed by law, from the due date of each payment until the date actually paid by Tenant. In addition to interest and all other amounts due to Landlord hereunder, Tenant, if required by and upon demand of Landlord, will pay Landlord a "late fee" equal to five percent (5%) of any payment which has not been paid within thirty (30) days after its due date. 4.07. RENTAL TAXES. If at any time during the Term, under federal, state or local law a tax, charge, capital levy or excise on rents (fixed, guaranteed or additional) or other tax (except income tax) shall be levied against Landlord on account of the Base Rent or Additional Rent payable herein, such tax, charge, capital levy or excise on rents or other such tax shall be paid by Tenant, or reimbursed to Landlord by Tenant, if such amounts are initially paid by Landlord. ARTICLE V. ALTERATIONS 5.01. ALTERATIONS. (a) Tenant may not make any Alterations without the prior written consent of Landlord, which consent shall not be unreasonably withheld, unless the Alteration is "material", in which event Landlord may withhold its consent in its sole discretion. Any Alteration affecting the structure of the Building or the electrical, mechanical or plumbing systems of the Building or requiring penetration of the roof, walls or floor of the Building or the Premises, and any other Alteration which is expected to cost in excess of $30,000, shall be considered a "material" Alteration. Alteration work undertaken by Tenant on the roof of the Building and parking garage is governed by Exhibit D. (b) If requested by Landlord, Tenant shall provide to Landlord, before commencement of any Alteration or delivery of any materials to be used therefor, complete and final plans and specifications, names and addresses of contractors, copies of contracts, necessary permits and licenses, and an indemnification in such form and amount as may be reasonably satisfactory to Landlord or a performance bond executed by a commercial surety reasonably satisfactory to Landlord, in an amount equal to 120% of the estimated cost of the Alterations. Tenant shall pay the cost of all such Alterations, and also shall pay Landlord a supervision fee equal to five percent (5%) of the cost of such Alterations, which fee shall be payable in advance prior to commencement of such Alterations, based on the estimated cost thereof, with an adjustment to be made upon completion of such Alterations based on the actual cost thereof. Upon completion of any Alteration, Tenant shall, if requested by Landlord, furnish Landlord with "as built" plans and specifications, sworn construction cost statements, and full and final waivers of liens and receipted bills covering all labor and materials expended and used in connection with such Alterations. Any Alterations made by Tenant shall comply with all insurance requirements and all laws, ordinances, rules and regulations of all governmental authorities and shall be constructed in a good and workmanlike manner, in accordance with the plans and specifications approved by Landlord, which approval shall not be unreasonably withheld, and shall be prosecuted diligently to completion. Tenant shall permit Landlord to inspect construction operations in connection with any Alterations. Landlord's approval of any plans, specifications 12 or working drawings for Alterations shall create no responsibility or liability on the part of Landlord for their completeness, design sufficiency, or compliance with all laws, rules and regulations of governmental agencies or authorities. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, losses, damages, liabilities, costs and expenses of any kind and description (including without limitation mechanics' liens and attorneys' fees and legal costs) which may arise out of or be connected in any way with such Alterations; such indemnity shall survive the expiration or termination of this Lease. All Alterations shall be done only by contractors and subcontractors approved by Landlord which approval shall not be unreasonably withheld or delayed, and at such time and in such manner as Landlord may from time to time reasonably designate. All Alterations shall be done in such a manner as to avoid labor disputes. Tenant shall pay the cost of repairing any damage caused to the Premises, the Building or the Project in connection with any Alterations. If any Alteration is material, or if otherwise required by Landlord in its reasonable discretion, Tenant shall maintain during construction of any Alterations, a policy of builder's risk insurance in an amount equal to the completed value of all improvements under construction, which policy shall be in form and substance satisfactory to Landlord and shall name Landlord and its Mortgagee as loss payees thereunder, as their interests may appear, and Tenant shall furnish a certificate thereof to Landlord prior to commencing such Alterations. This provision shall not apply to the work contemplated in Section 2.02. (c) All Alterations (other than Non-Removable Alterations) shall, at the election of Landlord, be removed by Tenant at its expense before the expiration of the Term, unless otherwise agreed by Landlord at the time of Landlord's consent to such Alteration. If requested by Tenant at the time of submission of plans and specifications to Landlord for review, Landlord shall designate which Alterations (other than Non-Removable Alterations) Tenant may be required to remove. Notwithstanding the foregoing, Tenant shall not be required to remove any base building improvements, ceiling and above ceiling improvements, light fixtures, mechanical, electrical, and plumbing systems, fixtures and equipment ("Non-Removable Improvements"). Tenant shall have the right to and Landlord may require Tenant, at its expense, to remove all improvements other than Non-Removable Improvements, including all computer and telecomununications equipment and related items, rooftop and garage mounted communication systems, emergency power generator, Tenant installed air conditioning system and Tenant's building signs. All Alterations which are not required to be removed pursuant to this subsection (c) shall remain upon the Premises and be surrendered therewith at the expiration or termination of the Term as the property of Landlord. If Landlord requires the removal of any Alterations (other than Non-Removable Alterations) Tenant shall, at its expense, repair any damage to the Premises, the Building or the Project caused by such removal and restore the Premises, the Building and the Project to their condition prior to the construction of such Alterations. 5.02. MECHANICS' LIENS. If any mechanic's, materialman's or similar lien is filed against the Premises, the Building or the Project as a result of any work or act of Tenant, its contractors or agents, Tenant shall cause the discharge of the lien within fifteen (15) days after the filing of the lien; or within such fifteen (15) days after the filing of the lien Tenant shall file a bond, letter of credit or other security sufficient to indemnify Landlord and the Project from and against such lien, provided that Tenant diligently contests such lien thereafter. If Tenant shall fail to cause the discharge of the lien, or to provide such security against such lien, Landlord may, after five (5) days' written notice to Tenant, but shall not be obligated to, bond or pay the lien or claim for the 13 account of Tenant without inquiring into the validity thereof In such event, Tenant shall promptly reimburse Landlord the amount so advanced or the costs and expenses of such bond. Landlord shall have the right to post a notice in the Premises disclaiming any liability for payment for any Alterations performed by persons or entities other than Landlord or its contractors, and/or for any liens arising in connection therewith, and Tenant agrees not to disturb any such notice. ARTICLE VI. LANDLORD'S SERVICES 6.01. SERVICES. Landlord will provide the following services: (a) Furnish heat and air conditioning to provide temperature conditions customarily provided for similar buildings in the Dallas area on Monday through Friday, from 8:00 a.m. - 8:00 p.m., and on Saturday from 8:00 a.m. to 1:00 p.m., holidays (New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day) excepted. After-hours heat and air conditioning will be available upon Tenant's request (with reasonable prior notice) at a charge of $50.00 per hour or at the then prevailing hourly rate charged by Landlord for such services, which shall be paid by Tenant on demand as Additional Rent. If and to the extent Tenant uses separate air conditioning equipment permitted under Exhibit D, Tenant shall not be charged for excess or after hours use under this section, but instead shall pay the costs of using such additional equipment. (b) Provide elevator service during the hours and days set forth in Section 6.01(a) above, and at all other times subject to such reasonable security measures and procedures as Landlord may impose. (c) Provide normal janitorial service similar to that furnished in comparable space within the general geographic area of the Project. Any and all additional janitorial service desired by Tenant shall be contracted for Tenant, at Tenant's written request, by Landlord with Landlord's janitorial agent, and the cost thereof shall be paid by Tenant to Landlord as Additional Rent. (d) Make all normal repairs to the roof, exterior walls, foundation and other structural elements of the Building, the systems serving the Building, and the Common Areas in a manner similar to that furnished in comparable spaces within the geographic are of the Project, excluding repairs to any fixtures, systems or utilities located within or exclusively serving the Premises, any special treatment of walls, floors or ceilings made by or at the request of Tenant, and any Alterations. Notwithstanding the foregoing, in the event any such repairs are required because of any act or omission of Tenant, its agents, employees, contractors or invitees, the cost thereof shall be paid by Tenant, and Landlord may make such repair and add the cost thereof, as Additional Rent, to the first installment of Base Rent which will thereafter become due. (e) Provide water for drinking, lavatory and toilet purposes drawn through fixtures installed by Landlord. 14 (f) Except as provided in Article VII, Section 7.07, furnish the Premises with electric current for lighting and normal use customarily provided for similar buildings in the Dallas area. Tenant will not install or operate in the Premises any electrically operated equipment, other than equipment normally used in modern offices, without first obtaining the prior written consent of Landlord, which may condition such consent upon payment by Tenant for the cost of any excess consumption or increase in capacity occasioned or necessitated by the operation of said equipment or machinery. Tenant shall not install or operate any space heaters or similar devices or equipment in the Premises. (g) Keys and locks sufficient for Tenant's use and occupancy of the Premises. (h) Tenant may use its own security personnel, at its sole expense, for the Premises and for escorting its employees and invitees to the Buildings parking garage or to public transportation. Nevertheless, Landlord shall continue to provide its current level of security to the Building. 6.02. INTERRUPTION. Landlord does not warrant that any of the services referred to in Section 6.01 will be free from interruption from causes beyond the reasonable control of Landlord. Any such interruption of services shall never be deemed an eviction or disturbance of Tenant's use or possession of the Premises, or any part thereof, nor shall it render Landlord liable to Tenant for damages, by abatement of rent or otherwise, nor shall it relieve Tenant from performance of Tenant's obligations under this Lease provided Landlord agrees to use reasonable and diligent efforts to promptly repair all equipment of machinery and to restore said services. 6.03. RENT ABATEMENT; TERMINATION. Notwithstanding the provisions of Section 6.02, in the event that the Premises are rendered uninhabitable as a direct result of Landlord's failure to provide any of the services set forth in Section 6.01 and such failure to provide any of the services set forth in Section 6.01 and such failure is not the result of any act of God, governmental authority or other event of force majeure or the result of any action or inaction of Tenant, then, if such uninhabitability continues for five consecutive days, rent shall be abated in the proportion that the Premises are uninhabitable, and, if such uninhabitability continues for 90 consecutive days for at least 50% of the Premises, Tenant may terminate this Lease. ARTICLE VII. TENANT'S OBLIGATIONS 7.01. REPAIRS AND MAINTENANCE BY TENANT. Except for the repairs Landlord is specifically obligated to make under this Lease, Tenant shall perform, at its expense, all maintenance and repairs of and to the Premises, any fixtures, systems or utilities located within or exclusively serving the Premises (including any separate HVAC equipment serving the Premises) which are necessary or desirable to keep the Premises and such fixtures, systems, utilities and equipment in good order and repair and in a clean, sanitary, safe and tenantable condition, including without limitation replacing all broken glass with glass of the same quality. Tenant also shall pay for any repairs to the Premises, the Building or the Project which Landlord is obligated to make pursuant to Section 6.01 when such repairs are necessitated by any act or omission of Tenant, its agents, employees, contractors or invitees, or by the failure of Tenant to perform its obligations under this Lease. 15 7.02. APPROVAL BY LANDLORD OF REPAIRS. Tenant shall give written notice to Landlord before any repair work is performed, and any such work shall be performed in accordance with and subject to the terms and conditions of Article V. 7.03. USE. Tenant shall use the Premises only for the Permitted Uses and for no other use or purpose whatsoever, and Tenant shall observe and comply promptly, at its expense, with all present and future laws, codes, ordinances, regulations, governmental requirements and insurance requirements relating to or affecting the use or occupancy of the Premises. Tenant shall not: (i) do or permit anything to be done in or about the Premises which will in any way unreasonably obstruct or interfere with the rights of other tenants of the Building; (ii) cause, maintain or permit any nuisance in, on or about the Premises or commit or allow to be committed any waste in, on or about the Premises; or (iii) do or permit anything to be done in or about the Premises which would increase the existing rate of insurance on the Building or any portion thereof or cause any cancellation of any insurance policy covering the Building or any portion thereof. 7.04. SURRENDER; HOLDING OVER. Upon the expiration of the Term or earlier termination thereof, Tenant shall peacefully and quietly quit and surrender the Premises to Landlord in the condition required by this Lease. In the event Tenant remains in possession of the Premises after the expiration or termination of this Lease and without the execution of a new lease, then Tenant shall be deemed to be occupying the Premises as a tenant at sufferance only, subject to all conditions, provisions and obligations of this Lease, except that the monthly Base Rent during any such holdover shall be 1 1/2 times the monthly Base Rent in effect immediately prior to the expiration or termination of the Term, and shall be payable in full for each whole or partial month of such holdover, without proration. Notwithstanding the foregoing, at any time during such holdover, Landlord may re-enter and take possession of the Premises without process, or by any legal process provided under applicable state law. Tenant shall indemnify, defend and hold Landlord harmless from and against all loss, cost, liabilities and damages sustained by Landlord by reason of such holdover. 7.05. UTILITIES. Tenant shall pay when due all separately metered or determined charges for electricity, heat, air conditioning, water, gas, fuel, sewage usage, garbage disposal, refuse removal, telephone and any other utility service furnished to the Premises during the Term. Any utilities serving the Premises not separately metered so as to measure only Tenant's consumption thereof shall be included as Operating Expenses under Article IV. 7.06. METERS. Tenant shall keep any gas, water and electric meter(s) installed for the Premises or any other meter(s) measuring the gas or water volume and electric current consumed at the Premises in good order and repair, at Tenant's expense. 7.07. SUBMETERING REQUIREMENT. Tenant shall, at its sole expense, install submeters in its telephone/computer room, which submeters shall measure all costs of HVAC and electrical service. Tenant shall be solely responsible for the payment of any energy and other utility costs for the telephone/computer room. Tenant may, at its sole expense, submeter utilities for its entire space and all of its equipment. In such event Tenant's use of utilities for the Dermised Premises shall be measured by such submeters. 16 7.08. NO VENDING MACHINES. Tenant shall not install or authorize the installation of any coin operated vending machines or similar devices without first obtaining the written consent of Landlord which will not be unreasonably withheld, provided Tenant shall have the right to install vending machines for the sole use of Tenant's employees and visitors. 7.09. SIGNS. (a) No sign, advertisement or notice shall be inscribed, painted or affixed on any part of the inside or outside of the Premises or the Building unless of such color, size and style and in such place upon the Premises or the Building as shall first be designated by Landlord; there shall be no obligation or duty on Landlord to allow any sign, advertisement or notice to be inscribed, painted or affixed on any part of the inside or outside of the Premises or the Building except as provided in Section 7.09(b). Signs on doors will be of building standard as set forth by Landlord and shall be ordered by Landlord, the cost to be paid by Tenant. Landlord shall have the right to remove all other signs, without notice to Tenant at the expense of Tenant except as provided in Section 7.09(b). (b) Tenant or its corporate affiliates may install two signs saying "OpTel" on the top of the Building of the same size as signs currently located on the top of the Building and of characteristics comparable to such existing signs, provided Landlord may require that the quality, installation and lighting of such signs be upgraded to a more attractive condition. Each sign will be located on the west end of the Building. One sign will be located on the south face and one sign will be located on the north face of the Building. All sign costs for the design, installation, maintenance, operation, etc. will be paid by Tenant. Landlord must approve of the sign design and installation method prior to the commencement of construction of the signs, which approval will not be unreasonably withheld. In the event a shared monument sign is constructed at the corner of Stemmons Freeway and West Mockingbird Lane during Tenant's tenancy, Tenant may utilize one sign panel on the shared monument sign. In such event, Tenant will pay it's pro rata share of all costs to design, install, and maintain the monument sign. Tenant, at its expense, may change the sign to substitute any name change for the name OpTel and to reflect an assignment or sublease of the Lease. (c) Tenant shall be entitled, at Tenant's cost, to its Pro Rata Share of Building Directory signage, strips, and other identifying material. Tenant also will be entitled to place identifying signs in the elevator lobbies of all single tenant floors on which the Premises are located. 7.10. RULES AND REGULATIONS. Tenant shall observe the rules and regulations set forth in Exhibit C, as the same may be modified from time to time by Landlord, and shall observe such other rules and regulations as Landlord may, from time to time, put into effect for the general safety, comfort and convenience of Landlord and occupants and tenants of the Building. ARTICLE VIII. ENVIRONMENTAL AND ADA COMPLIANCE 8.01. ENVIRONMENTAL. 17 (a) Landlord shall remove all Hazardous Substances from the Premises prior to the Commencement Date at Landlord's cost and expense and not to be reimbursed by Tenant as part of the Tenant Improvement Allowance or Operating Costs or otherwise. (b) Tenant shall not, and shall not permit its officers, agents, employees, contractors, subtenants, licensees or invitees to, transport, store, handle, warehouse, use, generate, treat, dispose of or release any Hazardous Substances in or on the Project. (c) Paragraph (a) of this Section 8.01 shall not be deemed to prohibit the incidental storage or use of Hazardous Substances in the ordinary course of Tenant's business, provided that (i) the nature, quantity and manner of storage or use of such Hazardous Substances are such as do not require any permit, license or other governmental approval under applicable Environmental Laws, (ii) such storage or use is in strict compliance with all applicable Environmental Laws, and (iii) all such Hazardous Substances shall be removed from the Premises, the Building and the Project, at Tenant's expense, on or before the expiration or termination of this Lease. (d) Tenant shall immediately notify Landlord if at any time during the Term (i) Tenant becomes aware of any spill, disposal, discharge or other release of any Hazardous Substance in or on the Premises, the Building or the Project, however caused; or (ii) Tenant receives any notice of investigation, notice of potentially responsible person status, request for information, demand for response action, or other inquiry, request or demand, however identified, from any federal, state or local governmental agency or entity with respect to any activity on or condition of the Premises, the Building or the Project that affects or allegedly affects human health or safety or the environment. (e) If it is discovered that a Hazardous Substance exists in, on or about the Premises, the Building or the Project as a result of Tenant's use or occupancy thereof, or in violation of Tenant's obligations under this Lease, then Tenant shall remove such Hazardous Substance within ten (10) days following notice thereof, such removal to be performed in strict compliance with all applicable Environmental Laws and all requirements of Landlord. If such removal is not performed within said period, Landlord shall have the right to enter the Premises and remove the Hazardous Substance and charge Tenant with the cost of removal and all damages (including, but without limitation, lost rents from the Premises and other portions of the Building), which amount shall be payable upon demand. (f) Tenant agrees to indemnify, defend and hold Landlord harmless from and against any loss, damage, liability, costs and expenses, including remediation costs, expert costs, consultant costs, attorneys' fees and other legal costs, arising out of or in any manner related to the generation, transportation, treatment, storage, handling, use, disposal or release of any Hazardous Substances in, on, from, to or about the Premises, the Building or the Project by Tenant, its officers, agents, employees, contractors, subtenants, licensees or invitees. This indemnity shall survive the expiration or termination of this Lease, or the assignment of this Lease by Tenant. 8.02. ADA COMPLIANCE. Except for Landlord's Work, Tenant shall be responsible for all improvements, alterations and services required to maintain the Premises in compliance with Accessibility Regulations. Tenant shall cause all Alterations in the Premises to comply with all 18 applicable Accessibility Regulations. Tenant shall indemnify, defend and hold Landlord harmless from and against any loss, damages, liability, costs and expenses, including attorneys' fees and other legal costs, which Landlord may incur as the result of any breach by Tenant of its obligations under this Section 8.02, including the application or enforcement, threatened or actual, of any Accessibility Regulations. Tenant's obligations under this Section shall survive the expiration or termination of this Lease, or the assignment of this lease by Tenant. ARTICLE IX. TRANSFER OF INTEREST, PRIORITY OF LIEN 9.01. ASSIGNMENT OR SUBLEASE BY TENANT. (a) Tenant may not, voluntarily or involuntarily, by operation of law or otherwise, assign, mortgage, pledge or otherwise transfer or encumber this Lease or any interest therein, or sublease the whole or any part of the Premises, without the prior written consent of Landlord. Any merger, consolidation, reorganization, liquidation or dissolution of Tenant, or any change in ownership of the shares of voting stock or other ownership interests in Tenant which results in a change of either the effective voting control or the majority ownership of Tenant from that existing on the date of this Lease or from that hereafter consented to by Landlord, shall constitute an assignment of this Lease, and shall require the prior written consent of Landlord. (b) Subject to Section 9.01(d), the prior written consent of Landlord to any such proposed assignment, transfer or sublease shall not be withheld unreasonably, if (i) the proposed assignee or subtenant is creditworthy considering the obligations to be assumed under this Lease and any applicable sublease; (ii) the proposed assignment or sublease is for a Permitted Use substantially similar to the use being made of the Premises by Tenant, (iii) in the case of a sublease, Tenant and any Guarantor acknowledge in writing that they will remain liable for the performance of all obligations pursuant to this Lease, and in the case of an assignment, Tenant and any Guarantor execute a guaranty of the assignee's performance under this Lease in form and substance satisfactory to Landlord; (iv) no Default shall be in existence at the time of the request for consent or at the time of the assignment or sublease; (v) the proposed assignee or sublessee is not a governmental entity, a present tenant in the Building, a person or entity with whom Landlord has negotiated for space in the Building during the prior twelve (12) months, or a person or entity whose tenancy in the Building would violate any exclusivity arrangement which Landlord has with any other tenant; and (vi) if the consent of any Mortgagee to such assignment or sublease is required, such consent has been obtained at Tenant's expense. IF THE FOREGOING CONDITIONS ARE NOT SATISFIED, LANDLORD'S CONSENT TO THE PROPOSED ASSIGNMENT OR SUBLEASE MAY BE WITHHELD IN LANDLORD'S SOLE AND ABSOLUTE DISCRETION. (C) If Tenant requests Landlord's consent to a specific assignment or subletting, Tenant will submit in writing to Landlord: (i) the name and address of the proposed assignee or subtenant; (ii) a counterpart of the proposed agreement of assignment or sublease executed by the assignee or subtenant; (iii) information, satisfactory to Landlord in its sole discretion, as to the nature and character of the business of the proposed assignee or subtenant, and as to the nature of its proposed use of the space; (iv) banking, financial or other credit information sufficient to 19 enable Landlord to determine the financial responsibility and character of the proposed assignee or subtenant; and (v) any other information reasonably requested by Landlord. (d) If Tenant proposes to assign this Lease, Landlord may, at its option, upon written notice to Tenant given within thirty (30) days after its receipt of the information described in Section 9.01(c), elect to recapture the Premises and terminate this Lease. If Tenant proposes to sublease all or part of the Premises for the remainder of the Term, Landlord may, at its option upon written notice to Tenant given within thirty (30) days after its receipt of the information described in Section 9.01(c), elect to recapture such portion of the Premises as Tenant proposes to sublease and upon such election by Landlord, this Lease shall terminate as to the portion of the Premises recaptured. Provided, however, that the provisions of this subsection shall not apply to assignments or sublettings to the entities set forth in subsection (f) of this Section. If a portion of the Premises is recaptured, the Base Rent and Tenant's Pro Rata Share shall be proportionately reduced based on the square footage of the recaptured space, and Landlord and Tenant shall execute an appropriate amendment to this Lease. Landlord may thereafter, without limitation, lease the recaptured portion of the Premises to the proposed assignee or subtenant without liability to Tenant. (e) If Landlord consents to any proposed assignment or sublease, then (i) Tenant and any Guarantor shall remain primarily liable for all of Tenant's obligations under this Lease, (ii) any assignee shall expressly assume in writing all of Tenant's obligations hereunder, and any subternant shall agree in writing to be bound by and subject to all of the terms and conditions of this Lease, (iii) any rent or other consideration payable by the proposed assignee or subtenant to Tenant in excess of amounts due under this Lease (after deducting Tenant's reasonable and necessary expenses incurred in connection with such assignment or subletting) shall be paid to Landlord, and not to Tenant, provided that if Tenant assigns or sublets the Lease to a corporate affiliate of Tenant, any rents or other consideration in excess of the amounts due under the Lease (after deducting Tenant's reasonable and necessary expenses incurred in connection with such assignment or subletting) shall be split evenly between Landlord and Tenant, (iv) Tenant shall reimburse Landlord upon demand for all costs and expenses, including reasonable attorneys' fees, incurred by Landlord in connection with such assignment or sublease, and (v) all sublease rentals are hereby assigned to Landlord as additional security for Tenant's obligations under this Lease, and Tenant hereby authorizes and directs each subtenant to pay such rent directly to Landlord, provided that Tenant shall have the license to continue collecting such rent as long as no Default has occurred and is continuing hereunder. (f) Notwithstanding the foregoing, without the consent of Landlord, Tenant and shall have the right to assign this Lease or sublet the Premises to any: (i) corporate successor of Tenant by merger or dissolution (ii) purchaser of all or substantially all of Tenant's assets or (iii) corporate affiliate of Tenant. 9.02. SUBORDINATION. Subject to Section 9.03, this Lease shall be subject and subordinate to the lien of any present or future Mortgage, irrespective of the time of execution or the time of recording of the Mortgage. Notwithstanding the foregoing, any Mortgagee may, from time to time, by giving notice to Tenant, elect that its Mortgage be subordinate to this Lease, which election shall be effective upon the giving of such notice. Upon Landlord's request, from time to time, Tenant shall confirm in a recordable written instrument, in such form as may be 20 required by any Mortgagee, that this Lease is so subordinate or so paramount to the lien of such Mortgagee's Mortgage (as the Mortgagee may elect). 9.03. ATTORNMENT AND NON-DISTURBANCE. If the Premises is encumbered by a Mortgage and the Mortgage is foreclosed, or if the Premises is sold pursuant to foreclosure or by reason of a default under a Mortgage, the following shall apply notwithstanding the foreclosure, the sale or the default; (i) Tenant shall not disaffirm this Lease or any of its obligations under this Lease; and, (ii) at the request of the Mortgagee or purchaser at the foreclosure or sale, Tenant shall agree to perform this Lease for the benefit of the Mortgagee or purchaser, provided that Tenant's right to continued use of the Premises is not adversely affected thereby. Any Mortgage entered into by Landlord after the date of this Lease shall provide, or Landlord shall obtain a separate agreement from the Mortgagee, that in the event of a foreclosure of such Mortgage, or the acquisition of the Premises, the Building or the Project by the Mortgagee by deed in lieu of foreclosure, the Mortgagee, its successors and assigns, will not terminate this Lease or inhibit Tenant's use of the Premises, provided that Tenant is not in default hereunder and continues to perform all of its obligations and pay all amounts due hereunder. 9.04. MORTGAGEE PROTECTION. Tenant agrees to give any Mortgagee by certified mail, return receipt requested, a copy of any notice of default served upon Landlord, provided that before such notice Tenant has been notified in writing of the address of such Mortgagee. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then any Mortgagee shall have an additional thirty (30) days within which to cure such default; provided, however, that if such default cannot be cured with diligence within that time, then such Mortgagee shall have such additional time as may be necessary to cure such default so long as such Mortgagee has commenced and is diligently pursuing the remedies necessary to cure such default (including, without limitation, the commencement of foreclosure proceedings, if necessary), in which event this Lease shall not be terminated or any Base Rent or Additional Rent abated while such remedies are being diligently pursued. In the event of the sale of the Building by foreclosure or deed in lieu thereof, the Mortgagee or purchaser at such sale shall not be (i) personally liable for any act or omission of Landlord occurring prior to such sale, (ii) bound by any payment of Base Rent or Additional Rent made more than one month in advance, (iii) bound by any modification, amendment or surrender of this Lease made without such Mortgagee's consent, or (iv) responsible for the return of the Security Deposit, except to the extent that such Mortgagee or purchaser actually received the Security Deposit. 9.05. TRANSFER OF LANDLORD'S INTEREST. The term "Landlord" as used in this Lease means only the owner for the time being or the Mortgagee in possession for the time being of the Building. Each time the Building is sold, the selling Landlord shall be released of all obligations and liability under this Lease arising from and after the date title is transferred. 9.06. FINANCIAL STATEMENTS. Within ninety (90) days after the end of each calendar year during the Term, Tenant shall provide to Landlord a copy of its annual financial statements for the immediately preceding year. If Tenant has otherwise had audited financial statements prepared for the year in question, Landlord shall be provided with a copy of the audited financial statements; however, if Tenant has not caused the financial statements to be audited, the financial statements shall be certified as true and correct by the Chief Financial Officer of Tenant. 21 Landlord and its agents shall keep all such financial information confidential and shall not disclose any such information to any third party except as otherwise required by law as necessary for financing purposes. ARTICLE X. CASUALTY 10.01. RENT ABATEMENT. If all or any portion of the Premises is damaged by fire or casualty, and this Lease is not terminated pursuant to any provisions of this Lease is not terminated pursuant to any provisions of this Lease, then Base Rent and Tenant's obligation to pay Operating Expenses shall abate from the date of the casualty in the proportion that the area of the portion of the Premises rendered unusable for the Permitted Uses bears to the entire area of the Premises. The abatement shall continue until the Premises, or the portion thereof which shall have been damaged, is again usable for the Permitted Uses. 10.02. OPTIONS TO TERMINATE. This Lease shall not be terminated as a result of fire or casualty except as follows: (a) Landlord shall have the option to terminate this Lease if the Premises or the Building are damaged (i) by fire or other cause to such an extent that, in Landlord's sole judgment, the damage cannot be substantially repaired within one hundred and eighty (180)) days after the date of such damage, or (ii) during the last year of the Term, unless Tenant has previously obligated itself to an additional rental Term of at least five (5) years. This option may be exercised by giving written notice of termination to Tenant within forty-five (45) days following the casualty. (b) Provided the casualty has not been caused by Tenant or its agents, employees, contractors, subtenants or invitees, Tenant shall have the option to terminate this Lease if the damage is not substantially repaired within one hundred eighty (180) days after the date on which Tenant gives written notice of the casualty to Landlord, provided that such 180-day period shall be extended by the period of any delay caused by Force Majeure. Such option to terminate must be exercised, if at all, by written notice given by Tenant to Landlord within ten (10) days after the expiration of such 180-day period. If this Lease is terminated as provided in this Section, Base Rent and Additional Rent shall be apportioned and paid to the date of such termination. Except as expressly provided in this Section, Tenant hereby waives all rights to terminate this Lease by reason of damage to the Premises as a result of fire or other casualty pursuant to any presently existing or hereafter enacted statute or other law. 10.03. OBLIGATION TO REBUILD. If all or any portion of the Premises is damaged as provided in Section 10.01, and this Lease is not terminated as provided in Section 10.02, then Landlord shall repair or rebuild the Premises to substantially the same condition the Premises were in immediately prior to the casualty, provided that Landlord's repair obligation shall include only those tenant improvements originally included in Landlord's Work. Tenant shall, at its sole expense, repair or replace all items of Tenant's Work, any Alterations and Tenant's personal property. The repair or rebuilding shall be commenced within a reasonable time after the 22 casualty, subject to Force Majeure. Notwithstanding the foregoing, Landlord shall not be obligated to expend any sums for repair or rebuilding which are greater than the proceeds of any insurance policy actually received by Landlord and made available to Landlord by any Mortgagee. 10.04. WAIVER OF SUBROGATION. Landlord and Tenant hereby release each other and each other's officers, directors, partners, employees and agents from liability or responsibility for any loss or damage to property covered by any property insurance required to be carried by such party pursuant to this Lease or any other property insurance actually carried by such party to the extent of the limits of such policy. This release shall apply not only to liability and responsibility of the parties to each other, but shall also extend to liability and responsibility for anyone claiming through or under the parties by way of subrogation or otherwise. This release shall apply even if the fire or other casualty shall have been caused by the fault or negligence of a party or anyone for whom a party may be responsible. This release shall not apply to loss or damage unless the loss or damage occurs during the times the applicable insurance policy contains a clause or endorsement to the effect that any release shall not adversely affect or impair the policy or prejudice the right of the insured to recover thereunder. Landlord and Tenant each agree that any property insurance policies covering the Building or the Premises or their contents shall include this clause or endorsement. ARTICLE XI. CONDEMNATION 11.01. TOTAL OR SUBSTANTIAL TAKING OF DEMISED PREMISES. If all of the Premises shall be taken, except for a Taking for temporary use, this Lease shall be terminated automatically as of the day prior to the Taking Date. If a substantial part of the Premises, the Building or the Project shall be taken for other than a temporary use, and such Taking renders the Premises unsuitable, in Landlord's reasonable judgment, for the Permitted Uses, then either Landlord or Tenant may terminate this Lease by giving notice to the other party within two (2) months after the Taking Date, and such termination shall be effective as of the day prior to the Taking Date. 11.02. ABATEMENT AND RESTORATION. If all or a portion of the Premises shall be taken, except for a Taking for temporary use, and this Lease is not terminated under Section 11.01, then (i) Base Rent and Tenant's Pro Rata Share shall be reduced in the proportion that the area so taken bears to the entire area of the Premises; and (ii) Landlord shall restore the remaining portion of the Premises to the extent practical, to render it reasonably suitable for the Permitted Uses, as reasonably determined by Landlord. Landlord shall not be obligated to expend an amount greater than the amount of any Award actually received by Landlord and made available to Landlord by any Mortgagee. 11.03. TAKING FOR TEMPORARY USE. If there is a Taking of all or part of the Premises for temporary use, this Lease shall continue in full force and effect without abatement of Base Rent or Additional Rent, and Tenant shall continue to comply with Tenant's obligations under this Lease, except to the extent compliance shall be rendered impossible or impracticable by reason of the Taking. 23 11.04. DISPOSITION OF AWARDS. Tenant shall be entitled to any Award made for a temporary Taking as described in Section 11.03, but only to the extent such Award is attributable to periods included in the Term of this Lease and only on the condition that Tenant continues to perform all of its obligations hereunder. All other Awards arising from a total or partial Taking of the Premises or of Tenant's leasehold interest awarded to Landlord or Tenant shall belong to and be the property of Landlord without any participation by Tenant. Except as otherwise expressly set forth in this Section 11.04, Tenant hereby waives any rights it may have with respect to the loss of its leasehold interest in this Lease and the Premises as a result of a Taking. The foregoing shall not prevent Tenant from making a separate claim for relocation expenses and loss of Tenant's personal property, to the extent allowed by law, as long as such claim is separate and distinct from any claim of Landlord and does not diminish Landlord's Award. ARTICLE XII. INDEMNITY AND INSURANCE 12.01. INDEMNIFICATION. Tenant shall indemnify, defend and hold Landlord harmless from and against all liabilities, losses, damages, claims, fines, penalties, costs and expenses, including attorneys' fees and other legal costs, which may be imposed upon, incurred by or asserted against Landlord by reason of all or any of the following, except to the extent caused by the gross negligence or willful misconduct of Landlord, its agents or employees or contractors, or by the acts of other tenants, their agents, employees and contractors: (a) any defect in the Premises or any part thereof; (b) any personal injury, death or property damage occurring on the Premises; (c) any negligence on the part of Tenant, its employees, agents, contractors, subtenants, licensees or invitees; (d) any failure of Tenant to comply with any requirement of any governmental authority; (e) any prosecution or defense of any suit or other proceeding in discharging the Project, the Building or the Premises or any part thereof from any liens, judgments or encumbrances created or suffered by Tenant upon or against the same or against Tenant's leasehold estate; (f) any proceedings in obtaining possession of the Premises from Tenant or its assigns after the termination of this Lease by forfeiture or otherwise; (g) any litigation commenced by or against Tenant to which Landlord is made a party; and (h) any failure on the part of Tenant to perform or comply with any covenant or agreement required to be performed or complied with by Tenant hereunder. The provisions of this Section 12.01 shall survive the expiration or termination of this Lease. 12.02. RELEASE OF LANDLORD. Except for Landlord's negligence or willful misconduct, property of any kind that may be on or at the Premises shall be at the sole and absolute risk of Tenant or those claiming through or under Tenant. Except for Landlord's negligence or willful misconduct, Landlord shall not be liable to Tenant or to any other person or entity and Tenant hereby releases and waives all claims against Landlord, its agents or employees, due to any of the following occurring in, on or about the Premises, the Building or the Project: (a) damage, loss or injury,, either to person or property; (b) loss of property sustained by Tenant, or by any other person, persons or entities; (c) equipment, fixtures, appliances or machinery being or becoming out of repair or defective; (d) the happening of any accident, however occurring; (e) any act or neglect of Tenant, or of any other person, persons or entities; (f) water, snow, rain, backing up of watermains or sewers, frost, steam, sewage, illuminating gas, sewer gas, odors, electricity or electric current, bursting, stoppage or leakage of pipes, radiators, plumbing, sinks and fixtures; 24 (g) theft or burglary resulting in any loss to Tenant or its employees; or (h) any nuisance made or suffered. 12.03. TENANT'S INSURANCE. (a) Throughout the Term, Tenant shall provide and maintain an "all risk" form property insurance policy on all of Tenant's fixtures, equipment, machinery, improvements, furniture and personal property, in the amount of the full replacement cost thereof, including coverage against, without limitation, sprinkler and water damage. A copy of such policy will be provided to Landlord on request. (b) Throughout the Term, Tenant shall provide and maintain a policy of commercial general liability insurance with respect to the Premises, written on an "occurrence" basis, with a combined single limit per occurrence of at least $1,000,000.00, and a general aggregate limit of at least $2,000,000.00, and including without limitation, personal injury and contractual liability coverage for the performance by Tenant of the indemnity agreements set forth in this Lease. Tenant's liability insurance policy shall name Landlord, any Mortgagee, Landlord's management company, and any designee of Landlord as additional insureds. The policy shall be written by an insurance company licensed to do business in the state where the Building is located and reasonably satisfactory to Landlord. A copy of such policy will be provided to Landlord on request. (c) All insurance policies required to be carried under this Lease by or on behalf of Tenant shall provide, and Tenant shall provide Landlord with certificates stating that: unless Landlord and each other additional insured shall be given thirty (30) days' written notice of any cancellation or failure to renew or material change to the policies, as the case may be (i) the insurance shall not be canceled and shall continue in full force and effect, (ii) the insurance carrier shall not fail to renew the insurance policies for any reason, and (iii) no material change may be made in an insurance policy. As used in this Lease, the term "insurance policy" shall include any extensions or renewals of an insurance policy. 12.04. LANDLORD'S INSURANCE. At all times during the Term, Landlord will carry and maintain an "all risk" form property insurance policy covering the Building and any leasehold improvements in the Premises installed as part of Landlord's Work, and such other insurance as Landlord reasonably determines from time to time. The insurance coverage's and amounts in this Section 12.04 will be determined by Landlord in its sole discretion. ARTICLE XIII. COVENANT OF QUIET ENJOYMENT 13.01. Landlord covenants that if Tenant shall pay the Base Rent and Additional Rent and perform all of the terms and conditions of this Lease to be performed by Tenant, Tenant shall during the Term peaceably and quietly occupy and enjoy possession of the Premises without molestation or hindrance by Landlord or any party claiming through or under Landlord, subject to the provisions of this Lease, any Mortgage to which this Lease is subordinate and any encumbrances of record affecting the Premises. 25 ARTICLE XIV. DEFAULTS; REMEDIES 14.01. DEFAULTS. Each of the following events shall constitute a Default: (a) Tenant or any Guarantor (i) makes an assignment for the benefit of creditors, (ii) files a petition in any court (whether or not pursuant to any statute of the United States or of any state) in any bankruptcy, reorganization, composition, extension, arrangement or insolvency proceedings, (iii) fails to cause any such petition filed against Tenant or any Guarantor to be dismissed within ninety (90) days, (iv) applies for the appointment of a trustee or receiver for it or all or any portion of its property, or (v) fails to cause any such receivership or trusteeship to be set aside within ninety (90) days after such appointment. (b) Tenant fails to pay any installment of Base Rent or Additional Rent or any other charge required to paid by Tenant under this Lease within ten (10) days after the due date thereof. (c) Tenant fails to perform or observe any of its other obligations under this Lease and such failure continues for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that if such failure cannot reasonably be cured within such 30-day period, a Default shall not exist hereunder if Tenant commences an appropriate cure promptly within such 30-day period and thereafter pursues such cure diligently to completion within a period not to exceed sixty (60) days. (d) Tenant abandons or vacates the Premises, or fails to take occupancy of the Premises within ten (10) days after the Commencement Date, unless Tenant commences to and continues to promptly pay the rent for the Premises, allows Landlord continuous access to the Premises during Tenant's absence and Tenant pays Landlord any additional operating and other costs occasioned by Tenant's absence. 14.02. REMEDIES. (a) Upon the occurrence of a Default, Landlord may, in addition to pursuing any other remedy available to Landlord under this Lease, at law or in equity, either (i) cancel and terminate this Lease, and this Lease shall not be treated as an asset of Tenant's bankruptcy estate, and such termination will not release Tenant from liability for all amounts as provided in subsection (c) hereof; or (ii) terminate Tenant's right to possession only without canceling, terminating or releasing Tenant's continued liability as set forth in subsection (b) hereof. Notwithstanding the fact that initially Landlord elects to terminate Tenant's right to possession only, Landlord shall have the continuing right to cancel and terminate this Lease at any time thereafter by giving written notice to Tenant. (b) In the event Landlord elects to terminate Tenant's right to possession only, Landlord may, at Landlord's option, enter into the Premises and take and hold possession thereof, without such entry into possession terminating this Lease, constituting an acceptance of surrender or releasing Tenant in whole or in part from Tenant's obligation to pay all amounts hereunder for the full stated Term. Upon such reentry, Landlord may remove all persons and property from the Premises and such property may be removed and stored in a public warehouse or elsewhere at the 26 cost of and for the account of Tenant, without Landlord becoming liable for any loss or damage which may be occasioned thereby. Such reentry may be conducted in any lawful manner. Upon and after entry into possession without termination of the Lease, Landlord may, but will not be required to, relet the Premises, or any part thereof, to anyone other than Tenant, for such time and upon such terms as Landlord shall determine. Whether or not Landlord re-enters the Premises, upon the election by Landlord to terminate Tenant's right to possession, Tenant shall be liable to Landlord for (i) all attorneys' fees and other enforcement costs incurred by Landlord by reason of the Default or in connection with exercising any remedy hereunder; (ii) the unpaid installments of Base Rent or Additional Rent or other unpaid sums which were due prior to such termination of right to possession, including interest and late payment fees, which sums shall be payable immediately; (iii) the installments of Base Rent and Additional Rent and other sums falling due pursuant to the provisions of this Lease for the periods after termination of Tenant's right to possession during which the Premises remain vacant, including interest, which sums shall be payable as they become due hereunder; (iv) all reasonable, actual, out-of-pocket expenses incurred in reletting or attempting to relet the Premises including, without limitation, costs for leasing commissions, remodeling and fixturing, substantially the same configuration as exists at the time of reentry and without addition of material improvements which shall be payable by Tenant as they are incurred by Landlord; and (v) while the Premises are subject to any new lease or leases made pursuant to this subsection (b), for the amount by which the monthly installments payable under such new lease or leases is less than the monthly installments for all Rent and other charges payable pursuant to this Lease, which deficiencies shall be payable monthly. (c) Notwithstanding Landlord's initial election to terminate Tenant's right to possession only, and notwithstanding any reletting without termination, Landlord, at any time thereafter, may elect to terminate this Lease, and to recover from Tenant (and Tenant agrees to pay on demand), in lieu of the amounts which would thereafter be payable pursuant to the foregoing subsection (b), but not in lieu of any amounts accruing prior to such election to terminate this Lease, as damages for loss of the bargain and not as a penalty, (i) an amount equal to the total of the Base Rent and Additional Rent which would otherwise have been payable hereunder during the entire remaining Term, reduced by the then fair market rental value of the Premises for the same period, and discounted to present value using an interest factor of five percent (5%) per annum over the applicable period of time and (ii) all expenses incurred by Landlord as a result of the Default including, without limitation, leasing commissions, attorneys' fees and other enforcement costs. (d) In addition to the foregoing remedies, Landlord may (but shall not be obligated to) make any payment or do any act required in Landlord's judgment to cure the Default, and charge the cost thereof to Tenant. Such amount shall be due and payable upon demand; however, the making of such payment or the taking of such action by Landlord shall not be deemed to cure the Default or to stop Landlord from pursuing any remedy to which Landlord would otherwise be entitled. 14.03. LANDLORD'S LIEN AND SECURITY INTEREST. (a) As security for payment of Base Rent, Additional Rent, damages and all other payments required to be made under this Lease by Tenant, Tenant grants to Landlord a lien upon and security interest in all furniture and furniture systems, (collectively, "Tenant's Property"). If 27 Tenant abandons or vacates any substantial portion of the Premises or a Default exists, Landlord may enter upon the Premises, using force if permitted under applicable law, and take possession of all or any part of Tenant's Property, and may sell all or any part of Tenant's Property at a public or private sale, in one or successive sales, with or without notice to the highest bidder for cash, and, on behalf of Tenant, sell and convey all or part of Tenant's Property to the highest bidder, and deliver to the highest bidder all of Tenant's title and interest in the property sold. The proceeds of the sale of Tenant's Property shall be applied by Landlord toward the reasonable costs and expenses of the sale, including attorney's fees, and then toward the payment of all sums then due by Tenant to Landlord under the terms of this Lease. Any excess remaining shall be paid to Tenant or any other person entitled to the same by law. Not withstanding the foregoing, any statutory lien or other lien granted by law in favor of Landlord, in order to secure the payment of any amounts due hereunder, is not waived, the express liens granted in this Lease being in addition to any such statutory lien. (b) This Lease is intended as and constitutes a security agreement within the meaning of the Uniform Commercial Code of the state in which the Premises are situated. Landlord, in addition to, but not in limitation of, the rights prescribed in this Lease, shall have all the rights, titles, liens and interests in and to Tenant's Property, now or hereafter located upon the Premises, which may be granted to a secured party, as that term is defined under the Uniform Commercial Code, in order to secure to Landlord payment of all sums due and the full performance of all of Tenant's obligations under this Lease. Tenant will, upon request, execute and deliver to Landlord one or more financing statements for the purpose of perfecting Landlord's security interest under this Lease, or Landlord may file this Lease or a copy thereof as a financing statement. Unless otherwise provided by law and for the purpose of exercising any right pursuant to this Section, Landlord and Tenant agree that reasonable notice shall be given if such notice is mailed to Tenant at least ten (10) days prior to any sale. 14.04. LANDLORD'S DEFAULT. If Landlord fails to perform or observe any material covenant, term, provision or condition of this Lease and such default should continue beyond a period of thirty (30) days after written notice by Tenant (or such longer period as is reasonably necessary to remedy such default, provided Landlord shall continuously and diligently pursue such remedy at all times until such default is cured) then, in any such event Tenant shall have the right to commence such actions at law or in equity to which Tenant may be entitled. Tenant shall not be entitled to offset against Base Rental and Additional Rental next coming due, or to counterclaim for any amounts owed to Tenant by Landlord pursuant to this Lease. The rights of Tenant pursuant to this Section 14.04 shall be subject to (and, if applicable Tenant shall have the benefit of) the express provisions of this Lease, if any, providing for remedies different from, and in exclusion of, the remedies above-described. Tenant agrees that the cure of any default by any of the Notice Parties shall be deemed a cure by Landlord under this Lease. 14.05. ADDITIONAL REMEDIES, WAIVERS, ETC. The rights and remedies of Landlord and Tenant set forth herein shall be in addition to any other right and remedy now and hereafter provided by law. All rights and remedies shall be cumulative and not exclusive of each other. No waiver of a Default shall extend to or affect any other Default or impair any right or remedy with respect thereto. No action or inaction by either party shall constitute a waiver of a Default. The acceptance by Landlord of any Base Rent, Additional Rent or other amounts, whether partial or full payment, shall not constitute an accord and satisfaction or a waiver of any Default. The 28 acceptance of any Base Rent or Additional Rent from any third party shall not constitute a waiver of any of the restrictions of Article IX. No waiver of a Default shall be effective against either party unless the same is in writing and is duly executed by an authorized representative of such party. ARTICLE XV. TENANT'S ESTOPPEL CERTIFICATE Within ten (10) days after each request by Landlord, Tenant shall deliver a certificate to Landlord, in writing, acknowledged and in proper form for recording. Each certificate shall be certified to Landlord, any Mortgagee, any assignee of any Mortgagee, any purchaser, or any other person specified by Landlord. Each certificate shall contain the following information certified by the person executing it on behalf of Tenant: (i) whether Tenant is in possession of the Premises; (ii) whether this Lease is modified and in full force and effect (or if there has been a modification of this Lease, whether this Lease is in full force and effect as modified); (iii) whether Landlord is in default under this Lease in any respect; (iv) whether there are then any claimed defenses against the enforcement of any right or remedy of Landlord, or any duty or obligation of Tenant (and if so, specifying the same); (v) the dates, if any, to which any Rent or other charges have been paid in advance; and (vi) any other information reasonably requested by Landlord. ARTICLE XVI. RELOCATION OF TENANT At any time during the Term, Landlord may, at its option, substitute for the Premises other premises in the Building (the "New Premises"), in which event the New Premises shall be deemed to be the Premises for all purposes hereunder as of the effective date of the substitution; provided, however, that (i) Landlord shall give written notice to Tenant of such substitution not less than sixty (60) days prior to the effective date thereof; (ii) the New Premises shall be similar to the Premises in configuration, and the New Premises shall not contain more than 105% or less than 95% of the number of rentable square feet of space than the number of rentable square feet of space contained in the Premises; (iii) the Base Rent, Tenant's Pro Rata Share and the amount of the Security Deposit shall be increased or decreased, if necessary, to reflect the difference, if any, in the number of rentable square feet of space contained in the Premises and in the New Premises; and (iv) Landlord, at Landlord's sole cost and expense, shall make such improvements to the, New Premises as may be necessary to render the New Premises comparable to the Premises, and Landlord shall move the property and equipment of Tenant located in the Premises to the New Premises. ARTICLE XVII. MISCELLANEOUS 17.01. INTERPRETATION. If any provision of this Lease or the application of any provision of this Lease to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Lease, or the application of such provision to persons or circumstances other than those to which it is invalid or unenforceable, shall not be affected thereby; and each provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 29 17.02. NOTICES. No notice, request, consent, approval, waiver or other communication under this Lease shall be effective unless the same is in writing and is mailed by registered or certified mail, or recognized national overnight courier such as Federal Express, postage or fees prepaid, addressed to each party at such party's Notice Address. Notices shall be deemed given effective on the date of mailing or deposit with the courier as provided in this Section. 17.03. SUCCESSORS AND ASSIGNS. Except as otherwise provided, this Lease shall bind and inure to the benefit of the parties and their respective successors, representatives and permitted assigns. 17.04 LIABILITY OF LANDLORD. Landlord and its parent, subsidiary and related or affiliated corporations or entities, and its and their officers, directors, shareholders, partners and members, shall have no personal liability under any provision of this Lease or with respect to any obligation or liability arising from or in connection with this Lease. Tenant shall look solely and exclusively to Landlord's interest in the Project the proceeds of any sale or transfer, insurance proceeds, and condemnation awards for the satisfaction of any judgment against Landlord. 17.05. GOVERNING LAW. This Lease shall be governed by and construed according to the laws of the State in which the Premises are located. 17.06. BROKERAGE. Tenant warrants that it has not dealt with any broker other than the Brokers, if any, identified in Article I, in connection with this Lease or concerning the renting of the Premises. Tenant shall indemnify, defend and hold Landlord harmless from and against any claims for brokerage fees, commissions or compensation arising out of any breach of the foregoing warranty. The provisions of this Section 17.06 shall survive the expiration or termination of this Lease. Landlord is paying all commissions payable to the brokers. 17.07. AUTHORITY. If Tenant executes this Lease as a corporation, partnership, trust or any other type of association or entity, each of the persons executing this Lease on behalf of Tenant does personally represent and warrant to Landlord that Tenant is a duly authorized and existing business entity, that Tenant is qualified to do business in the state in which the Premises are located, that the entity has full right and authority to enter into this Lease, and that each person signing on behalf of the entity is authorized to do so. 17.08. FORCE MAJEURE. Except as otherwise specifically provided in this Lease, if, despite diligent good faith efforts to do so, Landlord fails to perform, or is delayed or prevented from performing, any of its obligations under this Lease as a result of Force Majeure, then (i) Landlord shall not be liable for loss or damage for the failure and Tenant shall not be released from any of its obligations under this Lease by reason of the failure, and (ii) the period of delay or prevention shall be added to the time herein provided for the performance of any such obligation. 17.09. GENERAL. Submission of this Lease to Tenant for signature does not constitute a reservation of space or an option to lease. This Lease is not effective until execution by both Landlord and Tenant. This Lease may not be amended or modified in any respect, except by a writing signed by both Landlord and Tenant. The word "Tenant" wherever used in this Lease shall be construed to mean tenants in all cases where there is more than one tenant, and the necessary grammatical changes required to make the provisions of this Lease applied to 30 corporations, partnerships, trusts, associations, other entities or individuals, men or women, shall in all cases be assumed as though in each case fully expressed. The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of any Section. Tenant expressly agrees that, as a material consideration for the execution of this Lease, this Lease, with the specific references to written extrinsic documents, is the entire agreement of the parties and that there are, and were, no verbal representations, warranties, understandings, stipulations, agreements or promises pertaining to this Lease or the Premises or to expressly mentioned written extrinsic documents not incorporated in writing in this Lease. 17.10. EXHIBITS. The following Exhibits are attached to and made a part of this Lease: Exhibit A - Premises; Exhibit B; Exhibit B - Lease Term Certificate; Exhibit C - Rules and Regulations, and Exhibit D - Additional Lease Terms. 17.11. SPECIAL TERMINATION RIGHT. Tenant shall have a one-time right to terminate this Lease effective only on the date exactly sixty (60) months from the Commencement Date by delivering Landlord at least nine (9) months prior written notice and by paying to Landlord Eight Hundred Twenty Six Thousand Dollars ($826,000). Exercise of this right shall not impair Tenant's termination responsibilities under any provision of this Lease. 17.12. ADDITIONAL SECURITY DEPOSIT. Prior to execution of this Lease, Tenant shall provide to Landlord as security deposit, in addition to the security deposit set forth in Section 4.03, a sum equal to one year's rent of the entire Demised Premises. The Additional Security Deposit shall be conditioned on Tenant's fulfillment of all Tenant's covenants in this Agreement and Landlord may unilaterally draw upon the Additional Security Deposit in the event Tenant defaults on any of its duties under this Agreement. Landlord shall place the Additional Security Deposit in a separate account and may retain this Additional Security Deposit until such time as Tenant provides Landlord with an audited financial statement of Tenant, approved by Tenant's Board of Directors, showing that Tenant has total owner's equity of at least Thirty Five Million Dollars ($35,000,000.00). Upon Tenant's presentation of such an audited financial statement to Landlord, Landlord shall, within fifteen (15) business days, return the Additional Security Deposit sum received by Landlord to Tenant. To evidence their agreement to the foregoing the parties have duly executed this Lease the date first indicated above. LANDLORD: TENANT: SPACE CENTER DALLAS, INC. OPTEL, INC. By: Paul Knapp By: Rory Cole ----------------------- ------------------------- Title: VP Title: Chief Operating Officer ----------------------- ------------------------- Date: July 25, 1995 Date: 07-20-1995 ---------------- ------------------ 31 EXHIBIT A PREMISES 10th Floor 9th Floor 32 EXHIBIT B LEASE TERM CERTIFICATE RE: Lease Dated: July 25, 1995 Landlord: Space Center Dallas, Inc., a Minnesota Corporation Tenant: OpTel, Inc., a Delaware Corporation Leased Premises: Suite #: 9th & 10th floors 1111 W. Mockingbird Dallas, Texas 75247 Lease Commencement Date: December 1, 1995 Lease Term: December 1, 1995-through November 30, 2005 TO: Space Center Dallas, Inc. 1111 W. Mockingbird Dallas, Texas The undersigned, as Tenant under the above-described Lease, hereby certifies, as of the date hereof, for the benefit of and with the intent and understanding that such will be relied upon by you and any mortgagee or ground or underlying lessor of the Premises or the Project (as such terms are defined in the Lease): 1. That it has accepted full and complete possession of the Premises pursuant to the terms of the Lease, and that the Term of the Lease commenced on December 1, 1995. 2. That Landlord has satisfactorily complied with all of the requirements and conditions precedent to the commencement of the Term as specified in the Lease. 3. That the Lease is in full force and effect and that it has not been modified, amended, supplemented or superseded. 33 4. That no rent or other sums payable under the Lease have been prepaid except as provided by the terms thereof. 5. That the security deposit as provided by the Lease has been paid. 6. That there is no existing default under any of the terms and provisions of the Lease and that the undersigned does not now have or hold any defenses, setoffs or counterclaims against Landlord arising out of the Lease or in any way relating thereto, or arising out of any other transaction between Tenant and Landlord which might be set off or credited against the accruing rents. Provided, however, the following items, if any, remain to be completed: 7. That the rents provided in the Lease commenced to accrue on the 1st day of December, 1995. IN WITNESS WHEREOF, this Lease Term Certificate has been duly executed this 21st day of February, 1996. __________________________________________ By: J.F. Deschenes Title:____________________________________ Date: 96-02-21 34 EXHIBIT C RULES AND REGULATIONS THESE RULES AND REGULATIONS ARE SUBJECT AND SUBORDINATE TO THE PROVISIONS OF THE LEASE. 1 . The sidewalks, entries, passages, court corridors, stairways and elevators shall not be obstructed by Tenant, its employees or agents, or used by them for any purpose other than ingress and egress to and from the Premises. All safes or other heavy articles shall be carried up or into the Premises only at such times and in such manner as shall be prescribed by Landlord and Landlord shall in all cases have the right to specify the proper weight and position of any such safe or other heavy article. Any damage done to the Building or the Project by taking in or removing any such equipment or from overloading any floor in any way shall be paid by Tenant. Defacing or injuring in any way any part of the Building by Tenant, its agents, employees, contractors, licensees or invitees shall be paid for by Tenant. 2. Tenant will refer all contractors' representatives and installation technicians rendering any service on or to the Premises for Tenant to Landlord for Landlord's approval and supervision before performance of any contractual service. This provision shall apply to all work performed in the Building, including installation of telephones, telegraph equipment, electrical devices and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment or any other physical portion of the Building. Such approval, if given, shall in no way make Landlord, a party to any contract between Tenant and any such contractor or technician, and Landlord shall have no liability therefor. 3. No furniture shall be placed in front of the Building or in any lobby or corridor or on the loading dock without written consent of Landlord. 4. Landlord shall have the right to designate parking areas for the use of the tenants of the Building and their employees, and Tenant and its employees shall not park in parking areas not so designated, specifically including driveways, fire lanes, loading/unloading areas, walkways, visitor parking areas and building entrances. Tenant agrees that upon written notice from Landlord, it will furnish to Landlord, within five (5) days after receipt of such notice, the state automobile license numbers assigned to the automobiles of Tenant and its employees. Landlord shall not be liable for any vehicle of Tenant or its employees in the event that the Landlord may have towed such vehicle from the Common Areas when parked in violation of the provisions hereof. Landlord will not be liable for damage to vehicles in the parking areas or for theft of vehicles, personal property from vehicles, or equipment of vehicles. 5. Tenant shall not do or permit anything to be done in the Premises, or bring or keep anything therein, which will in any way increase the rate of fire insurance on the Building, or on property kept therein, or obstruct or interfere with the rights of other tenants, or in any way injure or annoy them, or conflict with the laws relating to fire, or with any regulations of the fire department, or with any insurance policy upon the Building or any part thereof, or conflict with any rules and ordinances of the local Board of Health or any other governing bodies. 35 6. Landlord's agents or employees providing janitorial service to the Premises may at all times keep a pass key, and they and other agents of Landlord shall at all times be allowed admittance to the Premises. 7. No additional locks shall be placed upon any doors without the prior written consent of the Landlord. All keys to the Premises shall be furnished by Landlord in a number reasonably requested by Tenant, the cost to be paid by Tenant. Upon termination of this Lease, all keys shall be surrendered, and Tenant shall then give Landlord or its agents an explanation of the combination of all locks upon the doors of the Premises. 8. No windows or other openings that reflect or admit light into the corridors or passageways, or to any other place in the Building, shall be covered or obstructed by Tenant. 9. No person shall disturb the occupants of the Building by the use of any musical instruments, the making of unseemly noises, or any unreasonable use. No dogs or other animals or pets of any kind will be allowed in the Building. 10. The water closets and other water fixtures shall not be used for any purpose other than those for which they were constructed, and any damage resulting to them from misuse by Tenant, its agents, employees, contractors, licensees or invitees shall be paid for by Tenant. 11. No bicycles or similar vehicles will be allowed in the Building. 12. Nothing shall be thrown out the windows of the Building or down the stairways or other passages. 13. Tenant shall not be permitted to use or keep in the Building any kerosene, camphene, burning fluid or other combustible materials. 14. If Tenant desires, at its cost, telegraphic, telephonic or other electric connections, Landlord or its agents will direct the electricians as to where and how the wires may be introduced, and without such directions, no boring or cutting for wires will be permitted. 15. No shades, draperies or other window coverings are allowed in the Premises except for building standard items approved by Landlord. No outside awnings are allowed by Landlord. 16. No portion of the Building shall be used for the purpose of lodging rooms or for any immoral or unlawful purposes. 17. All glass, locks and trimmings in or about the doors and windows and all electric fixtures belonging to the Building shall be kept whole, and whenever broken by Tenant, its agents, employees, contractors, licensees or invitees, shall be immediately replaced or repaired and put in order by Tenant under the direction and to the satisfaction of Landlord, and on removal shall be left whole and in good order. 18. Tenant shall not install or authorize the installation of any vending machines or food preparation devices (except coffee machines and microwave ovens for use by Tenant's 36 employees) without Landlord's prior written approval. Landlord shall have the right to rescind this approval, if given, without liability to Tenant for reimbursement of any of Tenant's costs or expenses. 19. Smoking is prohibited in all common areas (i.e., restrooms, corridors, lobbies, elevators, stairways, etc.). 20. Tenant shall not install or authorize the installation or use of any space heaters. 37 EXHIBIT D ADDITIONAL LEASE TERMS The following lease terms are in addition to the terms and conditions contained in the Lease. 1. BUILDING IMPROVEMENTS. Landlord shall make the following improvements to the Building by December 31, 1996, the costs of which shall not be borne in any way by Tenant: o Renovate the common area on the 1st floor; o Renovate all elevator cabs; o Renovate the restaurant and sundry shop on the 1st floor (subject to their negotiation of existing lease); and o Develop an outdoor patio area with seating for smokers. Landlord shall make the following improvements to the Building by December 31, 1996, the costs of which shall be allocated to Tenants as Operating Expenses provided that such allocation shall be based on amortization schedules of: (a) five years for the new energy management system; (b) 15 years for the retrofitted building lighting; and (c) 20 years for the new HVAC chillers. o Install two (2) new HVAC chillers; o Install a new energy management system; and o Substantially shall have begun retrofit of building lighting and have completed the retrofit of at least one half the lighting in the building. 2. CERTAIN TENANT INSTALLATIONS: subject to Landlord's reasonable approval of placement, design and installation, Tenant may: (a) Place its own emergency power generator in proximity to the Building's existing generator. Tenant shall pay all costs to purchase, install, operate and maintain the generator as well as the costs of providing a visual screen around its generator. Should Tenant remove its generator at any time, Tenant shall, at its cost, restore the generator site to the condition it was in prior to the generator's installation; (b) Place its own air conditioning unit on the Property, subject to Landlord's reasonableness approval of the location, design and installation of the unit. Tenant shall pay all costs to purchase, install, operate and maintain the unit as well as the cost of providing a visual screen around the unit if it is not placed within the Building. Should Tenant remove the air conditioning unit at any time, it shall, at its costs, restore the site on which the unit was placed to the condition it was in prior to the unit's installation (c) Install satellite dishes on the Building's rooftop and garage subject to landlord's approval of the number, size, location, design and installation of such devices which will not be unreasonably withheld or delayed. Landlord, as a condition of its approval, may require that Tenant provide screening suitable in size, material and color to Landlord with respect to all 38 satellite dish / antennae installations by Tenant on the Building. All costs of maintenance and any liability associated with the satellite dishes shall be borne by Tenant. Tenant may not sublease the satellite dishes to third parties. Landlord will not install or allow another party to install additional equipment on the rooftop of the Building which will interfere with the operation of Tenant's satellite dishes and accessory equipment. Tenant may from time to time add or relocate any such equipment subject to Landlord's approval. Landlord also will provide space at no expense to Tenant in the core of the Building necessary to accommodate Tenant's conduit and other requirements related to such equipment. Any assignee or sublessee of this Lease or the Premises or a portion thereof or and corporate affiliate of Tenant, shall have the right to use such equipment. (d) At such time as Tenant vacates the Building it shall, at its sole expense, remove the emergency power generator, building signs and satellite dishes discussed herein and restore the Building to its condition prior to the installation of Tenant's generator and satellite equipment. 3. ALTERNATIVE USE OF TENANT IMPROVEMENT ALLOWANCE: Tenant may use up to ten percent (10%) of Tenant's Improvement Allowance for moving expenses associated with Tenant's Improvement Allowance for moving expenses associated with Tenant's move into the Premises. 4. RENEWAL OPTION: Provided that Tenant is not in default, Tenant may renew the Lease for an additional period of five (5) years at a rental rate equal to the then existing market rate for Comparable Demised Premises in the Dallas-Fort Worth area, provided that Tenant gives Landlord six (6) months advance written notice of its intent to renew. 5. SECOND RIGHT OF FIRST REFUSAL: Tenant acknowledges that the 11th floor of the Building ("Temporary Space") is subject to a right of first refusal by another building tenant. In the event that the Temporary Space becomes available and the tenant with the first right of refusal elects not to occupy said space, Tenant may, within five (5) days after notice of the availability of the Temporary Space, exercise its second right of first refusal on the terms under which Landlord offers the Temporary Space to the proposed Tenant. 6. RELOCATION WITHIN BUILDING: During the term and any extension thereof of the lease of the Premises, Landlord may not cause Tenant to relocate to another portion of the Building. However, if Tenant occupies any other space within the Building, Tenant agrees that Landlord may relocate Tenant from such other space within other portions of the Building at Landlord's discretion. 7. ASBESTOS CONTAINING MATERIALS: Tenant acknowledges the presence of asbestos containing materials (ACM) in the Building and specifically acknowledges that it shall refer all contractors, contractors' representatives and installation technicians rendering any service on or to the Premises for Tenant to Landlord for Landlord's approval and supervision before performance of any contractual service. This provision shall apply to all work performed in the Building, including installation of telephones, telegraph equipment, electrical devices and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment or any other physical portion of the Building. If Landlord approves the contractual service contemplated by Tenant, such approval shall neither make Landlord or the 39 Building Owner a party to any contractual service agreement nor make Landlord or Building Owner liable for any claims or causes of action of whatsoever nature arising from the performance of the contractual service. 8. PARKING: Landlord shall make available to Tenant for Tenant's exclusive use for the entire Term, one (1) parking space in the parking garage associated with the Building on an unassigned basis for each 275 square feet of net rentable area (the "Parking Ratio") contained in the Premises from time to time, including any space added pursuant to the Right of First Refusal. Landlord shall not charge Tenant for parking. Such parking allocation shall be reduced by any parking spaces taken up or rendered unusable by Tenant's placement of communications equipment on the roof of the parking garage. 40 FIRST AMENDMENT TO LEASE FIRST AMENDMENT TO LEASE made this 25th day of July 1995 ("Amendment"), by and between SPACE CENTER DALLAS, INC., ("Landlord") and OPTEL INC., ("Tenant"); WITNESSETH: WHEREAS, Landlord and Tenant entered into a Lease Agreement dated April 14, 1995 ("Lease") whereby Landlord leased to Tenant the Demised Premises in Suite 1130, on the eleventh floor, consisting of approximately 7,910 rentable square feet of office space; NOW, THEREFORE, in consideration for the mutual covenants herein contained, Landlord and Tenant hereby agree that the Lease is hereby amended in accordance with the following: 1. EXPANSION SPACE Commencing upon Tenant's occupancy of Suite 200 (on approximately Aug. 1 1995), Tenant hereby leases an additional approximately 3,662 rentable square feet of office space located in Suite 200 and shown on the attached Exhibit "A". Any reference to Demised Premises shall be amended to reflect this change. The Expansion Space will be leased to Tenant in an "as-is" condition without any construction allowance. 2. TERM The Expiration Date of the Lease Agreement is hereby extended to October 31, 1995 or until Tenant's premises on the 9th and 10th floors is substantially completed. 3. BASE RENT Commencing upon Tenant's occupancy of Suite 200 and until the Expiration Date Tenant shall pay as Base Rent for the Demised Premises (as referenced in Paragraph 3 of the Lease) for both Suites 1130 and 200 as follows: ANNUAL BASE RENTAL RATE MONTHLY BASE RENT $11.50 per rentable square foot $11,089.83 per month Any reference to the Base Rent shall be amended to reflect this change. 4. ASBESTOS CONTANING MATERIALS (ACM) Tenant acknowledges the presence of asbestos containing material (ACM) in the Building and in that regard specifically acknowledges its obligations pursuant to Paragraph 2 of Exhibit B, Building Rules and Regulations, which is a part of the Lease. Landlord's responsibility will remain as regulated by Federal governmental agencies. First Amendment To Lease OpTel, Inc. Except as herein expressly provided, the Lease shall remain unchanged and in full force and effect. LANDLORD TENANT -------- ------ SPACE CENTER DALLAS, INC. OPTEL, IN By: /s/ Paul R. Knapp By: /s/ Rory O. Cole ------------------- ------------------- Name: Paul R. Knapp Name: Rory O. Cole Title: Vice President Title: Chief Operating Officer Date: July 25, 1995 Date: July 21, 1995 2 EXHIBIT A (DIAGRAM OF EXPANSION SPACE FLOOR PLAN) EXHIBIT B LEASE TERM CERTIFICATE RE: Lease Dated: July 25, 1995 --------------------------------- Landlord: Space Center Dallas, Inc., a Minnesota Corporation ---------------------------- Tenant: OpTel, Inc., a Delaware Corporation -------------------------------------- Leased Premises: Suite #: 9th & 10th floors -------------------- 1111 W. Mockingbird - --------------------------------------------------------- Dallas, Texas 75247 - --------------------------------------------------------- Lease Commencement Date: December 1,1995 --------------------------- Lease Term: December 1, 1995 - through --------------------------- November 30, 2005 --------------------------- TO: Space Center Dallas, Inc. ----------------------------------- 1111 W. Mockingbird ----------------------------------- Dallas, Texas ----------------------------------- The undersigned, as Tenant under the above-described Lease, hereby certifies, as of the date hereof, for the benefit of and with the intent and understanding that such will be relied upon by you and any mortgagee or ground or underlying lessor of the Premises or the Project (as such terms are defined in the Lease): 1. That it has accepted full and complete possession of the Premises pursuant to the terms of the Lease, and that the Term of the Lease commenced on December 1, 1995. 2. That Landlord has satisfactorily complied with all of the requirements and conditions precedent to the commencement of the Term as specified in the Lease. 3. That the Lease is in full force and effect and that it has not been modified, amended, supplemented or superseded. 33 4. That no rent or other sums payable under the Lease have been prepaid except as provided by the terms thereof. 5. That the security deposit as provided by the Lease has been paid. 6. That there is no existing default under any of the terms and provisions of the Lease and that the undersigned does not now have or hold any defenses, setoffs or counterclaims against Landlord arising out of the Lease or in any way relating thereto, or arising out of any other transaction between Tenant and Landlord which might be set off or credited against the accruing rents. Provided, however, the following items, if any, remain to be completed: 7. That the rents provided in the Lease commenced to accrue on the 1st day of December, 1995. IN WITNESS WHEREOF, this Lease Term Certificate has been duly executed this 21st day of February, 1996. ---------------------------------- By: /s/ J.F. Deschenes ---------------------------------- J.F. Deschenes Title: ---------------------------------- Date: 96-02-21 ---------------------------------- 34 FULTS REALTY CORPORATION ------------------------------- Investment Real Estate Services LOGO Friday, July 28, 1995 1111 WEST MOCKINGBIRD Mr. Rory O. Cole 1111 W. Mockingbird Ln. OpTel, Inc. Suite 180 1111 West Mockingbird Lane Dallas, TX 75247 Suite 1130 214.630.3012 Dallas, TX 75247 214.630.5804 Fax RE: OFFICE LEASE AGREEMENT Dear Rory: We are pleased to return your fully executed copy of OpTel's office lease agreement at 1111 West Mockingbird. Thanks for your business. It was indeed a pleasure to negotiate with you. Your team did a thorough job finalizing the lease, but I regretted that you weren't involved all the way through. I want to invite you, Ada, Jean-Francois and Bob to dinner on Friday, August 4 to celebrate OpTel's relocation to 1111 West Mockingbird. Sincerely, FULTS REALTY CORPORATION A Texas Corporation /s/ Robert B. Powell - --------------------------- Robert B. Powell, CCIM Marketing Representative cc: Jean-Francois Deschenes EX-10.8 16 EXHIBIT 10.8 FIRST AMENDMENT TO LEASE This FIRST AMENDMENT TO LEASE entered into this 8th day of August 1996, (hereinafter referred to as the "Amendment") by and between SPACE CENTER DALLAS, INC., ("Landlord") and OPTEL, INC., ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant entered into a Lease Agreement (the "Lease Agreement") dated July 25, 1995, whereby Landlord leased to Tenant a total of 34,102 rentable square feet of space identified as the entire ninth and tenth floors located at 1111 West Mockingbird Lane, Dallas, Texas 75247. NOW THEREFORE, in consideration of mutual covenants herein contained, Landlord and Tenant hereby agree that the Lease is hereby amended in accordance with the following: 1. EXPANSION SPACE The rentable area of the Premises will be increased by 10,711 rentable square feet (the "Phase I Expansion Space") effective on the date of Substantial Completion (defined below) of the Work (defined below) to be performed with respect to the Phase I Expansion Space, and again by 3,614 rentable square feet (the "Phase II Expansion Space") effective on the date of Substantial Completion of the Work to be performed with respect to the Phase II Expansion Space. The Phase I Expansion Space and the Phase II Expansion Space are each shown on the Exhibit A attached hereto. "Substantial Completion" shall be the date that Landlord has substantially completed the Work in conformity with the plans and specifications approved by Landlord and Tenant (except for normal punch list items) or the date that Landlord would have completed the Work but for Tenant Delays (as defined in the Lease Agreement), as certified by the architect that prepared the plans and specifications, and a certificate of occupancy, temporary or permanent, or its equivalent, has been secured or would have been secured but for any Tenant Delays. The "Work" shall mean the demolition, asbestos abatement and improvements to be performed with respect to the applicable Expansion Space as described in Paragraph 3 below. Subject to Tenant Delays and any delays caused by Force Majeure (as defined in the Lease Agreement), Landlord agrees to Substantially Complete the Work for the Phase I Expansion Space by November 1, 1996 and to Substantially Complete the Work for the Phase II Expansion Space by April 1, 1998. 2. TERM OF LEASE The lease for the Phase I Expansion Space shall commence on or about November 1, 1996. The lease for the Phase II Expansion Space shall commence on or about April 1, 1998. The lease expiration date for both the Phase I and the Phase II Expansion Spaces shall be coterminous with Tenant's Lease on the ninth and tenth floors of the Building which is November 30, 2005. 1 3. TENANT IMPROVEMENT ALLOWANCE Landlord shall, at Landlord's sole expense, demolish the existing improvements and abate the asbestos containing material in both Phase I and Phase II Expansion Spaces. Landlord shall provide Tenant a Tenant Improvement Allowance of $160,665.00 for the Phase I Expansion Space and $54,210.00 for the Phase II Expansion Space. Both Allowances are inclusive of remodeling taxes and shall apply toward the cost of architectural, engineering and other work undertaken by Tenant in Article II of the Lease Agreement. 4. BASE RENT The Base Rent for the Phase I and Phase II Expansion Space shall be as follows: ANNUAL RENTAL RATE PER TOTAL MONTHLY RENTABLE RENTABLE BASE PERIOD SQ FT. SQ FT RENT ------- ---------- ---------- --------- * 11/01/1996 to 11/30/2005 $13.25 10,711 $11,826.73 * 04/01/1998 to 11/30/2005 $13.25 14,325 $15,817.19 * The commencement dates set forth above are estimated dates, the actual date for the commencement of Base Rent shall be as set forth in Paragraph 1 above. 5. TENANT'S PRO RATA SHARE Tenant's total Pro Rata Share of the Building shall increase to 17.98 percent on November 1, 1996 and shall increase again to a total of 19.43 percent beginning on March 1, 1998 for the duration of the Lease Term. 6. SECURITY DEPOSIT Tenant shall provide to Landlord upon the execution of this Amendment, an additional Security Deposit of $15,817.19. 7. LANDLORD SERVICES Landlord shall furnish heat and air conditioning to the Phase I and Phase II Expansion Spaces on Monday through Friday, from 8:00 a.m. - 7:00 p.m., and on Saturday from 8:00 a.m. - 1:00 p.m., holidays excepted. Tenant may, at Tenant's expense, modify Tenant's own separate air conditioning system or install additional air conditioning equipment to serve the Phase I and Phase II Expansion Spaces. The installation of this equipment shall be subject to Landlord's approval. Tenant shall pay all 2 costs to operate and maintain this additional air conditioning equipment. 8. RIGHT OF REFUSAL OPTION Tenant shall have a First Right of Refusal Option to lease the following space in the Building ("First Right of Refusal Option Spaces") as shown on Exhibit B: o Suite 1111 containing approximately 2,811 rentable square feet. o The entire twelfth floor containing approximately 17,051 rentable square feet. o Suite 801/805 containing approximately 1,387 rentable square feet. o Suite 810 containing approximately 729 rentable square feet. o Suite 820 containing approximately 3,203 rentable square feet. o Suite 822 containing approximately 314 rentable square feet. o Suite 830/844/846 containing approximately 3,045 rentable square feet. o Suite 850/875 containing approximately 5,612 rentable square feet. Tenant shall have a Second Right of Refusal Option to lease the following spaces in the Building ("Second Right of Refusal Option Spaces") as shown on Exhibit C: o Suite 812 containing approximately 917 rentable square feet. o Suite 815 containing approximately 1,097 rentable square feet. o Suite 320/340/350/380/385 containing approximately 10,120 rentable square feet. Tenant shall have a Third Right of Refusal Option to lease the following spaces in the Building ("Third Right of Refusal Option Spaces") as shown on Exhibit D: o Suite 300 containing approximately 2,822 rentable square feet. o Suite 310 containing approximately 3,630 rentable square feet. Tenant may, within five (5) business days after written notice of the availability of the Right of Refusal Option Spaces, exercise its right of refusal to lease said space on the same lease terms under which Landlord offers the Right of Refusal Spaces to the proposed tenant (except as provided in Paragraph 9 below with respect to Suite 1111). 9. TENANT'S EXPANSION INTO SUITE 1111 In the event Tenant additionally leases Suite 1111 (containing 2,811 rentable square feet and identified in Exhibit B) from Landlord on a direct lease basis, either as a result of the Tenant's Right of Refusal Option or by Tenant's direct negotiations with the current tenant in Suite 1111 for them to vacate, then the Base Rental Rate of $13.25 per rentable square foot, the Tenant Improvement Allowance of $15.00 per rentable square foot and the other lease terms set forth in this First Amendment to Lease shall also apply to Suite 1111. Landlord shall, at Landlord's sole expense, demolish the then existing improvements and abate the asbestos containing material located in Suite 1111 prior to Tenant's occupancy. At such time as Tenant leases Suite 1111, Landlord and Tenant shall amend the Lease Agreement to reflect this additional space. 3 10. RELOCATION Consistent with Paragraph 6 of Exhibit D to the Lease Agreement, Landlord may not cause Tenant to relocate from the Phase I Expansion Space or the Phase II Expansion Space. 11. ASBESTOS CONTAINING MATERIALS Tenant acknowledges the presence of asbestos containing material (ACM) in the Building and specifically acknowledges that it shall refer all contractors, contractors' representatives and installation technicians rendering any service on or to the Premises for Tenant to Landlord for Landlord's approval and supervision before performance of any contractual service. This provision shall apply to all work performed in the Building, including installation of telephones, telegraph equipment, electrical devices and attachments and installations of any nature affecting floors, walls, woodwork, trim, windows, ceilings, equipment or any other physical portion of the Building. If Landlord approves the contractual service contemplated by Tenant, such approval shall neither make Landlord or the Building Owner a party to any contractual service agreement nor make landlord or Building Owner liable for any claims or causes of action of whatsoever nature arising from the performance of the contractual service. Except as hereby modified or amended, all other terms, covenants and conditions of the Lease Agreement are hereby ratified and confirmed and shall remain unmodified and in full force and effect. LANDLORD: TENANT: - ---------- --------- SPACE CENTER DALLAS, INC. OPTEL, By: /s/ Paul Knapp By: /s/ Rory Cole ------------------------- ------------------------- By: Paul Knapp By: /s/ Rory O. Cole ------------------------- Its: Vice President Its: Chief Operating Officer Date: August 5, 1996 Date: July 19, 1996 EXHIBIT B First Right of Refusal Option Space [Diagram of 11th Floor Plan at 1111 W. Mockingbird] EXHIBIT B First Right of Refusal Option Space [Diagram of 8th Floor Plan at 1111 W. Mockingbird] EXHIBIT B First Right of Refusal Option Space [Diagram of 12th Floor plan at 1111 W. Mockingbird] EXHIBIT C Second Right of Refusal Option Space [Diagram of 8th Floor Plan at 1111 W. Mockingbird] EXHIBIT C Second Right of Refusal Space [Diagram of 3rd Floor plan at 1111 W. Mockingbird] EXHIBIT D Third Right of Refusal Space [Diagram of 3rd Floor Plan at 1111 W. Mockingbird] EXHIBIT A EXPANSION SPACE [Diagram of 11th Floor plan at 1111 W. Mockingbird -- Phase I and Phase II Expansion Space] EX-10.9 17 EXHIBIT 10.9 Exhibit 10.9 OPTEL, INC RESTATED INCENTIVE STOCK PLAN (APPROVED BY THE BOARD ON NOVEMBER 12, 1996) I. Purpose This Restated Incentive Stock Plan (the "Plan") is intended to attract, retain and provide incentives to senior executives of the Corporation, and to thereby increase overall shareholders' value. The Plan generally provides for the granting of stock options to the eligible participants. II. Definitions (a) "Award" means stock options (including incentive stock options within the meaning of Section 422(b) of the Code) as described in or granted under this Plan. (b) "Award Agreement" means a written agreement setting forth the terms and conditions of each Award made under this Plan. (c) "Board" means the Board of Directors of the Corporation. (d) "Call" means the Corporation's right to purchase all (but not less than all) of the Common Stock acquired by a Participant upon the exercise of an Award at a purchase price per share equal to the Fair Market Value of a share of Common Stock as of the day on which the Participant's employment or other relationship is terminated. (e) "Change in Control" means: (i) Any person (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchangc Act")) other than Le Groupe Videotron Ltee or any subsidiary ("GVL") shall have acquired (by any means) the right (x) through the Beneficial Ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of any voting securities of the Corporation or (y) by contract, agreement or similar understanding or (z) any combination of (x) and (y), to elect a majority of the Board; provided that a Change of Control under this Section (e)(i) shall not be deemed to have occurred unless, and until the first date that, GVL shall not actually exercise control and a legal right to manage the day-to-day operations of the Corporation ("Actual Control") or (ii) The approval by the stockholders of the Corporation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation ("Corporate Transaction"); excluding, however, such a Corporate Transaction pursuant to which (1) all of substantially all of the individuals and entities who are the Beneficial Owners, respectively, of the then outstanding common stock ("Outstanding Corporation Common Stock") and of the then outstanding common stock entitled to vote generally in the election of Directors ("Outstanding Corporation Voting Securities") immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50% of, respectively, the outstanding common stock, and the combined voting power of the then outstanding common stock entitled to vote generally in the election of directors, as the case may be, of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, and (2) individuals who were immediately prior to the effective date of the Corporate Transaction members of the Board will constitute at least a majority of the board of directors of the corporation resulting from such Corporate Transaction; provided that a Change in Control under this Section (e)(ii) shall not be deemed to occur unless, and until the first date that, GVL shall not exercise Actual Control; or (iii) The approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation. (f) "Code," means the Internal Revenue Code of 1986, as amended from time to time. (g) "Committee" means the Compensation Committee of the Board or such other committee of the Board as may be designated by the Board from time to time to administer this Plan. (h) "Common Stock" means the $.01 par value Class A Common Stock of the Corporation. (i) "Corporation" means OpTel, Inc., a Delaware corporation. (j) "Director" means a member of the Board. (k) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (l) "Executive" means the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Vice Presidents reporting to the Chief Executive Officer and Chief Operating Officer, Directors and City General Managers reporting directly to the Vice Presidents, Chief Executive Officer or Chief Operating Officer, and other employees specifically designated by the Committee. 2 (m) "Fair Market Value" means the value determined by the Committee or the Board and, if shares of Common Stock are listed on a national securities exchange or traded on the over-the-counter market, the Fair Market Value shall be the mean of the highest and lowest trading prices or of the high bid and low asked prices of shares of Common Stock on such exchange, or on the over-the-counter market as reported by the NASDAQ system of the National Quotation Bureau, Inc., as the case may be, on the relevant date, and if there is no trading or bid or asked price on that day, the mean of the highest and lowest trading or high bid and low asked prices on the most recent day for which such prices are available preceding such relevant date; provided that the Committee and the Board acting reasonably may at any time specify some other definition of Fair Market Value. (n) "IPO Date" means the first date on which the Corporation has an effective registration statement under the Securities Act of 1933, as amended, covering the sale by the Corporation of its Common Stock. (o) "Participant" means an Executive who has been granted an Award under the Plan. (p) "Plan Year" means the fiscal year of the Corporation commencing September 1 and ending August 31. (q) "Put" means a Participant's right to require the Corporation to purchase all (but not less than all) of the Common Stock acquired by the Participant upon the exercise of an Award at a purchase price per share equal to the Fair Market Value of a share of Common Stock as of the day on which the Participant's employment or other relationship is terminated. (r) "Subsidiary" means any corporation or other entity, whether domestic or foreign, in which the Corporation has or obtains, directly or indirectly, a proprietary interest of more than 50% by reason of stock ownership or otherwise. III. Eligibility Any Executive of the Corporation or Subsidiary selected by the Committee is eligible to receive an Award pursuant to Section VI hereof IV. Plan Administration (a) Except as otherwise determined by the Board, the, Plan shall be administered by the Committee. The Board, or the Committee to the extent determined by the Board, shall periodically make, determinations with respect to the participation of Executives in the Plan and, except as otherwise required by law or this Plan, the terms of Awards granted, including exercisability schedules, price, option period, post-retirement and termination rights, payment alternatives such as cash, stock or other means of payment consistent with the purposes of this Plan, and such other terms and conditions as the Board or the Committee deems appropriated which shall be contained in an Award Agreement with respect to a Participant. 3 (b) The Committee shall have authority to interpret and construe the provisions of the Plan and any Award Agreement and make determinations pursuant to any Plan provision or Award Agreement which shall be final and binding on all persons. No member of the Committee shall be liable for any action or determination made in good faith, and the members shall be entitled to indemnification and reimbursement in the manner provided in the Corporation's Certificate of Incorporation, as it may be amended from time to time. (c) The Committee shall have the authority at any time to provide for the conditions and circumstances under which Awards shall be forfeited. The Committee shall have the authority to accelerate the vesting of any Award and the time at which any Award becomes exercisable. V. Capital Stock Subject to the Provisions of this Plan (a) The capital stock subject to the provisions of this Plan shall be shares of authorized but unissued Common Stock and shares of Common Stock held as treasury stock. Subject to adjustment in accordance with the provisions of Section X, and subject to Section V(b) below, the maximum number of shares of Common Stock that shall be available for grants of Awards under this Plan shall be 5,177. (b) There shall be carried forward and be available for Awards under the Plan, in addition to shares available for grant under paragraph (a) of this Section V, all of the following: (i) any unused portion of the limit set forth in paragraph (a) of this Section V; (ii) shares represented by Awards which are canceled, forfeited surrendered, terminated, paid in cash or expire unexercised; and (iii) the excess amount of variable Awards which become fixed at less than their maximum limitations. VI. Awards Under This Plan As the Board or Committee may determine, the following types of Awards may be granted under this Plan on a stand alone, combination or tandem basis: (a) Stock Option. An Award which provides a right to buy a specified number of shares of Common Stock at a fixed exersise price during a specified time. Unless otherwise specifically provided in an Award Agreement, (i) the exercise price of each share of Common Stock covered by a stock option shall not be less than 100% of the Fair Market Value of the Common Stock on the date of the grant of such stock option and (ii) 25% of the shares covered by the stock option shall become exerciseable on the second anniversary of its grant and an additional 25% of such shares shall be exercisable on each of the third, fourth and fifth anniversary of its grant. (b) Incentive Stock Option. An Award which may be granted only to Executives in the form of a stock option which shall comply with the requirements of Code 4 Section 422 or any successor section as it may be amended from time to time. The exercise price of any incentive stock option shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant of the incentive stock option Award. Unless otherwise specifically provided in an Award Agreement, 25% of the shares covered by the incentive stock option shall become exercisable on the second anniversary of its grant and an additional 25% of such shares shall become exercisable on each of the third, fourth and fifth anniversary of its grant. An Executive who owns stock representing 10% of the voting power or value of all classes of stock of the Corporation or a Subsidiary shall only be granted an incentive stock option (i) with an exercise price of at least a 110% of the Fair Market Value of the Common Stock on the date of the grant of such option and (ii) that expires 5 years from the date of its grant. Subject to adjustment in accordance with the provisions of Section X, the aggregate number of shares which may be subject to income stock option Awards under this Plan shall not exceed the maximum number of shares provided in paragraph (a) of Section V above. To the extent that Code Section 422 requires certain provisions to be set forth in a written plan, said provisions are incorporated herein by this reference. VII. Award Agreements Each Award under the Plan shall be evidenced by an Award Agreement setting forth the terms and conditions of the Award and executed by the Corporation and Participant. VIII. Other Terms and Conditions (a) Assignability. Unless provided to the contrary in any Award, no Award shall be assignable or transferable except by will, by the laws of descent and distribution and during the lifetime of a Participant, the Award shall be exercisable only by such Participant. No Award granted under the Plan shall be subject to execution, attachment or process. (b) Termination of Employment or Other Relationship. The Committee shall determine the disposition of the grant of each Award in the event of the retirement, disability, death or other termination of a Participant's employment or other relationship with the Corporation or a Subsidiary. (C) Rights as a Stockholder. A Participant shall have no rights as a stockholder with respect to shares covered by an Award until the date the Participant is the holder of record. No adjustment will be made for dividends or other rights for which the record date is prior to such date. (d) No Obligation to Exercise. The grant of an Award shall impose no obligation upon the Participant to exercise the Award. (e) Payments by Participants. The Committee may determine that Awards for which a payment is due from a Participant may be payable: (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Corporation, by money transfers or direct account debits; (ii) through the delivery or deemed delivery based on attestation to the ownership of shares of Common Stock with a Fair Market Value equal to the total payment due from the Participant; (iii) pursuant to a broker-assisted "cashless exercise" program if established by the Corporation; (iv) by a combination of the methods described in (i) through (iii) above; or (v) by such other methods as the Committee may deem appropriate. (f) Withholding. Except as otherwise provided by the Committee, the Participant shall be required to pay the amount of any taxes required to be withheld prior to the delivery of stock upon the exercise of an Award, or alternatively, a number of shares the Fair Market Value of which equals the amount required to be withheld may be deducted from the shares to be delivered upon the exercise of an Award. (g) Put and Call. If after the termination of a Participant's employment or other relationship with the Corporation or a Subsidiary for any reason, such Participant shall not then be employed by, or otherwise engaged with, the Corporation or a Subsidiary, the Corporation and the Participant shall have the respective rights at any time during the period of 45 days,after the date of such termination to exercise the Call and Put. The Put and Call may be exercised only by giving written notice of such exercise within such 45 day period to the Corporation, in the case of the exercise of the Put, or to the Participant (or his personal representative, as the case may be), in the case of the exercise of the Call. The closing of the purchase pursuant to the exercise of the Put or Call shall take place within 60 days after the notice was given. If neither the Put nor the Call are exercised, the Common Stock shall remain subject to the provision of Section VIII(h). The Committee, in its discretion, provide in an Award Agreement for a longer or shorter exercise period for the Put and/or Call. The Put and Call shall expire and not be exercisable on or following the IPO Date. (h) Right of First Refusal. Prior to the IPO Date, the holder of Common Stock received (directly or indirectly) upon the exercise of an Award shall not transfer or sell any of such Common Stock except pursuant to a bona fide written offer to purchase such shares for an all cash purchase price payable in full at closing and only after such shares shall have first been offered to the Corporation pursuant to this Section VIII(h). The transfer of any Common Stock in contravention of the provisions of this Section VIII(h) shall be null and void, and the transferee of such Common Stock shall not be entitled to any voting, dividend or other rights with respect to such Common Stock. If prior to the IPO Date, a holder of Common Stock desires to sell any or all of his Common Stock which, other than as a result of the provisions of this Section, would be transferable, pursuant to a bona fide written offer from a third party to purchase such Common Stock for a cash purchase price payable in full at closing, then the selling holder shall give notice to the Corporation stating the terms of the third party offer. For a period of 60 days after such notice has been given to the Corporation, the Corporation shall have the option to purchase all (but not less than all) of the Common Stock subject to the third party offer at the price per share set forth in the third party offer. The Corporation's option may be exercised only by notice of such exercise to the selling holder within such 60-day period. The closing of the purchase pursuant to the exercise of the Corporation's option shall take place within 60 days after the notice was given. 6 (i) Restrictions on Sale and Exercise. With respect to officers and directors for purposes of Section 16 of the Exchange Act, and if required to comply with rules promulgated thereunder, Common Stock acquired pursuant to the exercise of an Award may not be sold for at least six months from the grant of the Award. (j) Maximum Awards. Subject to adjustment in accordance with the provisions of Section X, the maximum number of shares of Common Stock that may be issued to any single Participant pursuant to Awards over the life of this Plan is 1,000. (k) Change in Control. In the event of a Change in Control, all Awards shall vest, become immediately exercisable and/or cease to be subject to any risk of forfeiture, as the case may be. (l) Additional Restrictions. The Committee may include provisions in an Award Agreement which would limit the right of a Participant with respect to an Award in the event that the Participant conducts himself in a manner adversely affecting the Company or engages in other activities proscribed in the Award Agreement. IX. Termination, Modification and Amendments (a) The Plan may from time to time be terminated, modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Corporation present or represented and entitled to vote at a duly held stockholders meeting. (b) The Board may at any time terminate the Plan or from time to time make such modifications or amendments of the Plan as it may deem advisable; provided, however, that the Board shall not make any material amendments to the Plan which require stockholder approval under applicable law, rule or regulation unless the same shall be approved by the requisite vote of the Corporation's stockholders. (c) No termination, modification or amendment of the Plan may adversely affect the rights conferred by an Award without the consent of the recipient thereof. 7 X. Recapitalization The aggregate number of shares of Common Stock as to which Awards may be granted to Participants, the number of shares thereof covered by each outstanding Award, and the price per share thereof in each such Award, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Corporation, or other change in corporate or capital structure; provided, however, that any fractional shares resulting from any such adjustment shall be eliminated. The Committee may also make the foregoing changes and any other changes, including changes in the classes of securities available, to the extent it is deemed necessary or desirable to preserve the intended benefits of the Plan for the Corporation and the Participants in the event of any other reorganization, recapitalization, merger, consolidation, spin-off, extraordinary dividend or other distribution or similar transaction. XI. No Right to Employment No person shall have any claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of, or in the other relationship with, the Corporation or a Subsidiary. Further, the Corporation and each Subsidiary expressly reserve the right at any time to dismiss a Participant free from any liability, or any claim under the Plan, except as provided herein or in any Award Agreement issued hereunder. XII. Governing Law To the extent that federal laws do not otherwise control, the Plan shall be construed in accordance with and governed by the laws of the State of Texas. XIII. Savings Clause This Plan is intended to comply in all aspects with applicable laws and regulations, including, with respect to those Executives who are officers or directors for purposes of Section 16 of the Exchange Act, Rule 16b-3 under the Exchange Act. In case any one more of the provisions of this Plan shall be held invalid, illegal or unenforceable in any respect under applicable law and regulation (including Rule 16b-3), the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalid, illegal or unenforceable provision shall be deemed null and void; however, to the extent permissible by law, any provision which could be deemed null and void shall first be construed, interpreted or revised retroactively to permit this Plan to be construed in compliance with all applicable laws (including Rule 16b-3) so as to foster the intent of this Plan. XIV. Effective Date and Term The Plan shall become effective upon adoption by the Board, subject to approval of the Plan by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Company entitled to vote thereon within one year following adoption of the Plan by the Board. All Awards granted prior to such approval by the stockholders shall be subject to such approval and shall not be exercisable and/or transferable prior thereto. In the event such approval is not obtained within such one-year period the Plan and all Awards granted thereunder shall be null and void. The Plan shall terminate on the tenth anniversary of the date on which it becomes effective. No Award shall be granted after the termination of the Plan. 9 EX-10.10 18 EXHIBIT 10.10 ANNUAL BONUS PLAN OpTel, Inc. August 21, 1996 PLAN OBJECTIVE - -------------- The objective of the Plan is to encourage Senior Management of OpTel, Inc. to take such decisions and measures as are needed to achieve and exceed the objectives defined in the annual business plans of OpTel, Inc., to compensate them on the basis of the results obtained over a financial year and, where these results justify such action, to provide cash compensation that is competitive when compared with the market. DEFINITIONS - ----------- The following definitions are applicable for the purposes of the present Plan: "Base salary" means such compensation as is earned for services rendered to the Corporation, but does not include bonuses, fees, director's fees, or incentives; "Board" means the OpTel, Inc. Board of Directors; "Committee" means the compensation committee of the OpTel, Inc. Board; "Corporation" means OpTel, Inc. "Economic value created (EVC)" means the amount of Net operating profit after taxes (NOPAT) (as defined below) less the Cost of capital (as defined below) for OpTel, Inc. where "the Net operating profit after tax (NOPAT)" means the operating income before deduction of interest expenses, annual bonuses and performance awards, but after deduction of taxes calculated at an annually set rate and after deduction of depreciation; and "cost of capital" means the amount derived from the Weighted average cost of capital (WACC) (as defined below) expressed as a rate multiplied by the amount of the Average net assets used (as defined below); where "the Weighted average cost of capital (WACC)" means the rate, expressed as a percentage, derived from the after-tax cost of the debt plus the cost of equity, both elements being proportionate to their importance in the target capital structure (at market value) of OpTel, Inc. This rate is set annually for the following financial year; and "the Average net assets used" means the assets calculated by dividing by 12 the aggregate of the 12 monthly amounts of the net assets used as determined by the Finance department of OpTel, Inc. "Officer" means any member of the Senior Management of OpTel, Inc. designated by the Committee as an officer. "Plan" means the annual bonus plan for Senior Management of OpTel, Inc. The "Senior Management" of OpTel, Inc. means generally, the Chief Executive Officer, Chief Operating Officer and the Vice Presidents reporting directly to the Chief Executive Officer or the Chief Operating Officer. ADMINISTRATION - -------------- The Plan is administered by the Committee which has decision-making authority with respect to determining: - - which Officers participate in the Plan; - - the (target) and (threshold) levels of the economic value added, and the EVC interval used to determine the bonus; - - bonus payment method; - - provisions applicable in case of resignation, dismissal, Retirement, disability or death of an Officer; - - all other rules or provisions required for the administration of the Plan. PERFORMANCE - ----------- The performance criteria used to determine the bonus payable to OpTel Officers are defined according to the EVC objectives applicable to OpTel. The objectives are approved by the Committee at the beginning of each financial year and based on the annual business plans of OpTel, Inc. BONUS LEVEL - ----------- The target bonus is 25% of the annual Base salary in force at the beginning of the financial year (September 1). 2 DETERMINATION OF BONUS - ---------------------- The bonus is determined at the end of the financial year and depends on the extent to which the objectives set at the beginning of the year have been achieved, using the following formula: Bonus = SL 25% X 1+ Real EVC-Target EVC ------------------- EVC Interval where SAL = Annual Base salary in force on September 1 that begins the financial year. Real EVC = The Economic value created by OpTel, Inc. as calculated at the end of the financial year. Target EVC = Anticipated Economic value created based on the annual business plans of OpTel, Inc. EVC Interval = A variable that will determine the slope of the bonus earned as established by the Committee at the beginning of each financial year. The bonus is zero if the real EVC over a financial year is less than the minimum EVC level (threshold) determined at the beginning of each financial year. The maximum bonus equals 4 times the target bonus (or 100% of the annual Base salary of the Officer). PAYMENT OF THE BONUS - -------------------- The bonus earned for a given financial year is paid in cash after year-end and after statutory deductions. Payment is made as recommended by the Committee, as soon as the financial results of the Corporation are known and approved by the Board and the EVC measures are calculated. The Committee recommendation must comply with the spirit of the annual business plan of OpTel, Inc. TERMINATION OF EMPLOYMENT, RETIREMENT AND DISABILITY - ---------------------------------------------------- o Resignation or dismissal 3 If the Officer voluntarily resigns or if his/her employment is terminated by the Corporation for cause or for any other reason linked to his/her performance (dismissal), no bonus is payable for the year of termination of employment. o Resignation triggered by the Corporation, Retirement or disability If the resignation of the Officer is triggered by the Corporation or if his/her employment is terminated following retirement or if the Officer suffers from total and permanent disability, the bonus is determined in proportion to the number of completed months of participation at the date of termination of employment, Retirement or disability unless the Committee should decide otherwise, in which case the bonus is determined at the discretion of the Committee. o Death Upon the death of the Officer, the bonus is determined in proportion to the number of completed months of participation at the date of death. NEW PARTICIPANT --------------- If an Officer begins to participate in the Plan during the first six months of a financial year, the bonus is determined in proportion to the number of completed months of participation during that financial year. If an Officer becomes a participant in the Plan during the last six months of a financial year, participation will be deferred until the beginning of the following year. IMPLEMENTATION - -------------- The CEO of OpTel, Inc. shall: o prior to August 31 of each year, provide the Committee with the list of Officers participating in the Plan for the upcoming financial year, the objectives (targets, threshold and interval) of economic value added that will serve to determine the amount of bonus for the upcoming financial year. The Committee shall: o prior to September 30 of each year, approve the list of Officers enrolled in the Plan and the EVC objectives that will be used to determine the amount of bonus for the upcoming financial year. 4 AMENDMENT AND CANCELLATION - -------------------------- The Committee may at any time and where necessary amend, suspend or cancel the Plan, in whole or in part. No amendment, suspension or cancellation of the Plan shall impact negatively on the rights accrued under the terms of the Plan. Non-assignability and non-transferability No right vested in the Officer with regard to his/her participation in the Plan shall be assigned or transferred by the Officer, except for such sums as are earned upon death under the terms of a will or under the terms of the legal provisions governing estates. 5 EX-10 19 EXHIBIT 10.11 APPROVED AS OF AUGUST 27, 1996 MEDIUM-TERM PERFORMANCE PLAN FOR SENIOR MANAGEMENT OF OpTel, Inc. AND SUBSIDIARIES PLAN OBJECTIVE The objective of the Plan is to encourage Senior Management of OpTel, Inc. to take such decisions and measures as are needed to achieve and exceed the objectives defined in the strategic annual business plans of OpTel, Inc., to compensate them on the basis of the results obtained over a three-year period and, where these results justify such action, to provide a total compensation package that is competitive when compared to market. DEFINITIONS The following definitions are applicable for the purposes of the present Plan: "Base salary" means such compensation that is earned for services rendered to the Corporation, but not including bonuses, fees, director's fees, or incentives; "Board" means the OpTel, Inc. Board of Directors; "Committee" means the compensation committee of the OpTel, Inc. Board; "Corporation" means OpTel, Inc. "EDITDA" means the consolidated earnings of the Corporation and its subsidiaries before interest, taxes, depreciation and amortization, calculated in accordance with the Corporations's accounting practices. "Officer" means any member of the Senior Management of OpTel, Inc. designated by the Committee as an officer. "Plan" means the medium-term performance plan for Senior Management of OpTel, Inc. "Senior Management" of OpTel, Inc. means the CEO, COO and Vice Presidents reporting directly to the CEO or COO. "Total and permanent disability" means that the Officer is, in the opinion of the Committee and on medical advice, unable to fulfill his/her functions for a prolonged period of time and that there is no indication that in the long term the said Officer will be able to take up his/her work again; ADMINISTRATION The Plan is administered by the Committee which has decision-making authority with respect to determining: 1 - - which Officers participate in the Plan; - - performance levels (threshold, acceptable, targeted, superior, exceptional) used to determine the performance award; - - performance factors used to determine the performance award; - - performance award payment methods; - - provisions applicable in cases of resignation, dismissal, Retirement, disablement or death of an officer; - - all other rules or provisions required for the administration of the Plan. PERFORMANCE CYCLE An Officer may earn a performance award based on his/her performance over a cycle of three consecutive years. The first performance cycle begins on September 1, 1996 and a new cycle will begin each year so that it will be possible for the Officer to receive a performance award every year as of the end of the first cycle. PERFORMANCE The performance criteria used to determine the performance award payable to OpTel, Inc. Officers are defined according to the EBITDA objectives applicable to OpTel, Inc. The objectives are approved by the Committee at the beginning of each cycle and based on the strategic business plans of OpTel, Inc. MEASUREMENT OF PERFORMANCE AND PERFORMANCE FACTORS The performance of Officers is measured two-dimensionally: - - the creation of nominal EBITDA during the performance cycle; and - - the growth of the EBITDA added during the performance cycle. Five performance levels are determined within each dimension, resulting in a performance factor matrix. This matrix establishes a performance threshold that corresponds to a zero performance factor and an exceptional performance level that corresponds to a performance factor of 2.5. 2 - - creation of EBITDA The performance levels related to this dimension are expressed as a nominal value and correspond to the sum of the EBITDA that has been earned during the performance cycle. Where a performance is located somewhere between two levels, the performance factor is established on a pro rata basis. At the beginning of each cycle, the required level of EBITDA added is approved by the Committee for each performance level: threshold, acceptable, target, superior, exceptional. These levels will remain unchanged during the whole cycle unless the Committee determines that certain changes are appropriate. Once approved by the Committee, these changes must be documented (reasons for changes and revised objectives). For example, major changes to the Corporation's investment plans might be considered as circumstances justifying such changes. - - growth of the EBITDA. The levels of performance relative to this dimension are established on the basis of the following points system: If #point otherwise #point A is greater than 0 +1 -1 B is greater than 0 +1 -1 A+B is greater than 0 +1 -1 B is greater than A +1 -1 where: A= Variation in the nominal EBITDA added between the second and first year of the performance cycle. B= Variation in the nominal EBITDA added between the third and second year of the performance cycle. 3 The performance factor matrix that incorporates the two performance measurement dimensions is as follows:
========================================================================================================================== Creation of economic value: (Cumulative EBITDA over 3 years) ========================================================================================================================== Threshold Acceptable Target Superior Exceptional ========================================================================================================================== Growth in 4 .25 1.25 1.5 2.00 2.50 ------------------------------------------------------------------------------------------------------------ the EBITDA 3 0 1.00 1.25 1.50 2.0 ------------------------------------------------------------------------------------------------------------ (number of 2 0 .75 1.00 1.25 1.50 ------------------------------------------------------------------------------------------------------------ points) 1 0 .50 .75 1.00 1.25 ------------------------------------------------------------------------------------------------------------ 0 or 0 0 .5 .75 1.00 less ==========================================================================================================================
A matrix presenting different performance factors may be approved at the beginning of the cycle, if the Committee deems this appropriate. LEVEL OF PERFORMANCE The target performance award is 20% of the annual Base salary in force at the beginning of the last year of the performance cycle. DETERMINATION OF THE PERFORMANCE AWARD The performance award is determined at the end of the performance cycle and depends on the extent to which the objectives determined at the beginning of the cycle have been achieved, using the following formula: Performance award = SAL X 20% X FAC where: SAL = Annual Base salary in force on September 1 of the last year of the cycle. FAC = Performance factor defined on the basis of the performance factor matrix. 4 PAYMENT OF THE PERFORMANCE AWARD The performance award earned for a given cycle is paid in cash after the end of the cycle and after statutory deductions, as soon as the financial results of the Corporation are known and approved by the Board and the EVC measures are calculated, in compliance with the Committee's recommendations. TERMINATION OF EMPLOYMENT, RETIREMENT AND DISABILITY Resignation or dismissal If the Officer voluntarily resigns or if his/her employment is terminated by the Corporation for cause or for any other reason linked to his/her performance (dismissal), the Officer forfeits all performance awards with respect to cycles that have not been completed at the date of termination of employment, unless the Committee decides otherwise, in which case the performance award is determined at the discretion of the Committee. Resignation triggered by the Corporation, Retirement or disability If the resignation of the Officer is triggered by the Corporation or if his/her employment is terminated following Retirement or if the Officer suffers from Total and permanent disability, the Officer ceases to participate in the Plan and the performance awards with respect to the incomplete cycles are determined as follows: If the event (resignation triggered by the Corporation, Retirement or disability) takes effect during the first year of the cycle, no performance award is paid for that cycle. If the event takes place during the second or third year of the cycle, eligibility for a performance award with respect to these cycles shall continue to be applicable and the performance awards are determined at the end of the respective cycles as if the Officer had continued to participate in the Plan until the end of the said cycles. Death If the Officer dies during the first year of a cycle, no performance award is paid for that cycle. If the Officer dies in the second or third year of a cycle, the performance awards for these cycles are determined at the end of the year in which the Officer died, and are based on the performance realized over the two or three-year cycle, as the case may be. The performance factor matrix where performance levels are redefined for a 5 two-year period. The performance achieved over the three-year period continues to be determined on the basis of the performance factor matrix set up at the beginning of the cycle. In order to accelerate payment of the award, the results of a cycle may be estimated. If the Officer dies subsequent to a resignation triggered by the Corporation, or after Retirement, or after the beginning of a period of Total and permanent disability, the same rules as those provided for under the sub-heading "Resignation triggered by the Corporation, Retirement or disability" apply. NEW PARTICIPANT If an Officer begins to participate in the Plan during the first six months of an ongoing cycle, his/her participation in the said cycle shall be presumed to have begun on the first day of the cycle in question. If an Officer becomes a participant in the Plan during the last six months of the first year of an ongoing cycle, his participation is deferred until the beginning of the following cycle. IMPLEMENTATION The CEO of OpTel, Inc. shall: prior to August 31 of each year, provide the Committee with the list of Officers participating in the Plan for the three-year cycle that begins on the following September 1 and the performance levels (threshold, acceptable, target, superior, exceptional) used to determine the performance award relative to the three-year cycle beginning on the following September 1. The Committee shall: prior to September 30 of each year, approve the list of Officers enrolled in the Plan and the performance levels used to determine the performance award for the three-year cycle beginning on the following September 1. 6 Amendment and cancellation The Committee may at any time and where necessary amend, suspend or cancel the Plan, in whole or in part. No amendment, suspension or cancellation of the Plan shall impact negatively on the rights accrued under the terms of the plan. Non-assignability and non-transferability No right vested in the Officer with regard to his/her participation in the Plan shall be assigned or transferred by the Officer, except for such sums as are earned upon death under the terms of a will or under the terms of the legal provisions governing estates. Performance levels of EBITDA for Medium Term Performance Plan First Cycle - F97-99 Performance Level Amount - ----------------- ------ Threshold $36,800,000 Acceptable 39,100,000 Target 41,400,000 Superior 46,000,000 Exceptional 54,600,000 7 EX-10.12 20 EXHIBIT 10.12 Exhibit 10.12 [LOGO] Le Groupe Videotron Itee Note de service --------------- - -------------------------------------------------------------------------------- To: Louis Brunel From: Claude Chagnon Date: November 15, 1996 Subject: Appointment of Louis Brunel as President and CEO of OpTel Inc. - -------------------------------------------------------------------------------- Further to your permanent appointment as President and Chief Executive Officer of OpTel Inc., I am pleased to confirm our discussion of Monday, October 28, 1996. Your compensation will be as follows: o Your basic annual salary will be US$275,000, effective November 1, 1996. This salary will be subject to annual review on the basis of your performance, as of September 1, 1997. o You will receive OpTel stock purchase options in the amount of five times your basic salary, under the stock purchase option plan recently approved by the Compensation Committee. Vesting will take place over a five-year period beginning September 1, 1995, at a rate of 25% per year as of 24 months following September 1, 1995. o You will be included in the annual and medium-term (3 year) bonus plan, as defined in the GVL executive compensation policy, adopted in September 1995. o You will receive an automobile, with a maximum pre-tax value of US$60,000, and all related expenses, for the performance of your duties. o Pension plan You will continue to belong to the GVL executive pension plan. Canadian legislation allows us to credit three years to an executive transferred abroad to work for the same company. If you remain in the United States for more than three years, we will use the GVL executive supplementary plan to cover your contribution for these extra years. The base salary used for calculations at the time of retirement will take account of your years of service in Canada and the United States. o Since there will be no moving costs, we agree that OpTel will pay an equivalent allowance for renting an apartment in Dallas, of up to US$2,500 per month. Appointment of Louis Brunel as President and CEO of OpTel Inc. Page 2 - -------------------------------------------------------------------------------- o We are prepared to pay an education allowance, if your children elect to enrol at an American university during your time in the United States. This allowance will represent the difference between registration and tuition costs at Canadian and U.S universities. o You will be eligible for the services of a financial advisor to help you prepare your Canadian and U.S. income tax returns. Further to your secondment to OpTel Inc. in Dallas, Texas, for a four-year period, Groupe Videotron Itee agrees that you may at any time return to a position with GVL equivalent to the position you now hold. In such case, your compensation will be the same as that you now receive in Canada, adjusted by a percentage corresponding to the average increase granted to GVL executives during your period abroad. GVL will maintain your full insurance coverage and your pension fund in effect during your stay abroad. Finally, if your employment contract is terminated by OpTel Inc. for any reason other than for cause, you will be entitled to accept the settlement provided by OpTel Inc., i.e. a separation allowance equivalent to two years' salary. If you resign from your position with OpTel Inc., however, the above-mentioned obligations assumed by GVL will of course no longer apply. Yours truly, /s/ Claude Chagnon ---------------------------- Claude Chagnon President & Chief Operating Officer cc: Gilles Dulude EX-10.13 21 EXHIBIT 10.13 Exhibit 10.13 [logo] OpTel The choice is clear. Dallas, January 3, 1997 PRIVATE AND CONFIDENTIAL Mr. Rory O. Cole 4339 Beverly Drive Dallas, TX 75205 Dear Rory. This letter is to memorialize the existing terms of your employment with OpTel, Inc. ("OpTel" or the "Company"), 1. TITLE AND DUTIES You will serve as the Chief Operating Officer of OpTel, Inc. and will have all duties corresponding to this function. You will report directly to the Chief Executive Officer of OpTel, Inc. Your employment will be at the pleasure of the Chief Executive Officer and the Board, subject only to OpTel's obligation to pay you severence as set forth in paragraph 8 below: 2. BASE SALARY Your base salary is $185,000, subject to an annual review on September 1 at the pleasure of the Board. 3. BONUS You shall be entitled to participate in the annual and medium term bonus plans currently approved by the Board of Directors of OpTel and in effect for the Company, as they may be amended or augmented from time to time. 4. VACATION You will be entitled to four fully paid weeks of vacation per year, on a non accrued basis. 1111 W. Mockingbird Lane Dallas, TX 75247 USA Tel: (214) 634-3800 Fax: (214) 634-3383 A Videotron Company [logo] OpTel The choice is clear. 5. STOCK OPTION You shall have the rights set forth in that certain stock option agreement dated November 12, 1996, a copy of which is attached to this letter ("stock agreement"), and under that certain Restated Incentive Stock Option Plan of OpTel dated as of November 12, 1996, as such plan may be amended from time to time. 6. COMPANY CAR The company will provide you with a Company car having a value not to exceed $30,000. The Company will pay for all gas, insurance and maintenance. 7. OTHER BENEFITS You shall be entitled to participate in all employee group benefit plans, such as medical, retirement, insurance and disability plans offered to the senior executives of OpTel. 8. SEVERANCE In the event that OpTel terminates your employment for any reason, OpTel shall pay you a lump sum severance payment equal to one year of your then effective base salary. This payment shall represent the sole payment to be made to you on account of the termination of your employment with OpTel and the Company shall have no further liability to you. 9. MERGER This letter of terms supercedes in all respect any prior agreements, understandings or arrangements with respect to your employment with OpTel or any of its affiliates and represents the sole and entire agreement with respect to the subject matter hereof. Notwithstanding the foregoing, that certain confidentiality agreement executed by you and dated of August 17, 1995 is and shall remain in full force and effect. Nothing stated herein is intended to affect or modify the Stock Agreement. Please sign below to confirm your acceptance and agreement to this letter and its terms and conditions. Very Truly Yours, /s/ Louis Brunel - ------------------------- Louis Brunel President and Chief Executive Officer Accepted and agreed, as of January 3, 1997 by: /s/ Rory O. Cole - ------------------------ Rory O. Cole LB/an Enclosure ISO for Employee OPTION AGREEMENT ---------------- OPTION AGREEMENT, dated as of November 12, 1996, by and between OpTel, Inc. (the "Corporation") and Rory O. Cole (the "Optionee"), residing at 4339 Beverly Drive, Dallas, Texas 75205. WHEREAS, the Corporation has adopted the OpTel, Inc. Restated Incentive Stock Plan (the "Plan"); and WHEREAS, the Compensation Committee of the Board of Directors of the Corporation (the "Committee") has determined that it is desirable and in the best interest of the Corporation to grant to the Optionee a stock option as an incentive for the Optionee to advance the interests of the Corporation. NOW, THEREFORE, the parties agree as follows: 1. Grant of Option. (a) Pursuant to the Plan, a copy of which is attached hereto, and subject to the terms and conditions set forth herein and therein, the Corporation hereby grants to the Optionee the right and option (the "Option") to purchase all or any part of 511.86 shares (the "Option Shares") of the Corporation's Class A Common Stock, $.01 par value per share (the "Common Stock"). (b) The Option is intended (to the extent permitted by applicable law) to qualify as an incentive stock option, as defined in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), to the maximum extent permitted by such Section 422. (c) The grant of the Option shall be subject to the Plan's approval by the shareholders of the Corporation within twelve months of the effective date of the Plan. In the event such approval is withheld, the Option shall become null and void. 2. Purchase Price. The purchase price (the "Purchase Price") of the Option Shares shall be $1,367.56 per share. 3. Time of Exercise; Term. (a) The Option shall become exercisable, on a cumulative basis, as to one-quarter of the Option Shares on the second anniversary of the Relevant Date, and as to an 1 additional one-quarter of the Option Shares on each of the third, fourth and fifth anniversary of the Relevant Date. (b) Subject to the earlier expiration as expressly provided in Paragraph 6 hereof, the Option shall expire and cease to have any force or effect on the tenth anniversary hereof. (c) For purposes of this Paragraph 3, Relevant Date means March 31, 1995. 4. Adjustment Upon Changes in Capitalization. (a) The aggregate number of Option Shares and the Purchase Price shall be appropriately adjusted by the Committee for any increase or decrease in the number of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Corporation, or other change in corporate or capital structure. (b) Any adjustment under this Paragraph 4 in the number of Option Shares shall apply proportionately to only the unexercised portion of the Option. If fractions of a share would result from any such adjustment, the adjustment shall be revised to the next lower whole number of shares. 5. Method of Exercising Option and Withholding. (a) The Option shall be exercised by the delivery by the Optionee to the Corporation at its principal office (or at such other address as may be established by the Committee) of written notice of the number of Option Shares with respect to which the Option is exercised, accompanied by payment in full of the aggregate Purchase Price for such Option Shares. Payment for such Option Shares shall be made (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Corporation, by money transfers or direct account debits; (ii) through the delivery or deemed delivery based on attestation to the ownership of shares of Common Stock with a fair market value equal to the total payment due; (iii) pursuant to a broker-assisted "cashless exercise" program if established by the Corporation; or (iv) by a combination of the methods described in (i) through (iii) above. (b) The Corporation's obligation to deliver shares of Common Stock upon the exercise of the Option shall be subject to the payment by the Optionee of any applicable federal, state and local withholding tax. The Corporation shall, to the extent permitted by law, have the right to deduct from any payment of any kind otherwise due to the Optionee any federal, state or local taxes required to be withheld with respect to such payment. Subject to the right of the Committee to disapprove any such election and require the withholding tax in cash, the Optionee shall have the right to elect to pay the withholding 2 tax with shares of Common Stock to be received upon exercise of the Option or which are otherwise owned by the Optionee. Any election to pay withholding taxes with stock shall be irrevocable once made. 6. Disability, Death or Termination of Employment; Change in Control. (a) If the employment of the Optionee with the Corporation or a Subsidiary (as defined in the Plan) shall be terminated for "Cause" (as hereinafter defined), and immediately after such termination the Optionee shall not then be employed by the Corporation or a Subsidiary, the Option to the extent not theretofore exercised shall expire forthwith. For purposes of this Option Agreement, "Cause" shall mean "Cause" as defined in any employment agreement ("Employment Agreement") between the Optionee and his employer, and, in the absence of an Employment Agreement or in the absence of a definition of "Cause" in such Employment Agreement, "Cause" shall mean (i) any continued failure by the Optionee to obey the reasonable instructions of the person to whom he reports, (ii) continued neglect by the Optionee of his duties and obligations as an employee of his employer, or a failure to perform such duties and obligations to the reasonable satisfaction of the person to whom he reports, (iii) willful misconduct of the Optionee or other actions in bad faith by the Optionee which are to the detriment of the Corporation or a Subsidiary including without limitation conviction of a felony, embezzlement or misappropriation of funds and conviction of any act of fraud or (iv) a breach of any material provision of any Employment Agreement not cured within 10 days after written notice thereof. (b) If the Optionee's employment with the Corporation or a Subsidiary shall terminate other than by reason of death or for Cause, and immediately after such termination the Optionee shall not then be employed by the Corporation or a Subsidiary, the Option may be exercised at any time within three months after such termination, subject to the provisions of subparagraph (d) of this Paragraph 6. The Option, to the extent unexercised, shall expire on the day three months after the termination of the Optionee's employment with his employer. (c) If the Optionee dies (i) while employed by the Corporation or a Subsidiary or (ii) within three months after the termination of his employment other than for Cause, the Option may be exercised at any time within six months after the Optionee's death, subject to the provisions of subparagraph (d) of this Paragraph 6. The Option, to the extent unexercised, shall expire on the date six months after the Optionee's death. (d) The Option may not be exercised pursuant to this Paragraph 6 except to the extent that the Optionee was entitled to exercise the Option at the time of the termination of his employment, or at the time of his death, and in any event may not be exercised on and after the tenth anniversary of the date hereof. (e) In the event of a Change in Control (as hereinafter defined) while the Optionee is employed with the Corporation or a Subsidiary, the Option to the extent not 3 then exercisable shall thereupon become exercisable. For purposes of this subparagraph (e), "Change in Control" means. (i) Any person (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than Le Groupe Videotron Ltee or any subsidiary ("GVL") shall have acquired (by any means) the right (x) through the Beneficial Ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of any voting securities of the Corporation or (y) by contract, agreement or similar understanding or (z) any combination of (x) and (y), to elect a majority of the Board; provided that a Change of Control under this subparagraph (e)(i) shall not be deemed to have occurred unless, and until the first date that, GVL shall not actually exercise control and a legal right to manage the day-to-day operations of the Corporation ("Actual Control"); or (ii) The approval by the stockholders of the Corporation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation ("Corporate Transaction"); excluding, however, such a Corporate Transaction pursuant to which (1) all or substantially all of the individuals and entities who are the Beneficial Owners, respectively, of the then outstanding common stock ("Outstanding Corporation Common Stock") and of the then outstanding common stock entitled to vote generally in the election of Directors ("Outstanding Corporation Voting Securities") immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 50% of, respectively, the outstanding common stock, and the combined voting power of the then outstanding common stock entitled to vote generally in the election of directors, as the case may be, of the company resulting from such Corporate Transaction (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) is substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, and (2) individuals who were immediately prior to the effective date of the Corporate Transaction members of the Board will constitute at least a majority of the board of directors of the corporation resulting from such Corporate Transaction; provided that a Change in Control under this subparagraph (e)(ii) shall not be deemed to occur unless, and until the first date that, GVL shall not exercise Actual Control; or (iii) The approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation. 4 7. Transfer and Investment Representation. (a) The Option is not transferable otherwise than by will or the laws of descent and distribution, and the Option may be exercised during the Optionee's lifetime only by the Optionee Any attempt to transfer the Option in contravention of this subparagraph (a) is void ab initio. The Option shall not be subject to execution, attachment or other process. (b) The Optionee represents that, unless at the time of exercise of the Option the Option Shares are registered under the Securities Act of 1933, any and all Option Shares purchased hereunder shall be acquired for investment only and without a view to the resale or distribution thereof. If the Option Shares are not so registered, certificates for the Option Shares shall bear a legend reciting the fact that such Option Shares may only be transferred pursuant to an effective registration statement under the Securities Act of 1933 or an opinion of counsel to the Corporation (or an opinion of counsel to the Optionee reasonably satisfactory to the Corporation) that such registration is not required. The Corporation may also issue "stop transfer" instructions with respect to such Option Shares while they are subject to such restrictions. 8. Put and Call. If after the termination of the Optionee's employment with the Corporation or a Subsidiary for any reason, such Optionee shall not then be employed by, or otherwise engaged with, the Corporation or a Subsidiary, (i) the Corporation shall have the right to purchase all (but not less than all) of the Common Stock acquired by the Optionee upon the exercise of the Option (the "Call") and (ii) the Optionee shall have the right to require the Corporation to purchase all (but not less than all) of the Common Stock acquired by the Optionee upon the exercise of the Option (the "Put"). The purchase price per share of Common Stock upon the exercise of the Put or Call shall be equal to the Fair Market Value (as defined in the Plan) of a share of Common Stock as of the day on which the Optionee's employment is terminated. The Put and Call may be exercised at any time during the period of 90 days after the date of such termination. The Put and Call may be exercised only by giving written notice of such exercise within such 90 day period to the Corporation, in the case of the exercise of the Put, or to the Optionee (or his personal representative, as the case may be), in the case of the exercise of the Call. The closing of the purchase pursuant to the exercise of the Put or Call shall take place within 60 days after the notice was given. If neither the Put nor the Call are exercised, the Common Stock shall remain subject to the provisions of Paragraph 9. The Put and Call shall expire and not be exercisable on or following the first date on which the Corporation has an effective registration statement under the Securities Act of 1933, as amended, covering the sale by the Corporation of its Common Stock (the "IPO Date"). 5 9. Right of First Refusal. Prior to the IPO Date, the holder of Common Stock received (directly or indirectly) upon the exercise the Option shall not transfer or sell any of such Common Stock except pursuant to a bona fide written offer to purchase such shares for an all cash purchase price payable in full at closing and only after such, shares shall have first been offered to the Corporation pursuant to this Paragraph 9. The transfer of any Common Stock in contravention of the provisions of this Paragraph 9 shall be null and void, and the transferee of such Common Stock shall not be entitled to any voting, dividend or other rights with respect to such Common Stock. If prior to the IPO Date, a holder of Common Stock desires to sell any or all of his Common Stock which, other than as a result of the provisions of this Paragraph 9, would be transferable, pursuant to a bona fide written offer from a third party to purchase such Common Stock for a cash purchase price payable in full at closing, then the selling holder shall give notice to the Corporation stating the terms of the third party offer. For a period of 60 days after such notice has been given to the Corporation, the Corporation shall have the option to purchase all (but not less than all) of the Common Stock subject to the third party offer at the price per share set forth in the third party offer. The Corporation's option may be exercised only by notice of such exercise to the selling holder within such 60-day period, The closing of the purchase pursuant to the exercise of the Corporation's option shall take place within 60 days after the notice was given. If the Corporation does not provide an exercise notice within the 60-day period, the holder of the Common Stock may sell the shares within 60 days thereafter to the third party on the terms previously disclosed to the Corporation. If the Common Stock is not sold during such 60-day period to the third party, the Common Stock shall remain subject to the provisions of this Paragraph 9. 10. No Rights in Option Shares. The Optionee shall have none of the rights of a shareholder with respect to the Option Shares unless and until issued to him upon exercise of the Option. 11. No Right to Employment. Nothing contained herein shall be deemed to center upon the Optionee any right to remain as an employee of the Corporation or a Subsidiary. Further, the Corporation and each Subsidiary expressly reserve the right at any time to dismiss Optionee free ftom any liability or any claim under the Plan, except as provided herein or in the Plan. 12. Governing Law/Jurisdiction. This Option Agreement was executed in the State of Texas and shall be governed by and construed in accordance with the laws of the State of Texas without reference to principles of conflict of laws. 6 13. Resolution of Disputes. Any disputes arising under or in connection with this Option Agreement shall be resolved by binding arbitration before a single arbitrator, to be held in Texas in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator shall be final and subject to appeal only to the extent permitted by law. Each party shall bear its or his own expenses incurred in connection with any arbitration; provided, however, the cost of the arbitration, including without limitation, reasonable attorneys' fees of the Optionee, shall be borne by the Corporation in the event the Optionee is the prevailing party in the arbitration. Anything to the contrary notwithstanding, each party hereto has the right to proceed with a court action for injunctive relief or relief from violations of law not within the jurisdiction of an arbitrator. 14. Miscellaneous. This Option Agreement cannot be changed or terminated orally. This Option Agreement and the Plan contain the entire agreement between the parties relating to the subject matter hereof. The paragraph headings herein are intended for reference only and shall not affect the interpretation hereof. IN WITNESS WHEREOF, the parties have executed this Option Agreement as of the day and year first above written. /s/ Rory O. Cole ------------------------------------ Rory O. Cole, Optionee OpTel, Inc. a Delaware corporation By: /s/ Louis Brunel --------------------------------- Name: Louis Brunel ---------------------------- Title: President & CEO --------------------------- 7 EX-10.14 22 EXHIBIT 10.14 Exhibit 10.14 [LOGO] September 15, 1995 VIA FACSIMILE Mr. Michael Katzenstein 336 Central Park West - Apt. 9F New York, NY 10025 Dear Michael: I am pleased to confirm our offer of employment as Vice President, General Counsel and Corporate Secretary at a weekly base salary of $3,261.00, for an initial term of three years. In that capacity, you will report to the Chief Executive Officer and be required to work closely with the Vice President of Legal Affairs of Le Groupe Videotron Ltee, our parent company. Your compensation package will include: o Long term stock option plan - to be established at OpTel Inc. level during the 1995 calendar year. You would be entitled to an up-front grant of 4 times your base annual salary, to be vested in line with the Company Stock Incentive Program, i.e. 25% vesting at the end of the second year and the remaining amount vested evenly over the 3rd, 4th and 5th years of service. o Participation in annual bonus program of 25% based upon accomplishment of identified performance goals and objectives of OpTel Inc. This bonus may reach up to 100% of your base salary depending on OpTel's results. o Participation of 20% to 50% of your base salary in a three year bonus program based on achievement of value added creation, goals of OpTel Inc. o A company car will be provided to you with a value not to exceed $30,000.00. The insurance and maintenance will be paid by the company. The fuel cost will be paid by you. o We will pay you a one-time signing bonus of $40,000 payable within 30 days of your employment date. 1111 W. Mockingbird Lane Dallas, TX 75247 USA Tel: (214) 634-3800 Fax: (214) 634-3838 A Videotron Company [LOGO] Mr. Michael Katzenstein Page two September 15, 1995 o A comprehensive benefits package is available to you, including a 401(k) plan, Medical, Dental and Life Insurance, Short and Long Term Disability, Employee Assistance Program, Section 125 "FlexPlan" (overview of benefits presentation made to employees attached). o All other terms and conditions consistent with the same executive level at OpTel. o Relocation assistance as outlined in the attached enclosures. This offer is contingent upon your passing OpTel's required pre-employment drug test for controlled substances, a background check and signing the attached Confidentiality and Non-Disclosure Agreement. The Immigration Reform and Control Act of 1986 requires that employers verify the employment eligibility and identification of all employees hired after November 6, 1986. Accordingly, on your first day of employment, you will be asked to show a company representative the documents identified in Attachment "A" (enclosed) and sign a statement that you are lawfully authorized to work in the United States and that the documents you have presented are genuine and relate to you. Also, please bring a copy of your birth certificate and a copy of your spouse's (if applicable) for benefits purposes. If you find these terms acceptable, please indicate your acceptance by signing below and return a copy of this letter and a completed application (enclosed) to the attention of Mr. Denny French, Human Resources Consultant. I look forward to you joining the OpTel team and feel confident that your background, experience, and leadership will make a significant contribution to OpTel's success. This offer is open for acceptance until October 5, 1995. Sincerely, /s/ Rory O. Cole - ------------------ Rory O. Cole Michael Katzenstein Chief Operating Officer ROC/lgs A Videotron Company EX-10.15 23 EXHIBIT 10.15 Exhibit 10.15 300, avenue Viger Est, Montreal (Quebec) Videotron Canada International Ltee H2X 3W4 Telephone: (514) 281-1232 Telecopieur: (514) 985-8420 Montreal, 31 January 1995 Mr. Julian Riches Director Financial Planning VIDEOTRON HOLDINGS, Plc Videotron House 76 Hammersmith Road London, W14 8UD U.K. Dear Julian: Following our recent discussions, I confirm, as listed below, the terms of your Offer of Employment with our Videotron subsidiary in the United States. TITLE: Chief Financial Officer ANNUAL SALARY: U.S. $130,000 AUTOMOBILE ALLOWANCE: U.S. $500/month HOLIDAYS/VACATIONS: 4 weeks TERM: 3 years o Short Term Incentive Bonus Plan of up to 30% of salary per annum dependent upon achievement of agreed upon goals and objectives o Participation in incentive Stock Plan of OpTel, Inc. o Reimbursement of all out-of-pocket relocation costs including storage and temporary housing of up to 60 days o Two round trip airline tickets per year for you and your wife to visit England -2- o Notice period of one year base salary and all reasonable relocation costs to return to the U.K. For your information, I am working on obtaining a Work Permit for you and your wife. Should you have any questions and/or comments, please do not hesitate to contact me or Ada, she will know how to reach me. If the above terms are acceptable to you, please sign the offer and return it to my attention, at your earliest convenience. Sincerely, /s/ Rory O. Cole /s/ Julian M. Riches --------------------------- ---------------------- Rory O. Cole Julian M. Riches Vice President New Market Development EX-10.16 24 EXHIBIT 10.16 Exhibit 10.16 300, avenue Viger Est, Montreal (Quebec) Videotron Canada International Ltee H2X 3W4 Telephone: (514) 281-1232 Telecopieur: (514) 985-8420 Montreal, February 8 1995 SENT VIA FACSIMILE - ------------------ Mr. William M. O'Neil 53A Primrose Gardens Belsize Park, London NW3 4UL U.K. Dear William: Following our recent discussions, I confirm, as listed below, the terms of your Offer of Employment with our Videotron subsidiary in the United States. TITLE: Vice President and Regional Manager Southern California and Arizona ANNUAL SALARY: U.S. $120,000 o This annual salary will be revisited based on your performance after six months. AUTOMOBILE ALLOWANCE: U.S. $500.00/month o Short Term Incentive Bonus Plan of up to 30% of your salary per annum dependent upon achievement of agreed upon goals and objectives. For the remainder of 1995, your bonus will be prorated and will be dependent upon achievement of agreed upon goals and objectives. o Participation in incentive Stock Plan of OpTel, Inc. o Reimbursement of all out-of-pocket relocation costs o Benefits consistent with those provided to other Senior Executives of the company. -2- Should you have any questions and/or for comments, please do not hesitate to Contact me. If the above terms are acceptable to you, please sign the offer and return it to my attention, at your earliest convenience. Sincerely, /s/ Rory O. Cole /s/ William M. O'Neil - -------------------- ---------------------------- Rory O. Cole William M. O'Neil Vice President New Market Development EX-10.17 25 SEPARATION AND CONSULTING AGREEMENT SEPARATION AND CONSULTING AGREEMENT THIS AGREEMENT (the "Agreement") made and entered into effective as of September 1, 1996, by and between OpTel, Inc., a Delaware corporation with its principal office at 1111 W. Mockingbird Lane, Dallas, Texas 75247 (the "Company"), and James A. Kofalt, an individual residing in Chapel Hill, North Carolina ("Consultant"); WITNESSETH: WHEREAS, Consultant has served as Chairman of the Board of Directors of the Company (the "Board") since April 1, 1995; and WHEREAS, Consultant has resigned from the office of Chairman of the Board, from membership in the Board and from any executive functions with the Company effective as of the date of this Agreement; and WHEREAS, the Company agrees to provide certain consideration to Consultant in exchange for a waiver and release of claims by Consultant; and WHEREAS, the Company desires to secure the further services of Consultant in the capacity as a consultant and advisor to the Company; and WHEREAS, in consideration of such arrangements, the parties hereto are willing to enter into this Agreement upon the terms and conditions herein set forth. NOW, THEREFORE, in consideration of the mutual promises and agreements set forth herein, the parties hereto agree as follows: 1. Engagement as Consultant: Upon the mutual agreement of the parties from time to time, Consultant agrees to serve the Company as an independent contractor under the terms and conditions herein provided. Consultant agrees to perform such services as shall be requested by the Company and agreed to by Consultant, at such times as are mutually agreeable to Consultant and the Company; provided, however, that Consultant shall not be obligated to perform services to the extent such services would interfere with Consultant's pursuit of other business interests not inconsistent with the terms of this Agreement. 2. Specific Transition Services: Consultant agrees that, in connection with winding up his duties as Chairman of the Board, he will continue to pursue a corporate relationship with Lincoln Properties Company, and will use his continuing good faith best efforts to assist the Company to negotiate a master agreement under which the Company will provide - 1 - telecommunications services to properties owned and managed by Lincoln Properties Company in the Company's markets. 3. Consideration for Execution of Agreement and Waiver and Release: In consideration for Consultant's execution of this Agreement and the Waiver and Release attached hereto as Attachment A, Consultant shall be entitled to the consideration set forth in this Paragraph 3. This consideration is provided subject to the binding execution by Consultant of the attached Waiver and Release and shall constitute payment in full of any claims by Consultant in any and all capacities accrued through the date of this Agreement. a. Lump Sum. The Company shall pay Consultant a one-time lump-sum payment of $70,000. Such amount shall be paid as soon as practicable upon the expiration of the Waiver Revocation Period described in the Waiver and Release with no revocation thereof (the "Waiver Effective Date"). b. Warrant Award. The Company shall issue to Consultant, pursuant to the Warrant Agreement attached hereto, a warrant (the "Warrant") to acquire 1,360 shares of Class A common stock of the Company at an exercise price of $984 per share, which shall become effective as of the Waiver Effective Date. The Warrant shall not be treated as an incentive stock option, but shall be treated as a nonqualified stock option under Section 83 of the Internal Revenue Code of 1986, as amended. The Warrant shall be exercisable as of the Waiver Effective Date, and shall terminate and expire on August 31, 1999, unless earlier terminated pursuant to its terms. The Warrant shall be subject to all other terms and conditions set forth in the Warrant Agreement. 4. Further Consideration for Consulting Services: In addition to the consideration described in Paragraph 3 above, Consultant shall be entitled to further consideration for consulting services as described in this Paragraph 4. a. Consulting Payments. Consultant shall be entitled to payment at a daily rate of $3,500 for every day during which Consultant performs any consulting duties described in Paragraphs I and 2 above; provided, however, that the maximum payment for services rendered during the month of September, 1996 shall be $ 15,000. b. Reimbursement for Expenses. The Company will reimburse Consultant for all reasonable out-of-pocket expenses incurred by him in connection with his performance of services under this Agreement in accordance with the Company's standard policies, practices and procedures. Consultant shall submit to the Company claims for reimbursement and documentation of expenses within sixty days of the date on which such expenses are incurred. -2- c. Employee Benefits. Consultant will not be eligible to participate in any employee benefit plans, programs or arrangements maintained by the Company. 5. Confidentially; Noncompetition; Nonsolicitation: A. Confidentiality: Consultant recognizes and acknowledges that in the course of his duties with the Company and as a result of the position of trust he has held and may continue to hold with the Company he has obtained or will obtain private or confidential information and proprietary data relating to the Company and its affiliates. Consultant agrees that for a period of five years from the effective date of this Agreement, he will not, either directly or indirectly, disclose or use confidential information acquired during his relationship with the Company except in connection with his duties under this Agreement or with the prior written consent of the Chairman of the Board of Directors or unless compelled to do so by process of law. Furthermore, Consultant agrees that, if compelled by process of law to violate the provisions of this Paragraph 5. Consultant will provide prior written notice to the Company in accordance with the notice provisions of Paragraph 11 of this Agreement so as to permit the Company to seek a protective order or other protective measure; and Consultant agrees to provide such notice as soon as reasonably practicable and with all due diligence recognizing that disclosure of confidential information could be harmful to the Company. Finally, Consultant agrees that the provisions of this Agreement shall constitute "confidential information" as described in this Paragraph 5. B. Noncompetition: Unless and to the extent that the Company gives Consultant a written waiver, Consultant agrees that for a period of one year from the effective date of this Agreement, he will not (whether acting alone or in concert with others, including actions as a member of a partnership or a joint venture or an investor in or a holder of securities of or an employee of, any corporation or other entity, or otherwise), (i) directly or indirectly engage in, (ii) have any interest in any person, firm, or corporation (except the Company) that directly or indirectly engages in, or (iii) perform any services for any person, firm or corporation (except the Company) that directly or indirectly engages in the "Business" (as defined in Paragraph 5.F. below) in the states of Florida, Texas, Colorado, Illinois, Arizona or California. Notwithstanding the foregoing, however, this provision shall not prohibit Consultant (i) from holding as a passive investment up to 5% of the outstanding securities of any class of a company whose securities are publicly traded, so long as Consultant does not serve as a member of the board of directors or an executive officer of or otherwise provide advice or services to such company, (ii) from continuing to hold an investment interest in Vanguard Communications, L.P., and (iii) from serving as Chairman of the Board of Directors and holding an indirect investment interest in Campuslink Communications Systems, Inc. ("Campuslink"), for so long as Campuslink is not in violation of any agreement with the Company. Any request for a written waiver of any part of this covenant shall be submitted in writing to the Company in accordance with the provisions of Section 11. The Company agrees to consider any such request within 10 business days of its receipt. The failure affirmatively to consent to any such request shall be deemed disapproval of the request. The Company agrees to act reasonably in considering any such request. -3- C.. Nonsolicitation: Consultant agrees that he shall not, directly or indirectly, during the period commencing on the effective date of this Agreement and ending May 10, 1999, (a) take any action to solicit or divert any business or customers away from the Company or its affiliates, (b) induce customers, suppliers, agents or other persons under contract or otherwise associated or doing business with the Company or its affiliates to terminate, reduce or alter any such association or business with or from the Company or its affiliates and/or (c) induce any person in the employment of the Company or its affiliates or any consultant to the Company or its affiliates to terminate such employment or consulting arrangement or accept employment or enter into any consulting arrangement with anyone other than the Company or its affiliates. D. Enforcement: Consultant hereby agrees that a violation of the provisions of Paragraph 5 or 6 would cause irreparable injury to the Company and its affiliates, for which they would have no adequate remedy at law. Any controversy or claim arising out of or relating to the provisions of this Paragraph 5 or 6, or any alleged breach of Paragraph 5 or 6, shall be settled by binding arbitration in accordance with Paragraph 9B. Notwithstanding the foregoing, however, the Company specifically retains the right before, during or after the pendency of any arbitration to seek injunctive relief from a court having jurisdiction for any actual or threatened breach of Paragraph 5 or 6 without necessity of complying with any requirement as to the posting of a bond or other security (it being understood that Consultant hereby waives any such requirement). Any such injunctive relief shall be in addition to any other remedies to which the Company may be entitled at law or in equity or otherwise, and the institution and maintenance of an action or judicial proceeding for, or pursuit of, such injunctive relief shall not constitute a waiver of the right of the Company to submit the dispute to arbitration. If any provision of Paragraph 5 or 6 is found by either a court of competent jurisdiction or the arbitrators to be unreasonably broad, oppressive or unenforceable, such court or arbitrators (i) shall narrow the scope of the Agreement in order to ensure that the application thereof is not unreasonably broad, oppressive or unenforceable, and (ii) to the fullest extent permitted by law, shall enforce such Agreement as though reformed. E. Survival: The provisions of Paragraphs 5 and 6 shall survive the termination of this Agreement regardless of the date, cause or manner of such termination. F. Business: For purposes of this paragraph 5, the term "Business" means the acquisition, development and operation of systems employing 18 Ghz spectrum and/or any other media (including, without limitation, SMATV and coaxial or fiber-optic cable but excluding systems employing facilities licensed in the ITFS, MDS or MMDS) for or in connection with the delivery of private cable television, telephone and other communication services to (i) residents of MDUs (ii) Institutions, and (iii) Commercial Facilities. "Commercial Facilities" means commercial, governmental and industrial offices and other facilities, each having 25 or more first outlets. "Institutions" means hotels, motels and prisons and educational and hospital facilities, each having 25 or more first outlets. "MDUs" means, collectively multiple dwelling units (comprising high-rise and low-rise apartment, condominium and cooperative complexes, town-house developments, mobile home parks and congregate care and other similar facilities), each containing 25 or more dwelling units. -4- 6. Nondisparagement: As a material inducement to the Company to enter into this Agreement, Consultant agrees that he will not (i) publicly criticize or disparage the Company or any affiliate, or privately criticize or disparage the Company or any affiliate in a manner intended or reasonably calculated to result in public embarrassment to, or injury to the reputation of, the Company or any affiliate in any community in which the Company or any affiliate is engaged in business; (ii) directly or indirectly take any action inconsistent with the Waiver and Release; or (iii) commit damage to the property of the Company or any affiliate or otherwise engage in any misconduct which is injurious to the business or reputation of the Company or any affiliate; provided, however, that Consultant will not be in breach of the covenant contained in (ii) above solely by reason of his testimony which is compelled by process of law. Consultant further agrees that he will not make any public or private oral or written statement to any person, or take any action or position inconsistent with, the agreed statement of facts set forth on Exhibit A. As used in Sections 5 and 6 of this Agreement, the term "affiliate" means the Company; Le Groupe Videotron Ltee ("Videotron"); any direct or indirect subsidiary of the Company; any direct or indirect subsidiary of Videotron; any other entity in which the Company, Videotron or any of their direct or indirect subsidiaries owns more than 50% of the outstanding equity interests; any officer, director or employee of the Company or of any of the foregoing entities; and any former officer, director or employee of the Company or of any of the foregoing entities. 7. Indemnification: The Company agrees to indemnify and defend Consultant to the extent permitted under Delaware law against all losses and expenses (including reasonable attorneys' fees and expenses) in connection with any claim arising out of or otherwise related to Consultant's services as a member of the Board of Directors or for actions taken in good faith as a consultant pursuant to this Agreement; provided, however, that such indemnification shall not extend to any claims by or that may relate to Vanguard Communications, L.P. or any of its affiliates or Consultant's passive investment position as a limited partner of Vanguard Communications, L.P. or any of its affiliates. 8. Effect of Prior Agreements: This Agreement contains the entire understanding between the parties hereto relating to the subject matter hereof and supersedes any other prior agreement between the Company and Consultant. 9. General Provisions: A. Nonassignabilitv. Neither this Agreement nor any right or interest hereunder shall be subject, in any manner, to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, whether voluntary or involuntary, by operation of law or otherwise, any attempt at such shall be void; and further provided, that any such benefit shall not in any way be subject to the debts, contract, liabilities, engagements or torts of Consultant, nor shall it be subject to attachment or legal process for or against Consultant. B. Submission to Arbitration. Subject to the right of the Company to seek injunctive relief under the provisions of Paragraph 5D above, any controversy or claim arising out of or relating to this contract or its alleged breach shall be settled by binding arbitration in Dallas, Texas before three arbitrators in accordance with the Commercial Arbitration Rules of the American -5- Arbitration Association ("AAA"), and any judgment on the award rendered by the arbitrators may be entered by any court having jurisdiction thereof. The arbitrators shall be selected by mutual agreement of the parties, if possible; provided, however, that persons eligible to be selected as arbitrators shall be limited to attorneys-at-law who (a) are on the AAA's Large, Complex Case Panel or a Center for Public Resources ("CPR") Panel of Distinguished Neutrals, or who have professional credentials similar to the attorneys listed on such AAA and CPR Panels, and (b) who practiced law for at least 15 years as an attorney in Texas specializing in either general commercial litigation or general corporate and commercial matters. If the parties fail to reach agreement upon appointment of an arbitrator within thirty days following receipt by one party of the other party's notice of desire to arbitrate, the arbitrator shall be selected from a panel or panels of persons submitted by the AAA who qualify as described above. The selection process shall be that which is set forth in the AAA Commercial Arbitration Rules then prevailing, except that, if the parties fail to select an arbitrator from one or more panels, AAA shall not have the power to make an appointment but shall continue to submit additional panels until an arbitrator has been selected. In any such arbitration proceeding, the arbitrators shall not have the power or authority to award punitive damages to any party. Judgment upon the award rendered may be entered in any court having jurisdiction. Each of Consultant and the Company shall, subject to the award of the arbitrators, pay an equal share of the arbitrators' fees. The arbitrators shall have the power to award recovery of all costs and fees (including attorneys' fees, administrative fees, arbitrators' fees, and court costs) to the prevailing party. C. Taxes. Consultant acknowledges that he has sought the advice of his own tax advisor regarding the tax treatment of income under this Agreement. The Company shall withhold from the amounts payable to Consultant under Paragraphs 3 and 4 of this Agreement all federal, state and local taxes that shall be required pursuant to any law or governmental regulation or ruling. D. Source of Payments. All payments provided in this Agreement shall be paid in cash from the general funds of the Company, and no special or separate funds shall be established and no other segregation of assets shall be made to assure payments. Consultant shall have no right, title, or interest whatever in or to any investments which the Company may make to aid the Company in meeting its obligations hereunder. Nothing contained in this Agreement, and no action taken pursuant to this provision, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between the Company and Consultant or any other person. To the extent that any person acquires a right to receive payments from the Company hereunder, such right shall be no greater than the right of an unsecured creditor of the Company. 10. Modification and Waiver: A. Amendment of Agreement. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. B. Waiver. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be an estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. -6- 11. Notices: All notices or communications hereunder shall be in writing, addressed as follows: To the Company: OpTel,Inc. 1111 W. Mockingbird Lane Dallas, Texas 75247 Attn: Chairman of the Board Copy: General Counsel To Consultant: James A. Kofalt 50209 Manly Chapel Hill, NC 27514 All such notices shall be conclusively deemed to be received and shall be effective, (i) if sent by hand delivery, upon receipt, (ii) if sent by telecopy or facsimile transmission, upon confirmation of receipt by the sender of such transmission or (iii) if sent by registered or certified mail, on the fifth day after the day on which such notice is mailed. 12. Governing Law: This Agreement has been executed and delivered in the State of Texas, and its validity, interpretation, performance, and enforcement shall be governed by the laws of said State. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and its seal to be affixed hereunto by its officers thereunto duly authorized, and Consultant has signed this Agreement, all as of the day first above written. OpTel, Inc. By: ------------------------------- ------------------------------- James A. Kofalt ("Consultant") -7- EXHIBIT A James A. Kofalt has elected to resign from the office of Chairman of the Board of Directors of OpTel, Inc. He has agreed to continue to serve as an independent consultant to OpTel, Inc. A-1 Dated: November 12, 1996 Attachment A WAIVER AND RELEASE In exchange for the consideration offered under the Separation and Consulting Agreement between me and OpTel, Inc. (the "Company"), dated September 1, 1996, and the Warrant Agreement attached thereto (collectively known as the "Agreement"), I hereby waive all of my claims and release the Company, its affiliates, its subsidiaries and each of their directors and officers, employees and agents, and employee benefit plans and the fiduciaries and agents of said plans (collectively referred to as the "Corporate Group") from any and all claims, demands, actions, liabilities and damages. All payments under the Agreement are voluntary on the part of the Company and are not required by any legal obligation of the Company to me other than the Agreement itself. I choose to accept this offer. I understand that signing this Waiver and Release is an important legal act. I acknowledge that the Company has advised me in writing to consult an attorney before signing this Waiver and Release. I understand that I have until 21 calendar days after the date shown above to consider whether to sign and return this Waiver and Release to the Company by first-class mail or by hand delivery in order for it to be effective. In exchange for the consideration offered to me by the Company pursuant to the Agreement, which is in addition to any remuneration or benefits to which I am already entitled, I agree not to sue or file any charges of discrimination, or any other action or proceeding with any local, state and/or federal agency or court regarding or relating in any way to the Company, and I knowingly and voluntarily waive all claims and release the Corporate Group from any and all claims, demands, actions, liabilities, and damages, whether known or unknown, arising out of or relating in any way to the Company, except with respect to rights under the Agreement and such rights or claims as may arise after the date this Waiver and Release is executed. This Waiver and Release includes, but is not limited to, claims and causes of action under: Title VII of the Civil Rights Act of 1964, as amended; the Age Discrimination in Employment Act of 1967, as amended; the Civil Rights Act of 1866, as amended; the Civil Rights Act of 1991; the Americans with Disabilities Act of 1990; the Older Workers Benefit Protection Act of 1990; the Employee Retirement Income Security Act of 1974, as amended; the Family and Medical Leave Act of 1993; the Texas Commission on Human Rights Act; the Texas Labor Code; and/or contract, tort, defamation, slander, wrongful termination or other claims or any other state or federal statutory or common law. Should any of the provisions set forth in this Waiver and Release be determined to be invalid by a court, agency or other tribunal of competent jurisdiction, it is agreed that such determination shall not affect the enforceability of other provisions of this Waiver and Release. -1- I acknowledge that this Waiver and Release and the Agreement set forth the entire understanding and agreement between me and the Company or any other member of the Corporate Group concerning the subject matter of this Waiver and Release and supersede any prior or contemporaneous oral and/or written agreements or representations, if any, between me and the Company or any other member of the Corporate Group. I understand that for a period of 7 calendar days following my signing this Waiver and Release (the "Waiver Revocation Period"), I may revoke my acceptance of the offer by delivering a written statement to the Company by hand or by registered mail, addressed to the address for OpTel, Inc. specified in the Agreement, in which case the Waiver and Release will not become effective. In the event I revoke my acceptance of this offer, the Company shall have no obligation to provide me the consideration offered under the Agreement. I understand that failure to revoke my acceptance of the offer within the Waiver Revocation Period will result in this Waiver and Release being permanent and irrevocable. I acknowledge that I have read this Waiver and Release, have had an opportunity to ask questions and have it explained to me and that I understand that this Waiver and Release will have the effect of knowingly and voluntarily waiving any action I might pursue, including breach of contract, personal injury, retaliation, discrimination on the basis of race, age, sex, national origin, or disability and any other claims arising prior to the date of this Waiver and Release. By execution of this document, I do not waive or release or otherwise relinquish any legal rights I may have which are attributable to or arise out of acts, omissions or events of the Company or any other member of the Corporate Group which occur after the date of execution of this Waiver and Release. I acknowledge that this Waiver and Release waives any rights I may have as a shareholder or a derivative shareholder of the Company with respect to any events which may have occurred up to and including the date of execution hereof, excluding any rights I may have solely by virtue of my investment interests in Vanguard Communications, L.P. AGREED TO AND ACCEPTED this _______ day ____________, of 1996. - ------------------------------ James A. Kofalt -2- EX-10.18 26 WARRANT AGREEMENT WARRANT AGREEMENT THIS WARRANT AGREEMENT (the "Agreement"), dated as of September 1, 1996, is made and entered into by and among Optel, Inc., a Delaware corporation (the "Company"), and James A. Kofalt (the "Warrantholder"). This Agreement is being executed in connection with the Separation and Consulting Agreement of even date herewith by and between the Company and the Warrantholder (the "Separation Agreement"). The Company agrees, in consideration of the Warrantholder's entering into the Separation Agreement, to issue and sell, and the Warrantholder, by entering into the Separation Agreement, will receive warrants, as hereinafter described (the "Warrants"), to purchase up to 1,360 (the "Shares"), of the Company's Class A Common Stock, par value $.01 per share (the "Common Stock"). The Purchase and sale of the Warrants shall occur contemporaneous with, and is subject to the closing of the Separation Agreement. In consideration of the foregoing and for the purpose of defining the terms and provisions of the Warrants and the respective rights and obligations thereunder, the Company and the Warrantholder, for value received, hereby agree as follows: Section 1. Transferability and Form of Warrants. 1.1. Registration. The Warrants shall be numbered and shall be registered on the books of the Company when issued. 1.2. Certain Limitations on Transfer. The Warrants and the Shares shall not be sold, assigned, tranferred or pledged except upon the conditions specified in this Agreement. The Warrants may not be transferred voluntarily and may only be transferred upon death, either by will or intestacy law, or otherwise by operation of law and only then if such transfer is made in accordance with the terms of this Agreement. The Warrantholder will cause any proposed purchaser, assignee, transferee or pledgee of the Warrants or the Shares, except for transferees in dispositions of Shares that are pursuant to an effective registration statement under the Act (as defined herein) or transferees in dispositions of Shares occurring after an IPO (as defined herein) pursuant to Rule 144 under the Securities Act of 1933, as amended (the "Act"), to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement. The Warrants may be divided or combined, upon request to the Company by the Warrantholder, into a certificate or certificates representing the right to purchase the same aggregate number of Shares. Unless the context indicates otherwise, the term "Warrantholder" shall include any transferee or transferees of the Warrants or the Shares that is required to be bound by the terms hereof, and the term "Warrants" shall include any and all warrants outstanding pursuant to this Agreement, including those evidenced by a certificate or certificates issued upon division, exchange, transfer or substitution pursuit to this Agreement. The Company may refuse to effect the transfer of the Warrants until the transferee of the Warrants executes a counterpart to this Agreement and it shall be a condition to any transfer that the transferee execute and deliverer to the Company a separate certificate that contains the representations and covenants in Section 11 hereof. The Warrantholder, by his receipt of a Warrant Certificate, agrees to be bound by and to comply with the terms of this Agreement. The Warrantholder represents and agrees, that the Warrant (and Shares if the Warrant is exercised) is purchased only for investment, for the Warrantholder's own account and without any present intention to sell, or with a view to distribution of, the Warrant or Shares. 1.3. Form of Warrants. The text of the Warrants and of the form of election to purchase Shares shall be substantially as set forth in Exhibit A attached hereto. The number of Shares issuable upon exercise of the Warrants is subject to adjustment upon the occurrence of certain events, all as hereinafter provided. The Warrants shall be executed on behalf of the Company by its President or by a Vice President, attested to by its Secretary or an Assistant Secretary. A Warrant bearing the signature of an individual who was at any time the proper officer of the Company shall bind the Company, notwithstanding that such individual shall have ceased to hold such office prior to the delivery of such Warrant or did not hold such office on the date of this Agreement. The Warrants shall be dated as of the date of signature thereof by the Company either upon initial issuance or upon division, exchange, transfer or substitution. 1.4. Legend on Warrants. Each Warrant Certificate shall bear the following legend: (a) "THE WARRANTS REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW. SUCH WARRANTS MAY NOT BE SOLD OR TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS AND UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER REASONABLY ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. COPIES OF THE WARRANT AGREEMENT COVERING THE PURCHASE OF THESE WARRANTS AND IMPOSING VARIOUS REQUIREMENTS, INCLUDING WITHOUT LIMITATION PROVISIONS RESTRICTING THEIR TRANSFER, MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION."; and (b) any legend required by applicable state securities law. -2- Any certificate issued at any time in exchange or substitution for any Warrant certificate bearing such legends shall also bear the above legends unless, in the opinion of the Company's counsel, the securities represented thereby need no longer be subject to such restrictions. The Warrantholder consents to the Company's making a notation on his records and giving instructions to any registrar or transfer agent of the Warrants in order to implement the restrictions on transfer established in this Agreement. Section 2. Exchange of Warrant Certificate. Any Warrant certificate may be exchanged for another certificate or certificates entitling the Warrantholder to purchase a like aggregate number of Shares as the certificate or certificates surrendered then entitled such Warrantholder to purchase. Any Warrantholder desiring to exchange a Warrant certificate shall make such request in writing delivered to the Company, and shall surrender, properly endorsed, with signatures guaranteed, the certificate evidencing the Warrant to be so exchanged. Thereupon, the Company shall execute and deliver to the person entitled thereto a new Warrant certificate or certificates as so requested. Section 3. Term of Warrants; Exercise of Warrants. (a) Subject to the terms of this Agreement, the Warrantholder shall have the right, at any time and from time to time during the period commencing on the Waiver Effective Date (as such term is defined in the Separation Agreement), and ending at 5:00 p.m. Dallas, Texas time, on August 31, 1999 (the "Termination Date"), to purchase from the Company up to the number of fully paid and nonassessable Shares to which the Warrantholder may at the time be entitled to purchase pursuant to this Agreement, upon surrender to the Company, at its principal office, of the certificate evidencing the Warrants to be exercised, together with the purchase form on the reverse thereof duly filled in and signed, with signatures guaranteed and upon payment to the Company of the Warrant Price (as defined in and determined in accordance with the provisions of this Section 3 and Sections 7 and 8 hereof), but in no event for less than 100 Shares (subject to appropriate adjustment for any stock split recapitalization or similar event) for any Warrantholder (unless less than an aggregate of 100 Shares (subject to appropriate adjustment for any stock split, recapitalization or similar event) are then purchasable under all outstanding Warrants held by a Warrantholder. The Warrants shall be exercisable, at the election of the Warrantholder, either in full or from time to time (subject to the other provisions in this Section) in part and, in the event of a certificate evidencing the Warrants is exercised in respect of less than all of the Shares specified therein at any time prior to the Termination Date, a new certificate evidencing the remaining portion of the Warrants held by the Warrantholder will be issued by the Company. It shall be a condition to exercise that the Warrantholder execute and deliver a certificate to the Company containing the representations and covenants set forth in Section 11 hereof, which certificate must state that such representations and warranties are true and correct. If the Waiver Effective Date does -3- not occur, then this Agreement will be terminated without further obligation by either party. (b) Payment by each Warrantholder of the aggregate Warrant Price due from him shall be made in cash or by immediately available funds, certified check or any combination thereof. (c) Upon such surrender of the Warrants and payment of such Warrant Price as aforesaid, the Company shall issue and cause to be delivered to or upon the written order of the exercising Warrantholder and in such name or names as the exercising Warrantholder may designate (which in no way shall limit the transfer restrictions hereunder) a certificate or certificates for the number of full Shares, so purchased upon the exercise of this Warrant, together with cash, as provided in Section 9 hereof, in respect of any fractional Shares otherwise issuable upon such surrender. Such certificate or certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such securities as of the date of surrender of the Warrants and payment of the Warrant Price, as aforesaid, notwithstanding that the certificate or certificates representing such securities shall not actually have been delivered or that the stock transfer books of the Company shall then be closed. Section 4. Payment of Taxes. The Company will pay all documentary stamp taxes, if any, attributable to the initial issuance of the Warrants or the securities comprising the Shares; provided, however, the Company shall not be required to pay any tax which may be payable in respect of any secondary transfer of the Warrants or of the securities comprising the Shares. Section 5. Mutilated or Missing Warrants. In case the certificate or certificates evidencing the Warrants shall be mutilated, lost, stolen or destroyed, the Company shall, at the request of the Warrantholder, issue and deliver in exchange and substitution for and upon cancellation of the mutilated certificate or certificates, or in lieu of and substitution for the certificate or certificates lost, stolen or destroyed, a new Warrant certificate or certificates of like tenor and representing an equivalent right or interest, but only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of such Warrant and a bond of indemnity, if requested, also satisfactory in form and amount at the applicant's cost. Applicants for such substitute Warrant certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Company may prescribe. Section 6. Reservation of Shares. There has been reserved, and the Company shall at all times keep reserved so long as the Warrants remain outstanding, out of its authorized Common Stock, such number of shares of Common Stock as shall be subject to purchase under the Warrants. Every transfer agent for the Common Stock and other securities of the Company issuable upon the exercise of the Warrants will be irrevocably authorized and directed at all times to reserve such number of authorized shares and other securities as shall be requisite for such purpose. The -4- Company will keep a copy of this Agreement on file with every transfer agent for the Common Stock and other securities of the Company issuable upon the exercise of the Warrants. The Company will supply every such transfer agent with duly executed stock and other certificates, as appropriate, for such purpose and will provide or otherwise make available any cash which may be payable as provided in Section 9 hereof. On or before taking any action that would cause an adjustment pursuant to the terms of the Warrants resulting in an increase in the number of shares of Common Stock deliverable upon such conversion or exercise above the number thereof previously authorized, reserved and available therefor, the Company shall take all such action so required for compliance with this Section. Section 7. Warrant Price. The price per Share at which Shares shall be purchasable upon the exercise of the Warrants (the "Warrant Price") shall be $984, subject to adjustment as provided in this Agreement. Section 8. Adjustments of Number of Shares and Warrant Price. The number and kind of securities purchasable upon the exercise of the Warrants and the Warrant Price shall be subject to adjustment from time to time upon the happening of certain events, as follows: 8.1. Adjustments The number of Shares purchasable upon the exercise of the Warrants shall be subject to adjustment as follows: (a) In case the Company shall (i) pay a dividend in Common Stock or make a distribution in Common Stock, (ii) subdivide its outstanding Common Stock, (iii) combine its outstanding Common Stock into a smaller number of shares of Common Stock or (iv) issue by reclassification of its Common Stock other securities of the Company, the number of Shares purchasable upon exercise of the Warrants immediately prior thereto shall be adjusted so that the Warrantholder shall be entitled to receive the kind and number of Shares or other securities of the Company which it would have owned or would have been entitled to receive immediately after the happening of any of the events described above had the Warrants been exercised immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this subsection 8.1(a) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (b) No adjustment in the number of Shares purchasable pursuant to the Warrants shall be required unless such adjustment would require an increase or decrease of at least three percent in the number of Shares then purchasable upon the exercise of the Warrants or, if the Warrants are not then exercisable, the number of Shares purchasable upon the exercise of the Warrants on the first date thereafter that the Warrants become exercisable; provided, however, that any adjustments which by reason of this subsection 8.1(b) are not required to be made immediately shall be carried forward and taken into account in any subsequent adjustment. -5- (c) Whenever the number of Shares purchasable upon the exercise of the Warrant is adjusted, as herein provided, the Warrant Price payable upon exercise of the Warrant shall be adjusted by multiplying such Warrant Price immediately prior to such adjustment by a fraction, of which the numerator shall be the number of Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment and of which the denominator shall be the number of Shares so purchasable immediately thereafter. (d) Whenever numbers of Shares purchasable upon the exercise of the Warrants is adjusted as herein provided, the Company shall cause to be promptly mailed to the Warrantholder by first class mail, postage prepaid, notice of such adjustment and a certificate of the chief financial officer of the Company setting forth the number of Shares purchasable upon the exercise of the Warrants after such adjustment, a brief statement of the facts requiring such adjustment and the computation by which such adjustment was made. (e) For the propose of this Section 8.1, the term "Common Stock" shall mean (i) the class of stock designated as the Class A Common Stock of the Company at the date of this Agreement or (ii) any other class of stock resulting from successive change or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event that at any time, as a result of an adjustment made pursuant to this Section 8, the Warrantholder shall become entitled to purchase any securities of the Company other than Common Stock, thereafter the number of such other securities so purchasable upon exercise of the Warrants shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in this Section 8. 8.2. No Adjustment for Certain Matters. During the term of the Warrants or upon the exercise of the Warrants, no adjustment shall be made (i) in respect of any dividends or distributions, except as specifically provided in subsection 8.1(a) or (ii) in respect of the consummation of any dissolution, liquidation or winding up of the Company or a consolidation, merger, share exchange or similar business combination or sale of its property, assets and business as an entirety or substantially as an entirety. Without limiting the generality of the foregoing, the Company shall have no obligation to cause any purchase or successor by merger, sale of assets or similar business combination to assume the obligations under this Agreement. 8.3.Statement on Warrant Certificates. Irrespective of any adjustments in the number of securities issuable upon exercise of Warrants, Warrant certificates theretofore or thereafter issued may continue to express the same number of securities as are stated in the similar Warrant certificates initially issuable pursuant to this Agreement. -6- However, the Company may, at any time in its sole discretion (which shall be conclusive), make any change in the form of Warrant certificate that it may deem appropriate and that does not affect the substance thereof; and any Warrant certificate thereafter issued, whether upon registration or transfer of, or in exchange or substitution for, an outstanding Warrant certificate, may be in the form so changed. Section 9. Fractional Interests; Fair Value. The Company shall not be required to issue fractional Shares on the exercise of the Warrants. If any fraction of a Share would, except for the provisions of this Section 9, be issuable on the exercise of the Warrants (or specified portion thereof), the Company shall pay an amount in cash equal to the then Fair Value of the Common Stock multiplied by such fraction. As used herein, the term "Fair Value" of the Common Stock or other Securities or other property shall mean the fair value as determined in good faith by the Company's Board of Directors, which determination shall be binding upon the Warrantholder; provided, however, that after the closing date of an initial public offering of Common Stock pursuant to a registration statement filed with and declared effective by the SEC (an "IPO"), Fair Value of the Common Stock for any day shall mean the last sales price, regular way, on such day or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, on such day, in either case as reported in the principal transaction reporting system with respect to securities listed or admitted to trading on the principal national securities exchange on which such security is listed or admitted to trading, or, if such security is not listed or admitted to trading on any national securities exchange but sales price information is reported for such security, as reported by The Nasdaq Stock Market ("Nasdaq") National Market or such other self-regulatory organization or registered securities information processor (as such terms are used under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that then reports information concerning such security, or, if sales price information is not so reported, the average of the high bid and low asked prices in the over-the-counter market on such day, as reported by Nasdaq or such other entity, or, if on such day such security is not quoted by any such entity, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such security selected by the Board of Directors of the Company. If on such day no market maker is making a market in such security, the fair value of such security on such day as determined in good faith by the board of Directors of the Company shall be used. Section 10. No right as Stockholder; Notices to Warrantholder. Nothing contained in this Agreement or in the Warrants shall be construed as conferring upon the Warrantholder or his transferees any rights as a stockholder of the Company, including the right to vote, receive dividends, call meetings, consent or receive notices as a stockholder in respect of any meeting of stockholders for the election of directors of the Company or any other matter or imposing any fiduciary or other duty on the Company, its officers or directors, in favor of the Warrantholder, all of which rights and duties are expressly disclaimed and waived by the Warrantholder. -7- Section 11. Securities laws; Restrictions on Transfer of Shares; Registration Rights. 11.1. (a) Compliance with Securities Act. The Warrantholder agrees that this Warrant and the related Shares (each of the Warrant and the Shares being referred to herein as a "Security" and together, "Securities") are being acquired for investment and that such Warrantholder will not purchase, offer, sell or otherwise dispose of any of the Securities except under circumstances which will not result in a violation of the Act. In order to exercise this Warrant, the Warrantholder must be able to confirm and shall confirm in writing, by executing a certificate to be supplied by the Company, all of the representations and other covenants contained in this Agreement, including that the Securities so purchased are being acquired for investment and not with a view toward distribution or resale. The Securities (unless registered under the Act) shall be stamped or imprinted with, in addition to any other appropriate or required legend, a legend in substantially the following form. "THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS REGISTERED OR QUALIFIED UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS THE CORPORATION RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE CORPORATION, STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT. COPIES OF THE AGREEMENT COVERING THE PURCHASE OF THESE SECURITIES THAT RESTRICT THEIR TRANSFER AND PROVIDE, FOR CERTAIN VOTING AGREEMENTS AND RIGHTS OF FIRST REFUSAL MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION." -8- Any certificate for Shares issued at any time in exchange or substitution for any certificate bearing such legends (except a new certificate issued to a transferee upon completion of a public distribution pursuant to a registration statement under the Act or upon completion of a sale occurring after an IPO under Rule 144 under the Act of the securities represented thereby) shall also bear the above legends unless, in the opinion of the Company's counsel, the securities represented thereby need no longer be subject to such restrictions. The Warrantholder consents to the Company making a notation on his records and giving instructions to any registrar or transfer agent of the Common Stock in order to implement the restrictions on transfer established in this Agreement. In addition, the Warrantholder specifically represents to the Company both at the time of initial purchase of the Warrant and at those future times as specified herein: (i) Prior to entering into the Separation Agreement, the original Warrantholder was the Chairman of the Board of the Company and as of the date of this Agreement remained as a director of the Company. The Warrantholder has experience in analyzing and investing in companies like the Company and is capable of evaluating the merits and risks of an investment in the Company and has the capacity to protect his own interests. The Warrantholder is an "Accredited Investor" as that term is defined in Rule 501(a) promulgated under the Act. The Warrantholder is aware of the Company's business affairs and financial condition, and has acquired information about the Company sufficient to reach an informed and knowledgeable decision to acquire the Securities. The Warrantholder is acquiring the Securities for his own account for investment purposes only not as a nominee or agent and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Act. The Warrantholder is acquiring the Securities for investment for his own account, not as a nominee or agent, and not with a view to, or for resale in connection with, any distribution thereof. The Warrantholder acknowledges the Company's obligation to include the Shares in certain registration statements as set forth in the Warrant Agreement, the effectiveness of which registration statements may be required for the resale of the Shares. Without limiting the generality of the preceding sentences of this Section, the Warrantholder has not offered or sold any portion of the Securities to be acquired by such Warrantholder and has no present intention of reselling or otherwise disposing of any portion of such Securities either currently or after the passage of a fixed or determinable period of time or upon the occurrence or nonoccurrence of any predetermined event or circumstance, and in particular the Warrantholder has no current intention to resell the Shares under such registration statements nor would he have such intention if such registration statements were effective -9- as of the date of this representation. The Warrantholder understands that investment in the Securities is subject to a high degree of risk. the Warrantholder can bear the economic risk of his investment, including the full loss of his investment, and by reason of his business or financial experience or the business or financial experience of his professional advisors has the capacity to evaluate the merits and risks of his investment and protect his own interest in connection with the purchase of the Securities. The Warrantholder represents that he does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participation to such person or to any third person, with respect to any of the Securities. If other than an individual, the Warrantholder also represent he has not been organized for the purpose of acquiring the Securities. The Warrantholder's purchase is not and will not be part of a plan or scheme to evade the registration requirements of the Act. (ii) The Warrantholder understands that the Securities have not been and, except as provided in this Agreement with respect to the sale of the Shares to third parties, will not be registered under the Act or any applicable state securities law in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of the Warrantholder's investment intent as expressed herein and the accuracy of the Warrantholder's representations as expressed herein and the Warrantholder will furnish the Company with such additional information as is reasonably requested by the Company in connection with such exemption. (iii) The Warrantholder further understands that the Securities must be held indefinitely unless subsequently registered under the Act and any applicable state securities laws, or unless exemptions from registration are otherwise available. Moreover, the Warrantholder understands that the Company is under no obligation to and does not expect to register the Securities except as provided for in this Agreement with respect to the Shares. (iv) The Warrantholder is aware of the provisions of Rule 144, promulgated under the Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof (or from an affiliate of such issuer), subject to the satisfaction of certain conditions, if applicable, including, among other things: the availability of certain public information about the Company; the resale occurring not less than two years after the party has purchased and paid for the securities to be sold; the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Exchange Act); and the amount of -10- securities being sold during any three-month period not exceeding the specified limitations stated therein. (v) The Warrantholder further understands that at the item he wishes to sell the Securities, it is possible that there will be no public market upon which to make such a sale, and that, even if such a public market then exists, the Company may not be satisfying the current public information requirement of Rule 144, and that, in such event, the Warrantholder may be precluded from selling the Securities under Rule 144 even if the minimum holding period had been satisfied. (vi) the Warrantholder further understands that in the event all of the requirements of Rule 144, are not satisfied, registration under the Act or compliance with registration exemption will be required; and that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such actions do so at their own risk. (vii) the Warrantholder has had a reasonable opportunity to ask questions relating to the Company' business, management and financial affairs with the Company's management, customers and other parties, and the Warrantholder has received satisfactory responses to the Warrantholder's inquires. The Warrantholder is not, and has not been within the ninety (90) days prior to the closing date of the purchase of the Securities, a broker or dealer of securities. To the best of his knowledge, (i) the Warrantholder was contacted regarding the sale of the Securities by a person or entity with whom the Warrantholder had a prior relationship and (ii) no securities were offered or sold to him by means of any form of general solicitation or general advertising, and in connection therewith the Warrantholder: did not (A) receive or review any advertisement, article, notice or other communication published in a newspaper or magazine or similar media or broadcast over television or radio, whether closed circuit or generally available; or (B) attend any seminar, meeting or industry investor conference whose attendees were invited by any general solicitation or general advertising. (b) Disposition of Securities. There shall be no transfer of Warrants except for transfer at death as set forth in Section 1.2. The transferee any Warrants must give notice to the Company of such transfer. Until such notice is -11- given, the transferee shall forfeit has right to exercise his registration rights hereunder. With respect to any offer, sale or other disposition of any Securities that are not registered under the Act, the Warrantholder hereof agrees to give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such Warrantholder's counsel to the effect that such offer, sale or other disposition may be effected without registration or qualification (under the Act as then in effect or any federal or state law then in effect) of such Securities and indicating whether or not under the Act, certificates for the Securities in question to be sold or otherwise disposed of require any restrictive legend as to applicable restrictions on transferability in order to ensure compliance with such law. Such opinion and such counsel must be satisfactory to the Company in its reasonable judgment and such opinion shall state that it may be relied upon by counsel to the company, and any stock exchange or transfer agent. Promptly upon receiving such written notice and satisfactory opinion, if so requested, the Company shall notify such Warrantholder that such Warrantholder may sell or otherwise dispose of such Securities, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this subsection (b) that the opinion of counsel for the Warrantholder is not satisfactory to the Company, the Company shall so notify the Warrantholder promptly after such determination has been made and shall specify in detail the legal analysis supporting any such conclusion. Each certificate representing the Securities thus transferred (except a transfer registered under the Act or a transfer of Shares, occurring after an IPO, pursuant to Rule 144) shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with such laws, unless in the aforesaid opinion of counsel for the Warrantholder, such legend is not required in order to ensure compliance with such laws. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions. (c) Transferees Bound. Prior to any transfer of Shares (except a transfer registered under the Act or a transfer of Shares, occurring after an IPO, pursuant to Rule 144), the proposed transferee shall agree in writing with the Company to be bound by the terms of this Agreement (whether or not the Warrant has been exercised or otherwise outstanding) as if an original signatory hereto, and the proposed transferee must be able to and must deliver a certificate to the Company containing the representations and covenants as set forth in this subsection 11.1. (d) No Registration of Transferred Warrants. The Warrantholder is not entitled to any registration rights with respect to the transfer of the Warrants. 11.2. Certain Definitions. As used in this Section 11, the following terms shall have the following meanings. -12- "Affiliate" shall mean, with respect to any person, any other person controlling, controlled by or under direct or indirect common control with such person (for the purposes of this definition "control," when used with respect to any specified person, shall mean the power to direct the management and policies of such person, directly or indirectly, whether through ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" shall have meanings correlative to the foregoing). "Business Day" shall mean a day Monday through Friday on which banks are generally open for business in the State of Texas. "Holder" shall mean the Warrantholder, and any person holding Registrable Securities to whom the registration rights under this Section 11 have been transferred in accordance with the terms hereof. "Majority Holders" shall mean any Holder(s) who in the aggregate are holders of not less than 51% of the then outstanding Registrable Securities. "Person" shall mean any person , individual, corporation, partnership, trust or other nongovernmental entity or any governmental agency, court, authority or other body (whether foreign, federal, state, local or otherwise). The terms "register," "registered" and registration" refer to the registration effected by preparing and filing a registration statement in compliance with the Act, and the declaration or ordering of the effectiveness of such registration statement. "Registrable Securities" shall mean (A) the Shares, and (B) any shares of Common Stock issued as (or issuable upon the conversion of any warrant, right or other security which is issued as) a dividend or other distribution with respect to or in replacement of the Shares; provided, however, that securities shall be treated as Registrable Securities only if and only for so long as they (I) have not been disposed of pursuant to a registration statement declared effective by the SEC,(II) have not been sold in a transaction exempt from the registration and prospectus delivery requirements of the Act, so that all transfer restrictions and restrictive legends with respect thereto are removed upon the consummation of such sale, (III) are held by a Holder or a permitted transferee pursuant to the terms hereof, or (IV) the registration rights as to the Holders of such Registrable Securities have not expired pursuant to Section 11.4(i). "Registration Expenses" shall mean all expenses incurred by the Company in complying with Section 11.3 hereof, including, without limitation, all registration, qualification, listing and filing fees, printing expenses, fees and expenses of counsel for the Company, and the expense of any special audits incident to or required by any such registration (but excluding the fees of legal counsel for any Holder). -13- "SEC" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Act. "Selling Expenses" shall mean all underwriting discounts, selling commissions, transfer taxes and expense allowances applicable to the sale of Registrable Securities and all fees and expenses of legal counsel for any Holder. 11.3 Piggy-Back Registration Rights. (a) Registration Rights. Following the time of the exercise of a Warrant, the Holder of a Warrant Share thereby purchased shall be entitled to the "piggy-back" registration rights granted hereby. Except as otherwise provided in this Section 11.3, the registration rights granted hereby may be used one time only. If the Company shall determine to register any of its equity securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating to employee benefit plans, or (ii) a registration relating to a transaction subject to Rule 145 promulgated under the Act, the company will. (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance) the Registrable Securities specified in a written requests or requests, (subject to the limitation of Section 11.3(b) below made within ten (10) days after receipt of such written notice from the Company, by the Holder. Such notification will be kept confidential by the Holder. If the Holder desires to include in any such registration statement all or any part of the Registrable Securities held by him, the Holders shall, within ten (10) days after receipt of the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 11.3(a)(i). In such event the right of any Holders to registration pursuant to Section 11.3 shall be conditioned upon such Holders' participation in such underwriting, and the inclusion of Registrable Securities in the underwriting shall be limited to the extent provided therein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an -14- underwriting agreements in customary form with the managing underwriter selected for such underwriting by the Company. Notwithstanding any other provision of this Section 11.3, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may limit the Registrable Securities to be included in such registration. In the event of a limitation (or elimination) on the number of shares to be included in a registration, then the Company shall so advise the Holders, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among each Holder and all other persons with registration rights that have requested that shares held by them be registered. Such allocation shall be in proportion, as nearly as practicable, to the respective number of shares of Common Stock requested to be registered by each Holder and by such other persons. To facilitate the allocation of shares in accordance with the above provisions, the Company may round the number of shares allocated to such Holder to the nearest 100 shares. If a holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. Any securities excluded or withdrawn from such underwriting shall be withdrawn from such registration, and shall not be transferred in a public distribution except in accordance with the terms of subsection 11.4(f)(vi). In the event that any Registrable Securities of a Holder are not included in a registration as a result of the limitation or elimination imposed by this subsection 11.3(b) then such Holder shall be entitled to one additional piggy-back registration right on the same terms as are provided in this Agreement. 11.4 Registration Matters (a) Right to Terminate Registration. The Company or any other Person initiating a registration shall have the right for any reason and without liability to any Holder to terminate, suspend or withdraw any registration initiated by it under this Section 11 prior to or after the effectiveness of such registration whether or not a Holder has elected to include securities in such registration; provided, that any termination, suspension or withdrawal of a registration prior to effectiveness of such registration statement or after effectiveness but prior to the expiration of the period described in subsection 11.4(c)(i) below shall not count as the Holder's piggy-back registration hereunder. (b) Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 11 shall be borne by the Company. All Selling Expenses relating to the securities registered by or on behalf of the Holders shall be borne by such Holders. (c) registration Procedures. In the case of the registration, qualification or compliance effected by the Company pursuant to this Agreement, the -15- Company will, upon reasonable request, inform each Holder whose Shares are included in the registration as to the status of such registration, qualification and compliance. Subject to Section 11.4(a) above, at its expense, the Company will: (i) use its reasonable best efforts to keep such registration and any qualification or compliance under state securities laws which the Company determines to obtain, effective until at least the 90 days (excluding any days for which sales may not be made pursuant to Section 11.4(d)) after the effective date of the registration or until the Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; and (ii) furnish such number of prospectuses and other documents incident thereto as the Holders from time to time may reasonably request. The period of time during which the Company is required hereunder to keep the Registration Statement effective is referred to herein as "the Registration Period." Notwithstanding anything to the contrary contained herein, at the Company's election the Company may cease to keep such registration, qualification or compliance effective with respect to a Holder's Registrable Securities , and the related registration rights of a Holder shall expire, at such time as the Holder may sell under Rule 144 under the Act (or other exemption from registration acceptable to the Company) in a three-month period all Registrable securities than held by such Holder. (d) Delay of sales (i) Each Holder will cease all sales of Registrable Securities if the Company believes that the filing of a requested registration statement at the time it is requested, or the offering and sale of Registrable Securities pursuant thereto, (A) would adversely affect a pending or proposed public offering of the Company's securities, or a material acquisition, or a transaction or negotiations, discussions or pending proposals with respect thereto or (B) would adversely affect the business, financial condition or prospects of the Company in view of the disclosures which may be required or advisable thereby; provided, however, that the Company's right to cause cessation of sales hereunder may be exercised on only one occasion within any 360-day period and in no event may cause cessation of sales hereunder for more than 90 days on such occasion. (ii) the Holders shall have no right to take any action to restrain, enjoin or otherwise delay any registration pursuant to this Section -16- 11 as a result of any controversy that may arise with respect to the interpretation or implementation of this Agreement. (e) Indemnification. (i) The Company will indemnify each Holder, each of its officers, directors, employees, partners, each underwriter (if any) , legal counsel and accountants, and each person controlling such Holder within the meaning of Section 15 of the Act, with respect to which any registration, qualification or compliance has been effected pursuant to this Agreement, and each person who controls any underwriter within the meaning of Section 15 of the Act, against all expenses, claims losses, damages and liabilities (or action in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) or a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Holder, each of its officers, directors, employees, partners legal counsel and accountants, and each person controlling such holder, and each person who controls any such underwriter, for reasonable legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action as incurred; provided, however, that the Company will not be liable in any such case to the extent that any untrue statement or omission or allegation thereof is made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by or on behalf of such Holder and stated to be specifically for use in preparation of such registration statement, prospectus, offering circular or other document; and provided further that the Company will not be liable in any such case where the expense, claim, loss, damage or liability arises out of or is related to the failure of any Holder to comply with the covenants and agreement contained in this Agreement respecting sales of Registrable Securities; and provided further, that the indemnity with respect to any preliminary prospectus shall not inure to the benefit of any underwriter or seller of a security (or to the benefit of any person controlling such underwriter or seller) to the extent that any such claim, loss, damage or liability results from the fact that the definitive prospectus, as amended and supplemented, was not sent or delivered to the person asserting any such claims, losses, damages or liabilities at or prior to the written confirmation of the sale of Registrable Securities to such person and the untrue statement (or alleged untrue -17- statement) or omission (or alleged omission) of a material fact contained in a preliminary prospectus was corrected in the definitive prospectus, as amended or supplemented, provided that the Company delivered the definitive prospectus, as amended or supplemented, to, such underwriter or seller on a timely basis to permit such delivery or sending. (ii) Each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of it directors, officers, employees, partners, legal counsel and accountants, each underwriter, if any, and each person who controls the Company or such underwriter within the meaning of Section 15 of the Act, against all claims, losses, damages and liabilities (or actions in respect thereof), including any of the foregoing incurred in settlement of any litigation, commenced or threatened, arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereof, incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any failure by each such Holder to comply with the covenants or agreements contained in this Agreement respecting the Registrable Securities and will reimburse the Company, such directors, officers, employees, partners, legal counsel and accountants for reasonable legal and any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action as incurred, in each case to the extent, but only to the extent, that such untrue statement or omission or allegation thereof is made in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by or on behalf of such Holder and stated to be specifically for use in preparation of such registration statement, prospectus, offering circular or other document; provided, however, that the indemnity with respect to any preliminary prospectus shall not inure to the person controlling such underwriter or seller) to the extent that such claim, loss, damage or liability results from the fact that the definitive prospectus, as amended and supplemented, was not sent or delivered to the person asserting any such claim, loss, damage or liability at or prior to the written confirmation of the sale of the Registrable Securities to such person and the untrue statement (or alleged untrue statement) or omission (or alleged omission) of a material fact contained in a preliminary prospectus was corrected in the definitive prospectus, as amended or supplemented, provided that the Company delivered the definitive prospectus, as amended or -18- supplemented, to, such underwriter or seller on a timely basis to permit such delivery or sending. (iii) Each party entitled to indemnification under this subsection 11.4(e) the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, which shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Agreement, unless such failure is prejudicial to the Indemnifying Party in defending such claim or litigation. An Indemnifying Party shall not be liable for any settlement of an action or claim effected without its written consent (which consent will not be unreasonably withheld). (iv) If the indemnification provided for in this subsection 11.4(e) is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage or expense (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and all Holders offering shares in the offering (the "Selling Shareholders") on the other from the offering of the Company securities, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Selling Shareholders on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand, and the Selling Shareholders on the other shall be the net proceeds from the offering (before deducting expenses) received by the Company on the one hand and the Selling Shareholders on the other. the relative fault of the Company on the one hand and the Selling Shareholder on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of material fact or the omission or alleged omission to state a -19- material fact relates to information supplied by the Company on the one hand and/or the Selling Shareholders and the parties' relevant intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Selling Shareholders agree that it would not be just and equitable if contribution pursuant to this subsection 11.4(e) were based solely upon the number of entities from whom contribution was requested or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection 11.4(e). (f) Covenants of Holder (i) Each Holder agrees that, upon receipt of any notice from the Company of the happening of any event requiring the preparation of a supplement or amendment to a prospectus relating to Registrable Securities so that, as thereafter delivered to such Holder, such prospectus will not contain untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, each holder will forthwith discontinue disposition of Registrable Securities pursuant to the registration statements contemplated by Section 11 until its receipt of copies of the supplemented or amended prospectus from the Company and, if so directed by the company, each Holder shall deliver to the Company all copies, other than permanent file copies then in such Holders' possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. (ii) Each Holder agrees to notify the company, at any time when a prospectus relating to the registration statement contemplated by Section 11, is required to be delivered by it under the Act, of the occurrence of any event relating to such Holder which requires the preparation of a supplement or amendment to such Holder which requires the preparation of a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading relating to such Holder, and such Holder shall promptly make available to the Company the information to enable the Company to prepare any such supplement or amendment. Each Holder also agrees that, upon delivery of any notice by it to the Company of the happening of any event of the kind described in the next preceding sentence of this subsection, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to such registration statement until its receipt of the copies of the supplemental or amended prospectus contemplated by this subsection, which the Company shall promptly make available to such Holder and, if so directed by the Company, such Holder shall deliver to the Company all -20- copies, other than permanent file copies then in such Holder's possession, of the prospectus covering such Registrable Securities current at the time of receipt of such notice. (iii) Each Holder shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may request in writing or as shall be required in connection with any registration, qualification or compliance referred to in this Section 11. (iv) Each Holder hereby covenants with the Company (1) not to make any sale of the Shares without effectively causing the prospectus delivery requirements under the Act to be satisfied, and (2) if such Shares are to be sold by any method or in any transaction other than on a national securities exchange, in the over-the-counter market, on the Nasdaq National Market, in privately negotiated transactions, or in a combination of such method, to notify the Company at least five business days prior to the date on which such Holder first offers to sell any such Shares. Each Holder agrees not to take any action with respect to any distribution deemed to be made pursuant to such registration statement that constitutes a violation of Rule 10(b)-6 under the Exchange Act or any other applicable rule, regulation or law. (v) Each Holder acknowledges and agrees that in the event of sales under a shelf registration statement under subsection 11.4 hereof the Registrable Securities sold pursuant to such registration statement are not transferable on the books of the Company unless the stock certificate submitted to the transfer agent evidencing such Shares is accompanied by a certificate reasonably satisfactory to the Company to the effect that (A) the Registrable Securities have been sold in accordance with such registration statements and (B) the requirement of delivering a current prospectus has been satisfied. (vi) Whether prior to or after the time the registration rights contemplated by Section 11 have terminated with respect to the Holders, each Holder agrees that it will not effect any sale, disposition or other transfer of Shares or Registrable Securities (whether or not its Shares or Registrable Securities are included in the registration) except pursuant to such registration statement, for a period of 180 days (or for such longer period as each executive officer of the Company personally agrees to be bound in a similar lock-up agreement) from the effective date of a registration statement in the case of an IPO and for a period 120 days (or for such longer period as each executive officer of the Company personally agrees to be bound in a similar -21- lock-up agreement) from the effective date of a registration statement in the case of a secondary public offering; provided, however, that as to each such registration, the Holder's obligations shall be limited to be no greater than obligations of all executive officers and directors of the company pursuant to similar lock-up agreements. Each Holder agrees not to take any action with respect to any distribution deemed to be made pursuant to such registration statement that constitutes a violation of Rule 10(b)-6 under the Exchange Act or any other applicable rule, regulation or law. (g) Transfer of Registration Rights. The rights to cause the Company to include Registrable Securities in a Registration Statement granted to the Holder by the Company under Section 11 may be assigned only to a transferee of the Warrants that receives the Warrants in a transfer made in accordance with this Agreement and who gives the notices required under this Agreement. The rights of the Holder with respect to Registrable Securities as set out herein shall not be transferable to any other Person, and any attempted transfer shall cause all rights of such Holder therein to be forfeited. (h) Waivers and Amendments. With the written consent of the Company and the Majority Holders, any provision of Sections 11.3 and 11.4 may be waived (either generally or in a particular instance, either retroactively or prospectively and either for a specified period of time or indefinitely) or amended. Upon the effectuation of each such waiver or amendment, the Company shall promptly give written notice thereof to each Holder, if any, who have not previously received notice thereof or consented thereto in writing. (i) Termination of Registration Rights. Notwithstanding any thing to the contrary contained herein, at the Company's election, the registration rights of any Holder shall expire, and the Company may cease to keep any registration, qualification or compliance effective with respect to any Registrable Securities, and at such time as such Holder may sell under Rule 144 under the Act in a three-month period all Registrable Securities then held by such Holder. Section 12. Notices. Any notice pursuant to this Agreement by the Company or by the Warrantholder or a Holder of Shares shall be in writing and shall be deemed to have been duly given if delivered or mailed by certified or registered first class mail, return receipt requested and postage prepaid: (a) If to the Warrantholder or a Holder of Shares, addressed to James A. Kofalt, 50209 Manly, Chapel Hill, North Carolina 27514. -22- (b) If to the Company, addressed to it at Optel, Inc., 1111 West Mockingbird Lane, Dallas, Texas 75247, Attention: Chief Executive Officer (with a copy to the General Counsel of the Company at the same address). Each party may from time to time change the address to which notices to it are to be delivered or mailed hereunder by notice in accordance herewith to the other party. Section 13. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company, the Warrantholder or the Holder of Shares shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 14. Applicable Law. This Agreement shall be deemed to be a contract made under the laws of the State of Texas and for all purposes shall be construed in accordance with the laws of said State applicable to contracts made and to be performed entirely within such state. Section 15. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Warrantholder and the Holders of Shares any legal or equitable right, remedy or claim under this Agreement. This Agreement shall be for the sole and exclusive benefit of the Company, the Warrantholder and the Holders of Shares. Section 16. Counterparts. This Agreement may be executed in any number of counterparts each of which shall be deemed an original, but all of which shall constitute one and the same instrument. Section 17. Amendment. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by written instrument signed by the party against whom enforcement of any such amendment, waiver, discharge or termination is sought; provided, however, that any provisions hereof may be amended, waived, discharged or terminated upon the written consent of the Company and the Warrantholder having the right to acquire by virtue of holding the Warrants at least 50% of the Shares which are then issuable upon exercise of the then outstanding Warrants. Section 18. Termination of Company Obligations. Notwithstanding any other provision of this Agreement, all rights (but not the obligations) of any Warrantholder (including without limitation, both any successor to the original Warrantholder and any Holder of Shares) shall terminate and all obligations (but not all rights) of the Company shall terminate upon the first date that Mr. James A. Kofalt violates paragraphs 5 or 6 of the Separation Agreement. Section 19.Stockholders Agreement; Rights of First Refusal. In the event that the Warrant is exercised prior to an IPO, then the Warrantholder hereby agrees that he shall thereupon (and without any further action by the Warrantholder) become bound by the terms of the -23- Stockholders Agreement dated as of December 22, 1994 (the "Stockholders Agreement") among the Company VPC Corporation, Vanguard Communications, L. P. and Vanguard Communications, Inc. Any transfer by the Warrantholder of any Shares shall be subject to sections 6.4(a) and (b) and sections 6.6(a),(e) and (f) of the Stockholders Agreement as if the term "Vanguard" in such sections (and only in such sections) referred to the Warrantholder. The Warrantholder shall be subject to the restrictions and obligations of the Stockholders Agreement in favor of the Company and other stockholders, but shall not be entitled to the benefits arising therefrom other than the rights to receive compensation upon the exercise of any purchase rights by another stockholder or third party. If the Shareholders Agreement is terminated prior to an IPO, all shares will nonetheless be (without any further action by the Warrantholder) subject to the right of first refusal on the same terms as Sections 6.4(a) and (b) of such Shareholders Agreement (the "Stockholder Provisions") which are incorporated herein and made a part hereof as fully as though set forth herein at length. In such event, the Stockholder Provisions shall be enforceable and effective in accordance with the terms of this Agreement (with such changes as may be necessary or appropriate to (i) conform the names of the designated parties in such sections to the names of the parties hereto and (ii) to provide that defined terms used in such sections have the same meanings herein as in the Stockholders Agreement as the case may be) irrespective of the time of termination of the term of the Stockholders Agreement. This second paragraph of Section 19 shall be effective until the date of the closing an IPO. Upon the request of the Company, the Warrantholder will also enter a written agreement pursuant to which the Warrantholder further evidences his agreements as set forth in this Section. Section 20. Gender. The gender of words used in this Agreement shall be construed to include whichever may be appropriate under any particular circumstances of the masculine, feminine or neuter genders. -24- IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed, all as of the day and year first above written. OPTEL, INC. By: /s/ Rory Cole ------------------------------ Name: Rory Cole Title: Chief Operating Officer JAMES A. KOFALT /s/ James A. Kofalt ------------------------------ -25- EX-10.19 27 ASSIGNMENT AGREEMENT ASSIGNMENT AGREEMENT ASSIGNMENT AGREEMENT, dated as of February 14, 1997 (the "Agreement"), among TVMAX TELECOMMUNICATIONS, INC., a Delaware corporation ("TVMAX"), SUNSHINE TELEVISION ENTERTAINMENT, INC., a Florida corporation ("Sunshine"), RICHEY PACIFIC CABLEVISION, INC., a California corporation ("Richey"), IRPC ARIZONA, INC., an Arizona corporation ("IRPC" and, together with TVMAX, Sunshine and Richey, the "Assignors"), and TRANSMISSION HOLDINGS, INC., a Delaware corporation ("THI"). R E C I T A L S: Each Assignor is the licensee under the licenses and authorizations issued by the Federal Communications Commission ("FCC"') set forth opposite such Assignor's name in Exhibit 1 hereto (collectively, all such licenses and authorizations, the "Authorizations"). TVMAX owns, or has the right to use and license the use of, various microwave facilities and related equipment which are used for or in connection with certain transmission services pursuant to the Authorizations (all such facilities and equipment, the "Equipment"). Each Assignor wishes to assign to THI the Authorizations under which such Assignor is a licensee, and THI wishes to assume such Authorizations from each Assignor. THI and each Assignor will apply for FCC approval (the "FCC Consent") of the assignment of such Assignor's Authorizations, as contemplated hereby, and expect to receive, pending FCC Consent, special temporary authority (the "STA") from the FCC for such assignment. Concurrently herewith, as an inducement and a condition concurrent to the Assignors' entering into this Agreement, TVMAX and THI are entering into an Equipment License and Services Agreement, and an Option Agreement, relating to, among other things, the Equipment and the Authorizations. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. ASSIGNMENT AND ASSUMPTION. Effective as of earliest date on which the STAs for the assignment of all of the Authorizations have been received and are effective (the "Effective Date"), each of the Assignors hereby sells, assigns, transfers and conveys to THI, its permitted successors and assigns, forever, all of such Assignor's right and interest in and under all of the Authorizations set forth opposite such Assignor's name in Exhibit 1, and THI hereby assumes and agrees to pay, perform and discharge when due, all of such Assignors obligations that arise from and after the Effective Date under the Authorizations; provided, however, that in the event of, and immediately upon, the final non-appealable denial by the FCC of the FCC Consent with respect to any Authorization, the foregoing assignment and assumption of such Authorization and all of the transactions contemplated hereby with respect to such Authorization shall automatically become, and be deemed to be, void ab initio, subject to further FCC approval to the extent required, and all parties shall be restored, and shall take all such actions as may be necessary to restore all the other parties, to their respective positions and circumstances immediately prior to the Effective Date. 2. REPRESENTATIONS AND WARRANTIES OF Assignors. Each Assignor hereby represents and warrants to THI as follows: (a) As of the date hereof, the Authorizations set forth opposite such Assignor's name in Exhibit 1 are in full force and effect, and there is no proceeding pending, or, to such Assignor's knowledge, threatened, before the FCC, that could result in the revocation, or material impairment of any of the Authorizations. (b) Each Assignor has the full corporate power and authority to enter into this Agreement and to assign its rights under the Authorizations pursuant hereto, and this Agreement has been duly authorized, executed and delivered by such Assignor and (assuming due authorization, execution and delivery by all other parties) constitutes the legal, valid and binding obligation of such Assignor, enforceable against such Assignor in accordance with its terms. 3. REPRESENTATIONS MID WARRANTIES OF THI. THI represents and warrants to each Assignor as follows: (a) THI has the full corporate power and authority to enter into this Agreement and to assume the liabilities and obligations under the Authorizations pursuant hereto. This Agreement has been duly authorized, executed and delivered by THI and (assuming due authorization, execution and delivery of this Agreement by all other parties) constitutes the legal, valid and binding obligation of THI, enforceable against THI in accordance with its terms. 4. INDEMNIFICATION. TVMAX shall indemnify and hold harmless THI, its agents, affiliates, and their respective officers, directors, shareholders, partners and employees from and against any and all losses, damages, claims, demands, liabilities, costs and expenses (including reasonable attorneys' and other professionals' fees and expenses) attributable to, arising from or caused by any obligations or liabilities (including, without limitation, damages, fines, interest or penalties) accrued or owing or that may hereafter be accrued or owing with respect to any act, omission or event relating to the Authorizations that occurs prior to the Effective Date. 5. NOTICES. All notices, consents, instructions and other communications required or permitted under this Agreement (collectively, "Notice") shall be effective only if given in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered mail, return receipt requested, postage prepaid. Notice shall be sent in each case to the appropriate addresses or telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may from time to time designate as to itself by notice similarly given to the other parties in accordance herewith, which shall not be deemed given until received by the addressee). Notice shall be given: (1) to the Assignors: c/o TVMAX Telecommunications, Inc. 1111 West Mockingbird Lane Dallas, Texas 75247 Attention: General Counsel Telecopier: (214) 634-3889 with a copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036-7798 Attention: Ralph J. Sutcliffe, Esq. Telecopier: (212) 479-6275 (2) to THI: 1111 West Mockingbird Lane Dallas, Texas 75247 Attention: Rory O. Cole Telecopier: (214) 634-3850 with a copy to: Goldberg, Godles, Wiener & Wright 1229 Nineteenth Street, N.W. Washington, D.C. 20036 Attention: Joseph Godles, Esq. Telecopier: (202) 429-4912 6. AMENDMENTS. This Agreement may not be amended or terminated nor may any provision hereof be waived except by a writing signed by or on behalf of all parties hereto or, in the case of a waiver, by the party against which such waiver may be asserted. 7. FURTHER ACTION. Each party hereto shall cooperate fully with the other party and shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable laws, and execute and deliver such documents and other papers as may be required or appropriate to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated hereby, including, without limitation, to effect, obtain or facilitate any governmental approval or acceptance of this Agreement, the filing or recording hereof, or the consummation of the transactions contemplated hereby. 8. ENTIRE AGREEMENT. This Agreement, including all Exhibits hereto, and the other writings referred to herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. 9. SEVERABILITY. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction; provided, however, that if at any time the FCC determines that this Agreement is inconsistent with THI's licensee obligations or is otherwise contrary to FCC policies, rules and regulations, or statutes, the parties shall renegotiate this Agreement in good faith and recast this Agreement in terms that are likely to cure the defects perceived by the FCC and return a balance of benefits to all parties comparable to the balance of benefits provided by this Agreement on its current terms and by related agreements, of even date herewith, between the parties. If, after such good faith negotiations, either party determines that recasting this Agreement to meet the defects perceived by the FCC is impossible, either party may terminate this Agreement without further liability upon 180 days' prior notice, provided that FCC consent for a wind-down period of such length is obtained. 10. COUNTERPARTS. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 11. ASSIGNMENT. This Agreement, and the rights and obligations hereunder of the parties hereto, shall not be assigned or delegated (by operation of law or otherwise), in whole or in part, including, but not limited to, assignments or delegations effecting the assignment or transfer of control of the Authorizations, by any party without the prior written consent of the other parties hereto. The provisions of this Agreement shall bind and inure to the benefit of the respective permitted successors and assigns of the parties. 12. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York applicable to contracts entered into and to be performed wholly within such state. 13. HEADINGS. The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. IN WITNESS WHEREOF, this Assignment Agreement has been duly executed and delivered by or on behalf of the parties hereto as of the date first above written. TVMAX TELECOMMUNICATIONS, INC. By: /s/ Michael E. Katzenstein ------------------------------------ Name: Michael E. Katzenstein Title: Vice President SUNSHINE TELEVISION ENTERTAINMENT, INC. By: /s/ Michael E. Katzenstein ------------------------------------ Name: Michael E. Katzenstein Title: Vice President RICHEY PACIFIC CABLEVISION, INC. By: /s/ Michael E. Katzenstein ------------------------------------ Name: Michael E. Katzenstein Title: Vice President IRPC ARIZONA, INC. By: /s/ Michael E. Katzenstein ------------------------------------ Name: Michael E. Katzenstein Title: Vice President TRANSMISSION HOLDINGS, INC. By: /s/ Rory O. Cole ------------------------------------ Name: Rory O. Cole Title: President EXHIBIT 1 To the Assignment Agreement Authorizations EXHIBIT 1 - -------------------------------------------------------------------------------- LICENSE NAME FCC FILE NUMBER FCC CALL SIGN - -------------------------------------------------------------------------------- TVMAX TELECOMMUNICATIONS, INC. 726174 WNTZ720 TVMAX TELECOMMUNICATIONS, INC. 9602724168 WPJF208 TVMAX TELECOMMUNICATIONS, INC. 9507718013 WNTZ719 TVMAX TELECOMMUNICATIONS, INC. 96027240154 WPJE780 IRPC ARIZONA INC. 793687 WNTS892 IRPC ARIZONA INC. 9603724468 WNTS893 TVMAX TELECOMMUNICATIONS, INC. 726651 WPJF813 TVMAX TELECOMMUNICATIONS, INC. 9506716203 WNTZ721 TVMAX TELECOMMUNICATIONS, INC. 9603725256 WPJF741 TVMAX TELECOMMUNICATIONS, INC. 9505715056 WNTZ484 TVMAX TELECOMMUNICATIONS, INC. 9511721060 WNTY545 TVMAX TELECOMMUNICATIONS, INC. 9603725255 WPJF740 TVMAX TELECOMMUNICATIONS, INC. 9603725235 WNTY541 TVMAX TELECOMMUNICATIONS, INC. 9507718010 WNTY543 TVMAX TELECOMMUNICATIONS, INC. 9604725657 WPJA219 TVMAX TELECOMMUNICATIONS, INC. 9511721683 WPJA220 TVMAX TELECOMMUNICATIONS, INC. 9507718021 WNTZ986 TVMAX TELECOMMUNICATIONS, INC. 9507718011 WNTT455 TVMAX TELECOMMUNICATIONS, INC. 725908 WPJF314 TVMAX TELECOMMUNICATIONS, INC. 9506716879 WPJA554 TVMAX TELECOMMUNICATIONS, INC. 9506716149 WNTZ728 TVMAX TELECOMMUNICATIONS, INC. 9511721059 WPJD444 TVMAX TELECOMMUNICATIONS, INC. 9601723129 WNTZ861 RICHEY PACIFIC CABLEVISION 9602723753 WNTM202 RICHEY PACIFIC CABLEVISION 775401 WNTK644 RICHEY PACIFIC CABLEVISION 9511721061 WNTP503 RICHEY PACIFIC CABLEVISION 798856 WNTU342 TVMAX TELECOMMUNICATIONS, INC. 727153 WPJD443 TVMAX TELECOMMUNICATIONS, INC. 727646 WPNB396 RICHEY PACIFIC CABLEVISION 9507718014 WNTU344 TVMAX TELECOMMUNICATIONS, INC. 9505715055 WNTZ483 TVMAX TELECOMMUNICATIONS, INC. 9602724017 WPJE782 TVMAX TELECOMMUNICATIONS, INC. 727460 WPNB364 TVMAX TELECOMMUNICATIONS, INC. 9507716611 WNTZ863 RICHEY PACIFIC CABLEVISION 783103 WNTP502 RICHEY PACIFIC CABLEVISION 9511721062 WNTM733 TVMAX TELECOMMUNICATIONS, INC. 725909 WPJF315 TVMAX TELECOMMUNICATIONS, INC. 727647 WPNB397 TVMAX TELECOMMUNICATIONS, INC. 9506716607 WNTZ860 TVMAX TELECOMMUNICATIONS, INC. 9603725254 WPJF739 TVMAX TELECOMMUNICATIONS, INC. 9602724016 WPJE781 TVMAX TELECOMMUNICATIONS, INC. 9507718020 WNTZ985 RICHEY PACIFIC CABLEVISION 702728 WNTV718 TVMAX TELECOMMUNICATIONS, INC. 9506716610 WNTZ862 TVMAX TELECOMMUNICATIONS, INC. 9506716612 WNTZ864 TVMAX TELECOMMUNICATIONS, INC. 727461 WPNB365 TVMAX TELECOMMUNICATIONS, INC. 727532 WNTP850 - -------------------------------------------------------------------------------- Page 1 - -------------------------------------------------------------------------------- LICENSE NAME FCC FILE NUMBER FCC CALL SIGN - -------------------------------------------------------------------------------- TVMAX TELECOMMUNICATIONS, INC. 727533 WPJC636 TVMAX TELECOMMUNICATIONS, INC. 9511721158 WPJC635 TVMAX TELECOMMUNICATIONS, INC. 726170 WPJF328 TVMAX TELECOMMUNICATIONS, INC. 726173 WPJF330 TVMAX TELECOMMUNICATIONS, INC. 726171 WPJF329 TVMAX TELECOMMUNICATIONS, INC. 726172 WPJF342 TVMAX TELECOMMUNICATIONS, INC. 9604725253 WPJF742 TVMAX TELECOMMUNICATIONS, INC. 9604725475 WPJF424 TVMAX TELECOMMUNICATIONS, INC. 9603725252 WPJF738 TVMAX TELECOMMUNICATIONS, INC. 9511721154 WPJC631 TVMAX TELECOMMUNICATIONS, INC. 9511721155 WPJC632 TVMAX TELECOMMUNICATIONS, INC. 9511721156 WPJC633 TVMAX TELECOMMUNICATIONS, INC. 9511721157 WPJC634 TVMAX TELECOMMUNICATIONS, INC. 9509719902 WPJB536 TVMAX TELECOMMUNICATIONS, INC. 9604725852 WNTM918 TVMAX TELECOMMUNICATIONS, INC. 9604725851 WPJF667 TVMAX TELECOMMUNICATIONS, INC. 9604725853 WNTN793 TVMAX TELECOMMUNICATIONS, INC. 9601723134 WNTZ572 TVMAX TELECOMMUNICATIONS, INC. 9505715240 WNTX955 TVMAX TELECOMMUNICATIONS, INC. 9511721463 WPJD340 TVMAX TELECOMMUNICATIONS, INC. 9511721464 WPJD341 TVMAX TELECOMMUNICATIONS, INC. 9602723898 WPJE955 TVMAX TELECOMMUNICATIONS, INC. 9505715274 WNTN239 TVMAX TELECOMMUNICATIONS, INC. 9505715224 WNTZ567 TVMAX TELECOMMUNICATIONS, INC. 9505715225 WNTZ568 TVMAX TELECOMMUNICATIONS, INC. 9505715227 WNTZ570 TVMAX TELECOMMUNICATIONS, INC. 9505715228 WNTZ571 TVMAX TELECOMMUNICATIONS, INC. 9505715223 WNTZ566 SUNSHINE TV ENTERTAINMENT 9505715047 WNTN784 SUNSHINE TV ENTERTAINMENT 702293 WNTV452 SUNSHINE TV ENTERTAINMENT 798584 WNTN784 SUNSHINE 1V ENTERTAINMENT 9505715044 WNTY540 SUNSHINE TV ENTERTAINMENT 9412710185 WNTX646 SUNSHINE TV ENTERTAINMENT 9412710184 WNTX645 SUNSHINE JV ENTERTAINMENT 9412710183 WNTX644 SUNSHINE TV ENTERTAINMENT 702546 WNTU230 SUNSHINE TV ENTERTAINMENT 727432 WPNB362 SUNSHINE TV ENTERTAINMENT 9505715048 WNTZ580 - -------------------------------------------------------------------------------- Page 2 EX-10.20 28 EQUIPMENT LEASE EQUIPMENT LICENSE EQUIPMENT LICENSE AGREEMENT, dated as of February 14, 1997 (the "Agreement"), between TVMAX TELECOMMUNICATIONS, INC., a Delaware corporation ("TVMAX") and IRPC ARIZONA, INC., an Arizona corporation ("Licensor"). R E C I T A L S: Licensor owns the microwave facilities and related equipment (all such facilities and equipment, the "Equipment") used to provide transmission services, and otherwise associated with the operation of 18-Gigahertz microwave paths, pursuant to the licenses and authorizations, issued by the Federal Communications Commission ("FCC") set forth in Schedule 1 hereto (the "Authorization). Concurrently herewith, (i) TVMAX, Licensor and certain of their affiliates are entering into an Assignment Agreement with Transmission Holdings, Inc. ("THI"), pursuant to which, among other things, Licensor is assigning to THI, and THI is assuming from Licensor, the Authorizations; and (ii) TVMAX and THI are entering into an Equipment License and Services Agreement, pursuant to which TVMAX is granting to THI a non-exclusive right and license to use certain of TVMAX's and its affiliates' microwave facilities and related equipment (including the Equipment), whether now owned or hereafter acquired, and THI will be providing to TVMAX certain transmission capacity services. TVMAX desires to obtain from Licensor, and Licensor is willing to grant to TVMAX, a non-exclusive royalty-free right and license, with the right to sublicense, to use the Equipment. NOW, THEREFORE, in consideration of the foregoing and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. Grant of License. Licensor hereby grants to TVMAX for the Term (as defined in Section 2) a non-exclusive non-assignable royalty-free right and license, with the right to sublicense, to use the Equipment pursuant to and in accordance with the Authorizations. 2. Term. The term of this Agreement shall commence on the date first set forth above and, unless otherwise terminated, renewed or extended as provided herein, shall continue in effect for a term of ten (10) years, terminating on February 13, 2007 (the "Initial Term", and together with any renewal terms, the "Term"). Upon termination of the Initial Term, the Term shall be automatically renewed for successive 10 year renewal terms, unless either party notifies the other at least six months prior to the expiration of the Initial Term or the then current renewal term of its intent not to renew the Term. 3. Amendments. This Agreement may not be amended or terminated nor may any provision hereof be waived except by a writing signed by or on behalf of all parties hereto or, in the case of a waiver, by the party against which such waiver may be asserted. 4. Further Action. Each party hereto shall cooperate fully with the other party and shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable laws, and execute and deliver such documents and other papers as may be required or appropriate to carry out the provisions of this Agreement and consummate, perform and make effective the transactions contemplated hereby. 5. Entire Agreement. This Agreement, including all Schedules hereto, contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. 6. Severability; Renegotiation Upon FCC Action. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction; provided, however, that if at any time during the term of this Agreement the FCC determines that this Agreement is inconsistent with or contrary to FCC policies, rules and regulations, or statutes, the parties shall renegotiate this Agreement in good faith and recast this Agreement in terms that are likely to cure the defects perceived by the FCC and return a balance of benefits to both parties comparable to the balance of benefits provided by related agreements between the parties of this date and by this Agreement in its current terms. If, after such good faith negotiations, either party determines that recasting this Agreement to meet the defects perceived by the FCC is impossible, either party may terminate this Agreement without further liability upon 180 days' prior notice, provided that FCC consent for a wind-down period of such length is obtained. 7. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and it -2- shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 8. Assignment. This Agreement, and the rights and obligations hereunder of the parties hereto, shall not be assigned or delegated (by operation of law or otherwise), in whole or in part, by either party without the prior written consent of the other party hereto. The provisions of this Agreement shall bind and inure to the benefit of the respective permitted successors and assigns of the parties. 9. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York applicable to contracts entered into and to be performed wholly within such state. 10. Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. -3- IN WITNESS WHEREOF, this Equipment License has been duly executed and delivered by or on behalf of he parties hereto as of the date first above written. TVMAX TELECOMMUNICATIONS, INC. By: /s/ Michael E. Katzenstein ----------------------------- Name: Michael E. Katzenstein Title: Vice President IRPC ARIZONA, INC. By: /s/ Michael E. Katzenstein ----------------------------- Name: Michael E. Katzenstein Title: Vice President -4- SCHEDULE 1 To the Equipment License AUTHORIZATIONS FCC FILE NUMBER FCC CALL SIGN - --------------- ------------- 793687 WNTS892 96037244684 WNTS893 -5- EX-10.21 29 SHAREHOLDER OPTION AGREEMENT SHAREHOLDER OPTION AGREEMENT SHAREHOLDER OPTION AGREEMENT, dated as of February 14, 1997 (the "Agreement" between TELEX TELECOMMUNICATIONS, INC., a Delaware corporation ("TVMAX") , and Henry Goldberg (the "Shareholder"). RECITALS: The Shareholder owns 100 shares of common stock, $.01 par value per share (the "Common Stock"), of Transmission Holdings, Inc., a Delaware corporation ("THI"). Concurrently herewith, (i) TVMAX, certain of its affiliates and THI are entering into an Assignment Agreement (the "Assignment"), pursuant to which TVMAX and certain of its affiliates are assigning to THI, and THI is assuming from TVMAX and such affiliates, effective as of the date (the "Effective Date") of receipt of grants of all required special temporary authority from the Federal Communications Commission ("FCC"), the various licenses and authorizations issued by the FCC and set forth in Schedule 1 (the "Assigned Authorizations"); and (ii) TVMAX and THI are entering into an Equipment License and Services Agreement (the "Services Agreement"), effective as of the Effective Date, pursuant to which TVMAX is granting to THI a non-exclusive right and license to use certain of TVMAX's and its affiliates' microwave facilities and related equipment, whether now owned or hereafter acquired (the "Equipment"), and THI will be providing to TVMAX transmission capacity services through the use of the Equipment, the Assigned Authorizations and the licenses and authorizations that THI may obtain in the future (together with the Assigned Authorizations, the "Authorizations"). Pursuant to the terms of the Services Agreement, THI is executing a certain promissory note (the "Note"), dated the Effective Date, in favor of TVMAX. In connection with, and as a condition to its entering into, the Assignment and the Services Agreement, TVMAX desires to be granted an option by each shareholder of THI, including the Shareholder, to purchase all of such shareholder's shares of Common Stock, and the Shareholder is willing to grant such option to TVMAX. Concurrently herewith, THI is entering into an Option Agreement with TVMAX (the "Asset Option Agreement"), pursuant to which THI is granting to TVMAX an option (the "Asset Option") to purchase all or, in certain circumstances, some of the assets of THI. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the parties agree as follows: 1. Option to Purchase Shares or Capital Stock of THI. (a) At any time during the Term (as defined below), TVMAX may, by giving written notice to the Shareholder of its election to do so (the "Exercise Notice"), require the Shareholder to sell to TVMAX, or such other person (the "Nominee") as TVMAX may designate, all, but not less than all, of the Company Shares (as defined below) owned by the Shareholder on the Closing Date (as defined below) (the "Shares"), for a purchase price equal to the lesser of (the "Purchase Price") (i) the book value (calculated in accordance with generally accepted accounting principles) of the Shares on and as of the Closing Date and (ii) the purchase price paid for the Shares by the Shareholder plus a premium of 10% per annum, compounded annually from the date of such purchase to the Closing Date. Upon delivery of the Exercise Notice by TVMAX to the Shareholder, TVMAX shall be obligated to buy from the Shareholder, and the Shareholder shall be obligated to sell to TVMAX, on the Closing Date the Shares for the Purchase Price. (b) For the purposes hereof, "Company Shares" of the Shareholder means and includes all shares of capital stock of THI now owned or hereafter acquired, beneficially or of record, by such Shareholder, irrespective of the time and manner of acquisition, including without limitation any securities resulting from a stock split, combination, recapitalization, dividend or exchange of Company Shares. (c) Closing. The closing of the purchase and sale of the Shares (the "Closing") pursuant to Section l(a) shall take place at the offices of Kronish, Lieb, Weiner, Hellman LLP, at 1114 Avenue of the Americas, New York, New York 10036, on the earlier of (the "Closing Date") (i) the date and time specified by TVMAX in the Exercise Notice, which date shall be at least 15 days but no more than 60 days from the date of such notice, or (ii) at least 10 days but no more than 30 days after the satisfaction of all of the conditions specified in Sections 9 and 10 hereof. At the Closing, (i) TVMAX (or the Nominee) shall pay the Purchase Price to the Shareholder, by, at TVMAX's option, wire transfer of immediately available funds, bank or certified check, or otherwise as may be agreed by TVMAX and the Shareholder, and (ii) the Shareholder shall deliver to TVMAX (or the Nominee) (A) the certificates representing the Shares together with such instruments as TVMAX shall reasonably request to effect the transfer thereof, (B) all necessary stock transfer stamps or funds for the purchase thereof (or so much thereof as is then due and payable), and (C) a certificate executed by the Shareholder containing representations to the effect that the Shareholder owns all right, title and interest in and to such -2- Shares, free and clear of all liens, claims, rights or other encumbrances, that he has duly authorized the sale of such Company Shares hereunder, and that all of the conditions to TVMAX's obligations to consummate the Closing have been satisfied on or prior to the date thereof. 2. Forbearances Related to the Options. The Shareholder hereby covenants and agrees that, during the Term, he shall take, or cause to be taken, all actions that would cause THI to perform, comply with and be bound by, each of the agreements, covenants and obligations of THI contained in the Note. 3. Term of the Option. TVMAX may give the Exercise Notice at any time beginning on the Effective Date and ending on the earlier of (the "Term") (i) tenth anniversary of the Effective Date and (ii) the date of closing of the exercise by TVMAX of the Asset Option pursuant to the Asset Option Agreement. 4. Covenants of the Parties. (a) Preservation of THI Assets; Accounts. During the Term, the Shareholder shall take, or cause to be taken, all action necessary to cause THI to (i) preserve, protect, renew and keep in full force and effect its existence, rights, licenses (including, without limitation, the Authorizations), permits, patents, trademarks, trade names and franchises, (ii) comply with all laws and regulations applicable to it, (iii) preserve, repair and maintain all assets and properties utilized in the conduct of its business, and (iv) maintain complete and accurate accounting books and records which shall reflect the transactions of the business of THI and the book value of the assets of THI in accordance with generally accepted accounting principles consistently applied. (b) Acquisitions and Dispositions of Company Shares. The option granted to TVMAX hereunder shall follow the Company Shares of the Shareholder in the event of any Transfer (as defined below) thereof and shall be binding upon any purchaser, assignee, pledgee or Transferee of the Shareholder. From and after the date of the Exercise Notice, the Shareholder may not acquire or Transfer any Company Shares, except with the prior consent of TVMAX. For the purposes hereof, "Transfer," as to any Company Shares, means any sale, exchange, assignment, the creation of any option or right to purchase, security interest or other encumbrance, and any other disposition of any kind whether voluntary or involuntary, affecting title to, possession of or voting rights in respect of such Company Shares, or any interest therein. (c) Legend. Each certificate representing Company Shares now or hereafter registered in the name of the Shareholder (or any permitted purchaser, assignee, pledges or Transferee), shall be endorsed with a legend substantially as follows: -3- "The shares presented by this certificate are subject to an option to purchase such shares exercisable at any time by TVMAX Telecommunications, Inc. ("TVMAX") pursuant to a Shareholder Option Agreement, dated as of February 14, 1997, between TVMAX and Henry Goldberg. The holder of this certificate, by acceptance hereof, agrees to be bound by all the terms of such Agreement, as the same may be in effect from time to time." (d) FCC Consent; Etc. Promptly after his receipt of the Exercise Notice, the Shareholder shall, and shall cause THI to, (i) apply for and use its reasonable efforts to obtain, to the extent required by law, the consent of the FCC to a transfer of control of THI (the "FCC Consent") and (ii) use the Shareholder's and THI's reasonable efforts (without expenditure of any funds by the Shareholder) to satisfy the other conditions contained herein and in the notice of exercise of such option. 5. Further Assurances; Renegotiation Upon FCC Action; Power of Attorney. (a) Further Assurances. Each party hereto shall cooperate fully with the other party and shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable laws, and execute and deliver such documents and other papers as may be required or appropriate to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated hereby, including, without limitation, to take such further action as may be necessary or desirable to comply with the requirements of the FCC, including, without limitation (i) the execution and delivery of such further instruments and documents or amendments to this Agreement as may reasonably be acceptable to the FCC and (ii) the application for, and obtaining from, the FCC any interim authorizations that may be necessary or desirable to assure the continued operation of the THI Business pending the Closing. (b) Renegotiation Upon FCC Action. If at any time during the term of this Agreement the FCC determines that this Agreement is inconsistent with THI's licensee obligations or is otherwise contrary to FCC policies, rules and regulations, or statutes, the parties shall renegotiate this Agreement in good faith and recast this Agreement in terms that are likely to cure the defects perceived by the FCC and return a balance of benefits to both parties comparable to the balance of benefits provided by this Agreement on its current terms and by related agreements, of even date herewith, between the parties. If, after such good faith negotiations, either party determines that recasting this Agreement to meet the defects perceived by the FCC is impossible, either party may terminate this Agreement without further liability upon 180 days' prior notice, provided that FCC consent for a wind-down period of such length is obtained. -4- (c) Power of Attorney. In furtherance of the foregoing, the Shareholder does hereby constitute and appoint TVMAX, with effect from the date of the Exercise Notice, as his true and lawful representative and attorney-in-fact, in his name, place and stead, at TVMAX's own cost and expense, to make, execute, sign and file with the FCC or other authority all such applications, other instruments, documents, and certificates, which in each case, may from time to time be required by applicable law to obtain all authorizations, consents, approvals, licenses, franchises, permits and certificates by or of all governmental bodies, including, but not limited to, the FCC, which TVMAX may deem necessary to effect the valid transfer and assignment of the shares to TVMAX (or the Nominee). 6. Representations and Warranties of THI. THI hereby represents and warrants to TVMAX: (a) Organization, Power Etc. THI is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it was organized and is duly qualified to do business in the jurisdictions in which it conducts business where failure to do so would have a material adverse effect on its financial condition. THI has all requisite power and authority to own, operate, and lease its properties and to carry on its business (including the THI Business) as now being conducted and to execute and deliver this Agreement and to perform its obligations hereunder. (b) Subsidiaries. Etc. THI does not own of record or beneficially, directly or indirectly, (i) any shares of outstanding capital stock or securities convertible into capital stock of any other corporation or (ii) any participating interest in any limited liability company, partnership, joint venture, or other non-corporate business enterprise. (c) Authorization of Agreement. The execution, delivery, and performance of this Agreement by THI and the consummation by it of the transactions contemplated hereby have been duly authorized by all requisite corporate action. This Agreement (assuming the due execution and delivery hereof by all other parties) constitutes the legal, valid and binding obligation of THI, enforceable in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws from time to time in effect which affect creditors' rights generally and by legal and equitable limitations on the availability of specific performance and other equitable remedies. (d) Effect of Agreement. The execution and delivery by it of this Agreement and the consummation by it of the transactions contemplated hereby will not violate any provision of law, its Certificate of Incorporation, By-laws, or any -5- judgment, award, or decree or any indenture, agreement, or other instrument to which it is a party, or by which it or any of its properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, or other instrument, or result in the creation or imposition of any lien, charge, security interest, or encumbrance of any nature whatsoever upon any of its properties or assets, which violation, breach, default, or lien would have a material adverse effect on its financial condition. (e) Governmental Approvals. Other than the FCC Consent, no approval, authorization, consent, or order or action of or filing with any court, administrative agency or other governmental authority is required for the execution and delivery by it of this Agreement or the consummation by it of the transactions contemplated hereby. (f) Financial Condition. Except as set forth on the Opening Balance Sheet, THI has no liabilities, whether absolute, accrued, or contingent, whether or not such liabilities would be required to be reflected on a balance sheet of THI as of the date hereof prepared in accordance with generally accepted accounting principles. (g) Litigation. There are no actions, suits, or proceedings with respect to the business of THI pending or, to the knowledge of THI, threatened before or by any federal, state, municipal, foreign, or other court, governmental department, commission, board, bureau, agency or instrumentality, or arbitration tribunal. To the knowledge of THI, there are no orders, judgments or decrees of any court or governmental agency, domestic or foreign, which apply, in whole or in part, to THI, which would have a material adverse effect on the financial condition, business, or operations of THI. (h) Compliance With Law. THI is not in default under any order of any court, governmental authority or arbitration board or tribunal to which it is a party, and, to the knowledge of THI, it has not been notified that it is in violation of any laws, ordinances, governmental rules, or regulations to which it is subject or has failed to obtain any licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its assets and properties or to the conduct of the business, the violation or which or failure to obtain might reasonably be expected, individually or in the aggregate, to materially adversely affect the operations or condition (financial or other) of THI. (i) THI and the THI Business. THI has good title to all of the assets comprising the THI Business and all of the assets used in and relating to the THI Business, free and clear of all liens, encumbrances and security interests of any kind. -6- Each of the Operative Agreements is in full force and effect and is assignable to TVMAX or the TVMAX Nominee, as the case may be, pursuant to the terms thereof. The Authorizations are in full force and effect, and there is no proceeding pending before the FCC, or, to the knowledge of THI, threatened, that could result in the revocation or material impairment of one or more of the Authorizations. The THI Business has been operated in accordance with FCC rules, regulations and policies in all material respects. 7. Representations and Warranties of TVMAX. The Shareholder represents and warrants to THI as follows: (a) Organization, Power, Etc. To the best of the Shareholder's knowledge, TVMAX is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it was organized and is qualified to do business in each jurisdiction where the failure to do so would have a material adverse effect on its financial condition. (b, Authorization of Agreements. The Shareholder has all requisite power and authority to execute and deliver this Agreement and to perform his obligations hereunder. This Agreement (assuming the due execution and delivery hereof by TVMAX) constitutes the legal, valid and binding obligation of the Shareholder, enforceable in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws from time to time in effect which affect creditors' rights generally and by legal and equitable limitations on the availability of specific performance and other equitable remedies. (c) Effect of Agreement. The execution and delivery by the Shareholder of this Agreement and the consummation by him of the transactions contemplated hereby will not violate any provision of law, or any judgment, award, or decree or any indenture, agreement, or other instrument to which he is a party, or by which he or any of his properties or assets is bound. (d) Governmental Approvals. Other than the FCC Consent, no approval, authorization, consent, or order or action of or filing with any court, administrative agency or other governmental authority is required for the execution and delivery by the Shareholder of this Agreement or the consummation by him of the transactions contemplated hereby. 8. Conditions Precedent to the Obligations of TVMAX. The obligations of TVMAX to consummate the Closing are subject to the satisfaction in all material respects at or prior to such closing of each of the following conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of the Shareholder contained -7- herein or in any certificate or document delivered to TVMAX pursuant hereto, and the representations and warranties of THI contained in the Asset Option Agreement, shall he true and correct in all material respects on and as of the date of such closing as though made at and as of that date, and the Shareholder and THI shall have delivered to TVMAX an appropriate certificate to such effect regarding their respective representations and warranties. (b) Compliance with Covenants. The Shareholder shall have performed and complied with all terms, agreements, covenants, and conditions of this Agreement to be performed or complied with by him at the Closing, and shall have delivered to TVMAX a certificate to such effect. (c) Opinions of Counsel. TVMAX shall have received an opinion of counsel to THI, in form and substance satisfactory to TVMAX. (d) Legal Actions or Proceedings. No legal action or proceeding shall have been instituted or threatened seeking to restrain, prohibit, invalidate, or otherwise affect the consummation of the transactions contemplated hereby or which would, if adversely decided, materially adversely affect the operation by TVMAX of the business of THI. (e) Approvals and Consents. There shall have been obtained and continue in full force and effect all authorizations, consents, approvals, licenses, franchises, permits and certificates by or of all governmental bodies, including, but not limited to, the FCC, and of all other third persons which TVMAX may deem necessary to permit the consummation of the Closing, and to effect the valid transfer and assignment of the Shares to TVMAX (or the Nominee) free and clear of any liens, encumbrances and other security interests. 9. Conditions Precedent to the Obligations of the Shareholder. The obligations of the Shareholder to consummate the Closing are subject to the satisfaction in all material respects at or prior to the Closing of each of the following conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of TVMAX contained in this Agreement or in any certificate or document delivered pursuant hereto shall be true and correct in all material respects on and as of such date as though made at and as of that date, and TVMAX shall have delivered a certificate, signed by the President or a Vice President of TVMAX (an "TVMAX Officer's Certificate"), to such effect. (b) Compliance with Covenants. TVMAX shall have performed and complied with all terms, agreements, covenants and -8- conditions of this Agreement to be performed or complied with by TVMAX at such date, and TVMAX shall have delivered an TVMAX Officer's Certificate to such effect. (c) All Proceedings To Be Satisfactory. All corporate and other proceedings to be taken by TVMAX in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to THI and its counsel. 10. Indemnification. TVMAX shall indemnify, defend and hold the Shareholder harmless from and against any and all losses, liabilities, obligations, damages, claims, deficiencies, amounts paid in settlement, assessments, judgments, penalties, costs and expenses (including, without limitation, reasonable attorneys' and other professionals' fees and charges incurred in connection with investigating, defending or preparing to defend any notices, actions, suits or proceedings) based upon, attributable to, arising out of or resulting from any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, to which the Shareholder is, or threatened to be made, a party by reason of the fact that he is or was a director, officer, employee or agent of THI, provided, that the Shareholder acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of THI, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. 11. Notices. All notices, consents, instructions and other communications required or permitted under this Agreement (collectively, "Notice") shall be effective only if given in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered mail, return receipt requested, postage prepaid. Notice shall be sent in each case to the appropriate addresses or telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may from time to time designate as to itself by notice similarly given to the other parties in accordance herewith, which shall not be deemed given until received by the addressee). Notice shall be given: 1) to TVMAX: 1111 West Mockingbird Lane Dallas, Texas 75247 Attention: General Counsel Telecopier: (214) 634-3889 -9- with a copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036-7798 Attention: Ralph J. Sutcliffe, Esq. Telecopier: (212) 479-6275 2) to the Shareholder: Mr. Henry Goldberg 1229 Nineteenth Street, N.W. Washington, DC 20036 Telecopier: (202) 429-4912 12. Amendments. This Agreement may not be amended or terminated nor may any provision hereof be waived except by a writing signed by or on behalf of all parties hereto or, in the case of a waiver, by the party against which such waiver may be asserted. 13. Entire Agreement. This Agreement, including all Schedules hereto, and the other writings referred to herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. 14. Severability. Except as provided in Section 5(b), any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. -10- 16. Assignment. This Agreement, and the rights and obligations of the parties hereunder shall not be assigned or delegated (by operation of law or otherwise), in whole or in part, by either party without the prior written consent of the other party hereto, except that TVMAX shall have the right to designate a Nominee pursuant to Section l(a). The provisions of this Agreement shall bind and inure to the benefit of the respective permitted successors and assigns of the parties. 17. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York applicable to contracts entered into and to be performed wholly within such state. -11- 18. Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. IN WITNESS WHEREOF, this Shareholder Option Agreement has been duly executed and delivered by or on behalf of the parties hereto as of the date first above written. TVMAX TELECOMMUNICATIONS, INC. By: /s/ Michael E. Katzenstein ----------------------------- Name: Michael E. Katzenstein Title: Vice President ___________________________________ Henry Goldberg -12- SCHEDULE 1 To the Option Agreement Attached hereto is a list of the Authorizations effective as of February 14, 1997. -1- SCHEDULE 1
- -------------------------------------------------------------------------------- LICENSE NAME FCC FILE NUMBER FCC CALL SIGN - -------------------------------------------------------------------------------- TVMAX TELECOMMUNICATIONS, INC. 726174 WNTZ720 TVMAX TELECOMMUNICATIONS, INC. 9602724168 WPJF208 TVMAX TELECOMMUNICATIONS, INC. 9507718013 WNTZ719 TVMAX TELECOMMUNICATIONS, INC. 9602724015 WPJE780 IRPC ARIZONA INC 793687 WNTS892 IRPC ARIZONA INC 96037244684 WNTS893 TVMAX TELECOMMUNICATIONS, INC. 726651 WPJF813 TVMAX TELECOMMUNICATIONS, INC. 9506716203 WNTZ721 TVMAX TELECOMMUNICATIONS, INC. 9603725256 WPJF741 TVMAX TELECOMMUNICATIONS, INC. 9505715056 WNTZ484 TVMAX TELECOMMUNICATIONS, INC. 9511721060 WNTY545 TVMAX TELECOMMUNICATIONS, INC. 9603725255 WPJF740 TVMAX TELECOMMUNICATIONS, INC. 9603725235 WNTY541 TVMAX TELECOMMUNICATIONS, INC. 9507718010 WNTY543 TVMAX TELECOMMUNICATIONS, INC. 9604725657 WPJA219 TVMAX TELECOMMUNICATIONS, INC. 9511721683 WPJA220 TVMAX TELECOMMUNICATIONS, INC. 9507718021 WNTZ986 TVMAX TELECOMMUNICATIONS, INC. 9507718011 WNTT455 TVMAX TELECOMMUNICATIONS, INC. 725908 WPJF314 TVMAX TELECOMMUNICATIONS, INC. 9506716879 WPJA554 TVMAX TELECOMMUNICATIONS, INC. 9506716149 WNTZ728 TVMAX TELECOMMUNICATIONS, INC. 9511721059 WPJD444 TVMAX TELECOMMUNICATIONS, INC. 9601723129 WNTZ861 RICHEY PACIFIC CABLEVISION 9602723753 WNTM202 RICHEY PACIFIC CABLEVISION 775401 WNTK644 RICHEY PACIFIC CABLEVISION 9511721061 WNTP503 RICHEY PACIFIC CABLEVISION 798856 WNTU342 TVMAX TELECOMMUNICATIONS, INC. 727153 WPJD443 TVMAX TELECOMMUNICATIONS, INC. 727646 WPNB396 RICHEY PACIFIC CABLEVISION 9507718014 WNTU344 TVMAX TELECOMMUNICATIONS, INC. 9505715055 WNTZ483 TVMAX TELECOMMUNICATIONS, INC. 9602724017 WPJE782 TVMAX TELECOMMUNICATIONS, INC. 727460 WPNB364 TVMAX TELECOMMUNICATIONS, INC. 9507716611 WNTZ863 RICHEY PACIFIC CABLEVISION 783103 WNTP502 RICHEY PACIFIC CABLEVISION 9511721062 WNTM733 TVMAX TELECOMMUNICATIONS, INC. 725909 WPJF315 TVMAX TELECOMMUNICATIONS, INC. 727647 WPNB397 TVMAX TELECOMMUNICATIONS, INC. 9506716607 WNTZ860 TVMAX TELECOMMUNICATIONS, INC. 9603725254 WPJF739 TVMAX TELECOMMUNICATIONS, INC. 9602724016 WPJE781 TVMAX TELECOMMUNICATIONS, INC. 9507718020 WNTZ985 RICHEY PACIFIC CABLEVISION 702728 WNTV718 TVMAX TELECOMMUNICATIONS, INC. 9506716610 WNTZ862 TVMAX TELECOMMUNICATIONS, INC. 9506716612 WNTZ864 TVMAX TELECOMMUNICATIONS, INC. 727461 WPNB365 TVMAX TELECOMMUNICATIONS, INC. 727532 WNTP850 - --------------------------------------------------------------------------------
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- -------------------------------------------------------------------------------- LICENSE NAME FCC FILE NUMBER FCC CALL SIGN - -------------------------------------------------------------------------------- TVMAX TELECOMMUNICATIONS, INC 727533 WPJC636 TVMAX TELECOMMUNICATIONS, INC 9511721158 WPJC635 TVMAX TELECOMMUNICATIONS, INC 726170 WPJF328 TVMAX TELECOMMUNICATIONS, INC 726173 WPJF330 TVMAX TELECOMMUNICATIONS, INC 726171 WPJF329 TVMAX TELECOMMUNICATIONS, INC 726172 WPJF342 TVMAX TELECOMMUNICATIONS, INC 9604725253 WPJF742 TVMAX TELECOMMUNICATIONS, INC 9604725475 WPJF424 TVMAX TELECOMMUNICATIONS, INC 9603725252 WPJF738 TVMAX TELECOMMUNICATIONS, INC 9511721154 WPJC631 TVMAX TELECOMMUNICATIONS, INC 9511721155 WPJC632 TVMAX TELECOMMUNICATIONS, INC 9511721156 WPJC633 TVMAX TELECOMMUNICATIONS, INC 9511721157 WPJC634 TVMAX TELECOMMUNICATIONS, INC 9509719902 WPJB536 TVMAX TELECOMMUNICATIONS, INC 9604725852 WNTM918 TVMAX TELECOMMUNICATIONS, INC 9604725851 WPJF667 TVMAX TELECOMMUNICATIONS, INC 9604725853 WNTN793 TVMAX TELECOMMUNICATIONS, INC 9601723134 WNTZ572 TVMAX TELECOMMUNICATIONS, INC 9505715240 WNTX955 TVMAX TELECOMMUNICATIONS, INC 9511721463 WPJD340 TVMAX TELECOMMUNICATIONS, INC 9511721464 WPJD341 TVMAX TELECOMMUNICATIONS, INC 9602723898 WPJE955 TVMAX TELECOMMUNICATIONS, INC 9505715274 WNTN239 TVMAX TELECOMMUNICATIONS, INC 9505715224 WNTZ567 TVMAX TELECOMMUNICATIONS, INC 9505715225 WNTZ568 TVMAX TELECOMMUNICATIONS, INC 9505715227 WNTZ570 TVMAX TELECOMMUNICATIONS, INC 9505715228 WNTZ571 TVMAX TELECOMMUNICATIONS, INC 9505715223 WNTZ566 SUNSHINE TV ENTERTAINMENT 9505715047 WNTN784 SUNSHINE TV ENTERTAINMENT 702293 WNTV452 SUNSHINE TV ENTERTAINMENT 798584 WNTN784 SUNSHINE 1V ENTERTAINMENT 9505715044 WNTY540 SUNSHINE TV ENTERTAINMENT 9412710185 WNTX646 SUNSHINE TV ENTERTAINMENT 9412710184 WNTX645 SUNSHINE JV ENTERTAINMENT 9412710183 WNTX644 SUNSHINE TV ENTERTAINMENT 702546 WNTU230 SUNSHINE TV ENTERTAINMENT 727432 WPNB362 SUNSHINE TV ENTERTAINMENT 9505715048 WNTZ580 - --------------------------------------------------------------------------------
Page 2 EXHIBIT lO.2l LIST OF SHAREHOLDBRS OF THI Henry Goldberg Rory O. Cole Russell S. Berman EX-10.22 30 OPTION AGREEMENT OPTION AGREEMENT OPTION AGREEMENT, dated as of February 14, 1997 (the "Agreement"), between TVMAX TELECOMMUNICATIONS, INC., a Delaware corporation ("TVMAX"), and TRANSMISSION HOLDINGS, INC., a Delaware corporation ("THI"). R E C I T A L S: Concurrently herewith, the parties are entering into (i) an Assignment Agreement (the "Assignment"), pursuant to which TVMAX and certain of its affiliates are assigning to THI, and THI is assuming from TVMAX and such affiliates, effective as of the date (the "Effective Date") of receipt of special temporary authority from the Federal Communications Commission ("FCC"), the various licenses and authorizations set forth in Schedule 1 (the "Assigned Authorizations") issued by the FCC; and (ii) an Equipment License and Services Agreement (the "Services Agreement"), effective as of the Effective Date, pursuant to which TVMAX is granting to THI a non-exclusive right and license to use certain of TVMAX's and its affiliates' microwave facilities and related equipment, whether now owned or hereafter acquired (the "Equipment"), and THI will be providing to TVMAX transmission capacity services through the use of the Equipment, the Assigned Authorizations and the licenses and authorizations that THI may obtain in the future (together with the Assigned Authorizations, the "Authorizations"). Pursuant to the terms of the Services Agreement, THI is executing a certain promissory note (the "Note"), dated the Effective Date, in favor of TVMAX. In connection with, and as a condition to its entering into, the Assignment and the Services Agreement, TVMAX desires to be granted an option by THI to purchase all or, in certain circumstances, some of the assets of THI, and THI is willing to grant such option to TVMAX. Concurrently herewith, each shareholder of THI is entering into a Shareholder Option Agreement with TVMAX (a "Shareholder Option Agreement"), pursuant to which such shareholder is granting to TVMAX an option (the "Equity Option") to purchase all of the shares of THI owned by such shareholder on the date of exercise of such option by TVMAX. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein, the parties agree as follows: 1. Option to Purchase Assets of THI. (a) At any time during the Term (as defined below), TVMAX may, by giving written notice to THI of its election to do so (the "Exercise Notice"), require THI to sell to TVMAX, or such other person (the "Nominee") as TVMAX may designate, either (i) all, but not less than all, of the assets and properties of THI (the "THI Assets"), including, without limitation, the Authorizations and the Services Agreement, for a purchase price equal to the sum (the "Entire Business Purchase Price") of the unpaid principal of and interest on the Note on and as of the Closing Date (as defined below) plus the lesser of (x) the book value (calculated in accordance with generally accepted accounting principles) of THI on and as of the Closing Date and (y) the amount of the initial capitalization of THI plus a premium of 10% per annum, compounded annually from the date of such capitalization to the Closing Date, or (ii) in connection with a sale or transfer by TVMAX of any of the Equipment (the "Transferred Equipment"), certain assets and properties of THI (including, without limitation, certain Authorizations) related to the Transferred Equipment, as designated by TVMAX in the Exercise Notice (the "Designated Assets"), for a purchase price (the "Partial Sale Price") which bears the same proportionate relationship to the Entire Business Purchase Price as the Transferred Equipment bears to the Equipment, as determined by TVMAX whose determination shall be conclusive and binding on all parties in the absence of manifest error. Upon delivery of the Exercise Notice by TVMAX to THI, TVMAX shall be obligated to buy from THI, and THI shall be obligated to sell to TVMAX, on the Closing Date the THI Assets for the Entire Business Purchase Price or the Designated Assets for the Partial Sale Price, as the case may be. (b) Closing. The closing of the purchase and sale (the "Closing") of the THI Assets or the Designated Assets, as the case may be, pursuant to Section l(a) shall take place at the offices of Kronish, Lieb, Weiner & Hellman LLP, at 1114 Avenue of the Americas, New York, New York 10036, on the earlier of (the "Closing Date") (i) the date and time specified by TVMAX in the Exercise Notice, which date shall be at least 15 days but no more than 60 days from the date of such notice, or (ii) at least 10 days but no more than 30 days after the satisfaction of all of the conditions specified in Sections 9 and 10 hereof. At the Closing, (i) TVMAX (or the Nominee) shall pay the Entire Business Purchase Price or the Partial Sale Price, as applicable, to THI, by, at TVMAX's option, wire transfer of immediately available funds, bank or certified check or by tender of the Note, if applicable, and (ii) THI shall deliver to TVMAX (or the Nominee) (A) such agreements, instruments and documents as TVMAX (or the Nominee) shall reasonably require to effect the sale, transfer and assignment to it of the THI Assets or the Designated Assets, as applicable, and (B) a certificate (a "THI Officer's Certificate"), dated the Closing Date, executed by the President, -2- Vice President or similar officer of THI, stating that all of the conditions to TVMAX's obligations to consummate the Closing have been satisfied on or prior to the date thereof and that all of the representations and warranties of THI made herein are true and correct on the date thereof with the same force and effect as if made on and as of the Closing Date. 2. Term of the Option. TVMAX may give the Exercise Notice at any time beginning on the Effective Date and ending on the earlier of (the "Term") (i) tenth anniversary of the Effective Date and (ii) the date of closing of the exercise by TVMAX of all of the Equity Options pursuant to the Shareholder Option Agreements. 3. Covenants of the Parties. (a) Preservation of THI Assets. During the Term, THI shall (i) preserve, protect, renew and keep in full force and effect its existence, fights, licenses (including, without limitation, the Authorizations), permits, patents, trademarks, trade names and franchises, (ii) comply with all laws and regulations applicable to it, and (iii) preserve, repair and maintain all assets and properties utilized in the conduct of its business. (b) Accounts. THI shall maintain complete and accurate accounting books and records which shall reflect the transactions of its business and the book value of the THI Assets in accordance with generally accepted accounting principles consistently applied. (c) Financial Statements; Access. During the Term, THI shall (i) furnish, or cause to be furnished, as the case may be, to TVMAX, as soon as available, all regularly prepared financial statements of THI, (ii) permit TVMAX, its employees and authorized representatives to have access to the premises, books, and records of THI at reasonable hours, and (iii) furnish TVMAX with such financial and operating data and other information with respect to the business and properties of THI as TVMAX may from time to time reasonably request. (d) FCC Consent; Etc. Promptly after its receipt of the Exercise Notice, THI shall (i) apply for and use its reasonable efforts to obtain the consent of the FCC to the assignment of the Authorizations, or certain of the Authorizations, as the case may be, to TVMAX or the Nominee (the "FCC Consent") and (ii) use its reasonable efforts to satisfy the other conditions to the Closing contained herein. -3- 4. Further Assurances; Renegotiation Upon FCC Action; Power of Attorney. (a) Further Assurances. Each part hereto shall cooperate fully with the other party and shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable laws, and execute and deliver such documents and other papers as may be required or appropriate to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated hereby, including, without limitation, to take such further action as may be necessary or desirable to comply with the requirements of the FCC, including, without limitation (i) the execution and delivery of such further instruments and documents or amendments to this Agreement as may reasonably be acceptable to the FCC and (ii) the application for, and obtaining from, the FCC any interim authorizations that may be necessary or desirable to assure the continued operation of the business of THI pending the Closing. (b) Renegotiation Upon FCC Action. If at any time during the term of this Agreement the FCC determines that this Agreement is inconsistent with THI's licensee obligations or is otherwise contrary to FCC policies, rules and regulations, or statutes, the parties shall renegotiate this Agreement in good faith and recast this Agreement in terms that are likely to cure the defects perceived by the FCC and return a balance of benefits to both parties comparable to the balance of benefits provided by this Agreement on its current terms and by related agreements, of even date herewith, between the parties. If, after such good faith negotiations, either party determines that recasting this Agreement to meet the defects perceived by the FCC is impossible, either party may terminate this Agreement without further liability upon 180 days' prior notice, provided that FCC consent for a wind-down period of such length is obtained. (c) Power of Attorney. In furtherance of the foregoing, THI does hereby constitute and appoint TVMAX, with effect from the date of the Exercise Notice, as its true and lawful representative and attorney-in-fact, in its name, place and stead, to make, execute, sign and file with the FCC or other authority all such applications, other instruments, documents, and certificates, which in each case, may from time to time be required by applicable law to (i) assign the Authorizations or any other FCC licenses held by THI from time to time at the Closing, and (ii) obtain any special temporary authority to continue the valid operation of the business of THI in connection with the exercise of and consummation of the transactions contemplated by the Exercise Notice. -4- REPRESENTATIONS AND WARRANTIES 5. Representations and Warranties of THI. THI hereby represents and warrants to TVMAX: (a) Organization, Power, Etc. THI is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction in which it was organized and is duly qualified to do business in the jurisdictions in which it conducts business where failure to do so would have a material adverse effect on its financial condition. THI has all requisite power and authority to own, operate and lease its properties, and to carry on its business as now being conducted and to execute and deliver this Agreement and to perform its obligations hereunder. (b) Subsidiaries, Etc. THI does not own of record or beneficially, directly or indirectly, (i) any shares of outstanding capital stock or securities convertible into capital stock of any other corporation or (ii) any participating interest in any limited liability company, partnership, joint venture, or other non-corporate business enterprise. (c) Authorization of Agreement. The execution, delivery, and performance of this Agreement by THI and the consummation by it of the transactions contemplated hereby have been duly authorized by all requisite corporate action. This Agreement (assuming the due execution and delivery hereof by TVMAX) constitutes the legal, valid and binding obligation of THI, enforceable in accordance with its terms except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws from time to time in effect which affects creditors' rights generally and by legal and equitable limitations on the availability of specific performance and other equitable remedies. (d) Effect of Agreement. The execution and delivery by it of this Agreement and the consummation by it of the transactions contemplated hereby will not violate any provision of law, its Certificate of Incorporation, By-laws, or any judgment, award, or decree or any indenture, agreement, or other instrument to which it is a party, or by which it or any of its properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, or other instrument, or result in the creation or imposition of any lien, charge, security interest, or encumbrance of any nature whatsoever upon any of its properties or assets, which violation, breach, default, or lien would have a material adverse effect on its financial condition. -5- (e) Governmental Approvals. Other than the FCC consent, no approval, authorization, consent, or order or action of or filing with any court, administrative agency or other governmental authority is required for the execution and delivery by it of this Agreement or the consummation by it of the transactions contemplated hereby. (f) Financial Condition. Except as set forth on the balance sheet of THI, dated the date hereof, a true and complete copy of which has been provided to TVMAX, THI has no liabilities, whether absolute, accrued, or contingent, whether or not such liabilities would be required to be reflected on a balance sheet of THI as of the date hereof prepared in accordance with generally accepted accounting principles. (g) Litigation. There are no actions, suits, or proceedings with respect to the business of THI pending or, to the knowledge of THI, threatened before or by any federal, state, municipal, foreign, or other court, governmental department, commission, board, bureau, agency or instrumentality, or arbitration tribunal. To the knowledge of THI, there are no orders, judgments or decrees of any court or governmental agency, domestic or foreign, which apply, in whole or in part, to THI, which would have a material adverse effect on the financial condition, business, or operations of THI. (h) Compliance With Law. THI is not in default under any order of any court, governmental authority or arbitration board or tribunal to which it is a party, and, to the knowledge of THI, it has not been notified that it is in violation of any laws, ordinances, governmental rules, or regulations to which it is subject or has failed to obtain any licenses, permits, franchises, or other governmental authorizations necessary to the ownership of its assets and properties or to the conduct of the business, the violation or which or failure to obtain might reasonably be expected, individually or in the aggregate, to materially adversely affect the operations or condition (financial or other) of THI. (i) THI and the THI Assets. THI has good title to all of the THI Assets, free and clear of all liens, encumbrances and security interests of any kind. The Services Agreement is in full force and effect and is assignable to TVMAX or the Nominee, as the case may be, pursuant to the terms thereof. The Authorizations are in full force and effect, and there is no proceeding pending before the FCC, or, to the knowledge of THI, threatened, that could result in the revocation or material impairment of one or more of the Authorizations. The business of THI has been operated in accordance with FCC rules, regulations and policies in all material respects. 6. Representations and Warranties of TVMAX. TVMAX represents and warrants to THI as follows: -6- (a) Organization, Power, Etc. TVMAX is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdictions in which is was organized and is qualified to do business in each jurisdiction where the failure to do so would have a material adverse effect on its financial condition. TVMAX has all requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. (b) Authorization of Agreements. The execution, delivery, and performance of this Agreement by TVMAX and the consummation by TVMAX of the transactions contemplated hereby have been duly and effectively authorized by all requisite corporate action. This Agreement constitutes the legal, valid, and binding obligation of TVMAX, enforceable in accordance with its terms. (c) Effect of Agreements. Neither the execution and delivery by TVMAX of this Agreement nor the consummation by TVMAX of the transactions contemplated hereby will violate any provision of law, the Certificate of Incorporation or By-laws of TVMAX or any judgment, award or decree or any material indenture, agreement, or other instrument to which TVMAX is a party, or by which TVMAX, or any of its properties or assets is bound, or conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under, any such indenture, agreement, or other instrument, or result in the creation or imposition of any lien, charge, security interest, or encumbrance of any nature whatsoever upon any properties or assets of TVMAX. (d) Governmental Approvals. Except for the FCC Consent, no approval, authorization, consent, or order or action of or filing with any court, administrative agency or other governmental authority is required for the execution and delivery by TVMAX of this Agreement or the consummation by TVMAX of the transactions contemplated hereby. CONDITIONS PRECEDENT TO THE CLOSINGS UNDER THE OPTIONS 7. Conditions Precedent to the Obligations of TVMAX. The obligations of TVMAX to consummate the Closing are subject to the satisfaction, in all material respects, or waiver by TVMAX at or prior to the Closing of each of the following conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of THI contained herein or in any certificate or document delivered to TVMAX pursuant hereto shall be true and correct in all material respects on and as of the date of such closing as though made at and as of that date, and THI shall have delivered to TVMAX a THI Officer's Certificate to such effect. -7- (b) Compliance with Covenants. THI shall have performed and complied with all terms, agreements, covenants, and conditions of this Agreement to be performed or complied with by it at such closing, and THI shall have delivered to TVMAX a THI Officer's Certificate to such effect. (c) All Proceedings To Be Satisfactory. All corporate and other proceedings to be taken by THI in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to TVMAX and its counsel, and TVMAX and said counsel shall have received all such counterpart originals or certified or other copies of such documents as it or they may reasonably request. (d) Opinions of Counsel. TVMAX shall have received an opinion of counsel to THI, in form and substance satisfactory to TVMAX. (e) Legal Actions or Proceedings. No legal action or proceeding shall have been instituted or threatened seeking to restrain, prohibit, invalidate, or otherwise affect the consummation of the transactions contemplated hereby or which would, if adversely decided, materially adversely affect the operation by TVMAX of the THI Business. (f) Approvals and Consents. There shall have been obtained and continue in full force and effect all authorizations, consents, approvals, licenses, franchises, permits and certificates by or of all governmental bodies, including, but not limited to, the FCC, and of all other third persons which TVMAX may deem reasonably necessary to permit the consummation of the Closing, and to effect the valid transfer and assignment of the THI Assets or the Designated Assets, as the case may be, to TVMAX (or the Nominee) free and clear of any liens, encumbrances and other security interests. 8. Conditions Precedent to the Obligations of THI or the Shareholders. The obligations of THI to consummate the Closing are subject to the satisfaction, in all material respects, or waiver by THI at or prior to the Closing of each of the following conditions: (a) Accuracy of Representations and Warranties. The representations and warranties of TVMAX contained in this Agreement or in any certificate or document delivered pursuant hereto shall be true and correct in all material respects on and as of such date as though made at and as of that date, and TVMAX shall have delivered a certificate, signed by the President or a Vice President of TVMAX (an "TVMAX Officer's Certificate"), to such effect. (b) Compliance with Covenants. TVMAX shall have performed and complied with all terms, agreements, covenants and -8- conditions of this Agreement to be performed or complied with by TVMAX at such date, and TVMAX shall have delivered an TVMAX Officer's Certificate to such effect. (c) All Proceedings To Be Satisfactory. All corporate and other proceedings to be taken by TVMAX in connection with the transactions contemplated hereby and all documents incident thereto shall be reasonably satisfactory in form and substance to THI and its counsel. MISCELLANEOUS 9. Notices. All notices, consents, instructions and other communications required or permitted under this Agreement (collectively, "Notice") shall be effective only if given in writing and shall be considered to have been duly given when (i) delivered by hand, (ii) sent by telecopier (with receipt confirmed), provided that a copy is mailed (on the same date) by certified or registered mail, return receipt requested, postage prepaid, or (iii) received by the addressee, if sent by Express Mail, Federal Express or other reputable express delivery service (receipt requested), or by first class certified or registered mail, return receipt requested, postage prepaid. Notice shall be sent in each case to the appropriate addresses or telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may from time to time designate as to itself by notice similarly given to the other parties in accordance herewith, which shall not be deemed given until received by the addressee). Notice shall be given: 1) to TVMAX: 1111 West Mockingbird Lane Dallas, Texas 75247 Attention: General Counsel Telecopier: (214) 634-3889 with a copy to: Kronish, Lieb, Weiner & Hellman LLP 1114 Avenue of the Americas New York, New York 10036-7798 Attention: Ralph J. Sutcliffe, Esq. Telecopier: (212) 479-6275 2) to THI: 1111 West Mockingbird Lane Dallas, Texas 75247 Attention: Rory O. Cole Telecopier: (214) 634-3850 -9- with a copy to: Goldberg, Godles, Wiener & Wright 1229 Nineteenth Street, N.W. Washington, D.C. 20036 Attention: Joseph Godles, Esq. Telecopier: (202) 429-4912 10. Amendments. This Agreement may not be amended or terminated nor may any provision hereof be waived except by a writing signed by or on behalf of all parties hereto or, in the case of a waiver, by the party against which such waiver may be asserted. 11. Further Action. Each party hereto shall cooperate fully with the other party and shall use all reasonable efforts to take, or cause to be taken, all appropriate action, do or cause to be done all things necessary, proper or advisable under applicable laws} and execute and deliver such documents and other papers as may be required or appropriate to carry out the provisions of this Agreement and consummate and make effective the transactions contemplated hereby, including, without limitation, to effect, obtain or facilitate any governmental approval or acceptance of this Agreement, the filing or recording hereof, or the consummation of the transactions contemplated hereby. 12. Entire Agreement. This Agreement, including all Schedules hereto, and the other writings referred to herein or delivered pursuant hereto contain the entire agreement among the parties with respect to the subject matter hereof and supersede all prior and contemporaneous arrangements or understandings with respect thereto. -10- 13. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Counterparts. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one such counterpart. 15. Assignment. This Agreement, and the rights and obligations of the parties hereunder, shall not be assigned or delegated (by operation of law or otherwise), in whole or in part, by any party without the prior written consent of all the other parties hereto, except that TVMAX shall have the right to designate a Nominee pursuant to Section l(a). The provisions of this Agreement shall bind and inure to the benefit of the respective permitted successors and assigns of the parties. 16. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York applicable to contracts entered into and to be performed wholly within such state. 17. Headings. The descriptive headings of the several Sections of this Agreement are inserted for convenience only and do not constitute a part of this Agreement. IN WITNESS WHEREOF, this Option Agreement has been duly executed and delivered by or on behalf of the parties hereto as of the date first above written. TVMAX TELECOMMUNICATIONS, INC. By: /s/ Michael E. Katzenstein ------------------------------------- Name: Michael E. Katzenstein Title: Vice President TRANSMISSION HOLDING, INC. By: /s/ Rory O. Cole ------------------------------------- Name: Rory O. Cole Title: President -11- SCHEDULE 1 To the Option Agreement Attached hereto is a list of the Authorizations effective as of February 14, 1997. SCHEDULE 1
- -------------------------------------------------------------------------------- LICENSE NAME FCC FILE NUMBER FCC CALL SIGN - -------------------------------------------------------------------------------- TVMAX TELECOMMUNICATIONS, INC. 726174 WNTZ720 TVMAX TELECOMMUNICATIONS, INC. 9602724168 WPJF208 TVMAX TELECOMMUNICATIONS, INC. 9507718013 WNTZ719 TVMAX TELECOMMUNICATIONS, INC. 9602724015 WPJE780 IRPC ARIZONA INC 793687 WNTS892 IRPC ARIZONA INC 96037244684 WNTS893 TVMAX TELECOMMUNICATIONS, INC. 726651 WPJF813 TVMAX TELECOMMUNICATIONS, INC. 9506716203 WNTZ721 TVMAX TELECOMMUNICATIONS, INC. 9603725256 WPJF741 TVMAX TELECOMMUNICATIONS, INC. 9505715056 WNTZ484 TVMAX TELECOMMUNICATIONS, INC. 9511721060 WNTY545 TVMAX TELECOMMUNICATIONS, INC. 9603725255 WPJF740 TVMAX TELECOMMUNICATIONS, INC. 9603725235 WNTY541 TVMAX TELECOMMUNICATIONS, INC. 9507718010 WNTY543 TVMAX TELECOMMUNICATIONS, INC. 9604725657 WPJA219 TVMAX TELECOMMUNICATIONS, INC. 9511721683 WPJA220 TVMAX TELECOMMUNICATIONS, INC. 9507718021 WNTZ986 TVMAX TELECOMMUNICATIONS, INC. 9507718011 WNTT455 TVMAX TELECOMMUNICATIONS, INC. 725908 WPJF314 TVMAX TELECOMMUNICATIONS, INC. 9506716879 WPJA554 TVMAX TELECOMMUNICATIONS, INC. 9506716149 WNTZ728 TVMAX TELECOMMUNICATIONS, INC. 9511721059 WPJD444 TVMAX TELECOMMUNICATIONS, INC. 9601723129 WNTZ861 RICHEY PACIFIC CABLEVISION 9602723753 WNTM202 RICHEY PACIFIC CABLEVISION 775401 WNTK644 RICHEY PACIFIC CABLEVISION 9511721061 WNTP503 RICHEY PACIFIC CABLEVISION 798856 WNTU342 TVMAX TELECOMMUNICATIONS, INC. 727153 WPJD443 TVMAX TELECOMMUNICATIONS, INC. 727646 WPNB396 RICHEY PACIFIC CABLEVISION 9507718014 WNTU344 TVMAX TELECOMMUNICATIONS, INC. 9505715055 WNTZ483 TVMAX TELECOMMUNICATIONS, INC. 9602724017 WPJE782 TVMAX TELECOMMUNICATIONS, INC. 727460 WPNB364 TVMAX TELECOMMUNICATIONS, INC. 9507716611 WNTZ863 RICHEY PACIFIC CABLEVISION 783103 WNTP502 RICHEY PACIFIC CABLEVISION 9511721062 WNTM733 TVMAX TELECOMMUNICATIONS, INC. 725909 WPJF315 TVMAX TELECOMMUNICATIONS, INC. 727647 WPNB397 TVMAX TELECOMMUNICATIONS, INC. 9506716607 WNTZ860 TVMAX TELECOMMUNICATIONS, INC. 9603725254 WPJF739 TVMAX TELECOMMUNICATIONS, INC. 9602724016 WPJE781 TVMAX TELECOMMUNICATIONS, INC. 9507718020 WNTZ985 RICHEY PACIFIC CABLEVISION 702728 WNTV718 TVMAX TELECOMMUNICATIONS, INC. 9506716610 WNTZ862 TVMAX TELECOMMUNICATIONS, INC. 9506716612 WNTZ864 TVMAX TELECOMMUNICATIONS, INC. 727461 WPNB365 TVMAX TELECOMMUNICATIONS, INC. 727532 WNTP850 - --------------------------------------------------------------------------------
Page 1
- -------------------------------------------------------------------------------- LICENSE NAME FCC FILE NUMBER FCC CALL SIGN - -------------------------------------------------------------------------------- TVMAX TELECOMMUNICATIONS, INC 727533 WPJC636 TVMAX TELECOMMUNICATIONS, INC 9511721158 WPJC635 TVMAX TELECOMMUNICATIONS, INC 726170 WPJF328 TVMAX TELECOMMUNICATIONS, INC 726173 WPJF330 TVMAX TELECOMMUNICATIONS, INC 726171 WPJF329 TVMAX TELECOMMUNICATIONS, INC 726172 WPJF342 TVMAX TELECOMMUNICATIONS, INC 9604725253 WPJF742 TVMAX TELECOMMUNICATIONS, INC 9604725475 WPJF424 TVMAX TELECOMMUNICATIONS, INC 9603725252 WPJF738 TVMAX TELECOMMUNICATIONS, INC 9511721154 WPJC631 TVMAX TELECOMMUNICATIONS, INC 9511721155 WPJC632 TVMAX TELECOMMUNICATIONS, INC 9511721156 WPJC633 TVMAX TELECOMMUNICATIONS, INC 9511721157 WPJC634 TVMAX TELECOMMUNICATIONS, INC 9509719902 WPJB536 TVMAX TELECOMMUNICATIONS, INC 9604725852 WNTM918 TVMAX TELECOMMUNICATIONS, INC 9604725851 WPJF667 TVMAX TELECOMMUNICATIONS, INC 9604725853 WNTN793 TVMAX TELECOMMUNICATIONS, INC 9601723134 WNTZ572 TVMAX TELECOMMUNICATIONS, INC 9505715240 WNTX955 TVMAX TELECOMMUNICATIONS, INC 9511721463 WPJD340 TVMAX TELECOMMUNICATIONS, INC 9511721464 WPJD341 TVMAX TELECOMMUNICATIONS, INC 9602723898 WPJE955 TVMAX TELECOMMUNICATIONS, INC 9505715274 WNTN239 TVMAX TELECOMMUNICATIONS, INC 9505715224 WNTZ567 TVMAX TELECOMMUNICATIONS, INC 9505715225 WNTZ568 TVMAX TELECOMMUNICATIONS, INC 9505715227 WNTZ570 TVMAX TELECOMMUNICATIONS, INC 9505715228 WNTZ571 TVMAX TELECOMMUNICATIONS, INC 9505715223 WNTZ566 SUNSHINE TV ENTERTAINMENT 9505715047 WNTN784 SUNSHINE TV ENTERTAINMENT 702293 WNTV452 SUNSHINE TV ENTERTAINMENT 798584 WNTN784 SUNSHINE 1V ENTERTAINMENT 9505715044 WNTY540 SUNSHINE TV ENTERTAINMENT 9412710185 WNTX646 SUNSHINE TV ENTERTAINMENT 9412710184 WNTX645 SUNSHINE JV ENTERTAINMENT 9412710183 WNTX644 SUNSHINE TV ENTERTAINMENT 702546 WNTU230 SUNSHINE TV ENTERTAINMENT 727432 WPNB362 SUNSHINE TV ENTERTAINMENT 9505715048 WNTZ580 - --------------------------------------------------------------------------------
Page 2 EX-10.23 31 EXHIBIT 10.23 CITY OF HOUSTON, TEXAS, ORDINANCE NO. 97-285 AN ORDINANCE GRANTING A TEMPORARY PERMIT TO TVMAX COMMUNICATIONS (TEXAS), INC., TO ENCROACH UPON AND USE THE PUBLIC WAY OF THE CITY OF HOUSTON, TEXAS, FOR THE PURPOSE OF LAYING, CONSTRUCTING, LEASING, MAINTAINING, REPAIRING, REPLACING, REMOVING, USING, AND OPERATING THEREIN, A TELECOMMUNICATIONS NETWORK FOR PROVIDING AUTHORIZED TELECOMMUNICATIONS SERVICES; PROVIDING FOR RELATED TERMS AND CONDITIONS; MAKING CERTAIN FINDINGS RELATED THERETO; AND DECLARING AN EMERGENCY. WHEREAS, TVMAX Communications (Texas), Inc. (the "Permittee") wishes to provide telecommunication services to its customers in certain portions of the City of Houston (the "City") by use of its existing fiber optic loop, and other facilities to be constructed and maintained hereafter; and WHEREAS, the Permittee has applied for, and the Permittee and the City are currently negotiating, a franchise agreement (the "Franchise") that will govern the long-term construction, operation and maintenance of the Permittee's telecommunication operations in accordance with the provisions of the City Charter and applicable law and ordinance; and WHEREAS, the Permittee has an existing cable television franchise, and has requested that it be issued this Temporary Permit to specify the conditions under which the facilities franchised thereunder, as well as extensions thereof, may be used to provide telecommunication services, during the pendency of negotiation and approval of the Franchise; NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF HOUSTON, TEXAS: ARTICLE I. DEFINITIONS AND INTERPRETATIONS Section 1.01. Short title. This ordinance shall be known and may be cited as the TVMAX Communications (Texas), Inc. Telecommunication Temporary Permit. Section 1.02. Definitions. For the purpose of this Temporary Permit, the following terms, phrases, words, and their derivations shall have the meaning given herein unless more specifically defined within other sections of this Temporary Permit. When not inconsistent with the context, words used in the present tense include the future tense, words in the single number include the plural number. The word "shall" is always mandatory, and not merely directory. Anniversary Date means the successive annual recurrence of the Effective Date. Cable Services shall have the meaning defined for such term in the Cable Communications Policy Act of 1984 is amended. City means the City of Houston, Texas, a home-rule municipal corporation principally located in Harris County, Texas, acting by and through its governing body, the City Council. City Engineer means the City Engineer for the City or a designee thereof. Confidential Information is defined in Section 4.01(c). Construction Permit Fee is defined in Section 3.06. Day, whether or not capitalized, means a calendar day, unless specifically provided otherwise, Director means the Director of the City's Department of Finance and Administration, or such person as the director may designate. Division is defined in Section 11.02(b). Effective Date is defined in Section 11.17. Franchise means the franchise agreement under negotiation between the City and the Permittee relating to the grant of a franchise for telecommunication services pursuant to Article II, Section 17 of the City's Charter. Gross Receipts means all Local Telecommunications Revenue (excluding (i) Permit Fees itemized on customer billings, (ii) sales taxes, excise taxes or any similar direct taxes upon the customer or subscriber collected by the Permittee, (iii) receipts from the sale or trade-in value of any property used in the provision of Services, (iv) refunds from suppliers, (v) refunds or rebates, credits or discounts to customers or subscribers) received by Permittee or by any affiliate, subsidiary, agent or assign of Permittee using the Public Way that does not have a current valid franchise with City, in connection with the provision of Services within the City of Houston, including payments received for operating, maintaining, leasing, exchanging or using all or any portion of the Network Facilities or for Services and payments attributable to the operation of the Network Facilities, Local Office is defined in Section 4.01(c). Local Telecommunication Revenue means the aggregate of all receipts, direct or indirect, for Services provided by the Permittee to its customers or subscribers whose service address is -2- physically located within the city limits of the City. Local Telecommunication Revenue shall not include any amounts charged to customers or subscribers that are paid to any telecommunication system operator or owner not affiliated with the Permittee for the provision of services on the Network Facilities if such amounts are included in the franchise fee payments of another telecommunication provider under franchise to the City. Minimun, Annual Fee is defined in Section 3.01(b). Network Facilities means conduits, ducts, manholes, vaults, tanks, towers, wave guides, optic fiber, microwave, dishes, and any associated converters, electrical lines, communications lines, transmission lines, cables, wires, amplifiers, switches, utility equipment, or other such object, device or facilities, including attachments and encasements containing such facilities, whether underground or overhead, which are designed, installed and constructed within the Public Way for the purpose of producing, receiving, amplifying, switching, transmitting or distributing audio, video, or other form of electronic signals to or from customers, subscribers or locations within city limits of the City in providing Services. Network Facilities does not include such facilities to the extent that they are used to provide Cable Services. New Construction Permit Fee is defined in Section 3.06. Permittee means TVMAX Communications (Texas), Inc. Person includes an individual, association, corporation, firm, joint venture, partnership, limited liability company, or other business entity or legal representative. Public Way means a Street or Water Way or any other right, title or interest in or to real property, which is owned or claimed by City for use of the public. Report is defined in Section 3.03. Services meams telecommunication services provided by the Permittee through its Network Facilities, excluding Cable Services (provided pursuant to separate franchise) but including without limitation (a) interconnecting telecommunication companies for the purpose of voice, data or non-cable video transmission; (b) providing switched or non-switched private line point-to-point service to end-users for voice, data and non-cable video transmission; (3) switching, transmitting or distributing signals on behalf of other telecommunication companies; or (4) any other telecommunication services authorized by State or Federal law. Street means the entire area within the boundary lines of every public street, avenue, road, parkway, drive, alley, highway, boulevard, bridge, tunnel or other City roadway whether improved or unimproved, and any part thereof including without limitation the pavement, shoulders, gutters, curbs, sidewalks, parking areas and all other areas within street lines. -3- Temporary Permit means this ordinance, and includes the rights, obligations and privileges granted to the Permittee herein. Temporary Permit Fee means the fees provided for payment by the Permittee as provided in this Temporary Permit. Water Way means the entire area within the boundary lines of every stream, lake, river, bayou, ditch or other body or course of water that is owned or maintained by the City. ARTICLE II. GRANT OF AUTHORITY AND TERM Section 2.01. Rights granted. There is hereby granted to the Permittee, subject to the reasonable and timely compliance by the Permittee with the provisions contained herein, the non-exclusive Temporary Permit granting the right to encroach upon and use the Public Way for the purpose of laying, constructing, leasing, maintaining, repairing, replacing, removing, operating or using the Network Facilities, in whole or in part, across, along, over, above, or under any Public Way specifically for the purpose of providing the Services. Section 2.02. Term and automatic termination. a. This Temporary Permit shall become effective on the Effective Date and the receipt by the City of the Acceptance Letter, and shall terminate on September 1, 1997, unless it is terminated earlier pursuant to the terms of this Temporary Permit Ordinance. BY ITS ACCEPTANCE HEREOF, THE PERMITTEE ACKNOWLEDGES THAT THE GRANT OF THIS TEMPORARY PERMIT CREATES NO OBLIGATION TO EXTEND OR RENEW THIS PERMIT OR OTHERWISE EXTEND THE AUTHORIZATION GRANTED HEREBY, OR TO PASS OR APPROVE THE FRANCHISE BY VIRTUE OF ITS APPROVAL OF THIS TEMPORARY PERMIT. ANY CONSTRUCTION OR OTHER EXPENDITURE BY OR ON BEHALF OF THE PERMITTEE IN CONNECTION WITH THIS TEMPORARY PERMIT IS UNDERTAKEN SOLELY AT THE RISK OF THE PERMITTEE. Notwithstanding the above, the City agrees to offer the Franchise to the Permittee on the same basis as offered to similarly situated applicants at such time, in accordance with the applicable provisions of State and Federal law; provided that the Permittee is and remains qualified therefor. The provisions of this Temporary Permit shall not be construed as binding or precedential with respect to the terms of the Franchise. b. Unless earlier terminated as provided elsewhere in this Temporary Permit Ordinance, this Temporary Permit shall automatically terminate upon the effective date of the Franchise. Section 2.03. Specific limitations. This Temporary Permit does not grant the Permittee the right to provide, directly or indirectly, any services not specifically authorized by the terms of this Temporary Permit. This Temporary Permit does not authorize the provision of Cable -4- Services, and the Permittee may provide Cable Services through the Network Facilities only if authorized specifically by a separate franchise either already in existence as of the Effective Date or later granted at the discretion of City Council. Section 2.04. Use of the Network by other Persons. a. The Permittee acknowledges and agrees that this Temporary Permit authorizes specific use of Public Ways only by the Permittee and it agrees that, except as specifically authorized herein or otherwise specifically authorized by the City, it will not allow the use, by lease or otherwise, of the Network Facilities by any other Person (other than an affiliate, subsidiary, or other entity controlled by the Permittee if such other Person's gross receipts are included in the Gross Receipts for purposes of the Temporary Permit Fee) to provide the Services or for any other purpose. Use of the Network Facilities by any Person for any purpose not specifically authorized hereunder shall be considered to be use thereof by the Permittee and is prohibited. b. The Permittee agrees to notify its customers or subscribers making sales of telecommunications services of their possible need for a certificate from the Texas Public Utility Commission, an FCC license, other state or federal authorization, or City franchise, in the form provided in Exhibit A, attached hereto. Such notice shall be given to existing customers or subscribers within 60 days of the Effective Date and to new customers or subscribers within 30 days of the acquisition of such customer or subscriber. Section 2.05. Use of the Public Way by other Persons. a. Nothing in this Temporary Permit shall ever be held or construed to confer upon the Permittee exclusive rights or privileges of any nature whatsoever. The City may permit other Persons to, and the Permittee acknowledges that the City or such other Persons may, lay, construct, operate, lease repair, maintain or make use of, any sewer, gas, water and other pipes or pipelines, cables, conduits, electrical lines, communications lines, transmission lines, utility equipment or any other object, improvement, facility or device across, along, over, above or under any Public Way. The City may also permit soil boring into and the installation of monitoring wells in or under any Public Way occupied by the Permittee, and authorize any other lawful use of the Public Way. b. In permitting such work to be done, City shall not be liable to the Permittee for any damages arising out of the performance of any such work by such third parties, provided that nothing herein shall relieve any Person other than the City or those operating on its behalf, from liability for damage to the Network or Network Facilities. c. If the City requires the Permittee to remove, alter, change, adapt or conform its Network to enable any Person except the City to use the Public Way, the Permittee shall be obligated to make such changes to its Network Facilities only if the Person obtains a cash bond prior to such work to reimburse Permittee for any loss and expense that will be caused by or -5- which will arise out of such changes to the Network Facilities. The City shall not be liable for any reimbursement, loss, or expense caused by or arising out of such changes to the Network Facilities. ARTICLE III. FEES Section 3.01. Temporary Permit Fee, generally. a. In consideration for the rights and privileges herein granted, the Permittee shall pay to the City those fees set forth herein in the manner and within the time limitations specifically provided. Time is of the essence with regard to payments required hereby. b. The Permittee shall pay to City a basic Temporary Permit Fee equal to four percent of Gross Receipts. Section 3.02. Timing of payment. Following the Effective Date, the Temporary Permit Fee shall be paid with respect to each calendar quarter, or portion thereof, within 45 days immediately following the end of the quarter. Section 3.03. Report to director; audit. a. On the same date that Temporary Permit Fee payments are to be paid, the Permittee shall file with the Director a report showing all revenue, detailed by category, from the operations of the Network Facilities for the preceding calendar quarter. The Permittee shall submit such report in the form of the City of Houston Temporary Permit Fee Remittance Form, set forth in Exhibit B, attached hereto (the "Report"). b. The City may, at its discretion, upon no less than 30 days prior written notice, require that the Permittee's records related to this Temporary Permit be audited by the Director to ascertain the correctness of any Report. If the audit determines that payment of Temporary Permit Fees was not made in accordance with the terms of this Temporary Permit and that such payment represents an underpayment of at least 10 percent of Temporary Permit Fees due, the Permittee shall reimburse the City for all reasonable audit costs, and pay all Temporary Permit Fees determined to be due and payable to the City hereunder. Such costs and fees shall be paid within 30 days after determination of amount due is made. Section 3.04. [Reserved.] Section 3.05. Late payment. If any quarterly payment is not received by the City on or before five days immediately following the due date, the Permittee shall pay interest at the annual rate of 10 percent, compounded daily. The Permittee agrees to pay all costs of collection for any amounts due hereunder, including reasonable attorney fees. -6- Section 3.06. Temporary Permit Fee not in lieu of certain permit fees. When submitting application for a New Construction Permit as provided in Article V, the Permittee shall pay the permit fees provided herein. Such permit fees are in addition to the Temporary Permit Fees and are non-refundable. Each application for a New Construction Permit shall be accompanied by a drawing and specification review fee of $1,005 ("New Construction Permit Fee"). The New Construction Permit Fee is only required for work in the Public Way other than routine maintenance or emergency repairs, as described in Section 5.02. ARTICLE IV. RECORDS AND FILING REQUIREMENTS Section 4.01. Record keeping. In addition to other records or filings required hereunder or by law, the Permittee shall: a. Maintain a list, for review by the Director or City Engineer upon request, of all entities that use any portion of the Network Facilities. b. File copies, upon the Director's request, of all requested reports made to federal and state authorities pertaining to the regulation of any activity of the Permittee in the Public Way. c. Retain all records pertaining to any use of the Public Way for a period of not less than 10 years at a location in Texas that is acceptable to the Director (the "Local Office") and make the same available to the Director for inspection, or copying from the Local Office during regular business hours upon 24 hours written notice. d. Maintain and provide a current map, upon request by the Director or City Engineer, certified by a registered professional engineer to be true and correct, showing the locations of the Network Facilities in the Public Ways. e. Maintain records, accounts, and financial and operating reports in a manner that will allow the City to determine the actual Gross Receipts. The Director may require the keeping of additional records or accounts reasonably necessary to determine the Permittee's compliance with the terms of this Temporary Permit. Section 4.02. Confidential information. a. The Director will not reproduce any customer lists, confidential contracts or confidential financial information clearly designated to be confidential or proprietary ("Confidential information") not specifically required for documentation of audit issues. Except as provided by law, thc City shall not disclose any Confidential Information to any Person. The Permittee agrees that it will permit the Director to remove Confidential Information from its Local Office for a period of 10 working days for the purpose of review to determine Temporary Permit -7- compliance, Upon expiration of 10 working days or the completion of the Director's Temporary Permit compliance review, whichever is first to occur, the Director shall return all Confidential Information removed from the Local Office; provided that the Director may retain copies of documents deemed by the Director to be reasonably necessary for purposes of determining compliance with this Temporary Permit. b. The Director shall not disclose any Confidential Information reproduced for documentation of audit issues unless the City has received a request to review or copy Confidential Information under the Texas Open Records Act or related law (the "Act"). Upon receipt of such request, the City shall (i) timely submit a request to the Attorney General of the State of Texas (or other appropriate official if the Attorney General is not the proper official) for an opinion as to whether the requested Confidential Information must be disclosed under the Act, and (ii) notify the Permittee that a request to review or copy Confidential Information has been submitted to the City. Confidential Information deemed subject to disclosure under the Act shall be disclosed. Section 4.03. Enforcement. The City Attorney, or the City Attorney's designee, shall have the right to enforce all legal rights and obligations under this Temporary Permit without further authorization. The Permittee agrees to provide the City access to all documents and records that the Director, the Controller or the City Attorney deem reasonably necessary to assist in determining the Permittee's compliance with this Temporary Permit. ARTICLE V. REGULATION OF CONSTRUCTION AND USE OF THE PUBLIC WAY Section 5.01. Interference with public use prohibited. The Permittee shall lay, construct, operate, lease, maintain, repair and replace the Network Facilities so as not to unreasonably interfere with use of the Public Way. Insofar as possible, the Permittee shall use existing Network Facilities in the provision of the Services. The Permittee shall provide any information reasonably related to location or operation of the Network or Services determined to be necessary by the City Engineer or the Director. The Permittee shall maintain, the Network Facilities in good order and condition, subject to ordinary wear and tear. Section 5.02. Permitting and plan approval. a. New Construction Permit. Before commencing any work in the Public Way other than routine maintenance or emergency work (as described in Subsections b and c below) the Permittee shall apply for and obtain a New Construction Permit. The application shall include the application fee described in Section 3.06, a written work description, including scale drawings, showing the Network Facilities' location (or proposed location) and estimated depth of the Network Facilitics (existing and proposed) in the immediate area of the proposed new construction. Such drawings and specifications shall be prepared, executed and sealed by a registered professional engineer. Such drawings and specifications will be reviewed by the City -8- Engineer and any comments will be provided to the Permittee as soon as practicable. The Permittee agrees to make any changes to the drawings and specifications requested by the City Engineer. b. Routine maintenance. Before the Permittee performs any routine maintenance or repairs on any Network Facilities, the Permittee shall give at least 30 days written notice to the City Engineer as to the time and location of the proposed maintenance or repair. Unless waived by the City Engineer in writing, daily work schedules shall be provided to the City by 8:30 a.m. each day any such routine maintenance or repair is performed. Written approval from the City Engineer of all routine maintenance or repair of the Network Facilities must be obtained prior to beginning work. Such approval by City Engineer shall constitute full authority for the issuance of permits. c. Emergency repairs. When an emergency occurs that could not reasonably have been foreseen and requires immediate work on the Network Facilities located in the Public Way, repairs may be performed by the Permittee and notice shall be given to City Engineer within 24 hours following the commencement of such emergency repairs. Such notice shall state the nature of the emergency repairs and the length of time estimated necessary to complete the emergency repairs. The Permittee shall apply for the proper permits as soon as reasonably practicable, and any work performed that is not consistent with then-applicable City standards shall be corrected upon notice thereof from the City. d. Payment of fees required. The City is not required to grant any permit or approval to the Permittee unless and until all fees due and payable pursuant to this Temporary Permit have been paid in full, including any permit fees. e. Other licenses and fees. The Permittee shall obtain and pay the cost of all licenses, permits, and certificates required by any statute, ordinance, rule or regulation of any local, state or federal regulatory body having jurisdiction over the conduct of its operations hereunder. The Permittee shall give notice to the Director of any revocation or failure to obtain any such license, permit or certificate affecting its performance hereunder within 15 days of such revocation or of the day upon which the Permittee received actual or constructive notice of its failure to obtain such license, permit or certificate. Section 5.03. Work standards. All work in the Public Way shall be performed in accordance with the City's Standard Specifications for Street and Storm Drainage & Street Paving Construction, as such may be amended from time to time, and shall be subject to the regulation, control and direction of the City Engineer. All work done in connection with the laying, construction, operation, maintenance, repair and replacement of the Network and Network Facilities shall be in compliance with all applicable laws, ordinances, rules and regulations of City, the applicable county, the State of Texas, and the United States. Section 5.04. Work in the Public Ways. -9- a. The Permittee's work affecting the Public Ways shall be performed in a manner calculated to cause the least inconvenience to the City and the public as may be reasonable possible under the circumstances. When the Permittee performs or causes to be performed any work in any Public Way, or so closely adjacent thereto as to create hazards for the public or themselves, the Permittee shall provide construction and maintenance signs and sufficient barricades and flagmen at work sites to protect the public, equipment and workmen. The application of such traffic control devices shall be consistent with the standards and provisions of the latest addition to the Texas Manual on Uniform Traffic Control Devices. Appropriate warning lights shall be used at all construction and maintenance zones where one or more traffic lanes are being obstructed during nighttime conditions. b. If the Permittee's work requires the closure of any part of any Street, such closure shall be performed in a manner approved in writing by the City Engineer. The Permittee shall not wholly close any Public Way, but shall at all times maintain a route of travel along and within any roadway that is within a Public Way; provided that, in cases of emergency, the City Engineer may authorize a temporary closing of any Public Way or sidewalk to allow the Permittee to complete any emergency repairs if in the opinion of the City Engineer, such closing is necessary to protect the safety of the public. Section 5.05. Restoration. a. At its sole cost and expense, the Permittee shall repair, clean up and restore the Public Way disturbed or affected during the maintenance, construction, repair, replacement or removal of the Network Facilities and shall warrant the repair and restoration of such Public Way and other surfaces for a period of two years from the date of completion of same. The City Engineer may require a bond as may be required under then-current City regulations; in the absence thereof, the Permittee shall to provide a surface correction bond in an amount estimated by the City Engineer to be the cost of repair of the Public Way. The terms and conditions of the bond will be substantially similar to those required by the City of other Persons performing similar work in the Public Ways. Such repairs, clean up and restoration shall be carried out pursuant to standards promulgated by the City Engineer, and shall return the Public Way and other disturbed surfaces to substantially the same condition as before the Permittee's work began. b. Any excavation in any portion of the Public Way shall be replaced with materials of the same kind as those removed unless the City Engineer approves of some other type of fill or material. Without limitation of the above, if after refilling an excavation the earth within the excavated area settles so as to leave a depression, and the depression is related to the Permittee's work, the Permittee shall make further necessary fills or other repair work from time to time to correct the problem as ordered by the City Engineer. The determination that the Public Way and other surfaces have been returned to substantially the same condition shall be within the reasonable excercise of the City Engineer's discretion. -10- Section 5.06. Relocation or removal. The Permittee may be required to lower, relocate or remove any Network Facility in any Public Way without cost to the City if reasonably necessary as determined by the City Engineer to abate a condition actually or potentially dangerous to the public health or safety, or as may be reasonably necessary to accommodate any public works project in the Public Way including, but not limited to, water, sanitary sewer, storm drains, street lights and traffic signal conduits, or any other facilities in or under the Public Way. In the alternative, where the City Engineer determines it to be feasible, the Permittee may be allowed to pay any additional costs incurred for the design or construction of such public works project in a manner that will avoid the relocation or removal of the Network Facilities. In determining the feasibility, the City Engineer shall be guided by the principles of economic waste. Section 5.07. Timely completion. If the Permittee fails to either (i) commence or thereafter to diligently prosecute any repair, refilling, lowering, relocation, or other work required by the City, or (ii) diligently complete any work that disturbs the Public Ways, the City may cause the work to be done or completed at the expense of the Permittee and may recover all such expense from the Permittee together with all costs and reasonable attorney fees. Section 5.08. Subsequent rules and regulations. The City Council or the City Engineer may make such other reasonable rules and regulations for the placement and manner of the Network Facilities as they may deem appropriate for the protection of the public and the Public Way and to avoid unreasonable interference with other uses or contemplated uses of the Public Way. Without limitation of the above, the City Engineer may amend the rules or regulations to require that all Network Facilities constructed after the effective date of such amended rules be placed underground. Section 5.09. Inspections. The City Engineer may perform inspections of any Network Facility located in the Public Way from time to time as the City Engineer may deem appropriate. The Permittee may have a representative present during such inspection. Section 5.10. Abandonment of obsolete facilities. a. When the Permittee opens a trench, accesses a conduit, bores, or is working on other locations it shall determine if the Network Facilities located therein, if any, are obsolete, and shall remove such obsolete Network Facilities from such locations, subject to the City Engineer's approval pursuant to Subsection (e), which shall include consideration of structural integrity of the Public Way. b. When the Permittee opens a trench, accesses a conduit or bores, it shall notify all other permittees or franchisees with facilities in the area of such work, so that all the other permittees or franchisees may remove their obsolete facilities, if any, from such location, at their sole cost. The Permittee may request a list of such other permittees or franchisees from the City Engineer, and may rely thereon for purposes of this Section. The Permittee shall cooperate with -11- the other in their efforts to remove obsolete facilities. Nothing in this section shall require the Permittee to delay its work in order to accommodate other permittees or franchisees. c. When the Permittee receives notification from another Permittee that it plans to open a trench, access a conduit or bore and the Permittee determines that the Network Facilities contained therein, if any, are obsolete, the Permittee may remove obsolete Network Facilities from such locations pursuant to Subsection (e) without causing a delay to the other Permittee, subject to the City Engineer's written approval, which shall include consideration of structural integrity of the Public Way. d. [Reserved]. e. Whenever the Permittee intends to abandon any Network Facility within the Public Way, the Permittee shall submit to the City Engineer for the City Engineer's approval a completed application describing the Network Facilities and the date on which the Permittee intends to abandon such Network Facilities. The Permittee may remove the Network Facilities or request that the City permit it to remain in place. If the Network Facilities remain in place, they shall be subject to all terms and conditions of this Temporary Permit as though it were in use by the Permittee. f. The City may require the Permittee to perform a combination of modification and removal of any Network Facilities determined by the Permittee to be obsolete under this section. The Permittee shall complete such modification or removal in accordance with a schedule approved in writing by the City Engineer. Until such time as the Permittee removes, modifies or replaces any obsolete Network Facilities as directed by the City Engineer, the Permittee shall be responsible for all necessary repairs, relocations of such Network Facilities, and maintenance of the Public Way occupied by such Network Facilities in the same manner and degree as if the Network Facilities were in active use. Section 5.11. Acquisition of property adjacent to Public Way. a. Before the Permittee acquires any interest in real property for the installation or relocation of Network Facilities along or adjacent to any Public Way, the Permittee shall give the City Engineer written notice of such planned acquisition no later than 30 days before the date of such acquisition. The City Engineer will review the proposed acquisition to see that same does not conflict or interfere with any proposed street or thoroughfare expansion. b. If the City Engineer determines that the proposed acquisition will unreasonably conflict or interfere with any proposed street or thoroughfare expansion, the City Engineer will notify Permittee of the potential conflict or interference within 30 days after receipt of notice from the Permittee, and the Permittee shall be required to accommodate the requirements of the City Engineer with regard to the use of the property. -12- c. If the Permittee fails to notify the City within the prescribed 30 day period, the City may require the Permittee to relocate its Network Facilities at no cost to the City to avoid unreasonable interference with such proposed street or thoroughfare expansion. Section 5.15. Abandonment of Public Way. If the City conveys, closes, abandons, or releases its interest in any Public Way containing Network Facilities installed or operated pursuant to this Temporary Permit, any such conveyance, closure, abandonment or release shall be subject to the rights of the Permittee under this Temporary Permit. Section 5.16. Bonding. The Permittee shall comply with all applicable requirements relating to the provision of bonds or other security to the City in connection with its work in the Public Ways. ARTICLE VI. [Reserved] ARTICLE VII. INDEMNIFICATION AND INSURANCE Section 7.01. Indemnification. THE Permittee COVENANTS AND WARRANTS THAT IT WILL PROTECT, DEFEND, AND HOLD HARMLESS THE CITY, ITS EMPLOYEES, OFFICERS, AND LEGAL REPRESENTATIVES (COLLECTIVELY, THE "CITY") FROM ANY AND ALL THIRD PARTY CLAIMS, DEMANDS, AND LIABILITY, INCLUDING DEFENSE COSTS, RELATING IN ANY WAY TO DAMAGES, CLAIMS, OR FINES ARISING BY REASON OF OR IN CONNECTION WITH THE PERMITTEE'S ACTUAL OR ALLEGED NEGLIGENCE OR OTHER ACTIONABLE PERFORMANCE OR OMISSION OF THE PERMITTEE IN CONNECTION WITH OR DURING THE PERFORMANCE OF ITS DUTIES UNDER THIS TEMPORARY PERMIT. THE PERMITTEE FURTHER EXPRESSLY COVENANTS AND AGREES TO PROTECT, DEFEND, INDEMNIFY, AND HOLD HARMLESS CITY FROM ALL CLAIMS, ALLEGATIONS, FINES, DEMANDS, AND DAMAGES RELATING IN ANY WAY TO THE ACTUAL OR ALLEGED JOINT AND/OR CONCURRENT NEGLIGENCE OF THE CITY AND THE PERMITTEE, WHETHER THE PERMITTEE IS IMMUNE FROM LIABILITY OR NOT. NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, THE LIABILITY OF THE PERMITTEE UNDER THIS INDEMNITY PROVISION SHALL NOT EXCEED $1,000,000 PER OCCURRENCE. IF THE TEMPORARY PERMIT GRANTED BY THIS ORDINANCE IS TERMINATED OR IS NOT RENEWED, AND THE PERMITTEE DOES NOT REMOVE ITS NETWORK FACILITIES FROM THE PUBLIC WAY, THE PERMITTEE SHALL -13- CONTINUE TO INDEMNIIFY AND HOLD HARMLESS THE CITY PURSUANT TO THIS ARTICLE AS LONG AS ITS FACILITIES ARE LOCATED IN THE PUBLIC WAY, AND FOR SAID PURPOSE, THIS SECTION SHALL SURVIVE THE TEMPORARY PERMIT. Section 7.02. Insurance. The Permittee shall maintain the following insurance coverage and the respective policies thereof shall cover all risks related to the Permittee's use and occupancy of the Public Way and all other risks associated with this Temporary Permit: a. Description of Insurance Coverage and Limits
Coverage Limit of Liability - --------------------- ----------------------------------- Workers' Compensation Statutory for Workers' Compensation. Employer's Liability Bodily Injury by Accident $1,000,000 (each accident) Bodily Injury by Disease $1,000,000 (policy limit) Bodily Injury by Disease $1,000,000 (each employee) Commercial General Liability: Combined single limits of $1,000,000 Including Broad Form per occurrence and $1,000,000 aggregate Coverage, Contractual Liability, Bodily and Personal Injury, and Completed Operations Products and Completed Operations $1,000,000 aggregate Automobile Liability insurance $1,000,000 combined single limit (for automobiles used by the per occurrence Permittee in the course of its performance under this Temporary Permit including Employer's Non-Ownership and Hired Auto Coverage) Excess Coverage $1,000,000 per occurrence/ combined aggregate in excess of limits specified for Employer's Liability, Commercial General Liability and Automobile Liability
Aggregate limits are per 12-month policy period, unless otherwise indicated. b. Other insurance-related requirements 1. The City shall be named an additional insured, by endorsement, on all applicable insurance policies. -14- 2. Applicable insurance policies shall each be endorsed with a waiver of subrogation in favor of the City 3. Insurers shall have a rating of B+ or better and a financial size of Class VI or better according to the current year's Best's rating. Each issuer must be responsible and reputable, must have financial capability consistent with the risks covered, and shall be subject to approval by the Director in the Director's discretion as to conformance with these requirements. 4. Deductible limits on insurance policies and/or self insured retention exceeding $50,000 require approval of the City. 5. Certificates of insurance shall state that the City shall be notified a minimum of 30 days prior to the insurer's action in the event of cancellation, non-renewal or material change in coverage regarding any insurance policy required in this Temporary Permit. 6. Full limits of insurance required in Subsection (a) shall be available for claims arising out of this Temporary Permit. 7. Certificates of insurance shall be provided by the Permittee to the City upon the Permittee's execution of this Temporary Permit. Any failure on the part of the City to request such documentation shall not be construed as a waiver of insurance requirements specified herein. 8. The City shall be entitled, upon request and without incurring expense, to review the insurance policies (or certified copies thereof) including endorsements thereto which relate to the insurance requirements specified herein and, at its discretion, to require proof of payment for policy premiums. 9. The City reserves the right to revise insurance requirements specified herein and require the Permittee to comply therewith within 60 days of the City's official notice of the revision. Such notice shall be in writing and shall state the particular revisions required, and the reasons therefor. 10. The City shall not be responsible for paying the cost of insurance coverage required herein. 11. Notice of any actual or potential claim and/or litigation that would affect insurance coverage required herein shall be provided to the City in a timely manner. In the alternative, a policy may by endorsement, establish a policy -15- aggregate for this Temporary Permit which meets the aggregate requirements specified herein. 12. Each insurance policy required herein shall be primary insurance to any other insurance available to the City with respect to any claims arising hereunder. 13. The Permittee shall agree to either require its contractors to maintain the same insurance coverage and limits thereof as specified herein or such coverage on the Permittee's contractors shall be provided by the Permittee. The Permittee shall continuously and without interruption, maintain in force the required insurance coverage and limits set forth above. Failure to do so will be a default under this Temporary Permit, allowing the City, at its option, to terminate this Temporary Permit in accordance with the provisions of Article IX. ARTICLE VIII. CITY NETWORK Section 8.01. Installation of City fiber. In the case of new construction of the Network, the Permittee, at its sole cost and expense, shall upon written request of the City at the time of the issuance of the New Construction Permit, provide to City for internal governmental purposes four dark fiber strands throughout the portion of the Network Facilities being constructed, as required by the City Engineer and suitable for City's needs. In addition, where such new construction is located directly adjacent to municipal buildings used by City for governmental purposes, the Permittee shall provide lateral lines connecting such locations to the Network as required by the City Engineer at 110 percent of the Permittee's direct cost, to be reimbursed by the City. The City shall be responsible for providing the Permittee with access to such locations. The City Engineer shall notify the Permittee of such locations prior to the commencement of construction of the applicable portions of the Network Facilities. The City reserves the right to obtain bids from vendors, other than the Permittee, for construction work not requiring access to the Network Facilities. Section 8.02. Additional innerduct work. In addition to the requirements of Section 8.01, the Permittee shall provide to the City without charge, and solely for governmental telecommunications purposes, and solely for governmental telecommunication purposes, a 1-1/4 inch innerduct in all of the Permittee's conduit facilities constructed under this Temporary Permit. Prior to such construction, the Permittee shall provide the City with written notice of the proposed location of the conduit. The City shall have 30 days after receipt of such notice to designate in writing the segments of conduit in which it desires such an innerduct. If there is sufficient space in the Public Way for the Permittee to reasonably size its conduit to allow for the City's innerduct without interference with the Permittee's use of the Public Way, then the Permittee shall grant the City's request. Additionally, the Permittee shall provide adequate space on all its own non-ducted -16- facilities constructed on, over, or within the Public Way, for the City to attach transmission media for governmental use, subject to the City obtaining necessary approvals. However, the Permittee shall not he required to disrupt or otherwise compromise service to its customers in order to meet the requirements of this subsection. ARTICLE IX. DEFAULT AND TERMINATION Section 9.01. Defaults. The occurrence of any of the following shall be an event of default under this Temporary Permit: i. failure of the Permittee to comply with any material term, condition or provision of this Temporary Permit; ii. any intentional false statement or misrepresentation as to a material fact in the Permittee's application for this Temporary Permit; iii. the Permittee's loss of or failure to obtain all licenses, permits, and certification lawfully required by any statute, ordinance, rule or regulation of any regulatory body having jurisdiction over the Permittee's operations under this Temporary Permit and pay all fees associated therewith; or iv. acts or omissions of the Permittee constituting evasion of payment of Temporary Permit Fees, including evasion by means of not reporting actual Gross Receipts, bartering or any other means. Section 9.02. Cure period. If the Permittee continues to violate or fails to comply with the material terms and provisions of this Temporary Permit for a period of 30 days after the Permittee has been notified in writing by the City to cure such specific alleged violation or failure to comply, then the City may follow the procedures set forth herein to declare that the Permittee has terminated all rights and privileges consented to in this Temporary Permit; provided that if the Permittee is alleged to be in violation of any material provisions of this Temporary Permit other than the payment of any fee due hereunder and if the Permittee commences efforts to cure such alleged violation(s) within 30 days after receipt of written notice and shall thereafter prosecute such curative efforts with reasonable diligence until such curative efforts are completed, then such alleged violation(s) shall cease to exist and no further action will be taken at that time. Section 9.03. Termination. Termination of this Temporary Permit shall be by City ordinance. The City shall provide written notice of such ordinance to terminate to the Permittee at least 60 days prior to such ordinance being included on City Council's agenda. Such notice shall set forth the causes and reasons for termination. The Permittee shall be provided the opportunity to appear before the City Council prior to the City Council's consideration of such termination of the Temporary Permit and such opportunity to speak shall be no less than 60 days -17- following receipt of notice of termination. Such notice shall set forth the time, date, and place of such time when the Permittee may appear before the City Council. Upon any termination of this Temporary Permit, all amounts due by the Permittee to City shall immediately become due and payable. ARTICLE X. TRANSFER OF TEMPORARY PERMIT OR LEASE OF FACILITIES Section 10.01. Prohibition. The rights, privileges and Temporary Permit granted hereunder may not be assigned, in whole or in part, without the prior consent of the City expressed by resolution or ordinance, and then only under such conditions as may therein be prescribed, except as otherwise provided in Section 10.04. No assignment in law or otherwise shall be effective until the assignee has filed with the Director an instrument, duly executed, reciting the fact of such assignment, accepting the terms hereof, and agreeing to comply with all of the provisions hereof, A mortgage or other pledge of assets in a bona fide lending transaction shall not be considered an assignment of this Temporary Permit for the purposes of this Article. Section 10.02. Process. Upon receipt of a request for consent to an assignment, the Director shall diligently investigate the request in a timely manner and place the request on the City Council agenda at the earliest practicable time. The City Council shall proceed to act on the request within a reasonable period of time. Section 10.03. Scope of Review. In reviewing a request for assignment, the City may inquire into the legal, technical and financial qualifications of the prospective assignee, and the Permittee shall assist the City in so inquiring. The City may condition said assignment upon such terms and conditions as it deems reasonably necessary, provided its approval and any such terms and conditions so attached shall be related to the legal, technical, and financial qualifications of the assignee as well as the Permittee's compliance with the terms hereof. Section 10.04. Assignments not Requiring Approval. Notwithstanding anything to the contrary contained in this article, the prior approval of the City shall not be required for any assignment to (i) any entity controlling, controlled by, or under common control with the Permittee, as long as such entity has expertise in the operation of the Network Facilities; (ii) any entity with which the Permittee or an affiliate of the Permittee shares joint ownership of the Network Facilities; or (iii) any entity that is a holder of a then-current comprehensive telecommunication (as distinguished from a Cable Services) franchise. The Permittee shall give written notice of such assignment and provide documentation demonstrating the assignee's financial resources to the Director. Section 10.05. Release. Upon receiving the City's consent to an assignment, or, in the event of an assignment qualifying under Section 10.04, upon giving notice under Section 10.04, -18- the Permittee shall be relieved of all conditions, obligations, and liabilities arising or which might arise hereunder that are assumed by the assignee. Section 10.06. Lease or use of the Network Facilities by other Persons. The Permittee shall have the right to lease the Network, or otherwise make the Network Facilities available, in whole or in part, to its customers in the ordinary conduct of the provision of Services, if: i. The Permittee retains responsibility for servicing and repairing the Network; and, ii. The lessee or customer has a valid franchise granted by City, if one is required, and such lessee or customer is not in default under the terms of such franchise. The Director shall determine whether a franchise is required. ARTICLE XI. MISCELLANEOUS Section 11.01. Discrimination prohibited. a. The Permittee shall not give unreasonable preference or advantage as to rates or services to anyone within a service classification; nor shall Permittee discriminate against anyone in the furnishing of Services under this Temporary Permit, or the charges therefor, on account of race, color, religion, sex or national origin. b. The Permittee shall comply with all laws, standards, orders and regulations regarding equal employment which are applicable to the Permittee. Section 11.02 [Reserved.] Section 11.03 Drug-free workplace. a. It is the policy of the City to achieve a drug-free work force and to provide a workplace that is free from the use of alcohol and illegal drugs. It is also the policy of the City that the manufacture, distribution, dispensation, possession, sale or use of alcohol or illegal drugs by contractors while on City premises is prohibited. By accepting this Temporary Permit, the Permittee agrees that it shall require any contractor working for or on behalf of the Permittee in the Public Way to comply with all applicable federal and state laws and regulations, as well as the requirements and procedures set forth in the Mayor's Policy on Drug Detection and Deterrence, City Council Motion No. 92-1971 and the Mayor's Drug Detection and Deterrence Procedures for Contractors, Executive Order No. 1-31, both of which are on file in the Office of the City Secretary. b. In addition, the Permittee shall require that any subcontractor working for or on behalf of Permittee's contractor(s) in the Public Way shall also be required to comply with the provisions -19- of this section, The City may require that the Permittee produce evidence that Permittee's contractors, as well as any subcontractors, are in compliance with this provision of this Temporary Permit. Section 11.04 Notice. a. All notices required or permitted hereunder shall be in writing and shall be deemed delivered when actually received or, if earlier, on the third day following deposit in a United States Postal Service post office or receptacle with proper postage affixed (certified mail, return receipt requested) addressed to the respective other party at the address prescribed below or at such other address as the receiving party may have theretofore prescribed by notice to the sending party. b. Any notice or communication required or permitted in the administration of this Temporary Permit may be sent by personal delivery, United States mail or courier and shall be sent as follows: Notice to the City Engineer will be to: City Engineer Director, Department of Public Works and Engineering City of Houston 1801 Main Houston, Texas 77002 Notice to the City or the Director will be to: Director, Department of Finance and Administration City of Houston 900 Bagby, 2nd Floor Houston, Texas 77002 Notice to the Permittee will be to: TVMAX Communications (Texas), Inc. 1111 West Mockingbird Lane, Suite 1130 Dallas, Texas 75247 Attention: Mr. Mike Katzenstein, Vice President and General Counsel and Mr Robert J. Collins Andrews & Kurth, L.L.P. 4200 Texas Commerce Tower Houston, Texas 77002 -20- or to such other address as the Director, the City Engineer or the Permittee may designate in writing from time to time. Any notice sent by facsimile transmission must, subsequent to such facsimile transmission, also be given by any other means provided for hereunder. Section 11.05. Force Majeure. Other than the Permittee's failure to pay amounts due and payable under this Temporary Permit, the Permittee shall not be in default or be subject to sanction under any provision of this Temporary Permit when its performance is prevented by Force Majeure. Force Majeure means an event caused by strike or other labor problem; embargo; epidemic; act of God; fire; flood; adverse weather conditions, or other major environmental disturbance, act of military authority; war or civil disorder. Provided, however, that such causes are beyond the reasonable control and without the willful act, fault, failure or negligence of the Permittee. Performance is not excused under this section following the end of the applicable event of Force Majeure. Section 11.06. Controlling laws. This ordinance and the Temporary Permit granted herein are subject to the applicable provisions of the Constitution and laws of the United States and of the State of Texas, the Charter of the City of Houston, and the Code of Ordinances, City of Houston of general applicability. All obligations of the parties hereunder are performable in Harris County, Texas. In the event that any legal proceeding is brought to enforce the terms of this Temporary Permit, the same shall be brought in Harris County, Texas. Section 11.07 Cumulative effect. This Temporary Permit shall be cumulative of all provisions of the Code of Ordinances, City of Houston, as amended, except in those instances where the provisions of this Temporary Permit are in direct conflict with the provisions of such Code, in which instances the provisions of this Temporary Permit shall supersede the conflicting provisions of such Code as they apply to the City. Section 11.08. Severability. It is hereby declared to be the intention of the City Council that the phrases, clauses, sentences, paragraphs and sections of this Temporary Permit are severable, and, if any phrase, clause, sentence, paragraph or section of this Temporary Permit shall be declared void ineffective or unconstitutional by the valid judgment or final decree of a court of competent jurisdiction, such voidness, ineffectiveness or unconstitutionality shall not affect any of the remaining phrases, clauses, sentences, paragraphs and sections of this Temporary Permit since the same would have been enacted by the City Council without the incorporation herein of any such void, ineffective or unconstitutional phrase, clause, sentence, paragraph or section. -21- Section 11.09. Entire agreement. This Temporary Permit merges the prior negotiations and understandings of the parties hereto and embodies the entire agreement of the parties, and there are not other agreements, assurances, conditions, covenants (expressed or implied) or other terms with respect to the Network Facilities whether written or verbal, antecedent or contemporaneous with the execution hereof. Section 11.10. Captions. Captions contained in this Temporary Permit are for reference purposes only, and therefore will be given no effect in construing this Temporary Permit and are not restrictive of the subject matter of any section of this Temporary Permit. Any reference to gender shall include the masculine, feminine and neutral. Section 11.11. Acceptance and approval. An approval by the Director, the City Engineer, or any other instrumentality of City, of any part of the Permittee's performance shall not be construed to waive compliance with this Temporary Permit or to establish a standard of performance other than required by this Temporary Permit or by law. Where this Temporary Permit contains a provision that either party approve or consent to any action of the other party, such approval or consent shall not be unreasonably withheld or delayed. Section 11.12. Non-waiver. Failure of either party hereto to insist on the strict performance of any of the terms and conditions hereof or to exercise any rights or remedies accruing hereunder upon default or failure of performance shall not be considered a waiver of the right to insist on, and to enforce by any appropriate remedy, strict compliance with any other obligation hereunder or to exercise any right or remedy occurring as a result of any future default or failure of performance except as specifically conceded herein. Section 11.13. Written amendment. Unless otherwise provided herein, this Temporary Permit may be amended only by an ordinance duly adopted by the City Council. Section 11.14. [Reserved]. Section 11.15. Duties upon termination. Unless this Temporary Permit is replaced by the Franchise as provided in Section 2.02, above, the Permittee shall notify the Director Engineer in writing of any of the Network Facilities that are constructed under the terms of this Temporary Permit and are not used or useful for providing service under the Permittee's existing cable television franchise, and that it wishes to remove from the Public Way within 90 days after the termination of this Temporary Permit. If the Permittee does not timely provide such notice, such Network Facilities shall, at the City's election, be and become property of the City, without the payment of other or further compensation to the Permittee, or the City may, at its option, elect to have all such property, if any, of the Permittee in or under the Public Way removed by the Permittee at the Permittee's sole cost and expense. If the property is to be removed, the Permittee shall have a reasonable time to remove the Network Facilities and the Permittee shall cause the Public Way to be restored to the same condition, or in as good a state of repair or condition, as -22- same was in prior to removal of the Network Facilities. The removal and restoration work shall proceed diligently to completion. All work incident to the removal of the Network Facilities or restoration of Public Way shall be done at the sole cost and expense of the Permittee, and shall be done under the supervision and satisfaction of the City Engineer, Notwithstanding anything to the contrary contained herein, following the completion of such removal, the Permittee shall not remove additional property at any time for any reason without the prior written approval of the Director, such approval to be at the sole discretion of the Director. Section 11.16. [Reserved]. Section 11.17. Acceptance. The Permittee shall, within 30 days from the Effective Date, file with the City Secretary a written statement executed in its name by an officer of the Permittee duly appointed and authorized to make such statement, in the form provided in Exhibit C. Section 11.18. Representations and warranties. In addition to the representations, warranties, and covenants of the Permittee to the City set forth elsewhere herein, the Permittee represents and warrants to the City and covenants and agrees (which representations, warranties, covenants and agreements shall not be affected or waived by any inspection or examination made by or on behalf of the City) that, as of the closing and throughout the term of this Temporary Permit. a. Organization, standing and power. The Permittee is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is duly authorized to do business in the State of Texas and in the City. The Permittee has all requisite power and authority to own or lease its properties and assets, to conduct its businesses as currently conducted and to execute, deliver and perform this Temporary Permit and all other agreements entered into or delivered in connection with or as contemplated hereby. b. Compliance with law. The Permittee is, to the best of its knowledge and belief, in compliance with all laws, ordinances, decrees and governmental rules and regulations applicable to the System and has obtained all government licenses, permits, and authorizations necessary for the operation and maintenance of the Network Facilities. c. Full disclosure. Without limiting the specific language of any other representation and warranty herein, all information furnished by the Permittee to the City in connection with this Temporary Permit, or otherwise related to System matters by authorized officers of the Permittee, to the best of the Permittee's knowledge and belief is accurate and complete in all material respects on the date ot passage of this Temporary Permit, and includes all material facts required to be stated therein and does not contain any untrue statement of a material fact or omit any material fact necessary to make the statements therein not misleading. There is no fact known to the Permittee, to the best of its knowledge, which materially and adversely affects or in the future could reasonably be expected to materially and adversely affect the business, operations, properties, assets or financial condition of the Network, or any part thereof, which has not been -23- set forth in this Temporary Permit or the other documents, certificates, and instruments delivered to the City by or on behalf of the Permittee specifically for use in connection with the transactions contemplated by this Temporary Permit. d. Truthful statements. The Permittee warrants, to the best of its knowledge and belief, that information provided and statements made in its application for this Temporary Permit were true and correct when made and are true and correct upon execution hereof. e. Survival of representations and warranties. All representations and warranties contained in this Temporary Permit shall survive the term of the Temporary Permit. Section 11.17. Emergency; Effective Date. A public emergency exists requiring that this ordinance be passed finally on the date of its introduction as requested in writing by the Mayor; therefore, this ordinance shall take effect immediately upon its passage and approval by the Mayor, provided that if the Mayor fails to sign this ordinance within five days after its passage and adoption, it shall take effect in accordance with HOUSTON, TEX., CITY CHARTER, art. VI, Section 6. PASSED AND ADOPTED, this 12th day of March 1997. APPROVED, this__________ day of __________, 1997. ______________________________ Mayor of the City of Houston Pursuant to HOUSTON, TEX., CITY CHARTER, art. VI, Section 6, the effective date of the foregoing ordinance is March 18, 1997. /s/ Anna Russell -------------------- City Secretary (Prepared by Legal Department /s/ XXXXXXX) (TA 2-25-97) (Requested by Richard Lewis, Director, Department of Finance & Administration) (LD File No.______________) -24- Section 2.04(b) EXHIBIT A Letter to Be Sent to Customers Who May Require Franchise Agreements* Dear ____________: Pursuant to the Temporary Permit between _________________ and the City of Houston (the "City") City Ordinance No. ______________________, this letter is to notify you that you may require authorization from the City of Houston to provide services via _________________ facilities located within City streets and rights-of-way. Information regarding applicability, procedures, and requirements for such authorization may be obtained by calling the City of Houston Division of Revenue and Regulatory Affairs at (713) 247-1353. [Company] --------------------------------------------- cc: City of Houston Note to Exhibit A: * Pursuant to Section 2.04(b) of Ordinance No. ________, this letter is to be sent to entities whose use of the Network should reasonably require certification, authorization, or licensing by the FCC, Texas Public Utility Commission, or such other federal or state regulatory authority. Section 3.03 EXHIBIT B CITY OF HOUSTON TELECOMMUNICATION FEE PAYMENT FORM Period Ending:_____________________________________ Permittee:_________________________________________ No. of Customers By Class Business (private) __________________ Business (public) __________________ Residential __________________ Sales and Revenues in City of Houston Local Service Revenue __________________ (5,000 to 5,069) 40 CFR Part 32 Network Access Services Revenue __________________ (5080-5084) Long Distance Revenue __________________ (5010-5169) Miscellaneous Revenues __________________ (5230-5270) Uncollectible __________________ TOTAL __________________ Temporary Permit Fee @ 4% of Gross Receipt __________________ * Attached supporting quarterly revenue reports. I, ANNA RUSSELL, City Secretary of the City of Houston, Texas, do hereby certify that the within and foregoing is a true and correct copy of Ordinance No. 97-285, passed and adopted by the City Council of said City on the 12th day of March, 1997 as the same appears in the records in my office. WITNESS my hand and the Seal of said City this 19th day of March, AD 1997. /s/ Anna Russell ---------------------------------------------- City Secretary of the City of Houston Anna Russell EX-10.24 32 EXHIBIT 10.24 Exhibit 10.24 City of Houston Ordinance No. 94-1279 AN ORDINANCE CONSENTING TO THE ASSIGNMENT OF THE CABLE TELEVISION FRANCHISE GRANTED PURSUANT TO CITY OF HOUSTON ORDINANCE NO. 89-338, AS AMENDED BY CITY OF HOUSTON ORDINANCE NO. 91-605, TO TVMAX COMMUNICATIONS (TEXAS), INC., AND PRESCRIBING CERTAIN SUPPLEMENTAL CONDITIONS TO SUCH ASSIGNMENT; PROVIDING FOR SEVERABILITY; AND CONTAINING OTHER PROVISIONS RELATING TO THE FOREGOING SUBJECT. ****** WHEREAS, Nationwide Communications Inc., d/b/a Eaglevision ("Eaglevision"), is authorized to carry on a cable television operation within the City of Houston (the "City") pursuant to City of Houston Ordinance No. 89-338, as amended by City of Houston Ordinance No. 91-605 (collectively, the "Franchise") pursuant to the terms and conditions set out therein; WHEREAS, pursuant to the terms of the Franchise and the Cable Act (as defined in the Franchise), Eaglevision has requested that the City approve the assignment of the Franchise to TVMAX Communications (Texas), Inc. ("TVMAX"), and TVMAX has joined in such request; and WHEREAS, the City Council of the City has determined that the assignment of the Franchise should be approved, subject to the terms and conditions described in this ordinance, NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF HOUSTON: Section 1. Consent to assignment. Subject to the acceptance by TVMAX of the assignment of the Franchise and to the Supplemental Conditions described below, the City hereby consents to the transfer, assignment and conveyance of the Franchise to TVMAX, solely for the purpose of operating a cable system or systems as described in the Cable Act, as amended. This consent shall not alter or modify the terms of the Franchise in any way not specifically described herein, other than to substitute TVMAX in place of Eaglevision as Grantee under the Franchise, and shall not be construed to constitute a waiver of any of the rights of the City under the Franchise, and this consent will not be construed to imply that the Grantee is or is not in compliance with any of the terms thereof. Section 2. Supplemental Conditions. (a) Pursuant to Section 34 of the Franchise, the City Council may place such conditions as it may prescribe upon its consent to any assignment thereof. The following provisions are hereby prescribed and promulgated by the City Council as conditions to such consent (the "Supplemental COnditions"). By its acceptance of the Franchise, TVMAX, on behalf of its successors and assigns, agrees that the terms of the Franchise and the Supplemental Conditions are fair and reasonable and agrees to abide by the terms thereof. (i) The amount of the Administrative Fee shall be increased from two percent (2%) to five percent (5%), notwithstanding any provisions of the Franchise to the contrary, in particular, subsection (b) of the Payments to the City section of the Franchise. (ii) The City shall not be required to allocate the revenues received from the Franchise Fee or the Administrative Fee in any manner except as may be determined by the City Council of the City. (iii) The Grantee shall, to support Public, Educational and Government Access Channels or other similar purposes, make additional payments to the City in accordance with the schedule attached hereto as Exhibit 1. The assessment to Subscribers of any fees or payments described 2 in (i), (ii) or (iii) herein shall be determined solely in accordance with the Cable Act, as amended, and other applicable federal law or regulation. Section 3. Acceptance of franchise. As a condition to the effectiveness of this assignment, within thirty (30) days following the effective date of this ordinance, TVMAX shall file with the City Secretary, accompanied by appropriate authorized corporate resolutions in a form acceptable to the City Attorney, a written statement in the following form signed in its name and behalf: "To the Honorable Mayor and the City Council of the City of Houston, Texas: For itself, its successors and assigns, TVMAX Communications (Texas), Inc. hereby accepts the assignment of the cable television franchise contained in City of Houston Ordinance No. 89-338, as amended by City of Houston Ordinance No. 91-605 and subject to the terms of City of Houston Ordinance No. 94- [insert number of this ordinance], and agrees to be bound by all of such terms, conditions and provisions." TVMAX Communications (Texas), Inc. By:____________________________________ Name:__________________________________ Title:_________________________________ "Dated this the ________ day of ___________________, 19____." Section 4. Severance. If any provision, section, subsection, sentence, clause, or phrase of this ordinance, or the application of same to any person or set of circumstances is for any reason held to be unconstitutional, void or invalid, the validity of the remaining portions of this 3 ordinance or their application to other persons or sets of circumstances shall not be affected thereby, it being the intent of the City Council in adopting this ordinance that no portion hereof or provision or regulation contained herein shall become inoperative or fail by reason of any unconstitutionality, voidness or invalidity of any other portion hereof, and all provisions of this ordinance are declared to be severable for that purpose. Section 5. Open meeting. The City Council officially finds, determines, recites and declares that a sufficient written notice of the date, hour, place and subject of this meeting of the City Council was posted at a place convenient to the public at the City Hall of the City for the time required by law preceding this meeting, as required by the Open Meeting Law, Tex. Gov't Code Ann., ch. 551 (Vernon 1994); and that this meeting was open to the public as required by law at all times during which this ordinance and the subject matter thereof was discussed, considered and formally acted upon. The City Council further ratifies, approves and confirms such written notice and the contents and posting thereof. Section 6. Emergency. A public emergency exists requiring that this Ordinance be passed finally on the date of its introduction as requested in writing by the Mayor; therefore; this Ordinance shall be passed finally on such date and shall take effect on the 30th day next following the date of its passage and approval by the Mayor. PASSED AND APPROVED this 30th day of November, 1994. /s/ Bob Lanie ---------------------------------- Mayor of the City of Houston Pursuant to HOUSTON, TEX., CITY CHARTER, art. VI, Section 6, the effective date of the foregoing ordinance is ________________, 19 ___. ____________________________ City Secretary 4 (Prepared by Legal Dep't ________________________________ TA/11-17-94 Senior Assistant City Attorney Requested by Director of Finance and Administration L.D. File No. 34946301.) AYE NO - ----------------------------------------------------------------------------- X MAYOR LANIER - ----------------------------------------------------------------------------- oooo oooo COUNCIL MEMBERS - ----------------------------------------------------------------------------- X HUEY - ----------------------------------------------------------------------------- ABSENT-OUT OF CITY CITY BUSINESS YARBROUGH - ----------------------------------------------------------------------------- X WONG - ----------------------------------------------------------------------------- X CALLOWAY - ----------------------------------------------------------------------------- X ROACH - ----------------------------------------------------------------------------- X DRISCOLL - ----------------------------------------------------------------------------- X J. KELLEY - ----------------------------------------------------------------------------- X FRAGA - ----------------------------------------------------------------------------- X REYES - ----------------------------------------------------------------------------- X SAENZ - ----------------------------------------------------------------------------- X TINSLEY - ----------------------------------------------------------------------------- X L. KELLEY - ----------------------------------------------------------------------------- ABSENT ON SUSPENSION LEE - ----------------------------------------------------------------------------- ABSENT-OUT OF CITY CITY BUSINESS ROBINSON - ----------------------------------------------------------------------------- CAPTION ADOPTED 5 EXHIBIT 1 The Grantee shall pay to the City the following amounts, in accordance with subsection (g) of Payments to the City: 1995 $120,000 1996 115,056 1997 103,274 1998 86,379 1999 66,961 2000 47,810 2001 31,210 2002 18,464 2003 9,793 2004 4,595 The above are annual amounts, each payable in four equal installments on the first day of each calendar quarter of the years specified, beginning January 1, 1995. Any amounts attributed to a specific year unpaid upon the expiration or termination of this Franchise shall be due and payable in full on the last day of such expiration or termination. 6 I, ANNA RUSSELL, City Secretary of the City of Houston, Texas, do hereby certify that the within and foregoing is a true and correct copy of Ordinance No. 94-1279, passed and adopted by the City Council of said City on the 30th day of November, 1994, as the same appears in the records in my office. WITNESS my hand and the Seal of said City this 29th day of December, A.D. 1994. /s/ Anna Russell ------------------------------------- City Secretary of the City of Houston Anna Russell To the Honorable Mayor and City Council of the City of Houston, Texas: For itself, its successors and assigns, Nationwide Communications Inc., dba EagleVision, hereby accepts the attached ordinance and agrees to be bound by all of its terms, conditions and provisions. NATIONWIDE COMMUNICATIONS INC. ATTEST: DBA EAGLEVISION /s/ Willard Hoyt /s/ Steve Berger - ----------------------------------- ----------------------------------- Willard Hoyt, Vice President, Steve Berger, President Treasurer and Assistant Secretary Dated: July 1, 1991 City of Houston Ordinance No. 91-605 AN ORDINANCE PRESCRIBING SUPPLEMENTAL CONDITIONS TO THE CABLE TELEVISION FRANCHISE GRANTED PURSUANT TO CITY OF HOUSTON ORDINANCE NO. 89-338 (PRIME TIME CABLE PARTNERS I, LTD.), CONSENTING TO THE ASSIGNMENT OF SUCH FRANCHISE TO NATIONWIDE COMMUNICATIONS INC. D/B/A EAGLEVISION UNDER SUCH SUPPLEMENTAL CONDITIONS; REPEALING CITY OF HOUSTON ORDINANCE NO. 89-337, WHICH GRANTED A CABLE TELEVISION FRANCHISE TO CONTINENTAL SATELLITE COMPANY; MAKING OTHER PROVISIONS RELATING TO THE SUBJECT. WHEREAS, the City of Houston has heretofore adopted an ordinance granting a cable television franchise (the "Franchise Ordinance") to Prime Time Cable Partners I, Ltd. ("Prime Time"); and WHEREAS, the City has been requested by the cable television franchise holder (Prime Time Cable Partners I, Ltd.) to consent to assignment of such franchise to Nationwide Communications Inc. dba Eaglevision ("Eaglevision"); and WHEREAS, Section 34 of the ordinance granting such franchise provides: The rights, privileges and franchise granted hereunder may not be assigned, in whole or in part, without the prior consent of City Council expressed by resolution or ordinance, and then only under such conditions as may therein be prescribed. No assignment to any person shall be effective until the assignee has filed with the City Secretary an instrument, duly executed, reciting the fact of such assignment, accepting the terms of this franchise, and agreeing to comply with all of the provision hereof; and WHEREAS, the City of Houston has heretofore adopted Ordinance No. 89-337 which granted a cable television franchise to Continental Satellite Company; and WHEREAS, a subsidiary of Nationwide Communications Inc., Video Eagle, Inc., has heretofore received an assignment of the Continental Franchise, which franchise will be redundant if the Prime Time Franchise is transferred to Nationwide Communications Inc.; WHEREAS, substantial investigations have been conducted to determine what conditions may be in the public interest to impose in connection with such assignments; and WHEREAS, it is hereby found and determined that, as a condition to the City's consent to the aforesaid requests, certain supplemental conditions should be imposed upon the assignee and that the Continental franchise should be repealed in connection with such a consent; NOW, THEREFORE, * * * * * * BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF HOUSTON: Section 1. Supplemental Conditions to Cable Television Franchise. The City of Houston hereby promulgates and prescribes the following Supplemental Conditions to Cable Television Franchise Ordinance No. 89-338, which, upon acceptance as therein provided, shall supplement and amend the cable television franchise granted in Ordinance No. 89-338. Subject to the acceptance of such Supplemental Conditions, the aforesaid ordinance and franchise therein granted, as supplemented, is hereby ratified and confirmed. Section 2. Consent to Assignments. Subject to the acceptance and execution of such Supplemental Conditions by Eaglevision for the franchise referred to above, the City of Houston hereby consents to the transfer, assignment, conveyance and other transactions reasonably necessary or convenient to assign and transfer the rights, privileges and franchise granted to Prime Time under Ordinance No. 89-338. Section 3. Section 1 of the Franchise Ordinance is hereby amended to include the following definitions, which shall replace the corresponding definitions in the Franchise Ordinance, where applicable; Section 1. Definitions. (5) "CATV System" shall mean an entity as defined under the Cable Communications Policy Act of 1984 and the rules and regulations of the Federal Communications Commission ("FCC"). (12) "Effective Competition" shall have the meaning set out in Section 623 of the Cable Communications Policy Act of 1984. -2- (18) "Gross CATV Revenues" shall mean all revenues collected by the Grantee, including, but not limited to, Regular Subscriber revenues, Pay Television revenues, Additional Services revenues, advertising revenues, revenues resulting from connection or rental of equipment of any kind, revenues received for the lease of Channels, and revenues received for the lease (for any purpose) of poles, wires, cables, conductors, conduits, equipment and other structures, equipment, and facilities used in providing the transmission of cable service. Gross Revenues shall not include the following: (1) any taxes or fees which are imposed on any Subscriber or User of CATV System by any governmental unit and collected by Grantee for such governmental unit; (2) revenues resulting from the studio production of programming used on the Educational Access or Public Access Channels; and (3) Gross SMATV interconnected Revenues from Standalone Operations that are not interconnected to Grantee's CATV System(s). (19) "Gross SMATV Revenues" shall mean all revenues from Standalone Operations collected by the Grantee, including, but not limited to, Regular Subscriber revenues, Pay Television revenues, Additional Services revenues, advertising revenues, revenues resulting from connection or rental of equipment of any kind, revenues received for the lease of Channels, and revenues received for the lease (for any purpose) of poles, wires, cables, conductors, conduits, equipment and other structures, equipment, and facilities used in providing the transmission of cable service. Gross SMATV Revenues shall not include the following: (1) any taxes or fees which are imposed on any Subscriber or User of Standalone Operations by any governmental unit and collected by Grantee for such governmental unit; (2) revenues resulting from the studio production of programming used on the Grantee's Educational Access or Public Access Channels; and (3) Gross CATV Revenues. -3- (20) "Interconnect" shall mean a condition of a CATV System by which the system is connected to adjacent CATV Systems by microwave, coaxial cable or other connecting device or by fiber optic cable and provides the capability for simultaneous carriage of signals, such as emergency override. (24) "Regular Subscriber Service" shall mean the simultaneous delivery by Grantee to television receivers, or any other suitable type of audio-video communication receivers, of that service regularly offered to all of its Subscribers, including all television broadcast signal required to be carried pursuant to the statutory requirements of the United States and any rules and regulations of the FCC implementing that statutory mandate and of all regular non-broadcast signals provided in the discretion of the franchisee to all Subscribers, but excluding additional tiers of one or more audio or video signals, and Pay Television as defined in subsection (20) above. (25) "Standalone Operation" shall mean a facility that serves only Subscribers in one (1) or more multiple unit dwellings under common ownership, control, or management that does not use any public rights-of-way as such use is defined now and in the future by the rules and regulations of the FCC. The subsequent definitions in the Franchise Ordinance shall be re-numbered accordingly. Section 4. The Additions to Franchise Area by Annexation or Otherwise Section of the Franchise Ordinance is hereby amended to read as follows: The Franchise Area shall include: (1) the area within the corporate limits of the City of Houston, as of the date this franchise is accepted by Grantee; and (2) territory which is annexed by the City during the term of this franchise. Section 5. Subsections (b) and (g) of the Conditions of Street Occupancy Section of the Franchise Ordinance are hereby amended to read as follows: -4- (b) Restoration. The surface of any street or other City Right-of-Way disturbed by Grantee in laying, constructing, maintaining, operating, using, extending, removing, replacing or repairing its CATV System shall be restored by Grantee immediately after the completion of the work, at its cost and expense, to as good a condition as before the commencement of the work and maintained by Grantee to the satisfaction of the Director of Capital Projects for one (1) year from the date of completion of such restoration work. Grantee shall repair any damage to private property adjacent to the public right-of-way caused by Grantee in laying, constructing, maintaining, operating, using extending, removing, replacing or repairing its CATV System and shall restore same to as good a condition as before the commencement of the work. All costs and expense associated with such repair shall be the sole responsibility of Grantee. No street shall be encumbered by construction, maintenance, removal, restoration or repair work by Grantee for a longer period than necessary to execute such work. If there is any unreasonable delay by Grantee in restoring and maintaining streets after such excavations or repairs have been made, the City shall have the right without further notice to restore or repair the same and to require Grantee to pay the reasonable cost of such restoration or repair. (g) Approval of Plans and Specifications. Grantee shall provide complete plans and specifications for all construction within streets to the Director of the City's Capital Projects Department for review at least thirty (30) days prior to the start of construction. The City's Director of Capital Projects shall approve all such plans and specifications prior to the beginning of construction which such approval shall not be unreasonably withheld. In the event of rejection, Grantee shall submit revised plans and specifications for approval. This provision shall apply to each construction sequence if the construction is accomplished in phases, and this provision shall also apply to any pre-existing facilities which are to be covered by this franchise. However, where approval of the Director of Capital Projects has been previously obtained, it shall not be necessary to resubmit or obtain an additional approval. -5- Section 6. The following language shall replace the corresponding language in the Section Liability Insurance in the Franchise Ordinance: Liability Insurance. (a) Minimum Coverage. Within thirty (30) days after the effective date of this franchise, Grantee shall file with the Director and shall maintain on file throughout the term of this franchise a certificate of insurance issued by a company duly authorized to do business and issue insurance in the State of Texas insuring the City and Grantee with respect to the installation, maintenance, and operation of Grantee's CATV System in the following minimum amounts: 1. Comprehensive General Liability: $1,000,000 combined single limit per occurrence for bodily injury, personal injury and property damage. 2. Automobile Liability: $1,000,000 combind single limit per accident for bodily injury and property damage. 3. Workers' Compensation and Employers Liability: Workers' Compensation limits statutory for the State of Texas and Employers Liability limits of $1,000,000 per accident. 4. Excess and Umbrella Liability Insurance in a form following the underlying coverages in an amount of $1,000,000 each occurrence and $1,000,000 aggregate. The amounts designated herein are minimum requirements and do not establish the limits of the contractor's liability. (b) Increased Coverage. City Council may from time to time, upon 20 days advance written notice to Grantee, require Grantee to increase the minimum amounts of liability insurance coverage to reasonable amounts generally required of CATV Systems. Such requirement shall be expressed by resolution or ordinance. Section 7. The Installation, Construction Section of the Franchise Ordinance shall be amended to read as follows: -6- (a) Permits and Authorizations. Grantee shall obtain necessary permits and authorizations which are required for its CATV System, if any, including, but not limited to, any applicable utility joint-use attachment agreements and permits, licenses, authorization and certificates to be granted by duly constituted local, state and federal government entities and regulatory agencies having jurisdiction over the installation and operation of the CATV System. After obtaining any necessary permits, licenses, authorizations and certificates, and after completion of make-ready work by utility companies in connection with use of utility poles and facilities, if any, Grantee may commence construction and installation. Construction may be pursued in separate projects thereafter. Nothing in this Franchise shall be construed to allow another CATV franchisee to rely upon the permits, licenses, authorizations and certificates obtained by Grantee as mandatory access easements or rights-of-way or easements to construct a CATV System or deliver CATV service. (b) Compliance. Because Grantee has existing facilities that do not have the requisite 35-channel capacity, Grantee shall bring its facilities into compliance by taking the following steps: (1) All new distribution plants shall have at least 35 channels of capacity. (2) Existing facilities shall be upgraded to 35-channel capacity within two years following the effective date (unless the Director approves an extension). (3) In either case, Grantee must add a receiver and modulator for each full power over the air television channel which at its own expense demonstrates that it is significantly viewed in Houston, Harris County, Texas in accordance with federal regulations or any successor rule or regulation governing the issue of significant viewership. -7- Grantee shall not be in violation of the 35-channel requirement if Grantee meets the compliance schedule set out in this subsection (b). Section 8. The following subsections of the Operational Standards Section of the Franchise Ordinance shall be amended to read as follows: Operational Standards. Grantee desires to install, maintain and operate its CATV System to the end that Subscribers may receive high quality service. Toward accomplishment of this purpose Grantee shall meet the following minimum standards: (f) Channel Capacity. Grantee's CATV System shall have a minimum channel capacity of 35 Channels. To the extent that Grantee elects, or is required, to increase the number of Channels carried on its CATV System to more than 35 Channels, Grantee agrees to include within such an increase a proportional increase in the number of Public, Educational, and Government Access Channels required by Sections 13, 14 and 15. (h) Standard of Care. Consistent with Section 621(a)(2) of the Cable Act of 1984, Grantee shall at all times employ a high standard of care and shall install, maintain and use approved methods and devices for preventing failures or accidents which are likely to cause damages, injuries or nuisances to the public. (i) No Obscenity. Cable television services that are obscene or indecent under applicable Federal law may not be provided over the CATV System. (k) Grantee's Office. Grantee shall maintain one principal office, and may maintain as many sub-offices as are reasonably necessary to promote good service and convenience to Subscribers to service provided through its CATV System. The principal office shall be open during all usual business hours, have a listed telephone number and be so equipped and operated that complaints and requests for repairs or adjustments may be received twenty-four (24) hours a day, seven (7) days a week. Such office shall maintain complete and updated maps of Grantee's CATV System and the construction plans and specifications thereof. -8- (l) Service Calls. Grantee shall respond to all service calls involving its facilities within forty-eight (48) hours and correct malfunctions as promptly as possible, but, in all events, within a reasonable time, which shall be seventy-two (72) hours after notice thereof, except during times of general breakdown due to weather or other catastrophe. For such purposes, Grantee shall maintain a competent staff of employees sufficient in size to provide adequate and prompt service to Subscribers. (n) Parental Lock. Grantee shall make available to Subscribers, upon request, a parental lock with the ability to "lock out" one channel or all channels. Section 9. The Underground Installation Section of the Franchise Ordinance is hereby amended to read as follows: In portions of the Franchise Area where all telephone lines and electric utility lines are underground, whether required by ordinance or not, any and all of Grantee's lines, cables and wires shall also be underground. It shall be the policy of the City that existing poles for electric and communication purposes be utilized whenever possible and that underground installation, even when not required, is preferable to the placing of additional poles. Section 10. The Section of the Franchise Ordinance entitled Interconnection shall be amended to read as follows: Grantee's Public, Educational and Governmental programming is intended to be provided through interconnection with other CATV Systems. Grantee's CATV Systems shall be interconnected with all other CATV Systems, but not Standalone Operations, operating in areas adjacent to Grantee's CATV Systems and under a franchise granted by the City. Such interconnections shall be completed within two (2) years from the effective date of the assignment of this franchise. If Grantee and any of the owners of adjacent CATV Systems have not agreed to interconnection points between the CATV Systems within one (1) year after the effective date of the assignment of this franchise, the City will be responsible for determining interconnect points that are fair and reasonable. -9- Notwithstanding anything provided in this section both Grantee and any adjacent franchisee must be under an affirmative duty under the terms of its franchise to Interconnect in the same manner before the City either names an Interconnect point hereunder or proceeds to collect liquidated damages pursuant to Section 34(c). Section 11. The Section of the Franchise Ordinance entitled Modifications by FCC; Jurisdiction of FCC shall be amended to read as follows: Modifications by FCC; Jurisdiction of FCC. To the extent that any rules and regulations adopted by the FCC concerning CATV Systems of the type operated by the franchisee hereunder conflict with the terms of this franchise, it is specifically agreed by the City and Grantee that this franchise shall be deemed to be modified in accordance with such rules and regulations unless such FCC rules and regulations specifically provide for grandfathering. Other rules and regulations of the FCC relating to CATV, as they are adopted from time to time, shall be incorporated into this franchise. Should the FCC lose or voluntarily abdicate regulatory jurisdiction over any aspect of CATV, the City shall be empowered to assume regulatory jurisdiction over any such deregulated aspects, provided that the City's regulation is not contrary to local, state or federal law. Section 12. The following Section shall be inserted in the Franchise Ordinance: Free Drops and Service to Schools and Public Buildings. (a) If not provided by another CATV System franchisee, Grantee shall provide one free drop to the principal facility of all public and private non-profit schools, universities and all governmental buildings or facilities located adjacent to or across a public street, highway, alley or right-of-way from Grantee's CATV System. If such drop is in excess of 300 aerial feet or 150 underground feet, the Subscriber shall reimburse the Grantee for its cost of time and materials in excess of the cost of said 300 aerial feet or 150 underground feet, whichever may be applicable. Drops will be required under this Section only if plant is readily accessible and conduits are reasonably available. -10- (b) Grantee shall provide the internal wiring of the buildings (specified in subsection (a) above), reimbursable at its cost of time and materials only, or, at the Subscriber's election, the Subscriber can provide access to the interconnect cable per the Grantees' specifications. (c) Grantee shall provide free Regular Subscriber Service, as may be designated by the City, (including one free converter per site) to the principal facility of all public and private non-profit schools and universities and all governmental buildings or facilities which are connected to Grantees' CATV System. Section 13. The Payments to the City Section of the Franchise Ordinance shall be amended to read as follows: Payments to the City. (a) Franchise Fee. As compensation for the right, privilege, and franchise herein conferred, Grantee shall pay to the City each year a sum equal to five percent (5%) of Grantee's Gross CATV Revenues for such year. Two percent (2%) of such franchise fee shall be maintained in a separate account by the City and shall be applied solely to the support of Public, Educational, and Governmental Access Channels. Such franchise fee payments shall be made quarterly. (b) Administrative Fee. To reimburse the City for its expenses and overhead associated with the administration of this franchise, Grantee shall pay to the City each year a sum equal to two percent (2%) of Grantee's Gross SMATV Revenues. Grantee may not assess or otherwise pass through such administrative fee to Subscribers. The City shall contribute twenty-five percent of such administrative fee to provide additional support of Public, Educational and Governmental Access Channels. (c) Payment. Grantee shall file with the Director within sixty (60) days after the expiration of each quarter of each calendar year, or portion thereof, during which this franchise is in effect, a financial statement prepared according to generally accepted accounting principles showing in detail the Gross CATV Revenues and Gross SMATV Revenues of Grantee during the preceding -11- quarter of the calendar year. Such statement shall be accompanied by Grantee's payment to the City of five percent (5%) of such Gross CATV Revenues representing the franchise fee and two percent (2%) of such Gross SMATV Revenues representing the administrative fee for such quarter. The franchise fee is subject to change at any time by City Council upon 20 days advance written notice to Grantee, but in any event will not be greater than that authorized by law. (d) Late Payment Penalty. Grantee shall pay a late penalty of 12% per annum calculated per day on the amount of franchise payment that is late. (e) Right of Inspection of Records. The Director shall have the right to inspect Grantee's records showing the Gross Revenue from which payments to the City are computed and to audit and recompute any and all amounts paid under this franchise. No acceptance of payment shall be construed as a release or as an accord and satisfaction of any claim the City may have for further or additional sums payable under this franchise or for the performance of any other obligation hereunder. (f) Audit. The Grantee shall pay the City's audit expenses, based upon its reasonable internal costs associated therewith and the City agrees not to burden the Grantee with an excessive number of audits and to be reasonable in its approach thereto. For purposes of this section, any payment of the City's audit expenses shall not be considered part of the franchise fee or administrative fee payable hereunder. (g) Other Payments to City. The franchise fee and administrative fee payable hereunder shall be exclusive of, and in addition to, all ad valorem taxes, special assessements for municipal improvements, fees for building permits for facilities not in the street, inspection fees not in the street, and other lawful obligations of the City. Section 14. Section 24 of the Franchise Ordinance shall be replaced with the following Section 25: -12- Section 25. Records and Reports. (a) Principal Office of Grantee. Grantee shall maintain a principal office in the City, as long as it continues to operate any in the City, and hereby designates such office as the place where all notices, directions, orders and requests may be mailed, served or delivered under this franchise. The Director shall be notified of the location of such office or any change thereof. (b) Records. Grantee shall keep complete and accurate records of its business and operations relevant to this franchise. All such records shall be maintained at Grantee's principal office. (c) Access by City. The Director or the Director's duly designated officers, agents or representatives, shall have access to all records of Grantee relevant to this franchise for ascertaining the correctness of any and all reports and may examine Grantee's officers and employees under oath in respect thereto. (d) Annual Report. A report shall be filed by the Grantee with the Director within ninety (90) days following the end of each Franchise Year. Such report shall include: (i) the number of Subscribers as of December 31 of the preceding year; and (ii) Gross Revenue and Regular Subscriber Service revenue received by Grantee for the preceding year. (iii) any additional City Streets used by Grantee's CATV System in providing its services to Subscribers or Users of its CATV System. The report shall be certified by a financial officer of Grantee, and shall include any other information as the Director may reasonably request in relation to Grantee's CATV System. (e) False Entry. Any false entry in the records of Grantee or false statement in the reports to the City as to a material fact, knowingly made by Grantee, shall constitute a violation of a material provision of this franchise ordinance. -13- (f) FCC Filings. Grantee shall file copies of all reports and filings with respect to its CATV System made to the FCC with the Director. Section 15. The following Section 26 is hereby inserted in the Franchise Ordinance and the subsequent Sections of the Franchise Ordinance shall be re-numbered accordingly: Section 26. Distant Extension of Distribution Cable. In the event that a potential Subscriber's premises are located at such a distance from a distribution cable that Grantee deems it not economically feasible to provide service as required herein, the Grantee shall determine, upon request from the potential Subscriber, the amount, conditions, and refund provisions of the cable extension charge that would be fair and reasonable under the particular conditions and circumstances. Generally, in no event shall it be deemed "not economically feasible" to extend a distribution cable a distance of three hundred (300) feet or less. Section 16. All provisions of the City of Houston Ordinance 89-338, except as amended herein, remain in full force and effect. Section 17. In the event of a conflict between the City of Houston Ordinance No. 89-338 and this Ordinance, this Ordinance shall prevail. Section 18. Acceptance of Franchise. Within thirty (30) days from the effective date of this ordinance, Grantee shall file with the City Secretary a written statement in the following form signed in its name and on its behalf: "To the Honorable Mayor and City Council of the City of Houston, Texas: "For itself, its successors and assigns, Nationwide Communications Inc., dba Eaglevision, hereby accepts the attached ordinance and agrees to be bound by all of its terms, conditions and provisions. ATTEST: Nationwide Communications Inc., dba Eaglevision By:__________________________ By:______________________________ Title: Title: President Dated this_________ day of ____________________, 1991." -14- Section 19. Repeal of Ordinance No. 89-337. (a) Subject to the consent of Video Eagle, Inc. as set forth in Section 19(b) of this Ordinance, Ordinance 89-337 which granted a cable television franchise to Continental Satellite Company is hereby repealed. (b) Simultaneous with Grantee's filing of the written statement described in Section 18 above Video Eagle, Inc., a wholly owned subsidiary of Nationwide Communictions Inc., shall file with the City Secretary a written statement in the following form signed in its name and on its behalf: To the Honorable Mayor and City Council of the City of Houston, Texas: "For itself, its successors and assigns, Video Eagle, Inc., a wholly owned subsidiary of Nationwide Communications Inc., consents to the repeal of City of Houston Ordinance No. 89-337, which granted a cable television franchise to Continental Satellite Company and agrees to be bound by all of the terms of such repeal. ATTEST: VIDEO EAGLE, INC. a wholly owned subsidiary of Nationwide Communications Inc. By:__________________________ By:______________________________ Title: Title: President Dated this_________ day of ____________________, 1991." -15- Section 20. Severability. If any provision, section, subsection, sentence, clause or phrase of this ordinance is for any reason held to be invalid or unconstitutional, such invalidity or unconstitutionality shall not affect the validity of the remaining portions of this ordinance. It is the intent of the City in adopting this ordinance that no portion or provision thereof shall become inoperative or fail by reason of any invalidity or unconstitutionality of any other portion or provision, and to this end all provisions of this ordinance are declared to be severable. Section 21. Notice. The City Council officially finds, determines and declares that a sufficient written notice of the date, hour, place and subject of each meeting at which this ordinance was discussed, considered or acted upon was given in the manner required by the Open Meetings Law, TEX. REV. CIV. STAT. ANN. art. 6252-17, as amended, and that each such meeting has been open to the public as required by law at all times during such discussion, consideration and action. The City Council ratifies, approves and confirms such notices and the contents and posting thereof. Section 22. Passage and Effective Date. This franchise, having been published as required by Article II, Section 17 of the City Charter shall take effect and be in force from and after thirty (30) days following its final passage and approval. PASSED first reading this the 1st day of May, 1991. PASSED second reading this the 8th day of May, 1991. PASSED AND APPROVED third and final reading this the 29th day of May, 1991. /s/ Frank O. Mancuso ----------------------------- Mayor of the City of Houston PROTEM (Prepared by Legal Department: ----------------------------- (DSC/abh 04/17/91) Assistant City Attorney (Requested by Al Haines, Director, Department of Finance & Administration) DSC312 (L.D. File No. 05-87004-02) -16- I, ANNA RUSSELL, City Secretary of the City of Houston, Texas, do hereby certify that the within and foregoing is a true and correct copy of Ordinance No. 91-605, passed and adopted by the City Council of said City on the 29th day of May, 1991, as the same appears in the records in my office. WITNESS my hand and the Seal of said City this 27th day of June, A. D. 1991. /s/ Anna Russell -------------------------- City Secretary of the City of Houston Anna Russell City of Houston Ordinance No. 89-338 AN ORDINANCE GRANTING TO PRIME TIME CABLE PARTNERS I, LTD., ITS SUCCESSORS AND ASSIGNS, THE RIGHT, PRIVILEGE, AND FRANCHISE FOR A TERM OF FIFTEEN (15) YEARS, TO ERECT, MAINTAIN, AND OPERATE A COMMUNITY ANTENNA TELEVISION SYSTEM IN THE CITY OF HOUSTON, TEXAS; TO ERECT, MAINTAIN, AND OPERATE ITS POLES, TOWERS, ANCHORS, WIRES, CABLES, ELECTRONIC CONDUCTORS, CONDUITS, MANHOLES, AND OTHER STRUCTURES AND APPURTENANCES IN, OVER, UNDER, ALONG, AND ACROSS THE PRESENT AND FUTURE PUBLIC STREETS, HIGHWAYS, ALLEYS, BRIDGES, EASEMENTS, AND OTHER PUBLIC WAYS AND PLACES IN THE CITY; PRESCRIBING COMPENSATION FOR THE RIGHTS, PRIVILEGES AND FRANCHISE CONFERRED HEREUNDER; PRESCRIBING THE CONDITIONS GOVERNING THE OPERATION OF BUSINESS INSOFAR AS IT AFFECTS THE USE OF PUBLIC PROPERTY FOR THE PURPOSE OF SUCH BUSINESS; CONTAINING GENERAL PROVISIONS RELATING TO THE SUBJECT; AND PROVIDING FOR SEVERABILITY. * * * * * * * * * * * WHEREAS, Prime Time Cable Partners I, Ltd., a Colorado limited partnership ("Prime Time"), is in the business of providing cable television systems at multi-family residential developments in the City of Houston, Texas; and WHEREAS, Prime Time has applied for a franchise to allow operation of a cable television system in the City of Houston; and WHEREAS, it is hereby found and determined by the City Council of the City of Houston that it is in the best interest of the City to grant such a franchise to Prime Time on the terms and conditions hereinafter set forth; NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF HOUSTON: 1 Section 1. Definitions. ----------- (a) For the purpose of this ordinance the following terms, phrases, words, abbreviations and their derivations shall have the meaning given herein. When not inconsistent with the context, words used in the present tense include the future tense, words in the plural number include the singular number, and words in the singular number include the plural number. The word "shall" is always mandatory, and not merely directory. (1) "Anniversary Date" shall mean the month and day of each year during the term hereof corresponding to the month and day which is the thirtieth day following the day this ordinance is passed and approved finally. (2) "Additional Services" shall mean any communications services other than Regular Subscriber Service and Pay Television provided by Grantee over the CATV System either directly or as a carrier for its subsidiaries, affiliates or any other person engaged in communications services, including, but not limited to, program guides, burglar alarm, data or other electronic intelligence transmission, facsimile reproduction, meter reading and home shopping. Additional Services shall not include the delivery by the CATV System of any programming on the Public, Educational or Governmental Access Channels, which programming is included in Regular Subscriber Service. (3) "Cable Act" shall mean the Cable Communications Policy Act of 1984. 2 (4) "CATV" shall mean community antenna television. (5) "CATV" System' shall mean a system of cables, wires, lines, towers, wave guides, microwave and laser beams, and any associated converters, equipment or facilities designed and constructed for the purpose of producing, receiving, amplifying and distributing by audio, video and other forms of electronic or electronic signals to and from subscribers and locations in the City. (6) "Channels" shall mean a band of frequencies, six mega hertz wide, in the electromagnetic spectrum which are capable of carrying either (1) audio-video television signals and non-video signals or (2) non-video signals. (7) "City" shall mean the City of Houston, Texas, a municipal corporation of the State of Texas. (8) "City Council" shall mean the governing body of the City of any successor to the legislative powers of the present City Council. (9) "Converter" shall mean an electronic device which converts signals to a frequency not susceptible to interference within the television receiver of a Subscriber and which, by an appropriate channel selector, also permits a Subscriber to view all signals delivered at designated dial locations. (10) "Director" shall mean the Director of the Finance & Administration Department, or the said Director's designee. 3 (11) "Educational Access Channels" shall mean Channels on the CATV System which are reserved for carriage of program materials by local educational authorities who obtain use of such channels from Grantee for the presentation of such material. (12)"Effective Competition" shall have the meaning set out in Section 633 of the Cable Comunications Policy Act of 1984. (13) "Federal Communications Commission" or "FCC" shall mean that agency as presently constituted by the United States Congress or any successor agency with jurisdiction over cable television matters. (14) "Franchise Area" shall mean the area within the corporate limits of the City as of the date on which this franchise is accepted by Grantee and such additional areas which may be within the Franchise Area of the Grantee as herein provided. (15) "Franchise Year" shall mean any twelve-month period commencing on an Anniversary Date and extending to the day immediately preceding the next subsequent Anniversary Date. (16) "Governmental Access Channel" shall mean the Channel on the CATV System which is reserved for carriage of program material by the City of Houston. (17) "Grantee" shall mean Prime Time or such other person who succeeds Prime Time in accordance with the provisions of this franchise. 4 (18) "Gross Revenues" shall mean all revenues collected by the Grantee, including, but not limited to, Regular Subscriber revenues, Pay Television revenues, Additional Services revenues, advertising revenues, revenues resulting from connection or rental of equipment of any kind, revenues received for the lease of Channels, and revenues received for the lease (for any purpose) of poles, wires, cables, conductors, conduits, equipment and other structures, equipment, and facilities used in providing the transmission of cable service. Gross Revenues shall not include the following: (1) any taxes which are imposed on any Subscriber or User of CATV System by any governmental unit and collected by Grantee for such governmental unit; (2) revenues resulting from the studio production of programming used on the Educational Access or Public Access Channels; and (3) revenues from Standalone operations that are not connected to Grantee's CATV System(s). (19)"Interconnect" shall mean a condition of a CATV System by which the system is connected to adjacent CATV Systems by microwave, coaxial cable or other connecting device or by fiber optic cable and provides the capability for simultaneous carriage of signals, such as emergency override. (20) "Pay Television" shall mean the delivery over the CATV System of programming to Subscribers for a fee or charge over and above charge for Regular Subscriber Service, on a per-program, per-channel or other subscription basis. (21)"Person" shall mean any person, firm, partnership, association, corporation, company or organization of any kind. 5 (22) "Public Access Channel" shall mean the Channel on the CATV System which is reserved for carriage of program material in the public interest provided by persons who obtain use of such Channel for Grantee for the presentation of such material. (23) "Regular Subscriber Service" shall mean the simultaneous delivery by Grantee to television receivers, or any other suitable type of audio-video communication receivers, of that service regularly offered to all of its Subscribers, including all broadcast signals authorized for carriage by the FCC and of all regular non-broadcast signals provided to all of its Subscribers, but excluding Additional Services and Pay Television. (24) "Standalone operation" shall mean a facility that serves only Subscribers in one (1) or more multiple unit dwellings under common ownership, control, or management that does not use any public rights-of-way. (25) "Street" shall mean the surface or the space above and below any public street, road, highway, alley, bridge, sidewalk, (or other public place or way now or hereafter held by the City for the purpose of public travel and shall include other easements or rights-of-way now held or hereafter held by the City which shall, within their proper use and meaning, entitle the City and Grantee to the use thereof for the purpose of installing or transmitting CATV System transmissions over poles, wires, cables, conductors, conduits, manholes, amplifiers, appurtenances, attachments, and other structures, equipment, and facilities as may be ordinarily necessary and pertinent to a CATV System. 6 (26) "Subscriber" shall mean a Person who pays for service delivered by the CATV System. (27) "User of CATV System" shall mean a Person who uses the CATV System to produce or to transmit programs or other communications to Subscribers. Section 2. Grant of Authority. ------------------- There is hereby granted to Grantee the right, privilege and franchise to have, acquire, construct, reconstruct, maintain, use, and operate in the Franchise Area, a CATV System, and to have, acquire, construct, reconstruct, maintain, use, and operate in, over, under, and along the present and future streets of the City as well as other easements and rights-of-way held by the City all necessary or desirable poles, towers, anchors, wires, cables, electronic conductors, underground conduits, manholes, and other structures and appurtenances necessary for the construction, maintenance and operation of a CATV System in the Franchise Area of the City. Section 3. Term of Franchise and Renewal. ------------------------------ (a) Initial Term. Upon the filing with the City by Grantee of the written acceptance required herein, this franchise shall be in full force and effect for a term and period of fifteen (15) years commencing on the thirtieth day following its final passage and approval. 7 (b) Performance Evaluation. In order to assure that Grantee is complying with the terms of this franchise and the character, quality and efficiency of service to be rendered, given, performed and furnished under this franchise, on or within thirty (30) days of the 5th and 10th Anniversary Dates of this franchise, City Council may at its discretion hold a public hearing or hearings for the purpose of reviewing the performance of Grantee under this franchise. Unless specifically waived by City Council, attendance of Grantee's duly authorized representative at any such public hearings shall be mandatory. The subject of any such hearings shall include, but not be limited to, Grantee's performance under, and compliance with the terms of, this franchise. At any such hearing Grantee shall make available to City Council, if requested, any records, documents or other information as may be relevant to City Council's review. At least ninety (90) days prior to the 5th and 10th Anniversary Dates of this franchise, the City Secretary shall, if a hearing is to be held, notify Grantee of the day and time of the hearing. At any such hearing, Grantee shall be entitled to all the rights of due process, including but not limited to, the right to present evidence, the right to cross-examine and right to be represented by counsel. All records and minutes of any such performance evaluation hearings shall be retained by the City Secretary and be available for inspection throughout the term of this franchise. (c) Renewal. Renewal of this franchise shall be at the discretion of the City in accordance with applicable law. 8 Section 4. Annexed Areas of City. ---------------------- This franchise shall extend to territory which is annexed by the City during the term of this franchise. Section 5. Use, Rental or Lease of Utility poles and Facilities. ----------------------------------------------------- There is hereby granted to Grantee the authority to contract with the City or any appropriate board or agency thereof or with the holder or owner of any utility franchise in the City for the use, rental or lease of its or their poles, underground conduits and other structures and facilities for the purpose of extending, carrying or laying its equipment in connection with this franchise. The City agrees that any public utility owning or controlling such poles or underground conduits may, without amendment to its franchise, allow, and is encouraged to allow, Grantee to make such use thereof pursuant to any agreement reached between such utility and Grantee. Section 6. Compliance with Applicable Laws. -------------------------------- The work done and activity in connection with the construction, reconstruction, maintenance, operation or repair of Grantee's CATV System shall be subject to and governed by all applicable present and future laws, rules and regulations of the City, the State of Texas and the United States of America, including the FCC and any other federal agency having jurisdiction. 9 Section 7. Subject to Police Powers of City. --------------------------------- The construction, maintenance and operation of Grantee's CATV System and all property of Grantee subject to the provisions of this franchise shall be subject to all lawful police powers, rules and regulations of the City. The City shall have the power at any time to order and require Grantee to remove or abate any pole, line, tower, wire, cable, guy, conduit, electric conductor or any other structure or facility that is dangerous to life or property. In the event Grantee, after written notice, fails or refuses to act, the City shall have the power to remove or abate the same at the expense of Grantee, all without compensation or liability for damages to Grantee. Section 8. Conditions of Street Occupancy. ------------------------------- (a) Use. All structures, wires, cables, equipment and facilities erected or maintained by Grantee within the City shall be located as to cause minimum interference with the proper and intended use of and with the rights of reasonable convenience of the owners or occupiers of property which adjoins any of such Streets. (b) Restoration. The surface of any street or other City Right-of-Way disturbed by Grantee in laying, constructing, maintaining, operating, using, extending, removing, replacing or repairing its CATV System shall be restored by Grantee immediately 10 after the Completion of the work, at its cost and expense, to as good a condition as before the commencement of the work and maintained by Grantee to the satisfaction of the Director of Public Works for one (1) year from the date of completion of such restoration work. No street shall be encumbered by construction, maintenance, removal, restoration or repair work by Grantee for a longer period than necessary to execute such work. If there is any unreasonable delay by Grantee in restoring and maintaining streets after such excavations or repairs have been made, the City shall have the right without further notice to restore or repair the same and to require Grantee to pay the reasonable cost of such restoration or repair. (c) Relocation. Whenever by reason of the construction, repair, maintenance, relocation, widening raising or lowering of the grade of any Street by the City or by the location or manner of construction, reconstruction, maintenance or repair of any public property, structure or facility by the City, it shall be deemed necessary by the City for Grantee to move, relocate, change, alter or modify any of its facilities, such change, relocation, alteration or modification shall be promptly made by Grantee, at its cost and expense, when directed in writing to do so by the Director, without claim for or right of reimbursement of cost or damages against the City. In the event Grantee, after such notice, fails or refuses to commence, pursue or complete such relocation work within a reasonable time, the City shall have the 11 authority, but not the obligation, to remove or abate such structures or facilities and to require Grantee to pay to the City the reasonable cost of such removal or abatement, all without compensation or liability for damages to Grantee. (d) Temporary Removal of Wire for Buildinq Moving. Upon written request of any person holding a building moving permit issued by the City, Grantee shall remove, raise or lower its wires and cables temporarily to permit the moving of houses, buildings or other bulky structures. The reasonable expense of such temporary removal, raising or lowering shall be paid by the benefited person, and Grantee may require such payment in advance, Grantee being without obligation to remove, raise or lower its wires and cables until such payment shall have been made. Grantee shall be given not less than 72 hours' advance written notice to arrange for such temporary wire and cable adjustments. (e) Tree Trimming. City Council shall, from time to time, pass ordinances regulating the trimming or removal of trees on or along City property and Grantee shall comply with those ordinances. (f) Placement of Fixtures. Grantee shall not place poles, towers or similar fixtures where the same will interfere with any gas, electronic or telephone fixtures, water hydrant or main, drainage facility or sanitary sewer, and all such poles, towers and similar facilities shall be placed as directed by the City and in such manner as not to interfere with the usual travel use or visibility of the Streets. 12 (g) Approval of Plans and Specifications. Grantee shall provide complete plans and specifications for all construction within Streets to the City's Director of Public Works and Engineering for review at least thirty (30) days prior to the start of construction. In the event of rejection, Grantee shall submit revised plans and specifications for approval. This provision shall apply to each construction sequence if the construction is accomplished in phases, and this provision shall also apply to any pre-existing facilities which are to be covered by this franchise. However, where approval of the Director of Public Works and Engineering has been previously obtained, it shall not be necessary to resubmit or obtain an additional approval. (h) Trench Safety. Grantee shall employ trench safety systems in accordance with the detailed specifications set out in the provisions of Excavations, Trenching, and Storing, Federal Occupational Safety and Health Administration Standards, 29 CFR, Part 1926, Subpart P, as amended, including Proposed Rules published in the Federal Register (Vol. 52, No. 72) on Wednesday, April 15, 1987. In case of a conflict between the OSHA standards and the Proposed Rules, the more stringent requirement will apply. The sections that are incorporated into this franchise by reference specifically include but are not limited to Sections 1926-650 through 1926-653. Grantee shall comply with trench safety specifications set out in applicable Texas rules and regulations. 13 (i) Notice to Director. Grantee shall provide written to the Director of the location of all construction within Streets at least thirty (30) days prior to construction. Section 9. Indemnification and Liability for Damages. ----------------------------------------- Grantee shall pay, and by its acceptance of this franchise specifically agrees that it will pay, the following: (a) Damages and Penalties. All damages or penalties which the City, its officers, agents or employees, may legally be required to pay as a result of damages arising out of copyright infringements, and all other damages, arising out of the installation, maintenance or operation of Grantee's CATV System, whether or not any act or omission complained of is authorized, allowed or prohibited by this franchise; and (b) Expenses. If any action or proceeding is brought against the City or any of its officers, officials, or employees with respect to which payment may be sought for claims, for damages or penalties as described in Section a, Grantee, upon written notice from City, shall assume the investigation and defense thereof, including the employment of counsel and the payment of all expenses. These expenses shall include all out-of-pocket expenses, such as, but not limited to, attorney fees, expert witness fees and court costs and shall also include the reasonable value of any services rendered by any officers or employees of the City. It is the intent of this section, and by its acceptance of 14 this franchise, Grantee specifically agrees that Grantee shall indemnify and hold the City, its officers, agents and employees, harmless from all liability, damage, cost or expense arising from claims for injury of persons, damage to property or penalties occasioned by reason of any conduct undertaken by reason of this franchises. The City shall not and does not by reason of the granting of this franchise assume any liability of Grantee whatsoever for injury to persons, damage to property or penalties. (c) City shall have the right to employ separate counsel in any such action or proceeding and to participate in the investigation and defense thereof, and Grantee shall pay the fees and expenses of such separate counsel if employed with the approval and consent of Grantee or if representation of both the Grantee and City by the same attorney would be inconsistent with accepted canons of professional ethics. Grantee shall not be liable for any settlement of any such claim, action, or proceeding effected without its consent. City shall give prompt notice to Grantee of any claim, action, or proceeding against it upon which City may seek payment of damages or penalty by Grantee hereunder. Section 10. Liability Insurance. ------------------- (a) Minimum Coverage. Within thirty (30) days after the effective date of this franchise, Grantee shall file with the Director and shall maintain on file throughout the term of this franchise a certificate of insurance issued by a company or 15 insurer duly authorized to do business in the State of Texas insuring the City and Grantee with respect to installation, maintenance and operation of Grantee's CATV System in the following minimum amounts: (1) One Person. Five Hundred Thousand Dollars ($500,000.00) for bodily injury or death to any one person. (2) One Accident. One Million Dollars ($1,000,000.00) for bodily injury or death resulting from any one accident. (3) Property Damage. Five Hundred Thousand Dollars ($500,000.00) for property damage resulting from any one occurence. (4) All Other Types of Liability. One Hundred Thousand Dollars $100,000.00) for all other types of liability. (b) Increased Coverage. City Council may from time to time require Grantee to increase the minimum amounts of liability insurance coverage to reasonable amounts generally required of persons occupying the City Streets. Such requirements shall be expressed by resolution or ordinance. (c) Notice of Cancellation or Reduction. Such certificate of insurance shall contain the provision that written notice of expiration, cancellation or reduction in coverage of the policy shall be delivered to the Director and to Grantee at least thirty (30) days in advance of the effective date thereof. 16 (d) Term. Such liability insurance shall be kept in full force and effect by Grantee during the existence of this franchise and thereafter until after the removal of all poles, wires, cables, underground conduits, manholes and other conductors and fixtures incident to the maintenance and operation of Grantee's CATV system, should such removal be required by the City or undertaken by Grantee. Section 11. Installation, Construction. (a) Permits and Authorizations. Grantee shall obtain necessary permits and authorizations which are required for its CATV System, if any, including, but not limited to, any applicable utility joint-use attachment agreements and permits, licenses, authorization and certificates to be granted by duly constituted local,state and federal government entities and regulatory agencies having jurisdiction over the installation and operation of the CATV System. After obtaining any necessary permits, licenses, authorizations and certificates, and after completion of make-ready work by utility companies in connection with use of utility poles and facilities, if any, Grantee may commence construction and installation. Construction may be pursued in separate projects thereafter. (b) Compliance. Because Grantee has existing faclities that do not have the requisite 35-channel capacity, Grantee shall bring its facilities into compliance by taking the following steps: 17 (1) All new distribution plant and headend plant shall have at least 35 channels of capacity. (2) Existing facilities shall be upgraded to 35-channel capacity within two years following the effective date (unless the Director approves an extension). (3) In either case, Grantee must add a receiver and modulator for each new channels as it is activated (but is not required to provide them for inactive channels). Grantee shall not be in violation of the 35-channel requirement if Grantee meets the compliance schedule set out in this subsection (b). Section 12. Operational Standards. --------------------- Grantee desires to install, maintain and operate its CATV System in accordance with the highest accepted standards of the cable television industry to the end that Subscribers may receive high quality service. Toward accomplishment of this purpose Grantee shall meet the following minimum standards: (a) Compliance with FCC Rules. Grantee's CATV System shall comply with all applicable present and future rules and regulations of the FCC. (b) Quality of Color Signals. Grantee's CATV System shall be capable of transmitting and passing the entire color television spectrum without the introduction of material degradation of color intelligence and fidelity 18 (c) Rated for Continuous Operation. Grantee's CATV System shall be designed and rated for twenty-four hour a day continuous operation. (d) Quality of Picture. Grantee's CATV System shall be capable of and shall allow the production of a picture upon any Subscriber's television screen in black and white or color, provided the Subscriber's television set is capable of producing a color picture, that is undistorted and free from ghost images and accompanied by proper sound, assuming the technical, standard production television set is in good repair and the television broadcast signal transmission is satisfactory. In any event, the picture which can be produced shall be as good as the state of the art allows. (e) No Cross Modulation or Interference. Grantee's CATV System shall transmit or distribute signals of adequate strength to allow the production of good pictures with good sound in all television receivers of all Subscribers without causing cross modulation in the cables or interference with other electrical or electronic systems. (f) Channel Capacity. Grantee's CATV System shall have a minimum channel capacity of 35 Channels. To the extent that Grantee elects, or is required, to increase its channel capacity, Grantee agrees to include within such an increase a proportional increase in the number of Public, Educational, and Government Access Channels required by Sections 13, 14 and 15. 19 (g) Temperature Range. Grantee's CATV System shall be capable of operating throughout the air temperature range of 0 to 110 degrees Fahrenheit without degradation of audio or video fidelity. (h) Standard of Care. Consistent with Section 621(a)(2) of the Cable Act, Grantee shall at all times employ a high standard of care and shall install, maintain and use approved methods and devices for preventing failures or accidents which are likely to cause damages, injuries or nuisances to the public. (i) No Obscenity. Cable television services that are obscene under the United States Constitution may not be provided over the CATV System. (j) Service and Repair. Grantee shall render efficient service, make repairs promptly and interrupt service only for good cause and for the shortest time possible. Insofar as possible, such interruptions shall be preceded by forty-eight (48) hours' notice and shall occur during periods of minimum use. (k) Grantee's Office. Grantee shall maintain one principal office, and may maintain as many sub-offices as are reasonably necessary to promote good service and convenience to Subscribers to service provided through its CATV System. The principal office shall be open during all usual business hours, have a listed telephone number and be so equipped and operated that complaints and requests for installation, repairs or adjustments may be 20 received twenty-four (24) hours a day, seven (7) days a week. Such office shall maintain complete and updated maps of Grantee's CATV System and the construction plans and specifications thereof. (1) Service Calls. Grantee shall respond to all service calls involving its facilities within twenty-four (24) hours and correct malfunctions as promptly as possible, but, in all events, within a reasonable time, which shall be seventy-two (72) hours after notice thereof, except during times of general breakdown due to weather or other castastrophe. For such purposes, Grantee shall maintain a competent staff of employees sufficient in size to provide adequate and prompt service to Subscribers. (m) State of the Art. Grantee shall undertake such construction and installation for its facilities as may be reasonably necessary to keep reasonably current with the latest developments in the state of the art in the provision of cable television services. (n) Converter-Parental Lock. Grantee shall make available to Subscribers, upon request, Converters that are equipped with a parental lock capable of locking or securing one channel or all channels. Section 13. Public Access Channel. At least one (1) Channel shall be reserved for the use of the public, and shall have nondiscriminatory access without charge on a first-come, 21 first-serve basis as administered by the Access Houston Corporation or such other entity as is selected by the City to administer Public Access. Section 14. Educational Access Channels. At least two (2) Channels shall be reserved for the use of the educational authorities in the City. Use of such Channels shall be provided free of charge, and administered by the Access Houston Corporation or such other entity as is selected by the City to administer Education Access. Section 15. Government Access Channel. At least one (1) Channel shall be reserved for use by the City, free of charge, and administered by the City. Section, 16. Underground Installation. In portions of the Franchise Area having telephone lines and electric utility lines underground, whether required by ordinance or not, any and all of Grantee's lines, cables and wires shall also be underground. It shall be the policy of the City that existing poles for electric and communication purposes be utilized whenever possible and that underground installation, even when not required, is preferable to the placing of additional poles. 22 Section 17. Interconnection. Grantee's Public, Educational and Governmental programming is intended to be provided through interconnection with other CATV Systems. Grantee's CATV System shall be interconnected with all other CATV Systems operating in an area adjacent to Grantee's CATV System and under a franchise granted to the City. Such interconnection shall be completed within two (2) years from the effective date of the franchise. If Grantee and any of the owners of adjacent CATV Systems have not agreed to an interconnection point between the CATV Systems within one (1) year after the effective date of this franchise, the City will be responsible for determining an interconnect point that is fair and reasonable. Notwithstanding anything provided in this section both Grantee and any adjacent franchise must be under an affirmative duty under the terms of its franchise to Interconnect in the same manner before the City either names an Interconnect point hereunder or proceeds to collect liquidated damages pursuant to Section 32(C). Section 18. Emergency Use of CATV System. ----------------------------- In the event of an emergency or disaster, Grantee shall upon request of City Council or its designated representative, and to the extent feasible with the installation of interconnection points with franchised CATV operators, make its CATV System facilities available to the City for emergency use during the period of such emergency or disaster and shall provide such personnel as may be practicable to operate its facilities under 23 the circumstances. To the extent technically feasible, Grantee shall incorporate into its facilities a provision to allow the connection of emergency interuption devices whereby the City, in time of crisis, may be able to introduce a message an all channels simultaneously. Section 19. Compliance with State and Federal Laws. -------------------------------------- Notwithstanding any other provision of this franchise to the contrary, Grantee shall at all times comply with all laws, rules and regulations of the state and federal governments and any administrative agencies thereof. If any such state or federal law, sale or regulation shall require or permit Grantee to perform any service or shall prohibit Grantee from performing any service in conflict with the provisions of this franchise of the City, then immediately following knowledge thereof Grantee shall notify the Director in writing of the point of conflict believed to exist between such state or federal law, rule or regulation and this franchise or any ordinance, rule, regulation or charter provision of the City. If the City determines that a material provision of this franchise does in fact conflict with such state or federal law, rule or regulation, it shall have the right to modify any provision hereof to such reasonable extent as may be necessary to carry out the full intent and purpose of this franchise. 24 Section 20. Modifications by FCC; Jurisdiction of FCC. ----------------------------------------- It is specifically agreed by the City and Grantee that any modifications of the provisions of this franchise resulting from amendment of applicable rules and regulations of the FCC shall be incorporated into this franchise by City Council within one (1) year of the adoption of the amendment by the FCC, or at the time of the renewal of this franchise, whichever occur first. Should the FCC lose or voluntarily abdicate regulatory jurisdiction over any subject matter relevant to this franchise, the City shall be empowered to assume regulatory jurisdiction over any such deregulated aspects, provided that the City's regulation is not contrary to local, state or federal law. Section 21. Employment Requirements. Grantee shall afford equal opportunity in employment to all qualified persons. No person shall be discriminated against in employment because of race, color, religion, national origin or sex. Grantee shall establish, maintain and carry out a positive, continuing program of specified practices designed to assure equal opportunity in every aspect of its employment policies and practices. Section 22. Other Business Activity. Grantee shall not engage in the business of selling, repairing or installing television receivers or radio receivers within the City during the term of this franchise. Grantee shall not suggest, recommend or 25 single out any television or radio service firm or business establishment to be patronized by Subscribers. Grantee shall exercise all reasonable influence on its officers, agents, employees and representatives to ensure compliance with this section. It is provided, however, that this section does not prohibit Grantee from servicing or repairing Converters and other technical equipment which it owns and which are leased or otherwise furnished to Subscribers for use with Grantee's services. It is further provided that this franchise does not apply to Standalone Operations of Grantee; however, should any such Standalone Operation ever be connected to any part of Grantee's CATV System which uses any Street: (1) such former Standalone Operation shall immediately become subject to this franchise, and (2) from that time forward, the Gross Revenues shall include revenues from that former Standalone Operation. Section 23.Payments to the City. -------------------- (a) Amount and Time. As compensation for the right, privilege, and franchise herein conferred, Grantee shall pay to the City each year a sum equal to five percent (5%) of Grantee's Gross Revenues for such year. Two percent (2%) of such franchise fee shall be maintained in a separate account by the City and shall be applied solely to the support of Public, Educational, and Governmental Access Channels. Such franchise fee payments shall be made quarterly. Grantee shall file with the Director within 26 sixty (60) days after the expiration of each quarter of each calendar year, or portion thereof, during which this franchise is in effect, financial statement prepared according to generally accepted accounting principles showing in detail the Gross Revenues of Grantee during the preceding quarter of the calendar year. Such statement shall be accompanied by Grantee's payment to the City of five percent (5%) of such Gross Revenues for such quarter. The franchise fee is subject to change at any time by City Council upon 20 days advance written notice to Grantee, but in any event will not be greater than that authorized by law. The payment of the City's audit expenses shall not be considered as part of the franchise fee payable under this section. (b) Late Payment Penalty. Grantee shall pay a late penalty of 12% per annum calculated per day on the amount of franchise payment that is late. (c) Right of Inspection of Records. The Director shall have the right to inspect Grantee's records showing the Gross Revenue from which payments to the City are computed and to audit and recompute any and all amounts paid under this franchise. No acceptance of payment shall be construed as a release or as an accord and satisfaction of any claim the City may have for further or additional sums payable under this franchise or for the performance of any other obligation hereunder. 27 (d) Other Payments to City. The franchise fee payable hereunder shall be exclusive of, and in addition to, all ad valorem taxes, special assessments for municipal improvements, fees for building permits for facilities not in the Street, inspection fees not in the street, and other lawful obligations of the City. Section 24. Records and Reports. (a) Principal Office of Grantee. Grantee shall maintain a principal office in the City, as long as it continues to operate any in the City, and hereby designates such office as the place where all notices, directions, orders and requests may be mailed, served or delivered under this franchise. The Director shall be notified of the location of such office or any change thereof. (b) Records. Grantee shall keep complete and accurate records of its business and operations relevant to this franchise. All such records shall be maintained at Grantee's principal office. (c) Access by City. The Director or the Director's duly designated officers, agents or representatives, shall have access to all records of Grantee relevant to this franchise for ascertaining the correctness of any and all reports and may examine Grantee's officers and employees under oath in respect thereto. 28 (d) Annual Report. A report shall be filed by Grantee with the Director within ninety (90) days following the end of each Franchise Year. Such report shall include: (i) the number of Subscribers as of December 31 of the preceding year; and (ii) Gross Revenue and Regular Subscriber Service revenue received by Grantee for the preceeding year. (iii) any additional City Streets used by Grantee's CATV System in providing its services to Subscribers or Users of its CATV System. The report shall be certified by a financial officer of Grantee, and shall include any other information as the Director may reasonably request in relation to Grantee's CATV System. The Director may audit the books and records of the Grantee to verify the amount of franchise fee owed and paid, and the Grantee shall pay the City's reasonable expenses for such audits. Payment of such audit expenses shall be made within thirty (30) days of Grantee's receipt of a written invoice signed by the Director. (e) False Entry. Any false entry in the records of Grantee or false statement in the reports to the City as to a material fact, knowingly made by Grantee, shall constitute a violation of a material provision of this franchise ordinance. (f) FCC Filings. Grantee shall file copies of all reports and filings with respect to its CATV System made to the FCC with the Director. 29 Section 25. Senior Citizen Promotional Program. In order to facilitate the availability of services provided over its CATV System to senior citizens, Grantee may, as a special promotion, discount installation charges on a permanent basis or for extended period of time giving a maximum number of senior citizens a chance to take advantage of the savings. For purposes of this Section, senior citizens shall include heads of households who are at least 60 years of age. Section 26. Rates. ----- (a) Pursuant to Section 623 of the Cable Act and as a cable operator subject to Effective Competition, Grantee shall not be subject to rate regulation. (b) If at any time during the term of this franchise it is determined that Grantee is not subject to Effective Competition, or is subject by statute or otherwise to rate regulation, then Grantee shall become subject to rate regulation, by the City or as lawfully allowed, no later than one (1) year after such determination. Section 27. Customer Relations. Grantee shall develop and implement a comprehensive customer relations plan to bring all customer services to a high level of quality and efficiency, which shall include, without limitation: (1) high efficiency telephone 30 and computer billing and record keeping systems adequate to meet customer demands, (2) requirements that all field employees carry a visible identification card, and (3) procedures to assure that field personnel make every attempt to provide notice to occupants of dwelling units before entering the premises to install or maintain service. Section 28. Grantee's Rules. Grantee shall have the authority to promulgate such rules, regulations, terms, and conditions governing the conduct of its business as shall be reasonably necessary to enable Grantee to exercise its rights and to perform its obligations under this franchise and to assure an uninterrupted service over its CATV System; provided, however, such rules, regulations, terms and conditions shall not be in conflict with any of the provisions of this franchise or any ordinance of the City, the provisions of its Charter, the laws of the State of Texas and the United States of America and the rules and regulations of the FCC and any other federal agency having jurisdiction. A copy of Grantee's rules, regulations, terms and conditions shall be filed with the Director and shall thereafter be maintained current by Grantee. Section 29. Discontinuance of Service For Non-Payment. ----------------------------------------- Grantee may disconnect installations and discontinue service to a Subscriber upon failure of Subscriber to pay Subscriber's bill by its due date. 31 Section 30. Prohibition of Discriminatory or Preferential --------------------------------------------- Practices. --------- In its rates or charges, or in making available the services or facilities, or in its rules or regulations, or in any other respect, Grantee shall not make or grant any unreasonable preference or advantage to any Subscriber or potential Subscriber and shall not subject any such person to any unreasonable prejudice or disadvantage. This provision shall not be deemed to prohibit promotional campaigns to stimulate subscriptions or other legitimate uses thereof, nor to prohibit variations in rates where varying levels of service are provided or where costs or revenue requirements vary. Section 31. Non-Exclusive Franchise. The rights, privileges and franchise granted hereby are not exclusive, and nothing herein contained shall be construed to prevent the City from granting any like or similar rights, privileges and franchise to any other person within all or any portion of the City including the Franchise Area. Section 32. Revocation of Franchise. ----------------------- (a) In addition to all rights and powers of the City by virtue of this franchise or otherwise, the City reserves as an additional and as a separate and distinct power the right to 32 terminate and cancel this franchise and all rights and privileges of Grantee hereunder in any of the following events or for any of the following reasons: (1) Violation of Provision. Grantee shall by act or omission violate any term, condition or provision of this franchise and shall fail or refuse to effect compliance within thirty (30) days following written demand by the Director to do so. (2) Insolvent or Bankrupt. Grantee becomes insolvent or is adjudged bankrupt, or all or any part of Grantee's facilities are sold under an instrument to secure a debt and are not redeemed by Grantee within thirty (30) days from the date of such sale; provided, however this shall not be an event of termination or cancellation in the event of bankruptcy proceeding and the trustee, receiver or debtor in possession agrees in writing to be bound by the terms of this franchise. (3) Fraud or Deceit. Grantee attempts to or does practice any fraud or deceit in its conduct or relations under this franchise with the City, Subscribers or potential subscribers. (b) Any such termination and cancellation of this franchise shall be by ordinance adopted by City Council; provided, however, before any such ordinance is adopted, Grantee must be given at least sixty (60) days advance written notice, which notice shall set. forth the cause and reasons for the proposed termination and cancellation, shall advise Grantee that it will be provided an opportunity to be heard by City Council regarding such proposed 33 action before any such action is taken, and shall set forth the time, date and place of the hearing. In no event shall such hearing be held less than thirty (30) days following delivery of such notice to Grantee. (c) In addition to the rights of the City to revoke this franchise under Section 31(a) above, should Grantee fail or refuse to cure any non-compliance with any term, condition or provision of this franchise contained in Section 3.(b) 5, 8(a), 8(b), 8(c), 8(d), 8(f), 8(g), 10, 11(b), 12(a) (to the extent FCC penalities are not applicable), 12.(b), 12.(c), 12.(d), 12.(e), 12.(f), 12.(g)., 12.(k), 12.(n), 13, 14, 15, 16, 17, 18, 22, 24, and 30, whether or not the time for such compliance as provided in such sections has passed, within thirty (30) days following (i) a hearing before the City Council after thirty (30) days written notice of such hearing to Grantee, and (ii) following such hearing, written demand by the Director that Grantee comply with such term, condition, or provision, Grantee shall forfeit and pay to the City the sum of Three Hundred Dollars ($300.00) for each day it shall so fail or refuse, as liquidated damages and not as penalty; provided, however, Grantee shall notify the Director as soon as reasonably possible of any force majeure preventing compliance. 34 Section 33. Force Majeure. Other than its failure, refusal or inability to pay its debts and obligations including, specifically, the payments to the City required by this franchise, Grantee shall not be declared in default or be subject to any sanction under any provision of this franchise in those cases in which performance of such provision is prevented by reasons beyond its control. Section 34. Assignment of Franchise. The rights, privileges and franchise granted hereunder may not be assigned, in whole or in part, without the prior consent of City Council expressed by resolution or ordinance, and then only under such conditions as may therein be prescribed. No assignment to any person shall be effective until the assignee has filed with the Director an instrument, duly executed, reciting the fact of such assignment, accepting the terms of this franchise, and agreeing to comply with all of the Provisions hereof. Section 35. Publication Cost. In compliance with the provisions of Article II, Section 18 of the City Charter, Grantee shall pay the cost of those publications of this franchise required by such Charter provisions. 35 Section 36. Grantee to Have No Recourse. --------------------------- (a) Requirements and Enforcement. Except as expressly provided herein, Grantee shall have no recourse whatsoever against the City for any loss, cost, expense or damage arising out of the provisions or requirements of this franchise or because of the enforcement thereof by the City or because of the lack of the City's authority to grant all or any part of this franchise. (b) Grantee's Understanding. Grantee expressly acknowledges that in accepting this franchise, it relied solely upon its own investigation and understanding of the power and authority of the City to grant this franchise and that Grantee was not induced to accept this franchise by any understanding, promise or other statement, verbal or written, by or on behalf of the City or by any third person concerning any term or condition not expressed herein. (c) Construction of Franchise. By acceptance of this franchise, Grantee acknowledges that it has carefully read the provisions, hereof and is willing to and does accept all of the risks of the meanings of such provisions and agrees that in the event of any ambiguity herein or in the event of any other dispute over the meaning thereof, the same shall be construed strictly against Grantee and in favor of the City. 36 Section 37. Valuation. This franchise is granted subject to the lawful provisions of Article II, Section 17, of the City Charter, which provisions are made a part hereof and incorporated herein by reference. If the City should elect to exercise its rights under such Charter provisions, payment of a fair valuation, which shall be the then current fair market value, or as required by Section 627 of the Cable Act, if applicable, shall be required. Should the parties fail to agree upon the then current fair market value, the same shall be determined in an appropriate proceeding filed in any court having jurisdiction. Section 38. Acceptance of Franchise. Within thirty days from the effective date of this ordinance, Grantee shall file with the City Secretary a written statement in the following form signed in its name and behalf: "To the Honorable Mayor and City Council of the City of Houston, Texas: "For itself, its successors and assigns, Prime Time Cable a Partners I, Ltd., Colorado limited partnership, hereby accepts the attached ordinance and agrees to be bound by all of its terms, conditions and provisions. PRIME TIME CABLE PARTNERS I, LTD. a Colorado Limited Partnership By: PRIME TIME CABLE CORPORATION its managing general partner BY: --------------------------------- "Dated this day of ,1988. ----------------- --------------------------- 37 If any provision, section, subsection, sentence, clause or phrase of this franchise is for any reason held to be invalid or unconstitutional, such invalidity or unconstitutionality shall not affect the validity of the remaining portions of this franchise. It is the intent of the City in adopting this franchise that no portion or provision thereof shall become inoperative or fail by reason of any invalidity or unconstitutionality of any other portion or provision, and to this end all provisions of this franchise are declared to be severable. Section 39. Passage and Effective Date. This franchise, having been published as required by Article 11, Section 17 of the City Charter shall take effect and be in force from and after the thirtieth day following its final passage and approval. PASSED first reading this the 8th day of March, 1989. PASSED second reading this the 15th day of March, 1989. PASSED AND APPROVED third and final reading this the 29th day of March, 1989. PASSED this the 29th day of March, 1989. APPROVED this the 29th day of March, 1989. /s/ ----------------------------- Mayor of the City of Houston /s/ ----------------------------- Assistant City Attorney (Prepared by Legal Department: (TSD/jbl, 12/28/88) (Requested by Byron Marshall, Acting Director, Department of Finance & Administration) (L.D. File No. 05-87004-01) 38 I, ANNA RUSSELL, City Secretary of the City of Houston, Texas, do hereby certify that the within and foregoing is a true and correct copy of Ordinance No. 89-338, passed by the City Council and approved by the Mayor of said City on the 29th day of March, 1989, as the same appears in the records in my office. WITNESS my hand and the Seal of said City this 30th day of March, A.D. 1989. /s/ Anna Russell ------------------------------------- City Secretary of the City of Houston Anna Russell EX-12.1 33 EXHIBIT 12.1 Exhibit 12.1 OPTEL, Inc. DEFICIENCY OF EARNINGS TO FIXED CHARGES
Period from April 20, 1993 (Date of Eight Month Inception) to Year Ended Period Ended Year Ended December 31, December 31, August 31, August 31, 1993 1994 1995 1996 ---------------------------------------------------------------- Loss before income taxes 307 7,944 10,630 18,430 Plus: fixed charges before capitalized interest (3) (114) (1,473) (6,402) ---------------------------------------------------------------- Total loss 304 7,830 9,157 12,028 ================================================================ Fixed charges Financial expenses (per financial statements) 3 76 1,268 5,999 Interest factor of rental expense - 38 205 403 ---------------------------------------------------------------- Total fixed charges before capitalized interest 3 114 1,473 6,402 Capitalized interest - - - 1,850 ---------------------------------------------------------------- Total fixed charges 3 114 1,473 8,252 ================================================================ Deficiency of earnings to fixed charges 307 7,944 10,630 20,280 ================================================================ Operating lease expense per financial statements - 113 616 1,208 ================================================================
Six Month Six Month Period Ended Period Ended February 29, February 28, 1996 1997 ------------------------- Loss before income taxes 7,242 16,292 Plus: fixed charges before capitalized interest (2,314) (8,803) ------------------------- Total loss 4,928 7,489 ========================= Fixed charges Financial expenses (per financial statements) 2,211 8,602 Interest factor of rental expense 103 201 ------------------------- Total fixed charges before capitalized interest 2,314 8,803 Capitalized interest 634 984 ------------------------- Total fixed charges 2,948 9,787 ========================= Deficiency of earnings to fixed charges 7,876 17,276 ========================= Operating lease expense per financial statements 308 604 =========================
OPTEL, Inc. DEFICIENCY OF EARNINGS TO FIXED CHARGES PROFORMA
Six Month Year Ended Period Ended August 31, February 28, 1996 1997 ---------------------------------- Loss before income taxes 18,430 16,292 Less: high yield interest (13%) 29,250 14,625 Plus: fixed charges before capitalized interest (35,652) (23,428) ---------------------------------- Total loss 12,028 7,489 ================================== Fixed charges Financial expenses (per financial statements) 5,999 8,602 High yield interest (13%) 29,250 14,625 Interest factor of rental expense 403 201 ---------------------------------- Total fixed charges before capitalized interest 35,652 23,428 Capitalized interest 1,850 984 ---------------------------------- Total fixed charges 37,502 24,412 ================================== Deficiency of earnings to fixed charges 49,530 31,901 ================================== Operating lease expense per financial statements 1,208 604 ==================================
EX-21.1 34 EXHIBIT 21.1 Exhibit 21.1 OPTEL, INC SUBSIDIARIES Corporations Richey Pacific Cablevision, Inc. a California corporation IRPC Arizona, Inc. an Arizona corporation OpTel (Texas) Telecom, Inc. a Delaware corporation TVMAX Communications (Texas), Inc. a Delaware corporation OpTel (Florida) Telecom, Inc. a Delaware corporation IRC Texas, Inc. a Texas corporation TA B GP Holdings Corp. a Delaware corporation IRPC Texas-Ventana, Inc. a Texas corporation TVMAX Telecommunications, Inc. a Delaware corporation Sunshine Television Entertainment, Inc. a Florida corporation OpTel, Inc. a Delaware corporation OpTel (Illinois) Telecom, Inc. a Delaware corporation OpTel (California) Telecom, Inc. a Delaware corporation Limited Partnerships OpTel (Illinois), L.P. Richey Pacific Cabel Partners V, L.P. Richey Pacific Cable Partners VI, L.P. Richey Pacific Cable Partners VII, L.P. EX-23.2 35 EXHIBIT 23.2 [Goldberg, Godles, Wiener & Wright Letterhead] April 10, 1997 OpTel, Inc. 1111 W. Mockingbird Lane Dallas, Texas 75247 Ladies and Gentlemen: We hereby consent to the use of our name under the caption "Legal Matters" in the Prospectus included in the Registration Statement on Form S-4 (the "Registration Statement") and to the use of this consent as an exhibit to the Registration Statement. Very truly yours, Goldberg, Godles, Wiener & Wright EX-23.3 36 EXHIBIT 23.3 Exhibit 23.3 INDEPENDENT AUDITOR'S CONSENT We consent to the use in this Registration Statement of OpTel, Inc. on Form S-4 of our report dated November 7, 1996 (February 7, 1997 as to Note 13) of OpTel, Inc. and our reports dated January 27, 1997 of Richey Pacific Cablevision, EagleVision and of Triax Associates V, L.P., appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Summary Consolidated Financial and Operating Data," "Selected Consolidated Financial and Operating Data" and "Experts" in such Prospectus. DELOITTE & TOUCHE LLP Dallas, Texas April 10, 1997 EX-25.1 37 EXHIBIT 25.1 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM T-1 STATEMENT OF ELIGIBILITY AND QUALIFICATION UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)_________ --------------- U.S. TRUST COMPANY OF TEXAS, N.A. (Exact name of trustee as specified in its charter) 75-2353745 (State of incorporation (I.R.S. employer if not a national bank) identification No.) 2001 Ross Avenue, Suite 2700 75201-2936 Dallas, Texas (Zip Code) (Address of trustee's principal executive offices) Compliance Officer U.S. Trust Company of Texas, N.A. 2001 Ross Avenue, Suite 2700 Dallas, Texas 75201-2936 (214) 754-1200 (Name, address and telephone number of agent for service) --------------- OpTel, Inc. (Exact name of obligor as specified in its charter) Delaware 95-4498704 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 1111 W. Mockingbird Lane Dallas, Texas 75247 (Address of principal executive offices) (Zip Code) --------------- 13% Senior Notes due 2005 (Title of the indenture securities) =============================================================================== GENERAL 1. General Information. Furnish the following information as to the Trustee: (a) Name and address of each examining or supervising authority to which it is subject. Federal Reserve Bank of Dallas (11th District), Dallas, Texas (Board of Governors of the Federal Reserve System) Federal Deposit Insurance Corporation, Dallas, Texas The Office of the Comptroller of the Currency, Dallas, Texas (b) Whether it is authorized to exercise corporate trust powers. The Trustee is authorized to exercise corporate trust powers. 2. Affiliations with Obligor and Underwriters. If the obligor or any underwriter for the obligor is an affiliate of the Trustee, describe each such affiliation. None. 3. Voting Securities of the Trustee. Furnish the following information as to each class of voting securities of the Trustee: As of December 31, 1997 - ------------------------------------------------------------------------------- Col A. Col B. - ------------------------------------------------------------------------------- Title of Class Amount Outstanding - ------------------------------------------------------------------------------- Capital Stock - par value $100 per share 5,000 shares 4. Trusteeships under Other Indentures. Not Applicable 5. Interlocking Directorates and Similar Relationships with the Obligor or Underwriters. Not Applicable 6. Voting Securities of the Trustee Owned by the Obligor or its Officials. Not Applicable 7. Voting Securities of the Trustee Owned by Underwriters or their Officials. Not Applicable 8. Securities of the Obligor Owned or Held by the Trustee. Not Applicable 9. Securities of Underwriters Owned or Held by the Trustee. Not Applicable 10. Ownership or Holdings by the Trustee of Voting Securities of Certain Affiliates or Security Holders of the Obligor. Not Applicable 11. Ownership or Holdings by the Trustee of any Securities of a Person Owning 50 Percent or More of the Voting Securities of the Obligor. Not Applicable 12. Indebtedness of the Obligor to the Trustee. Not Applicable 13. Defaults by the Obligor. Not Applicable 14. Affiliations with the Underwriters. Not Applicable 15. Foreign Trustee. Not Applicable 16. List of Exhibits. T-1.1 - A copy of the Articles of Association of U.S. Trust Company of Texas, N.A.; incorporated herein by reference to Exhibit T-1.1 filed with Form T-1 Statement, Registration No. 22-21897. 16. (con't.) T-1.2 - A copy of the certificate of authority of the Trustee to commence business; incorporated herein by reference to Exhibit T-1.2 filed with Form T-1 Statement, Registration No. 22-21897. T-1.3 - A copy of the authorization of the Trustee to exercise corporate trust powers; incorporated herein by reference to Exhibit T-1.3 filed with Form T-1 Statement, Registration No. 22-21897. T-1.4 - A copy of the By-laws of the U.S. Trust Company of Texas, N.A., as amended to date; incorporated herein by reference to Exhibit T-1.4 filed with Form T-1 Statement, Registration No. 22-21897. T-1.6 - The consent of the Trustee required by Section 321(b) of the Trust Indenture Act of 1939. T-1.7 - A copy of the latest report of condition of the Trustee published pursuant to law or the requirements of its supervising or examining authority. NOTE As of December 31, 1996 the Trustee had 5,000 shares of Capital Stock outstanding, all of which are owned by U.S. T.L.P.O. Corp. As of December 31, 1996 U.S. T.L.P.O. Corp. had 35 shares of Capital Stock outstanding, all of which are owned by U.S. Trust Corporation. U.S. Trust Corporation had outstanding 9,752,781 shares of $5 par value Common Stock as of December 31, 1996. The term "Trustee" in Items 2, 5, 6, 7, 8, 9, 10 and 11 refers to each of U.S Trust Company of Texas, N.A., U.S. T.L.P.O. Corp. and U.S. Trust Corporation. Inasmuch as this Form T-1 is filed prior to the ascertainment by the Trustee of all the facts on which to base responsive answers to Items 2, 5, 6, 7, 9, 10 and 11, the answers to said Items are based upon incomplete information. Items 2, 5, 6, 7, 9, 10 and 11 may, however, be considered correct unless amended by an amendment to this Form T-1. In answering any items in this Statement of Eligibility and Qualification which relates to matters peculiarly within the knowledge of the obligors or their directors or officers, or an underwriter for the obligors, the Trustee has relied upon information furnished to it by the obligors and will rely on information to be furnished by the obligors or such underwriter, and the Trustee disclaims responsibility for the accuracy or completeness of such information. - --------------- SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, U.S Trust Company of Texas, N.A., a national banking association organized under the laws of the United States of America, has duly caused this statement of eligibility and qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Dallas, and State of Texas on the 20th day of March, 1997. U.S. Trust Company of Texas, N.A., Trustee By: /s/ John C. Stohlmann ----------------------------------- John C. Stohlmann Vice President Exhibit T-1.6 CONSENT OF TRUSTEE Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of 1939 as amended in connection with the proposed issue of OpTel, Inc. 13 % Senior Notes due 2005, we hereby consent that reports of examination by Federal, State, Territorial or District authorities may be furnished by such authorities to the Securities and Exchange Commission upon request therefore. U.S. Trust Company of Texas, N.A., Trustee By: /s/ John C. Stohlmann ----------------------------------- John C. Stohlmann Vice President
Board of Governors of the Federal Reserve System OMB Number: 7100-0036 Federal Deposit Insurance Corporation OMB Number: 3064-0052 Office of the Comptroller of the Currency Federal Financial Institutions Examination Council OMB Number: 1557-0081 Expires March 31,1999 - ----------------------------------------------------------------------------------------------------------------------------------- Please Refer to Page i, (1) Table of Contents, for (LOGO) the required disclosure of estimated burden - ----------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED REPORTS OF CONDITION AND INCOME FOR A BANK WITH DOMESTIC OFFICES ONLY AND TOTAL ASSETS OF (961231) LESS THAN $100 MILLION - - FFIEC 034 ---------------- REPORT AT THE CLOSE OF BUSINESS DECEMBER (RCRI 9999) 31, 1996 This report is required by law: 12 U.S.C. Section 324 (State This report form is to be filed by banks with domestic member banks); 12 U.S. c. Section 1817 (State nonmember offices only. Banks with branches and consolidated banks); and 12 U.S. C. Section 161 (National banks). subsidiaries in U.S. territories and possessions, Edge or Agreement subsidiaries, foreign branches, consolidated foreign subsidiaries, or International Banking Facilities must file FFIEC 031. - ----------------------------------------------------------------------------------------------------------------------------------- NOTE: The Reports of Condition and Income must be signed by an The Reports of Condition and Income are to be prepared in authorized officer and the Report of Condition must be accordance with Federal regulatory authority instructions. attested to by not less than two directors (trustees) NOTE: these instructions may in some cases differ from generally for State from nonmember banks and three directors accepted accounting principles. for State member and National Banks. We, the undersigned directors (trustees), attest to the I, Alfred B. Childs, SVP & Cashier correctness of this Report of Condition (including the ------------------------------- supporting schedules) and declare that it has been examined Name and Title of Officer Authorized to Sign Report by us and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the of the named bank do hereby declare that these appropriate Federal regulatory authority and is true and Reports of Condition and Income (including the correct. supporting schedules) have been prepared in conformance with the instructions issued by the /s/ Stuart M. Pearman appropriate Federal regulatory authority and are ------------------------- true to the best of my knowledge and belief. Director (Trustee) /s/ Alfred B. Childs /s/ J. T. Moore Jr. - --------------------------- -------------------------- Signature of Officer Authorized to Sign Report Director (Trustee) January 15, 1997 /s/ Peter J. Denker - ----------------- ----------------------------- Date of Signature Director (Trustee) - ----------------------------------------------------------------------------------------------------------------------------------- FOR BANKS SUBMITTING HARD COPY REPORT FORMS: STATE MEMBER BANKS: Return the original and one copy NATIONAL BANKS: Return the original only in the special to the appropriate Federal Reserve District Bank. return address envelope provided. If express mail is used in lieu of the special return address envelope, return the original only to the FDIC, c/o Quality Data Systems, 2127 STATE NONMEMBER BANKS: Return the original only in Espey Court, Suite 204, Crofton, MD 21114. the special return address envelope provided. If express mail is used in lieu of the special return address envelope, return the original only to the FDIC, c/o Quality Data Systems, 2127 Espey Court, Suite 204, Crofton, MD 21114. - ----------------------------------------------------------------------------------------------------------------------------------- FDIC Certificate Number ____________ 12-31-96 (RCRI 9050) Banks should affix the address label in this space. U. S. Trust Company of Texas, National Association -------------------------------------------------- Legal Title of Bank (TEXT 9010) 2001 Ross Avenue, Suite 2700 ---------------------------- City (TEXT 9130) Dallas, TX 75201 ----------------------------------------------------------------- State Abbrev. (TEXT 9200) ZIP Code (TEXT 9220) Board of Governors of the Federal Reserve System, Federal Deposit Insurance corporation, Office of the Comptroller of the Currency
U.S. Trust Company of Texas, N.A. Call Date: 12/31/96 State #: 6797 FFIEC 034 2100 Ross Avenue, Suite 2700 Vendor ID: D Cert #: 33217 Page RC-2 Dallas, TX 75201 Transit #: 11101765 --------------- 9 --------------- CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL AND STATE-CHARTERED SAVINGS BANKS FOR DECEMBER 31, 1996 All schedules are to be reported in thousands of dollars. Unless otherwise indicated, report the amount outstanding as of the last business day of the quarter. Schedule RC - Balance Sheet C100 Dollar Amounts in Thousands - --------------------------------------------------------------------------------------------------------------------------------- ASSETS 1. Cash and balances due from depository institutions: RCON ---- -------- a. Noninterest-bearing balances and surrency and coin(1,2)___________ ______ _______ 0081 325 1.a -------- -------- b. Interest bearing balances(3)__________________________________________ ______ _______ 0071 173 1.b -------- 2. Securities: -------- a. Held-to-maturity securities (from Schedule RC-B, column A)___________ ______ _______ 1754 0 2.a -------- -------- b. Available-for-sale securities (from Schedule RC-B, column D)________ ______ _______ 1773 101,385 2.b -------- 3. Federal funds sold and securities purchased under agreements to resell: -------- a. Federal funds sold (4)________________________________________________ ______ _______ 0276 0 3.a -------- -------- b. Securities purchased under agreements to resell(5)____________________ ______ _______ 0277 0 3.b -------- 4. Loans and lease financing receivables: RCON ---- --------- a. Loans and leases, net of unearned income (from Schedule RC-C)_________ 2122 42,103 4.a --------- --------- b. LESS: Allowance for loan and lease losses_____________________________ 3123 481 4.b --------- --------- c. LESS: Allocated transfer risk reserve_________________________________ 3128 0 4.c --------- -------- d. Loans and leases, net of unearned income, allowance, and reserve RCON ---- (item 4.a minus 4.b and 4.c)________________________________________ ______ _______ 2125 41,622 4.d -------- -------- 5. Trading assets___________________________________________________________ ______ _______ 3545 0 5. -------- -------- 6. Premises and fixed assets (including capitalized leases)_________________ ______ _______ 2145 753 6. -------- -------- 7. Other real estate owned (from Schedule RC-M)_____________________________ ______ _______ 2150 0 7. -------- -------- 8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M)_____________________________________________________ ______ _______ 2130 0 8. -------- -------- 9. Customers' liability to this bank on acceptances outstanding_____________ ______ _______ 2155 0 9. -------- -------- 10. Intangible assets (from Schedule RC-M)___________________________________ ______ _______ 2143 0 10. -------- -------- 11. Other assets (from Sechedule RC-F)_______________________________________ ______ _______ 2160 1,511 11. -------- -------- 12. a. Total assets (sum of items 1 through 11)______________________________ ______ _______ 2170 145,769 12.a -------- -------- b. Losses deferred pursuant to U.S.C. 1823(j)____________________________ ______ _______ 0306 0 12.b -------- -------- c. Total assets and losses deferred pursuant to 12 U.S.C. 1823(j) (sum of items 12.a and 12.b)_______________________________________ ______ _______ 0307 145,769 12.c --------
(1) Includes cash items inprocess of collection and unposed debits. (2) The amount reported in this item must be greater than or equal to the sum of Schedule RC-M, items 3.a and 3.b. (3) Includes time certificates of deposit not held for trading. (4) Report 'term federal funds sold' in Schedule RC, item 4.a, 'Loans and leases, net of unearned income,' and in Schedule RC-C, part 1. (5) Report securities purchased under agreements to resell that involve the receipt of immediately available funds and mature in one business day or roll over under a continuing contract in Schedule RC, item 3.a, 'Federal funds sold.'
U.S. Trust Company of Texas, N.A. Call Date: 12/31/96 State #: 6797 FFIEC 034 2100 Ross Avenue, Suite 2700 Vendor ID: D Cert #: 33217 Page RC-2 Dallas, TX 75201 Transit #: 11101765 10 --------------- Schedule RC - Continued Dollar Amounts in Thousands - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES 13. Deposits: a. In domestic offices (sum of totals of RCON -------- columns A and C from Schedule RC-E)_________________________________ RCON 2200 118,129 13.a ---- -------- --------- (1) Noninterest-bearing (1)________________________________________ 6631 12,669 13.a.1 --------- --------- (2) Interest-bearing ______________________________________________ 6636 105,440 --------- b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (1) Noninterest-bearing____________________________________________ (2) Interest-bearing_______________________________________________ 14. Federal funds purchased and securities sold under agreements to RCON repurchase: ---- -------- a. Federal funds purchased (2)___________________________________________ ______ _______ 0278 0 14.a -------- -------- b. Securities sold under agreements to repurchase (3)____________________ ______ _______ 0279 0 14.b -------- -------- 15. a. Demand notes issued to the U.S. Treasury______________________________ ______ _______ 2840 0 15.a -------- -------- b. Trading liabilities___________________________________________________ ______ _______ 3548 0 15.b -------- 16. Other borrowed money: -------- a. With a remaining maturity of one year or less________________________ ______ _______ 2332 0 16.a -------- -------- b. With a remaining maturity of more than one year______________________ ______ _______ 2333 6,000 16.b -------- -------- 17. Mortgage indebtedness and obligations under capitalized leases___________ ______ _______ 2910 0 17. -------- -------- 18. Bank's liability on acceptances executed and outstanding_________________ ______ _______ 29200 0 18. -------- -------- 19. Subordinated notes and debentures________________________________________ ______ _______ 3200 0 19. -------- -------- 20. Other liabilities (from Schedule RC-G)___________________________________ ______ _______ 2930 1,575 20. -------- -------- 21. Total liabilities (sum of items 13 through 20)___________________________ ______ _______ 2948 125,704 21. -------- -------- 22. Limited-life preferred stock and related surplus_________________________ ______ _______ 3282 0 22. -------- EQUITY CAPITAL --------- 23. Perpetual preferred stock and related surplus____________________________ ______ ______ 3838 7,000 23. --------- --------- 24. Common stock_____________________________________________________________ ______ ______ 3230 500 24. --------- --------- 25. Surplus (exclude all surplus related to preferred stock)_________________ ______ ______ 2829 8,384 25. --------- --------- 26. a. Undivided profits and capital reserves________________________________ ______ ______ 3632 4,045 26.a --------- --------- b. Net unrealized holding gains (losses) on available-for-sale securities ______ ______ 8434 136 26.b --------- --------- 27. Cumulative foreign currency translation adjustments______________________ ______ ______ 3210 --------- --------- 28. a. Total equity capital (sum of items 23 through 27)_____________________ ______ ______ 3210 20,065 28.a --------- --------- b. Losses deferred pursuant to 12 U.S.C. 1823(j)_________________________ ______ ______ 0306 0 28.b --------- --------- c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823(j) (sum of items 28.a and 28.b)_________________________________________ ______ ______ --------- --------- 29. Total liabilities, limited-life preferred stock, equity capital, and losses deferred pursuant to 12 U.S.C. 1823(j) (sum of items 21, 22, and 28.c)____________________________________________________________________ ______ ______ 2257 145,769 29. --------- Memorandum To be reported only with the March Report of Condition. --------- 1. Indicate in the box at the right the number of the statement below that best describes the RCON most comprehensive level of auditing work performed for the bank by independent external ----- N/A M.1 auditors as of any date during 1995__________________________________________________________ 6724 --------- 1 = Independent audit of the bank conducted in accordance 4 = Directors' examination of the bank performed by other with generally accepted auditing standards by certified external auditors (may be required by state chartering public accounting firm which submits a report on the bank authority) 2 = Independent audit of the bank's parent holding company 5 = Review of the bank's financial statements by external conducted in accordance with generally accepted auditing auditors standards by a certified public accounting firm which 6 = Compilation of the bank's financial statements by submits a report on the consolidated holding company (but external auditors not on the bank separately) 7 = Other audit procedures (excluding tax preparation 3 = Directors' examination of the bank conducted in accordance work) with generally accepted auditing standards by a certified 8 = No external audit work public accounting firm (may be required by state chartering authority)
(1) Includes total demand deposits and noninterest-bearing time and savings deposits. (2) Report "term federal funds purchased" in Schedule RC, item 16, 'Other borrowed money.' (3) Report securities sold under agreements to repurchase that involve the receipt of immediately available funds and mature in one business day or roll over under a continuing contract in Schedule RC, item 14.a, 'Federal funds purchased.' EX-27.1 38 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE OPTEL, INC. FISCAL YEAR ENDED AUGUST 31, 1996 AND THE SIX MONTH PERIOD ENDED FEBRUARY 28, 1997 FINANCIAL STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR 6-MOS AUG-31-1996 FEB-28-1997 AUG-31-1996 FEB-28-1997 1,677,332 135,015,397 0 0 3,605,853 4,459,962 542,134 819,999 0 0 0 0 109,670,849 131,467,313 5,871,199 9,426,626 175,978,345 417,881,390 0 0 98,377,727 348,337,390 0 0 0 0 23,046 25,296 59,256,709 49,962,108 175,978,345 417,681,390 0 0 27,604,847 18,621,717 0 0 11,867,960 8,701,471 0 0 1,376,835 838,662 5,999,133 8,601,762 (18,429,784) (16,292,351) 0 0 (18,429,784) (16,292,351) 0 0 0 0 0 0 (18,429,784) (16,292,351) (8.30) (7.01) (8.30) (7.01)
EX-99.1 39 LETTER OF TRANSMITTAL LETTER OF TRANSMITTAL for 13% Senior Notes Due 2005 of OpTel, Inc. Pursuant to the Exchange Offer in Respect of All of their Outstanding 13% Senior Notes Due 2005 for 13% Senior Notes Due 2005, Series B Pursuant to the Prospectus Dated , 1997 - ------------------------------------------------------------------------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED, TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE BUSINESS DAY PRIOR TO THE EXPIRATION DATE. - ------------------------------------------------------------------------------- TO: U.S. TRUST COMPANY OF TEXAS, N.A., EXCHANGE AGENT If by Mail: U.S. Trust Company of Texas, N.A. P.O. Box 841 Cooper Station New York, NY 10276-0841 If by Hand: U.S. Trust Company of Texas, N.A. 111 Broadway Lower Level New York, NY 10006-1906 If by Overnight Courier: U.S. Trust Company of Texas, N.A. 770 Broadway 13th Floor -- Corporate Trust Operations New York, NY 10003-9598 Confirm by Telephone: 1-800-225-2398 Bondholder Inquiry or 212-420-6668 Tony Nista Delivery of this Letter of Transmittal to an address, or transmission, other than as set forth above will not constitute a valid delivery. The instructions contained herein should be read carefully before this Letter of Transmittal is completed. HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. By execution hereof, the undersigned acknowledges receipt of the Prospectus (the "Prospectus"), dated , 1997, of OpTel, Inc. (the "Issuer"), which, together with this Letter of Transmittal and the Instructions hereto (the "Letter of Transmittal"), constitute the Issuer's offer (the "Exchange Offer") to exchange $1,000 principal amount of its 13% Senior Notes Due 2005, Series B (the "New Notes") that have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement of which the Prospectus constitutes a part, for each $1,000 principal amount of its outstanding 13% Senior Notes Due 2005 (the "Old Notes"), upon the terms and subject to the conditions set forth in the Prospectus. The Issuer has not entered into any arrangement or understanding with any person to distribute the New Notes to be received in the Exchange Offer and to the best of the Company's information and belief, each person participating in the Exchange Offer is acquiring the New Notes in its ordinary course of business and has no arrangement or understanding with any person to participate in the distribution of the New Notes to be received in the Exchange Offer. This Letter of Transmittal is to be used by Holders if: (i) certificates representing Old Notes are to be physically delivered to the Exchange Agent herewith by Holders; (ii) tender of Old Notes is to be made by book-entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC") pursuant to the procedures set forth in the Prospectus under "The Exchange Offer -- Procedures for Tendering Old Notes" by any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Old Notes (such participants, acting on behalf of Holders, are referred to herein, together with such Holders, as "Acting Holders"); or (iii) tender of Old Notes is to be made according to the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer-Procedures for Tendering Old Notes." Delivery of documents to DTC does not constitute delivery to the Exchange Agent. The term "Holder" with respect to the Exchange Offer means any person: (i) in whose name Old Notes are registered on the books of the Issuer or any other person who has obtained a properly completed bond power from the registered Holder or (ii) whose Old Notes are held of record by DTC who desires to deliver such Old Notes by book entry transfer at DTC. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Old Notes must complete this Letter of Transmittal in its entirety. All capitalized terms used herein and not defined herein shall have the meaning ascribed to them in the Prospectus. The instructions included with this Letter of Transmittal must be followed. Questions and requests for assistance or for additional copies of the Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Exchange Agent. See Instruction 8 herein. HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY. List below the Old Notes to which this Letter of Transmittal relates. If the space provided below is inadequate, list the certificate numbers and principal amounts on a separately executed schedule and affix the schedule to this Letter of Transmittal. Tenders of Old Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof. - ------------------------------------------------------------------------------- DESCRIPTION OF OLD NOTES - ------------------------------------------------------------------------------- | Certificate | Aggregate | Number(s)* | Principal | (Attach signed | Amount Names(s) and Address(es) of Holder(s) | list if | Tendered (if less (Please fill in, if blank) | necessary) | than all)** - ------------------------------------------------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | ----------------------------------------- | | - ------------------------------------------------------------------------------- TOTAL PRINCIPAL AMOUNT OF OLD NOTES TENDERED - ------------------------------------------------------------------------------- * Need not be completed by Holders tendering by book-entry transfer. ** Need not be completed by Holders who wish to tender with respect to all Old Notes listed. See Instruction 2. - ------------------------------------------------------------------------------- / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: --------------------------------------------- DTC Book-Entry Account No.: ------------------------------------------------ Transaction Code No.: ------------------------------------------------------ If Holders desire to tender Old Notes pursuant to the Exchange Offer and (i) certificates representing such Old Notes are not lost but are not immediately available, (ii) time will not permit this Letter of Transmittal, certificates representing such Old Notes or other required documents to reach the Exchange Agent prior to the Expiration Date or (iii) the procedures for book-entry transfer cannot be completed prior to the Expiration Date, such Holders may effect a tender of such Old Notes in accordance with the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer-Procedures for Tendering Old Notes." / / CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING: Name(s) of Holder(s) of Old Notes: ------------------------------------------- Window Ticket No. (if any): ------------------------------------------------- Date of Execution of notice of Guaranteed Delivery: -------------------------- Name of Eligible Institution that Guaranteed Delivery: ----------------------- DTC Book-Entry Account No.: -------------------------------------------------- If Delivered by Book-Entry Transfer, Name of Tendering Institution: ----------------------------------------------- Transaction Code No.: -------------------------------------------------------- / / CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: ------------------------------------------------------------------------ Address: --------------------------------------------------------------------- --------------------------------------------------------------------- LADIES AND GENTLEMEN: Subject to the terms of the Exchange Offer, the undersigned hereby tenders to the Issuer the principal amount of Old Notes indicated above. Subject to and effective upon the acceptance for exchange of the principal amount of Old Notes tendered in accordance with this Letter of Transmittal, the undersigned sells, assigns and transfers to, or upon the order of, the Issuer all right, title and interest in and to the Old Notes tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Issuer and as Trustee under the Indenture for the Old Notes and the New Notes) with respect to the tendered Old Notes with full power of substitution to (i) deliver certificates for such Old Notes to the Issuer, or transfer ownership of such Old Notes on the account books maintained by DTC, together, in either such case, with all accompanying evidences of transfer and authenticity to, or upon the order of, the Issuer and (ii) present such Old Notes for transfer on the books of the Issuer and receive all benefits and otherwise exercise all rights of beneficial ownership of such Old Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. The undersigned hereby represents and warrants that he or she has full power and authority to tender, sell, assign and transfer the Old Notes tendered hereby and that the Issuer will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, when the same are acquired by the Issuer. The undersigned also acknowledges that this Exchange Offer is being made in reliance upon an interpretation by the staff of the Securities and Exchange Commission that the New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer may he offered for resale, resold and otherwise transferred by holders thereof (other than any such holder that is an "affiliate" of the Issuer within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders' business and such holders have no arrangement with any Person to participate in the distribution of such New Notes. The undersigned acknowledges that if he or she is participating in the Exchange Offer for the purpose of distributing the New Notes, the undersigned must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of the New Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes, the undersigned represents that such Old Notes were acquired as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not he deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned represents that (i) the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of such Holder's business, (ii) such Holder has no arrangements with any person to participate in the distribution of such New Notes and (iii) such Holder is not an "affiliate," as defined under Rule 405 of the Securities Act, of the Issuer or, if such Holder is an affiliate, that such Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Issuer to he necessary or desirable to complete the assignment and transfer of the Old Notes tendered hereby. For purposes of the Exchange Offer, the Issuer shall be deemed to have accepted validly tendered Old Notes when, as and if the Issuer has given oral or written notice thereof to the Exchange Agent. If any tendered Old Notes are not accepted for exchange pursuant to the Exchange Offer for any reason, certificates for any such unaccepted Old Notes will he returned (except as noted below with respect to tenders through DTC), without expense, to the undersigned at the address shown below or at a different address as may be indicated under "Special Issuance Instructions" as promptly as practicable after the Expiration Date. All authority conferred or agreed to be conferred by this Letter of Transmittal shall survive the death, incapacity or dissolution of the undersigned and every obligation under this Letter of Transmittal shall he binding upon the undersigned's heirs, personal representatives, successors and assigns. The undersigned understands that tenders of Old Notes pursuant to the procedures described under the caption "The Exchange Offer-Procedures for Tendering Old Notes" in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Issuer upon the terms and subject to the conditions of the Exchange Offer. Unless otherwise indicated under "Special Issuance Instructions," please issue the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange and return any Old Notes not tendered or not exchanged, in the name(s) of the undersigned (or in either such event, in the case of Old Notes tendered by DTC, by credit to the account at DTC). Similarly, unless otherwise indicated under "Special Delivery Instructions," please send the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange and any certificates for Old Notes not tendered or not exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signatures, unless, in either event, tender is being made through DTC. In the event that both "Special Issuance Instructions" and "Special Delivery Instructions" are completed, please issue the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange and return any Old Notes not tendered or not exchanged in the name(s) of, and send said certificates to, the person(s) so indicated. The undersigned recognizes that the Issuer has no obligation pursuant to the "Special Issuance Instructions" and "Special Delivery Instructions" to transfer any Old Notes from the name of the registered holder(s) thereof if the Issuer does not accept for exchange any of the Old Notes so tendered. PLEASE SIGN HERE (To Be Completed by All Tendering Holders of Old Notes Regardless of Whether Old Notes Are Being Physically Delivered Herewith) This Letter of Transmittal must be signed by the Holder(s) of Old Notes exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if tendered by a participant in DTC, exactly as such participant's name appears on a security position listing as the owner of Old Notes, or by person(s) authorized to become registered Holder(s) by endorsements and documents transmitted with this Letter of Transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below under "Capacity" and submit evidence satisfactory to the Issuer of such person's authority to so act. See Instruction 3 herein. If the signature appearing below is not of the registered Holder(s) of the Old Notes, then the registered Holder(s) must sign a valid proxy. X Date: ----------------------------------- ---------------------------------- X Date: ----------------------------------- ---------------------------------- Signature(s) of Holder(s) or Authorized Signatory Names(s): Address --------------------------- ----------------------------- --------------------------- ----------------------------- (Please Print) (Including Zip Code) Capacity: Area Code and Telephone No.: ------------------------ --------------- Social Security No.: ----------------------- SIGNATURE GUARANTEE (See Instruction 3 herein) Certain Signatures Must Be Guaranteed by an Eligible Institution ------------------------------------------------------------------------ (Name of Eligible Institution Guaranteeing Signatures) ------------------------------------------------------------------------ (Address (including zip code) and Telephone Number (including area code) of Firm) ------------------------------------------------------------------------ (Authorized Signature) ------------------------------------------------------------------------ (Printed Name) ------------------------------------------------------------------------ (Title) Date: ---------------------------
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS (See Instructions 3 and 4 herein) (See Instructions 3 and 4 herein) To be completed ONLY if certificates To be completed ONLY if certificates for Old Notes in a principal amount not for Old Notes in a principal amount not tendered are to be issued in the name tendered or not accepted for purchase of, or the New Notes issued pursuant to or the new notes issued pursuant to the the Exchange Offer are to be issued to Exchange Offer are to be sent to the order of, someone other than the someone other than the person or person or persons whose signature(s) persons whose signature(s) appear(s) appear(s) within this Letter of within this Letter of Transmittal or an Transmittal or issued to an address address different from that shown in different from that shown in the box the box entitled "Description of Old entitled "Description of Old Notes" Notes" within this Letter of within this Letter of Transmittal, or Transmittal. if Old Notes tendered by book-entry transfer that are not accepted for purchase are to be credited to an account maintained at DTC. Name: Name: ................................ ...................................... (Please Print) (Please Print) Address: Address: ............................. ................................... (Please Print) (Please Print) Zip Code Zip Code ............................. ................................... ..................................... ............................................ Taxpayer Identification or Taxpayer Identification or Social Social Security Number Security Number
INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER 1. Delivery of this Letter of Transmittal and Old Notes. The certificates for the tendered Old Notes (or a confirmation of a book-entry into the Exchange Agent's account at DTC of all Old Notes delivered electronically), as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile hereof and any other documents required by this Letter of Transmittal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. The method of delivery of the tendered Old Notes, this Letter of Transmittal and all other required documents to the Exchange Agent is at the election and risk of the Holder and, except as otherwise provided below, the delivery will be deemed made only when actually received by the Exchange Agent. Instead of delivery by mail, it is recommended that the Holder use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. No Letter of Transmittal or Old Notes should be sent to the Issuer. Holders who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent prior to the Expiration Date must tender their Old Notes and follow the guaranteed delivery procedures set forth in the Prospectus. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Old Notes, the certificate number or numbers of such Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within five business days after the Expiration Date, this Letter of Transmittal (or facsimile thereof) together with the certificate(s) representing the Old Notes (or a confirmation of electronic delivery of book-entry delivery into the Exchange Agent's account at DTC) and any of the required documents will be deposited by the Eligible Institution with the Exchange Agent; and (iii) such properly completed and executed Letter of Transmittal (or facsimile hereof), as well as all other documents required by this Letter of Transmittal and the certificate(s) representing all tendered Old Notes in proper form for transfer (or a confirmation of electronic mail delivery of book-entry delivery into the Exchange Agent's account at DTC), must be received by the Exchange Agent within five business days after the Expiration Date, all as provided in the Prospectus under the caption "Guaranteed Delivery Procedures." Any Holder of Old Notes who wishes to tender his Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m., New York City time, on the Expiration Date. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be determined by the Issuer in its sole discretion, which determination will be final and binding. The Issuer reserves the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Issuer's acceptance of which would, in the opinion of counsel for the Issuer, be unlawful. The Issuer also reserves the right to waive any irregularities or conditions of tender as to particular Old Notes. The Issuer's interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Issuer shall determine. Neither the Issuer, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost by the Exchange Agent to the tendering Holders of Old Notes, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. 2. Partial Tenders. Tenders of Old Notes will he accepted in all denominations of $1,000 and integral multiples in excess thereof. If less than the entire principal amount of any Old Notes is tendered, the tendering Holders should fill in the principal amount tendered in the third column of the chart entitled "Description of Old Notes." The entire principal amount of Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of all Old Notes is not tendered, Old Notes for the principal amount of Old Notes not tendered and a certificate or certificates representing New Notes issued in exchange of any Old Notes accepted will be sent to the Holder at his or her registered address, unless a different address is provided in the appropriate box on this Letter of Transmittal or unless tender is made through DTC, promptly after the Old Notes are accepted for exchange. 3. Signatures on the Letter of Transmittal; Bond Powers and Endorsements; Guarantee of Signatures. If this Letter of Transmittal (or facsimile hereof) is signed by the registered Holder(s) of the Old Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the Old Notes without alteration, enlargement or any change whatsoever. If this letter of Transmittal (or facsimile hereof) is signed by the registered Holder(s) of Old Notes tendered and the certificate(s) for New Notes issued in exchange therefor is to be issued (or any untendered principal amount of Old Notes is to be reissued) to the registered Holder, such Holder need not and should not endorse any tendered Old Note, nor provide a separate bond power. In any other case, such Holder must either properly endorse the Old Notes tendered or transmit a properly completed separate bond power with this Letter of Transmittal, with the signatures on the endorsement or bond power guaranteed by an Eligible Institution. If this Letter of Transmittal (or facsimile hereof) is signed by a person other than the registered Holder(s) of any Old Notes listed, such Old Notes must be endorsed or accompanied by appropriate bond powers signed as the name of the registered Holder(s) appears on the Old Notes. If this Letter of Transmittal (or facsimile hereof) or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, or officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Issuer, evidence satisfactory to the Issuer of their authority so to act must be submitted with this Letter of Transmittal. Endorsements on Old Notes or signatures on bond powers required by this Instruction 3 must be guaranteed by an Eligible Institution. Signatures on this Letter of Transmittal (or facsimile hereof) must he guaranteed by an Eligible Institution unless the Old Notes tendered pursuant thereto are tendered (i) by a registered Holder (including any participant in DTC whose name appears on a security position listing as the owner of Old Notes) who has not completed the box set forth herein entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" or (ii) for the account of an Eligible Institution. 4. Special Issuance and Delivery Instructions. Tendering Holders should indicate, in the applicable spaces, the name and address to which New Notes or substitute Old Notes for principal amounts not tendered or not accepted for exchange are to be issued or sent, if different from the name and address of the person signing this Letter of Transmittal (or in the case of tender of the Old Notes through DTC, if different from DTC). In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. 5. Transfer Taxes. The Issuer will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of the Old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with this Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. Except as provided in this Instruction 5, it will not be necessary for transfer tax stamps to be affixed to the Old Notes listed in this Letter of Transmittal. 6. Waiver of Conditions. The Issuer reserves the absolute right to amend, waive or modify specified conditions in the Exchange Offer in the case of any Old Notes tendered. 7. Mutilated, Lost, Stolen or Destroyed Old Notes. Any tendering Holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated herein for further instruction. 8. Requests for Assistance or Additional Copies. Questions and requests for assistance and requests for additional copies of the Prospectus or this Letter of Transmittal may be directed to the Exchange Agent at the address specified in the Prospectus. Holders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Exchange Offer. (DO NOT WRITE IN SPACE BELOW) - ------------------------------------------------------------------------------- Certificate Surrendered | Old Notes Tendered | Old Notes Accepted - ----------------------------|------------------------|------------------------- | | - ----------------------------|------------------------|------------------------- | | - ----------------------------|------------------------|------------------------- | | - ----------------------------|------------------------|------------------------- | | - ------------------------------------------------------------------------------- Delivery Prepared by Checked by Date --------------- --------------- -------------- - ------------------------------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----