-----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, PKa1IdDk0r9y0zelhuCSWaTyie+Ebj+7ITrQqfKzn5kmCc5cknMXgELQcPaNohkq PUskn+dHwFRNmVfgmOfe5g== 0000950134-99-004527.txt : 19990520 0000950134-99-004527.hdr.sgml : 19990520 ACCESSION NUMBER: 0000950134-99-004527 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19990519 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTEL INC CENTRAL INDEX KEY: 0001036712 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 95445524 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-56231 FILM NUMBER: 99630169 BUSINESS ADDRESS: STREET 1: 1111 W MOCKINGBIRD LANE STREET 2: SUITE 1000 CITY: DALLAS STATE: TX ZIP: 75247 BUSINESS PHONE: 2146343800 MAIL ADDRESS: STREET 1: 1111 W. MOCKINGBIRD LN. STREET 2: SUITE 1000 CITY: DALLAS STATE: TX ZIP: 75247 S-1/A 1 AMENDMENT NO. 7 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1999 REGISTRATION NO. 333-56231 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 7 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- OPTEL, INC. (Exact name of registrant as specified in its charter) --------------------- 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. JONATHAN A. SCHAFFZIN, ESQ. KRONISH LIEB WEINER & HELLMAN LLP OPTEL, INC. CAHILL GORDON & REINDEL 1114 AVENUE OF THE AMERICAS 1111 W. MOCKINGBIRD LANE 80 PINE STREET NEW YORK, NEW YORK 10036-7798 DALLAS, TEXAS 75247 NEW YORK, NEW YORK 10005 (212) 479-6000 (214) 634-3800 (212) 701-3000
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SECURITIES NUMBER OF SHARES OFFERING PRICE AGGREGATE OFFERING AMOUNT OF TO BE REGISTERED TO BE REGISTERED PER SHARE PRICE(1) REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------------- Class A Common Stock, par value $.01 per share.... 7,577,870 $17.00 $128,823,790 $35,813.01(2) - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act. (2) Previously paid. --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED MAY 19, 1999 PROSPECTUS [OPTEL LOGO] 6,640,370 SHARES OPTEL, INC. COMMON STOCK ------------------ OpTel, Inc. is selling 6,250,000 shares of its common stock, and the selling stockholders named in this prospectus are selling 390,370 shares. OpTel will not receive any proceeds from the sale of the shares by the selling stockholders. The underwriters named in this prospectus may purchase up to 937,500 additional shares of common stock from OpTel under certain circumstances. This is an initial public offering of common stock. OpTel currently expects the initial public offering price to be between $15.00 and $17.00 per share. The common stock has been approved for listing on the Nasdaq National Market under the symbol "OTEL" subject to notice of issuance. ------------------ INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 9. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------
PER SHARE TOTAL ------------ ------------ Public offering price $ $ Underwriting discount $ $ Proceeds to OpTel (before expenses) $ $ Proceeds to the selling stockholders (before expenses) $ $
The underwriters are offering the shares subject to various conditions. The underwriters expect to deliver the shares to purchasers on or about , 1999. ------------------ SALOMON SMITH BARNEY GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC. CIBC WORLD MARKETS , 1999 3 OPTEL MARKETS - ------------------------------------------------------------------------------ [Map of the United States highlighting markets in which OpTel, Inc. operates and the expected telephone roll-out schedule.] [OPTEL LOGO] 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information included elsewhere in this Prospectus, including the Consolidated Financial Statements and the notes thereto. As used in this Prospectus, the terms "Company" or "OpTel" mean OpTel, Inc., a Delaware corporation, and its subsidiaries, except where the context otherwise requires. Certain terms used herein are defined in the glossary attached hereto as Appendix A. References to fiscal years throughout this Prospectus are to the Company's fiscal years, which end on August 31 of each calendar year. Prospective investors should carefully consider the factors set forth in "Risk Factors." This Prospectus contains "forward-looking" statements concerning the Company's operations, economic performance and financial condition, which are subject to inherent risks and uncertainties, including those identified under "Risk Factors." THE COMPANY OpTel is a leading network based provider of integrated communications services, including local and long distance telephone, cable television and high speed Internet access services, to residents of multiple dwelling units ("MDUs") in the United States. In each market that it serves, OpTel seeks to become the principal competitor in the MDU marketplace to the incumbent local exchange carrier ("ILEC") and the incumbent franchise cable television operator by providing a package of voice, video and Internet access services at competitive prices. OpTel believes its ability to deliver an integrated service offering to MDU residents over its own networks and its long-term contractual relationships with MDU owners and associations provide it with a competitive advantage. MDUs comprise a wide variety of high density residential complexes, including high- and low-rise apartment buildings, condominiums, cooperatives, town houses and mobile home communities. According to 1990 U.S. Census Bureau data, there are more than 13.2 million dwelling units in MDUs with greater than 10 dwelling units in the United States. Within the MDU market, the Company focuses on MDUs of 150 or more dwelling units ("Large MDUs"). Based on industry sources, the Company believes that, within its existing markets there are approximately 3.0 million dwelling units within these Large MDUs. The Company currently provides cable television and telecommunications services in a number of metropolitan areas including Houston, Dallas-Fort Worth, Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco, Chicago, Atlanta, Orlando-Tampa and Indianapolis. The Company is licensed as a competitive local exchange carrier ("CLEC") in each of its major markets. The Company has commenced offering central office switched local exchange services in Houston and Dallas-Fort Worth and intends to offer these services in substantially all of its major markets by the end of calendar 2000. In addition, the Company commenced offering high speed Internet access at select MDUs in Houston, Dallas-Fort Worth, and San Francisco in January 1999 and intends to introduce its high speed Internet access services in substantially all of its major markets over the next 12 months. As of February 28, 1999, the Company had 435,738 units under contract and 401,600 units passed for cable television services and 218,023 cable television subscribers. At that date, the Company had 107,109 units under contract and 47,462 units passed for telecommunications and 13,229 telecommunications lines in service. OpTel secures long-term rights of entry agreements ("Rights of Entry") with MDU owners. Rights of Entry generally grant OpTel the exclusive right to provide cable television service to an MDU or group of MDUs and provide that the MDU owner will promote OpTel as the preferred provider of telecommunications services within the MDU. Rights of Entry generally provide OpTel with the exclusive services of the MDU's leasing staff to market the Company's services to residents. Rights of Entry also generally grant OpTel the exclusive right to use the coaxial cable network at the MDU. As a result, at MDUs where OpTel has cable television Rights of Entry, OpTel effectively will be the only company positioned to provide high speed Internet access via cable modem. Rights of Entry generally provide financial incentives to property owners to promote and sell the Company's services to MDU residents. The Company's Rights of Entry typically have original terms of 10 to 15 years (five years for Rights of Entry with condominium associations). The weighted 5 average unexpired term of the Company's Rights of Entry was approximately eight and one half years as of February 28, 1999 (assuming the Company's exercise of available renewal options). The Company intends to continue to develop and utilize its own networks to deliver its service offerings. The Company also plans to collocate network facilities for telecommunications services in selected ILEC end offices in certain of its markets. Through collocation, the Company will lease the ILEC's transport network on an unbundled basis to initially reach a subscriber. The Company believes collocation will decrease the time required to provide telephone services to a subscriber, increase the Company's addressable market by providing a cost effective means of servicing smaller MDUs and, over time, promote new Rights of Entry. The Company will select the ILEC end offices in which it will collocate based upon MDU concentration. When it has secured a Right of Entry and a sufficient subscriber base at an MDU, the Company intends to bring its own network transport facilities to the MDU and discontinue collocation services in order to increase operating margins. In addition, the Company intends to test market telephone services to residents of single family dwellings in certain markets where it has collocated facilities. The initial test will be conducted in the Houston market. STRATEGY OpTel's goal is to become the nation's largest integrated communications provider for Large MDUs. In order to achieve this objective, OpTel has customized strategies to rapidly and cost effectively address its markets, deploy its networks and offer an integrated service package supported by superior customer service. The following highlights key elements of OpTel's growth and operating strategies: Provide an Integrated Service Offering. In order to establish the broadest possible relationship with its subscribers, OpTel offers an integrated package of communications services at competitive rates. OpTel's service offerings include: (i) basic and premium tier cable television services, which the Company can customize on a sub-market basis to meet local preferences; (ii) a full featured switched local and long distance telephone offering; (iii) high speed Internet access via cable modem with downstream transmission speeds of up to 1.5 MB per second, which is delivered through a venture with an independent Internet service provider; and (iv) where market conditions justify, an additional tier of direct broadcast satellite ("DBS") programming from EchoStar Satellite Corporation ("EchoStar") that includes over 300 channels of digital video and audio programming. The Company believes its integrated service offering will capitalize on MDU residents' preference for a single source provider of communications services, enhancing OpTel's ability to attract and retain subscribers. Continue to Rapidly Expand Subscriber Base. The Company intends to rapidly expand its subscriber base by: (i) securing additional Rights of Entry from MDU owners through the use of its experienced and growing sales force and (ii) increasing penetration and cross-selling additional services to existing subscribers in MDUs where the Company has Rights of Entry through the use of marketing and incentive programs. The Company will continue to market its Rights of Entry on a business to business basis to local, regional and national MDU owners, including real estate investment trusts ("REITs"). The Company's strategy to promote subscriber growth includes having MDU leasing agents provide an effective point of sale including at the time MDU residents initially secure their leases. As an additional strategy to drive growth, the Company will directly market local and long distance telephone services to tenants residing in MDUs not covered by Rights of Entry but who can be served by collocating telecommunications network facilities at certain ILEC end offices and leasing unbundled transport network from that ILEC. The Company believes that its ability to directly market services to MDU residents will drive Rights of Entry with owners who will want to share in OpTel's success. When it has secured a Right of Entry and a sufficient subscriber base at an MDU, the Company intends to bring its own network transport facilities to the MDU and discontinue collocation services in order to increase operating margins. Deploy Cost Effective Networks. OpTel's networks are specifically designed to provide services to MDUs. OpTel's advanced proprietary network infrastructure utilizes a combination of point-to-point microwave transmission equipment and fiber optic cable to efficiently deliver the Company's various services to 2 6 MDU residents. A substantial portion of the Company's network cost to serve an MDU is related to the infrastructure specific to that MDU and is invested only after the Company and the MDU owner have entered into a long-term Right of Entry. The Company plans to interconnect its microwave network hubs to provide a redundant ring architecture for telecommunications and to permit the future transport of digital video programming and Internet traffic from a single source within a market. The Company intends to expand its use of central office switches in order to improve cost efficiencies and enhance its local service offering. The Company expects to serve substantially all of its major markets with its own central office switches by the end of calendar 2000. As a licensed CLEC in each of its major markets, the Company also intends to collocate facilities and lease ILEC transport network in order to offer telecommunications services in advance of installing network transport facilities from its switch to the subscriber. Over time, OpTel believes substantially all telecommunications services to MDUs serviced under Rights of Entry will be migrated from ILEC leased transport network to its own network facilities. Provide Superior Customer Service. The Company believes that an important success factor for competitive service providers will be to ensure superior customer service. Accordingly, the Company has focused on implementing, provisioning and servicing practices designed around the residential MDU customer. The Company has a national customer service center staffed with knowledgeable representatives to address the needs of residents 24-hours-a-day, seven-days-a-week and dedicated local service teams, trained to support all of the Company's service offerings, that provide prompt installation and response to customer service calls. The Company also has service center staff dedicated to responding to calls from MDU owners and their leasing agents. Because the Company believes that the best way to control the quality and consistency of technical and field services is to train and supervise the service technicians, the Company relies primarily on its own personnel to perform these functions and dedicates individual technical service teams to a few proximate MDUs. Pursue Selective Acquisitions and Strategic Relationships. OpTel began operations in April 1993 with a strategy of consolidating the then fragmented private cable television, or non-franchise cable television, industry serving MDUs. Since May 1996, the Company has completed and successfully integrated six acquisitions of MDU oriented video providers representing approximately 700 MDUs served and 103,000 subscribers. The Company intends to continue to seek acquisition opportunities in order to capitalize on economies of scale, expand its subscriber base, provide a client base to cross-sell its other services and decrease the time to market. The Company delivers high speed Internet access services through a strategic relationship with an Internet service provider that specializes in delivering broadband Internet connectivity and content to MDUs. In addition, the Company has entered into a strategic relationship with EchoStar for the delivery of an additional tier of DBS programming and will continue to evaluate other strategic alliances. EXPERIENCED MANAGEMENT AND COMMITTED SHAREHOLDER Since April 1995, OpTel has been indirectly majority owned by Le Groupe Videotron Ltee ("GVL"), which also owns the second largest cable television operator in Canada (based on number of subscribers). GVL has invested approximately $250 million of equity capital in OpTel. These invested amounts have been critical to OpTel's growth. OpTel benefits from GVL's experience developing and providing cable television and telecommunications services to residential customers in the United Kingdom. The President and Chief Executive Officer and Chief Financial Officer of OpTel served as the Vice-Chairman and Chief Executive Officer and Chief Financial Officer, respectively, of the since-divested GVL affiliate in the United Kingdom. OpTel management's extensive operating experience in both the telecommunications and cable television industries, including the construction and design of networks and sales and customer support, provides OpTel with significant expertise in managing and developing an infrastructure to support voice, video and Internet access operations. 3 7 RISK FACTORS The Company operates in highly competitive market segments which are subject to extensive regulation at the federal, state and local level. The Company's success in providing telecommunications services, as well as cable television and Internet access services, is dependent upon a number of factors, some of which are controlled by the Company and some of which are controlled by third parties, including ILECs, MDU owners and residents and government entities. Such factors include risks associated with the Company's history of net losses and negative cash flow, the Company's substantial indebtedness and the insufficiency of its earnings to cover fixed charges, the significant capital requirements of the Company's operations and the Company's dependence upon its strategic relationships with MDU owners. See "Risk Factors" for a detailed discussion of certain factors which should be considered by purchasers of the common stock. ORGANIZATION AND PRINCIPAL OFFICE OpTel was incorporated in Delaware in July 1994 as the successor to a California limited partnership that was organized in April 1993. The Company's principal offices are located at 1111 W. Mockingbird Lane, Dallas, Texas 75247, and its telephone number is (214) 634-3800. 4 8 THE OFFERING Unless otherwise indicated, the information in this Prospectus assumes (i) an initial public offering price of $16.00 per share, (ii) that the Underwriters' over-allotment option will not be exercised, (iii) a 5 for 1 stock split which will be effected upon consummation of the Offering (the "Split") and (iv) the conversion of all the outstanding classes of common stock and all outstanding series of preferred stock into shares of Class A Common Stock, par value $.01 per share (the "Common Stock") immediately prior to the consummation of the Offering. While the information in this Prospectus assumes the conversion of all of the outstanding shares of the Company's Class B Common Stock, $.01 per share (the "Class B Common"), and 9.75% Series A Preferred Stock, par value $.01 per share (the "Series A Preferred"), immediately prior to the consummation of the Offering, the actual conversion will occur after the Offering is consummated. See "Risk Factors -- Risks Associated with GVL's Series A Preferred Stock and Class B Common Stock." Common Stock offered by the Company..... 6,250,000 shares Common Stock offered by the Selling Stockholders............................ 390,370 shares ________ Total.............................. 6,640,370 shares Common Stock outstanding after the Offering................................ 33,539,458 shares(1) Use of Proceeds......................... The Company intends to use the net proceeds from the Offering for capital expenditures related to the purchase and installation of communications equipment and for general corporate purposes, including working capital. The Company will not receive any proceeds from the sale of shares by the Selling Stockholders. See "Use of Proceeds." Nasdaq National Market Symbol........... OTEL - --------------- (1) Excludes (i) 140,195.80 shares of Common Stock issuable upon exercise of presently exercisable stock options granted to officers, employees and consultants at a weighted average exercise price of $16.78 per share and (ii) 175,636.10 shares of Common Stock issuable upon exercise of presently exercisable warrants at a weighted average exercise price of $11.96 per share. If the Series A Preferred is not converted until 90 days following the Offering, up to approximately 250,258 additional shares of Common Stock may be issued upon conversion of the Series A Preferred as a result of the conversion of additional accrued and unpaid dividends on the outstanding shares. 5 9 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The summary consolidated financial data as of August 31, 1998 and for the years ended August 31, 1996, 1997 and 1998 have been derived from the consolidated financial statements of the Company included elsewhere herein and audited by Deloitte & Touche LLP, independent auditors, as set forth in their report thereon also included herein. The summary historical consolidated financial and operating data presented below as of and for the six months ended February 28, 1998 and 1999 have been derived from unaudited consolidated financial statements of the Company. In the opinion of management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position and results of operation for these periods. Operating results for the six months ended February 28, 1998 and 1999, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. As a result of the Company's history of growth through acquisitions, the Company's historical financial results are not directly comparable from period to period, nor are they indicative of future results of operations in many respects. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Consolidated Financial Statements of the Company and the notes thereto appearing elsewhere in this Prospectus.
HISTORICAL ---------------------------------------------------- SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 28, ------------------------------ ------------------- 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED OPERATIONS DATA Revenues: Cable television...................... $ 25,893 $ 36,915 $ 61,081 $ 25,247 $ 38,095 Telecommunications.................... 1,711 2,922 3,882 1,644 2,870 -------- -------- -------- -------- -------- Total revenues................ 27,604 39,837 64,963 26,891 40,965 Operating expenses: Programming, access fees and revenue sharing............................ 11,868 19,202 28,825 12,419 18,689 Customer support, general and administrative..................... 19,636 28,926 35,847 15,855 26,335 Depreciation and amortization......... 8,676 14,505 28,481 10,759 17,997 -------- -------- -------- -------- -------- Total operating expenses................ 40,180 62,633 93,153 39,033 63,021 -------- -------- -------- -------- -------- Loss from operations.................... (12,576) (22,796) (28,190) (12,142) (22,056) Interest expense, net(1)................ (5,854) (25,739) (39,564) (21,885) (22,558) -------- -------- -------- -------- -------- Loss before income taxes and extraordinary item.................... (18,430) (48,535) (67,754) (34,027) (44,614) Net loss(2)............................. $(18,430) $(48,535) $(74,398) $(34,027) $(44,614) -------- -------- -------- -------- -------- Dividends on preferred stock............ -- -- (8,748) -- (9,710) Loss attributable to common equity...... $(18,430) $(48,535) $(83,146) $(34,027) $(54,324) ======== ======== ======== ======== ======== Basic and diluted loss per share of common equity(3)...................... $ (1.66) $ (4.00) $ (6.29) $ (2.64) $ (3.96)
6 10
HISTORICAL ------------------------- AS ADJUSTED AUGUST 31, FEBRUARY 28, FEBRUARY 28, 1998 1999 1999(4) ---------- ------------ ------------ (DOLLARS IN THOUSANDS) BALANCE SHEET DATA Cash and cash equivalents.................................. $123,774 $ 60,032 $152,282 Restricted investments..................................... 63,207 38,645 38,645 Property, plant and equipment, net......................... 268,044 308,289 308,289 Intangible assets.......................................... 160,370 159,055 159,055 Total assets............................................... 627,170 581,459 673,709 Notes payable and long-term obligations.................... 429,278 428,853 428,853 Total liabilities.......................................... 466,394 465,297 465,297 Stockholders' equity....................................... 160,776 116,162 208,412
SIX MONTHS YEAR ENDED ENDED AUGUST 31, FEBRUARY 28, -------------------------------- -------------------- 1996 1997 1998 1998 1999 -------- --------- --------- --------- -------- (DOLLARS IN THOUSANDS) OTHER FINANCIAL DATA Net cash flows used in operating activities......................... $ (453) $ (15,935) $ (26,268) $ (15,215) $(31,441) Net cash flows used in investing activities......................... (72,037) (143,125) (121,532) (60,293) (31,186) Net cash flows provided by (used in) financing activities............... 72,131 244,688 184,269 117,745 (1,115) Capital expenditures(5).............. 62,121 71,505 85,643 37,900 56,928 EBITDA(6)............................ (3,900) (8,291) 291 (1,383) (4,059)
AS OF ---------------------------------------------- AUGUST 31, ------------------------------ FEBRUARY 28, 1996 1997 1998 1999 -------- -------- -------- ------------ OPERATING DATA CABLE TELEVISION Units under contract(7).......................... 241,496 295,149 432,955 435,738 Units passed(8).................................. 225,433 254,032 399,210 401,600 Basic subscribers................................ 114,163 132,556 216,249 218,023 Basic penetration(9)............................. 50.6% 52.2% 54.2% 54.3% Premium units(10)................................ 60,641 95,150 182,788 176,411 Pay-to-basic ratio(10)(11)....................... 53.1% 71.8% 84.5% 80.9% Average monthly revenue per basic subscriber(12)................................. $22.70 $24.94 $27.95 $29.20 TELECOMMUNICATIONS Units under contract(7).......................... 20,945 39,831 94,338 107,109 Units passed(8).................................. 12,364 16,572 35,671 47,462 Lines(13)........................................ 4,126 6,185 9,244 13,229 Line penetration(14)............................. 33.4% 37.3% 25.9% 27.9% Average monthly revenue per line(15)............. $42.10 $47.23 $46.62 $44.50
- --------------- (1) Interest expense, net is reflected net of interest income and interest capitalized in property, plant and equipment. Includes interest expense on the Company's 15% Convertible Notes (the "GVL Notes") of approximately $5,342,000, $15,204,000 and $9,640,000 for the years ended August 31, 1996, 1997 and 1998, respectively and $9,640,000 for the six months ended February 28, 1998. Effective March 1, 1998, the GVL Notes were exchanged for approximately 6,962 shares of Series A Preferred. (2) The Company reported an extraordinary loss on debt extinguishment of $6,644,000 for the year ended August 31, 1998 due to the repayment and termination of a senior secured credit facility (the "Senior Credit Facility"). (3) Loss per share has been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" and the Split. Basic and diluted loss per share are computed in the same manner since common stock equivalents are antidilutive. 7 11 (4) Gives effect to the Offering and the assumed conversion of all outstanding classes of common stock and all outstanding series of preferred stock into Common Stock immediately prior to the consummation of the Offering. Such conversions will have no impact on stockholders' equity. (5) Capital expenditures include expenditures on property, plant and equipment together with intangible assets excluding expenditures for business acquisitions. (6) EBITDA represents earnings (loss) before interest expense (net of interest income and amounts capitalized), income tax benefits, depreciation and amortization. EBITDA is not intended to represent cash flow from operations or an alternative to net loss, each as defined by generally accepted accounting principles. In addition, the measure of EBITDA presented herein may not be comparable to other similarly titled measures by other companies. The Company believes that EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in the cable television and telecommunications industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in its industry. (7) Units under contract represents the number of units currently passed and additional units with respect to which the Company has entered into Rights of Entry for the provision of cable television and telecommunications services, respectively, but which the Company has not yet passed and which the Company expects to pass within the next five years. At this time the majority of all units under contract for telecommunications are also under contract for cable television. (8) Units passed represents the number of units with respect to which the Company has connected its cable television and telecommunications systems, respectively. The difference between units under contract and units passed represents units for which Rights of Entry have been entered into, but which are not yet connected for cable television and telecommunications services, respectively. (9) Basic penetration is calculated by dividing the total number of basic subscribers at such date by the total number of units passed. (10) Beginning with the year ended August 31, 1997, to be consistent with most other cable television providers, the Company revised the method of reporting premium penetration to include all premium units in the calculation. Historically the calculation excluded premium channels that were provided to customers as part of an expanded basic line up or other special arrangements. Prior years have not been restated. For comparative purposes, the premium units and the pay-to-basic ratio as of August 31, 1997 and 1998 and February 28, 1999 presented under the previous method of reporting are 84,875, 136,863 and 128,137, respectively, and 64.0%, 63.3% and 58.8%, respectively. (11) Pay-to-basic ratio is calculated by dividing the total number of premium units by the total number of basic subscribers. (12) Represents average monthly revenue divided by the average number of basic subscribers for the fiscal periods ended as of the date shown. (13) Lines represent the number of telephone lines currently being provided to telecommunications subscribers. A telecommunications subscriber can subscribe for more than one line. The Company has revised its method of reporting lines to reflect only one line in service where multiple customers share a single line. The Company has restated the number of lines previously reported to reflect this change. (14) Line penetration is calculated by dividing the total number of telecommunications lines at such date by the total number of units passed. (15) Represents average monthly revenue divided by the average number of lines for the fiscal periods ended as of the date shown. 8 12 RISK FACTORS Any investment in the Common Stock offered hereby involves a high degree of risk. Prospective investors should consider carefully the following factors in addition to other information set forth elsewhere in this Prospectus. LIMITED OPERATIONS OF CERTAIN SERVICES; HISTORY OF NET LOSSES AND NEGATIVE CASH FLOW OpTel's business commenced in 1993. Historically, substantially all of OpTel's revenues were derived from providing cable television services. The Company's telephone and Internet access services only recently have been initiated or their availability only recently expanded in new market areas. OpTel expects to increase substantially the size of these operations in the near future. There is, therefore, limited historical financial information about OpTel upon which to base an evaluation of OpTel's performance in the markets and for the services that will be its principal focus in the future. Furthermore, as a result of its rapid growth and implementation of various new business strategies, including the expansion of its telecommunications business, the Company has incurred in the past, and may incur the future, certain unanticipated costs and capital expenses. Given OpTel's limited experience operating telecommunications networks, there can be no assurance that it will be able to compete successfully in the telecommunications industry. The development of OpTel's business and the expansion of its networks will require substantial capital, operational and administrative expenditures, a significant portion of which may be incurred before the realization of revenues. These expenditures will result in negative cash flow until an adequate customer base is established and revenues are realized. Although its revenues have increased in each of the last three years, OpTel has incurred substantial up-front operating expenses for marketing, customer operations, administration and maintenance of facilities, general and administrative expenses and depreciation and amortization in order to solicit and service customers in advance of generating significant revenues. As a result of these factors, the Company has generated operating losses of $22.1 million, $28.2 million, $22.8 million and $12.6 million for the six months ended February 28, 1999, fiscal 1998, fiscal 1997 and fiscal 1996, respectively, as its cable television and telecommunications customer base has grown. While the Company reported positive EBITDA (as defined in the Glossary) of $0.3 million for fiscal 1998, the Company reported negative EBITDA of $4.1 million, $8.3 million and $3.9 million for the six months ended February 28, 1999, fiscal 1997 and fiscal 1996, respectively. There can be no assurance that OpTel will achieve profitability or positive EBITDA in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT The Company's indebtedness is substantial in relation to its stockholders' equity and cash flow. As of February 28, 1999, assuming the Offering had been completed on such date, the Company would have had total consolidated indebtedness of approximately $428.9 million and stockholders' equity of approximately $208.4 million. The Company's earnings were insufficient to cover its debt service by approximately $77.2 million for fiscal 1998 and $45.7 million for the six months ended February 28, 1999. See "Capitalization" and "Selected Historical Consolidated Financial and Operating Data." The indentures governing the Company's two series of outstanding notes (the "Indentures") impose certain restrictions on the operations and activities of the Company. The Company's ability to make scheduled payments of principal of, or to pay interest on, or to refinance, its indebtedness depends upon the success of its business strategies and its future performance, which to a significant extent are subject to general economic, financial, competitive, regulatory and other factors beyond its control. There can be no assurance that the Company will be able to generate the substantial increases in cash flow from operations that will be necessary to service its indebtedness. In the absence of such operating results, the Company could face substantial liquidity problems and might be required to raise additional financing through the issuance of debt or equity securities. Furthermore, the Company expects that it may need to refinance the principal amount of its outstanding notes at their respective maturities. There can be no assurance that the Company will be successful in raising such financing when required or that the terms of any such financing will be attractive. 9 13 See "-- Significant Capital Requirements and Need for Additional Financing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The degree to which OpTel is leveraged could have adverse consequences to holders of its Common Stock including the following: (i) a substantial portion of OpTel's cash flow from operations will be dedicated to the payment of the principal of and interest on its indebtedness thereby reducing funds available for other purposes, (ii) OpTel's vulnerability to changes in general economic conditions or increases in prevailing interest rates could be increased, (iii) OpTel's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes could be impaired and (iv) OpTel may be more leveraged than certain of its competitors, which may be a competitive disadvantage. SIGNIFICANT CAPITAL REQUIREMENTS AND NEED FOR ADDITIONAL FINANCING The Company will require substantial capital on a continuing basis to finance cable television, telecommunications and Internet network expansion related to subscriber and market growth, to upgrade existing facilities to desired technical and signal quality standards and to finance any acquisitions of other operators. The Company believes, based on its current business plan, that its cash on hand, together with the proceeds of the Offering, will provide the Company with sufficient financial resources to fund its capital requirements through the third quarter of fiscal 2000. However, the Company's future capital requirements will depend upon a number of factors, including the Company's success in obtaining new Rights of Entry, the extent of its telecommunications roll out, the size and timing of any acquisitions, marketing expenses, staffing levels and customer growth, as well as other factors that are not within the Company's control, such as competitive conditions, changes in technology, government regulation and capital costs. The Company expects to fund additional capital requirements through internally generated funds and public or private debt and/or equity financing. There can be no assurance, however, that OpTel will be successful in raising sufficient debt or equity when required or on terms that it will consider acceptable. Moreover, the terms of OpTel's outstanding indebtedness impose certain restrictions upon OpTel's ability to incur additional indebtedness or issue additional stock. Under the terms of the more restrictive of the Company's Indentures, the Company can only incur approximately $50 million of additional indebtedness. The aggregate amount of indebtedness which can be incurred by the Company under its more restrictive Indenture is directly related to the number of cable television subscribers served by the Company. As a result, growth of the Company's telecommunications business, where the Company has focused significant management attention and resources, will not increase the Company's ability to incur indebtedness under the terms of the more restrictive Indenture. The Company may need to incur indebtedness in excess of its current capacity. See "Description of Certain Indebtedness." In addition, GVL has the power to prevent the Company from obtaining additional debt or equity financing. See "-- Control by GVL." Failure to generate or raise sufficient funds may require OpTel to delay or abandon some of its future expansion or expenditures, which would have a material adverse effect on its growth and its ability to compete in the cable television, telecommunications and Internet access industries. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." RISKS ASSOCIATED WITH ACQUISITIONS OpTel expects to continue to make acquisitions of strategically important businesses when sufficiently attractive opportunities arise. Acquisitions may divert the resources and management time of OpTel and will require integration of the acquired operations with OpTel's existing networks and services. There can be no assurance that any acquisition of assets, operations or businesses will be successfully integrated into OpTel's operations. The Company typically has acquired businesses that were privately held by entrepreneurs, many of which businesses were without the same regulatory compliance practices and internal accounting controls and procedures as those of the Company. Accordingly, the Company frequently is required to take remedial actions, which may include the expenditure of funds and take extensive time to implement. In general, the Company factors the costs associated with these matters into the terms of its acquisitions, including, where practicable, through indemnification rights. However, there can be no assurance that the Company's results of operations will not be materially adversely affected by these or other matters arising from past or future 10 14 acquisitions. Consistent with its consolidation strategy, OpTel is currently evaluating and often engages in discussions regarding various acquisition opportunities. These acquisitions may be funded by cash on hand and/or through the issuance of OpTel's debt and/or equity securities. It is possible that one or more of such possible acquisitions, if completed, could adversely affect OpTel's cash flow, or increase OpTel's debt, or that such an acquisition could be followed by a decline in the market value of OpTel's securities. RISK ASSOCIATED WITH TELECOMMUNICATIONS STRATEGY The Company is currently introducing central office switched telecommunications services to MDUs served by its existing networks. The Company believes that a successful introduction of these telecommunications services is important to its long-term growth. Its success will be dependent upon, among other things, the Company's ability to assess markets, design and install telecommunications networks, including switches, obtain cooperation of the ILECs and obtain any required government authorizations and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions, and the willingness of MDU residents to accept a new provider of telecommunications services. There can be no assurance that the Company will be able to successfully introduce central office switched telecommunications services in any of its markets in a timely manner in accordance with its strategic objectives and failure to do so could have a material adverse effect on the Company. Specific risks associated with the Company's telecommunications strategy include: Switch Installation and Network Enhancement; Lack of Redundant Switches. An essential element of the Company's telecommunications strategy is the provision of switched local exchange service. The Company has recently commenced operating central office switches in its Houston and Dallas-Fort Worth markets and intends to implement central office switches in substantially all of its major markets by the end of calendar year 1999. In connection with the implementation of central office switches in additional markets, the Company will be reconfiguring its microwave networks in such markets to carry bi-directional voice traffic. The Company intends to use certain components of its existing infrastructure to deliver bi-directional transmission utilizing microwave frequencies, principally in the 23GHz band. While the Company believes this frequency and other required frequencies are available for license on the paths that will be required, the Company has not yet commenced frequency coordination in each of its markets and there can be no assurance regarding path or frequency availability. In addition, there can be no assurance that the installation of the required switches and the reconfiguration of the network will be completed on schedule. The failure of the Company to successfully reconfigure its microwave networks and to have its switches operational on a timely basis could have a material adverse effect upon the Company's ability to expand its telecommunications services. In addition, the Company intends initially to install only one switch in each market. As a result, a switch failure which disables both the primary and redundant capabilities of a Company switch may have a material adverse effect on the Company's ability to provide telecommunications services in the affected market which may continue for an indefinite period. The Company may seek to enter into contracts with other telecommunications service providers to provide backup capabilities in the event of a switch failure. However, there can be no assurance that the Company will be able to successfully negotiate such agreements or that such agreements will be available on favorable terms. See "Business -- Network Architecture." Reliance On Third Parties. As part of its telecommunications configuration, the Company may transport telephone traffic across municipal boundaries or local access and transport areas ("LATAs") which may require the Company to have multiple interconnection agreements. While the Company has entered into interconnection agreements with ILECs serving portions of its markets, the Company is currently negotiating agreements for the interconnection of its networks with the network of other ILECs in certain areas. There can be no assurance that the Company will be able to successfully negotiate interconnection agreements with the ILEC or any other local exchange carrier ("LEC") in each market where the Company plans to offer central office switched telecommunications services or that it will be able to do so on favorable terms. The failure to negotiate the necessary interconnection agreements could have a material adverse effect upon the Company's ability to expand its telecommunication services. See "-- Uncertainties Related to Subscriber Access." Currently, the Company provides local telephone service as an STS provider in most of its markets. STS providers generally use an ILEC's facilities (although in many states CLECs can now supply STS 11 15 operators with facilities) to provide local telephone service as a reseller, subject to state regulation. If ILECs were no longer required to provide tariffed services to STS providers or if STS-type service classifications were to be eliminated, the Company's telephone operations could be materially adversely affected. The Company relies on the services of a third-party vendor to provide certain carrier-to-carrier billing services. The failure by such vendor to accurately bill interexchange carriers' ("IXCs") access charges could have a material adverse effect on the Company. Uncertainties Related to Collocation Strategy. In order to accelerate the Company's time to market and increase the Company's addressable market, the Company intends to collocate facilities in certain ILEC end offices and to lease from the ILEC unbundled transport network from the office to the customer. Collocation space is obtained on a first come/first served basis. As a result, there can be no assurance the Company will be able to obtain collocation sites in the end offices it desires. Where the Company relies on leased unbundled network elements, the Company and its customer are dependent on the ILEC to assure uninterrupted service. The ILECs have limited experience in providing unbundled network elements, and there can be no assurance the ILECs will provide and maintain these elements in a prompt and efficient manner. The failure to obtain collocation space or unbundled network elements on a timely basis or of the ILEC to maintain such unbundled network elements in a prompt and efficient manner could have a material adverse effect on the Company's ability to expand its telecommunications services. Pursuing a collocation strategy requires the Company to invest in network infrastructure in advance of signing up customers. The Company's marketing strategy to date has relied heavily on its ability, derived from its Rights of Entry, to maintain a presence at the MDU, to market to the residents of an MDU through the leasing agent and to offer a bundled service offering. As part of the Company's collocation strategy, the Company will be marketing its services directly to residents of MDUs where the Company does not have a Right of Entry. There can be no assurance that the Company will be able to successfully market its services directly to MDU residents and, as a result, generate a return on its invested capital. Uncertainties Related to Reciprocal Compensation. The Communications Act of 1934, as amended, (the "Communications Act") requires LECs to provide reciprocal compensation to other carriers for local traffic terminated on such other carrier's network. Notwithstanding this requirement, a number of ILECs have taken the position that traffic terminated to Internet service providers ("ISPs") is not local traffic. Competitive carriers generally have been successful in challenging this position before the public utility commissions ("PUCs") in several states. However, the FCC has determined that ISP-bound calls constitute interstate traffic for jurisdictional purposes and it is considering the adoption of a federal rule regarding the appropriate inter-carrier compensation for such traffic. There can be no assurance that traffic terminated to an ISP will not ultimately be held to be exempt from the reciprocal compensation requirements. If that were the case, the Company may not receive compensation for traffic originated on another carriers' network and terminated by the Company to an ISP. Uncertainties Related to Subscriber Access. ILECs often refuse to reconfigure their networks so that CLECs may access on-property distribution facilities at a single point on or near an MDU property. Accordingly, the Company has experienced and can be expected to continue to experience difficulties bringing its network-based telephone services to subscribers at some of the MDUs that it seeks to serve. Where the Company is not able to access on-property ILEC distribution facilities, it must either install duplicative distribution facilities or lease unbundled loops from an ILEC in order to reach individual subscribers within an MDU. Either of these alternatives may raise the cost of service or delay entry. While the Company is seeking regulatory changes to address access to on-property MDU telephone wiring, there can be no assurance that this barrier to entry will be reduced or diminished, or that it will not have an adverse effect on the Company's efforts to expand its competitive telephone services. See "Business -- Regulation -- Telecommunications Regulation -- Competitive Local Exchange Carrier Regulation." Uncertainties Related to Access Charges. The Company charges IXCs "access charges" for the right to terminate and originate traffic on the Company's local network. The Company depends in substantial part upon these access charges to defray the costs of its network build-out. At least one IXC has questioned the reasonableness of the Company's access rate and has refused to pay any access rate greater than that charged by the ILEC in the same local calling area. There can be no assurance that the Company's access rates will 12 16 not be found to be unreasonable, or that regulatory or market forces will not compel the Company to lower its access rates, which could, in either case, materially adversely affect the profitability or the speed of deployment of the Company's local telephone network. Potential 911, E-911 and Intrusion Alarm Liability. The Company delivers local exchange service, including access to emergency ("911") services, to MDU residents. Mechanical or electrical defects, power failures or catastrophic events may temporarily disrupt operation of the Company's switches, preventing, delaying or impeding access to 911 service. In many jurisdictions, telecommunications carriers are required to implement services which permit a 911 operator to immediately identify the location of the caller ("E-911 service"). To provide E-911 service at an MDU, the telecommunications service provider or its agent must maintain a database with certain information relating to the MDU residents. The failure of the Company or its agent to maintain such database in a timely and accurate manner could prevent, delay or impede the operation of E-911 service. In addition, because of the configuration of the Company's telecommunications networks, the Company's telecommunications traffic may cross more than one E-911 jurisdiction. This will require the Company to coordinate among these various jurisdictions. There can be no assurance that the Company will not be liable for damage to property or personal injuries that may directly or indirectly result from any failure of 911 or E-911 service to operate properly. Moreover, the Company may provide 911, E-911 or operator services by contracting such services from other carriers in its markets. The providers of these services will generally require the Company to indemnify them for any losses or liability incurred in connection with such services except for those caused exclusively by the gross negligence or malfeasance of the carrier. In addition, the Company currently provides certain intrusion alarm services through subcontractors. There can be no assurance that the Company will not be liable for any property damage or personal injuries that may result from intrusion alarm malfunctions or from a subcontractor's failure to appropriately monitor the intrusion alarm systems under contract. RISKS ASSOCIATED WITH RIGHTS OF ENTRY The Company's business depends upon its ability to enter into and exploit favorable new long-term Rights of Entry for demographically attractive MDUs and to exploit and renew its existing Rights of Entry. Its success in doing so may be affected by a number of factors, including (i) the extent of competition in the provision of multichannel television and telecommunications services, (ii) its ability to identify suitable MDUs and contract with their owners, (iii) the continuing demographic attractiveness of the markets in which the Company has chosen to focus its business, (iv) occupancy rates in the MDUs to which it provides services, (v) its ability to maintain superior levels of customer service, (vi) the absence of material adverse regulatory developments and (vii) the enforceability of the material terms of its Rights of Entry, including exclusivity provisions. Cancellation or non-renewal of certain of such arrangements could materially adversely affect the Company's business in any such affected area. In addition, the failure by the Company to enter into and maintain any such arrangements for a particular network which is already under development may affect the Company's ability to acquire or develop that network. See "Business -- Competition" and "-- Regulation." The Company's Rights of Entry generally provide that the Company will have the exclusive right to provide residents within the applicable MDU with multichannel television services and, where Rights of Entry extend to telecommunications services, an undertaking by the MDU owner to promote OpTel as the preferred provider of telecommunications services within the MDU. While the Company believes that the exclusivity provisions in its cable television Rights of Entry are now generally enforceable under applicable law, current trends at the state and federal level suggest that the future enforceability of these provisions may be uncertain. Certain states in which the Company operates, including Illinois and Florida (for condominiums only), and certain cities and municipalities in states in which the Company operates, have adopted "mandatory access" laws that provide that no resident of an MDU may be denied access to programming provided by incumbent franchise cable systems, regardless of any rights granted by an MDU owner to another multichannel television operator. Texas has adopted a "mandatory access" law for state certified telecommunications service providers. In addition, Virginia, where the Company serves two MDUs, prohibits private cable television operators from entering into revenue sharing or up front incentive payment arrangements with MDU owners. 13 17 At least one state outside of the Company's markets has imposed restrictions on the use of marketing agreements between local exchange carriers and MDU owners, and legislation is pending in California, which already has adopted regulations to this effect, which would prohibit exclusive access arrangements for local exchange services and potentially limit other types of marketing agreements between carriers and MDU owners. Further, the Federal Communications Commission (the "FCC") has initiated a notice of proposed rulemaking seeking comment on whether the FCC should adopt regulations restricting exclusive contracts for video services. There can be no assurance that laws or regulations that either limit the Company's ability to enter into exclusive Rights of Entry or restrict the Company's ability to enter into marketing agreements with MDU owners will not be adopted at the federal or state level, or that, if adopted, such laws or regulations will not have a material adverse effect on the Company's business. Broad mandatory access would likely increase the Company's capital costs associated with new Rights of Entry and result in competitive services being offered at MDUs where the Company presently has exclusive Rights of Entry. See "-- Regulation." In a number of instances individual Rights of Entry are subordinate by their terms to indebtedness secured by the MDU, with the effect that enforcement of the security interest or default under such indebtedness could result in termination of such Right of Entry. Bankruptcy of an MDU owner could also result in rejection of a Right of Entry as an "executory contract." Moreover, the terms of a number of the Company's Rights of Entry require it to remain competitive with other competitors in that market in general or competitive in terms of price of offering, technology, number of programming channels and levels of service. To meet these requirements, the Company could be required to upgrade its networks and equipment, which would require capital expenditures. The failure to remain competitive under any of these standards in a market could result in a loss or cancellation of the related Right of Entry. Such losses or cancellations could, in the aggregate, have a material adverse effect on the Company's business. See "Business -- Strategic Relationships with MDU Owners." UNCERTAINTIES RELATED TO THE AVAILABILITY OF RADIO SPECTRUM The Company relies upon use of the radio spectrum, principally 18 GHz microwave radio, in its network architecture. The 18 GHz point-to-point microwave paths that the Company uses, and the other microwave frequencies that the Company uses or intends to use, are licensed by the FCC. The FCC has issued a Notice of Proposed Rulemaking seeking comment on a proposal to make terrestrial microwave users, like the Company, secondary to satellite downlinks in portions of the 18 GHz band that currently are used by the Company. Under the proposal, any 18GHz microwave paths licensed to the Company pursuant to applications filed with the FCC after the date the new rules are released to the public would not be permitted to cause harmful interference to satellite downlinks in the 18GHz band. If adopted, the proposal would severely limit the Company's use of the 18 GHz microwave band and potentially strand some of the Company's investment in network facilities. If the proposal is adopted, the Company would seek authority to use other portions of the radio spectrum, but such use will likely require other FCC rule changes, as to which there can be no assurance, and there can be no assurance that migration by the Company to other bands is technically feasible or that such migration would not negatively affect the cost of the Company's networks. In addition, the bands of spectrum that the Company uses or intends to use, including but not limited to the 18 GHz band, are shared with other users. There can be no assurance that the FCC will not change the allocation for, or the rules applicable to, any frequency band that the Company uses or seeks to use in such a way as to limit the Company's access to or use of the band. See "Business -- Regulation -- Microwave and Private Cable Regulation." DISTANCE AND WEATHER LIMITATIONS; LINE OF SIGHT; AVAILABILITY OF TRANSMISSION SITES Point-to-point microwave transmission requires a direct line of sight between two dishes comprising a link and is subject to distance and rain attenuation. The Company expects that its average coverage radius of Network Hubs will be approximately five miles, depending on local conditions, and it is expected that the Company's Network Hubs will utilize power control to increase signal strength and mitigate the effects of rain attenuation. In areas of heavy rainfall, transmission links are engineered for shorter distances and greater power to maintain transmission quality. The reduction of path link distances to maintain transmission quality 14 18 may increase the cost of service coverage. While these increased costs may not be significant in all cases, such costs may render point-to-point microwave transmissions uneconomical in certain circumstances. Due to line of sight limitations, the Company currently plans to install its dishes and antennas on the rooftops of buildings and on other tall structures. The Company expects generally to be able to construct intermediate links or use other means to resolve line of sight and distance issues. However, these limitations may render point-to-point links uneconomical in certain locations. The Company's microwave network expansion plans require the Company to lease or otherwise obtain permission to install equipment at rooftop and tower transmission sites in substantially all of its markets. The availability of these sites is subject to market conditions and may be subject to zoning and other municipal restrictions. The Company believes that as additional wireless video and telecommunications providers emerge, competition for such transmission sites will continue to increase. There can be no assurance that the necessary sites will be available or that the terms upon which access to such sites may be obtained will be acceptable. DEPENDENCE ON STRATEGIC RELATIONSHIPS OpTel has entered into a number of important strategic relationships which are necessary for OpTel to provide certain of its service offerings. These include OpTel's alliance with I(3)S, Inc. ("I(3)S"), an ISP, to provide high-speed Internet access services and OpTel's agreement with EchoStar which permits OpTel to provide an additional digital tier of DBS programming. The failure of these parties to deliver the services for which OpTel has contracted could adversely affect the Company's ability to deliver these services. RAPID TECHNOLOGICAL CHANGES AND UNCERTAIN MARKET DEVELOPMENT The multichannel television and telecommunications industries, including Internet services, are subject to rapid and significant changes in technology and frequent service innovations. The effect on the business of the Company of future technological changes, such as changes relating to emerging transmission technologies, cannot be predicted. The Company believes that its future success will depend on its ability, as to which no assurance can be given, to enhance its existing systems or implement new systems, to respond to new technologies and to develop and introduce in a timely fashion new products and services on a competitive basis. The markets in which the Company competes are constantly evolving. Many telecommunications and cable television operators are attempting to integrate network components. For example, video distribution equipment is being considered for voice and data telecommunications and vice versa. The convergence of these traditional services towards integrated multimedia services presents both opportunity and material risk to companies such as OpTel. The Company will face enhanced competition from competitors with greater financial, technical, marketing and other resources. Many of these competitors may offer packages of services that are more extensive than the services which the Company plans to offer. There can be no assurance that the Company will be able to predict accurately the direction of this evolving market or be able to respond effectively to the highly competitive environment. See "-- Competition" and "Business -- Competition." INFORMATION SYSTEMS AND AUTOMATION The Company has recently implemented a new customer management information system and has migrated its telephone subscribers to the new system. The Company intends to migrate its cable television subscribers to the new system during fiscal 1999. The Company expects the new customer management information system to be an important factor in its operations. If the conversion is not completed in a timely manner, or is not completed at all or, if after conversion, the new system fails or is unable to perform as expected, it could have a material adverse effect on the Company. Furthermore, as the Company's business expands, problems may be encountered with higher processing volumes or with additional automation features, in which case the Company might experience system breakdowns, delays and additional unbudgeted expense to remedy the defect or to replace the defective system with an alternative system. The Company's Year 2000 compliance depends in part on the successful conversion to the new system and on the new system 15 19 being Year 2000 compliant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." MANAGEMENT OF GROWTH AND DEPENDENCE ON QUALIFIED PERSONNEL The Company is highly dependent upon the efforts of its senior management, the loss of any of whom could impede the achievement of service delivery and marketing objectives and could have a material adverse effect on the Company. The Company has undertaken a rapid expansion of its networks and services. This growth has increased the operating complexity of the Company as well as the level of responsibility for both existing and new management personnel. The Company's ability to manage its expansion effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base and attract and retain highly skilled and qualified personnel. Any failure by the Company to effectively manage its growth and attract and retain qualified personnel could have a material adverse effect on its business. COMPETITION Substantially all markets for voice, video and Internet services are highly competitive and the Company expects that competition will intensify. See "Business -- Competition." In each of its markets, the Company faces significant competition from larger companies with greater access to capital, technology and other competitive resources. The Company's switched local exchange services compete with ILECs, STS providers, CLECs and competitive access providers ("CAPs") and will compete with long distance telephone companies, franchise cable television operators and Internet protocol telephone services as they begin to enter the local telephone business. The Company's long distance service competes with established IXCs and resellers and with long distance Internet protocol telephone services. In addition, recent telecommunications offerings, including PCS, and future offerings may increase competition in the telecommunications industry. The Company's private cable television services compete with incumbent franchise cable television operators as well as wireless cable television operators, other private cable television operators, DBS operators and stand-alone satellite service providers. Recent and future legislative, regulatory and technological developments likely will result in additional competition, as telecommunications companies enter the cable television market, franchise cable television operators and IXCs begin to enter the local telephone market and ILECs enter the interexchange market. See "Business -- Regulation." Similarly, mergers, joint ventures and alliances among franchise, wireless or private cable television operators, regional Bell operating companies ("RBOCs") and IXCs may result in providers capable of offering bundled cable television and telecommunications services in direct competition with the Company. For example, the recent merger of AT&T and Tele- Communications, Inc. ("TCI") has resulted in a single large, well financed integrated communications provider with which the Company may compete. The Company competes with multichannel television operators and telecommunications service providers to obtain Rights of Entry and to enroll subscribers. In most markets serviced by the Company, franchise cable television operators now offer revenue sharing and access fee arrangements to MDU owners in exchange for exclusive rights of entry agreements. There can be no assurance that these payments will not increase in the future as competition increases for access to the higher quality MDUs. Another basis of competition is the breadth of programming and range of services offered. Although the Company as a matter of course investigates new sources of programming and technologies that may increase its range of services, other larger and more diversified competitors may attract the targeted MDUs based on their increased menu of services. There can be no assurance that the Company will be able to compete successfully with existing competitors or new entrants in the market for such services. See "Business -- Competition." Competition also may be enhanced by technological developments that allow competitors of the Company to bypass property owners altogether and market their services directly to the residents of MDUs. Although the Company's Rights of Entry prohibit residents from installing receiving equipment on the exterior of the building, these provisions are not always enforced and do not prohibit residents from utilizing other services and technologies. For example, the Rights of Entry do not prevent a resident from using cellular telephone service offered by another provider. While the Company believes that the exclusivity provisions of 16 20 its Rights of Entry provide it with competitive advantages, such advantages may be significantly diminished by technological, regulatory and other developments beyond the control of the Company. Such developments may impact the Company's strategies and may require it to expend funds beyond the levels currently contemplated. See "Business -- Regulation -- Regulation of Cable Television -- Subscriber Access." As an emerging CLEC in each of its major markets, OpTel faces significant competition for the local exchange services it offers from ILECs which currently dominate their local telecommunications markets. ILECs have longstanding relationships with their customers, which relationships may create competitive barriers. Furthermore, ILECs may have the potential to subsidize competitive service from monopoly service revenues. OpTel believes that various legislative initiatives, including the Telecom Act have removed most of the remaining legislative barriers to local exchange competition. Nevertheless, in light of the passage of the Telecom Act, regulators also are likely to provide ILECs with increased pricing flexibility as competition increases. If ILECs are permitted to lower their rates substantially or engage in excessive volume or term discount pricing practices for their customers, the net income or cash flow of integrated communications carriers and CLECs, including OpTel, could be materially adversely affected. DEPENDENCE UPON PROGRAM MATERIAL The Company has fixed-term contracts with various program suppliers. The average term of such contracts is approximately five years and such contracts are typically renewed upon expiration. In recent years the cable industry has experienced a rapid escalation in the cost of programming. This escalation may continue and the Company may not be able to pass the full programming cost increases on to its subscribers. In addition, if the contracts were terminated or not renewed, the Company would be required to seek program material from other sources, which could place the Company at a competitive disadvantage. Although federal law and FCC regulations require that vertically integrated franchise cable television system operators and cable television programmers sell programming to other video distributors, such as the Company, on fair and non-discriminatory terms, the Company has in the past been denied certain popular sports programming by certain providers who claim that the programming is not required to be licensed to the Company. These denials have adversely impacted, and any such denials in the future could adversely impact, the Company's activities in the affected markets. There can be no assurance that the equal program access laws and regulations will not be invalidated, changed or repealed, which could limit the Company's ability to obtain programming or raise the cost of programming. In addition, one aspect of the equal program access laws, the prohibition on the sale of exclusive distribution rights by certain programmers, is scheduled to expire on October 5, 2002, unless the FCC finds, during a proceeding to be conducted in 2001, that the prohibition continues to be necessary to promote competition in the multichannel television market. See "Business -- Regulation." REGULATION The cable television and telecommunications industries are subject to extensive regulation at the federal, state and local levels. Many aspects of regulation at the federal, state and local levels currently are subject to judicial review or are the subject of administrative or legislative proposals to modify, repeal, or adopt new laws and administrative regulations and policies, the results of which the Company is unable to predict. The United States Congress and the FCC have in the past, and may in the future, adopt new laws, regulations and policies regarding a wide variety of matters, including rulemakings arising as a result of the Telecom Act, that could, directly or indirectly, affect the operation of the Company's business. The business prospects of the Company could be materially adversely affected (i) by the application of current FCC rules or policies in a manner leading to the denial of applications by the Company for FCC licenses or a change in the regulatory status of the Company's private cable television and telecommunications operations, (ii) by the adoption of new laws, policies or regulations, (iii) by changes in existing laws, policies or regulations, including changes to their interpretations or applications, that modify the present regulatory environment or (iv) by the failure of certain rules or policies to change in the manner anticipated by the Company. See "Business -- Regulation." The Company believes that its exclusive Rights of Entry are now generally enforceable under applicable law; however, current trends at the state and federal level suggest that the future enforceability of these 17 21 provisions may be uncertain. The FCC is seeking comment on whether such exclusive contracts should be limited to a maximum period of seven years. Although it is open to question whether the FCC has statutory and constitutional authority to compel mandatory access, there can be no assurance that it will not attempt to do so. Any such action would tend to undermine the exclusivity provisions of the Company's Rights of Entry. See "-- Risks Associated with Rights of Entry." The FCC also has issued a rule preempting certain state, local and private restrictions on over-the-air reception antennas. There can be no assurance that future state or federal laws or regulations will not restrict the ability of the Company to offer revenue sharing or access payments, limit MDU owners ability to receive revenue sharing or prohibit MDU owners from entering into exclusive access agreements, any of which could have a material adverse effect on the Company's business. See "Business -- Sales and Marketing," "-- Strategic Relationships with MDU Owners" and "-- Regulation." The Company uses a substantial number of point-to-point microwave paths which are licensed by the FCC. There can be no assurance that the Company will be able to acquire licenses for the microwave paths that it seeks in the future, or that changes in the FCC's regulations will not limit the Company's ability to use desirable frequencies for the distribution of its services, or otherwise impair the Company's microwave licenses. See "-- Uncertainties Related to the Availability of Radio Spectrum." If the Company cannot license the necessary paths on the desired frequencies, it may be necessary to utilize other frequencies for signal transport or other means of signal transport. There can be no assurance that the cost of such alternate means of transport will not exceed those associated with the desired microwave frequency. Further, even if the FCC grants the desired licenses, the Company may not have the financial resources to construct the necessary facilities within the time permitted by the license. In addition, state and local zoning and land use laws may impede the efficient deployment of the Company's microwave antennas. Any of the foregoing developments could have a material adverse effect on the Company's business. See "Business -- Network Architecture." As an emerging CLEC, OpTel is subject to varying degrees of federal, state and local regulation. OpTel is not currently subject to price cap or rate of return regulation at the state or federal level. OpTel is, however, generally subject to certification or registration and tariff or price list filing requirements for intrastate services by state regulators. Although passage of the Telecom Act should result in increased opportunities for companies that are competing with the ILECs, no assurance can be given that changes in current or future regulations adopted by the FCC or state regulators or other legislative or judicial initiatives relating to the telecommunications industry would not have a material adverse effect on OpTel. Moreover, while the Telecom Act reduces regulation to which non-dominant LECs are subject, it also reduces the level of regulation that applies to the ILECs and increases their ability to respond quickly to competition from OpTel and others. In addition, the Telecom Act will permit RBOCs, for the first time, to offer long distance service in the regions in which they provide local exchange service upon demonstrating to the FCC and state regulatory agencies that they have complied with the FCC's interconnection regulations designed to foster local exchange competition. While the FCC has not yet approved an RBOC application to provide in-region long distance service it may do so in the future. In addition, the FCC has put in place access charge reform rules which may over time result in a net decrease in the access charges paid by IXCs to LECs for originating or terminating long distance traffic. To the extent ILECs are afforded increased pricing flexibility or access charges are reduced, the ability of the Company to compete with ILECs for certain services may be adversely affected. The Company, increasingly uses ILEC network elements for transport and other network functions as it expands its telecommunications offering. The ILECs were required to make these unbundled network elements ("UNEs") available to CLECs by FCC regulation. The Supreme Court, however, recently vacated the FCC's UNE regulations. As a result, it is unclear at this time whether, and to what extent, the ILEC UNEs that OpTel has used or intends to use will be available in the future. The majority of states currently permit STS services with relatively few regulatory barriers. However, several states require certification and place some conditions or restraints on the provision of STS services. Additionally, STS providers must comply with the conditions of service set forth in the LEC's tariffs under which STS providers receive service. There can be no assurance that the regulatory environment will continue 18 22 to be favorable for STS providers or that regulatory changes will not slow or stop the Company's planned migration from an STS provider into a CLEC in each of its markets. Although the current regulatory environment enables competition for local exchange services, there is no assurance that the Company will be able to compete successfully against established providers and new entrants in that marketplace. In addition, various state and federal laws and regulations limit the Company's ability to enforce exclusivity provisions of Rights of Entry so as to exclude other telecommunications providers from an MDU. LATE FEES CLASS ACTION LITIGATION On April 12, 1999, a purported class action complaint was filed in the District Court of Harris County, Texas by Marc H. Levy, individually and on behalf of all cable subscribers that have paid late fees to the Company. The plaintiff alleges that late fees charged to plaintiff for delinquent payments of cable subscription charges are an illegal penalty. The plaintiff seeks unspecified damages and other relief. The case is in its very early stages, and no assurance can be given as to its ultimate outcome or that any such outcome will not materially adversely affect the Company. OpTel believes that it has meritorious factual and legal defenses, and intends to defend vigorously against these claims. FOREIGN OWNERSHIP RESTRICTIONS The Communications Act prohibits any corporation directly or indirectly controlled by any other corporation of which more than 25 percent of the capital stock is owned or voted by non-U.S. citizens from holding a common carrier radio station license absent a finding by the FCC that the grant of such a license to such a licensee would serve the public interest. In 1997, the United States agreed, in the context of the World Trade Organization ("WTO") Basic Telecom Agreement, to allow foreign suppliers from WTO member nations, including Canada, to provide a broad range of basic telecommunications services in the United States. Those commitments became effective in February 1998. In light of those commitments, the FCC has determined that it will adopt an "open entry standard" for suppliers of telecommunications services from WTO member nations, including Canada. In conjunction with its new open entry policies, the FCC has adopted a presumption favoring grant of applications to exceed the 25 percent limit on non-U.S. ownership described above when the non-U.S. investment is from a WTO member nation. GVL, the Company's principal stockholder, is a Canadian corporation. As the Company expands its telecommunications services, it plans to offer services which may constitute "common carrier" services. To the extent that the Company seeks to use its frequency licenses to provide "common carrier" telecommunications services, it will be required to obtain FCC approval. Although grant of such authority will be presumed to be in the public interest, there can be no assurance that the FCC will permit the Company to hold common carrier authorizations. The failure to obtain such common carrier authorizations could limit the Company's ability to offer certain telecommunications services and therefore have a material adverse effect on its marketing plan. CONTROL BY GVL General. After consummation of the Offering and assuming the conversion of all outstanding classes of common stock and all outstanding series of preferred stock into Common Stock immediately prior to the consummation of the Offering, VPC Corporation ("VPC"), an indirect wholly-owned subsidiary of GVL, will own approximately 57.1% of the outstanding Common Stock and voting rights of the Company. Accordingly, VPC can and, following consummation of the Offering, will continue to be able to elect a majority of the Board of Directors of the Company (the "Board") and control the vote on matters submitted to the vote of the Company's stockholders. Potentially Competing Ventures. In addition to its investment in the Company, GVL, through other subsidiaries, currently holds interests in wireless cable systems or licenses to operate wireless cable systems in a number of U.S. markets including San Francisco, San Diego and Victorville, California and Tampa, Florida. These subsidiaries employ wireless cable systems, satellite master antenna television ("SMATV") systems or hard wire franchise cable television systems. As a result, affiliates of GVL may compete with the Company in markets where their services overlap. In addition, an affiliate of GVL has recently commenced delivering high 19 23 speed Internet access in the San Francisco area. These services may compete with the Company's high speed Internet offering. GVL Indenture. GVL is party to an indenture which limits the aggregate amount of indebtedness which can be incurred by GVL and its subsidiaries, including the Company, taken as a whole (based upon a ratio of total consolidated indebtedness to consolidated operating cash flow). As a result, GVL's strategies and the operating results of its subsidiaries other than the Company may affect the ability of the Company to incur additional indebtedness. As of February 28, 1999, GVL was able to incur approximately Cdn $560 million (approximately $376 million based on an exchange rate of $1.00 = Cdn $1.487 as reported by the Wall Street Journal for April 16, 1999) of indebtedness under its indenture. There can be no assurance that this number may not decrease substantially in the future. There can be no assurance that GVL will not restrain the Company's growth or limit the indebtedness incurred by the Company so as to ensure GVL's compliance with the terms of its debt instruments. Stockholders' Agreement. GVL, VPC, Capital Communications CDPQ Inc. ("CDPQ"), a subsidiary of Caisse, a Quebec financial institution and minority shareholder of GVL, and the Company are parties to a Stockholders' Agreement, dated as of August 15, 1997 (the "Stockholders' Agreement"), pursuant to which, among other things, VPC and CDPQ agreed to vote for certain of CDPQ's nominees for director and CDPQ was granted preemptive rights to acquire new securities issued by the Company subject to certain exceptions (including a registered public offering) and tag along rights upon the sale by VPC of its interest in OpTel. In addition, CDPQ agreed to certain restrictions on the transfer of its shares of Common Stock. See "Principal and Selling Stockholders -- Stockholders' Agreement." RISKS ASSOCIATED WITH GVL'S SERIES A PREFERRED STOCK AND CLASS B COMMON STOCK VPC, an indirect wholly-owned subsidiary of GVL, holds all of the outstanding shares of Series A Preferred and 9,617,795 shares of Class B Common. The Series A Preferred and Class B Common are expected to be converted into Common Stock and therefore all financial and stockholder ownership information in the Prospectus assumes such conversion occurred immediately prior to the consummation of the Offering. The actual conversion, however, will not take place until a date expected to occur not more than 90 days after the Offering. Pursuant to an agreement to be executed prior to the consummation of the Offering among the Company, VPC and GVL (the "Conversion and Exchange Agreement"), VPC is required, on or before the earlier to occur of August 29, 1999 or the 90th day following the consummation of the Offering, (a)(i) to convert all of the Series A Preferred then outstanding into Class B Common, and (ii) immediately upon receipt of these shares of Class B Common to convert them into shares of Common Stock and (b) to convert all of the shares of Class B Common held by VPC into Common Stock. Upon conversion of all of the then outstanding shares of Class B Common held by VPC into Common Stock all other outstanding shares of Class B Common will automatically convert into Common Stock. Dividends will continue to accrue on the outstanding shares of Series A Preferred until such shares are converted into Common Stock in accordance with their terms. See "Description of the Capital Stock -- Preferred Stock." In the event of a breach by VPC or GVL of the Conversion and Exchange Agreement it is possible that (i) the Series A Preferred would remain outstanding and, under the terms of such securities, accrue dividends at 9.75% per annum in kind until August 29, 1999 and thereafter in cash, (ii) the Series A Preferred would be converted by VPC into Class B Common but not then converted into Common Stock or (iii) the outstanding Class B Common would not be converted into Common Stock and would remain outstanding. If the Series A Preferred were to remain outstanding, it would continue to enjoy a dividend and liquidation preference over the Common Stock and to restrict the Company's ability to pay dividends on the Common Stock. If the Class B Common were to remain outstanding after the conversion of the Series A Preferred or otherwise, it would enjoy ten votes per share, while the Common Stock is entitled to one vote per share. In either event, the equity interest or voting power, or both, of the holders of the Common Stock would be diluted. There can be no assurance that the Company or the holders of the Common Stock would have an adequate remedy in the 20 24 event of a breach of the Conversion and Exchange Agreement by VPC or GVL. See "Description of Capital Stock." CHANGE OF CONTROL UNDER THE INDENTURES A transfer by VPC of its interest in OpTel or a transfer by GVL of its interest in VPC or the conversion by VPC of its Class B Common together with an election by VPC not to convert its Series A Preferred may result in a "Change of Control" as defined under the Indentures, which would require the Company to offer to purchase its outstanding notes. There can be no assurance that the Company would have the financial resources to meet its obligations under the Indentures in the event of a Change of Control. A Change of Control could also result in the acceleration of or an event of default in respect of other indebtedness of the Company allowing the lenders or holders thereof to require repayment of such indebtedness in full. Neither VPC nor GVL is under any obligation to prevent a Change of Control. The occurrence of a Change of Control could have a material adverse effect on the Company, including the loss of GVL's strategic involvement with the Company. YEAR 2000 RISK OpTel has implemented a Year 2000 program to ensure that its subscriber serving cable and telecommunications equipment and its critical computer systems, applications and other technology will function properly beyond December 31, 1999. There can, however, be no assurance that the Year 2000 program will be successful. If the Company's Year 2000 program is not successfully completed, the Company may not be able to deliver or bill for its cable television, telecommunications or Internet access services after December 31, 1999. The ability of third parties with whom OpTel transacts business to adequately address their Year 2000 issues is outside of the Company's control. There can be no assurance that the failure of the Company or such third parties to adequately address their respective Year 2000 issues will not have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop or be sustained. The initial public offering price for the Common Stock will be determined through negotiations among the Company and the Underwriters and may not be indicative of the market price of the Common Stock after the Offering. See "Underwriting." The market prices of securities of early stage communications companies similar to the Company have historically been highly volatile. Future announcements concerning the Company or its competitors, including quarterly results, technological innovations, services offered, government legislation or regulation and general market, economic and political conditions, may have a significant effect on the market price of the Common Stock. DILUTION There will be an immediate and substantial dilution of a purchaser's investment in the Common Stock in that the net tangible book value per share of Common Stock after the Offering will be substantially less than the per share offering price of the Common Stock. See "Dilution." LACK OF DIVIDEND HISTORY; RESTRICTIONS ON PAYMENT OF DIVIDENDS OpTel has never declared or paid any cash dividends on its Common Stock and does not expect to declare any such dividends in the foreseeable future. Payment of any future dividends will depend upon earnings and capital requirements of OpTel, OpTel's debt facilities and other factors the Board considers appropriate. OpTel intends to retain earnings, if any, to finance the development and expansion of its business. In addition, 21 25 the terms of OpTel's outstanding indebtedness restrict the payment of dividends on Common Stock. See "Description of Certain Indebtedness." ANTI-TAKEOVER PROVISIONS VPC's voting control of OpTel, certain other provisions of OpTel's Certificate of Incorporation and Bylaws, the provisions of the Delaware General Corporation Law (the "DGCL") and OpTel's outstanding indebtedness may make it difficult in some respects to effect a change in control of OpTel and replace incumbent management. The existence of these provisions may have a negative impact on the price of the Common Stock, may discourage third-party bidders from making a bid for OpTel or may reduce any premiums paid to stockholders for their Common Stock. In addition, the Board has the authority to issue shares of a class of common stock which has multiple votes per share and to fix the rights and preferences of, and to issue shares of, OpTel's preferred stock, which may have the effect of delaying or preventing a change in control of OpTel without action by its stockholders. See "Description of Capital Stock -- Certain Provisions of OpTel's Certificate of Incorporation and Bylaws and of Delaware Law" and "-- Common Stock." SHARES ELIGIBLE FOR FUTURE SALE Future sales of shares, or the perception that such sales may occur, by existing stockholders under Rule 144 of the Securities Act, or through the exercise of outstanding registration rights or the issuance of shares of Common Stock upon the exercise of options or warrants, could materially adversely affect the market price of shares of Common Stock and could materially impair OpTel's future ability to raise capital through an offering of equity securities. No predictions can be made as to the effect, if any, that market sales of such shares or the availability of such shares for future sale will have on the market price of shares of Common Stock prevailing from time to time. See "Description of Capital Stock -- Shares Eligible for Future Sales" and "-- Registration Rights of Certain Security Holders." FORWARD LOOKING STATEMENTS The statements contained in this Prospectus that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "estimates," "projects," "anticipates," "expects," "intends," "believes" or the negative thereof or other variations thereon or comparable terminology or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader that these forward-looking statements are only estimates or predictions. No assurance can be given that future results will be achieved. Actual events or results may differ materially as a result of risks facing OpTel or actual events differing from the assumptions underlying such statements. All forward-looking statements made in connection with this Prospectus which are attributable to OpTel or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995 does not apply to initial public offerings. 22 26 USE OF PROCEEDS The net proceeds to the Company from the Offering (based on an assumed initial public offering price of $16.00 per share) are estimated to be approximately $92.25 million ($106.2 million if the over-allotment option granted to the Underwriters is exercised in full) after deducting estimated underwriting discounts and commissions and other offering expenses payable by the Company. Upon consummation of the Offering, the Company will have cash on hand of approximately $152.3 million. The Company anticipates its capital requirements over the next five years to be approximately $650 million. The Company cannot precisely quantify the amount of the proceeds from the Offering which will be used for capital expenditures. The Company intends to use the net proceeds from the Offering for capital expenditures related to the purchase and installation of communications equipment and for general corporate purposes, including working capital. In addition, the Company may use a portion of the net proceeds for acquisitions. Although the Company is currently evaluating and often engages in discussions regarding various acquisition opportunities, no agreement or agreement in principle to effect any material acquisition has been reached. Pending such uses, the net proceeds of the Offering will be invested in short-term investment grade securities. The Company will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Stockholders. DIVIDEND POLICY The Company has never paid cash dividends on the Common Stock and does not anticipate paying dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of the Board and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board deems relevant. In addition, the Company's ability to declare and pay dividends on the Common Stock is restricted by the terms of OpTel's outstanding indebtedness. See "Risk Factors -- Lack of Dividend History; Restrictions on Payment of Dividends." 23 27 CAPITALIZATION The following table sets forth, on an unaudited basis at February 28, 1999, (i) the historical capitalization of the Company as adjusted to give effect to the Split and (ii) the capitalization as adjusted to give effect to the Offering, the Split and the conversion of all outstanding classes of common stock and all outstanding series of preferred stock into Common Stock, each of which will occur on or before the 90th day after the consummation of the Offering. This table should be read in connection with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and the notes thereto appearing elsewhere in this Prospectus.
AS OF FEBRUARY 28, 1999 ----------------------- AS ACTUAL ADJUSTED(1) --------- ----------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................... $ 60,032 $ 152,282 Restricted Investments...................................... 38,645 38,645 --------- --------- Total..................................................... $ 98,677 $ 190,927 ========= ========= Indebtedness: 13% Senior Notes Due 2005................................. $ 219,786 $ 219,786 11 1/2% Senior Notes Due 2008............................. 200,000 200,000 Notes payable and other long-term liabilities............. 3,476 3,476 Deferred acquisition liabilities.......................... 5,591 5,591 --------- --------- Subtotal............................................. 428,853 428,853 Stockholders' equity: Class A common stock, $0.01 par value ("Common Stock"); 180,000,000 shares authorized; 821,360 issued and outstanding; 33,282,619 issued and outstanding as adjusted;.............................................. 8 333 Class B common stock, $0.01 par value ("Class B Common"); 60,000,000 shares authorized; 11,767,490 issued and outstanding; none issued and outstanding as adjusted;.............................................. 118 -- Class C common stock, $0.01 par value ("Class C Common"); 3,000,000 shares authorized; 1,125,000 issued and outstanding; none issued and outstanding as adjusted;.............................................. 11 -- Series A Preferred Stock, $0.01 par value, 10,000 shares authorized; 7,301.6 issued and outstanding; none issued and outstanding as adjusted............................ 153,341 -- Series B Preferred Stock, $0.01 par value; 1,000 shares authorized; 1,042.6 issued and outstanding; none issued and outstanding as adjusted............................ 63,827 -- Additional paid-in capital................................ 113,671 422,893 Accumulated deficit....................................... (214,814) (214,814) --------- --------- Subtotal............................................. 116,162 208,412 --------- --------- Total capitalization.............................. $ 545,015 $ 637,265 ========= =========
- --------------- (1) Gives effect to the Offering (assuming an initial public offering price of $16.00 per share and after deducting estimated underwriting discounts and commissions and estimated fees and expenses of $7,750,000) and to the conversion of all outstanding classes of common stock and all outstanding series of preferred stock into Common Stock upon consummation of the Offering. Does not give effect to the conversion of accrued and unpaid dividends on the Series A Preferred and Series B Preferred from February 28, 1999 through the date of conversion. Approximately 69,146 additional shares of Common Stock will be issued in respect of dividends accrued after February 28, 1999 with respect to the Series B Preferred. If the Series A Preferred is not converted until 90 days following the Offering, up to approximately 437,951 additional shares of Common Stock may be issued upon conversion of the Series A Preferred as a result of the conversion of additional accrued and unpaid dividends on the outstanding shares. See "Risk Factors -- Risks Associated with GVL's Series A Preferred Stock and Class B Common Stock" and "Description of Capital Stock." 24 28 DILUTION The net tangible book value per share of Common Stock is the difference between the Company's tangible assets and its liabilities, divided by the number of shares of common stock outstanding. For investors in the Common Stock, dilution is the per share difference between the assumed $16.00 per share initial offering price of the Common Stock offered hereby and the net tangible book value of the Common Stock immediately after completing the Offering. Dilution in this case results from the fact that the per share offering price of the Common Stock is substantially in excess of the per share net tangible book value of the Common Stock prior to the Offering. As of February 28, 1999, without taking into account any changes in the Company's net tangible book value subsequent to that date other than to give effect to the assumed conversion of all outstanding classes of common stock and all outstanding series of preferred stock into an aggregate of 26,468,098 shares of Common Stock, (based on an assumed offering price of $16.00 per share), the as adjusted net tangible book value of each of the assumed outstanding shares of Common Stock would have been $(1.57) per share. As of February 28, 1999, without taking into account any changes in the Company's net tangible book value subsequent to that date other than to give effect to the sale of the Common Stock offered hereby based on an assumed offering price of $14.76 per share (after deducting estimated offering expenses including discounts and commissions) and the conversions described above, the as adjusted net tangible book value of each of the assumed outstanding shares of Common Stock would have been $1.48 per share. Therefore, investors in the Common Stock would have paid $16.00 for a share of Common Stock having a net tangible book value of approximately $1.48 per share after the Offering; that is, their investment would have been diluted by approximately $14.52 per share. At the same time, existing stockholders would have realized an increase in net tangible book value of $3.05 per share after the Offering without further cost or risk to themselves. The following table illustrates this per share dilution: Assumed initial public offering price per share of Common Stock..................................................... $16.00 Net tangible book value per share of Common Stock before the Offering.................................................. $(52.22) Increase in net tangible book value per share resulting from conversions(1)............................................ $ 50.65 Increase in net tangible book value per share of Common Stock attributable to investors in the Offering(1)(2)..... $ 3.05 As adjusted net tangible book value per share of Common Stock after the Offering(1)(2)............................ $ 1.48 ------ Dilution to new investors(1)(2)............................. $14.52 ======
- --------------- (1) Assumes that none of the Company's outstanding options or warrants are exercised. See "Management -- Incentive Stock Plan," and "-- Stock Purchase Plan" and "Description of Capital Stock." Assumes the conversion of all outstanding classes of common stock and all outstanding series of preferred stock into an aggregate of 26,468,098 shares of Common Stock, respectively, all based on an assumed initial offering price of $16.00 per share of Common Stock. (2) After deduction of the estimated offering expenses payable by the Company (including the underwriting discounts and commissions). 25 29 SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA The following selected historical consolidated financial data as of August 31, 1997 and 1998 and for the years ended August 31, 1996, 1997 and 1998 have been derived from the consolidated financial statements of the Company included elsewhere herein and audited by Deloitte & Touche LLP, independent auditors as set forth in their report thereon also included herein. The selected financial data of the Company as of and for the periods ended December 31, 1993, December 31, 1994 and August 31, 1995 and as of August 31, 1996 have been derived from the Company's audited financial statements not included herein. The selected financial data presented below as of and for the six month periods ended February 28, 1998 and 1999 have been derived from unaudited interim consolidated financial statements of the Company. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position and results of operation for these periods. Operating results for the six months ended February 28, 1998 and 1999, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. In 1995, the Company changed its fiscal year end to August 31 to match that of its majority stockholder. As a result of the change in fiscal year and the Company's history of growth through acquisitions the Company's historical financial results are not directly comparable from period to period, nor are they indicative of future results of operations in many respects. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Consolidated Financial Statements of the Company and the notes thereto, appearing elsewhere in this Prospectus.
PERIOD FROM APRIL 20, 1993 EIGHT MONTH (DATE OF INCEPTION) YEAR ENDED PERIOD ENDED YEAR ENDED AUGUST 31, TO DECEMBER 31, DECEMBER 31, AUGUST 31, ------------------------------ 1993 1994 1995 1996 1997 1998 ------------------- ------------ ------------ -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED OPERATIONS DATA Revenues: Cable television............ $ 12 $ 240 $ 8,783 $ 25,893 $ 36,915 $ 61,081 Telecommunications.......... -- 202 788 1,711 2,922 3,882 ----- ------- -------- -------- -------- -------- Total revenues.............. 12 442 9,571 27,604 39,837 64,963 Operating expenses: Programming, access fees and revenue sharing........... 6 470 4,558 11,868 19,202 28,825 Customer support, general and administrative........ 304 7,733 12,055 19,636 28,926 35,847 Depreciation and amortization.............. 8 117 2,420 8,676 14,505 28,481 ----- ------- -------- -------- -------- -------- Total operating expenses...... 318 8,320 19,033 40,180 62,633 93,153 ----- ------- -------- -------- -------- -------- Loss from operations.......... (306) (7,878) (9,462) (12,576) (22,796) (28,190) Interest expense, net(1)...... (1) (66) (1,169) (5,854) (25,739) (39,564) ----- ------- -------- -------- -------- -------- Loss before income taxes and extraordinary item.......... (307) (7,944) (10,631) (18,430) (48,535) (67,754) Net loss(2)................... $(307) $(7,944) $(10,161) $(18,430) $(48,535) $(74,398) ===== ======= ======== ======== ======== ======== Basic and diluted loss per share of Common Equity(3)... N/A N/A $ (1.38) $ (1.66) $ (4.00) $ (6.29) SIX MONTHS ENDED FEBRUARY 28, ------------------- 1998 1999 -------- -------- CONSOLIDATED OPERATIONS DATA Revenues: Cable television............ $ 25,247 $ 38,095 Telecommunications.......... 1,644 2,870 -------- -------- Total revenues.............. 26,891 40,965 Operating expenses: Programming, access fees and revenue sharing........... 12,419 18,689 Customer support, general and administrative........ 15,855 26,335 Depreciation and amortization.............. 10,759 17,997 -------- -------- Total operating expenses...... 39,033 63,021 -------- -------- Loss from operations.......... (12,142) (22,056) Interest expense, net(1)...... (21,885) (22,558) -------- -------- Loss before income taxes and extraordinary item.......... (34,027) (44,614) Net loss(2)................... $(34,027) $(44,614) ======== ======== Basic and diluted loss per share of Common Equity(3)... $ (2.64) $ (3.96)
26 30
DECEMBER 31, AUGUST 31, -------------- ----------------------------------------- FEBRUARY 28, 1993 1994 1995 1996 1997 1998 1999 ---- ------- -------- -------- -------- -------- ------------ (DOLLARS IN THOUSANDS) BALANCE SHEET DATA Cash and cash equivalents......................... $ 41 $ 5,019 $ 2,036 $ 1,677 $ 87,305 $123,774 $ 60,032 Restricted investments............................ -- -- -- -- 67,206 63,207 38,645 Property, plant and equipment, net................ 509 11,379 48,060 103,800 160,442 268,044 308,289 Intangible assets................................. -- 16,189 55,443 65,876 82,583 160,370 159,055 Total assets...................................... 588 33,820 108,072 175,978 403,416 627,170 581,459 Convertible notes due stockholder................. -- 15,000 17,950 89,414 129,604 -- -- Notes payable and long-term obligations........... 52 7,675 9,023 8,963 228,573 429,278 428,853 Total liabilities................................. 206 31,007 39,527 116,700 383,051 466,394 465,297 Stockholders' equity.............................. 382 2,813 68,545 59,279 20,365 160,776 116,162
PERIOD FROM APRIL 20, 1993 (DATE OF EIGHT MONTH INCEPTION) YEAR ENDED PERIOD ENDED TO DECEMBER 31, DECEMBER 31, AUGUST 31, 1993 1994 1995 --------------- ------------ ------------ (DOLLARS IN THOUSANDS) OTHER FINANCIAL DATA Net cash flows used in operating activities......... $(183) $ (3,332) $ (3,494) Net cash flows used in investing activities......... (517) (10,576) (72,144) Net cash flows provided by (used in) financing activities................... 741 18,886 72,655 Capital expenditures(4)........ 517 9,278 22,170 EBITDA(5)...................... (298) (7,761) (7,042) SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 28, -------------------------------- --------------------- 1996 1997 1998 1998 1999 -------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) OTHER FINANCIAL DATA Net cash flows used in operating activities......... $ (453) $ (15,935) $ (26,268) $ (15,215) $ (31,441) Net cash flows used in investing activities......... (72,037) (143,125) (121,532) (60,293) (31,186) Net cash flows provided by (used in) financing activities................... 72,131 244,688 184,269 117,745 (1,115) Capital expenditures(4)........ 62,121 71,505 85,643 37,900 56,928 EBITDA(5)...................... (3,900) (8,291) 291 (1,383) (4,059)
AS OF AUGUST 31, ------------------------------------------ FEBRUARY 28, 1995 1996 1997 1998 1999 ------- ------- ------- ------- ------------ OPERATING DATA(6) CABLE TELEVISION Units under contract(7)..................................... 173,324 241,496 295,149 432,955 435,738 Units passed(8)............................................. 170,336 225,433 254,032 399,210 401,600 Basic subscribers........................................... 75,944 114,163 132,556 216,249 218,023 Basic penetration(9)........................................ 44.6% 50.6% 52.2% 54.2% 54.3% Premium units(10)........................................... 39,753 60,641 95,150 182,788 176,411 Pay-to-basic ratio(10)(11).................................. 52.3% 53.1% 71.8% 84.5% 80.9% Average monthly revenue per basic subscriber(12)............ $ 22.84 $ 22.70 $ 24.94 $ 27.95 $ 29.20 TELECOMMUNICATIONS Units under contract(9)..................................... 10,322 20,945 39,831 94,338 107,109 Units passed(10)............................................ 9,116 12,364 16,572 35,671 47,462 Lines(13)................................................... 2,650 4,126 6,185 9,244 13,229 Line penetration(14)........................................ 29.1% 33.4% 37.3% 25.9% 27.9% Average monthly revenue per line(15)........................ $ 36.86 $ 42.10 $ 47.23 $ 46.62 $ 44.50
---------------------- (1) Interest expense, net is reflected net of interest income and interest capitalized in property, plant and equipment. Includes interest expense on the GVL Notes of approximately $919,000, $5,342,000, $15,204,000 and $9,640,000 for the eight month period ended August 31, 1995, the years ended August 31, 1996, 1997 and 1998, respectively and $9,640,000 for the six months ended February 28, 1998. Effective March 1, 1998, the GVL Notes were exchanged for approximately 6,962 shares of Series A Preferred. (2) The Company had no taxable income for the periods reported. The Company reported an income tax benefit of approximately $470,000 in the eight month period ended August 31, 1995. In addition, the Company incurred an extraordinary loss of $6,644,000 in the year ended August 31, 1998. (3) Loss per share is not presented for the periods the Company was organized as a partnership. Loss per share has been restated to reflect the adoption of statement of Financial Accounting Standards No. 128, "Earnings Per Share" and the Split. Basic and diluted loss per share are computed in the same manner since common stock equivalents have an antidilutive effect. (4) Capital expenditures include expenditures on property, plant and equipment together with intangible assets excluding expenditures for business acquisitions. 27 31 (5) EBITDA represents earnings (loss) before interest expense (net of interest income and amounts capitalized), income tax benefits, depreciation and amortization. EBITDA is not intended to represent cash flow from operations or an alternative to net loss, each as defined by generally accepted accounting principles. In addition, the measure of EBITDA presented herein may not be comparable to other similarly titled measures by other companies. The Company believes that EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in the cable television and telecommunications industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in its industry. (6) Operating data for 1993 and 1994 is not available because such information was not tracked prior to the acquisition of the Company by VPC. The Company does not believe that the operating statistics for 1993 and 1994, if they were available, would be material because the Company's revenues during such periods were minimal. (7) Units under contract represents the number of units currently passed and additional units with respect to which the Company has entered into Rights of Entry for the provision of cable television and telecommunications services, respectively, but which the Company has not yet passed and which the Company expects to pass within the next five years. At this time the majority of all units under contract for telecommunications are also under contract for cable television. (8) Units passed represents the number of units with respect to which the Company has connected its cable television and telecommunications systems, respectively. The difference between units under contract and units passed represents units for which Rights of Entry have been entered into, but which are not yet connected for cable television and telecommunications services, respectively. (9) Basic penetration is calculated by dividing the total number of basic subscribers at such date by the total number of units passed. (10) Beginning with the year ended August 31, 1997, to be consistent with most other cable television providers, the Company has revised the method of reporting premium penetration to include all premium units in the calculation. Historically the calculation excluded premium channels that were provided to customers as part of an expanded basic line up or other special arrangements. Prior years have not been restated. For comparative purposes, the premium units and the pay-to-basic ratios as of August 31, 1997 and 1998, and February 28, 1999, presented under the previous method of reporting are 84,875, 136,863 and 128,137, respectively, and 64.0%, 63.3% and 58.8%, respectively. (11) Pay-to-basic ratio is calculated by dividing the total number of premium units by the total number of basic subscribers. (12) Represents average monthly revenue divided by the average number of basic subscribers for the fiscal periods ended as of the date shown. (13) Lines represent the number of telephone lines currently being provided to telecommunications subscribers. A telecommunications subscriber can subscribe for more than one line. The Company has revised its method of reporting lines to reflect only one line in service where multiple customers share a single line. The Company has restated the number of lines previously reported to reflect this change. (14) Line penetration is calculated by dividing the total number of telecommunications lines at such date by the total number of units passed. (15) Represents average monthly revenue divided by the average number of lines for the fiscal period ended as of the date shown. 28 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, the following analysis relates solely to historical results and does not consider any potential impact that the Offering or the proposed use of proceeds may have on the operations and financial condition of the Company. OVERVIEW OpTel is a leading network based provider of integrated communications services, including local and long distance telephone, cable television and high speed Internet access services, to residents of MDUs in the United States. The Company was organized in April 1993 to build, acquire and operate private cable television and telecommunications systems. The Company seeks to capitalize on opportunities created by the Telecom Act to become the principal competitor in the Large MDU market to the ILEC and the incumbent franchise cable television operator. The Company has commenced offering central office switched telecommunications services in Houston and Dallas-Fort Worth and expects to offer such services in substantially all of its major markets by the end of calendar 2000. In addition, the Company recently commenced offering high speed Internet access at select MDUs in several of its markets and intends to introduce its high speed Internet access services in all of its major markets over the next 12 months. Since inception, the Company has experienced substantial growth. This growth has been achieved through a combination of acquisitions of other operators, many of which operated SMATV systems, and the negotiation of new Rights of Entry. In general, the conduct of the acquired operations prior to acquisition was materially different from the conduct of operations following acquisition. Among the changes made in many of the businesses after acquisition were (i) commencing conversion of SMATV systems to 18GHz or fiber optic networks, (ii) delivering customer service from a more advanced national call center in Dallas, (iii) increasing the number of programming channels, (iv) improving technical and field service and system reliability, (v) improving regulatory and financial controls and (vi) initiating telecommunications services offerings. On October 27, 1997, the Company purchased the residential cable television and associated fiber optic network assets of Phonoscope Ltd. and the stock of several affiliated entities (collectively "Phonoscope") representing approximately 56,000 units under contract for cable television. On April 13, 1998, OpTel acquired, subject to the consummation of certain transfer conditions, the private cable television and telecommunications services and related agreements of Interactive Cable Systems, Inc. ("ICS"), representing approximately 90,000 cable television and telecommunication units under contract. The Company has included 100% of the assets and operating results of the ICS operations in its consolidated financial statements since April 13, 1998 because (i) although the transfer of legal title to the Rights of Entry relating to the remaining MDUs is subject to the receipt of certain third party consents, the Company may elect to waive the consent conditions, (ii) under the terms of a management agreement, the Company services the units with respect to which there remained unsatisfied transfer conditions and, in connection therewith, during the period that ICS has to secure the necessary consents, the Company receives all the economic benefit of (including all the revenues associated with) and incurs the costs and economic risks associated with these units and (iii) the entire purchase price was paid (although a portion of the purchase price is being held in escrow for the protection of the Company, subject to the receipt of the necessary consents). The Company and ICS are in the process of making final adjustments to the purchase which are expected to result in the Company returning several serviced properties to ICS and in an agreed reduction to the purchase price. The aggregate adjustments are not expected to represent more than 8% of the transaction. As of February 28, 1999, the Company had 435,738 and 107,109 units under contract for cable television and telecommunications, respectively, and 401,600 and 47,462 units passed for cable television and telecommunications, respectively. As of such date, OpTel had 218,023 cable television subscribers and 13,229 telecommunication lines in service. OpTel believes that by utilizing an advanced proprietary network infrastructure it can market a competitive integrated package of voice, video and Internet access services in its serviced markets. As of 29 33 February 28, 1999, approximately 258,989 units representing approximately 64% of the Company's units passed for cable television were passed by the Company's networks. OpTel expects to connect a majority of the MDUs currently served by SMATV systems to 18GHz or fiber optic networks by the end of calendar 2000. Once an MDU is brought onto the Company's networks, gross profit per subscriber at the MDU generally increases. In addition, networks provide OpTel with the infrastructure necessary to deliver an integrated package of communications services to subscribers at the MDU. The Company's telecommunications revenue is comprised of monthly recurring charges, usage charges and initial non-recurring charges. Monthly recurring charges include fees paid by subscribers for line rental and additional features. Usage charges consist of fees paid by end users for long distance, fees paid by the ILEC for terminating intraLATA traffic to the Company's network and access charges paid by carriers for long distance traffic originated and terminated to and from local customers. Initial non-recurring charges include fees paid by subscribers for installation. The Company's cable television revenue is comprised of monthly recurring charges paid by subscribers, monthly recurring charges paid by MDU owners for bulk services and fees paid by subscribers for premium services and some non-recurring charges. The Company offers its cable services under either retail or bulk agreements. Under retail agreements, the Company contracts directly with MDU residents. Under bulk agreements, the Company contracts directly with MDU owners for basic cable to be provided to all units in a particular MDU, but generally at lower rates per unit than under retail agreements. The effect of this lower per unit rate on revenue is generally offset by the 100% penetration achieved by bulk agreements. Premium services are contracted for directly by subscribers under both types of agreements and include fees paid for premium channels and pay-per-view. The Company anticipates that its overall revenue per subscriber will increase as the number of bulk contracts declines as a percentage of the Company's Rights of Entry. Additionally, the Company believes that its revenue per subscriber will increase as it migrates its SMATV properties onto the Company's networks. See "Business -- Network Architecture." The line item programming, access fees and revenue sharing with respect to the Company's telecommunications services consists of leased transport facilities, terminating access charges from ILECs, fees paid to IXCs for long distance and revenue sharing. Leased transport facility costs may include the rental of T-1s to connect the MDUs to the ILEC and may include costs associated with connecting the Company's Network Hubs to each other and to its central office switch. Terminating access charges are fees paid to the ILEC for intraLATA calls which are originated by OpTel's subscribers and terminated on the ILECs network. Fees paid to IXCs for long distance include costs associated with terminating toll calls initiated by OpTel's subscribers. Revenue sharing costs represent certain fees paid to owners of MDUs pursuant to the terms of Rights of Entry. The line item programming, access fees and revenue sharing with respect to the Company's cable television services consists of programming costs, franchise fees and revenue sharing. Programming costs include those fees paid to obtain the rights to broadcast certain video programming. Revenue sharing costs represent certain fees paid to owners of MDUs pursuant to the terms of Rights of Entry. The Company's customer support, general and administrative expenses include selling and marketing costs, customer service, engineering, facilities and corporate and regional administration. Through February 28, 1999, the Company had invested approximately $526 million primarily in its cable television and telecommunications assets. The Company's revenues have grown from $0.4 million for the year ended December 31, 1994 to $65.0 million for fiscal 1998 and $41.0 million for the six months ended February 28, 1999. While pursuing its investment and development strategy, the Company has incurred substantial up-front operating expenses for marketing, customer operations, administration and maintenance of facilities, general and administrative expenses and depreciation and amortization in order to solicit and service customers in advance of generating significant revenues. As a result of these factors, the Company has generated operating losses of $22.1 million, $28.2 million, $22.8 million and $12.6 million for the six months ended February 28, 1999 and the years ended August 31, 1998, 1997, 1996, respectively, as its cable television and telecommunications customer base has grown. The Company reported positive EBITDA of $0.3 million for the year ended August 31, 1998 as compared with negative EBITDA of $8.3 million and $3.9 million for 30 34 the years ended August 31, 1997 and 1996, respectively. For the six months ended February 28, 1999, the Company reported negative EBITDA of $4.1 million. The decline in EBITDA is primarily the result of the increased costs associated with the roll out of telecommunications services in the Company's major markets and the deployment of switch collocation access and Internet access services. For the six months ended February 28, 1999, telephone passings, revenues and line growth have been gaining momentum, however, cable passings, revenues and subscribers remained flat. To address the situation, the Company is reorganizing marketing and sales management, has launched direct sales activities and will introduce other direct marketing initiatives in the third quarter. There can be no assurance that the Company will generate operating profits or achieve positive EBITDA in the future. FACTORS AFFECTING FUTURE OPERATIONS The principal operating factors affecting the Company's future results of operations are expected to include (i) changes in the number of MDUs under Rights of Entry, (ii) penetration rates for its services, (iii) the terms of its arrangements with MDU owners, including revenue sharing and length of contract, (iv) the prices that it charges its subscribers, (v) normal operating expenses, which in the cable television business principally consist of programming expenses and in the telecommunications business principally consist of fees paid to long distance carriers, the cost of trunking services and other LEC charges, as well as, in each case, billing and collection costs, technical service and maintenance expenses and customer support services, (vi) financing costs, and (vii) capital expenditures as the Company commences offering central office switched telecommunication services in additional markets and completes its conversion of SMATV systems. The Company's results of operations may also be impacted by future acquisitions, as well as by various initiatives to broaden the Company's service offering and addressable market. The first of such initiatives is to collocate network facilities for telecommunication services in selected ILEC end offices in certain of its markets. The Company will select the ILEC end offices in which it will collocate based upon MDU concentration. Through collocation, the Company will lease the ILEC's transport network on an unbundled basis to initially reach a subscriber. The Company believes collocation will decrease the time required to provide telephone services to a subscriber, increase the Company's addressable market by providing a cost effective means of servicing smaller MDUs and, over time, promote new Rights of Entry. Other initiatives aim at creating new revenue sources by offering related services including a range of Internet access and DBS services. The Company anticipates that it will continue to have higher churn than is typical of an incumbent franchise cable television operator due to the frequent turnover of MDU tenants. This churn generally does not result in a reduction in overall penetration rates since the outgoing subscriber is generally quickly replaced by a new tenant in the unit. This may result in installation revenue per unit that is higher than for a franchise cable television operator. Although this may also require higher installation expenses per subscriber, because of the layout of MDUs and the Company's ability to obtain "permission to enter" from the MDU owner, installations can often be completed when the subscriber is not home, limiting the expense of installation. Accordingly, the Company does not believe that churn is as significant an operating statistic as it is for franchise cable television operators. With respect to the Company's telecommunications services, the Company believes that its best opportunity for a sale arises when a subscriber first signs a lease and takes occupancy in an MDU. Accordingly, the Company believes that during the early stages of the roll out of its central office switched telecommunications services in a market it benefits from the high rate of MDU resident turnover. RESULTS OF OPERATIONS All of the Company's acquisitions have been accounted for by the purchase method of accounting. As a result of the Company's growth through acquisitions and the change in fiscal year, the Company's historical financial results are not directly comparable from period to period, nor are they indicative of future results of operations in many respects. 31 35 The following table sets forth, for the periods indicated, certain operating and financial information relating to the Company.
AS OF AUGUST 31, AS OF FEBRUARY 28, --------------------------- ------------------- 1996 1997 1998 1998 1999 ------- ------- ------- -------- -------- OPERATING DATA CABLE TELEVISION Units under contract(1)...................... 241,496 295,149 432,955 372,138 435,738 Units passed(2).............................. 225,433 254,032 399,210 320,286 401,600 Basic subscribers............................ 114,163 132,556 216,249 172,643 218,023 Basic penetration(3)......................... 50.6% 52.2% 54.2% 53.9% 54.3% Average monthly revenue per basic subscriber(4).............................. $22.70 $24.94 $27.95 $27.57 $29.20 TELECOMMUNICATIONS Units under contract(1)...................... 20,945 39,831 94,338 61,082 107,109 Units passed(2).............................. 12,364 16,572 35,671 17,551 47,462 Lines(5)..................................... 4,126 6,185 9,244 6,375 13,229 Line penetration(6).......................... 33.4% 37.3% 25.9% 36.3% 27.9% Average monthly revenue per line(7).......... $42.10 $47.23 $46.62 $43.64 $44.50
SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 28, -------------------------------- ------------------- 1996 1997 1998 1998 1999 -------- --------- --------- -------- -------- (DOLLARS IN THOUSANDS) FINANCIAL DATA Revenues: Cable television................... $ 25,893 $ 36,915 $ 61,081 $ 25,247 $ 38,095 Telecommunications................. 1,711 2,922 3,882 1,644 2,870 -------- --------- --------- -------- -------- Total revenues............. $ 27,604 $ 39,837 $ 64,963 $ 26,891 $ 40,965 EBITDA(8)............................ $ (3,900) $ (8,291) $ 291 $ (1,383) $ (4,059) Net cash flows used in operating activities......................... $ (453) $ (15,935) $ (26,268) $(15,215) $(31,441) Net cash flows used in investing activities......................... (72,037) (143,125) (121,532) (60,293) (31,186) Net cash flows provided by (used in) financing activities............... 72,131 244,688 184,269 117,745 (1,115) Net loss............................. (18,430) (48,535) (74,398) (34,027) (44,614)
- --------------- (1) Units under contract represents the number of units currently passed and additional units with respect to which the Company has entered into Rights of Entry for the provision of cable television and telecommunications services, respectively, but which the Company has not yet passed and which the Company expects to pass within the next five years. At this time the majority of all units under contract for telecommunications are also under contract for cable television. (2) Units passed represents the number of units with respect to which the Company has connected its cable television and telecommunications systems, respectively. (3) Basic penetration is calculated by dividing the total number of basic subscribers at such date by the total number of units passed. (4) Represents average monthly revenue divided by the average number of basic subscribers for the fiscal periods ended as of the date shown. (5) Lines represent the number of telephone lines currently being provided to telecommunications subscribers. A telecommunications subscriber can subscribe for more than one line. The Company has revised its method of reporting lines to reflect only one line in service where multiple customers share a single line. The Company has restated the number of lines previously reported to reflect this change. (6) Line penetration is calculated by dividing the total number of telecommunications lines at such date by the total number of units passed. (7) Represents average monthly revenue divided by the average number of lines for the fiscal period ended as of the date shown. (8) EBITDA represents income (loss) from operations before interest (net of interest income and amounts capitalized), income taxes and depreciation and amortization. EBITDA is not intended to represent cash flow from operations or an alternative to net loss, each as defined by generally accepted accounting principles. In addition, the measure of EBITDA presented herein may not be comparable to other similarly titled measures by other companies. The Company believes that EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in the cable television and telecommunications industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in its industry. 32 36 Six months ended February 28, 1999 compared to six months ended February 28, 1998 Total Revenues. Total revenues for the first six months of fiscal 1999 increased by $14.1 million, or 52%, to $41.0 million compared to revenues of $26.9 million for the first six months of fiscal 1998. The increase in total revenue is principally the result of the acquisition of ICS in April 1998 and the inclusion of the operating results of Phonoscope, which was acquired in October 1997, for the full six month period. Cable Television. Cable television revenues for the first six months of fiscal 1999 increased by $12.8 million, or 51%, to $38.1 million from $25.2 million for the comparable period in fiscal 1998. This reflected a 26% increase in the number of basic subscribers and a 6% increase in the average monthly revenue per basic subscriber. The average monthly revenue per basic subscriber increased from $27.57 for the first six months of fiscal 1998 to $29.20 for the first six months of fiscal 1999. The increase in average monthly revenue per basic subscriber mainly resulted from annual rate increases, rate increases following property upgrades and a shift in the mix of basic subscribers to favor cities with higher average monthly revenue per basic subscriber. The Company maintained basic penetration at 54%. Telecommunications. Telecommunications revenues for the first six months of fiscal 1999 increased by 75% to $2.9 million, up from $1.6 million for the comparable period of the preceding year, reflecting both a 108% increase in the number of lines compared to the first six months of fiscal 1998 and a 2% increase in the average monthly revenue per line, which rose from $43.64 to $44.50. Since launching central office switches in Houston and Dallas during fiscal 1998, the Company has increased its efforts to market its telephone product in these markets. Although the average monthly revenue per line for the six months ended February 28, 1999 increased from the six months ended February 28, 1998, it decreased from the year ended August 31, 1998. This decrease reflects a combination of (i) seasonal variations in long distance usage; (ii) the impact of incentives offered by the Company to subscribers as part of the initial marketing of its central office switched services in Dallas; and (iii) the impact of changes in call volumes. The Company does not believe the changes in call volumes are reflective of a trend. However, because of the relatively small number of lines serviced by the Company, changes in the number or length of calls made by a small group of individual subscribers can have a noticeable impact on the average revenue per line. Programming, Access Fees and Revenue Sharing. Programming, access fees and revenue sharing increased from $12.4 million for the first six months of fiscal 1998 to $18.7 million for the first six months of fiscal 1999. The increased cost is primarily attributed to the subscriber growth mentioned above and to increases in rates charged by programming suppliers. Customer Support, General and Administrative. Customer support, general and administrative expenses were $26.3 million for the first six months of fiscal 1999 compared to $15.9 million for the first six months of fiscal 1998. The increase in customer support, general and administrative expenses was largely due to an increase in personnel associated with the expansion of the Company's operations and the roll-out of telephone and Internet services. EBITDA. The Company's EBITDA (earnings (loss) before interest, income taxes, and depreciation and amortization) for the first six months of fiscal 1999 was negative $4.1 million compared to negative $1.4 million for the first six months of fiscal 1998. EBITDA is not intended to represent cash flow from operations or an alternative to net loss, each as defined by generally accepted accounting principles. Depreciation and Amortization. Depreciation and amortization was $18.0 million for the first six months of fiscal 1999 compared to $10.8 million for the first six months of fiscal 1998. This increase is primarily attributable to an increase in cable and telephone systems and intangible assets resulting from continued purchases and construction of such systems and from acquisitions of businesses. Interest Expense. Interest expense (net of amounts capitalized) was $25.8 million for the first six months of fiscal 1999, a small decrease from interest expense of $26.0 million for the first six months of fiscal 1998. This decrease is attributable to the elimination of interest expense associated with the convertible notes payable to stockholders in March 1998 with the conversion of these notes to preferred stock. 33 37 Interest and Other Income. For the first six months of fiscal 1999, interest and other income was $3.3 million, compared to $4.1 million for the first six months of fiscal 1998, reflecting a decrease of $0.9 million. This is primarily the result of the Company having a smaller average balance of invested cash during the first six months of fiscal 1999 than fiscal 1998. The Company invests its cash in money market funds and other short-term, high grade instruments according to its investment policy and certain restrictions of its indebtedness. Fiscal year ended August 31, 1998 compared to fiscal year ended August 31, 1997 Total Revenues. Total revenues for the fiscal year ended August 31, 1998 increased by $25.1 million or 63% to $64.9 million compared to revenues of $39.8 million for the fiscal year ended August 31, 1997. Cable Television. Compared to fiscal 1997, cable television revenues increased by $24.2 million, or 66%, to $61.1 million from $36.9 million, reflecting both a 63% increase in the number of subscribers and a 12% increase in the average monthly revenue per basic subscriber which rose from $24.94 for fiscal 1997 to $27.95 for fiscal 1998. The increase in average monthly revenue per basic subscriber resulted from a combination of rate increases following property upgrades, annual rate increases and increased premium revenues as the Company's pay to basic ratio improved from 72% to 85% over the course of the year. The Company continued to grow basic penetration which increased by 2% over the year. Telecommunications. Compared to fiscal 1997, telecommunications revenues increased by $1.0 million, or 33%, to $3.9 million from $2.9 million. This increase is mainly due to the increase in the number of lines served by the Company and higher average monthly revenue per line associated with the lines served by the Company's central office switches. Programming, Access Fees and Revenue Sharing. Programming, access fees and revenue sharing was $28.8 million for fiscal 1998 compared to $19.2 million for fiscal 1997. Substantially all of the increased cost is attributable to the subscriber growth mentioned above. Customer Support, General and Administrative. Customer support, general and administrative expenses were $35.8 million for fiscal 1998 compared to $28.9 million for fiscal 1997. The increase in expenses was largely due to an increase in personnel associated with the expansion of the Company's operations and recruitment for the roll out of the Company's telecommunications services in advance of the expected revenues. EBITDA. The Company's EBITDA increased from negative $8.3 million to positive $0.3 million over the year. There can be no assurance that the Company will be able to achieve or sustain positive EBITDA in the future. Depreciation and Amortization. Depreciation and amortization was $28.5 million for fiscal 1998 compared to $14.5 million in fiscal 1997. This increase is primarily attributable to an increase in cable and telephone systems and intangible assets resulting from continued purchases and construction of such systems and from acquisitions of businesses. Interest Expense, Net. Interest expense (net of amounts capitalized) was $48.5 million for fiscal 1998, an increase of $17.1 million over interest expense of $31.4 million for fiscal 1997, reflecting the increase in the Company's debt incurred principally to fund the build out of its networks. Interest and Other Income. Interest and other income was $8.9 million for fiscal 1998, an increase of $3.2 million over interest income and other income of $5.7 million for fiscal 1997. The increase in interest and other income was largely due to an increase in cash and cash equivalents and restricted investments resulting from the proceeds of the offering of $225 million of 13% Senior Notes due 2005 (the "1997 Notes") in February 1997, and from the proceeds of the offering of the 11.5% Senior Notes due 2008 (the "1998 Notes") in July 1998. Income Tax Benefit. The Company has experienced net operating losses for the years ended August 31, 1998 and 1997. Realization of deferred tax assets is dependent on generating sufficient taxable income prior to 34 38 expiration of the loss carryforwards. The Company is unable to determine whether these accumulated losses will be utilized; accordingly, a valuation allowance has been provided and no benefit has been recognized. Extraordinary Loss. The Company incurred an extraordinary loss of $6.7 million in 1998. This loss can be directly attributed to the repayment of the Senior Credit Facility, which was retired in July of 1998. Included in the extraordinary loss are $5.4 million for write off of debt issue costs and $1.3 million associated with the prepayment penalty. Fiscal year ended August 31, 1997 compared to fiscal year ended August 31, 1996 Total Revenues. Total revenues for the fiscal year ended August 31, 1997 increased by $12.2 million or 44% to $39.8 million compared to revenues of $27.6 million for the fiscal year ended August 31, 1996. Cable Television. Compared to fiscal 1996, cable television revenues increased by $11.0 million, or 42%, to $36.9 million from $25.9 million, reflecting both a 16% increase in the number of subscribers and a 10% increase in the average monthly revenue per basic subscriber which rose from $22.70 for fiscal 1996 to $24.94 for fiscal 1997. The increase in average monthly revenue per basic subscriber resulted from a combination of rate increases following property upgrades, annual rate increases and increased premium revenues as the Company's pay to basic ratio improved from 53% to 72% over the course of the year. The Company continued to grow basic penetration which increased by 1.6% over the year. Telecommunications. The Company's strategy is to roll out central office switched local exchange services in each of the major markets in which it operates. Until recently the Company served certain properties as an STS provider, reselling telephone service using PBXs situated at the MDU properties. The Company has not historically promoted such STS service because it was not in line with its strategy to offer central office switched telecommunications services to its subscribers. Despite not promoting telecommunications services during the year, telecommunications contributed $2.9 million of revenue compared to $1.7 million in the preceding year, mainly as a result of increased penetration and a 34% increase in the number of units where telephone service is offered from 12,364 at the end of fiscal 1996 to 16,572 at the end of fiscal 1997. Programming, Access Fees and Revenue Sharing. Programming, access fees and revenue sharing was $19.2 million for fiscal 1997 compared to $11.9 million for fiscal 1996. Such costs are generally variable based on the number of subscribers or gross revenues. Overall, programming, access fees and revenue sharing as a percentage of total revenues increased over the year from 43.0% to 48.2%, largely due to costs associated with the increase in the number of subscribers served by PBX telephone service, the increase in premium cable penetration which has lower associated margins and, to a lesser extent, an increase in the proportion of the Company's portfolio under revenue sharing arrangements with property owners. The PBX costs represent the costs of interconnecting individual properties with the ILEC's central office switch. These costs will be substantially reduced once the Company is able to utilize its own networks to pass telephone traffic to Company owned central office switches. Customer Support, General and Administrative. Customer support, general and administrative expenses were $28.9 million for fiscal 1997 compared to $19.6 million for fiscal 1996. The increase in expenses was largely due to an increase in personnel associated with the expansion of the Company's operations and recruitment for the roll out of the Company's telecommunications services in advance of the expected revenues. In addition, the Company incurred a one time reorganization charge of $1.4 million associated with the restructuring of certain senior management positions during the year which was included in such expenses. EBITDA. The Company's EBITDA decreased from negative $3.9 million to negative $8.3 million over the year, largely due to the reduced gross margins and the expansion of the Company's operations in anticipation of the roll out of telecommunications services. The increase in negative EBITDA was largely within expectations given that the Company increased its personnel in the middle of fiscal 1997 in anticipation of two significant events that occurred after the end of the fiscal year: the launch of the Houston central office switch and the consummation of the acquisition of certain residential cable television and associated fiber optic network assets also in Houston. 35 39 Depreciation and Amortization. Depreciation and amortization was $14.5 million for fiscal 1997 compared to $8.7 million in fiscal 1996. This increase is primarily attributable to an increase in cable and telephone systems and intangible assets resulting from continued purchases and construction of such systems and from acquisitions of businesses. Interest Expense, Net. Interest expense (net of amounts capitalized) was $31.4 million for fiscal 1997, an increase of $25.4 million over interest expense of $6.0 million for fiscal 1996, reflecting the increase in the Company's debt incurred principally to fund the build out of its network. Interest and Other Income. Interest and other income was $5.7 million for fiscal 1997, an increase of $5.6 million over interest income and other income of $0.1 million for fiscal 1996. The increase in interest income and other income was largely due to an increase in cash and cash equivalents and restricted investments resulting from the proceeds of the offering of the 1997 Notes in February 1997. Income Tax Benefit. The Company has experienced net operating losses for the years ended August 31, 1997 and 1996. Realization of deferred tax assets is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company is unable to determine whether these accumulated losses will be utilized; accordingly, a valuation allowance has been provided and no benefit has been recognized. LIQUIDITY AND CAPITAL RESOURCES The development of OpTel's business and the expansion of its network have required substantial capital, operational and administrative expenditures, a significant portion of which have been incurred before the realization of revenues. These expenditures will continue to result in negative cash flow until an adequate customer base is established and revenues are realized. Although its revenues have increased in each of the last three years, OpTel has incurred substantial up-front operating expenses for marketing, customer operations, administration and maintenance of facilities, general and administrative expenses and depreciation and amortization in order to solicit and service customers in advance of generating significant revenues. As a result of these factors, the Company has generated operating losses of $22.1 million, $28.2 million, $22.8 million and $12.6 million for the six months ended February 28, 1999 and for the years ended August 31, 1998, 1997, and 1996, respectively, as its cable television and telecommunications customer base has grown. The Company reported net losses of $44.6 million for the six months ended February 28, 1999 as compared with net losses of $74.4 million, $48.5 million and $18.4 million for the years ended August 31, 1998, 1997 and 1996, respectively. During the past year, the Company has required external funds to finance capital expenditures associated with the completion of acquisitions in strategic markets, expansion of its networks and operating activities. Net cash used in the acquisition and construction of the Company's cable television and telecommunications networks and related business activities was $56.9 million for the first six months of fiscal 1999 compared to $129.0 million for fiscal 1998 and $78.2 million for fiscal 1997. From inception and until February 1997, the Company relied primarily on investments from GVL, its principal stockholder, in the form of equity and convertible notes to fund its operations. Effective March 1, 1998, GVL converted all of the outstanding GVL Notes, including accrued interest, into shares of Series A Preferred with an aggregate liquidation preference of approximately $139.2 million. The Series A Preferred earns dividends at the annual rate of 9.75%, initially payable in additional shares. Pursuant to the terms of the Conversion and Exchange Agreement, VPC has agreed to convert all of its shares of Series A Preferred, including accrued and unpaid dividends thereon through the conversion date, and all of its Class B Common, into Common Stock on or before the earlier to occur of August 29, 1999 or the 90th day after the consummation of the Offering. See "Risk Factors -- Risks Associated with GVL's Series A Preferred Stock and Class B Common Stock." None of the Company's stockholders or affiliates is under any contractual obligation to provide additional financing to the Company. In February 1997, the Company issued $225 million principal amount at maturity of 13% Senior Notes Due 2007 (the "1997 Notes") along with 1,125,000 shares of Class C Common for aggregate net proceeds of $219.2 million. Of this amount, approximately $79.6 million was placed in an escrow account in order to cover 36 40 the first six semi-annual interest payments due on the 1997 Notes. At February 28, 1999, approximately $28.0 million remained in such escrow account. On July 7, 1998, the Company issued $200 million principal amount of 1998 Notes. The aggregate net proceeds of the 1998 Notes were approximately $193.5 million. Of this amount, approximately $126.3 million was used to repay all outstanding amounts under the Senior Credit Facility and to pay other costs associated with terminating the Senior Credit Facility and approximately $22.0 million was placed in an escrow account to fund the first two semi-annual interest payments on the 1998 Notes. At February 28, 1999, approximately $10.7 million remained in such escrow account. The Company's future results of operations will be materially impacted by its ability to finance its planned business strategies. The Company expects that it will spend approximately $650 million on capital expenditures over the next five years. The Company expects it will need approximately $550 million in financing in addition to the proceeds of the Offering over the next five years in order to achieve its business strategy within its targeted markets. The Company will incur approximately $260 million in cash interest expense on its outstanding indebtedness, including the $38.7 million currently held in escrow, over the next five years. A considerable portion of the Company's capital expenditure requirements is scaleable dependent upon the number of Rights of Entry that the Company signs. The foregoing estimates are based on certain assumptions, including the timing of the signing of Rights of Entry, the conversion of MDUs currently served by SMATV systems to networks and the telecommunications roll out, each of which may vary significantly from the Company's plan. The capital expenditure requirements will be larger or smaller depending upon whether the Company is able to achieve its expected market share among the potential MDUs in its markets. The Company plans to finance its future capital requirements through additional public or private equity or debt offerings. There can be no assurance that the Company will be successful in obtaining any necessary financing on reasonable terms or at all. Under the terms of the more restrictive of the Company's Indentures, the Company can only incur approximately $50 million of additional indebtedness. The aggregate amount of indebtedness which can be incurred by the Company under its more restrictive Indenture is directly related to the number of cable television subscribers served by the Company. As a result, growth of the Company's telecommunications business, where the Company has focused significant management attention and resources, will not increase the Company's ability to incur indebtedness under the terms of the more restrictive Indenture. The Company may need to incur indebtedness in excess of its current capacity. In addition, GVL has the power to prevent the Company from obtaining additional debt or equity financing. See "Risk Factors -- Control by GVL." GVL is party to an indenture which limits the aggregate amount of indebtedness which can be incurred by GVL and its subsidiaries, including the Company, taken as a whole (based upon a ratio of total consolidated indebtedness to consolidated operating cash flow). As a result, GVL's strategies and the operating results of its subsidiaries other than the Company may affect the ability of the Company to incur additional indebtedness. As of February 28, 1999, GVL was able to incur approximately Cdn. $560 million (approximately $376 million based on an exchange rate of $1.00 = Cdn. $1.487 as reported by the Wall Street Journal for April 16, 1999) of indebtedness under its indenture. There can be no assurance that this number may not decrease substantially in the future. There can be no assurance that GVL will not restrain the Company's growth or limit the indebtedness incurred by the Company so as to ensure GVL's compliance with the terms of its debt instruments. The Company benefits from the fact that it does not require a substantial capital investment in its cable television and telecommunications networks in advance of connecting subscribers to its networks. A significant portion of the capital investment required to connect subscribers consists of costs associated with establishing a minimum point of entry, the costs of internal wiring and distribution equipment and the erection of microwave transmitting and receiving equipment specific to the MDU. These expenditures are, to a large extent, "success-based" and will only be incurred when new properties are brought into service or when existing properties serviced by SMATV or PBX systems are connected to the networks. When a new Right of Entry is signed, it takes approximately four months of construction work to activate signal at the property. Once the property is activated, penetration rates increase rapidly. The balance of the budgeted capital expenditures is for infrastructure assets not related to individual MDUs. These assets include central office switches, cable television head ends, computer hardware and software and capitalized construction costs. The 37 41 Company, can to some degree, control the timing of the infrastructure capital expenditures by controlling the timing of the telecommunications roll out and the scope of its expansion. In order to accelerate the achievement of the Company's strategic goals, the Company is currently evaluating and often engages in discussions regarding various acquisition opportunities. The Company also engages from time to time in preliminary discussions relating to possible investments in the Company by strategic investors. There can be no assurance that any agreement with any potential acquisition target or strategic investor will be reached nor does management believe that any thereof is necessary to achieve its strategic goals. YEAR 2000 COMPLIANCE The Year 2000 issue is the result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date ending in "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations including, among other things, a temporary inability to provide services to subscribers, process transactions, send invoices, or engage in similar normal business activities. To ensure that its subscriber serving cable and telecommunications equipment and its critical computer systems, applications and other technology (collectively "Date Sensitive Technology") will function properly beyond 1999, the Company has implemented a Year 2000 program. PROJECT AND STATE OF READINESS The Company has developed a three-phase plan that is designed to assess the impact of the Year 2000 issue on its Date Sensitive Technology. Due to the fact that it is not always necessary to complete one phase prior to commencing the next, some projects within a given phase have been started, while there may be outstanding tasks associated with prior phases. Priority is always placed on mission critical systems affecting large numbers of customers or the Company's ability to take and process service orders and bill for its services. Phase I -- Problem Determination In this phase the Company performed an inventory and assessment to determine which portions of its Date Sensitive Technology would have to be replaced or modified in order for its networks, office equipment and information management systems to function properly after December 31, 1999. While the Company believes its inventory is substantially complete, the equipment utilized by OpTel is disbursed throughout the markets that the Company serves, and there can be no assurances that mission critical equipment has not been overlooked. The Company also conducted a risk assessment to identify those systems whose failure would be expected to result in the greatest risk to the Company's business. The Company's risk assessment and determinations as to the need for remediation were based in part on representations made by hardware and software vendors as to the Year 2000 compliance of systems and equipment utilized by the Company and in part on the results of Year 2000 equipment testing done by GVL. There can be no assurances that any vendor representations received and relied upon by the Company were accurate or complete or that the results of GVL's Year 2000 equipment tests are a reliable indicator of the Year 2000 compatability of the Company's equipment. In addition, OpTel has not yet received responses from all of its equipment vendors, and there can be no assurance that OpTel will receive responses from all of its vendors in a timely manner or that responses will be accurate or complete. As of March 15, 1999, the Company estimated that this phase was 95% complete. Phase II -- Plan for Remediation of Mission Critical Known Non-Compliant Date Sensitive Technology During Phase II, the Company designed a plan to make the necessary modifications to and/or replace Date Sensitive Technology that is mission critical and known to be non-compliant. While the Company believes that as of March 15, 1999, its planning for achieving Year 2000 compliance was 75% complete, the discovery of additional Date Sensitive Technology requiring remediation could adversely impact the current plan and increase the resources required to implement the plan. The plan includes the conversion of the Company's current customer management system to a vendor certified compliant platform and the upgrade of 38 42 PBX switches that the Company does not currently plan to replace with central office switches prior to December 31, 1999. Phase III -- Operational Sustainability The Company has begun the process of remediating its non-compliant Date Sensitive Technology and plans to use both internal and external resources to reprogram or replace and test certain components of its networks and information processing systems for Year 2000 compliance. The Company is currently scheduling the installation of other necessary upgrades to Date Sensitive Technology. Although the Company intends to conduct tests to ensure its equipment is Year 2000 compliant, it will focus primarily on those systems whose failure would pose the greatest risks to the Company's operations. The Company will endeavor to test all mission critical equipment but will likely not test all of its equipment that is not deemed mission critical. The Company will rely upon vendor representations, if received, or on the results of Year 2000 equipment testing done by GVL, where tests are not conducted. There can be no assurance that any vendor representations received and relied upon will be accurate or complete or that the results of GVL's Year 2000 equipment tests will be a reliable indicator of the Year 2000 compatibility of the Company's equipment or that the Company will have recourse against any vendors whose representations or certifications as to the Year 2000 compliance of their products prove misleading. The Company is striving to achieve operational sustainability no later than September 30, 1999, which is prior to any anticipated impact on its operating systems. Though the majority of the work will be completed by that date, certain elements will not be completed until the fourth quarter of calendar 1999, primarily due to limited availability of compliant software and hardware and prioritization of mission critical systems. As of March 15, 1999, the Company estimated that its remediation efforts were approximately 25% complete. Successful completion of the Year 2000 conversion program is substantially dependent upon successful implementation of the Company's new customer management information system which is dependent upon a third party vendor meeting an implementation schedule and delivering a system that is Year 2000 compliant. As a contingency plan, the Company will be upgrading its existing cable subscriber billing system to a version represented by the vendor to be Year 2000 compliant. There can be no assurance that (i) the new customer management information system will be implemented on schedule, (ii) the Company will successfully implement all of the other necessary hardware and software upgrades or (iii) other components of the Year 2000 conversion program will be completed in a timely manner. See "Risk Factors -- Information Systems and Automation." COSTS The Company estimates the cost of its Year 2000 program will be $4.2 million, of which $4.1 million remains to be incurred. Remediation costs and costs to replace non-compliant systems are expensed as incurred. Additionally, the Company has incurred and will incur costs related to the purchase and implementation of its new accounting system and customer management information systems. The estimated total cost of these systems is $7.6 million, of which $3.6 million remains to be incurred. The foregoing estimates will likely be revised and there can be no assurance that the revisions will not be significant. The estimated costs of the project and the date which the Company has established to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans, the cost of third party hardware, software and services, and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, unanticipated mergers and acquisitions and similar uncertainties. The failure of the Company to become Year 2000 compliant on a timely basis could have a material adverse effect on the Company's business, financial condition, cash flows and results of operations. 39 43 RISKS AND CONTINGENCY PLAN While the Company is working to test its own mission-critical systems for Year 2000 compliance, the Company does not control the systems of its service or content providers. The Company has taken an inventory of its third party service or content providers and believes that its inventory is complete. However, there can be no assurance that mission critical providers have not been overlooked. Based on this inventory, the Company is currently seeking assurances from its suppliers and strategic business partners regarding the Year 2000 readiness of their systems. Many of the Company's third party providers have indicated that they are, or will be, Year 2000 compliant. The Company, however, has not undertaken an in-depth evaluation of such providers in relation to the Year 2000 issue and the ability of third parties with which OpTel transacts business to adequately address their Year 2000 issues is outside of OpTel's control. The Company has not obtained and will not obtain Year 2000 certifications from video programming suppliers, ILECs, CLECs and IXCs with whom it does business. There is risk that the interaction of the Company's systems and those of its suppliers or business partners may be impacted by the Year 2000 change. In addition, in light of the vast interconnection and interoperability of telecommunications networks worldwide and the reliance of cable television systems on satellite distribution of programming, the ability of any cable television or telecommunications provider, including the Company, to provide services to its customers (e.g., to complete calls and deliver programming and to bill for such services) is dependent, to some extent, on the networks and systems of other parties. To the extent the networks and systems of those parties are adversely impacted by Year 2000 problems, the ability of the Company to service its customers may be adversely impacted as well. There can be no assurance that the failure of OpTel or such third parties to adequately address their respective Year 2000 issues will not have a material adverse effect on OpTel's business, financial condition, cash flows and results of operations. In a recent release regarding Year 2000 disclosure, the Commission stated that public companies must disclose the most reasonably likely worst case Year 2000 scenario. Although it is not possible to assess the likelihood of any of the following events, each must be included in a consideration of worst case scenarios: widespread failure of electrical, gas, and similar supplies serving the Company; widespread disruption of the services provided by common communications carriers and satellites that transmit video programming; similar disruption to the means and modes of transportation for the Company and its employees, contractors, suppliers, and customers; significant disruption to the Company's ability to gain access to, and remain working in, office buildings and other facilities; failure of controllers contained in the cable television system headends and of the Company's video distribution network; failure of the Company's switches, telephone network and telephone traffic distribution system; failure in customer service networks and/or automated voice response systems; and failure of substantial numbers of the Company's critical computer hardware and software systems, including both internal business systems and systems controlling operational facilities such as electrical generation, transmission, and distribution systems; and the failure of outside entities' systems, including systems related to billing, banking and finance. The financial impact of any or all of the above worst-case scenarios has not been and cannot be estimated by the Company due to the numerous uncertainties and variables associated with such scenarios. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third party providers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Company believes that, with the implementation of new business systems and completion of the Year 2000 project as scheduled, the possibility of significant interruptions of normal operations should be reduced. In addition, the Company is currently developing appropriate contingency plans to address situations in which various systems of the Company, or of third party providers, are not Year 2000 compliant. The Company also intends to participate in industry wide efforts to address Year 2000 issues, the goal of which is to develop contingency plans which address not only the Company's issues but those of the industry as a whole. 40 44 RECENTLY ISSUED ACCOUNTING PRINCIPLES Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," is effective for earnings per share calculations and disclosures for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period earnings per share data that is presented. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share," and provides reporting standards for calculating "Basic" and "Diluted" earnings per share. The Company has adopted SFAS No. 128, which did not have a significant impact upon the Company's reported earnings per share, and its earnings per share computations have been restated for all prior periods. Effective September 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which established standards for the reporting and display of comprehensive income and its components in the financial statements. The Company has no items of other comprehensive income to report in the periods presented. The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way public companies disclose information about operating segments, products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The Company is currently evaluating the applicability of the requirements of SFAS No. 131. Depending on the outcome of the Company's evaluation, additional disclosure may be required for fiscal 1999. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for accounting and reporting for derivative instruments. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999; however, earlier application is permitted. Management is currently not planning on early adoption of this statement and has not completed an evaluation of the impact of the provisions of this statement on the Company's consolidated financial statement. INFLATION The Company does not believe that inflation has had a material effect on its results of operations to date. However, there can be no assurance that the Company's business will not be adversely affected by inflation in the future. MARKET RISK At February 28, 1999, the Company had no derivative financial instruments. Furthermore, substantially all of the Company's indebtedness bears a fixed interest rate. Therefore, the Company is not sensitive to changes in market interest rates. 41 45 BUSINESS THE COMPANY OpTel is a leading network based provider of integrated communications services, including local and long distance telephone, cable television and high speed Internet access services, to residents of MDUs in the United States. In each market that it serves, OpTel seeks to become the principal competitor in the MDU marketplace to the ILEC and the incumbent franchise cable television operator by providing a package of voice, video and Internet access services at competitive prices. OpTel believes its ability to deliver an integrated service offering to MDU residents over its own networks and its long-term contractual relationships with MDU owners and associations provide it with a competitive advantage. MDUs comprise a wide variety of high density residential complexes, including high- and low-rise apartment buildings, condominiums, cooperatives, town houses and mobile home communities. According to 1990 U.S. Census Bureau data, there are more than 13.2 million dwelling units in MDUs with greater than 10 dwelling units in the United States. Within the MDU market, the Company focuses on Large MDUs. Based on industry sources, the Company believes that, within its existing markets there are approximately 3.0 million dwelling units within these Large MDUs. The Company currently provides cable television and telecommunications services in a number of metropolitan areas including Houston, Dallas-Fort Worth, Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco, Chicago, Atlanta, Orlando-Tampa and Indianapolis. The Company is licensed as a CLEC in each of its major markets. The Company has commenced offering central office switched local exchange services in Houston and Dallas-Fort Worth and intends to offer these services in substantially all of its major markets by the end of calendar 2000. In addition, the Company commenced offering high speed Internet access at select MDUs in Houston, Dallas-Fort Worth and San Francisco in January 1999 and intends to introduce its high speed Internet access services in substantially all of its major markets over the next 12 months. As of February 28, 1999, the Company had 435,738 units under contract and 401,600 units passed for cable television services and 218,023 cable television subscribers. At that date, the Company had 107,109 units under contract and 47,462 units passed for telecommunications and 13,229 telecommunications lines in service. OpTel secures long-term Rights of Entry with MDU owners. Rights of Entry generally grant OpTel the exclusive right to provide cable television service to an MDU or group of MDUs and provide that the MDU owner will promote OpTel as the preferred provider of telecommunications services within the MDU. Rights of Entry generally provide OpTel with the exclusive services of the MDU's leasing staff to market the Company's services to residents. Rights of Entry also generally grant OpTel the exclusive right to use the coaxial cable network at the MDU. As a result, at MDUs where OpTel has cable television Rights of Entry, OpTel effectively will be the only company positioned to provide high speed Internet access via cable modem. Rights of Entry generally provide financial incentives to property owners to promote and sell the Company's services to MDU residents. The Company's Rights of Entry typically have original terms of 10 to 15 years (five years for Rights of Entry with condominium associations). The weighted average unexpired term of the Company's Rights of Entry was approximately eight and one half years as of February 28, 1999 (assuming the Company's exercise of available renewal options). The Company intends to continue to develop and utilize its own networks to deliver its service offerings. The Company also plans to collocate network facilities for telecommunications services in selected ILEC end offices in certain of its markets. Through collocation, the Company will lease the ILEC's transport network on an unbundled basis to initially reach a subscriber. The Company believes collocation will decrease the time required to provide telephone services to a subscriber, increase the Company's addressable market by providing a cost effective means of servicing smaller MDUs and, over time, promote new Rights of Entry. The Company will select the ILEC end offices in which it will collocate based upon MDU concentration. When it has secured a Right of Entry and a sufficient subscriber base at an MDU, the Company intends to bring its own network transport facilities to the MDU and discontinue collocation services in order to increase operating margins. In addition, the Company intends to test market telephone services to residents of single 42 46 family dwellings in certain markets where it has collocated facilities. The initial test will be conducted in the Houston market. OpTel is a holding company with limited assets that conducts substantially all of its operations through its subsidiaries. OpTel derives substantially all of its revenue from the operations of its subsidiaries. OpTel has 22 subsidiaries, each of which generally operates in a specific geographic area. INDUSTRY OVERVIEW -- MARKET OPPORTUNITIES Widespread Changes in Communications Industry Both the telephone and cable television segments of the communications industry are currently undergoing widespread changes brought about by, among other things, (i) decisions of federal and state regulators which have opened the monopoly local telephone and cable television markets to competition, (ii) the ensuing transformation of the previously monopolistic communications market controlled by heavily regulated incumbents into a consumer-driven competitive service industry, and (iii) the need for higher speed, higher capacity networks to meet the increasing consumer demand for expanded communications services including broader video choices and high speed Internet services. The convergence of these trends has created opportunities for new types of communications companies capable of providing a wide range of voice, video and data services. Opening of Communications Markets Divestiture of the Bell System. Until the passage of recent federal legislative reform and other state and federal regulatory efforts to expand competition into the local telephone market, the structure of the U.S. telecommunications industry was shaped principally by the 1984 court-supervised divestiture of local telephone services from AT&T (the "Divestiture") and other judicial and regulatory initiatives which were designed primarily to implement structural and technical industry changes through which competition could develop in the long distance market. Under this structure, the RBOCs and certain other LECs were permitted to retain their monopolies in the provision of local exchange services, but were required to connect their local subscribers to the long-distance services of AT&T and other IXCs. Under this regime, two distinct industry segments developed; competitive IXCs, which offered subscribers long distance telephone services between judicially defined LATAs, and monopoly LECs, which offered subscribers local and toll services within judicially defined LATAs, including connection (or "access") to IXCs for interLATA long-distance services. As a result, the long-distance business became intensely competitive, with low barriers to entry and many service providers competing in a commodity-type market, while providers of local exchange services continued to face relatively little competition. Deregulation of Local Telephone Services. After the structural and technical network changes were put in place following the Divestiture to give IXCs other than AT&T "equal access" to the local exchange facilities of the monopoly ILECs, and with long-distance competition beginning to provide consumers with diverse services and lower rates, regulatory policy makers gradually began to examine whether the competitive benefits which were being experienced in the long-distance marketplace as a result of Divestiture should be expanded to local exchange services. While a small number of states and the FCC had already adopted rules and regulations which opened certain limited and discrete segments of the local exchange market to competition from CAPs and CLECs offering primarily dedicated high-speed private line and some local switching services to large business users, the passage of the Telecom Act in February 1996 codified the pro-competitive policies on a national level and required both the FCC and the state regulatory commissions to adopt dramatic and sweeping changes in their rules and regulations in furtherance of those policies. The Telecom Act required regulators to remove market entry barriers and to enable companies like OpTel to become full service providers of local telephone service by, among other things, mandating that the ILECs provide interconnection and competitively priced network facilities to competitors. In addition, the Telecom Act permits RBOCs to offer long-distance interLATA services in competition with IXCs once they have demonstrated that they have implemented changes to permit economically efficient competition in their local markets for both business and residential services. The Telecom Act also repealed the LEC/cable television 43 47 cross-ownership restriction, which prohibited LECs from providing multichannel television directly to subscribers in their telephone service areas. See "-- Regulation." Deregulation of Cable Television. Unlike the local telephone market, the cable television market is not subject to regulatory or statutory prohibitions on competition. Nevertheless, competition to incumbent franchised cable television operators has developed in relatively few markets nationwide. Because of the lack of any meaningful competition, in 1992 Congress passed legislation providing for the regulation of certain cable rates. Subsequently, as part of its general goal of supplanting regulation with competition, the Telecom Act took further steps to provide alternative regulatory structures to encourage entry into the multichannel video programming distribution market. Rapid Growth of Internet Access Services. In recent years, the Internet has experienced rapid growth and the number of subscribers accessing the Internet is expected to increase significantly in the foreseeable future. ISPs provide a means for subscribers to access the Internet's resources. ISP Internet access services vary from dial-up access to high speed dedicated transmission lines and high speed cable modem access for broadband services. OpTel's Opportunity. The Company believes that its ability to serve a single subscriber with both twisted pair and coaxial cable "last mile" connections positions the Company to take advantage of the new regulatory and market environment. As a result, the Company believes that it will be among the first to offer a single-source package of integrated voice, video and Internet access services in its MDU markets. By combining the enhanced telephone services offered by CLECs with high quality video programming and high speed cable modem based Internet access, OpTel will act as a single source provider of a wide range of voice, video and Internet access services to the MDU market. OpTel's integrated service offerings are available either individually or in bundled packages, providing the consumer with added choice and convenience. STRATEGY OpTel's goal is to become the nation's largest integrated communications provider for Large MDUs. In order to achieve this objective, OpTel has customized strategies to rapidly and cost effectively address its markets, deploy its networks and offer an integrated service package supported by superior customer service. The following highlights key elements of OpTel's growth and operating strategies: Provide an Integrated Service Offering. In order to establish the broadest possible relationship with its subscribers, OpTel offers an integrated package of communications services at competitive rates. OpTel's service offerings include: (i) basic and premium tier cable television services, which the Company can customize on a sub-market basis to meet local preferences; (ii) a full featured switched local and long distance telephone offering; (iii) high speed Internet access via cable modem with downstream transmission speeds of up to 1.5 MB per second, which is delivered through a venture with an independent ISP; and (iv) where market conditions justify, an additional tier of DBS programming from EchoStar that includes over 300 channels of digital video and audio programming. The Company believes its integrated service offering will capitalize on MDU residents' preference for a single source provider of communications services, enhancing OpTel's ability to attract and retain subscribers. Continue to Rapidly Expand Subscriber Base. The Company intends to rapidly expand its subscriber base by: (i) securing additional Rights of Entry from MDU owners through the use of its experienced and growing sales force and (ii) increasing penetration and cross-selling additional services to existing subscribers in MDUs where the Company has Rights of Entry through the use of marketing and incentive programs. The Company will continue to market its Rights of Entry on a business to business basis to local, regional and national MDU owners, including REITs. The Company's strategy to promote subscriber growth includes having MDU leasing agents provide an effective point of sale including at the time MDU residents initially secure their leases. As an additional strategy to drive growth, the Company will directly market local and long distance telephone services to tenants residing in MDUs not covered by Rights of Entry but who can be served by collocating telecommunications network facilities at certain ILEC end offices and leasing unbundled transport network from that ILEC. The Company believes that its ability to directly market services to MDU residents will drive Rights of Entry with owners who will want to share in OpTel's success. When it has 44 48 secured a Right of Entry and a sufficient subscriber base at an MDU, the Company intends to bring its own network transport facilities to the MDU and discontinue collocation services in order to increase operating margins. Deploy Cost Effective Networks. OpTel's networks are specifically designed to provide services to MDUs. OpTel's advanced proprietary network infrastructure utilizes a combination of point-to-point microwave transmission equipment and fiber optic cable to efficiently deliver the Company's various services to MDU residents. A substantial portion of the Company's network cost to serve an MDU is related to the infrastructure specific to that MDU and is invested only after the Company and the MDU owner have entered into a long-term Right of Entry. The Company plans to interconnect its microwave network hubs to provide a redundant ring architecture for telecommunications and to permit the future transport of digital video programming and Internet traffic from a single source within a market. The Company intends to expand its use of central office switches in order to improve cost efficiencies and enhance its local service offering. The Company expects to serve substantially all of its major markets with its own central office switches by the end of calendar 2000. As a licensed CLEC in each of its major markets, the Company also intends to collocate facilities and lease ILEC transport in order to offer telecommunications services in advance of installing network transport facilities from its switch to the subscriber. Over time, OpTel believes substantially all telecommunications services to MDUs serviced under Rights of Entry will be migrated from ILEC leased transport network to its own network facilities. Provide Superior Customer Service. The Company believes that an important success factor for competitive service providers will be to ensure superior customer service. Accordingly, the Company has focused on implementing, provisioning and servicing practices designed around the residential MDU customer. The Company has a national customer service center staffed with knowledgeable representatives to address the needs of residents 24-hours-a-day, seven-days-a-week and dedicated local service teams, trained to support all of the Company's service offerings, that provide prompt installation and response to customer service calls. The Company also has service center staff dedicated to responding to calls from MDU owners and their leasing agents. Because the Company believes that the best way to control the quality and consistency of technical and field services is to train and supervise the service technicians, the Company relies primarily on its own personnel to perform these functions and dedicates individual technical service teams to a few proximate MDUs. Pursue Selective Acquisitions and Strategic Relationships. OpTel began operations in April 1993 with a strategy of consolidating the then fragmented private cable television, or non-franchise cable television, industry serving MDUs. Since May 1996, the Company has completed and successfully integrated six acquisitions of MDU oriented video providers representing approximately 700 MDUs served and 103,000 subscribers. The Company intends to continue to seek acquisition opportunities in order to capitalize on economies of scale, expand its subscriber base, provide a client base to cross-sell its other services and decrease the time to market. The Company delivers high speed Internet access services through a strategic relationship with an ISP that specializes in delivering broadband Internet connectivity and content to MDUs. In addition, the Company has entered into a strategic relationship with EchoStar for the delivery of an additional tier of DBS programming and will continue to evaluate other strategic alliances. MARKETS Historically, the Company's strategy has been to enter markets either through the acquisition of private cable television operators serving the target market or by entering into Rights of Entry with a major MDU owner in the market. Upon acquisition of an operator, the Company historically has begun the process of upgrading the acquired systems by converting MDUs from SMATV technology to the Company's microwave or, in Houston, fiber optic networks, adding additional programming and improving customer service. In addition, the Company has been able to achieve cost efficiencies by consolidating acquired operations into its existing organization. The Company's strategy for deploying telecommunications services in its markets is through developing network infrastructure which utilizes, to the extent possible, elements of the Company's existing video distribution network. See "-- Network Architecture." 45 49 The following table sets forth, as of February 28, 1999 the markets where OpTel currently operates and, for each such market, certain additional information including the date the Company launched, or intends to launch, its central office switched telecommunications service offering. The timing and order of the launch of central office switched telecommunications services in each of the Company's markets may vary and will depend on a number of factors, and no assurance can be given the Company will launch such services in each of its markets.
NUMBER OF UNITS IN UNITS UNDER NUMBER OF MDUS UNITS UNDER CABLE CONTRACT FOR TELE- UNITS IN WITH OVER CONTRACT UNITS PASSED TELEVISION TELE- COMMUNICATIONS LOCATION MARKET(1) 150 UNITS(2) FOR CABLE FOR CABLE(3) SUBSCRIBERS COMMUNICATIONS(4) LINES IN SERVICE - -------- --------- ------------ ----------- ------------ ----------- ----------------- ---------------- Houston.............. 363,000 315,000 144,565 138,113 65,231 30,926 5,059 Dallas-Fort Worth.... 486,000 405,000 62,207 52,577 25,531 26,198 4,289 Los Angeles.......... 730,000 295,000 27,815 20,634 13,467 9,202 93 Phoenix.............. 219,000 155,000 26,359 25,848 10,119 3,326 368 San Francisco........ 410,000 246,000 25,724 23,930 16,138 5,046 70 Denver............... 142,000 106,000 19,402 19,009 10,661 7,031 298 San Diego............ 504,000 304,000 24,051 23,348 14,031 4,998 943 Miami-Ft. 234,000 225,000 27,825 25,079 19,530 8,343 165 Lauderdale......... Chicago.............. 417,000 342,000 30,552 29,933 18,726 3,109 90 Atlanta.............. 285,000 233,000 11,084 10,530 6,116 1,291 132 Orlando-Tampa........ 240,000 205,000 18,372 17,231 10,339 2,494 286 Other markets(5)..... -- -- 17,782 15,368 8,134 5,145 1,436 --------- --------- ------- ------- ------- ------- ------ Total........ 4,030,000 2,831,000 435,738 401,600 218,023 107,109 13,229 ========= ========= ======= ======= ======= ======= ====== EXPECTED CLEC SERVICES LOCATION LAUNCH DATE - -------- ---------------- Houston.............. In service Dallas-Fort Worth.... In service Los Angeles.......... 3rd Quarter 1999 Phoenix.............. 3rd Quarter 1999 San Francisco........ 3rd Quarter 1999 Denver............... 4th Quarter 1999 San Diego............ Fiscal 2000 Miami-Ft. Fiscal 2000 Lauderdale......... Chicago.............. Fiscal 2000 Atlanta.............. Fiscal 2001 Orlando-Tampa........ Fiscal 2001 Other markets(5)..... Total........
- --------------- (1) Represents rental units in MDUs and is based on March 25, 1998 information published by industry sources. The number of units does not include condominiums. According to 1990 U.S. Census Bureau data there were 1.8 million dwelling units in condominiums in the Company's markets. (2) Represents rental units in MDUs with more than 150 dwelling units in the United States and is based on March 25, 1998 information published by industry sources. The number of units in MDUs with greater than 150 units does not include condominiums. (3) Units passed represents the number of units to which the Company has connected its cable television systems. (4) The Company has connected telecommunications infrastructure at only 47,462 of the units under contract for telecommunications. (5) Other markets include Austin, Texas; Las Vegas, Nevada; Indianapolis, Indiana; and greater Washington, D.C. The Company installed its first central office switches in the Houston and Dallas-Fort Worth markets and currently offers switched access local exchange services to most of its telecommunications customers in these markets. As of February 28, 1999, the Company had 57,124 units under contract for telecommunications in Houston and Dallas-Fort Worth. The Company intends to progressively commence full scale marketing of local exchange based telecommunications services in substantially all of its major markets by the end of calendar 2000. The Company is licensed as a CLEC in all of its major markets and has completed or is negotiating interconnection agreements with the principal ILECs in each of these markets. The Company commenced offering high speed Internet access at select MDUs in Houston, Dallas-Fort Worth and San Francisco in January 1999, and intends to introduce its high speed Internet access services in substantially all of its major markets over the next 12 months. SERVICES OpTel provides a wide range of voice, video and Internet access services, both individually and as integrated service offerings. Voice. OpTel's telephone Rights of Entry generally provide that the MDU owner will market exclusively OpTel's local telephone services to MDU residents. In the markets where it has central office switches, OpTel offers local exchange telephone service, including standard dial tone access and substantially all other feature groups provided by the ILEC. OpTel offers a wide range of value-added services, including call forwarding, call waiting, caller identification, conference calling, speed dial, calling card, 800-numbers and voice mail. OpTel generally prices its local telephone offering at a discount to the ILEC rates in each of its serviced markets. OpTel also provides long distance services, including outbound, inbound and calling card services, through a resale arrangement with a large national interexchange carrier. OpTel contracts or plans to contract 46 50 for other ancillary services, including operator service, directory listings and emergency 911 service and, in certain markets, transport, from the local ILEC and other service providers. The Company currently provides telephone service under two regulatory frameworks. In Houston and Dallas-Fort Worth, the Company provides telephone services as a CLEC through Company owned central office switches. In other markets, and to a limited extent in Houston and Dallas-Fort Worth, OpTel provides telephone services as an STS provider. The Company intends to convert a substantial portion of its STS telephone operations to CLEC operations and to provide switched access local exchange services to a substantial portion of its telephone customers by the end of calendar 2000. Video. OpTel offers its subscribers a full range of popular cable television programming at competitive prices. The Company's networks are capable of delivering up to 72 uncompressed analog channels of programming. The Company offers various programming packages to its cable television subscribers. The Company's basic video programming package provides extensive channel selection featuring all major cable and broadcast networks. The Company's premium video programming package features uninterrupted, full-length motion pictures, sporting events, concerts and other entertainment programming and includes HBO, Cinemax, Showtime and The Movie Channel, as well as supplementary channels such as HBO 2, HBO 3 and Cinemax 2. Premium services are offered individually or in discounted packages with basic or other services. Certain of the Company's systems are capable of offering movies, sporting events, concerts and other special events on a pay-per-view basis. In addition, the programming selections available at an MDU served by the Company's microwave networks can be tailored on a sub-market basis to meet local preferences and, unlike franchise cable television systems which may be required to carry all local broadcast channels and public access channels, the Company's microwave networks can utilize all of their available channels to provide popular entertainment, news and information programming. The Company's programming packages are generally competitively priced compared to similar packages offered by the incumbent franchise cable television operator. To enhance its video programming offerings, the Company has made arrangements with a distributor of DBS programming services providing for the Company's receipt of programming via DBS technology and the insertion of that programming into its analog lineup ("DBS Transport Right"). The Company currently uses the DBS Transport Right on a limited basis to service MDUs in its San Francisco and Miami-Ft. Lauderdale markets using a single, standard DBS receiving antenna at each serviced MDU. The DBS signal is received in digital form, converted at the MDU receiver site to analog form and distributed over the existing coaxial cable to the subscriber's unit. The DBS Transport Right permits the Company to provide basic programming or to supplement the Company's other programming services. DBS Services. To augment its own video programming offerings, the Company has entered into an agreement with EchoStar that provides OpTel with the right to order and receive, on behalf of OpTel's MDU customers, EchoStar's DISH Network DBS programming. At MDUs where the Company decides to offer this service, its basic and expanded basic cable customers will be able to select any one or more of DISH Network's programming services or packages as additional tiers. DISH Network's digital service offers CD-quality audio and high-quality video channels providing over 300 programming services consisting of local, national and international video and music entertainment. To receive and distribute DISH Network's programming at a particular MDU, the Company will install on the property one or more DBS receiving antennae and signal distribution equipment. The Company will then distribute DISH Network's DBS services in digital format to MDU customers through the Company's on-property cable distribution network. The Company's agreement with EchoStar has an initial term ending December 31, 2001. High-Speed Internet Access. OpTel has recently initiated a cable modem based high-speed Internet access service in its Houston, Dallas-Fort Worth, San Francisco and Denver markets in conjunction with I(3)S, an ISP that specializes in delivering broadband Internet connectivity and content to MDUs. The Company and I(3)S have a strategic alliance to provide high-speed Internet services in the Company's major markets. The 47 51 Company intends to roll out its high speed Internet access service in substantially all of its major markets over the next 12 months. The Company expects to offer customers a choice of transmission speeds ranging from approximately 64 kilobits ("KB") per second (normal dial-up Internet speed is typically 28.8 KB per second) to 1.5 megabits ("MB") per second. Internet connections providing transmission speeds greater than 128 KB per second are generally referred to as "high-speed." The transmission speeds of the services that the Company intends to offer will greatly exceed the speed of services typically offered by ILECs and compare favorably to Integrated Services Digital Network ("ISDN") and to digital subscriber line ("DSL") services that might be offered by competitors. OpTel initially will connect each property to the ISP's point of presence using OpTel's microwave transport or its owned or leased local loop transport. At each property, the data stream will be carried to the subscriber's unit via the property's existing coaxial cable distribution wiring. The subscriber will connect a personal computer to the high-speed Internet service using software provided by the ISP and the subscriber's cable modem which will be connected to a standard cable television outlet. Optel intends to explore the possibility of providing dial-up Internet access services in addition to its current high-speed Internet access services. The Company is also evaluating offering a DSL high speed Internet access service. If offered, such services may be bundled with other services or offered on a stand-alone basis. NETWORK ARCHITECTURE The Company's strategy is to deliver its service offerings through integrated networks. The diagram below depicts the configuration of a typical microwave network used by the Company to deliver cable television, telecommunications and high speed Internet access services. DIAGRAM The Company uses a combination of point-to-point microwave transmission equipment and fiber optic cable in order to offer a single source for video, voice telecommunications and eventually high speed Internet access services. As of February 28, 1999, the Company had 56 microwave networks in service (consisting of over 650 microwave paths) in eleven metropolitan areas, and, in Houston, three fiber optic networks, covering over 400 route miles. In order to integrate service offerings, the Company actively adds properties it services 48 52 within existing network coverage to its networks and seeks to cost effectively develop new networks to cover MDU clusters serviced by the Company in new or expanded markets. To maximize network coverage of its microwave networks, the Company establishes hubs designed to service MDU clusters (each a "Network Hub"). Network Hubs usually are located on rooftops or towers. The network is extended from the Network Hubs to the serviced MDUs via point-to-point microwave using 18GHz for video, 23 GHz for telephone and, in certain markets, 12GHz for video. Each Network Hub includes equipment to receive and transmit the Company's video programming. The signal is transmitted to a receiving dish at the MDU which must be within the line of site of the Network Hub or a repeater site. To ensure transmission quality, the Company limits the radius of each microwave link to between four and ten miles, depending on topographic and climatic conditions. Within the MDUs it serves, the Company distributes video programming and Internet services via conventional coaxial cable. The on-property network uses a combination of traps (electronic filtering devices), addressable decoder-converter boxes and interdiction. OpTel's network design is digital capable. All voice traffic over OpTel's networks is digitally encoded. The networks will facilitate digital compression for video signal when economical and required by the marketplace. If OpTel is required to carry digital broadcast programming (e.g., HDTV), then the networks may be upgraded to transmit such programming without material architectural change. The Company transports video programming to MDUs which are not yet on the Company's networks by receiving video programming at a self-contained SMATV head end located at the MDU. The Company intends to convert the majority of its SMATV systems to microwave or fiber optic networks by the end of calendar 2000. To roll out its central office switched voice telecommunications offering in areas covered by its microwave networks, the Company will link certain of its Network Hubs to both the central office switch and other Network Hubs to form a network backbone. When fully deployed in a market, this network backbone will utilize either of 6GHz or 11GHz microwave or fiber optic transmission capacity to form synchronous optical network ("SONET") self-healing rings that provide high speed redundant connections for the delivery of voice traffic. Where it uses fiber, the Company either will install its own fiber optic facilities or on a limited basis will lease fiber from other providers. Voice traffic will be delivered from a Network Hub to a serviced MDU over 23GHz microwave links. The 23GHz microwave links will use the same microwave transmission equipment that is used to relay video signal. Voice traffic is delivered to the individual unit using a traditional copper wire twisted pair. The Company has commenced offering network based central office switched telecommunication services in Houston over its fiber optic networks and in Dallas-Fort Worth over its microwave networks. The Company has chosen the 5ESS-2000 digital switch manufactured by Lucent Technologies Inc. ("Lucent"). Unlike traditional long distance or local switches, the Lucent switch enables the Company to provide local and long distance services from a single platform. This uniform and advanced switch platform enables the Company to (i) deploy features and functions quickly in all of its networks, (ii) expand switch capacity in a cost effective manner and (iii) lower maintenance costs through reduced training and spare part requirements. The Company expects to continue to deploy Lucent switches to provide a consistent technology platform throughout its network. The Company will use its networks to aggregate MDU long distance and local traffic at its central office switch. Prior to or in lieu of establishing a microwave link for telecommunications services, the Company may lease transport (T-1 service) from another facilities based carrier. As an initial entry strategy in certain markets, the Company may lease telecommunication switch capacity in certain markets from third-party providers in order to accelerate the roll out of telephone services and to migrate telecommunications services to its own switch over time. OpTel has entered into an agreement with a national CLEC, pursuant to which OpTel may purchase local telephone service and local loop elements. During any time period and in any market that the Company is purchasing such services from the CLEC, the CLEC has the exclusive right to provide OpTel with these services. OpTel is required to maintain each service ordered for a 24-month minimum period. The Company has not yet used the services of the CLEC in any market. 49 53 The Company intends to continue to develop and utilize its own networks to deliver its service offerings. The Company also plans to collocate network facilities for telecommunication services in selected ILEC end offices in certain of its markets. Through collocation, the Company will lease the ILEC's transport network on an unbundled basis to initially reach a subscriber. The Company believes collocation will decrease the time required to provide telephone services to a subscriber, increase the Company's addressable market by providing a cost effective means of servicing smaller MDUs and, over time, promote new Rights of Entry. The Company will select the ILEC end offices in which it will collocate based upon MDU concentration. When it has secured a Right of Entry and a sufficient subscriber base at an MDU, the Company intends to bring its own network transport facilities to the MDU and discontinue collocation services in order to increase operating margins. In areas where the Company offers telecommunications services but where it has not yet migrated to its networked central office switch architecture, a PBX switch is installed at the MDU and traffic from the MDU is transported via leased trunk lines to the LEC's central office. From the LEC's central office, local calls are routed through the LEC's network. The Company intends to convert all of its PBX serviced properties to its central office switched telecommunications offering. OpTel has contracted with a third party to monitor its central office switches and certain network elements connected to those switches. In 1999, OpTel will establish a Network Operations Center to internalize the functions now provided by the third party and to enhance monitoring, control and maintenance of its networks. OpTel's Network Operational Center will be located at its Dallas headquarters and will be staffed 24-hours-a-day, seven-days-a-week. The Network Operations Center will monitor and manage OpTel's central office telephone switches, PBX switches and certain additional elements of its telecommunications and cable television networks. SALES AND MARKETING A critical aspect of the Company's sales and marketing efforts is the development of strategic contractual relationships with MDU owners. These relationships encourage the owners to promote and sell the Company's cable television and telecommunications services to MDU residents. The Company intends to grow its business by negotiating additional Rights of Entry to serve MDUs currently served by other providers and newly-constructed MDUs, by acquiring other existing operators that serve MDUs, as appropriate, and by providing MDUs it currently serves for cable television with additional services, such as telephone and Internet access. As an additional strategy to drive growth, the Company will directly market local and long distance telephone services to tenants residing in MDUs not covered by Rights of Entry but who can be served by collocating telecommunications network facilities at certain ILEC end offices and leasing unbundled transport network from that ILEC. The Company believes that its ability to directly market services to MDU residents will drive Rights of Entry with owners who will want to share in OpTel's success. The Company tailors its sales and marketing efforts to two different constituencies: (i) owners of MDUs and their agents and (ii) residents at MDUs for which the Company has obtained Rights of Entry. Each constituency is served by a separate sales and marketing team. Sales to MDU Owners The Company maintains a full-time professional sales force dedicated to securing Rights of Entry from owners of MDUs. Many of the Company's sales representatives have previous experience in commercial real estate sales and leasing. The Company has developed an incentive compensation plan for sales personnel which the Company believes encourages sales personnel to target MDUs with more favorable demographic characteristics. Promotion of sales to local MDU owners is conducted primarily by (i) using established relationships with property developers, owners and management companies, (ii) direct mail and direct sales campaigns to owners and apartment managers, (iii) canvassing MDU owners with properties within the coverage of the Company's existing and planned networks and (iv) attending and participating in trade shows, conventions and seminars targeted to the MDU industry. In addition, the Company markets to owners of large 50 54 multiregional portfolios of MDUs. When marketing to MDU owners, the Company emphasizes the following competitive advantages: New Revenue Source for MDU Owner. An MDU owner who enters into Rights of Entry with the Company generally receives a percentage of the revenue generated by the MDU. The revenue sharing percentages generally range between six and ten percent of such revenue, are often scaled based on penetration and are fixed over the term of the Right of Entry. The Company may from time to time pay up-front "key-money" in lieu of or in combination with revenue participation. While some franchise cable television operators and ILECs now offer revenue sharing and access fee arrangements to some MDU owners, it is the Company's experience that neither the ILECs nor the incumbent franchise cable television operators are willing to offer broad-based, revenue-based incentive compensation to MDU owners. Property Enhancements. The Company often installs a package of telecommunications and security enhancements at the MDUs it serves, at a nominal cost or at no cost to the MDU owner. For example, the Company can install a monitoring camera at the main entrance that permits MDU residents to identify guests by tuning their television set to the building's security channel. In addition, the Company often provides a dedicated information channel that permits the building's management to send messages to the MDU residents over the private cable television system. These enhancements are relatively inexpensive for the Company to provide and can be important to MDU owners and property managers. New Marketing Tool and Amenity to Rent Apartments. The principal concern of an MDU owner is to rent apartments. The Company believes that its services and property enhancements can serve as an important marketing tool for owners to attract prospective tenants because its services are generally provided at a price competitive with those charged by the franchise cable operator and lower than those charged by the ILEC and long distance carriers. The Company works with on-site managers to emphasize the benefits of the Company's services and the added value and convenience provided by the Company. The Company also maintains direct lines to facilitate rapid response to customer support calls initiated by MDU owners and managers. Marketing to MDU Residents Once an MDU owner executes a Right of Entry, the Company aggressively markets its services to actual and potential subscribers within the MDU in order to increase penetration rates for basic and additional services. The Company believes that its best opportunity for a sale arises when a resident first signs a lease and takes occupancy in an MDU. Accordingly, the Company believes that during the first few years after it activates cable television or telecommunications services at an MDU it benefits from the high rate of MDU resident turnover. The Company has developed orientation and incentive programs for on-site property managers and leasing agents, with the objective of enlisting them as the Company's subscriber sales force. In addition, the Company markets to residents of MDUs covered by Rights of Entry through (i) direct mail and direct sales campaigns, (ii) special promotions and sign-up parties, (iii) establishment of a physical presence at a building and (iv) distribution of point-of-sale marketing materials. The Company intends to market telephone services to residents of MDUs not covered by Rights of Entry but that can be serviced using the Company's collocation strategy by (i) direct mail and direct sales campaigns, including telemarketing, and (ii) where the MDU owner permits, through on property sales activities similar to those described above. The Company stresses the following themes when marketing its services to MDU tenants: Simplicity and Convenience. In general, a subscriber can order any of the Company's services offered at that MDU through the MDU's leasing agent at the time of lease signing. In addition, in certain of its markets, the Company is able to provide one-stop shopping for both cable television and telecommunications services. Competitive Pricing. The Company believes it offers a competitive telecommunications offering and cable television channel line-up (often including pay-per-view and premium services) at prices that are generally competitive with those charged by the ILEC and local franchise cable television operator. Upon introduction of its integrated billing system, the Company plans to offer pricing incentives to purchase more than one service from OpTel. 51 55 Competitive Video Offering. The Company's analog video programming offering at an MDU is generally competitive with or superior to the analog offering of the local franchise operator in that market. In addition, the programming selections available at an MDU served by the Company's microwave networks can be tailored on a sub-market basis to meet local preferences and, unlike franchise cable television systems which may be required to carry all local broadcast channels and public access channels, the Company's microwave networks can utilize all of their available channels to provide popular programming. The Company believes that its additional tier of DBS programming will be superior to the current or announced offerings of the franchise cable television operator in each of its markets. Better Service and Quality. The Company is upgrading its networks and support systems to ensure continued reliable, high quality delivery of a range of cable television and telecommunications services and expanding its offerings to encompass a broad range of value-added telecommunications services. The Company is committed to providing excellent customer service. The Company believes the most effective means of attracting and retaining MDU owners and subscribers is by providing high quality subscriber service, including: (i) maintaining a 24-hour-a-day, seven-day-a-week subscriber telephone support, (ii) com-puterized tracking of all incoming calls to minimize waiting times, (iii) service calls generally made the same day the subscriber indicates a service problem, (iv) scheduling flexible, seven-day-a-week installation and service appointments, (v) placing follow-up calls and on-site inspections to verify subscriber satisfaction and (vi) completing 80% of installations completed within three business days of receiving the initial installation request, often within 24 hours. The Company also uses focus groups and subscriber surveys to monitor subscriber satisfaction. STRATEGIC RELATIONSHIPS WITH MDU OWNERS A critical aspect of the Company's growth strategy is the development of strategic relationships with owners of MDU portfolios. These relationships encourage the MDU owner (which may be an ownership association) to promote and sell the Company's cable television and telecommunications services to MDU residents. The Company solicits and negotiates Rights of Entry with owners of national, regional and local portfolios of MDUs. The Company's Rights of Entry typically have original terms of ten to fifteen years (five years for Rights of Entry with condominium associations). The weighted average unexpired term of the Company's Rights of Entry was approximately eight and one half years as of February 28, 1999 (assuming the Company's exercise of available renewal options). Many Rights of Entry provide MDU owners with financial incentives to work closely with the Company to promote its products and services. Financial incentives may include revenue sharing or payment of up-front inducements to MDU owners. In addition, the Company believes that the delivery of special services tailored to MDU owners and residents provides marketing advantages to the MDU owner in leasing its units. A substantial majority of the Company's Rights of Entry were acquired through various acquisitions and, as a result, have not always contained all of the foregoing terms and provisions. The long-term Rights of Entry negotiated with MDU owners effectively make the Company the exclusive multichannel television provider, leaving MDU residents with the option of receiving multichannel television from the Company or receiving off-air programming from local broadcasters. Rights of Entry covering telecommunications include an undertaking by the MDU owner to promote OpTel as the preferred provider of telecommunications services within the MDU. The Company believes that the development of strategic relationships with MDU owners will enable the Company to maintain its preferred competitive position even if the exclusivity of the Rights of Entry becomes limited by future developments. However, legal and regulatory limitations on exclusivity could adversely affect the Company's ability to form new strategic relationships with MDU owners and could increase the capital costs associated therewith. See "Risk Factors -- Risks Associated with Rights of Entry" and "-- Regulation -- Telecommunications Regulation -- Competitive Local Exchange Carrier Regulation." 52 56 COMPETITION Substantially all markets for voice, video and Internet services are highly competitive and the Company expects that competition will intensify. In each of its markets, the Company faces significant competition from larger companies with greater access to capital, technology and other competitive resources. The Company's switched local exchange services compete with the ILEC, STS providers, CLECs and CAPs and will compete with long distance telephone companies, franchise cable television operators and Internet protocol telephone services as they begin to enter the local telephone business. The Company's long distance services compete with established IXCs and resellers and long distance Internet protocol telephone services. In addition, recent telecommunications offerings, including PCS, and future offerings may increase competition in the telecommunications industry. The Company's private cable television services compete with incumbent franchise cable television operators as well as wireless cable television operators, other private cable television operators, DBS operators and stand-alone satellite service providers. Recent and future legislative, regulatory and technological developments likely will result in additional competition in each of the markets in which the Company competes. Moreover, mergers, joint ventures and alliances among franchise, wireless or private cable television operators, RBOCs and IXCs may result in providers capable of offering bundled cable television and telecommunications services in direct competition with the Company. For example, the recent merger of AT&T and TCI has resulted in the formation of a single large, well-financed ICP with which the Company may compete. Although certain technological and regulatory barriers remain, the proposed merger could have a substantial impact on the telecommunications and cable television markets. Although the Company as a matter of course investigates new sources of programming and technologies that may increase its range of services, other larger and more diversified competitors may attract the targeted MDUs based on their increased menu of services. While the Company believes that the exclusivity provisions of its Rights of Entry provide it with competitive advantages, such advantages may be significantly diminished by technological and other developments beyond the control of the Company. In addition, technological developments may allow competitors of the Company to bypass property owners altogether and market their services directly to tenants of MDUs. See "Risk Factors -- Risks Associated with Rights of Entry" and "-- Competition." Certain of the Company's current and potential competitors are described below. ILECs. In each of its markets, OpTel faces, and expects to continue to face, significant competition for the local exchange services it offers from the ILECs, which currently dominate their local telephone markets. OpTel competes with the ILECs in its markets on the basis of product offerings (including the ability to offer integrated voice and video services), reliability, technology and customer service, as well as price. In addition, under the Telecom Act and ensuing federal and state regulatory initiatives, barriers to local exchange competition are being removed. The introduction of such competition also establishes the predicate for the incumbent RBOCs to provide in-region interexchange long distance services. The RBOCs are currently allowed to offer "incidental" long distance service in-region and to offer out-of-region long distance service. Once the RBOCs are allowed to offer in-region long distance services, they will also be in a position to offer single source local and long distance service similar to that offered by OpTel and proposed by the three largest IXCs (AT&T, MCI Worldcom and Sprint Corporation). The Company expects that the increased competition made possible by regulatory reform will result in certain pricing and margin pressures in the telecommunications services businesses. See "Risk Factors -- Regulation" and "-- Regulation." OpTel has sought, and will continue to seek, to provide a full range of local voice services in competition with ILECs in its service areas. The Company expects to compete in this market by (i) establishing strategic relationships with MDU owners so as to allow the Company to market effectively to MDU residents, (ii) providing value added, enhanced services to MDU residents, (iii) bundling its telecommunications and cable television services, (iv) providing a high level of customer service and responsiveness, and (v) competitively pricing its products. 53 57 The Telecom Act permits the ILECs and others to provide a wide variety of video services directly to subscribers in competition with OpTel. Various LECs currently provide video services within and outside their telephone service areas through a variety of distribution methods, including both the deployment of broadband wire facilities and the use of wireless transmission facilities. The Company cannot predict the likelihood of success of video service ventures by LECs or the impact on the Company of such competitive ventures. CLECs and Other Competitors. Other CLECs compete for local telephone services, although they have to date focused primarily on the market for corporate customers. In addition, potential competitors capable of offering private line and special access services also include other smaller long distance carriers, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end-users. However, OpTel believes that it will be among the first to offer an integrated package of voice, video and Internet access services to customers in MDUs. Incumbent Franchise Cable Systems. The Company's major competition for cable television Rights of Entry in each market comes from the incumbent franchise cable television operator. In certain markets serviced by the Company, franchise cable television operators now offer revenue sharing and access fee arrangements to MDU owners. There can be no assurance that these payments will not increase in the future as competition increases for access to the MDUs. Another basis of competition is the breadth of programming and range of services offered. The Company competes with franchise cable operators by (i) focusing exclusively on MDUs, (ii) sharing profits with MDU owners, (iii) providing an integrated product offering that to an increasing extent in the future will include Internet services, (iv) offering customized programming and (v) charging lower cable and local telephone rates to subscribers. Wireless Cable. Wireless cable systems are similar to the Company's 18GHz and 12GHz networks in that they use microwave transmitting and receiving equipment. Wireless cable systems differ from 18GHz and 12GHz systems in that (i) they "broadcast" their video programming directly to individual subscribers and generally not to an MDU's receiver (ii) their systems transmit in an omni-directional manner, which allows them to provide service to all households within a wireless operator's "line-of-sight," and (iii) wireless cable systems may include subscriber-to-hub transmission capabilities, which would allow them to provide interactive and telecommunication services. Historically, wireless operators have had difficulty acquiring or leasing the critical mass of channels required to offer a competitive programming lineup. Local Multipoint Distribution Service. The FCC has issued rules reallocating the 28GHz band to create a new local exchange and video programming delivery service referred to as local multipoint distribution service ("LMDS"). LMDS systems, like wireless cable systems, will use point-to-multipoint microwave distribution. Unlike wireless cable systems, however, LMDS systems will be able to provide channel capacity equal or greater to that of most cable systems, including the Company's cable systems. In addition, LMDS systems may include subscriber-to-hub transmission capabilities, which would allow them to provide interactive and telecommunication services. In March 1998, the FCC completed its auction of LMDS licenses. So far, however, there has been no significant commercial deployment of LMDS systems in the Company's serviced markets. SMATV Systems. The largest number of private cable companies are operators of SMATV systems. Like the Company, these SMATV operators offer a multichannel television service pursuant to Rights of Entry with MDU owners. Where the Company has introduced or will introduce 18GHz systems, the Company competes with SMATV systems on the basis of (i) larger channel offerings (typically SMATV offers 33 to 45 channels), (ii) the quality of its video programming delivery, (iii) customer service and (iv) the perceived high price of SMATV relative to the programming package provided. Direct Broadcast Satellite. DBS systems involve the transmission of encoded video programming direct from a satellite to the home user without any intermediate processing or retransmission by a terrestrial operator. Although prices have been decreasing, DBS service typically requires the purchase of equipment and installation fees which are a significant cost to the subscriber. In addition, subscribers generally pay a monthly programming fee to receive DBS service, which can be lower than those charged by the Company before consideration of the equipment costs. However, the Company believes that it can effectively compete with DBS systems in the MDU marketplace for the following reasons. First, DBS line-of-sight problems are 54 58 significant (unless an entire MDU is connected to the service) because a DBS antenna must be pointed in the proper direction to receive video programming from the satellite. More importantly, DBS operators are generally not permitted to retransmit network or local broadcasting programming. Certain DBS operators have announced "MDU programs" which generally consist of either (i) paying commissions to a local satellite dish dealer who has, at its own expense, overbuilt an MDU or (ii) billing MDU owners for the service on a bulk basis. The Company's Rights of Entry currently prohibit an MDU owner from allowing a DBS system to be installed at the MDU subject to legal and regulatory limitations. See "-- Regulation -- Regulation of Cable Television -- Subscriber Access" for discussion of limits on the enforceability of restrictions on DBS antennae placement in MDU areas (such as apartment balconies or patios). Internet Services. The market for Internet access services is extremely competitive and highly fragmented. No significant barriers to entry exist, and competition in this market is expected to intensify as use of the Internet grows. The Company competes (or in the future may compete) directly or indirectly with (i) national and regional ISPs, (ii) national telecommunications companies, (iii) LECs, (iv) cable operators, and (v) nonprofit or educational ISPs. Some of these present or potential future competitors have or can be expected to have substantially greater market presence and financial, technical, marketing and other resources than the Company. Certain of the Company's online competitors have introduced unlimited access to the Internet and their proprietary content at flat rates, and certain of the LECs have also introduced competitive flat-rate pricing for unlimited access and have initiated in certain markets "always on" service such as DSL. There can be no assurance that competition will not lead to pricing pressures in the Internet business. Advances in communications technology as well as changes in the marketplace and the regulatory and legislative environment are constantly occurring. In addition, a continuing trend towards business combinations and alliances in the communications industry may also create significant new competitors to OpTel. The Company cannot predict whether competition from such developing and future technologies or from such future competitors will have a material impact on its operations. See "Risk Factors -- Competition." REGULATION The telecommunications and multichannel television industries are subject to extensive regulation at the federal, state and local levels. The following summary does not purport to describe all present and proposed federal, state and local regulations and legislation relating to the telecommunications and multichannel television industries. Legislative and regulatory proposals under consideration from time to time by Congress and various federal agencies, as well as state and local franchise requirements, have in the past, and may in the future, materially affect the Company and the telecommunications and multichannel television industries. Additionally, many aspects of regulation at the federal, state and local levels currently are subject to judicial review or are the subject of administrative or legislative proposals to modify, repeal or adopt new laws and administrative regulations and policies. Neither the outcome of these proceedings nor their impact on the Company can be predicted at this time. The Company believes that it is in compliance in all material respects with all federal, state and local regulations applicable to it. In some instances, the Company has acquired businesses that did not comply with all regulations applicable to them and it undertook to remediate such matters as soon as practicable. See "Risk Factors -- Risks Associated with Acquisitions." TELECOMMUNICATIONS REGULATION The telecommunications services provided by the Company are subject to regulation by federal, state and local government agencies. As the Company implements its telecommunications strategy, which includes replacing many of its current PBX switches with networked central office switches, the Company will increasingly become regulated as a CLEC. The FCC has jurisdiction over interstate services and state regulatory commissions exercise jurisdiction over intrastate services. Additionally, local authorities may regulate limited aspects of the Company's business, such as the use of public rights-of-way. The following subsections summarize the local, state and federal regulations that pertain to the Company's current and projected telecommunications services. 55 59 Competitive Local Exchange Carrier Regulation The FCC historically has left the regulation of the intrastate aspects of local exchange service to the states. It has, however, exercised its jurisdiction over interstate matters and jurisdictionally mixed matters respecting local telephone service. The Telecom Act expands the FCC's authority to regulate local exchange service, and there can be no assurance that the FCC will not exercise this authority aggressively. State regulation of local exchange service traditionally has favored the ILECs. The state laws have, with the exception of STS, generally prohibited competition in the local exchange services market. The Telecom Act expressly preempts such prohibitions. The Telecom Act declares that no state or local laws or regulations may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service. States may, however, impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality and consumer protection. Local authorities may also require reasonable, competitively neutral compensation for use of the public rights-of-way. For purposes of the Telecom Act, CLECs and ILECs are subject to the same basic set of requirements. However, certain additional obligations are imposed on ILECs, but not on CLECs. Although the Company does not believe that the regulatory burdens applicable to CLECs will have a material effect on its business, no assurance can be given at this time regarding the extent or impact of such regulation. The Telecom Act requires all carriers, both CLECs and ILECs, to interconnect with the facilities of other carriers, to resell their services, to provide number portability, to provide dialing parity, to afford access to their poles, ducts, conduits and rights-of-way and to establish reciprocal compensation for the transport and termination of other LECs' telephone traffic. All providers of telecommunications services are also subject to the Telecom Act's requirements that they contribute to state and federal universal service funds. ILECs are subject to certain additional requirements, such as a duty to negotiate interconnection agreements in good faith, to unbundle elements of their networks, to provide nondiscriminatory interconnection with their networks, to comply with specific resale obligations, to provide notice of changes to their networks and to allow collocation of other carriers' equipment on their premises. The Company is not, however, considered an ILEC in any state. The FCC and various state PUCs are in the process of defining the precise contours of the requirements that will govern local exchange service in the future. Although the Telecom Act sets forth certain standards, it also authorizes the states to adopt additional regulations provided that such regulations do not conflict with the federal standards. It is unclear at this time how the states will respond to the Telecom Act and what additional regulations they may adopt. The Supreme Court recently vacated the FCC's regulations regarding the UNEs that ILECs are required to make available to CLECs. Although the Court concluded that the FCC does have jurisdiction to establish certain national pricing standards for UNEs, it determined that the FCC had not applied an appropriate limiting principle in identifying the UNEs subject to its rules. Accordingly, the FCC will, on remand, again consider which network elements ILECs must unbundle and make available to CLECs. In its first implementing order, issued prior to the Supreme Court decision, the FCC identified as UNEs most network functionalities for which access is technically feasible. The FCC declined, however, to define any subloop elements as UNEs. As a result, ILECs often refuse to reconfigure their networks so that CLECs may access on-property distribution facilities at a single point on or near an MDU property. Accordingly, the Company has experienced, and can be expected to continue to experience, practical difficulties bringing its network-based telephone services to subscribers at some of the MDUs that it seeks to serve. Where the Company is not able to access on-property ILEC distribution facilities, it must either install duplicative distribution facilities on the MDU property or lease unbundled loops from an ILEC in order to reach individual subscribers within the MDU. Either of these alternatives may raise the cost of service or delay entry by the Company. If, on remand, the FCC identifies subloop distribution facilities as UNEs, as advocated by the Company, the Company would likely have increased access to subscribers at the properties that it serves. The Communications Act requires LECs to pay reciprocal compensation to other carriers for terminating their local traffic. A number of ILECs have taken the position that traffic terminated to an ISP is not local and that no reciprocal compensation payment by the originating carrier to the terminating carrier for such traffic 56 60 therefore is required. The vast majority of states that have addressed the issue have rejected that argument and concluded that LECs are entitled to reciprocal compensation for terminating ISP-bound traffic. However, the FCC has determined that ISP-bound calls constitute interstate traffic for jurisdictional purposes and it is considering the adoption of a federal rule regarding the appropriate inter-carrier compensation for such traffic. There can be no assurance that traffic terminated to an ISP will not ultimately be held to be exempt from the reciprocal compensation requirements. It is not possible for the Company to predict the outcome of these or any other proceedings relating to the Telecom Act. Nonetheless, at this time it is clear that an increasing number of service providers will be seeking to compete as CLECs in the local exchange markets and that state and federal regulations will, to some extent, allow for such market entry. Although jurisdictional lines of authority and basic implementation issues are being determined by the FCC and the federal courts in accordance with the statutory provisions outlined above, several states already have begun the process of opening the local exchange market to competition. Most states require companies seeking to compete in intrastate telecommunications services to be certified to provide such services. These certifications generally require a showing that the carrier has the financial, managerial and technical resources to offer the proposed services consistent with the public interest. State regulation of telecommunications services may impose upon the Company additional regulatory burdens, including quality of service obligations and universal service contributions. The California Public Utilities Commission ("CPUC") recently issued a decision prohibiting any carrier from entering into an agreement or other arrangement with a MDU owner that has the effect of restricting access by other carriers to the property or affords other carriers with inferior access to the property. By way of example, the CPUC decision explains that an agreement that provides for the exclusive marketing of ILEC services to MDU tenants may be improper if the agreement has the effect of preventing other carriers from accessing, and providing service to, a MDU because of the building owner's financial incentives under the marketing agreement. Under the Company's Rights of Entry, the Company typically assumes ownership or management of the on-property telephone wiring and secures exclusive marketing arrangements with MDU management. The Company provides all other carriers with non-discriminatory and competitively-neutral access to the on-property wiring and believes that its Rights of Entry are consistent with the CPUC's decision. However, there can be no assurance that, if such Rights of Entry were challenged in a complaint brought by another carrier, the CPUC would not conclude otherwise. From time to time state legislative and regulatory proposals are introduced or considered in states where the Company operates which, if adopted, would limit the Company's ability to enter into exclusive marketing agreements for its telephone services. While the Company does not believe that these proposals have broad support, there can be no assurance as to the likelihood of their passage or adoption in any state. Shared Tenant Services The resale of STS is subject to the terms and conditions in the tariffs of the telecommunications company whose services it resells and to regulation by the states in which the Company resells such services. Historically, virtually all such telecommunications company tariffs flatly prohibited resale of local exchange service. However, in recent years several state legislatures and PUCs determined that resale of local exchange service is in the public interest and have directed telecommunications companies within their jurisdictions to allow for resale of local exchange service, opening the way for STS operations. Moreover, the Telecom Act requires such resale pursuant to interconnection agreements with the ILEC. In some states, PUCs have issued detailed regulations governing the provision of STS and other resale services. In other jurisdictions where no formal requirements have been adopted, most telecommunications companies have nonetheless modified their tariffs to provide for resale of local exchange services. The precise terms and conditions under which such resale services may be provided varies from state to state, and from LEC to LEC, and may include significant restrictions and limitations. These include: (i) a requirement to be certified by the state PUC, (ii) restrictions with respect to the location and ownership of MDUs to which STS service may be provided and the crossing of public rights-of-way by STS operator 57 61 facilities, (iii) regulations allowing telecommunications companies to apply different local service rate structures (e.g., measured use vs. flat rate) to STS providers and other subscribers, in some cases lessening or even eliminating efficiencies which might otherwise be realized through the use of the LECs' trunking facilities, (iv) regulations providing for LEC access or rights-of-way to directly service individual customers within an MDU and (v) in certain states, limits or prohibitions on resale of intrastate long distance and local service at a profit. None of the states in which the Company has significant operations has adopted regulations governing the provision of STS services. The California PUC has, however, adopted informal STS "guidelines." In addition, Florida requires providers of STS services to be certified to resell local exchange services. Other than the California "guidelines" and Florida's certification requirement, the Company may provide STS services in each of its major markets, subject only to individual telecommunications company tariff provisions. The tariffs of all major LECs serving these jurisdictions provide for resale of local exchange service pursuant to varying terms and conditions. Provision of STS service in these states in the future will be subject to any regulations that ultimately may be adopted by state authorities, and to changes in telephone company tariffs. Information Service Provider Regulation Information service providers, including Internet access providers, are largely unregulated at this time (apart from federal, state and local laws and regulations applicable to business in general). However, there can be no assurance that this business will not become subject to regulatory restraints. For instance, although the FCC has rejected proposals to impose additional costs and regulations on information service providers to the extent they use local exchange telephone network facilities, it has suggested that certain telephone-to-telephone services provided by information service providers using the Internet backbone may be reclassified as "telecommunications services" and subject to regulation as such. Any such change may affect demand for the Company's Internet related services. There also have been efforts at the federal and state level to impose taxes and other burdens on information service providers and to regulate content provided via the Internet and other information services. These efforts have not generally been upheld when challenged in court. Nonetheless, the Company expects that proposals of this nature will continue to be debated in Congress and state legislatures in the future. No assurance can be given that changes in current or future regulations adopted by the FCC or state regulators or other legislative or judicial initiatives relating to Internet services would not have a material adverse effect on OpTel. In addition, although there is a trend in the law away from ISP liability for content posted or published on the Internet, there can be no assurance that the Company's involvement in the provision of ISP services will not subject it to liability for acts performed by third parties using the Internet. Long Distance Resale Regulation Non-dominant IXCs, such as the Company, are subject to limited federal regulation. Nonetheless, carriers are required by statute to offer their services under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory, and to file tariffs for their international and interexchange services. As a non-dominant carrier, the Company is permitted to make tariff filings on a single day's notice and without cost support to justify specific rates. The FCC generally does not exercise direct oversight over cost justification and the level of charges for service of non-dominant carriers, although it has the statutory power to do so. The FCC has jurisdiction to act upon complaints brought by third parties, or on the FCC's own motion, against a carrier for failure to comply with its statutory obligations. REGULATION OF CABLE TELEVISION Certain of the Company's networks are, for regulatory purposes, deemed to be "Cable Systems." To constitute a Cable System, a multichannel television system must use hard-wire or fiber optic cable that makes a tangible physical crossing or use of a public right-of-way. All Cable Systems are required to obtain a local franchise and are subject to state and local regulation as well as federal Cable System regulation, including rate regulation in certain circumstances. The Company's microwave and SMATV systems are not 58 62 considered Cable Systems and thus are not subject to local franchising requirements and are free from most Cable System regulation. The Company's Houston system, a portion of its Fort Worth system and certain other small systems are regulated as Cable Systems. However, the Company's Houston, Fort Worth and other small franchise cable television systems are exempt from federal rate regulation and the universal service obligation, even though they are Cable Systems, because they are subject to "effective competition" as discussed in greater detail below. Set forth below is a discussion of the principal laws and regulations governing the Company's private and franchise cable television operations. Federal "Cable System" Regulation. The regulations imposed on Cable Systems include requirements to (i) obtain a local franchise (which may require the franchisee to pay franchise fees to local governments of up to 5% of yearly gross revenues), (ii) delete certain programs from cablecasts, (iii) comply with certain customer service standards, (iv) retransmit certain broadcast television programming, (v) in most circumstances, conform subscriber service and equipment rates to applicable federal regulations, (vi) comply with FCC equal employment opportunity ("EEO") rules and policies, (vii) make available channels for leased-access programmers at rates that are to be calculated on a formula established by the FCC and (viii) offer customer service to all buildings passed by the network. In addition, rates for basic cable service on Cable Systems not subject to "effective competition" are regulated by local franchising authorities. The Company's networks that are Cable Systems are subject to these requirements, which impose regulatory costs and reduce the speed and flexibility with which the Company and its Cable System competitors can respond to competitive challenges from other video distribution technologies. The Company's Cable Systems, however, are exempt from rate regulation because they are, the Company believes, subject to "effective competition." Cable Systems are deemed to be subject to "effective competition" if any of: (i) fewer than 30% of the households in the franchise area subscribe to the service of the Cable System, (ii) the area is served by at least two unaffiliated multichannel television operators, both of which are able to provide service to at least 50% of the households in the franchise area, and the number of households actually subscribing to all but the largest multichannel television operator exceeds 15%, (iii) the local franchising authority itself offers multichannel television to at least 50% of the households in the franchise area, or (iv) a LEC or its affiliate offers multichannel television directly to subscribers by any means (other than direct-to-home satellite services) in the franchise area. No assurance can be given that the Company does not, or will not in the future, constitute "effective competition" to any franchise cable television operator with which it competes. Copyright Licensing. Cable Systems and private cable television systems are entitled to federal compulsory copyright licensing privileges. In order to obtain a compulsory copyright, such systems must make semi-annual payments to a copyright royalty pool administered by the Library of Congress. A compulsory copyright provides a blanket license to retransmit the programming carried on television broadcast stations. Non-broadcast programming, often referred to as cable channel programming, is not subject to the compulsory copyright license. The Company purchases this copyrighted programming from program suppliers (e.g., ESPN), which in turn obtain rights to the programming directly from the program copyright owner pursuant to a private negotiated agreement. Bills have been introduced in Congress over the past several years that would eliminate or modify the cable compulsory license. The need to negotiate with the copyright owners for each program carried on each broadcast station in the channel lineup could increase the cost of carrying broadcast signals or could impair the Company's ability to obtain programming. Must-Carry and Retransmission Consent. The Communications Act grants local television stations the right to elect either to force local Cable Systems to "carry" the television station free of charge (a "must carry" right) or to prohibit Cable Systems and private cable television systems from carrying the local television station (a "retransmission consent" right). Under the must-carry rules, a Cable System, subject to certain restrictions, generally must carry, upon request by the station and depending on the number of usable activated channels on the system, all commercial television stations with adequate signals that are licensed to the same market as the Cable System. Under the retransmission consent rules, Cable Systems and private cable television systems are precluded from carrying commercial broadcast stations that choose not to exercise their must-carry rights, all "distant" commercial broadcast stations (except for "superstations", i.e., commer- 59 63 cial satellite-delivered independent stations such as WTBS), commercial radio stations and certain low-powered television stations, without obtaining those stations' explicit written consent for the retransmission of their programming. Retransmission consent agreements do not obviate a copyright license for the programming carried on the broadcaster's signal. However, Cable Systems and private cable television systems may obtain a compulsory copyright license for broadcast programming as described above. To date, the "must carry/retransmission consent" regulations have not had a significant impact on either the operations or profitability of the Company. Nonetheless, there can be no assurance that broadcasters, in some circumstances, will not withhold retransmission consent, require excessive compensation for that consent or impose onerous conditions thereon which could adversely affect the Company. Furthermore, it is unclear at this time the extent to which Cable Systems will be required to carry multiple signals of digital television broadcast stations or HDTV signals. The resolution of these must-carry issues may have a significant impact on the programming carried on the Company's systems. Elimination of the Telco-Cable Cross-Ownership Restriction. The Telecom Act repealed the LEC cable television cross-ownership restriction, which prohibited LECs from providing multichannel television directly to subscribers in their telephone service areas. This change may increase the level of competition in the multichannel television market. LECs now have several options for entering and competing in the multichannel television marketplace. LECs now may (i) provide video programming to subscribers through radio communications under Title III of the Communications Act, (ii) provide transmission of video programming on a common carrier basis under Title II of the Communications Act (i.e., provide a common carrier video platform), (iii) provide video programming as a Cable System under Title VI of the Communications Act (franchise cable) or (iv) provide video programming by means of an "open video system." Open video systems are not required to comply with the full panoply of federal Cable System regulation, but they are subject to certain additional programming selection limitations. It is unclear at this time the extent to which any of these market entry options will be used by LECs. The Uniform Rate Requirement. Prior to enactment of the Telecom Act, the Communications Act generally provided that Cable Systems were required to have a rate structure for the provision of cable service that was uniform throughout its geographic area. The Telecom Act provides that this requirement is applicable only where "effective competition" is absent. Further, the Telecom Act exempts from the uniform rate requirement non-predatory bulk discounts offered to MDUs. Consequently, the franchise cable television operators with which the Company competes now have increased pricing flexibility with respect to MDU bulk discounts. Program Access. The program access provisions of the Communications Act were intended to eliminate unfair competitive practices and facilitate competition by providing competitive access to certain defined categories of programming. Generally, these restrictions are applicable to Cable System operators, satellite cable programming vendors in which a Cable System operator has an attributable interest and satellite broadcast programming vendors. The programming access provisions prohibit these entities from charging unfair, unreasonable or discriminatory prices for programming. Further, the programming access provisions prohibit most exclusive dealing arrangements pursuant to which Cable Systems obtain the exclusive right to distribute the subject programming within their franchise areas. Such exclusive distribution arrangements have been found to inhibit the ability of new entrants to compete in the multichannel television market. The prohibition on exclusive contracts, however, is scheduled to expire on October 5, 2002 unless the FCC determines, during a proceeding that is to be conducted in 2001, that the prohibition continues to be necessary to promote competition in the multichannel television market. The Telecom Act amended the program access provisions by adding that the provisions shall also apply to common carriers and their affiliates. Thus, telecommunications companies entering the market will find it more difficult to limit their competitors' access to programming. Subscriber Access. The FCC has initiated a notice of proposed rulemaking seeking comment on whether the FCC should adopt regulations restricting exclusive contracts. The FCC has indicated that it seeks to ensure a level competitive playing field in the emerging multichannel television market. One possibility raised by the FCC is the establishment of a federal mandatory access requirement or a limit on the duration of exclusive service agreements between MDU owners and video programming providers. Although it is open to 60 64 question whether the FCC has statutory and constitutional authority to compel mandatory access or restrict exclusive agreements, there can be no assurance that it will not attempt to do so. Either such action would tend to undermine the exclusivity provisions of the Company's Rights of Entry with MDU owners. The FCC also has preempted certain state, local and private restrictions on over-the-air reception antennas placed on MDU properties, including rental properties and properties occupied by, but not within the exclusive control of the viewer. This limits the extent to which MDU owners and the Company may enforce certain aspects of the Company's Rights of Entry agreements which otherwise would prohibit, for example, placement of DBS receive antennae in MDU areas (such as apartment balconies or patios) under the exclusive occupancy of a renter. State and Local Cable System Regulation. Because Cable Systems use public rights-of-way, they are subject to state and local regulation, typically imposed through the franchising process. State and/or local officials often are involved in the franchisee selection, system design and construction, safety, consumer relations, billing and community-related programming and services among other matters. Cable Systems generally are operated pursuant to nonexclusive franchises, permits or licenses granted by a municipality or other state or local government entity. Franchises generally are granted for fixed terms and in many cases are terminable if the franchise operator fails to comply with material provisions of the franchise. Cable franchises typically contain provisions governing fees to be paid to the franchising authority, length of the franchise term, renewal, sale or transfer of the franchise, territory of the franchise, design and technical performance of the system, use and occupancy of public rights-of-way and types of cable services provided. Although federal law contains certain procedural safeguards to protect incumbent Cable Systems from arbitrary denials of franchise renewal, the renewal of a cable franchise cannot be assured unless the franchisee has met certain statutory standards. Moreover, even if a franchise is renewed, a franchising authority may impose new requirements, such as the upgrading of facilities and equipment or higher franchise fees. At least two states, Massachusetts and Connecticut, have adopted legislation subjecting Cable Systems to regulation by a centralized state government agency. There can be no assurance that other states will not similarly adopt state level regulation. The Company's Houston cable television franchise and its other limited cable television franchises are subject to state and local franchise laws. Moreover, although the Company's non-franchised private cable systems that use microwave distribution technologies are not subject to local franchise laws, state and local property tax and environmental laws are applicable to the Company's business. For example, the Company has to comply with local zoning laws and applicable covenants, conditions and restrictions when installing its antennae and other microwave equipment. In addition, a number of states have enacted mandatory access laws. Although such laws differ in some respects from state to state, state mandatory access laws generally require that, in exchange for just compensation, the owners of rental apartments (and, in some instances, the owners of condominiums and manufactured housing parks) must allow the local franchise cable television operator to have access to the property to install its equipment and provide cable service to residents of the MDU. Such state mandatory access laws effectively eliminate the ability of the property owner to enter into an exclusive Right of Entry with a provider of cable or other video programming services. In addition, Virginia has an anti-compensation statute that forbids an owner of an MDU from accepting compensation from whomever the owner permits to provide cable or other video programming services to the property. Such a statute limits the ability of a cable or other video programming provider to enter into an exclusive Right of Entry with an owner of an MDU because an owner usually is induced to enter an exclusive agreement through financial incentives. These statutes have been and are being challenged on constitutional grounds in various states. The Company does not have significant operations in any mandatory access state other than Florida (with respect to condominiums) and Illinois. When operating in Illinois, the Company generally enters into bulk sales agreements with MDU owners, whereby the MDU owner agrees to purchase cable television, at a discount, for each unit in the MDU and provides the service to the MDU resident as one of the amenities included in their rent. 61 65 MICROWAVE AND PRIVATE CABLE REGULATION The Company uses microwave distribution networks, which typically operate in the 18GHz band, to interconnect individual private cable systems with each other and with head-end facilities. The FCC exercises jurisdiction over 18GHz microwave and other transport technologies using the radio frequency spectrum pursuant to Title III of the Communications Act, which vests authority in the FCC to regulate radio transmissions and to issue licenses for radio stations. The scope, content and meaning of existing laws, rules and regulations governing all microwave technologies are subject to legislative, judicial and administrative changes. There can be no assurance that future legislative or regulatory actions will not adversely affect the Company's ability to deliver video or telecommunications programming using the radio frequency spectrum or raise the cost of such delivery. The Company's microwave networks must comply with the FCC's licensing procedures and rules governing a licensee's operations. Application to use microwave "paths" and frequencies is made to the FCC and is subject to certain technical requirements and eligibility qualifications. After microwave paths are licensed to an applicant, the facilities must normally be constructed and fully operational within 18 months of the grant. The facilities must be built in strict accordance with the terms of the granted application. New licenses are valid for ten years from the date of grant, after which the licensee must apply to the FCC for license renewal. License renewal is not an automatic right, although it is routinely granted if the licensee is in substantial compliance with the FCC rules. Licensing procedures include (i) obtaining an engineering report confirming that the proposed path does not interfere with existing paths and (ii) filing with the FCC a statement of eligibility and use, a system diagram and a statement regarding compliance with the frequency coordination requirement. The entire licensing procedure requires approximately 120 days. The Company does not "own" the paths and frequencies granted by the FCC. Rather, the Company is merely licensed or permitted to "use" the frequencies. Moreover, the rights granted to the Company to use microwave frequencies are not to the complete exclusion of other potential licensees. First, the Company's rights only extend to the microwave paths identified in its application as connecting the various points in its network. Other microwave users are permitted to file applications and serve the same buildings as the Company (in so far as the microwave licensing is concerned), but they may not interfere with an incumbent user's licensed microwave paths. Second, the Company has no right to the airspace over which the programming is transmitted. Obstructions could be constructed in the line-of-sight of the microwave paths, precluding connection of the Network Hubs with the various reception points to be served. The microwave bands used by the Company also are authorized for use by other kinds of users, including non-video, point-to-point microwave, mobile communications and satellite transmissions. Although sharing these frequencies is technically feasible, it is possible that the Company will be unable to obtain licenses for frequency paths it desires, or that it will be able to use only a portion of the frequencies at certain locations because of pre-existing users. The Company anticipates that in the future it will use 6GHz, 11GHz and 23GHz microwave frequencies, which are available for both private or common carrier communications, to provide bi-directional telecommunications services. The Company also intends to use the 11 GHz frequencies for hub-to-hub transmission of video entertainment material. The FCC recently denied a request filed by the Company for waiver of the FCC rule that prohibits private microwave licensees from using the 11 GHz frequencies for the delivery of video entertainment materials to customers or for the final radio link to a private cable system. Although there can be no assurance, the Company does not believe that the denial will have an adverse impact on its proposed use of 11 GHz frequencies for hub-to-hub transport. The application and licensing procedures for authorizations to use the 6GHz, 11GHz and 23GHz frequencies are substantially the same as those described above. Although the Company expects that 6GHz, 11GHz and 23GHz frequencies will be available on its current paths and to meet its future needs, the Company has not commenced frequency coordination, and there can be no assurance that the Company will be able to obtain licenses for these frequencies on the paths it desires. The FCC, at the request of national defense agencies, restricted the use of 18GHz frequencies in the greater Denver and Washington, D.C. areas. This change has limited the Company's ability to use 18GHz 62 66 microwave technologies in these two markets. The Company has, however, received assurances from the FCC that it will be permitted, subject to certain waiver and/or rulemaking procedures, to use 12GHz microwave as a medium to deliver multi-channel video programming and telecommunications services in Denver. The Company believes that 12GHz microwave paths are an acceptable substitute for 18GHz microwave paths and that the change will not materially adversely affect the Company's network plans in Denver. The 12GHz frequencies are not, however, generally available to private microwave licensees. Nonetheless, the Company has been granted a waiver by the FCC of the rule prohibiting the use of the 12 GHz band by private microwave licensees for the carriage of video programming material, and special temporary authority to use the 12 GHz frequencies, on selected paths in Denver. There can, however, be no assurance that 12 GHz paths will be available for the Company's future needs in Denver or the Washington, D.C. area. The FCC also has issued a Notice of Proposed Rulemaking seeking comment on a proposal to make terrestrial microwave systems secondary to satellite downlinks in 250 MHz of spectrum between 18.3 GHz and 18.55 GHz. The Company's 18 GHz networks currently use 440 MHz of spectrum in the frequencies between 18.140 GHz and 18.580 GHz. Under the proposal as originally released, terrestrial stations in existence or applied for as of September 18, 1998, would have been grandfathered as co-primary with satellite services in the 18.3-18.55 GHz band, but terrestrial systems for which applications were filed after that date would not have been permitted to cause harmful interference to satellite downlinks in the band. The Company, however, working in cooperation with the private cable industry, successfully petitioned the FCC to amend its grandfathering proposal. Under the new proposal, all terrestrial microwave stations operated in this band by private cable operators, such as those operated by the Company, that are constructed or for which an application has been filed by the date of the release of the order implementing the new rules, if such new rules are adopted, will be grandfathered as co-primary in the band. Further, in its order amending the grandfathering proposal, the FCC suggested that it would make every effort to preserve an appropriate spectrum allocation for private cable services such as those offered by the Company. Nonetheless, if terrestrial microwave systems ultimately are made secondary to satellite downlinks in the 18 GHz band, the Company's use of that band would be severely limited and there can be no assurance that the Company would be able to migrate its networks to alternative spectrum, or that such migration would not negatively affect the cost of the Company's systems. To reduce the Company's reliance on 18GHz microwave and to take advantage of superior propagation characteristics of lower frequency microwave transmissions, the Company has filed a petition for rulemaking that proposes FCC rule changes to allow the Company and other private microwave licensees to use 12GHz frequencies nationwide for the delivery of video programming materials. This band, which the Company has obtained limited authority to use in the Denver market, normally is not available for video distribution services by private microwave licensees. There can be no assurance that this proceeding will be resolved in a manner satisfactory to the Company. Further, the FCC has issued a Notice of Proposed Rulemaking seeking comment on rule changes that would permit increased use of both the 11 GHz and 12 GHz bands by satellite operators. There can be no assurance that the FCC will not adopt rules in this proceeding that would negatively affect the Company's proposed use of these bands. Radio frequency ("RF") emissions from microwave equipment may pose health risks to humans. The FCC recently adopted new guidelines and methods for evaluating the environmental effects of RF emissions from FCC-regulated transmitters, including microwave equipment. The updated guidelines and methods generally are more stringent than those previously in effect. The Company expects that the microwave equipment to be provided by its vendors will comply with applicable FCC guidelines. Although private cable television operators are not subject to the full range of regulation applicable to Cable Systems, they are subject to the following federal regulations. First, private cable television operators are entitled to the compulsory copyright license described above. Second, private cable television operators benefit from the federal laws and regulations that require certain programming providers to make cable programming available to all multichannel video programming distributors on fair, reasonable and nondiscriminatory terms. Third, as noted above, private cable television operators are required to obtain retransmission consent from local broadcasters in order to retransmit their signals. Finally, private cable television systems are required to comply with the FCC's EEO rules and policies, although the continuing validity of these rules and 63 67 policies has been called into question by a recent court of appeals decision overturning portions of the FCC's EEO rules applicable to broadcast stations. Because they are subject to minimal federal regulation, private cable television operators have significantly more competitive flexibility than do the franchised Cable Systems with which they compete. Private cable television operators have fewer programming restrictions, greater pricing freedom, and they are not required to serve any customer who they do not choose to serve. In addition, with the exception of local zoning laws and regulations, state and local authorities generally have no jurisdiction over private cable television operators. The Company believes that these advantages help to make its private cable television systems competitive with larger franchised Cable Systems. EMPLOYEES As of February 28, 1999, the Company had a total of 747 full-time employees. The Company believes that its continued success will depend in large part on its ability to attract and retain highly skilled and qualified personnel. The Company has nondisclosure agreements with all of its senior executive officers. From time to time the Company also uses the services of contract technicians for installation and maintenance services. The Company relies principally on outside contractors for network construction. None of the Company's employees are currently represented by a collective bargaining agreement. The Company believes that its relationships with its employees are good. PROPERTIES The Company's executive offices are located in Dallas, Texas and house its national call center and its corporate, engineering, sales and marketing and corporate administrative services groups. The original lease provides for approximately 52,000 square feet of space and has a ten-year term expiring November 30, 2005. The Company has an option to extend the lease term for an additional five-year term at the then market rental rate. In September 1998, the Company leased an additional 17,000 square feet in the same building, for a term of one year, to provide for needed expansion. The Company pays approximately $71,000 per month for the space in its headquarters building. The Company has the right to acquire additional space at its current location when such space becomes available. In October 1997, the Company purchased a building proximate to its executive offices in Dallas, Texas. The Company has installed the central office switch for the Dallas-Fort Worth market in the building and has relocated its Dallas regional operations to the same building. The Company also leases facilities in each of the thirteen cities in which it has established regional operations. The Company owns substantially all of the telecommunications and cable television equipment essential to its operations. The Company's major fixed assets are telecommunications switches, cable television head ends, microwave transmitters and receivers, SMATV receivers, PBX switches and coaxial fiber optic cable. These properties do not lend themselves to description by character and location of principal units. Substantially all of this equipment (other than fiber optic cable laid under public rights of way) resides on or under the MDUs served by the Company or in leased facilities in various locations throughout the metropolitan areas served by the Company. LEGAL PROCEEDINGS The Company is not a party to any legal proceedings except for those described below and those arising in the ordinary course of business. The Company does not believe that any legal proceeding to which it is a party will have a material adverse impact on the Company's financial condition, results of operations or cash flows. On April 27, 1998, an action was commenced against the Company in the United States District Court for the Northern District of California by Octel Communications Corp. ("Octel"), charging the Company with trademark infringement, trade name infringement, trademark dilution, and unfair competition (the "Civil Action") based on its use of the name "OpTel" and seeking to enjoin the Company from using the name and trademark "OpTel." Although the Company does not believe that its use of the name "OpTel" infringes on 64 68 the trademark rights or trade name rights of Octel or any other person, there can be no assurance as to the outcome of the Civil Action or related administrative proceedings, if either go forward, or that any such outcome would not materially adversely affect the Company. Shortly after the filing of the Civil Action, the parties commenced settlement discussions and the Company's time to answer the complaint and assert counterclaims has been continuously extended by agreement of the parties. The parties have reached an agreement in principle, subject to definitive agreement (the "Proposed Settlement), that would resolve all issues between the parties and settle the Civil Action and related administrative proceedings. Under the Proposed Settlement, the Company will change the name under which it conducts business from OPTEL to OPTELNET, or such other name or names as determined by the Company. The change of business name will occur over time, enabling the Company to transition signage over a nearly three year period, change markings on vehicles as they are phased out of service and use existing supplies of printed materials. The Company will retain the right to use "Optel, Inc." as its corporate name and as a service mark in conjunction with certain services and the Company will receive trademark registrations for OPTEL for which it has previously applied. Under the Proposed Settlement, Octel will assign to the Company its common law rights in the name OCTELNET and will discontinue use of that name over an agreed time period. The settlement, if consummated, is not expected to have a material financial or other impact on the Company. On April 12, 1999, a purported class action complaint was filed in the District Court of Harris County, Texas by Marc H. Levy, individually and on behalf of all cable subscribers that have paid late fees to the Company. The plaintiff alleges that late fees charged to plaintiff for delinquent payments of cable subscription charges are an illegal penalty. The plaintiff seeks unspecified damages and other relief. The case is in its very early stages, and no assurance can be given as to its ultimate outcome or that any such outcome will not materially adversely affect the Company. OpTel believes that it has meritorious factual and legal defenses, and intends to defend vigorously against these claims. 65 69 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the directors and executive officers of the Company as of April 19, 1999:
NAME POSITION AGE - ---- -------- --- Andre Chagnon.................. Chairman of the Board and Director 71 Louis Brunel................... Director; President and Chief Executive Officer 57 Frederick W. Benn.............. Director 64 Christian Chagnon.............. Director 43 William O. Hunt................ Director 65 R. Douglas Leonhard............ Director 62 Lynn McDonald.................. Director 39 Alain Michel................... Vice Chairman of the Board and Director 49 Jayne L. Stowell............... Director 47 Bertrand Blanchette............ Chief Financial Officer 41 David J. Curtin................ Vice President, Engineering 43 Stephen Dube................... Chief Operating Officer 43 James Greene................... Vice President, Telephone 53 Michael E. Katzenstein......... Vice President, Legal Affairs and General Counsel 39 Dan R. Smith................... Vice President, Sales 52 Lynn Zera...................... Vice President, Human Resources 51
Andre Chagnon has served as Chairman of the Board and as a Director since October 1998. Since October 1998, Mr. Chagnon has served as Chairman of the Board, President and Chief Executive Officer of GVL; prior thereto he was its Chairman of the Board and Chief Executive Officer. Mr. Chagnon is also a director of Cable Television Laboratories, Inc. Louis Brunel has served as a Director since March 1995 and as President and Chief Executive Officer since April 1996. Since 1988, Mr. Brunel has held various positions at GVL and its subsidiaries, including, immediately prior to joining OpTel, Vice-Chairman and Chief Executive Officer of Videotron Holdings Plc ("VHP"), a since-divested United Kingdom based cable and telephone subsidiary of GVL. While at VHP, Mr. Brunel was the chief architect of VHP's cable television/telecommunications business. From 1988 to 1990, he served as Vice President, Corporate Development of GVL. In addition, he served as President of Videotron International Ltee from September 1994 through December 1996. Frederick W. Benn was appointed as a Director in November 1998. From 1987 until his retirement at the end of 1995, Mr. Benn was a partner with the law firm of Smith Lyons in Toronto, Canada. Mr. Benn also serves as a director of both GVL and its affiliate, Videotron Ltee. Christian Chagnon has served as a Director since March 1997 and has been Senior Vice President, Strategic Planning and Technology of GVL since September 1994. Prior to August 1994, Mr. Chagnon was also President of Videotron Services Informatiques Ltee. Mr. Chagnon also serves as a Director of GVL. Mr. Christian Chagnon is the son of Mr. Andre Chagnon. William O. Hunt was appointed as a Director in June 1998. Since December 1992, Mr. Hunt has served as Chairman of the Board, Chief Executive Officer and President of Intellicall, Inc., a manufacturer of network and customer premise equipment. Mr. Hunt also serves as a Director of The Allen Group Inc., American Homestar Corporation, DSC Communications Corporation and Dr. Pepper Bottling Company of Texas. R. Douglas Leonhard was appointed as a Director in November 1998. From 1986 until his retirement in 1997, Mr. Leonhard was Senior Vice President of the LaCantera Development Company, a wholly owned subsidiary of United Services Automobile Association, a large financial services company that provides an 66 70 array of services including property and casualty insurance, personal financial service products, and travel and personal banking services. Mr. Leonhard also serves on the board of Continental Mortgage and Equity Trust, Income Opportunity Realty Investors, Inc., and Transcontinental Realty Investors, Inc., each a publicly traded REIT. Lynn McDonald was appointed as a Director in June 1998. Since 1996, Ms. McDonald has been a Manager with CDPQ, a subsidiary of Caisse that actively manages private placements in communications companies. Prior to joining CDPQ, Ms. McDonald worked at the Fonds de Solidarite des Travailleurs du Quebec, a venture capital fund. Previously, Ms. McDonald was a special situations equity analyst at BBN James Capel, a Canadian stock brokerage firm. Ms. McDonald is also a Director of Fundy Communications Inc., Telexis Corporation, Les Systemes Proxima Ltee and Regional Vision Inc. Alain Michel has served as a Director since April 1997. Since July 1992, Mr. Michel has held various management positions at GVL, including, since July 1994, Senior Vice President and Chief Financial Officer. Mr. Michel is also a Director of NB Capital, Inc., a publicly traded Delaware real estate investment trust, Microcell Telecommunications Inc., a Canadian public company which provides telecommunications services and in which GVL holds a minority interest, and Groupe Goyette Inc., a Canadian private company which provides transportation and storage services. Jayne L. Stowell was appointed as a Director in December 1998. Since December 1998, Ms. Stowell has served as a Senior Vice President of Level 3 Communications, Ltd. From May 1996 to December 1998, Ms. Stowell served as a Senior Vice President of MCI WorldCom. From June 1993 to January 1996, Ms. Stowell served as a Managing Director of Bell Canada International. Ms. Stowell also serves as a director of another affiliate of GVL. Bertrand Blanchette was appointed Chief Financial Officer in September 1996. From September 1995 to December 1996, Mr. Blanchette served as Chief Financial Officer of VHP. From June 1994 to December 1995, he was Vice President, Control of GVL. From October 1986 to May 1994, Mr. Blanchette was Vice President, Finance of Heroux, Inc., a Canadian public company which manufactures airplane parts. David J. Curtin was appointed Vice President, Engineering in April 1999. From 1983 to April 1999, Mr. Curtin held various management positions of Southern New England Telephone, including most recently, President of SNET Cellular, Inc. Stephen Dube was appointed Chief Operating Officer in October 1998. Since July 1995 Mr. Dube has held various senior management positions at OpTel, including Vice President, Operations and Vice President, Marketing and Corporate Development. From July 1995 to March 1997, Mr. Dube served as a Director of OpTel. From July 1995 to December 1996, Mr. Dube served as a Vice President of Videotron International. From January 1992 to April 1995, Mr. Dube was Senior Vice President of Laurentian Financial Inc., a financial services company. James Greene was appointed Vice President, Telephone in April 1998. From June 1997 to April 1998, Mr. Greene was an independent consultant and advised the Company on the launch of its first central office switch in Houston, Texas and the commencement of CLEC services. Mr. Greene consulted for OpTel on an exclusive basis from November 1997 until his appointment as Vice President. From 1993 to November 1997, Mr. Greene was a consultant for several state and local regulatory bodies and worked principally with the State of Oregon. Michael E. Katzenstein was appointed Vice President, Legal Affairs and General Counsel in November 1995. Prior to joining OpTel, Mr. Katzenstein was a partner at Kronish Lieb Weiner & Hellman LLP. Mr. Katzenstein received his J.D. from Boston University School of Law in 1985. Dan R. Smith was appointed Vice President, Sales in April 1999. From 1990 to April 1999, Mr. Smith served in various sales related management positions at Intermedia Communications Inc., Shared Technologies Fairchild and Fairchild Communications Services. Lynn Zera was appointed Vice President, Human Resources in November 1995. From July 1994 to October 1995, Ms. Zera was Executive Director of Keystone Consulting. From July 1993 to July 1994, she was Executive Director of Human Resources of Intellicall, Inc. 67 71 Pursuant to the Company's Bylaws, Directors are elected annually and serve in such capacity until the earlier of their removal or resignation or the election of their successors. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth certain information concerning compensation awarded to or paid to the Company's Chief Executive Officer and the four most highly compensated executive officers (collectively, the "Named Executive Officers") for the fiscal years ended August 31, 1998, 1997 and 1996.
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------ ------------------------------ SECURITIES FISCAL OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS* COMPENSATION OPTIONS COMPENSATION(17) --------------------------- ------ -------- ------- ------------ ---------- ---------------- Louis Brunel...................... 1998 $309,600 $25,000 $ 89,179(7)(8) 51,022.75 -- President and Chief 1997 $269,623 -- $ 66,062(8)(9) 80,173.95 -- Executive Officer 1996 $ 35,095(1) -- -- -- -- Michael E. Katzenstein............ 1998 $182,000 $30,000 -- -- $4,184 Vice President, Legal Affairs 1997 $175,000 $57,500 $ 65,196(10) 45,688.05 $2,820 and General Counsel 1996 $135,346(2) $40,000 $103,756(11) -- $3,334 Bertrand Blanchette............... 1998 $158,000 $17,500 $ --(12) -- -- Vice President and 1997 $129,702(3) $ 5,000 $ 33,961(12)(13) 21,865.60 -- Chief Financial Officer 1996 -- -- -- -- -- Stephen Dube...................... 1998 $170,775 $30,000 $ 24,172(14)(15) 14,577.50 $3,006 Vice President and Chief Operating 1997 $119,139 $15,000 $ 63,514(15)(16) 16,909.40 $2,844 Officer 1996 $ 36,542(4) -- -- -- -- John Czapko....................... 1998 $150,000 -- -- 16,326.55 $ 346(18) Vice President, Sales and Marketing 1997 $ 70,000(5) $10,000 -- -- -- 1996 -- -- -- -- -- Lynn Zera......................... 1998 $124,000 $17,500 $ 6,000 -- $2,575 Vice President, Human Resources 1997 $112,877 $21,040 -- 12,827.85 $2,809 1996 $ 83,750(6) -- -- -- $2,513
- --------------- * In fiscal 1999, bonuses in respect of fiscal 1998 services were paid as follows: Mr. Brunel $135,000; Mr. Katzenstein $45,500; Mr. Blanchette $39,500; Mr. Dube $41,000; Mr. Czapko $37,500; and Ms. Zera $31,000. These bonuses are not reflected in the schedule. (1) During fiscal 1996, Mr. Brunel was paid primarily by GVL. Beginning June 1, 1996, a portion of Mr. Brunel's salary was allocated to the Company. Effective November 1, 1996, Mr. Brunel accepted the position of President and Chief Executive Officer on a full-time basis. (2) Mr. Katzenstein commenced employment with the Company in November 1995. (3) Mr. Blanchette commenced employment with the Company as Chief Financial Officer in September 1996. During the period September 1996 through December 1996, Mr. Blanchette continued to act as Chief Financial Officer of VHP, a subsidiary of GVL which was divested in December 1996. During such period, Mr. Blanchette's salary was paid by VHP and a portion of such salary was allocated to the Company. Mr. Blanchette commenced full-time employment with the Company effective January 1, 1997. (4) During fiscal 1996, Mr. Dube was paid primarily by GVL. Beginning June 1, 1996, a portion of Mr. Dube's salary was allocated to the Company. Effective January 1, 1997, Mr. Dube became a full-time employee of the Company. (5) Mr. Czapko commenced employment with the Company in March 1997. (6) Ms. Zera commenced employment with the Company in November 1995. (7) $51,960 represents temporary housing and commuting reimbursements. (8) Does not include tax return preparation fees paid or reimbursed by the Company. (9) $39,790 represents temporary housing and commuting reimbursements and $21,680 represents an automobile allowance. (10) $49,823 represents tax reimbursements resulting from relocation. (11) $93,706 represents relocation payments. (12) Does not include tax return preparation fees and the cost of family travel to Montreal paid or reimbursed by the Company. (13) $29,161 represents relocation payments. 68 72 (14) $22,179 represents tax reimbursements resulting from relocation payments. (15) Does not include tax return preparation fees, the cost of family travel to Montreal and family education costs paid or reimbursed by the Company. (16) $54,288 represents relocation payments. (17) Represents 401(k) matching fund contributions by the Company. (18) Mr. Czapko resigned effective January 19, 1999. As part of a severance package, Mr. Czapko was, among other things, paid a lump sum amount of $155,000. Such payment was made in fiscal 1999. OPTION GRANTS IN FISCAL 1998 The following table sets forth options to purchase shares of the Common Stock granted to the Named Executive Officers during fiscal 1998.
POTENTIAL REALIZED VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM OPTIONS EMPLOYEES IN EXERCISE EXPIRATION ----------------------------- NAME GRANTED FISCAL YEAR PRICE DATE 5% 10% - ---- ---------- ------------ -------- ------------- ------------ -------------- Louis Brunel.................... 51,022.75 31.06% $17.15 March, 2008 $676,359.26 $1,483,015.76 Stephen Dube.................... 6,997.30 4.26% $17.15 January, 2008 $ 92,756.44 $ 203,381.95 7,580.20 4.62% $17.15 April, 2008 $100,483.38 $ 220,324.39 John Czapko..................... 16,326.55 9.94% $17.15 March, 2007 $216,425.29 $ 474,543.82
AGGREGATED OPTION EXERCISES IN FISCAL 1998 AND FISCAL YEAR END 1998 OPTION VALUES The following table shows the values of options held by the Named Executive Officers as of the end of fiscal 1998. No options were exercised by the Named Executive Officers during fiscal 1998.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END 1998 1998(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Louis Brunel........................ 32,799.55 98,398.70 $80,358.90 $241,076.82 Michael E. Katzenstein.............. 11,422.00 34,266.05 $53,866.15 $161,598.69 Bertrand Blanchette................. -- 21,865.60 -- $ 53,570.72 Stephen Dube........................ 5,976.70 25,510.65 $14,642.92 $ 62,501.08 John Czapko......................... -- 16,327.05 -- $ 40,001.27 Lynn Zera........................... 6,413.90 6,413.95 $15,714.06 $ 15,714.18
- --------------- (1) Based on an assumed fair market value of $19.60 per share of Common Stock as of August 31, 1998. EMPLOYMENT AGREEMENTS Louis Brunel is employed as President and Chief Executive Officer of the Company pursuant to an employment agreement expiring on October 31, 2000, subject to automatic one year extensions. Mr. Brunel receives an annual base salary of $350,000, a Company automobile and apartment for his use. Mr. Brunel is also entitled to participate in the Company's Incentive Stock Plan (as described below) and Bonus Plan (as described below). In the event of termination due to death or disability, Mr. Brunel will be entitled to receive his then current base salary for the remaining term of the agreement, the pro rata portion of his bonus for the then current bonus period and, in the case of a disability, certain relocation expenses. In the event the Company elects not to extend the term of the agreement, Mr. Brunel will be entitled to receive his then current base salary for 24 months thereafter, the pro rata portion of his bonus for the then current bonus period, a bonus based on the average bonus for the prior two years pro rated for the 24 month severance period and certain outplacement services and relocation expenses. In the event the agreement is terminated by the Company "without cause" or by Mr. Brunel for "good reason," Mr. Brunel will be entitled to receive his then 69 73 current salary for the remaining term of the agreement or 24 months, whichever is longer, the pro rata portion of his bonus for the then current bonus period, a bonus based on the average bonus for the prior two years pro rated for the severance period and certain outplacement services and relocation expenses. Upon a change in control of the Company or the termination of the employment agreement for any reason other than "for cause," all options will immediately vest and become exercisable and remain exercisable for the shorter of the term of the option agreement or 12 months, even if Mr. Brunel is no longer an employee of the Company. The agreement provides that Mr. Brunel is subject to non-competition restrictions during the term of the agreement and, unless the term of the agreement is not renewed by the Company or the agreement is terminated by the Company "without cause" or by Mr. Brunel for "good reason," for nine months thereafter. In addition, Mr. Brunel receives from GVL certain expatriate benefits, including participation in certain GVL-sponsored benefit plans. Michael E. Katzenstein is employed as Vice President, Legal Affairs and General Counsel of the Company pursuant to an employment agreement expiring April 15, 2001, subject to automatic one year extensions. Mr. Katzenstein currently receives an annual base salary of $235,000 and a Company automobile. Bertrand Blanchette is employed as Chief Financial Officer of the Company pursuant to an employment agreement expiring on April 15, 2001, subject to automatic one year extensions. Mr. Blanchette receives an annual base salary of $210,000, a monthly automobile allowance and a pension contribution equal to 5% of his salary. Stephen Dube is employed as Chief Operating Officer of the Company pursuant to an employment agreement expiring on April 15, 2001, subject to automatic one year extensions. Mr. Dube receives an annual base salary of $245,000 and a Company automobile. Lynn Zera is employed as Vice President, Human Resources of the Company pursuant to an employment agreement expiring on April 15, 2001, subject to automatic one year extensions. Ms. Zera receives an annual base salary of $138,000 and a monthly automobile allowance. Each of Messrs. Blanchette, Dube and Katzenstein and Ms. Zera are entitled to participate in the Company's Incentive Stock Plan and Bonus Plan. In the event of termination due to death or disability, such individual will be entitled to receive his or her then current base salary for the remaining term of the agreement, the pro rata portion of his or her bonus for the then current bonus period and, except in the case of Ms. Zera, in the case of a disability, certain relocation expenses. In the event the Company elects not to extend the term of such individual's employment, such individual will be entitled to receive his or her then current base salary for the remaining term of the employment agreement and for 12 months (or, if a change of control of the Company has occurred since the most recent extension of the employment term, 24 months) thereafter, the pro rata portion of his or her bonus for the then current bonus period, a bonus based on his or her average bonus for the prior two years pro rated for the severance period and certain outplacement services and, except in the case of Ms. Zera, relocation expenses. In the event such individual's employment agreement is terminated by the Company "without cause" or by such individual for "good reason," such individual will be entitled to receive his or her then current salary for the remaining term of the agreement or 12 months (or, if such termination is within 12 months of a change of control of the Company, 24 months), whichever is longer, the pro rata portion of his or her bonus for the then current bonus period, a bonus based on his or her average bonus for the prior two years pro rated for the severance period and certain outplacement services and, except in the case of Ms. Zera, relocation expenses. Upon a change in control of the Company, all options held by Messrs. Blanchette, Dube and Katzenstein and by Ms. Zera will immediately vest and become exercisable and remain exercisable for the remaining term of such options, even if such individual is no longer an employee of the Company. Upon termination other than "for cause," all options held by the respective executive will continue to vest in accordance with their terms and will remain exercisable until 12 months after the expiration of the term of the employment agreement. Each of Messrs. Blanchette, Dube and Katzenstein and Ms. Zera are subject to non-competition restrictions during the term of their respective employment agreements and, unless the term of such agreement is not renewed by the Company or such agreement is terminated by the Company "without cause" or by such individual for "good reason," for nine months thereafter. In addition, Messrs. Blanchette and Dube receive certain expatriate benefits, including participa- 70 74 tion in certain GVL-sponsored benefit plans and, in the case of Mr. Blanchette, post-termination relocation and severance benefits, from GVL. INCENTIVE STOCK PLAN In fiscal 1997, the Company adopted an Incentive Stock Plan. In fiscal 1998, the Company adopted amendments to such plan, certain of which will become effective, subject to stockholder approval, on the date the Offering is consummated (as so amended, the "Plan"). Twelve percent of the Common Stock outstanding, on a fully diluted basis, on the date the Offering is consummated, may be issued under the terms of the Plan. The number of shares issuable under the Plan will be adjusted on each January 1 to 12% of the then outstanding Common Stock, on a fully diluted basis, if such adjustment would increase the number of shares. As of February 28, 1999, options to purchase 916,987.65 shares of Common Stock have been granted under the Plan, none of which have been exercised, at a weighted average exercise price of $18.48 per share of Common Stock. The Company intends to issue a significant number of options to purchase shares of Common Stock at the initial public offering price to employees of the Company, including the Named Executive Officers, on the date the Offering is consummated. The Plan authorizes the Board to issue incentive stock options ("ISOs") as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), stock options that do not conform to the requirements of that Code section ("Non-ISOs"), stock appreciation rights ("SARs"), restricted stock, stock awards, dividend equivalent rights, performance based awards and similar stock-based awards. The Plan shall terminate on the tenth anniversary of the date the Offering is consummated. Stock Options. The Board has discretionary authority to determine the types of options to be granted, the persons to whom options shall be granted (provided that options shall only be granted to directors, senior executives and other employees designated by the Board), the number of shares to be subject to each option granted (provided that no single participant in the Plan shall be entitled to receive more than 1,000,000 shares of Common Stock pursuant to the Plan) and the terms of the stock option agreements. Unless otherwise specifically provided in the option agreement, (i) the exercise price of an option will not be less than the fair market value, as determined by the Board, of the Common Stock on the date of the grant and (ii) the options shall become exercisable in equal installments on each of the second, third, fourth and fifth anniversaries of the effective date of grant; provided that if a participant owns 10% of the voting power or equity interests of all classes of the Company's stock, ISOs granted to such person (i) shall have an exercise price not less than 110% of the fair market value of the Common Stock on the date of the grant and (ii) shall expire five years from the date of grant. In the event of a "change of control," all options shall vest and become immediately exercisable. At the discretion of the Board, the exercise price may be paid by personal check, bank draft, money order, or money transfers, through the delivery of shares of the Common Stock, pursuant to a broker-assisted "cashless exercise" program if established by the Company or by such other method as the Board may deem appropriate. Stock Appreciation Rights. The Board may award SARs, which may or may not be granted together with options, under the plan. Generally, SARs permit the holder thereof to receive an amount (in cash, Common Stock or a combination thereof) equal to the number of shares of Common Stock with respect to which SARs are exercised multiplied by the excess of the fair market value of the Common Stock on the exercise date over the exercise price. In general, the exercise of any portion of the SARs or any related option will cause a corresponding reduction in the number of shares of Common Stock remaining subject to such SARs and related option. Restricted Stock. Awards of Common Stock granted under the Plan may be subject to forfeiture until such restrictions, terms and conditions as the Board may determine lapse or are fulfilled, as the case may be. The Board will determine how the price for the Common Stock, if any, may be paid. Generally, a participant obtaining a restricted stock award will have all the rights of a stockholder while the Common Stock is subject to restrictions, including the right to vote the Common Stock and to receive dividends. Restricted Common Stock will be issued in the name of the participant and held in escrow until any applicable restrictions lapse or terms and conditions are fulfilled, as the case may be. Until the restrictions are eliminated, restricted Common Stock may not be transferred. 71 75 Dividend Equivalent Award. The Board may grant an award that represents the right to receive a dividend or its equivalent with respect to any new or previously existing award, which will entitle the recipient to receive at the time of settlement an amount equal to the actual dividends paid on the Common Stock delivered to the recipient, calculated from the date of award and accounted for as if reinvested in Common Stock on the dividend payment dates. This type of award may be paid in the form of Common Stock, cash or a combination of both. Performance-Based Awards. The Board may grant awards under the Plan upon the satisfaction of specified performance goals. The performance period for a performance based award shall be established prior to the time such award is granted and may overlap with performance periods relating to other awards granted under the Plan to the same recipient. Each award shall be contingent upon future performance and achievement of objectives described either in terms of Company-wide performance or in terms that are related to the performance of the recipient or of the division, subsidiary, department or function within the Company in which the recipient is employed. Such objectives shall be based on increases in share prices, operating income, net income or cash flow thresholds, sales results, return on common equity or any combination of the foregoing. Following the end of each performance period, the holder of each award shall be entitled to receive payment of an amount, not exceeding the maximum value of the award, based on the achievement of the performance measures for such performance period, as determined by the Board. Unless the award specifies otherwise, including restrictions in order to satisfy the conditions under Section 162(m) of the Code, the Board may adjust the payment of awards or the performance objectives if events occur or circumstances arise which would cause a particular payment or set of performance objectives to be inappropriate, as determined by the Board. Other Stock Based Awards. The Board may grant Common Stock or other Common Stock based awards that are related to or similar to the awards described above. STOCK PURCHASE PLAN In fiscal 1998, the Company adopted the 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") which is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. The Stock Purchase Plan will become effective, subject to stockholder approval, on the date the Offering is consummated. One percent of the Common Stock outstanding, on a fully diluted basis, on the date the Offering is consummated, will be issuable under the terms of the Stock Purchase Plan. The Stock Purchase Plan provides for a series of six month "Option Periods." Subject to certain limitations, employees may contribute between 1% and 10% of their compensation to the Stock Purchase Plan during an Option Period and purchase Common Stock at the end thereof. At the start of each Option Period, employees electing to participate in the Stock Purchase Plan are deemed to have been granted an option to purchase a number of whole shares of Common Stock at an exercise price (the "Exercise Price") equal to eighty-five percent (85%) of the lower of the fair market value of one share of the Common Stock on (i) the first day of the Option Period or (ii) the last day of the Option Period (the "Exercise Date"). The number of shares underlying such option is determined by dividing (i) the amount contributed by such employee to the Stock Purchase Plan during the Option Period by (ii) the Exercise Price. On each Exercise Date, each employee will automatically be deemed to have exercised his or her option to purchase at the Exercise Price the largest number of whole shares of Common Stock which can be purchased with the amount contributed by such employee to the Stock Purchase Plan less any amounts previously applied to option exercises under the terms of the Stock Purchase Plan; provided, however, no employee shall be permitted to purchase more than 20,000 shares of Common Stock during any Option Period and subject to reduction in order to avoid issuance of more shares than are provided for under the terms of the Stock Purchase Plan. ANNUAL BONUS PLAN The Company has adopted an Annual Bonus Plan (the "Bonus Plan") pursuant to which the Board is authorized to grant cash bonuses to certain employees of the Company. Bonuses are payable only if the Company achieves certain performance targets approved by the Compensation Committee at the beginning of the fiscal year. 72 76 401(k) PLAN The Company has implemented an employee savings and retirement plan (the "401(k) Plan") covering certain of the Company's employees who have at least three months of service with the Company and have attained the age of 21. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 15% of such compensation or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The Company has made, and may in the future make, contributions to the 401(k) Plan on behalf of eligible employees. Employees become 100% vested in these Company contributions after one year of service. The 401(k) Plan is intended to qualify under Section 401 of the Code so that contributions by employees or by the Company to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the 401(k) Plan employee salary deferrals in selected investment options. COMMITTEES OF THE BOARD OF DIRECTORS The Board has an Audit Committee and a Compensation Committee. The functions of the Audit Committee include recommending to the Board the retention of independent public accountants, reviewing the scope of the annual audit undertaken by the Company's independent public accountants and the progress and results of their work and reviewing the financial statements of the Company and its internal accounting and auditing procedures. The Audit Committee is composed of Andre Chagnon, William O. Hunt, Lynn McDonald and Alain Michel. The chairman of the Audit Committee is Mr. Hunt. The function of the Compensation Committee is to supervise the Company's compensation policies, administer the employee incentive plans, review officers' salaries and bonuses, approve significant changes in employee benefits and consider other matters referred to it by the Board. The Compensation Committee is composed of Andre Chagnon, William O. Hunt, Lynn McDonald and Alain Michel. The Chairman of the Compensation Committee is Mr. Chagnon. COMPENSATION OF DIRECTORS Directors of the Company who are neither employees of the Company nor designees of the Company's significant stockholders will receive an annual fee of $15,000, a fee of $1,000 per meeting of the Board and an annual fee of $1,500 if they serve as the chairperson of a committee of the Board. Each such Director also receives options to purchase 5,000 shares of Common Stock at the fair market value on the date of grant. The options will become exercisable in equal installments on each of the second, third, fourth and fifth anniversaries of the effective date of the grant. Directors who are either employees of the Company or designees of the Company's significant stockholders will not be compensated for their services. However, all Directors will be reimbursed for actual out-of-pocket expenses incurred by them in connection with their attending meetings of the Board or any committees of the Board. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During fiscal 1997 and part of fiscal 1998, Mr. Brunel served as a member of the Compensation Committee. Effective May 19, 1998, Mr. Brunel resigned from the Compensation Committee. LIMITATION OF LIABILITY; INDEMNIFICATION; INSURANCE The Company's Certificate of Incorporation provides that the Company shall, to the fullest extent permitted by the DGCL, indemnify all persons which it may indemnify pursuant thereto (i.e., directors and officers) and shall advance expenses incurred in defending any proceeding for which such right to indemnification is applicable, provided that, if the DGCL so requires, the indemnitee provides the Company with an undertaking to repay all amounts advanced if it is determined by a final judicial decision that such person is not entitled to indemnification pursuant to this provision. The Company's Certificate of Incorporation also contains a provision eliminating the personal liability of the Company's directors for monetary 73 77 damages for breach of any fiduciary duty. By virtue of this provision, under the DGCL, a director of the Company will not be personally liable for monetary damages for breach of his fiduciary duty as a director, except for liability for (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) dividends or stock purchases or redemptions that are unlawful under the DGCL and (iv) any transaction from which a director derives an improper personal benefit. However, this provision of the Company's Certificate of Incorporation pertains only to breaches of duty by directors as directors and not in any other corporate capacity such as officers, and limits liability only for breaches of fiduciary duties under the DGCL and not for violations of other laws, such as the federal securities laws. As a result of the inclusion of such provision, stockholders may be unable to recover monetary damages against directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. The inclusion of this provision in the Company's Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Company and its stockholders. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling OpTel pursuant to the foregoing provisions, OpTel has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The directors and officers of the Company are insured (subject to certain exceptions and deductions) against liabilities that they may incur in their capacity as such, including liabilities under the Securities Act, under a liability insurance policy carried by GVL. Such policy provides coverage in an aggregate amount of $50 million (subject to a $250,000 deductible) and expires in October 1999. The Company expects that this insurance will be renewed in the ordinary course. 74 78 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock by (i) each Director of the Company who beneficially owns any Common Stock, (ii) each Named Executive Officer, (iii) each person known by the Company to beneficially own 5% or more of the outstanding shares of Common Stock, (iv) each person (other than the Company) including shares in the Offering and (v) all directors and executive officers of the Company as a group, in each case as adjusted to reflect the assumed conversion of all of the outstanding classes of common stock and all outstanding series of preferred stock into Common Stock immediately prior to the consummation of the Offering and the Split.
BENEFICIAL OWNERSHIP PRIOR TO BENEFICIAL OWNERSHIP AFTER OFFERING OFFERING ------------------------------ NUMBER ---------------------------- NUMBER OF OF SHARES NUMBER OF BENEFICIAL OWNER SHARES(1) PERCENT(2) OFFERED SHARES(1) PERCENT(2) - ---------------- -------------- ----------- ---------- ------------- ---------- Le Groupe Videotron Ltee...................... 19,135,069.64(3) 70.12 -- 19,135,069.64 57.05 Caisse de depot et placement du Quebec........ 2,149,695.00(4) 7.88 -- 2,149,695.00 6.41 Interactive Cable Systems, Inc................ 2,933,440.13(5) 10.75 -- 2,933,440.13 8.75 Nomura Holding America Inc.................... 1,368,956.02(5) 5.02 -- 1,368,956.02 4.08 MCI Telecommunications Corporation............ 577,297.26(5) 2.12 -- 577,297.26 1.72 Frederick W. Benn............................. --(6) * -- * William O. Hunt............................... --(6) * -- * R. Douglas Leonhard........................... --(6) * -- * Louis Brunel.................................. 65,598.35(7) * -- 65,598.35 * Michael E. Katzenstein........................ 22,844.05(8) * -- 22,844.05 * Bertrand Blanchette........................... 5,466.40(9) * -- 5,466.40 * Stephen Dube.................................. 11,953.35(10) * -- 11,953.35 * Lynn Zera..................................... 6,413.90(11) * -- 6,413.90 * All directors and executive officers as a group (14 persons).......................... 112,276.05(12) * -- 112,276.05 * DFG Corporation(13)........................... 8,000.00 * 8,000.00 -- * FamCo Income Partners(13)..................... 11,250.00 * 11,250.00 -- * FamCo Value Income Partners(13)............... 22,400.00 * 22,400.00 -- * FamCo Offshore(13)............................ 8,500.00 * 8,500.00 -- * ZPG Securities(13)............................ 2,000.00 * 2,000.00 -- * Colony Partners............................... 5,000.00 * 5,000.00 -- * Asiel & Co. LLC............................... 1,300.00 * 1,300.00 -- * TCB as Custodian for NCRAM Client A(14)....... 52,500.00 * 52,500.00 -- * TCB as Custodian for NCRAM Client B(14)....... 5,000.00 * 5,000.00 -- * SEI Institutional Managed Trust(15)........... 1,500.00 * 1,500.00 -- * Texaco Inc.(15) .............................. 1,000.00 * 1,000.00 -- * RJR Nabisco(15)............................... 1,000.00 * 1,000.00 -- * City of NY Employee Retirement System(15)..... 2,000.00 * 2,000.00 -- * BEA Income Fund, Inc.(15)..................... 2,500.00 * 2,500.00 -- * BEA Strategic Global Income Fund(15).......... 1,250.00 * 1,250.00 -- * Douglas G. Boven and Elizabeth S. Neufeld..... 50.00 * 50.00 -- * Julian R. Schwab.............................. 535.00 * 535.00 -- * Eaton Vance High Income Portfolio............. 29,200.00 * 29,200.00 -- * Eaton Vance Income Fund of Boston............. 7,300.00 * 7,300.00 -- * Hallmark Master Trust......................... 1,000.00 * 1,000.00 -- * Battery Park High Yield Fund(14).............. 2,500.00 * 2,500.00 -- * GAM High Yield Fund, Inc...................... 2,500.00 * 2,500.00 -- * Merrill Lynch Global Currency Bond Series Corporate High Income Portfolio(16)......... 25,000.00 * 25,000.00 -- * Prospect Street High Income Portfolio Inc..... 17,500.00 * 17,500.00 -- * Van Kampen Income Trust....................... 2,500.00 * 2,500.00 -- * Van Kampen High Income Corporate Bond Fund.... 16,375.00 * 16,375.00 -- * Ameritech Pension Trust(15)................... 750.00 * 750.00 -- * Gleacher Natwest.............................. 2,500.00 * 2,500.00 -- * Pacific Life Insurance Company................ 27,500.00 * 27,500.00 -- * Alliance Balanced Shares...................... 5,000.00 * 5,000.00 -- * James A. Kofalt(17)........................... 124,960.00 * 124,960.00 -- *
- --------------- (1) Under the rules of the Commission, a person is deemed to be the beneficial owner of a security if such person has or shares the power to vote or direct the voting of such security or the power to dispose or direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities if that person has the right to acquire beneficial ownership within 60 days. Accordingly, more than one person may be deemed to be a beneficial owner of the same securities. Unless otherwise indicated by footnote, the named individuals have sole and investment power with respect to the securities beneficially owned. 75 79 (2) "*" indicates less than one percent. In accordance with the Commission's rules, each beneficial owner's holdings have been calculated assuming the full exercise of warrants and options and the conversion of all shares of convertible preferred stock held by such holder which are currently exercisable or convertible or which will become exercisable or convertible within 60 days after the date of this Prospectus and no exercise of warrants and options or conversion of preferred stock held by any other person. (3) Such shares are owned by VPC, an indirect wholly-owned subsidiary of GVL. Andre Chagnon, the founder of GVL, indirectly controls approximately 72% of GVL's outstanding voting rights. See "-- Stockholders' Agreement" and "-- GVL Shareholders' Agreement" for the terms of certain agreements governing the voting and disposition of the shares of Common Stock held by VPC and GVL. GVL's address is 300 Avenue Viger East, Montreal, Quebec, H2X 3W4. (4) Such shares are owned by CDPQ, a wholly-owned subsidiary of Caisse. See "-- Stockholders' Agreement" and "-- GVL Shareholders' Agreement" for the terms of certain agreements covering the voting and disposition of the shares of Common Stock held by Caisse and CDPQ. In addition, Caisse holds $20.0 million of 1998 Notes. Caisse's address is 1981, Avenue McGill College, Montreal, Quebec, H3A 3C7. (5) See "-- ICS Stockholders' Agreement and ICS Registration Rights Agreement" for the terms of certain agreements governing the disposition of such shares of Common Stock. ICS's address is 1901 N. Glenville Drive, Suite 800, Richardson, Texas 75081. Nomura Holding America Inc.'s ("Nomura") address is 2 World Financial Center, Building B, New York, New York 10281. MCI Telecommunications Corporation's ("MCI") address is 1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006. Includes shares currently held in escrow pending the resolution of post-closing adjustments in connection with the acquisition of certain assets of ICS. (6) Excludes 5,000 shares of Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (7) Includes 65,598.35 shares of Common Stock underlying presently exercisable options. Excludes 144,764.60 shares of Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (8) Includes 22,844.05 shares of Common Stock underlying presently exercisable options. Excludes 43,843.65 shares of Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (9) Includes 5.466.40 shares of Common Stock underlying presently exercisable options. Excludes 36,191 shares of Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (10) Includes 11,953.35 shares of Common Stock underlying presently exercisable options. Excludes 52,965.50 shares of Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (11) Includes 6,413.90 shares of Common Stock underlying presently exercisable options. Excludes 25,747.30 shares of Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (12) With respect to executive officers who are not Named Executive Officers, excludes 36,325.55 shares of Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (13) Funsten Asset Management Company is the portfolio manager for each of DFG Corporation, FamCo Income Partners, FamCo Value Income Partners, FamCo Offshore and ZPG Securities and may be deemed to be the beneficial owner of the securities owned by these entities. (14) Nomura Corporate Research and Asset Management Inc. ("NCRAM") is the investment advisor for each of TCB as Custodian for NCRAM Client A, TCB as Custodian for NCRAM Client B and the Battery Park High Yield Fund. NCRAM may be deemed to be the beneficial owner of the securities owned by the Battery Park High Yield Fund and NCRAM as Custodian for NCRAM Client B. (15) Credit Suisse Asset Management is an investment adviser for each of the Ameritech Pension Trust, BEA Income Fund, Inc., BEA Strategic Global Income Fund, Inc., City of New York Employee Retirement System, RJR Nabisco, SEI Institutional Managed Trust and Texaco, Inc., and may be deemed to be the beneficial owner of the securities owned by each of these accounts. (16) Merrill Lynch Global Currency Bond Series, Corporate High Income Portfolio, is a mutual fund organized under the laws of the Grand Duchy of Luxembourg and is advised by Merrill Lynch Asset Management, L.P. Merrill Lynch Global Currency Bond Series, Corporate High Income Portfolio is the beneficial owner of the securities. (17) James Kofalt held the position as Chairman of the Board of Directors of OpTel during 1995 and 1996 and also served as a consultant to OpTel during 1996 and 1997. 76 80 As of February 28, 1999, all of the outstanding shares of the Class B Common were held by VPC and CDPQ and all of the outstanding shares of Common Stock were held by ICS. See "Risk Factors -- Control by GVL." ICS STOCKHOLDERS' AGREEMENT AND ICS REGISTRATION RIGHTS AGREEMENT In connection with the Company's acquisition of certain assets of ICS, ICS, Nomura, MCI (ICS, Nomura, and MCI, together, the "ICS Group"), VPC, GVL and the Company entered into a Stockholders' Agreement (the "ICS Stockholders' Agreement") dated as of April 9, 1998 and the Company, ICS, Nomura and MCI entered into a Registration Rights Agreement (the "ICS Registration Rights Agreement") dated as of April 9, 1998. Under the ICS Stockholders' Agreement, the shares of Common Stock owned by the ICS Group (collectively, the "ICS Shares") are subject to drag-along rights if VPC (or GVL through the sale of its interests in VPC) elects to sell equity interests representing 50% or more of the voting power of the outstanding capital stock of the Company or 50% or more of the equity interests held by VPC. Pursuant to the ICS Registration Rights Agreement, following the consummation of the Offering, the ICS Group has piggyback registration rights, on three occasions, in registration statements filed by the Company for the sale of its equity securities, subject to certain conditions, including customary allocation and holdback provisions. STOCKHOLDERS' AGREEMENT In August 1997, CDPQ purchased the minority interest in the Company from Vanguard Communications L.P. ("Vanguard"). In connection with the sale by Vanguard of its minority stock position in the Company to CDPQ, the Company, VPC, GVL and CDPQ entered into the Stockholders' Agreement and the Company and CDPQ entered into a related Registration Rights Agreement (the "Registration Rights Agreement"), under which CDPQ has certain rights and obligations relating to the Company and VPC. CDPQ is also a party to the GVL Shareholders' Agreement described below. The following is a summary of certain provisions of the Stockholders' Agreement and the Registration Rights Agreement. Designation of Directors. Under the Stockholders' Agreement, for as long as CDPQ holds at least 5% of the Company's voting stock, CDPQ and VPC have agreed to vote for nominees of CDPQ for a number of Directors of the Company and each of its subsidiaries, and each committee of the Board and each of its subsidiaries, which is proportionate (in relation to the total number of Directors or committee members) to CDPQ's percentage ownership of the Company's voting stock, but in no event less than one Director and one committee member. This agreement supersedes the rights of Caisse to designate a Director of the Company pursuant to the GVL Shareholders' Agreement; however, such rights are subject to reinstatement in the event CDPQ ceases to be a stockholder of the Company. Pursuant to the terms of the Stockholders' Agreement, CDPQ has designated Lynn McDonald as a Director of the Company. Rights in Connection with Other Financings; Tag-Along Rights. Pursuant to the Stockholders' Agreement, VPC is obligated to cause the Company to afford CDPQ rights equivalent to those afforded other purchasers of the Company's capital stock to the extent they are more advantageous than the rights held by CDPQ. Subject to certain exceptions (including a public offering of the Company's equity securities) and waiver by CDPQ at VPC's request in connection with certain events, the Company is obligated to afford CDPQ preemptive rights to purchase equity securities which the Company proposes to sell in proportion to CDPQ's ownership of the total outstanding equity securities of the Company prior to the sale. In addition, pursuant to the Stockholders' Agreement, CDPQ has certain tag-along rights in connection with sales by VPC of outstanding shares of the Company's voting stock. Registration Rights. Pursuant to the Registration Rights Agreement, nine months after the consummation of the Offering and, subject to certain conditions, CDPQ has the right, on two occasions, to require the Company to register under the Securities Act certain shares of Common Stock. In addition, CDPQ has piggyback registration rights, on three occasions, to include such shares of Common Stock in registration 77 81 statements filed by the Company for the sale of equity securities, subject to certain conditions, including customary allocation and holdback provisions. GVL SHAREHOLDERS' AGREEMENT Caisse, CDPQ, Sojecci Ltee and Sojecci (1995) Ltee, the principal shareholders of GVL, and Andre Chagnon (the founder of GVL) are parties to an amended and restated shareholders agreement, dated as of May 10, 1995 (the "GVL Shareholders' Agreement"), which provides, among other things, that for so long as GVL controls the Company, Caisse will be allowed to select one of GVL's nominees to the Board and to have one representative on the Audit Committee of the Company. While this right has been superseded by the Stockholders' Agreement, it is subject to reinstatement in the event CDPQ ceases to be a stockholder of the Company or the Stockholders' Agreement ceases to be enforceable. See "-- Stockholders' Agreement." 78 82 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CONVERTIBLE NOTES, SERIES A PREFERRED AND CLASS B COMMON The Company has financed a large portion of its capital needs by borrowing from its majority stockholder, VPC. The Company borrowed approximately $17.8 million, $73.4 million and $23.7 million from VPC in the form of the GVL Notes during the eight month period ended August 31, 1995, fiscal 1996 and fiscal 1997, respectively. The GVL Notes bore interest at a rate of 15% per annum, payable concurrently with the payment of principal. Interest was added to principal on an annual basis. Effective March 1, 1998, VPC exchanged all of the GVL Notes for 6,962.21365 shares of the Series A Preferred. In addition, on July 26, 1995, VPC purchased from the Company (i) 1,558,260 shares of Class B Common for approximately $16.7 million and (ii) a 15% convertible note having a principal amount of approximately $8.3 million. On April 1, 1996, the note was converted into 776,145 shares of Class B Common (after giving effect to the contribution, in connection with the settlement of certain disputes between the then principal stockholders, of certain shares received by VPC as accrued interest on the note). Pursuant to the Conversion and Exchange Agreement, VPC is required, on or before the earlier to occur of August 29, 1999 or the 90th day following the consummation of the Offering, to convert all of the Series A Preferred then outstanding and all of the Class B Common then held by it into shares of Common Stock. The Conversion and Exchange Agreement also provides that OpTel can seek specific enforcement of the Conversion and Exchange Agreement, and that GVL and VPC will indemnify OpTel against all liabilities and claims that may arise in the event of a breach by GVL and VPC of the Conversion and Exchange Agreement. See "Risk Factors -- Risks Associated with GVL's Series A Preferred Stock and Class B Common Stock." VANGUARD-RELATED TRANSACTIONS In August 1996, in connection with a negotiated settlement of certain disputes between the Company and Vanguard, which then held a minority interest in the Company, the Company granted Vanguard an option (the "Vanguard Option") to purchase 244,685 shares of Class B Common at an exercise price of $10.71 per share, subject to adjustment. On August 15, 1997, Vanguard exercised the option prior to the sale of its minority interest in the Company to CDPQ. In September 1996, the Company entered into a consulting agreement with James A. Kofalt, a former Chairman of the Board and active participant in the management of the Company and a limited partner of Vanguard, pursuant to which the Company agreed to compensate Mr. Kofalt with a one time payment of $70,000. In connection therewith, the Company also granted Mr. Kofalt a warrant (the "Kofalt Warrant") to purchase up to 124,960 shares of Common Stock at an exercise price of $10.71 per share, subject to adjustment. The Kofalt Warrant is presently exercisable and expires on August 31, 1999. In addition, pursuant to the terms of the Kofalt Warrant, Mr. Kofalt has piggyback registration rights in registration statements filed by the Company for the sale of its equity securities, subject to certain conditions, including customary allocation and holdback provisions. See "Description of Capital Stock -- Registration Rights of Certain Security Holders." MANAGEMENT FEES In connection with a negotiated settlement of certain disputes between the Company and Vanguard, in August 1996, VPC and Vanguard agreed to provide, at the specific request of the Board, such reasonable consultant, advisory and management services as the Company might reasonably require. These arrangements with Vanguard and VPC were terminated as of August 15, 1997, upon the sale of Vanguard's minority interest in the Company to CDPQ. The Company has not determined if the aggregate fees paid to VPC and Vanguard in connection with such services were greater or less than the fees the Company would have been required to pay if it had obtained such services from an unaffiliated third party. The Company accrued a liability of $29,167 to each of VPC and Vanguard for general consulting services during fiscal 1996. Vanguard was paid such amount during fiscal 1997. In fiscal 1997, the Company accrued and paid Vanguard $350,000 (plus travel expenses) for such services and accrued $350,000 to VPC for similar services. None of such amounts have been paid to VPC. 79 83 ACQUISITION OF CERTAIN ASSETS Effective as of July 31, 1996, the Company purchased certain assets from certain affiliates of VPC for an aggregate purchase price of approximately $3.9 million. The assets represented approximately 23,000 units passed. The operations of the acquired assets are located in the San Francisco, California and Tampa, Florida areas. The amounts paid represented the sellers' historical costs. At the time of the purchase, the Board received a valuation report which estimated the fair market value of such assets to be approximately equal to their historical cost. INSURANCE The Company purchases certain insurance coverage through GVL, including directors and officers liability insurance. The Company paid an aggregate of approximately $478,000, $434,000 and $456,000 to GVL for this insurance coverage in fiscal 1996, 1997 and 1998, respectively. SERVICE AGREEMENTS Pursuant to the terms of the Stockholders' Agreement, VPC and certain of its affiliates provide certain strategic planning and treasury support services to the Company and perform internal audits of the Company's operations. Additional services may be provided as and when requested by the Company. The Company is charged for such services based on an estimate of the actual cost of the personnel engaged and materials used to provide such services (without an allowance for profit). The Company paid VPC $310,000 for such services in fiscal 1998. In addition, OpTel provides certain customer support and billing services to certain affiliates of GVL which operate wireless cable systems using MMDS technology. OpTel charges such affiliates based on the actual cost of the personnel engaged and materials used to provide such services. SHARED LITIGATION EXPENSES GVL, the Company and certain other affiliates of GVL were named as defendants in a lawsuit by a former employee of the Company. GVL and the Company agreed to joint representation by a single law firm and to share the associated expenses. The costs to the Company of the litigation, including defense and settlement, were not material. 80 84 DESCRIPTION OF CAPITAL STOCK GENERAL Following the Offering, the authorized capital stock of the Company will consist of 180,000,000 shares of Common Stock, 60,000,000 shares of Class B Common, 3,000,000 shares of Class C Common and 10,000,000 shares of preferred stock. All of the outstanding shares of Class C Common will be converted into Common Stock concurrently with the consummation of the Offering, all of the outstanding shares of Series B Preferred will be converted into Common Stock promptly following the Offering and all shares of Class B Common and Series A Preferred will be converted into Common Stock on or before the earlier to occur of August 29, 1999 or the 90th day after the consummation of the Offering. See "Risk Factors -- Risks Associated with GVL's Series A Preferred Stock and Class B Common Stock." After giving effect thereto and assuming the exercise of all outstanding options and warrants to acquire Common Stock, there will be 34,632,082 shares of Common Stock outstanding on a fully diluted basis. If the Series A Preferred is not converted until 90 days following the Offering, up to approximately 250,258 additional shares of Common Stock may be issued upon conversion of the Series A Preferred as a result of the conversion of additional accrued and unpaid dividends on the outstanding shares. Upon consummation of the Offering and conversion of all the outstanding classes of common stock and all the outstanding series of preferred stock into Common Stock as described above, there will be no shares of Class B Common or Class C Common and no shares of preferred stock issued and outstanding. All of the outstanding shares of all classes of common stock and all series of preferred stock are fully paid and nonassessable. COMMON STOCK As of February 28, 1999, after giving effect to the 5 for 1 stock split, there were 821,360 shares of Common Stock, 11,767,490 shares of Class B Common and 1,125,000 shares of Class C Common outstanding. The rights of the holders of shares of all classes of common stock are identical in all respects except that holders of the Common Stock are entitled to one vote for each issued and outstanding share, holders of the Class B Common are entitled to 10 votes for each issued and outstanding share and holders of the Class C Common, except as otherwise may be required by law, are not entitled to notice of or to vote at any meetings of the stockholders or actions taken by written consent. Holders of common stock do not have cumulative voting rights, so that holders of more than 50% of the voting rights attached to the common stock are able to elect all of the Company's Directors. Certain of the Company's stockholders who, after consummation of the Offering, will own over 63.5% of the Common Stock and voting power of the Company, have entered into a voting agreement pursuant to which they have agreed to vote their shares for certain nominees. See "Principal and Selling Stockholders -- Stockholders' Agreement" and "Risk Factors -- Control by GVL." Holders of the Common Stock and the Class B Common vote together as a single class on all matters submitted to a vote of the stockholders, other than certain matters which may adversely affect the rights of the individual class. Each share of Class B Common is convertible, at the option of the holder and automatically and irrevocably upon the occurrence of certain events, into one share of Common Stock. Upon conversion by VPC of all of the then outstanding shares of Class B Common held by VPC into Common Stock, all other outstanding shares of Class B Common will automatically and irrevocably convert into Common Stock on a one-for-one basis. Pursuant to the terms of the Conversion and Exchange Agreement, VPC has agreed to convert all of its shares of Class B Common into Common Stock on or before the earlier to occur of August 29, 1999 or the 90th day following the consummation of the Offering. There are no rights of redemption or sinking fund provisions with respect to outstanding shares of any class of capital stock. The Company, VPC and CDPQ have contractually agreed to certain preemptive rights with respect to any future issuances of capital stock. Subject to certain exceptions (including a public offering of the Company's equity securities), the Company is obligated to afford CDPQ preemptive rights to purchase equity securities which the Company proposes to sell in proportion to CDPQ's ownership of the total outstanding equity securities of the Company prior to the sale. See "Principal and Selling Stockholders -- Stockholders' Agreement." 81 85 This description is intended as a summary and is qualified in its entirety by reference to the DGCL and the Company's Certificate of Incorporation and Bylaws. Copies of the Company's Certificate of Incorporation and Bylaws have been filed as exhibits to the Registration Statement of which this Prospectus is a part. PREFERRED STOCK The preferred stock may be issued at any time or from time to time in one or more series with such designations, powers, preferences, rights, qualifications, limitations and restrictions (including dividend, conversion and voting rights) as may be fixed by the Board, without any further vote or action by the stockholders. Although the Company has no present plans to issue any additional shares of preferred stock, the ownership and control of the Company by the holders of the Common Stock would be diluted if the Company were to issue preferred stock that had voting rights or that was convertible into Common Stock or Class B Common. In addition, the holders of preferred stock issued by the Company would be entitled by law to vote on certain transactions such as a merger or consolidation, and thus the issuance of preferred stock could dilute the voting rights of the holders of the Common Stock on such issues. The issuance of preferred stock could also have the effect of delaying, deferring or preventing a change of control of the Company. The Company currently has outstanding two series of preferred stock. Pursuant to the terms of the Conversion and Exchange Agreement, VPC has agreed to convert all of its shares of Series A Preferred, including accrued and unpaid dividends thereon through the conversion date, into Common Stock on or before the earlier to occur of August 29, 1999 or the 90th day following the consummation of the Offering. The Company will cause all of the shares of Series B Preferred to be converted into approximately 4,058,333 shares of Common Stock promptly following the Offering. Thereafter, there will be no outstanding shares of any series of preferred stock and the holders of the Common Stock will have all the equity voting rights in the Company. By its terms, the Series A Preferred is convertible into Class B Common, at the option of the holder, during the period commencing on the date the Offering is consummated and terminating on the earlier to occur of the 180th day following the consummation of the Offering or August 29, 1999 (the "Series A Conversion Period"). Shares of Series A Preferred may be converted by the holder into Class B Common at the "conversion price" which is defined as the price per share which is the highest of (i) $16.44, (ii) the price per share at which the Common Stock is first sold to the public in the Offering, and (iii) the quotient of $225 million divided by the number of shares of Common Stock outstanding, on a fully diluted basis, subject to certain adjustments and exceptions. The number of shares of Class B Common issuable upon conversion of each share of Series A Preferred will be determined by dividing the sum of (i) the liquidation preference ($20,000 per share) plus all accrued and unpaid dividends on such share by (ii) the conversion price. Pursuant to the terms of the Conversion and Exchange Agreement, VPC has agreed to convert all of its shares of Series A Preferred, including accrued and unpaid dividends thereon through the conversion date, into Class B Common and has agreed to immediately thereafter exchange the Class B Common for Common Stock on a one-for-one basis. Based on an assumed initial public offering price of $16.00 per share and an assumed conversion date of August 29, 1999, a total of approximately 9,767,532 shares of Common Stock will be issued upon conversion and exchange of all the outstanding shares of Series A Preferred. The Company will cause the conversion of all the outstanding shares of Series B Preferred into Common Stock promptly after the consummation of the Offering by delivering a notice to each holder of Series B Preferred. Such notice will automatically become effective upon receipt thereof. The number of shares of Common Stock issuable upon conversion of each share of Series B Preferred will be determined by dividing the sum of (i) the liquidation preference ($60,000 per share) plus all accrued and unpaid dividends on such share by (ii) the initial public offering price. Based on an assumed initial public offering price of $16.00 per share, a total of approximately 4,058,333 shares of Common Stock will be issued upon conversion of all of the outstanding shares of Series B Preferred. As of February 28, 1999, the Company had outstanding 7,301.62157 shares of the Series A Preferred (having an aggregate liquidation preference of approximately $146,032,000). Holders of the Series A Preferred are entitled to receive cumulative dividends accruing at the annual rate of 9.75% of the aggregate liquidation preference thereof. Until the expiration of the Series A Conversion Period, dividends are payable 82 86 annually, in arrears, by the issuance of additional shares of Series A Preferred having an aggregate liquidation preference equal to the amount of such dividends. Thereafter, dividends are payable in cash. Unless full cumulative dividends on all outstanding shares of Series A Preferred have been paid, the Company may not make dividend payments or distributions on any securities junior to the Series A Preferred ("Series A Junior Securities") (other than dividend payments or other distributions paid solely in shares of Series A Junior Securities) or redeem or make sinking fund or similar contributions for the redemption of any Series A Junior Securities. Series B Preferred shares are Series A Junior Securities. The Series A Preferred is redeemable, in whole or in part, at the option of the Company, at any time after the Series A Conversion Period, at a price, in cash, equal to the liquidation preference plus accrued and unpaid dividends to the date of redemption. Subject to certain limited exceptions and except as required by law, holders of the Series A Preferred have no voting rights. As of February 28, 1999, the Company had outstanding 1,042.60156 shares of the Series B Preferred (having an aggregate liquidation preference $62,556,000). Holders of the Series B Preferred are entitled to receive cumulative dividends accruing at the annual rate of 8% of the aggregate liquidation preference thereof. Dividends are payable quarterly, in arrears, by the issuance of additional shares of Series B Preferred having an aggregate liquidation preference equal to the amount of such dividends. Unless full cumulative dividends on all outstanding shares of Series B Preferred have been paid, the Company may not make dividend payments or distributions on any securities junior to the Series B Preferred ("Series B Junior Securities") (other than dividend payments or other distributions paid solely in shares of Series B Junior Securities) or redeem or make sinking fund or similar contributions for the redemption of any Series B Junior Securities. This description is intended as a summary and is qualified in its entirety by reference to the DGCL, to the certificates of designation setting forth the rights of the holders of the Series A Preferred and Series B Preferred and to the Conversion and Exchange Agreement. OUTSTANDING OPTIONS AND WARRANTS As of February 28, 1999, there were outstanding options to purchase 916,987.65 shares of the Common Stock pursuant to the Plan with a weighted average exercise price of $18.48 per share. See "Management -- Incentive Stock Plan." As of the same date, there were outstanding warrants to purchase 175,636.10 shares of the Common Stock with a weighted average exercise price of $11.96 per share. Under the Kofalt Warrant, Mr. Kofalt has the right to purchase up to 124,960 shares of Common Stock at an exercise price of $10.71 per share. The Kofalt Warrant is presently exercisable and expires on August 31, 1999. Rory Cole has the right to purchase up to 47,031.80 shares of Common Stock at an exercise price of $14.88 per share (the "Cole Warrant"). The Cole Warrant is presently exercisable and expires on July 11, 2002. Gordon Hecht has a warrant to purchase up to 3,644.30 shares of Common Stock at an exercise price of $17.15 per share (the "Hecht Warrant"). The Hecht Warrant is presently exercisable and expires on December 31, 2000. The Kofalt Warrant, the Cole Warrant and the Hecht Warrant provide for adjustments to the number of exercisable shares and the exercise price if the Company pays a common stock dividend or distribution to its stockholders, subdivides its common stock, combines its common stock into a smaller number of shares or issues by reclassification of its common stock other securities, subject to certain exceptions and limitations. REGISTRATION RIGHTS OF CERTAIN SECURITY HOLDERS Pursuant to the Registration Rights Agreement, nine months after the consummation of the Offering, CDPQ has the right, on two occasions, subject to certain conditions, to require the Company to register under the Securities Act shares of common stock to be issued to CDPQ upon the conversion of the Class B Common. Pursuant to the Common Stock Registration Rights Agreement among the Company, VPC, GVL, Salomon Brothers Inc, Merrill Lynch, Pierce Fenner & Smith Incorporated and U.S. Trust Company of Texas, N.A., dated as of February 14, 1997, holders of the Class C Common have the right after the 90th day following the Offering, and subject to certain conditions, to require the Company to effect one demand registration of the Common Stock to be issued upon conversion of the Class C Common (the "Class C Registration Shares"). Such demand registration rights only may be exercised upon the written request of holders of at least one-third of the Class C Registration Shares. In lieu of filing and causing to become effective a demand registration, the Company may satisfy its obligation with respect to such demand 83 87 registration by making and consummating an offer to purchase all of the Class C Registration Shares at a price at least equal to the fair market value. The Company is party to several agreements pursuant to which certain holders of the Company's securities have the right, under certain circumstances, to require the Company to include their shares of Common Stock (or shares of Common Stock issuable upon exercise or conversion of certain outstanding warrants or convertible securities) in registration statements filed by the Company under the Securities Act. The rights cover an aggregate of 8,279,348 shares of Common Stock. In addition, certain stockholders have exercised their right to include certain shares of Common Stock in the Registration Statement of which this Prospectus forms a part. TRANSFER AGENT The Transfer Agent and Registrar for the Common Stock is American Stock Transfer & Trust Company. SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering, the Company will have outstanding 33,539,458 shares of Common Stock. Of these shares, the 6,250,000 shares of Common Stock offered hereby (and any additional shares of Common Stock sold upon exercise of the Underwriters' over-allotment option) will be freely tradeable without restriction or further registration under the Securities Act. The remaining shares of Common Stock held by the existing stockholders (including any shares of Common Stock issued upon conversion of the Series A Preferred) are "restricted securities" under the Securities Act. The restricted shares were issued and sold by the Company in private transactions in reliance upon exemptions from registration under the Securities Act and may not be sold except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act ("Rule 144"). In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year, including persons who may be deemed "affiliates" of the Company, will be entitled to sell in any three-month period a number of shares of Common Stock that does not exceed the greater of: (i) 1% of the then outstanding shares of Common Stock (approximately 335,395 shares after giving effect to the Offering) or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are also subject to certain other requirements relating to manner of sale, notice and availability of current public information about the Company. A person who has beneficially owned restricted securities for at least two years and who is not, and has not been at anytime during the three-month period immediately preceding the sale, an affiliate of the Company is entitled to sell restricted shares pursuant to Rule 144(k) without regard to the limitations described above. Because there has been no public market for shares of the Common Stock of the Company, the Company is unable to predict the effect that sales made under Rule 144, pursuant to future registration statements or otherwise, may have on the market price for the shares of Common Stock. Nevertheless, sales of a substantial amount of Common Stock in the public market, or the perception that such sales could occur, could adversely affect market prices. FUTURE SALES OF STOCK TO EMPLOYEES The Company plans to seek to attract and retain employees in part by offering stock options and other purchase rights for a significant number of shares of Common Stock. These plans may have the effect of diluting the percentage of ownership in the Company of the then existing stockholders. See "Management -- Incentive Stock Plan" and "-- Stock Purchase Plan." CERTAIN PROVISIONS OF OPTEL'S CERTIFICATE OF INCORPORATION AND BYLAWS AND OF DELAWARE LAW General. The Certificate of Incorporation and Bylaws of OpTel and the DGCL contain certain provisions that could make more difficult the acquisition of OpTel by means of a tender offer, a proxy contest or otherwise. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of OpTel first to negotiate with 84 88 OpTel. Although such provisions may have the effect of delaying, deferring or preventing a change in control of OpTel, the Company believes that the benefits of increased protection of OpTel's potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the Company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. See "Risk Factors -- Anti-Takeover Provisions." The description set forth below is intended as a summary only and is qualified in its entirety by reference to the Certificate of Incorporation and Bylaws of OpTel. Class B Common and Blank Check Preferred Stock. The Company's Certificate of Incorporation authorizes the issuance of up to 60,000,000 shares of Class B Common and up to 10,000,000 shares of preferred stock from time to time in one or more designated series. The approximately 7,302 outstanding shares of Series A Preferred and the approximately 1,043 outstanding shares of Series B Preferred will revert to authorized but unissued status upon their conversion into Common Stock. See "-- Preferred Stock." The Board, without approval of the stockholders, is authorized to establish voting, dividend, redemption, conversion, liquidation and other provisions of a particular series of preferred stock. The issuance of shares of Class B Common or preferred stock could, among other things, adversely affect the voting power or other rights of the holders of Common Stock and, under certain circumstances, make it more difficult for a third party to acquire, or discourage a third party from acquiring, control of the Company. See "Risk Factors -- Control by GVL" and "-- Anti-Takeover Provisions." The Board has no present intention to authorize the issuance of any shares of Class B Common or any additional series of preferred stock. Advance Notice Requirements for Stockholder Proposals and Director Nominations. Upon consummation of the Offering, OpTel's Bylaws will require advance notice procedures with regard to stockholder proposals and the nomination, other than by or at the direction of the Board of Directors or a committee thereof, of candidates for election as directors. These procedures will provide that notice of stockholder proposals and stockholder nominations for the election of directors at an annual meeting must be in writing and received by the Company no earlier than 90 days and no later than 60 days prior to the anniversary of the preceding year's annual meeting (or if the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, no earlier than the 90th day prior to such meeting and no later than the close of business on the later of the 60th day prior to such meeting or the tenth day following the date the annual meeting is announced). Nominations for the election of directors at a special meeting must be in writing and received by the Company no earlier than the 90th day prior to such meeting and no later than the close of business on the later of the 60th day prior to such meeting or the tenth day following the date such meeting is announced. The notice of stockholder nominations for the election of directors must set forth certain information with respect to each nominee who is not an incumbent director. Anti-Takeover Statute. Section 203 of the DGCL ("Section 203") prohibits certain persons ("Interested Stockholders") from engaging in a "business combination" with a Delaware corporation for three years following the date such persons become Interested Stockholders. Interested Stockholders generally include (i) persons who are the beneficial owners of 15% or more of the outstanding voting stock of the corporation and (ii) persons who are affiliates or associates of the corporation and who held 15% or more of the corporation's outstanding voting stock at any time within three years before the date on which such person's status as an Interested Stockholder is determined. Subject to certain exceptions, a "business combination" includes, among other things (i) mergers or consolidations, (ii) the sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets having an aggregate market value equal to 10% or more of either the aggregate market value of all assets of the corporation determined on a consolidated basis or the aggregate market value of all the outstanding stock of the corporation, (iii) transactions that result in the issuance or transfer by the corporation of any stock of the corporation to the Interested Stockholder, except pursuant to a transaction that effects a pro rata distribution to all stockholders of the corporation, (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series, or securities convertible into the stock of any class or series, of the corporation that is owned directly or indirectly by the Interested Stockholder or (v) any receipt by the Interested Stockholder of the benefit (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. 85 89 Section 203 does not apply to a business combination if (i) before a person becomes an Interested Stockholder, the board of directors of the corporation approves the transaction in which the Interested Stockholder became an Interested Stockholder or approved the business combination, (ii) upon consummation of the transaction that resulted in the Interested Stockholder becoming an Interested Stockholder, the Interested Stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (other than certain excluded shares) or (iii) concurrently with or following a transaction in which the person became an Interested Stockholder, the business combination is (a) approved by the board of directors of the corporation and (b) authorized at an annual or special meeting of stockholders (and not by written consent) by the affirmative vote of the holders of at least two-thirds of the outstanding voting stock of the corporation not owned by the Interested Stockholder. CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the material United States federal income tax considerations generally applicable to holders acquiring the Common Stock in the Offering but does not purport to be a complete analysis of all potential consequences. The discussion is based upon the Code, Treasury regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now in effect, all of which are subject to change at any time by legislative, judicial or administrative action. Any such changes may be applied retroactively in a manner that could adversely affect a holder of the Common Stock. The discussion assumes that the holders of the Common Stock will hold it as a "capital asset" within the meaning of Section 1221 of the Code. The tax treatment of a holder of the Common Stock may vary depending on such holder's particular situation or status. Certain holders (including S corporations, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, taxpayers subject to alternative minimum tax and persons holding the Common Stock as part of a straddle, hedging or conversion transaction) may be subject to special rules not discussed below. The following discussion does not consider all aspects of United States federal income taxation that may be relevant to the purchase, ownership and disposition of the Common Stock by a holder in light of such holder's personal circumstances. In addition, the discussion does not consider the effect of any applicable foreign, state or local tax laws. PERSONS CONSIDERING THE PURCHASE OF COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. For purposes of this discussion, a "U.S. Holder" means a citizen or resident of the United States, a corporation, partnership or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof, an estate whose income is includible in gross income for United States federal income tax purposes regardless of its source or a trust if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. A "Non-U.S. Holder" means a holder that is not a U.S. Holder. TAX CONSEQUENCES TO U.S. HOLDERS Distributions on the Common Stock A cash distribution on the Common Stock will be taxable to the U.S. Holder as ordinary dividend income to the extent that the amount of the distribution does not exceed the Company's current or accumulated earnings and profits allocable to such distribution (as determined for United States federal income tax purposes). To the extent that the amount of the distribution exceeds the Company's current or accumulated earnings and profits allocable to such distribution, the distribution will be treated as a return of capital, thus reducing the holder's adjusted tax basis in the Common Stock with respect to which such distribution is made. The amount of any such excess distribution that exceeds the U.S. Holder's adjusted tax basis in the Common Stock will be taxed as capital gain and will be long-term capital gain if the U.S. Holder's holding period for the Common Stock exceeds one year. There can be no assurance that the Company will have sufficient earnings 86 90 and profits to cause distributions on the Common Stock to be treated as dividends for United States federal income tax purposes. For purposes of the remainder of this discussion, the term "dividend" refers to a distribution paid out of current or accumulated earnings and profits, unless the context indicates otherwise. Dividends received by corporate U.S. Holders will generally be eligible for the 70% dividends-received deduction under Section 243 of the Code. There are, however, many exceptions and restrictions relating to the availability of the dividends-received deduction, such as restrictions relating to (i) the holding period of the stock on which the dividends are received, (ii) debt-financed portfolio stock, (iii) dividends treated as "extraordinary dividends" for purposes of Section 1059 of the Code and (iv) taxpayers that pay alternative minimum tax. Corporate U.S. Holders should consult their own tax advisors regarding the extent, if any, to which such exceptions and restrictions may apply to their particular factual situations. A corporate holder must satisfy a separate 46-day (91-day, in the case of certain preferred stock dividends) holding period requirement with respect to each dividend in order to be eligible for the dividends-received deduction with respect to such dividend. Sale or Other Taxable Disposition of Common Stock Upon a sale or other taxable disposition of the Common Stock, the difference between the sum of the amount of cash and the fair market value of other property received and the holder's adjusted tax basis in the Common Stock will be capital gain or loss. This gain or loss will be long-term capital gain or loss if the U.S. Holder's holding period for the Common Stock exceeds one year. TAX CONSEQUENCES TO NON-U.S. HOLDERS Distributions on the Common Stock Dividends paid to a Non-U.S. Holder of Common Stock that are not effectively connected with the conduct of a trade or business within the United States by the Non-U.S. Holder (or, if certain tax treaties apply, attributable to a permanent establishment therein maintained by the Non-U.S. Holder) will be subject to United States federal income tax, which generally will be withheld at a rate of 30% of the gross amount of the dividends unless the rate is reduced by an applicable income tax treaty. Under currently applicable Treasury regulations, dividends paid to an address in a country other than the United States are subject to withholding (unless the payor has knowledge to the contrary). Dividends paid to a Non-U.S. Holder of Common Stock that are effectively connected with a United States trade or business conducted by such Non-U.S. Holder will be taxed at the graduated rates applicable to United States citizens, resident aliens and domestic corporations (the "Regular Federal Income Tax") and will not be subject to withholding if the Non-U.S. Holder gives an appropriate statement to the Company or its paying agent in advance of the dividend payment. In addition to the Regular Federal Income Tax, effectively connected dividends (or dividends attributable to a permanent establishment) received by a Non-U.S. Holder that is a corporation may also be subject to an additional branch profits tax at a rate of 30% (unless the rate is reduced by an applicable income tax treaty). Sale or Other Taxable Disposition of Common Stock A Non-U.S. Holder generally will not be subject to United States federal income tax or withholding on gain recognized upon a sale or other disposition of Common Stock unless: (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-U.S. Holder (or, if certain tax treaties apply, attributable to a permanent establishment therein maintained by the Non-U.S. Holder), in which case the branch profits tax also may apply if the Non-U.S. Holder is a corporation; (ii) in the case of a Non-U.S. Holder who is a non-resident alien individual and holds the Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year and certain other conditions are met; or (iii) the Common Stock constitutes a United States real property interest by reason of the Company's status as a "United States real property holding corporation" ("USRPHC") for United States federal income tax purposes at any time within the shorter of the five-year period preceding such disposition or such Non- 87 91 U.S. Holder's holding period for the Common Stock. The Company does not believe that it is or will become a USRPHC for federal income tax purposes. If a Non-U.S. Holder falls within clause (i) or (iii) in the preceding paragraph, the holder will be taxed on the net gain derived from the sale under the Regular Federal Income Tax and may be subject to withholding under certain circumstances (and, in the case of a corporate Non-U.S. Holder, may also be subject to the branch profits tax described above). If a Non-U.S. Holder falls under clause (ii) in the preceding paragraph, the holder generally will be subject to United States federal income tax at a rate of 30% on the gain derived from the sale. Federal Estate Tax An individual Non-U.S. Holder who owns, or is treated as owning, Common Stock at the time of his or her death or has made certain lifetime transfers of an interest in Common Stock will be required to include the value of such Common Stock in his or her gross estate for United States federal estate tax purposes, and therefore may be subject to United States federal estate tax unless an applicable estate tax treaty provides otherwise. New Withholding Regulations The Treasury Department recently promulgated final regulations regarding the withholding and information reporting rules applicable to payments made to Non-U.S. Holders (the "New Withholding Regulations"). In general, the New Withholding Regulations do not significantly alter the substantive withholding and information reporting requirements but rather unify current certification procedures and forms and clarify reliance standards. The New Withholding Regulations are generally effective for payments made after December 31, 1999, subject to certain transition rules. NON-U.S. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE IMPACT, IF ANY, OF THE NEW WITHHOLDING REGULATIONS. INFORMATION REPORTING AND BACKUP WITHHOLDING Generally, distributions on (and, in the case of U.S. Holders, proceeds from the sale of) Common Stock will be reported annually to holders of Common Stock and to the IRS. A U.S. Holder of Common Stock may be subject to backup withholding at the rate of 31% with respect to dividends paid on, or the proceeds of a sale or exchange of, the Common Stock, unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates its exemption or (b) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A U.S. Holder of Common Stock that does not provide the Company with the holder's correct taxpayer identification number may be subject to penalties imposed by the IRS. A Non-U.S. Holder of Common Stock may also be subject to certain information reporting or backup withholding if certain requisite certification is not received or other exemptions do not apply. Any amount paid as backup withholding with respect to a holder of Common Stock would be creditable against such holder's United States federal income tax liability, provided that the required information is furnished to the IRS. 88 92 DESCRIPTION OF CERTAIN INDEBTEDNESS THE 1998 NOTES On July 7, 1998, the Company issued $200,000,000 principal amount of 11 1/2% Senior Notes due 2008. The 1998 Notes mature on July 1, 2008. Cash interest on the 1998 Notes is payable semi-annually in arrears on each January 1 and July 1 at a rate of 11 1/2% per annum. Upon issuance of the 1998 Notes, the Company deposited with an escrow agent an amount of cash and government securities that, together with the proceeds from the investment thereof, were estimated to be sufficient to pay when due the first two interest payments on the 1998 Notes, with the balance to be retained by the Company. The 1998 Notes and the 1997 Notes are collateralized by a first priority security interest in such escrow account. The 1998 Notes may be redeemed at the Company's option at any time after July 1, 2003 upon payment of the redemption price plus accrued and unpaid interest, if any, to the date of redemption. In the event of a change of control of the Company, holders of the 1998 Notes have the right to require the Company to purchase their 1998 Notes, in whole or in part, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The Indenture governing the 1998 Notes (the "1998 Indenture") contains certain covenants that, among other things, limit the ability of the Company and its subsidiaries to make certain restricted payments, incur additional indebtedness, pay dividends or make other distributions, repurchase equity interests or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its subsidiaries, issue or sell equity interests of the Company's subsidiaries or enter into certain mergers and consolidations. In addition, under certain circumstances, the Company is required to offer to purchase 1998 Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, with the proceeds of certain asset sales. The 1998 Indenture also provides for customary events of default. This description is intended as a summary and is qualified in its entirety by reference to the 1998 Indenture, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. THE 1997 NOTES The Company has outstanding $225,000,000 principal amount of 13% Senior Notes due 2005. The 1997 Notes mature on February 15, 2005. Cash interest on the 1997 Notes is payable semi-annually in arrears on each February 15 and August 15 at a rate of 13% per annum. Upon issuance of the 1997 Notes, the Company deposited with an escrow agent an amount of cash and government securities that, together with the proceeds from the investment thereof, were estimated to be sufficient to pay when due the first six interest payments on the 1997 Notes, with the balance to be retained by the Company. The 1997 Notes are collateralized by a first priority security interest in such escrow account. The 1997 Notes may be redeemed at the Company's option at any time after February 15, 2002 upon payment of the redemption price plus accrued and unpaid interest, if any, to the date of redemption. In the event of a change of control of the Company, holders of the 1997 Notes have the right to require the Company to purchase their 1997 Notes, in whole or in part, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase. The Indenture governing the 1997 Notes (the "1997 Indenture") contains certain covenants that, among other things, limit the ability of the Company and its subsidiaries to make certain restricted payments, incur additional indebtedness, pay dividends or make other distributions, repurchase equity interests or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its subsidiaries, issue or sell equity interests of the Company's subsidiaries or enter into certain mergers and consolidations. In addition, under certain circumstances, the Company is required to offer to purchase 1997 Notes at a price equal to 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, with the proceeds of certain asset sales. The 1997 Indenture also provides for customary events of default. The covenants set forth in the 1997 Indenture are similar, but more restrictive in some instances, to those in the 1998 Indenture. This description is intended as a summary and is qualified in its entirety by reference to the 1997 Indenture, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. 89 93 UNDERWRITING Subject to the terms and conditions set forth in an agreement between the Underwriters, the Selling Stockholders and the Company (the "Underwriting Agreement"), the Company and the Selling Stockholders have agreed to sell to each of the Underwriters named below (the "Underwriters"), and each of the Underwriters for whom Salomon Smith Barney Inc., Goldman, Sachs & Co., Bear, Stearns & Co. Inc. and CIBC World Markets Corp. are acting as representatives (the "Representatives"), has severally agreed to purchase the number of shares of Common Stock (the "Shares") set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES - ------------ ---------------- Salomon Smith Barney Inc.................................... Goldman, Sachs & Co......................................... Bear, Stearns & Co. Inc..................................... CIBC World Markets Corp. ................................... ---------- Total............................................. ==========
The Company and the Selling Stockholders have been advised by the Representatives that the several Underwriters initially propose to offer such Shares to the public at the Price to Public set forth on the cover page of this Prospectus and part of the Shares to certain dealers at such price less a concession not in excess of $ per Share under the Price to Public. The Underwriters may allow and such dealers may reallow a concession not in excess of $ per Share to certain other dealers. After the Offering, the Price to Public and such concessions may be changed. The Underwriting Agreement provides that the obligations of the several Underwriters thereunder are subject to the approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligations is such that they are committed to purchase and pay for all of the above Shares if any are purchased. The Shares are offered subject to receipt and acceptance by the Underwriters and to certain other conditions, including the right to reject orders in whole or in part. The Company granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an aggregate of 937,500 additional shares of Common Stock from the Company at the Price to Public less the Underwriting Discounts and Commissions, each as set forth on the cover page of this Prospectus. If the Underwriters exercise such option in whole or in part, then each Underwriter will be committed, subject to certain conditions, to purchase such additional shares proportionate to such Underwriter's initial commitment. The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the Underwriters against certain liabilities and expenses, including liabilities under the Securities Act, or will contribute to payments that the Underwriters may be required to make in respect thereof. Subject to certain exceptions, the Company, its directors, executive officers and certain stockholders, including VPC and CDPQ, have agreed not to offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or announce the offering of any shares of Common Stock, including any such shares beneficially owned or controlled by any such person, or any securities convertible into, or exchangeable or exercisable for, shares of the Common Stock, for 180 days from the date of this Prospectus, without the prior written consent of Salomon Smith Barney Inc. The Underwriters will not confirm sales to any discretionary account without the prior specific written approval of the customer. At the Company's request, the Underwriters have reserved up to 312,500 Shares (the "Directed Shares") for sale at the Price to Public to persons who are directors, officers or employees of, or otherwise associated with, the Company and its affiliates and who have advised the Company of their desire to purchase such Shares. The number of Shares available for sale to the general public will be reduced to the extent of sales of Directed Shares to any of the persons for whom they have been reserved. Any Shares not so purchased will be offered by the Underwriters on the same basis as all other Shares offered hereby. 90 94 The following table shows the underwriting discounts and commissions to be paid to the Underwriters by OpTel. These amounts are shown assuming both no exercise and full exercise of the Underwriters' option to purchase additional shares of common stock.
PAID BY OPTEL ---------------------------- NO EXERCISE FULL EXERCISE ----------- ------------- Per share................................................... $ 1.12 $ 1.12 Total....................................................... $7,000,000 $8,050,000
The underwriting discounts and commissions to be paid by the Selling Stockholders will be $1.12 per share and $437,214 total. The Underwriters have no option to purchase additional shares from the Selling Stockholders. During and after the Offering, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include overallotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members of other broker-dealers in respect of the Shares sold in the Offering for their account may be reclaimed by the syndicate if such Shares are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock which may be higher than the price that might otherwise prevail in the open market. The Underwriters are not required to engage in these activities and may end these activities at any time. In addition, in connection with this offering, certain of the Underwriters (and selling group members) may engage in passive market making transactions in the Common Stock on the Nasdaq National Market, prior to the pricing and completion of the Offering. Passive market making consists of displaying bids on the Nasdaq National Market no higher than the bid prices of independent market makers and making purchases at prices no higher than those independent bids and effected in response to order flow. Net purchases by a passive market maker on each day are limited to a specified percentage of the passive market maker's average daily trading volume in the Common Stock during a specified period and must be discontinued when such limit is reached. Passive market making may cause the price of the Common Stock to be higher than the price that otherwise would exist in the open market in the absence of such transactions. If passive market making is commenced, it may be discontinued at any time. Prior to the Offering, there has been no public market for the Common Stock. The Price to Public was determined by negotiations between the Company and the Representatives. Among the factors considered in determining the Price to Public were prevailing market conditions, the market values of publicly traded companies that the Underwriters believed to be somewhat comparable to the Company, the demand for the Shares and for similar securities of publicly traded companies that the Underwriters believed to be somewhat comparable to the Company, the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods and other factors deemed relevant. There can be no assurance that the prices at which the Shares will sell in the public market after the Offering will not be lower than the Price to Public. Salomon Brothers Inc (an affiliate of Salomon Smith Barney Inc.), Goldman, Sachs & Co. and CIBC Oppenheimer Corp. were initial purchasers in connection with the Company's offering, in July 1998, of $200,000,000 aggregate principal amount of the 1998 Notes, for which they received customary fees. Salomon Brothers Inc was an initial purchaser in connection with the Company's offering, in February 1997, of units consisting of $225,000,000 aggregate principal amount of the 1997 Notes and 1,125,000 shares of the Class C Common, for which it received customary fees. From time to time, Salomon Smith Barney Inc. (or certain of its affiliates) has provided, and may in the future provide, financial advisory services to the Company for which it has received, and expects to continue to receive, customary fees. Canadian Imperial Bank of Commerce, an affiliate of CIBC World Markets Corp., acted as the administrative agent for the syndicate of lenders and as a lender in connection with the Senior Credit Facility, for which it received customary fees. Goldman Sachs 91 95 Credit Partners, L.P., an affiliate of Goldman, Sachs & Co., arranged the Senior Credit Facility and acted as a lender, for which it received customary fees. CERTAIN MARKET INFORMATION Prior to the Offering, no class of equity securities of the Company has been traded in any public market. There can be no assurance that a public trading market will develop for the Common Stock or, if one develops after the completion of the Offering, that it will be sustained. See "Risk Factors -- Lack of Prior Public Market; Possible Volatility of Stock Price." The Common Stock has been approved for listing on the Nasdaq National Market under the symbol "OTEL" subject to notice of issuance. LEGAL MATTERS The validity of the securities offered hereby and certain other legal matters in connection with the sale of securities offered hereby will be passed upon for the Company by Kronish Lieb Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036. Certain federal regulatory matters related to the Offering or described herein will be passed upon for the Company by Goldberg, Godles, Wiener & Wright, 1229 Nineteenth Street, N.W., Washington, D.C. 20036, the Company's FCC counsel. Certain legal matters relating to the sale of the securities offered hereby will be passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), 80 Pine Street, New York, New York 10005. EXPERTS The Consolidated Financial Statements of the Company as of August 31, 1997 and 1998 and for the years ended August 31, 1996, 1997 and 1998, and the Financial Statement of the Assets and Liabilities of ICS Communications, LLC, acquired by the Company for the year ended December 31, 1997, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement or the exhibits and schedules thereto, certain portions having been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits and financial statement schedules thereto, which may be inspected without charge at the public reference facility maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, 13th Floor, New York, New York 10007 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Such Web site is located at http://www.sec.gov. While the Company has disclosed all the information material to an investment decision regarding the Common Stock, statements made in this Prospectus concerning the contents of any document referred to herein are not necessarily complete. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. 92 96 The Company will provide without charge to each person to whom a copy of this Prospectus has been delivered, a copy of any or all of the documents (other than exhibits to such documents) which have been incorporated by reference in the Registration Statement, upon the oral or written request of such person to OpTel, Inc., 1111 W. Mockingbird Lane, Dallas, Texas 75247 (telephone (214) 634-3800), Attention: Bertrand Blanchette. 93 97 APPENDIX A GLOSSARY Access Charges -- The charges paid by an IXC to an ILEC or CLEC for the origination or termination of the IXC's customer's long distance calls. CAP (Competitive Access Provider) -- A service provider that competes with local telephone companies for access traffic by providing to high-volume customers private line access to IXCs. Although traditional CAPs did not provide a complete package of local exchange services, some CAPs have begun to provide local exchange services following the passage of the Telecom Act. Central Office -- The switching center and/or central circuit termination facility of a local telephone company. CLEC (Competitive Local Exchange Carrier) -- A telephone service provider (carrier) offering services similar to those offered by the former monopoly local telephone company. A CLEC may also provide other types of telecommunications services (e.g., long distance). CLEC Certification -- Granted by a state public service commission or public utility commission, this certification provides a telecommunications services provider with the legal standing to offer local exchange telephone services in direct competition with ILECs and other CLECs. Such certifications are granted on a state-by-state basis. Collocate or Collocation -- An interface point for the interconnection of a CLEC's network to the network of an ILEC or another CLEC. Collocation can be 1) physical, where the CLEC "builds" a fiber optic network extension into the ILEC's or CLEC's central office, or 2) virtual, where the ILEC or CLEC leases a facility, similar to that which it might build, to affect a presence in the ILEC's or CLEC's central office. Communications Act of 1934 -- Federal legislation that established rules for broadcast and nonbroadcast communications, including both wireless and wire line telephone service which continues, as amended, to be in effect today. EBITDA -- represents earnings before interest expense (net of interest income and amounts capitalized), income tax benefits, depreciation and amortization. EBITDA is not intended to represent cash flow from operations or an alternative to net loss, each as defined by generally accepted accounting principles. In addition, the measure of EBITDA presented herein may not be comparable to other similarly titled measures by other companies. The Company believes that EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in the cable television and telecommunications industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in its industry. FCC (Federal Communications Commission) -- The principal U.S. Government agency charged with the oversight of all public communications media. HDTV (High Definition Television) -- Digital signals used in television broadcasting which have been the subject of recent federal legislation. Head End -- Equipment necessary to receive video programming via satellite transmission and combine the signals into a channel lineup for distribution. Hertz, Megahertz and Gigahertz -- The dimensional unit for measuring the frequency with which an electromagnetic signal cycles through the zero-value state between lowest and highest states. One Hertz (abbreviated Hz) equals one cycle per second. MHz (MegaHertz) stands for millions of Hertz. GHz (GigaHertz) stands for billions of Hertz. ICP (Integrated Communications Provider) -- A communications carrier that provides packaged or integrated services from among a broad range of categories, including local exchange services, long distance services, data services, cable television services and other communications services. A-1 98 ILEC (Incumbent Local Exchange Carrier) -- The local exchange carrier that was the monopoly carrier prior to the opening of local exchange services to competition. Interconnection (co-carrier) Agreement -- A contract between an ILEC and a CLEC for the interconnection of the two networks for the purpose of mutual exchange of traffic between the networks, allowing customers of one of the networks to call users served by the other network. These agreements set out the financial and operational aspects of such interconnection. Interexchange Services -- Telecommunications services that are provided between two exchange areas, generally meaning between two cities (i.e., long distance). InterLATA -- Telecommunications services originating inside a LATA and terminating outside of that LATA. Internet -- A global collection of interconnected computer networks which use a specific communications protocol. ISDN (Integrated Services Digital Network) -- An information transfer standard for transmitting digital voice and data over telephone lines at speeds up to 128 KB per second. ISP (Internet Service Provider) -- A service provider that provides access to the Internet, normally for dial-access customers, by sharing communications lines and equipment. IXC (Interexchange Carrier) -- A provider of telecommunications services that extend between exchanges or cities, also known as a long distance provider. KB (Kilobits) per second -- A transmission rate. One kilobit equals 1,024 bits of information. LATA (Local Access and Transport Area) -- A geographic area inside of which a LEC can offer switched telecommunications services, including long distance (known as local toll). The LATA boundaries were established at the divestiture of the local exchange business of AT&T. LEC (Local Exchange Carrier) -- Any telephone service provider offering local exchange services. LECs include ILECs, RBOCs and CLECs. LMDS (Local Multipoint Distribution Service) -- A wireless point to multipoint communications service. Local Exchange -- An area inside of which telephone calls are generally completed without any toll or long distance charges. Local exchange areas are defined by the state regulator of telephone services. Local Exchange Services -- Telephone services that are provided within a local exchange. These usually refer to local calling services (e.g., dial tone services). MB (Megabits) per second -- A transmission rate. One megabit equals 1,024 kilobits. MDU (Multiple Dwelling Unit) -- High density residential complexes such as high- and low-rise apartment buildings, condominiums, cooperatives, townhouses and mobile home communities. MMDS (Multichannel Multipoint Distribution Service) -- A wireless point to multipoint distribution system using microwave transmitting and receiving equipment that broadcasts to individual subscribers in an omni-directional manner. Modem -- A device for transmitting digital information over an analog telephone line. Network Hubs -- Locations where the Company has installed Head End equipment and telecommunications transmitting and receiving equipment for distribution to MDUs. Network Operations Center -- A facility where the Company monitors and manages the Company's networks. A-2 99 PBX (Private Branch Exchange) -- A telephone switching system designed to operate at the MDU. A PBX connects telephones to each other and to lines and trunks that connect the PBX to the public network and/or private telephone networks. POP (Point of Presence) -- A location where a carrier, usually an IXC, has located transmission and terminating equipment to connect its network to the networks of other carriers or to customers. RBOC (Regional Bell Operating Company) -- ILECs created by the divestiture of the local exchange business of AT&T. These include BellSouth, Bell Atlantic, Ameritech, US WEST, SBC Communications, Inc. and PacBell. Reciprocal Compensation -- The compensation paid to and from one local exchange carrier to another for termination of a local call on the other's networks. STS (Shared Tenant Services) -- The provision of telecommunications services to multiple tenants by allowing these users to have shared access to telephone lines and other telephone services. SMATV (Satellite Master Antenna Television) -- Non-networked systems which transmit video programming via Head Ends located at individual MDUs. SONET (Synchronous Optical Network) -- Self-healing rings that provide high speed redundant connections for the delivery of voice traffic. Switch -- A device that opens or closes circuits or selects the paths or circuits to be used for transmission of information. Switching is the process of interconnecting circuits to form a transmission path between users. A switch also captures information for billing purposes. Switch-based -- A communications provider that delivers its services to the end-user via owned switches and leased (or owned) transport. T-1 -- A high-speed digital circuit typically linking high volume customer locations to long distance carriers or other customer locations. Typically utilized for voice transmissions as well as the interconnection of local area networks, T-1 service accommodates transmission speeds of up to 1.544 MB per second, which is equivalent to 24 voice grade equivalent circuits. Trunk -- A dedicated circuit which concentrates subscriber lines. A trunked system combines multiple channels with unrestricted access in such a manner that user demands for channels are automatically "queued" and then allocated to the first available channel. A-3 100 INDEX TO FINANCIAL STATEMENTS OPTEL, INC. AND SUBSIDIARIES: Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of August 31, 1997 and 1998 and February 28, 1999 (unaudited)......................... F-3 Consolidated Statements of Operations for the years ended August 31, 1996, 1997 and 1998, and the six months ended February 28, 1998 and 1999 (unaudited).................... F-4 Consolidated Statements of Stockholders' Equity for the years ended August 31, 1996, 1997 and 1998 and the six months ended February 28, 1998 and 1999 (unaudited)....... F-5 Consolidated Statements of Cash Flows for the years ended August 31, 1996, 1997 and 1998 and the six months ended February 28, 1998 and 1999 (unaudited).................... F-6 Notes to Consolidated Financial Statements.................. F-7 ACQUIRED COMPANY: Assets and Liabilities Acquired of ICS Communications, LLC by OpTel, Inc.: Independent Auditors' Report.............................. F-24 Statements of Revenues and Direct Expenses for the year ended December 31, 1997 and the three months ended March 31, 1998 (unaudited)............................. F-25 Notes to Financial Statements............................. F-26
F-1 101 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc.: We have audited the accompanying consolidated balance sheets of OpTel, Inc. and subsidiaries (the "Company") as of August 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended August 31, 1996, 1997 and 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of OpTel, Inc. and subsidiaries as of August 31, 1997 and 1998, and the results of their operations and their cash flows for the years ended August 31, 1996, 1997 and 1998, in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP Dallas, Texas October 6, 1998 F-2 102 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) ASSETS
AUGUST 31, -------------------- FEBRUARY 28, 1997 1998 1999 -------- --------- ------------ (UNAUDITED) Cash and cash equivalents.................................. $ 87,305 $ 123,774 $ 60,032 Restricted investments (Notes 6 and 12).................... 67,206 63,207 38,645 Accounts receivable (net of allowance for doubtful accounts of $1,125, $1,803 and $2,359 respectively)............... 4,044 9,458 12,845 Prepaid expenses, deposits and other assets................ 1,836 2,317 2,593 Property and equipment, net (Note 4)....................... 160,442 268,044 308,289 Intangible assets, net (Note 5)............................ 82,583 160,370 159,055 -------- --------- --------- TOTAL............................................ $403,416 $ 627,170 $ 581,459 ======== ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable, accrued expenses and other liabilities... $ 21,896 $ 31,842 $ 30,759 Deferred revenue and customer deposits..................... 2,978 5,274 5,685 Convertible notes payable to stockholder (Note 9).......... 129,604 -- -- Notes payable and long-term obligations (Note 6)........... 228,573 429,278 428,853 -------- --------- --------- Total liabilities................................ 383,051 466,394 465,297 Commitments and contingencies (Notes 3 and 7) Stockholders' equity (Notes 9, 10 and 13): Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding............... -- -- -- Series A preferred stock, $.01 par value; 10,000 shares authorized; none, 6,962 and 7,302 issued and outstanding........................................... -- 146,115 153,341 Series B preferred stock, $.01 par value; 2,000 shares authorized; none, 991 and 1,043 issued and outstanding........................................... -- 61,343 63,827 Class A common stock, $.01 par value; 8,000,000 shares authorized; none, 164,272 and 164,272 issued and outstanding........................................... -- 2 2 Class B common stock, $.01 par value; 6,000,000 shares authorized; 2,353,498 issued and outstanding.......... 24 24 24 Class C common stock, $.01 par value; 300,000 shares authorized; 225,000 issued and outstanding............ 2 2 2 Additional paid-in capital................................. 97,683 113,780 113,780 Accumulated deficit........................................ (77,344) (160,490) (214,814) -------- --------- --------- Total stockholders' equity....................... 20,365 160,776 116,162 -------- --------- --------- TOTAL............................................ $403,416 $ 627,170 $ 581,459 ======== ========= =========
See notes to consolidated financial statements. F-3 103 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 28, ------------------------------ ------------------- 1996 1997 1998 1998 1999 -------- -------- -------- -------- -------- (UNAUDITED) REVENUES: Cable television................................ $ 25,893 $ 36,915 $ 61,081 $ 25,247 $ 38,095 Telecommunications.............................. 1,711 2,922 3,882 1,644 2,870 -------- -------- -------- -------- -------- Total revenues.......................... 27,604 39,837 64,963 26,891 40,965 OPERATING EXPENSES: Programming, access fees and revenue sharing.... 11,868 19,202 28,825 12,419 18,689 Customer support, general and administrative.... 19,636 28,926 35,847 15,855 26,335 Depreciation and amortization................... 8,676 14,505 28,481 10,759 17,997 -------- -------- -------- -------- -------- Total operating expenses................ 40,180 62,633 93,153 39,033 63,021 -------- -------- -------- -------- -------- LOSS FROM OPERATIONS.............................. (12,576) (22,796) (28,190) (12,142) (22,056) OTHER INCOME (EXPENSE): Interest expense on convertible notes payable to stockholder (Notes 4 and 9).................. (5,342) (15,204) (9,640) (9,640) -- Other interest expense.......................... (657) (16,210) (38,837) (16,386) (25,837) Interest and other income....................... 145 5,675 8,913 4,141 3,279 -------- -------- -------- -------- -------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM... (18,430) (48,535) (67,754) (34,027) (44,614) INCOME TAXES (Note 8)............................. -- -- -- -- -- -------- -------- -------- -------- -------- LOSS BEFORE EXTRAORDINARY ITEM.................... (18,430) (48,535) (67,754) (34,027) (44,614) EXTRAORDINARY LOSS ON DEBT EXTINGUISHMENT (Note 6).............................................. -- -- (6,644) -- -- -------- -------- -------- -------- -------- NET LOSS.......................................... (18,430) (48,535) (74,398) (34,027) (44,614) EARNINGS ATTRIBUTABLE TO PREFERRED STOCK.......... -- -- (8,748) -- (9,710) -------- -------- -------- -------- -------- NET LOSS ATTRIBUTABLE TO COMMON EQUITY............ $(18,430) $(48,535) $(83,146) $(34,027) $(54,324) ======== ======== ======== ======== ======== BASIC AND DILUTED LOSS BEFORE EXTRAORDINARY ITEM PER SHARE OF COMMON EQUITY...................... $ (8.30) $ (19.98) $ (28.94) $ (13.20) $ (19.81) BASIC AND DILUTED EXTRAORDINARY LOSS PER SHARE OF COMMON EQUITY................................... -- -- (2.51) -- -- -------- -------- -------- -------- -------- BASIC AND DILUTED LOSS PER SHARE OF COMMON EQUITY (Notes 2 and 10)................................ $ (8.30) $ (19.98) $ (31.45) $ (13.20) $ (19.81) ======== ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF SHARES OF COMMON EQUITY OUTSTANDING (Notes 2 and 10).................... 2,220 2,430 2,644 2,578 2,743 ======== ======== ======== ======== ========
See notes to consolidated financial statements. F-4 104 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS AND SHARES IN THOUSANDS)
SERIES A SERIES B CLASS A CLASS B PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK ------------------------- ------------------------- ------------------- ------------------- SHARES LIQUIDATION SHARES LIQUIDATION SHARES PAR SHARES PAR OUTSTANDING VALUE OUTSTANDING VALUE OUTSTANDING VALUE OUTSTANDING VALUE ----------- ----------- ----------- ----------- ----------- ----- ----------- ----- BALANCE, SEPTEMBER 1, 1995... -- $ -- -- $ -- -- $-- 2,150 $21 Issuance of stock upon debt conversion................ -- -- -- -- -- -- 171 2 Contribution and cancellation of shares.... -- -- -- -- -- -- (16) -- Net loss.................... -- -- -- -- -- -- -- -- -- -------- --- ------- --- --- ----- --- BALANCE, AUGUST 31, 1996..... -- -- -- -- -- -- 2,305 23 Issuance of stock with senior notes offering..... -- -- -- -- -- -- -- -- Stock options exercised..... -- -- -- -- -- -- 48 1 Net loss.................... -- -- -- -- -- -- -- -- -- -------- --- ------- --- --- ----- --- BALANCE, AUGUST 31, 1997..... -- -- -- -- -- -- 2,353 24 Earnings attributable to preferred stock........... -- 6,871 -- 1,877 -- -- -- -- Issuance of stock upon debt conversion................ 7 139,244 -- -- -- -- -- -- Issuance of stock to acquire the ICS operations........ -- -- 1 59,466 164 2 -- -- Net loss.................... -- -- -- -- -- -- -- -- -- -------- --- ------- --- --- ----- --- BALANCE, AUGUST 31, 1998..... 7 146,115 1 61,343 164 2 2,353 24 Earnings attributable to preferred stock (unaudited)............... -- 7,226 -- 2,484 -- -- -- -- Net loss (unaudited)........ -- -- -- -- -- -- -- -- -- -------- --- ------- --- --- ----- --- BALANCE, FEBRUARY 28, 1999 (unaudited)................. 7 $153,341 1 $63,827 164 $ 2 2,353 $24 == ======== === ======= === === ===== === CLASS C COMMON STOCK ------------------- ADDITIONAL SHARES PAR PAID-IN ACCUMULATED OUTSTANDING VALUE CAPITAL DEFICIT TOTAL ----------- ----- ---------- ----------- -------- BALANCE, SEPTEMBER 1, 1995... -- $-- $ 78,902 $ (10,379) $ 68,544 Issuance of stock upon debt conversion................ -- -- 9,163 -- 9,165 Contribution and cancellation of shares.... -- -- -- -- -- Net loss.................... -- -- -- (18,430) (18,430) --- --- -------- --------- -------- BALANCE, AUGUST 31, 1996..... -- -- 88,065 (28,809) 59,279 Issuance of stock with senior notes offering..... 225 2 6,998 -- 7,000 Stock options exercised..... -- -- 2,620 -- 2,621 Net loss.................... -- -- -- (48,535) (48,535) --- --- -------- --------- -------- BALANCE, AUGUST 31, 1997..... 225 2 97,683 (77,344) 20,365 Earnings attributable to preferred stock........... -- -- -- (8,748) -- Issuance of stock upon debt conversion................ -- -- -- -- 139,244 Issuance of stock to acquire the ICS operations........ -- -- 16,097 -- 75,565 Net loss.................... -- -- -- (74,398) (74,398) --- --- -------- --------- -------- BALANCE, AUGUST 31, 1998..... 225 2 113,780 (160,490) 160,776 Earnings attributable to preferred stock (unaudited)............... -- -- -- (9,710) -- Net loss (unaudited)........ -- -- -- (44,614) (44,614) --- --- -------- --------- -------- BALANCE, FEBRUARY 28, 1999 (unaudited)................. 225 $ 2 $113,780 $(214,814) $116,162 === === ======== ========= ========
See notes to consolidated financial statements. F-5 105 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED AUGUST 31, FEBRUARY 28, -------------------------------- ------------------- 1996 1997 1998 1998 1999 -------- --------- --------- -------- -------- (UNAUDITED) OPERATING ACTIVITIES: Net loss.......................................... $(18,430) $ (48,535) $ (74,398) $(34,027) $(44,614) Adjustments to reconcile net loss to net cash flow used in operating activities: Depreciation and amortization................... 8,676 14,505 28,481 10,759 17,997 Noncash portion of extraordinary loss on debt extinguishment................................ -- -- 5,349 -- -- Noncash interest expense........................ 5,661 15,107 10,950 10,291 691 Noncash interest earned on restricted investments................................... -- (2,303) (3,466) (1,927) (1,180) Increase (decrease) in cash from changes in operating assets and liabilities, net of effect of business combinations: Accounts receivable........................... (1,370) (754) (4,003) (1,493) (3,387) Prepaid expenses, deposits and other assets... (126) (785) (68) 118 (276) Deferred revenue and customer deposits........ 906 640 1,081 653 411 Accounts payable, accrued expenses and other liabilities................................. 4,230 6,190 9,806 411 (1,083) -------- --------- --------- -------- -------- Net cash flows used in operating activities................................ (453) (15,935) (26,268) (15,215) (31,441) -------- --------- --------- -------- -------- INVESTING ACTIVITIES: Purchases of businesses........................... (9,916) (6,717) (43,354) (37,018) -- Acquisition of intangible assets.................. (7,904) (10,112) (7,172) (4,274) (4,552) Purchases and construction of property and equipment....................................... (54,217) (61,393) (78,471) (33,626) (52,376) Purchases of restricted investments............... -- (79,609) (21,785) -- -- Proceeds from maturity of restricted investments..................................... -- 14,706 29,250 14,625 25,742 -------- --------- --------- -------- -------- Net cash flows used in investing activities................................ (72,037) (143,125) (121,532) (60,293) (31,186) -------- --------- --------- -------- -------- FINANCING ACTIVITIES: Proceeds from convertible notes payable........... 73,438 33,700 -- -- -- Repayments on convertible notes payable........... -- (10,000) -- -- -- Proceeds from senior notes payable................ -- 218,000 200,000 -- -- Financing costs of senior notes payable........... -- (5,738) (6,480) -- -- Proceeds from bank financing, net of transaction costs........................................... -- -- 119,329 119,852 -- Repayment on bank financing....................... -- -- (125,000) -- -- Proceeds from issuance of common stock............ -- 9,620 -- -- -- Payment on notes payable and long-term obligations..................................... (1,307) (894) (3,580) (2,107) (1,115) -------- --------- --------- -------- -------- Net cash flows provided by (used in) financing activities...................... 72,131 244,688 184,269 117,745 (1,115) -------- --------- --------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................................... (359) 85,628 36,469 42,237 (63,742) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...... 2,036 1,677 87,305 87,305 123,774 -------- --------- --------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 1,677 $ 87,305 $ 123,774 $129,542 $ 60,032 ======== ========= ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Notes 3 and 9): Cash paid during the period for interest.......... $ 290 $ 15,059 $ 36,831 $ 15,997 $ 26,492 ======== ========= ========= ======== ======== Increase in capital lease obligations............. $ 879 $ 1,630 $ 2,742 $ 1,306 $ -- ======== ========= ========= ======== ======== Convertible debt issued for accrued interest...... $ 6,436 $ 16,490 $ 9,640 $ 9,640 $ -- ======== ========= ========= ======== ======== Common stock issued for convertible debt.......... $ 9,166 $ -- $ -- $ -- $ -- ======== ========= ========= ======== ======== Preferred stock issued for convertible debt....... $ -- $ -- $ 139,244 $ -- $ -- ======== ========= ========= ======== ======== Preferred stock issued for purchase of business... $ -- $ -- $ 59,466 $ -- $ -- ======== ========= ========= ======== ======== Common stock issued for purchase of business...... $ -- $ -- $ 16,099 $ -- $ -- ======== ========= ========= ======== ======== Earnings attributable to preferred stock.......... $ -- $ -- $ 8,748 $ -- $ 9,710 ======== ========= ========= ======== ========
See notes to consolidated financial statements. F-6 106 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED AUGUST 31, 1996, 1997 AND 1998 AND THE SIX MONTHS ENDED FEBRUARY 28, 1998 AND 1999 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) 1. DESCRIPTION OF BUSINESS OpTel, Inc., a Delaware corporation, and subsidiaries (the "Company" or "OpTel") is the successor of the cable television and telecommunications operations of Vanguard Communications, L.P. ("Vanguard"). Vanguard commenced operations in April 1993. On December 20, 1994, Vanguard contributed its cable television and telecommunications operations to its wholly owned subsidiary, OpTel. The contribution to OpTel was recorded at Vanguard's historical cost. OpTel is a developer, operator and owner of private cable television and telecommunications systems that utilize advanced technologies to deliver cable television and telecommunications services to customers in multiple dwelling units ("MDUs"). The Company negotiates long-term, generally exclusive cable television service agreements and nonexclusive telecommunications service agreements with owners and managers of MDUs, generally for terms of up to 15 years. The Company's primary markets are major metropolitan areas in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Texas and Washington, D.C. During the period from April 20, 1993 (date of inception) to March 31, 1995, the Company was wholly owned by Vanguard. On March 31, 1995, VPC Corporation ("VPC") (a wholly owned subsidiary of Le Groupe Videotron Ltee ("Videotron"), a Quebec corporation) acquired a 66.75% interest in the Company. At August 31, 1998, VPC's interest in the Company was 70.13% (see Note 9). 2. SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information -- The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of management, all adjustments (consisting only of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the six month periods ended February 28, 1998 and 1999, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. Principles of Consolidation -- The consolidated financial statements include the accounts of OpTel and its wholly owned and majority-owned subsidiaries and limited partnerships. All significant intercompany accounts and transactions have been eliminated. Amounts due to minority limited partners are included in notes payable and long-term obligations. Cash and Cash Equivalents -- Cash and cash equivalents of the Company are composed of demand deposits with banks and highly liquid, short-term investments with maturities of three months or less when purchased. Restricted Investments -- Restricted investments of the Company are composed of U.S. Treasury securities restricted for payment of interest on the Company's Senior Notes. These investments are classified as held to maturity and are carried at amortized cost. Property and Equipment -- Property and equipment are stated at cost, which includes amounts for construction materials, direct labor and overhead, and capitalized interest. When assets are disposed of, the costs and related accumulated depreciation are removed, and any resulting gain or loss is reflected in income for the period. Cost of maintenance and repairs is charged to operations as incurred; significant renewals and betterments are capitalized. F-7 107 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Depreciation is calculated using the straight-line method over the estimated useful lives of the various classes of property and equipment as follows: Headends.................................................... 15 years Telephone switches.......................................... 10 years Distribution systems and enhancements....................... 15 years Computer software and equipment............................. 2 to 4 years Other....................................................... 5 to 10 years
Management routinely evaluates its recorded investments for impairment in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," based on projected undiscounted cash flows and other methods when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management believes the investments to be recoverable. Intangible Assets -- Costs associated with licensing fees, commissions and other direct costs incurred in connection with the execution of rights-of-entry agreements to provide cable television and telecommunications service to MDUs, the excess of purchase price over the fair value of tangible assets acquired (goodwill) and other intangible assets are amortized using the straight-line method over the following estimated useful lives: Goodwill.............................................. 20 years Licensing fees and rights-of entry costs.............. Initial term of contract Deferred financing costs.............................. Terms of indebtedness Other................................................. 1 to 5 years
Management routinely evaluates its recorded investments in intangible assets for impairment in accordance with SFAS No. 121 based on projected undiscounted cash flows and other methods when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and believes the investments to be recoverable. Amounts recorded as goodwill have been acquired in the business combinations discussed in Note 3. Such amounts are generally attributable to market entry or expansion. Federal and State Income Taxes -- Prior to August 2, 1996, the Company and its corporate subsidiaries filed a consolidated federal income tax return. Beginning August 2, 1996, in connection with VPC's acquiring additional stock from Vanguard, the Company was included in VPC's consolidated federal income tax return. Effective February 14, 1997, as the result of issuing Class C Common (see Notes 6 and 9), the Company was deconsolidated from VPC for tax purposes. Beginning March 1, 1998, as the result of VPC's converting its convertible notes payable to Series A Preferred, the Company will be included in VPC's consolidated federal income tax return. Effective April 13, 1998, as the result of issuing shares of Common Stock and Series B Preferred, the Company will again be required to file a separate consolidated federal income tax return. During the period in which the Company was consolidated with VPC, for purposes of financial reporting, the Company recorded federal and state income tax as if it were filing a separate return. Deferred tax assets and liabilities are recorded based on the difference between the tax basis of the assets and liabilities and their carrying amounts for financial reporting purposes, referred to as "temporary differences." Provision is made or benefit recognized for deferred taxes relating to temporary differences in the recognition of expense and income for financial reporting purposes. To the extent a deferred tax asset does not meet the criterion of "more likely than not" for realization, a valuation allowance is recorded. Revenue Recognition and Deferred Revenue -- The Company recognizes revenue as cable television programming and telecommunications services are provided to subscribers. OpTel typically bills customers in advance for monthly cable television services, which results in the deferral of revenue until those services are F-8 108 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) provided. Installation revenue is recognized in the period installation services are provided to the extent of direct selling costs. For all periods presented, installation revenues have not exceeded direct selling costs. The Company expenses all initial subscriber costs as incurred due to the short-term subscriber lives associated with MDU service and because such costs do not constitute additions to property and equipment. Net Loss per Common Share -- The computation of basic and diluted loss per common share is based on the weighted average number of common shares outstanding during the period (see Note 10). Common stock equivalents are included in the computation if they are dilutive. For the year ended August 31, 1996, the convertible notes payable to stockholder are excluded from the diluted earnings per share calculation because of their antidilutive effect. For the years ended August 31, 1997 and 1998, the convertible notes payable to stockholder; the Series A and the Series B preferred stock; and 90,037 and 123,685 stock options and warrants, respectively, are excluded from the diluted earnings per share calculation because of their antidilutive effect. As a result, diluted loss per common share for the years ended August 31, 1996, 1997 and 1998, is considered to be the same as basic. Derivative Financial Instruments -- Derivative financial instruments are utilized by the Company to reduce interest rate risk and include interest rate swaps. The Company does not hold or issue derivative financial instruments for speculative or trading purposes. Gains and losses resulting from the termination of derivative financial instruments are recognized over the shorter of the remaining original contract lives of the derivative financial instruments or the lives of the related hedged positions or, if the hedged positions are sold or extinguished, are recognized in the current period as gain or loss. Acquisitions -- The Company's acquisitions are accounted for using the purchase method of accounting and include results of operations of the acquired businesses in the accompanying consolidated financial statements from the dates of acquisition. Identifiable tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair value at the date of acquisition. The excess of the purchase price over the net assets acquired is recorded as goodwill. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reporting amounts of certain assets, liabilities, revenues and expenses. Actual results may differ from such estimates. The Company is in the initial stages of entering new markets and acquiring or constructing the infrastructure necessary to deliver cable television and telecommunication services. The Company's network upgrades and investment in central office switched telecommunications require significant investment, a portion of which will not be recovered unless the Company's customer base increases from current levels, as to which there can be no assurance due to possible adverse effects of competition, regulatory changes, technology changes, the ability to finance future expenditures or other unforeseen factors. The carrying value of property, equipment and intangible assets will be subject to ongoing assessment. New Accounting Pronouncements -- In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share," which established new standards for computing and presenting earnings per share and was effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Prior periods presented have been restated to reflect the adoption of SFAS No. 128, which did not have a significant impact upon the Company's reported earnings per share. Effective September 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which established standards for reporting and display of comprehensive income and its components in the financial statements. The Company has no items of other comprehensive income to report in the periods presented. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way public companies disclose information about F-9 109 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) operating segments, products and services, geographic areas and major customers. The Company will adopt the disclosure requirements in the fiscal year ending August 31, 1999. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes standards for accounting and reporting for derivative instruments. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999; however, earlier application is permitted. Management is currently not planning on early adoption of this statement and has not completed an evaluation of the impact of the provisions of this statement on the Company's consolidated financial statements. Reclassifications -- Certain reclassifications of prior-year amounts have been made to conform to the current-year presentation. 3. ACQUISITIONS On December 28, 1994, the Company acquired the stock of the operating subsidiaries of International Richey Pacific Cablevision, Ltd. ("IRPC"). The Company, as a result of the acquisition from IRPC, is a general partner in limited partnership investments (the "Partnerships"). The operations of these Partnerships have been consolidated with those of the Company. The Company had the option to purchase the interest of each limited partner at defined amounts ranging from 110% to 140% of each limited partner's initial capital contribution for the first four years of the partnership agreements and was required to purchase the interests at the end of the fifth year at 150% of the initial capital contribution. During the periods ended August 31, 1996, 1997 and 1998, OpTel paid $392, $0 and $753, respectively, to repurchase all of the partnership obligations, including the appreciation described above (see Note 6). The operations of the acquired subsidiaries and the partnerships are located in the San Diego, California, and Phoenix, Arizona, areas. On January 11, 1995, the Company purchased the assets of EagleVision for $15,200 in cash, the assumption of approximately $110 of liabilities and a deferred payment due to the seller of not less than $6,000 and not more than $10,000 based on the profitability of OpTel's assets in the Houston, Texas, market with certain adjustments. This deferred payment is payable at the seller's option, either (a) following the sale of all or substantially all of the EagleVision assets or the sale of a majority of the outstanding voting capital of the OpTel subsidiary that acquired EagleVision assets to a third party that is not an affiliate or (b) at the conclusion of the fifth or sixth year following the acquisition. This deferred payment is carried on the accompanying consolidated balance sheets in notes payable and long-term obligations at the net present value of the estimated final payment with an accretion of interest recorded to operations. As of the date of acquisition and as of August 31, 1998, the estimated payment due was $6,000 with a net present value at August 31, 1997 and 1998, of $4,903 and $5,338, respectively. EagleVision's operations are located in the Houston, Texas, area. On June 30, 1995, the Company purchased the stock of Sunshine Television Entertainment, Inc. ("Sunshine") for $5,500 in cash and the assumption of approximately $350 of liabilities. Sunshine's operations are located in the Miami, Florida, area. On July 31, 1995, the Company purchased the assets of Interface Communications Group, Inc. and certain related entities ("Interface") for $8,900 in cash and the assumption of approximately $30 of liabilities. The operations of Interface are located in the Denver, Colorado, area. On August 31, 1995, the Company purchased the general and limited partnership interests of Triax Associates V, L.P. ("Triax"), for $15,200 in cash and the assumption of approximately $100 of liabilities. The operations of Triax are located in the Chicago, Illinois, area. On January 30, 1996, the Company purchased the assets of Telecom Master L.P. and Telecom Satellite Systems Corporation ("Telecom") for approximately $5,700 in cash and the assumption of $100 of liabilities. The operations of Telecom are located in the Dallas, Texas, area. F-10 110 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On August 2, 1996, the Company purchased certain assets of certain subsidiaries of Wireless Holdings, Inc., and Videotron (Bay Area), Inc., companies that are 50% and 80% owned and controlled by Videotron, respectively, for approximately $3,880. The amount paid represents the sellers' historical cost, which also approximates the acquired assets' estimated fair market value. The operations of the acquired assets are located in the San Francisco, California, and Tampa, Florida, areas. On November 12, 1996, the Company purchased the assets of Malvey Cable Company ("Nor-Cal") for approximately $2,500 in cash. The operations of Nor-Cal are located in the San Francisco, California, area. On March 14, 1997, the Company purchased the stock of Tara Communication Systems, Inc. ("Tara") for $2,450 in cash and the assumption of approximately $65 of liabilities. The operations of Tara are located in the Chicago, Illinois, area. On August 1, 1997, the Company purchased certain assets of Northgate Communications, Inc. ("Northgate") for approximately $1,700 in cash. The operations of Northgate are located in the Los Angeles and San Diego, California, areas. On October 27, 1997, the Company purchased the residential cable television and associated fiber optic network assets of Phonoscope Ltd. and the stock of several affiliated entities (collectively "Phonoscope"). The operations of Phonoscope are in Houston, Texas. The purchase price consisted of $38 million in cash and the assumption of $0.2 million of liabilities. The purchase price was allocated $15.5 million to property and equipment, $5.4 million to rights-of-entry and $17.3 million to goodwill. On March 3, 1998, the Company entered into a definitive purchase agreement to acquire certain cable television and telephone assets of Interactive Cable Systems, Inc. ("ICS"). The total purchase price is approximately $83.4 million and consists of approximately $4.8 million of cash, Series B Preferred with a liquidation preference of $59.5 million, and 164,272 shares of Common Stock plus assumed liabilities of $1.6 million and including transaction costs of approximately $1.4 million. The Series B Preferred earns dividends at an annual rate of 8%, payable in additional shares of Series B, and is convertible into Common Stock based upon the liquidation preference plus any cumulative unpaid dividends at the time of the conversion divided by the share price upon consummation of an initial public offering. As of March 2, 1999, the Company had received consents and accepted the transfer of legal title to approximately 90% of the assets that are the subject of the aggregate acquisition. The Company expects the resolution of legal title for the balance of the acquisition to be completed during the balance of fiscal 1999 as ICS meets certain conditions. Approximately 10% of the total purchase price remains escrowed until ICS meets these conditions. The Company has included 100% of the assets and operating results of the ICS operations in its consolidated financial statements since April 13, 1998, because (i) although the transfer of legal title to the remaining assets is subject to the receipt of certain third-party consents, the Company may elect to waive the consent conditions, (ii) under the terms of a management agreement, during the period that ICS has to secure the necessary consents, the Company is managing these assets and receives all the revenues associated with and incurs all the expenses associated with these units and (iii) the entire purchase price was paid (although a portion of the purchase price is being held in escrow for the protection of the Company, subject to the receipt of the necessary consents). The assets being acquired are located in Houston, Dallas/Fort Worth, San Diego, Phoenix, Chicago, Denver, San Francisco, Los Angeles, Miami-Ft. Lauderdale, Tampa-Orlando, Atlanta, Indianapolis and greater Washington, D.C. At August 31, 1998, the allocation of the purchase price is F-11 111 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recorded on a preliminary basis subject to third-party consents, as follows and is subject to adjustment; however, management does not expect the impact of any adjustments to be material: Accounts receivable......................................... $ 1,333 Prepaid expenses, deposits and other assets................. 249 Property and equipment...................................... 30,000 Identifiable intangible assets (rights-of-entry)............ 9,325 Goodwill.................................................... 42,580 Deferred revenue and customer deposits...................... (842) Capital lease obligations................................... (793) ------- Total............................................. $81,852 =======
The pro forma results presented below have been prepared to illustrate the effects of the ICS acquisition as if it had occurred on the first day of the periods presented. The pro forma financial information is not necessarily indicative of either future results of operations or the results that might have been achieved if such transactions had been consummated on the indicated dates.
YEARS ENDED AUGUST 31 --------------------- 1997 1998 --------- --------- Total revenues.............................................. $ 56,465 $ 75,665 Loss from operations........................................ (33,166) (33,620) Net loss.................................................... (59,047) (79,913) Basic and diluted loss per common share of common equity.... (24.60) (33.38)
The pro forma effect of the acquisition of Phonoscope would have had an insignificant impact on the consolidated results of operations of the Company for the years ended 1997 and 1998. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
AUGUST 31 ------------------- FEBRUARY 28 1997 1998 1999 -------- -------- ----------- (UNAUDITED) Headends............................................ $ 53,088 $ 77,470 $ 82,335 Telephone switches.................................. 9,347 23,474 23,474 Distribution systems and enhancements............... 68,538 113,775 130,245 Computer software and equipment..................... 9,512 16,753 18,551 Other............................................... 8,762 12,813 13,815 Construction in progress............................ 26,177 57,748 85,981 -------- -------- -------- 175,424 302,033 354,401 Less accumulated depreciation....................... (14,982) (33,989) (46,112) -------- -------- -------- $160,442 $268,044 $308,289 ======== ======== ========
Included in property and equipment is $3,069 and $5,532 of equipment acquired under capital leases at August 31, 1997 and 1998, respectively. Interest expense of $2,256 and $2,753 was capitalized during 1997 and 1998, respectively. F-12 112 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INTANGIBLE ASSETS Intangible assets consisted of the following:
AUGUST 31 ------------------- FEBRUARY 28 1997 1998 1999 -------- -------- ----------- (UNAUDITED) Goodwill............................................ $ 53,081 $112,485 $113,052 Licensing fees and rights-of-entry costs............ 30,833 53,030 56,350 Deferred financing costs............................ 5,784 12,264 12,877 Other............................................... 3,243 1,926 1,978 -------- -------- -------- 92,941 179,705 184,257 Less accumulated amortization....................... (10,358) (19,335) (25,202) -------- -------- -------- $ 82,583 $160,370 $159,055 ======== ======== ========
The Company's right-of-entry agreements represent the Company's agreement to provide cable television and telecommunications service to MDUs and typically have initial terms of 10 to 15 years. The right-of-entry agreements generally provide for MDU owners to receive an up-front cash payment and payment of a portion of revenues over the terms of the agreements. 6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS Notes payable and long-term obligations consisted of the following:
AUGUST 31 -------------------- FEBRUARY 28 1997 1998 1999 -------- -------- ----------- (UNAUDITED) 13% Senior Notes Due 2005, Series B, net of unamortized discount of $6,526, $5,651 and $5,214.......................................... $218,474 $219,349 $219,786 11.5% Senior Notes Due 2008....................... -- 200,000 200,000 Installment notes payable bearing interest at rates ranging from 7.75% to 13% per annum, substantially all collateralized by certain transportation equipment or private cable television systems.............................. 280 167 94 Limited partner obligations....................... 714 -- -- Obligations under capital leases, net of amounts representing interest of $581 and $941 for 1997 and 1998........................................ 2,185 4,424 3,382 Deferred acquisition liabilities.................. 6,920 5,338 5,591 -------- -------- -------- $228,573 $429,278 $428,853 ======== ======== ========
On February 14, 1997, the Company issued $225 million of 13% Senior Notes Due 2005 ("2005 Notes"). The 2005 Notes require semiannual interest payments due on August 15 and February 15 of each year until their maturity on February 15, 2005. The 2005 Notes are redeemable at the option of the Company generally at a premium at any time after February 15, 2002, and can be redeemed, in part, also at a premium, earlier upon the occurrence of certain defined events. In addition, a transfer by VPC of its interest in OpTel, a transfer by Videotron of its interest in VPC or an election by VPC to convert its Class B Common into shares of Common Stock may result in a change of control under the indenture, which could require the Company to purchase the 2005 Notes. The 2005 Notes are unsecured. F-13 113 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In connection with the issuance of the 2005 Notes, the Company issued 225,000 shares of Class C Common. The portion of the net proceeds allocated to the Class C Common is $7 million. Such amount has been recorded as stockholders' equity and as a discount to the 2005 Notes. Concurrent with the issuance of the 2005 Notes, the Company was required to deposit in an escrow account $79.6 million in cash that, together with the proceeds from such investment, will be sufficient to pay when due the first six interest payments on the 2005 Notes. Such amount is reflected as restricted investments on the accompanying consolidated balance sheets. In December 1997, the Company, through subsidiaries, secured a $150 million senior secured credit facility (the "Senior Facility") from a syndicate of financial institutions. The Senior Facility consisted of a term loan in the amount of $125 million (which was drawn on December 19, 1997, with an original maturity of August 2004) bearing interest at LIBOR plus 3.5% and a $25 million revolving credit commitment. The Senior Facility was secured by a first fixed and floating lien on substantially all of the assets of the Company and its subsidiaries. The Senior Facility contained financial maintenance requirements and certain limitations on the Company's ability to incur indebtedness, incur capital expenditures and pay dividends. On July 7, 1998, the Company repaid and terminated the Senior Facility with proceeds from a private placement of $200 million 11.5% Senior Notes Due 2008 (the "2008 Notes"). In connection with the repayment of the Senior Facility, the Company was required to pay a prepayment penalty of $1.3 million. Additionally, the Company wrote off debt issuance costs of $5.4 million related to the Senior Facility. These amounts are included in extraordinary loss on debt extinguishment in the accompanying statements of operations. The 2008 Notes require semiannual interest payments on January 1 and July 1 of each year until their maturity on July 1, 2008. The 2008 Notes are redeemable at the option of the Company, generally at a premium, at any time after July 1, 2003, and can be redeemed in part, also at a premium, earlier upon the occurrence of certain defined events. Concurrent with the issuance of the 2008 Notes, the Company was required to deposit in an escrow account $21.8 million in cash that, together with the proceeds of the investment thereof, will be sufficient to pay when due the first two interest payments on the 2008 Notes. Subsequent to year-end, the Company has initiated an offer to exchange the 2008 Notes for registered securities with substantially identical terms, including interest rate and maturity (the "Offer to Exchange"). To comply with certain covenants of the Senior Facility and to reduce the impact of changes in interest rates on the Senior Facility, the Company entered into interest rate swap agreements with total notional amounts of $75 million in which the Company had agreed to receive a variable rate equal to LIBOR and pay fixed rates ranging from 5.96% to 6.00%. The swap agreements were terminated on July 17, 1998, in exchange for cash payments of $578,000, which was expensed. Aggregate maturities of the Company's indebtedness are as follows as of August 31, 1998: Fiscal year ending: 1999...................................................... $ 1,579 2000...................................................... 6,621 2001...................................................... 760 2002...................................................... 228 2003...................................................... 49 Thereafter.................................................. 420,041 -------- Totals............................................ $429,278 ========
F-14 114 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES Legal -- The Company is a defendant in certain lawsuits incurred in the ordinary course of business. It is the opinion of the Company's management that the outcome of the suits now pending will not have a material, adverse effect on the operations, cash flows or consolidated financial position of the Company. On April 9, 1998, a purported class action complaint was filed in the District Court of Harris County, Texas, on behalf of all cable subscribers in the United States that have paid late fees to either Phonoscope or the Company. The action was dismissed without prejudice during the first quarter of fiscal 1999 and the Company believes it will be indemnified by Phonoscope for all its costs and expenses associated with the defense of the action. On April 27, 1998, a civil action was commenced against the Company in the United States District Court for the Northern District of California by Octel Communication Corp. ("Octel"), charging the Company with trademark infringement, trade name infringement, trademark dilution and unfair competition based on its use of the name "OpTel" (the "Civil Action") and seeking to enjoin the Company from using the name "OpTel." The Civil Action follows a now-suspended administrative proceeding in the Patent and Trademark Office ("PTO") relating to registration of the "OpTel" mark by the Company. The PTO found the Company's application for registration to be allowable; however, Octel commenced the PTO proceeding claiming that the Company's mark is confusingly similar to the "Octel" mark used by that party in a related field, and claiming that the Company's application had procedural deficiencies. During the course of the PTO proceeding, the Company acquired rights to the marks "Optel" and "Optel Communications" in the telecommunications field, which are believed to predate the rights of Octel to its trademark, and the Company commenced two further proceedings against Octel in the PTO seeking cancellation of two of the trademark registrations owned by Octel. The various proceedings in the PTO between the Company and Octel were consolidated and thereafter suspended on May 15, 1998, in view of the commencement of the Civil Action. The Company believes it has meritorious counterclaims in the Civil Action and intends to vigorously defend against Octel's claims. Although the Company does not believe that its use of the name "OpTel" infringes on the trademark or trade name rights of Octel or any other person, there can be no assurance as to the outcome of the Civil Action or the proceedings in the PTO (if reinstated) or that any such outcome would not materially adversely affect the Company. Employment and Consulting Agreements -- Employment agreements with certain executive employees provide for separation payments ranging from 3 to 24 months of the employee's annual salary if employment is terminated due to change of control or without cause. However, stipulations for termination payment and payment terms vary. The Company paid or accrued approximately $297, $278 and $0 in severance during 1996, 1997 and 1998, respectively, related to such employment agreements. The Company leases office space and certain equipment under operating leases. The leases generally have initial terms of 3 to 20 years. Minimum future obligations on operating leases at August 31, 1998, consist of the following: Fiscal year ending: 1999...................................................... $ 3,579 2000...................................................... 3,258 2001...................................................... 2,806 2002...................................................... 2,337 2003...................................................... 1,996 Thereafter.................................................. 3,768 ------- Total minimum lease payments...................... $17,744 =======
F-15 115 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rental expense under operating leases for the years ending August 31, 1996, 1997 and 1998, was $2,158, $2,763 and $3,876, respectively. The Company's rental expense under operating leases includes facility rentals as well as rental of space for distribution purposes. 8. INCOME TAXES Income tax expense (benefit) consists of the following for the years ended August 31, 1996, 1997 and 1998:
1996 1997 1998 ------- -------- -------- Current tax expense................................... $ -- $ -- $ -- Deferred tax expense (benefit)........................ (4,470) (13,213) (25,261) Change in deferred tax valuation allowance............ 4,470 13,213 25,261 ------- -------- -------- Total income tax expense (benefit).......... $ -- $ -- $ -- ======= ======== ========
A reconciliation of income taxes on reported pretax loss at statutory rates to actual income tax expense (benefit) for the years ended August 31, 1996, 1997 and 1998, is as follows:
1996 1997 1998 --------------- ---------------- ---------------- Income tax at statutory rates............ $(6,266) (34.0)% $(16,502) (34.0)% $(25,295) (34.0)% State income taxes, net of federal tax benefit................................ (1) -- 8 -- -- -- Valuation allowance...................... 4,470 24.0 13,213 27.0 25,261 34.0 Expenses (deductible) not deductible for tax purposes........................... 1,797 10.0 (842) (2.0) 34 -- Utilization of net operating loss by parent company in consolidated return................................. -- -- 4,123 9.0 -- -- ------- ----- -------- ----- -------- ----- Total income tax benefit....... $ -- --% $ -- --% $ -- --% ======= ===== ======== ===== ======== =====
The net deferred tax assets consist of the tax effects of temporary differences related to the following:
AUGUST 31 ------------------- 1997 1998 -------- -------- Allowance for uncollectible accounts receivable............. $ 381 $ 613 Equipment, furniture and fixtures........................... (10,694) (10,663) Intangible assets........................................... 421 (246) Accrued employee compensation............................... 214 505 Net operating loss carryforwards............................ 31,121 56,410 IRPC deferred tax liability................................. (480) (480) Other....................................................... 59 144 -------- -------- Deferred tax asset before valuation allowance............... 21,022 46,283 Valuation allowance......................................... (21,022) (46,283) -------- -------- Net deferred tax asset...................................... $ -- $ -- ======== ========
Realization of deferred tax assets is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company is unable to determine whether these accumulated losses will be utilized; accordingly, a valuation allowance has been provided. F-16 116 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following are the expiration dates and the approximate net operating loss carryforwards at August 31, 1998: Expiration dates through: 2010...................................................... $ 1,346 2011...................................................... 11,521 2012...................................................... 26,161 2013...................................................... 47,921 2014...................................................... 78,965
Certain of the Company's net operating losses were utilized by VPC while the Company was included in VPC's consolidated tax return. Such losses will not be available for future use by the Company, and accordingly, the deferred tax benefit and valuation allowance were reduced. In connection with the revised shareholder agreement (see Note 9), subsequent to August 31, 1997, the Company will be reimbursed for any tax benefit generated by the Company and utilized by VPC. 9. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER, STOCK ISSUANCE AND OTHER TRANSACTIONS WITH STOCKHOLDERS AND RELATED PARTIES Transactions With VPC -- From December 22, 1994 through March 31, 1995, the Company borrowed $60,000 from VPC under a Senior Secured Convertible Note Agreement. The note was converted to 1,120,985 shares of Class B Common of OpTel on March 31, 1995. Concurrently, VPC purchased 105,667 shares of OpTel's Class B Common from Vanguard. On July 26, 1995, VPC invested $25,000 in the Company, of which $16,688 represented VPC's purchase of an additional 311,652 shares of OpTel's Class B Common, and $8,312 represented a convertible note payable that bore interest at 15% and was convertible to 155,229 shares of Class B Common at the option of VPC. On April 1, 1996, VPC converted the $8,312 note and accrued interest of $854 into 155,229 shares of Class B Common. From August 1995 through August 1997, the Company issued a total of $131,400 in convertible notes ("Convertible Notes") to VPC, all of which bore interest at 15%, generally with principal and interest due on demand. Under the terms of the Convertible Notes, any accrued interest on which there was no demand for payment as of each August 31 automatically converted to additional principal payable. On March 1, 1998, VPC converted its Convertible Notes payable, including accrued interest, of $139.2 million into a like amount of Series A Preferred. Such stock earns dividends at the annual rate of 9.75%, payable in additional shares of Series A Preferred, and is convertible under certain circumstances and at certain prices at the option of the holder of the shares into shares of Class B Common upon consummation of an initial public offering, or during the 90-day period commencing April 30, 1999. Transactions With CDPQ -- In August 1997, in connection with a revised shareholder agreement, Capital Communication CDPQ, Inc. ("CDPQ"), a minority stockholder of Videotron, acquired all of Vanguard's interest in OpTel. Immediately prior to the sale to CDPQ, Vanguard exercised an option to purchase 48,937 shares of Class B Common at an exercise price of $53.55 per share, subject to adjustment, that had been granted to Vanguard in August 1996. The option exercise resulted in the Company's receiving $2,620 in cash. In connection with the sale by Vanguard of its minority stock position in the Company to CDPQ, the Company, VPC and CDPQ entered into the Stockholders' Agreement, and the Company and CDPQ entered into a related Registration Rights Agreement (the "Registration Rights Agreement"), under which CDPQ has certain rights and obligations relating to the Company and VPC. F-17 117 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Under the Stockholders' Agreement, for as long as CDPQ holds at least 5% of the Company's voting stock, CDPQ may designate a number of Directors of the Company and each of its subsidiaries, and each committee of the Board and each of its subsidiaries, which is proportionate (in relation to the total number of Directors or committee members) to CDPQ's percentage ownership of the Company's voting stock, but in no event less than one Director and one committee member. Pursuant to the Stockholders' Agreement, VPC is obligated to cause the Company to afford CDPQ rights equivalent to those afforded other purchasers of the Company's capital stock to the extent they are more advantageous than the rights held by CDPQ. Subject to certain exceptions (including a public offering of the Company's equity securities) and waiver by CDPQ at VPC's request in connection with certain events, the Company is obligated to afford CDPQ preemptive rights to purchase equity securities that the Company proposes to sell in proportion to CDPQ's ownership of the total outstanding equity securities of the Company prior to the sale. In addition, pursuant to the Stockholders' Agreement, CDPQ has certain tag-along rights in connection with sales by VPC of outstanding shares of the Company's voting stock. Pursuant to the Registration Rights Agreement, nine months after the consummation of the IPO and, subject to certain conditions, CDPQ has the right, on two occasions, to require the Company to register under the Securities Act shares of Common Stock issued to CDPQ upon the conversion of the Class B Common. In addition, CDPQ has piggyback registration rights, on three occasions, to include such shares of Common Stock held by it in registration statements filed by the Company for the sale of its equity securities, subject to certain conditions, including customary allocation and holdback provisions. Pursuant to the terms of the Stockholders' Agreement, VPC and certain of its affiliates provide certain strategic planning and treasury support services to the Company and perform internal audits of the Company's operations. Additional services may be provided as and when requested by the Company. The Company is charged for such services based on an estimate of the actual cost of the personnel engaged and materials used to provide such services (without an allowance for profit). Transactions With THI -- The Company has assigned substantially all of its frequency licenses to THI, an entity owned by an employee of the Company and two individuals who provide legal counsel to the Company, in exchange for a $1 million secured promissory note with interest at 8% due on February 14, 2007 (the "License Note"). The License Note contains covenants that restrict THI from, among other things, incurring indebtedness other than to the Company or in the ordinary course of business and merging or consolidating with another entity. The terms of the Company's continued and unencumbered use of the frequency licenses are subject to a license and services agreement (the "THI Agreement") pursuant to which THI agreed to provide to the Company all the transmission capacity it requires or may in the future require, and the Company granted THI a nonexclusive license to use all of the Company's facilities and related equipment, such as microwave transmitting and receiving equipment, required to provide such transmission capacity. The Company received an option from THI to purchase all or, in certain circumstances, some of the assets of THI at a price equal to the principal balance on the License Note plus accrued interest at 10% per annum and a separate option from each stockholder of THI to purchase all of such person's shares of capital stock of THI at the lesser of (x) the book value of the shares being purchased and (y) the price paid for such shares plus a 10% premium compounded annually. The THI option and the individual options are exercisable at any time prior to February 14, 2007, subject to FCC approval. THI is included in the consolidated financial statements of the Company based upon the Company's ability to control THI as a result of a combination of the covenants contained in the License Note and the Company's ability to exercise its option to purchase the assets or stock of THI. The option agreement and the License Note are eliminated upon consolidation. F-18 118 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Transactions With Other Related Parties -- Videotron is party to an indenture that limits the aggregate amount of indebtedness that can be incurred by Videotron and its subsidiaries, including the Company, taken as a whole (based upon a ratio of total consolidated indebtedness to consolidated operating cash flow). In September 1996, the Company entered into a consulting agreement with a former director of the Company who is a limited partner of Vanguard. In connection therewith, the Company granted him a warrant to purchase up to 24,992 shares of Common Stock at an exercise price of $53.55 per share, subject to adjustment, that is presently exercisable and expires on August 31, 1999. VPC and an affiliate of Vanguard had each agreed to provide consultant, advisory and management services for $350 per annum (plus travel expenses) per party. This arrangement terminated in August 1997 with the sale of Vanguard's interest in the Company. The Company purchases certain insurance coverage through Videotron, including directors' and officers' liability insurance. The Company paid an aggregate of approximately $478,000, $434,000 and $456,000 to Videotron for this insurance coverage in fiscal 1996, 1997 and 1998, respectively. OpTel provides certain customer support and billing services to certain affiliates of Videotron that operate wireless cable systems using MMDS technology. OpTel charges such affiliates based on the actual cost of the personnel engaged and materials used to provide such services. Upon consummation of an initial public offering, each Director who is neither an employee of the Company nor a designee of the Company's significant stockholders will receive options to purchase shares of Common Stock having an aggregate value of $150 (or, if such Director is not serving in such capacity upon consummation of an initial public offering, on the date of his or her election to the Board) with an exercise price equal to the initial public offering price (or the fair market value on the date of grant). The options will become exercisable in equal installments on each of the second, third, fourth and fifth anniversaries of the effective date of the grant. 10. STOCKHOLDERS' EQUITY The Common Stock, Class B Common and Class C Common of the Company are identical in all respects and have equal powers, preferences, rights and privileges except that each holder of Common Stock is entitled to one vote for each share of Common Stock held, each holder of Class B Common is entitled to ten votes for each share of Class B Common held, and each holder of Class C Common does not possess any voting privileges. VPC and CDPQ are the only holders of Class B Common, and upon any transfer other than to a permitted holder, the Class B Common automatically converts to a like number of shares of Common Stock. On February 7, 1997, the Company approved a stock split effected in the form of a stock dividend. Each share of outstanding Class B Common (the only class of common stock then outstanding) received 17.3768 additional shares. The number of authorized shares of Common Stock and Class B Common was increased to 8,000,000 and 6,000,000, respectively. The financial statements have been restated to reflect the stock split as if it had occurred on December 20, 1994, the date the Company reorganized as a corporation. Additionally, the Company authorized the issuance of 300,000 shares of Class C Common. The Series A Preferred (see Note 9) is convertible under certain circumstances and at certain prices at the option of the holder of the shares into shares of Class B Common upon consummation of an initial public offering, or during the 90-day period commencing April 30, 1999. The Series B Preferred (see Note 3) is convertible into Common Stock based upon the liquidation preference plus any cumulative unpaid dividends at the time of the conversion divided by the share price upon consummation of an initial public offering. F-19 119 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following the consummation of an initial public offering, all of the outstanding shares of the Company's Class C Common and Series B Preferred will be converted to Common Stock. On June 5, 1998, OpTel filed a registration statement on Form S-1 with the Securities and Exchange Commission (the "SEC") with respect to a proposed initial public offering (the "IPO") of $100 million of its Common Stock. No assurance can be given that the IPO will be consummated or, if consummated, that the proceeds received by the Company will be the amount currently contemplated. 11. EMPLOYEE BENEFIT PLAN 401(k) Plan -- The OpTel 401(k) Plan (the "401(k) Plan") conforms to the provisions of the Employee Retirement Income Security Act of 1974. It is a contributory tax deferred 401(k) Plan. All employees are required to have three consecutive months of service to be eligible to participate in the 401(k) Plan. Also, effective January 1, 1998, an employee must have one year of service with the employer before being eligible to receive employer matching contributions. The Company's matching contribution is a discretionary amount to be annually determined by the Board of Directors of the Company. For the periods ended August 31, 1996, 1997 and 1998, the Company's match of its employees' elective contributions was $188, $289 and $349, respectively. 12. RESTRICTED INVESTMENTS Concurrent with the issuance of the 2005 Notes, the Company was required to deposit in an escrow account $79.6 million in cash that was subsequently invested in U.S. Treasury securities. The securities are classified as held-to-maturity and, at August 31, 1997 and 1998, have an amortized cost basis of $67,206 and $41,422, respectively; an aggregate fair value of $67,233 and $41,855, respectively; and gross unrealized holding gains of $27 and $432, respectively. The contractual maturity of the securities correspond to the semiannual interest payment dates required under the 2005 Notes through February 15, 2000. Concurrent with the issuance of the 2008 Notes, the Company was required to deposit in an escrow account $21.8 million in cash that was subsequently invested in U.S. Treasury securities. The securities are classified as held-to-maturity and, at August 31, 1998, have an amortized cost basis of $21,785, an aggregate fair value of $22,002 and gross unrealized holding gains of $217. The contractual maturity of the securities correspond to the semiannual interest payment dates required under the 2008 Notes through July 1, 1999. 13. EMPLOYEE STOCK OPTIONS AND WARRANTS AND STOCK PURCHASE PLAN During the year ended August 31, 1997, the Company adopted a stock option and award plan (the "Incentive Stock Plan") for the benefit of officers and key employees. The plan is administered by a committee of the Board of Directors. The plan authorizes the Board to issue incentive stock options, as defined in Section 422A(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and stock options that do not conform to the requirements of that Code section. The Board has discretionary authority to determine the types of options to be granted, the persons to whom options shall be granted, the number of shares to be subject to each option granted and the terms of the stock option agreements. In fiscal 1998, the Company adopted amendments to the Incentive Stock Plan, certain of which will become effective, subject to stockholder approval, on the date an initial public offering is consummated (as so amended, the "Plan"). Five percent of the Common Stock outstanding, on a fully diluted basis, on the date an initial public offering is consummated, may be issued under the terms of the Plan. F-20 120 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unless otherwise specifically provided in the option agreement, (i) the exercise price of an option will not be less than the fair market value, as determined by the Board, of the Common Stock on the date of grant and (ii) the options vest in equal installments on each of the second, third, fourth and fifth anniversaries of the date of grant. The options issued as of August 31, 1998, expire ten years from the date of grant. In the event of a "change in control," all options shall vest and become immediately exercisable. The Board has authorized 241,086 shares of Common Stock to be issued under the Plan. Stock option activity under the Plan and warrants issued (see Note 9) for the years ended August 31, 1997 and 1998 and the six months ended February 28, 1999 (unaudited), was as follows:
NUMBER OF WEIGHTED AVERAGE SHARES PRICE PER SHARE PRICE PER SHARE --------- ---------------- ---------------- Options and warrants outstanding at September 1, 1996....................... -- -- $ -- Granted................................. 112,115 $53.55 to $85.75 $76.70 Exercised............................... -- -- -- Forfeited............................... (22,078) $53.55 to $85.75 $80.92 ------- Options and warrants outstanding at August 31, 1997................................ 90,037 $53.55 to $85.75 $75.66 Granted................................. 43,657 $74.42 to $85.75 $83.31 Exercised............................... -- -- -- Forfeited............................... (10,009) $85.75 $85.75 ------- Options and warrants outstanding at August 31, 1998 (including 35,127 warrants).... 123,685 $53.55 to $85.75 $77.54 Granted................................. 120,395 $98.00 $98.00 Exercised............................... -- -- -- Forfeited............................... (25,555) $85.75 to $98.00 $91.58 ------- Options and warrants outstanding at February 28, 1999 (unaudited)........... 218,525 $53.55 to $98.00 $87.17 ======= Options and warrants exercisable at February 28, 1999 (unaudited)........... 63,166 $53.55 to $98.00 $70.50 Options available for grant at February 28, 1999 (unaudited).................... 57,688
The weighted average remaining contractual life of the stock options and warrants outstanding at August 31, 1998, is seven years. At August 31, 1998, the Company has reserved a total of 88,558 and 35,127 shares of Common Stock for issuance upon the exercise of stock options and stock warrants, respectively. The Company has also granted stock warrants in connection with an agreement to provide consulting services (see Note 9). The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," in accounting for its stock option and award plan and the stock warrants. During 1997 and 1998, the exercise price of each option granted was greater than or equal to the estimated fair value of the Company's stock on the date of grant. Accordingly, no compensation expense has been recognized under this plan. For the years ended August 31, 1997 and 1998, the difference between actual net loss and loss per share and net loss and loss per share on a pro forma basis as if the Company had utilized the accounting methodology prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," would have been $44 and $.02 per share and $547 and $.21 per share, respectively. F-21 121 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The estimated weighted average grant date fair value of options and warrants granted during 1997 and 1998 was $1.10 per share and $31.76 per share, respectively. For purposes of determining fair value of each option, the Company used the minimum value method using the following assumptions:
1997 1998 -------------- -------------- Risk-free interest rate.............................. 6.18% to 6.88% 5.47% to 6.92% 2.5 to 10 Expected life........................................ 3 to 10 years years
In fiscal 1998, the Company adopted the 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan"), which is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. The Stock Purchase Plan will become effective, subject to stockholder approval, on the date an initial public offering is consummated. One percent of the Common Stock outstanding, on a fully diluted basis, on the date an initial public offering is consummated, will be issuable under the terms of the Stock Purchase Plan. As of August 31, 1998, no stock has been issued under the Stock Purchase Plan. 14. FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirement of SFAS No. 107, "Disclosure About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
AUGUST 31, 1997 AUGUST 31, 1998 --------------------- --------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- Assets: Cash and cash equivalents........................ $ 87,305 $ 87,305 $123,774 $123,774 Restricted investments........................... 67,206 67,233 63,207 63,857 Accounts receivable.............................. 4,044 4,044 9,458 9,458 Liabilities: Accounts payable, accrued expenses and other liabilities................................... 21,896 21,896 31,842 31,842 Customer deposits and deferred revenue........... 2,978 2,978 5,274 5,274 Convertible notes payable to stockholder......... 129,604 129,605 -- -- Notes payable and long-term obligations.......... 228,573 235,570 429,278 440,367
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable, and customer deposits and deferred revenue approximates fair value. The fair values of convertible notes payable to stockholder, and certain notes payable and long-term obligations are estimated based on present values using applicable market discount rates or rates that approximate what the Company could obtain from the open market. The fair value of restricted investments and the 1997 and 1998 Notes are based on quoted market prices. The fair value estimates presented herein are based on pertinent information available to management as of August 31, 1997 and 1998. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the date presented, and therefore, current estimates of fair value may differ significantly from the amounts presented herein. F-22 122 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited quarterly results of operations for the years ended August 31, 1997 and 1998:
YEAR ENDED AUGUST 31, 1997 ----------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Revenues........................................... $ 9,076 $ 9,546 $ 10,495 $ 10,720 Operating expenses................................. 12,693 14,096 17,003 18,841 Other expense...................................... 3,277 4,849 8,867 8,746 Loss before extraordinary item..................... (6,894) (9,399) (15,375) (16,867) Extraordinary loss on debt extinguishment.......... -- -- -- -- Net loss........................................... (6,894) (9,399) (15,375) (16,867) Dividends on preferred stock....................... -- -- -- -- Net loss attributable to common equity............. (6,894) (9,399) (15,375) (16,867) Basic and diluted loss per common share............ (2.99) (4.01) (6.08) (6.65) Weighted average number of shares outstanding...... 2,305 2,342 2,530 2,538
YEAR ENDED AUGUST 31, 1998 ----------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- Revenues........................................... $ 12,252 $ 14,639 $ 18,025 $ 20,047 Operating expenses................................. 18,748 20,285 24,656 29,464 Other expense...................................... 9,774 12,112 7,574 10,104 Loss before extraordinary item..................... (16,270) (17,758) (14,205) (19,521) Extraordinary loss on debt extinguishment.......... -- -- -- (6,644) Net loss........................................... (16,270) (17,758) (14,205) (26,165) Dividends on preferred stock....................... -- -- (4,068) (4,680) Net loss attributable to common equity............. (16,270) (17,758) (18,273) (30,845) Basic and diluted loss per common share............ (6.31) (6.89) (6.84) (11.24) Weighted average number of shares outstanding...... 2,578 2,578 2,673 2,743
F-23 123 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc. We have audited the accompanying statement of revenues and direct expenses of the Assets and Liabilities of ICS Communications, LLC acquired by OpTel, Inc. ("OpTel") for the year ended December 31, 1997. This financial statement is the responsibility of OpTel's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statement presents fairly, in all material respects, the revenues and direct expenses of the Assets and Liabilities of ICS Communications, LLC acquired by OpTel, Inc. for the year ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP May 15, 1998 Dallas, Texas F-24 124 ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC ACQUIRED BY OPTEL, INC. STATEMENTS OF REVENUES AND DIRECT EXPENSES
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1997 MARCH 31, 1998 ----------------- -------------- (UNAUDITED) REVENUES: Cable television.......................................... $14,559,625 $4,028,128 Telecommunications........................................ 2,127,310 354,587 ----------- ---------- Total revenues.................................... 16,686,935 4,382,715 OPERATING EXPENSES: Programming, access fees and revenue sharing.............. 8,747,441 1,909,037 Customer support, general and administrative.............. 5,371,634 1,215,493 Depreciation and amortization............................. 8,088,727 1,988,608 ----------- ---------- Total operating expenses.......................... 22,207,802 5,113,138 ----------- ---------- LOSS FROM OPERATIONS........................................ (5,520,867) (730,423) INTEREST EXPENSE............................................ (141,504) (35,376) ----------- ---------- EXCESS OF DIRECT EXPENSES OVER REVENUES..................... $(5,662,371) $ (765,799) =========== ==========
See notes to financial statements. F-25 125 ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC ACQUIRED BY OPTEL, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements include the accounts of ICS Communications, LLC (the "Company") only as they relate to the assets acquired and liabilities assumed by OpTel, Inc. ("OpTel") on April 9, 1998. The statement of revenues and direct expenses include only the results of operations for the assets acquired and liabilities assumed and do not include any amounts representing corporate overhead of the Company or interest incurred on liabilities not assumed by OpTel. In preparation of the statement of revenues and direct expenses, certain regional overhead costs were allocated to the assets acquired. Such allocations were based upon subscriber counts, cable passings or other criteria as considered appropriate. The Company's operations are in a single business segment, the providing of cable television and local and long distance telephone services to the high density residential market, including apartment complexes, condominiums and other multi-family residential properties (collectively "MDUs"). The Company provides these services generally under exclusive, long-term contracts with owners and managers of MDUs. The assets acquired include long-term contracts to provide cable television and telephone services to MDU properties, the property and equipment comprising the cable television and telephone delivery systems for each of the contracts, other prepaid assets specifically identified at the date of the purchase (generally prepaid rent on delivery equipment) and customer receivables. In connection with the purchase, certain liabilities were assumed, generally capital lease obligations related to the property and equipment used in telephone delivery systems. The primary markets of the assets acquired are major metropolitan areas in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Texas, and the greater Washington D.C. area. Interim Financial Information -- The accompanying unaudited consolidated financial statement of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of management, all adjustments (consisting only of normal recurring entries) considered necessary for a fair presentation have been included. Property and Equipment -- Property and equipment, including equipment under capital leases, is stated at cost, which includes amounts for construction materials, direct labor and overhead and capitalized interest. Cost of maintenance and repairs is charged to operations as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the various classes of property and equipment as follows: Installed cable and headend equipment............ 5-10 years Telephone switches and equipment................. 5-10 years
Intangible Assets -- Intangible assets includes costs associated with licensing fees, commissions and other direct costs incurred in connection with the execution of rights-of-entry agreements to provide cable television and telecommunications service to MDUs. Intangible assets are amortized using the straight-line method over the lesser of the term of the right-of-entry agreement or 5 years. Revenue Recognition -- Cable subscriber fees for basic monthly services and premium channels are billed in advance and recorded as revenue in the month the service is provided. Telecommunication service billings include residential service fees billed in advance plus amounts based on minutes of use billed in arrears. Telecommunications service revenues are recognized in the month the service is provided. F-26 126 ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC ACQUIRED BY OPTEL, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates included in the accompanying financial statements include the allowance for doubtful accounts, the recoverability of the carrying value of property and equipment and intangible assets and the allocation of regional overhead as it relates to the assets acquired. Actual results could differ from those estimates. 2. CAPITAL LEASE OBLIGATIONS During 1995 and 1996 the Company entered into capital leases for telephone equipment with five year terms. The leases are payable in monthly installments ranging from $1,267 to $2,121 bearing interest at rates ranging from 10.4% to 13.0%. Scheduled maturities on capital lease obligations are as follows: Year ending: 1998........................................... $ 379,980 1999........................................... 379,980 2000........................................... 243,440 Thereafter..................................... -- ---------- Total payments......................... 1,003,400 Less amounts representing interest............. (178,344) ---------- Capital lease obligation............... $ 825,056 ==========
3. RELATED PARTY TRANSACTIONS The Company's largest shareholder is MCI Telecommunications Corporation ("MCI"). In the ordinary course of the Company's local and long distance telephone services, the Company purchases certain services from MCI under terms and rates that management believes are no more favorable to the Company than those arranged with other parties. F-27 127 [OPTEL LOGO] - ------------------------------------------------------------------------------- [PHOTO OF OPTEL'S HOME WEB PAGE] The Company continues to rapidly launch central office switched services in its major markets and has recently commenced offering high speed Internet access. [PHOTO OF ONE OF THE COMPANY'S SWITCHES] Telephone traffic is brought to Optel's full featured central office telephone switches and distributed together with video and Internet traffic over the Company's proprietary microwave and fiber optic cable networks. [PHOTO OF A MICROWAVE DISH] OpTel's advanced microwave and fiber optic cable networks distribute a wide range of voice, video and Internet access services. [PHOTO OF AN OPTEL TECHNICIAN] As part of its commitment to customer service, OpTel offers flexible installation and service appointments. [PHOTO OF OPTEL'S CUSTOMER SERVICE CENTER] OpTel's national customer service center provides 24-hour-a-day, seven-day-a-week telephone support for the Company's cable, telephone and Internet customers. The depicted trademarks and service marks, other than OpTel, are not the property of OpTel and belong to their respective holders; no endorsement is implied. 128 ------------------------------------------------------ ------------------------------------------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. OPTEL HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. OPTEL IS NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary...................... 1 Risk Factors............................ 9 Use of Proceeds......................... 23 Dividend Policy......................... 23 Capitalization.......................... 24 Dilution................................ 25 Selected Historical Consolidated Financial and Operating Data.......... 26 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 29 Business................................ 42 Management.............................. 66 Principal and Selling Stockholders...... 75 Certain Relationships and Related Transactions.......................... 79 Description of Capital Stock............ 81 Certain Federal Income Tax Considerations........................ 86 Description of Certain Indebtedness..... 89 Underwriting............................ 90 Certain Market Information.............. 92 Legal Matters........................... 92 Experts................................. 92 Additional Information.................. 92 Glossary................................ A-1 Index to Financial Statements........... F-1
------------------ Until 1999, all dealers that buy, sell or trade the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ ------------------------------------------------------ 6,640,370 SHARES OPTEL, INC. COMMON STOCK [OPTEL LOGO] ------------ PROSPECTUS , 1999 ------------ SALOMON SMITH BARNEY GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC. CIBC WORLD MARKETS ------------------------------------------------------ ------------------------------------------------------ 129 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following statement sets forth the expenses payable in connection with this Registration Statement (estimated except for the registration fee and the NASD filing fee), all of which will be borne by OpTel: Securities and Exchange Commission filing fee............... $ 35,813 NASD filing fee............................................. $ 10,500 National Market listing fee................................. $ 95,000 Legal fees and expenses..................................... $200,000 Accountant's fees and expenses.............................. $150,000 Printing costs.............................................. $150,000 Miscellaneous............................................... $108,687 -------- Total............................................. $750,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation provides that the Company shall, to the fullest extent permitted by the DGCL, indemnify all persons whom it may indemnify pursuant thereto (i.e., directors and officers) and shall advance expenses incurred in defending any proceeding for which such right to indemnification is applicable, provided that, if the DGCL so requires, the indemnitee provides the Company with an undertaking to repay all amounts advanced if it is determined by a final judicial decision that such person is not entitled to indemnification pursuant to this provision. The Company's Certificate of Incorporation also contains a provision eliminating the personal liability of the Company's directors for monetary damages for breach of any fiduciary duty. By virtue of this provision, under the DGCL, a director of the Company will not be personally liable for monetary damages for breach of his fiduciary duty as a director, except for liability for (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) dividends or stock purchases or redemptions that are unlawful under the DGCL, and (iv) any transaction from which a director derives an improper personal benefit. However, this provision of the Company's Certificate of Incorporation pertains only to breaches of duty by directors as directors and not in any other corporate capacity such as officers, and limits liability only for breaches of fiduciary duties under the DGCL and not for violations of other laws, such as the federal securities laws. As a result of the inclusion of such provision, stockholders may be unable to recover monetary damages against directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. The inclusion of this provision in the Company's Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Company and its stockholders. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. During July 1998, the Company issued $200,000,000 principal amount of the 1998 Notes to qualified institutional buyers who purchased the securities in a private placement pursuant to Rule 144A and/or buyers who purchased the securities pursuant to Regulation S. The gross proceeds of this private placement were approximately $194.5 million. In each instance, the offers and sales were made without any public solicitation; the notes bear restrictive legends; and appropriate stop transfer instructions have been or will be given to the transfer agent. In connection with such offering, Salomon Brothers Inc (an affiliate of Salomon Smith Barney Inc.), Goldman, Sachs & Co. and CIBC Oppenheimer Corp. received customary commissions. All issuances II-1 130 of securities in this private placement were made in reliance on the exemptions from registration provided by Section 4(2) of the Securities Act, and Rule 144A and Regulation S promulgated thereunder, as transactions by an issuer not involving a public offering. On April 13, 1998, in connection with the acquisition of certain assets of ICS, the Company issued 821,357.70 shares of Common Stock and 991.1039 shares of the Series B Preferred. Such issuances were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. All of the securities were acquired by the recipients thereof for investment and with no view toward the sale or redistribution thereof. The sales were made without any public solicitation; the stock certificates bear restrictive legends and appropriate stop transfer instructions have been or will be given to the transfer agent. Effective March 1, 1998, VPC exchanged $139.2 million principal amount of the GVL Notes, constituting all of the GVL Notes, for 6,962.21365 shares of the Series A Preferred. The issuance of the shares of Series A Preferred in exchange for the GVL Notes was made in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act for securities exchanged by an issuer with its existing security holders exclusively. No commissions or other remuneration was paid or given for soliciting such exchange. In August 1997, immediately prior to CDPQ's purchase of Vanguard's minority interest in the Company, Vanguard exercised the Vanguard Option and purchased 244,685 shares of the Class B Common at a price of $10.71 per share (aggregate consideration of $2,620,392). The issuance of the shares of Class B Common pursuant to Vanguard's exercise of the Vanguard Option was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The securities were acquired without any public solicitation; the securities bears a restrictive legend and appropriate stop transfer instructions have been or will be given to the transfer agent. On July 11, 1997, the Company issued to Mr. Cole a warrant to purchase up to 47,031.80 shares of Common Stock at an exercise price of $14.88 per share, subject to adjustment, in consideration for Mr. Cole's separation agreement. The warrant is exercisable until July 11, 2002. On July 3, 1997, the Company issued to Mr. Hecht a warrant to purchase up to 3,644.30 shares of Common Stock at an exercise price of $17.15 per share, subject to adjustment, in consideration for Mr. Hecht's settlement agreement. The warrant is exercisable until December 31, 2000. The issuance of these securities was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The securities were acquired by the recipients thereof for investment and with no view toward the sale or redistribution thereof. The securities were acquired without any public solicitation; the securities bear restrictive legends and appropriate stop transfer instructions have been or will be given to the transfer agent. During February 1997, the Company issued $225,000,000 principal amount of the 1997 Notes and 1,125,000 shares of the Class C Common to qualified institutional buyers who purchased the securities in a private placement pursuant to Rule 144A and/or buyers who purchased the securities pursuant to Regulation D. The gross proceeds of this private placement were approximately $220 million. In each instance, the offers and sales were made without any public solicitation; the notes and stock certificates bear restrictive legends; and appropriate stop transfer instructions have been or will be given to the transfer agent. In connection with such offering, Salomon Brothers Inc and Merrill Lynch, Pierce Fenner & Smith Incorporated received customary commissions. All issuances of securities in this private placement were made in reliance on the exemptions from registration provided by Section 4(2) of the Securities Act, and Rule 144A and Regulation D promulgated thereunder, as transactions by an issuer not involving a public offering. During fiscal 1997, fiscal 1998 and fiscal 1999, the Company granted options to purchase a total of 1,179,266.25 shares of Common Stock to certain employees of the Company as part of their compensation packages. Such issuances were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. All of the securities were acquired by the recipients thereof for investment and with no view toward the sale or redistribution thereof. II-2 131 The securities were acquired without any public solicitation; the securities bear restrictive legends; and appropriate stop transfer instructions have been or will be given to the transfer agent. On September 1, 1996, the Company issued to Mr. Kofalt a warrant to purchase up to 124,960 shares of Common Stock at an exercise price of $10.71 per share in consideration for Mr. Kofalt's separation agreement. The warrant is exercisable until August 31, 1999. The issuance of this security was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering. The security was acquired by the recipient thereof for investment and with no view toward the sale or redistribution thereof. The security was acquired without any public solicitation; the security bears a restrictive legend; and appropriate stop transfer instructions have been or will be given to the transfer agent. In August 1996, in connection with a negotiated settlement of certain disputes between the Company and Vanguard, which at such time held a minority interest in the Company, the Company granted Vanguard an option to purchase 244,685 shares of Class B Common at an exercise price of $10.71 per share, subject to adjustment. The issuance of this security was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The security was acquired by the recipient thereof for investment and with no view toward the sale or redistribution thereof. The Vanguard Option was subsequently exercised. The Company issued GVL Notes to VPC in the amount of $23.7 million , $73.4 million and $17.8 million during fiscal 1997, fiscal 1996 and the eight-month period ended August 31, 1995, respectively. All of the GVL Notes were subsequently exchanged for shares of Series A Preferred, as described above. The issuance of the GVL Notes was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions not involving a public offering. The GVL Notes were acquired by VPC for investment and with no view toward the sale or distribution thereof. In addition, on July 26, 1995, VPC purchased from the Company (i) 1,558,260 shares of Class B Common for approximately $16.7 million and (ii) a 15% convertible note having a principal amount of approximately $8.3 million. On April 1, 1996, the note was converted into 776,145 shares of Class B Common (after giving effect to the contribution, in connection with the settlement of certain disputes between the then principal stockholders, of certain shares received by VPC as accrued interest on the note). The issuance of these securities was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The securities were acquired by the recipient thereof without a view toward the sale or redistribution thereof. ITEM 16. EXHIBITS AND FINANCIAL DATA SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 -- Proposed Form of Underwriting Agreement. 2.1 -- Purchase Agreement (the "ICS Purchase Agreement") among OpTel, ICS and ICS Licenses, Inc., dated as of March 4, 1998.(4) 2.2 -- Amendment Number One to the ICS Purchase Agreement, dated as of March 4, 1998.(4) 2.3 -- Purchase Agreement (the "Phonoscope Purchase Agreement"), dated as of August 13, 1997, among OpTel, Phonoscope, Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook and Lee Cook Family Trust.(2) 2.4 -- Amendment Number One to the Phonoscope Purchase Agreement, dated as of August 13, 1997.(4) 2.5 -- Amendment Number Two to the Phonoscope Purchase Agreement, dated as of August 13, 1997.(4)
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Restated Certificate of Incorporation of OpTel, together with all amendments thereto.(6) 3.1(A) -- Amended and Restated Certificate of Incorporation of OpTel, together with all amendments thereto to be effective as of the consummation of the Offering. 3.2 -- Bylaws of OpTel.(1) 3.2(A) -- Amended and Restated Bylaws of OpTel, to be effective as of the consummation of the Offering. 3.3 -- Certificate of Designation of Voting Power, Designations, Preferences, Limitations, Restrictions and Relative Rights of the Series A Preferred.(4) 3.4 -- Certificate of Designation of Voting Power, Designations, Preferences, Limitations, Restrictions and Relative Rights of the Series B Preferred.(4) 4.1 -- See the Amended and Restated Certificate of Incorporation and amendments thereto filed as Exhibit 3.1 and the Amended and Restated Bylaws filed as Exhibit 3.2. 4.2 -- Indenture, dated as of February 14, 1997, between OpTel and U.S. Trust Company of Texas, N.A., as Trustee and as Escrow Agent.(1) 4.3 -- Form of 1997 Note (included in Exhibit 4.2).(1) 4.4 -- Escrow Agreement, dated as of February 14, 1997, between OpTel and U.S. Trust Company of Texas, N.A., as Trustee and as Escrow Agent.(1) 4.5 -- Indenture dated as of July 7, 1998 between OpTel and U.S. Trust Company of Texas, N.A., as Trustee.(5) 4.6 -- Form of 1998 Note (included in Exhibit 4.5).(5) 4.7 -- Escrow Agreement, dated as of July 7, 1998 between OpTel and U.S. Trust Company of Texas, N.A., as Trustee and Escrow Agent.(5) 4.8 -- Form of Stock Certificate for the Common Stock. 5.1 -- Opinion of Kronish Lieb Weiner & Hellman LLP. 8.1 -- Opinion of Kronish Lieb Weiner & Hellman LLP re: Tax matters (included in Exhibit 5.1). 10.1 -- Stockholders' Agreement dated as of August 15, 1997 by and among VPC, CDPQ and OpTel.(3) 10.2 -- Stockholders' Agreement dated as of April 9, 1998 among OpTel, Nomura, MCI, GVL and ICS.(4) 10.3 -- Common Stock Registration Rights Agreement, dated as of February 14, 1997, among OpTel, VPC, GVL and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith Incorporated and U.S. Trust Company of Texas, N.A.(1) 10.4 -- Registration Rights Agreement, dated as of August 15, 1997, between OpTel and CDPQ.(2) 10.5 -- Registration Rights Agreement dated as of April 9, 1998, between OpTel, ICS, Nomura and MCI.(4) 10.6 -- Warrant Agreement dated as of September 1, 1996, between OpTel and James A. Kofalt.(1) 10.7 -- Warrant Agreement, dated as of July 11, 1997, between OpTel and Rory O. Cole.(2) 10.8 -- Lease Agreement dated July 25, 1995 between Space Center Dallas, Inc. and OpTel.(1) 10.9 -- First Amendment to Lease Agreement dated August 8, 1996 between Space Center Dallas, Inc. and OpTel.(1)
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.10 -- Restated Incentive Stock Plan of OpTel, dated June 4, 1998, as amended. 10.11 -- Annual Bonus Plan of OpTel.(1) 10.12 -- 1998 Employee Stock Purchase Plan of OpTel. 10.13 -- Employment Agreement between Bertrand Blanchette and OpTel, dated April 15, 1999. 10.14 -- Employment Agreement between Stephen Dube and OpTel, dated April 15, 1999. 10.15 -- Employment Agreement between Lynn Zera and OpTel, dated April 15, 1999. 10.16 -- Employment Agreement between Louis Brunel and OpTel dated April 15, 1999. 10.17 -- Employment Agreement between Michael Katzenstein and OpTel dated April 15, 1999. 10.18 -- Separation Agreement dated as of July 11, 1997, between OpTel and Rory O. Cole.(4) 10.19 -- City of Houston, Texas, Ordinance No. 89-338 dated March 29, 1989 granting to PrimeTime Cable Partners I, Ltd. the right to operate for 15 years a Community Antenna Television System, and subsequent ordinances consenting to assignment of rights to EagleVision and to TVMAX Communications (Texas), Inc.(1) 10.20 -- City of Houston, Texas, Ordinance No. 97-285 dated March 19, 1997, granting TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network.(1) 10.21 -- City of Houston, Texas, Ordinance No. 97-1088 dated September 3, 1997, extending to TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network (originally granted pursuant to the permit referenced in Exhibit 10.20 hereto).(2) 10.22 -- City of Houston, Texas, Ordinance No. 97-1567 dated December 23, 1997, granting to TVMAX Communications (Texas), Inc. a franchise to operate a Telecommunications Network (superseding and replacing the temporary permits referenced in Exhibits 10.20 and 10.21 hereto).(4) 10.23 -- Amendment Number 001 to the Videotron/Lucent Agreement, dated August 28, 1997, among Videotron Telecom Ltee and Lucent Technologies Canada Inc. and TVMAX and Lucent Technologies Inc.(2) 10.24 -- Interconnection Agreement under Sections 251 and 252 of the Telecom Act by and between Southwestern Bell Telephone Company and OpTel (Texas) Telecom, Inc.(2) 10.25 -- Residential Reseller Agreement dated as of May 29, 1998 by and between Teleport Communications Group Inc. and TVMAX.(7)** 10.26 -- Strategic Alliance Agreement dated as of March 10, 1998 between I(3)S, Inc. and TVMAX.(6)** 10.27 -- EchoStar Satellite Corporation MDU Dealer Agreement, dated as of January 14, 1999, by and between EchoStar and TVMAX Telecom, Inc.*** 10.28 -- Conversion and Exchange Agreement. 21.1 -- List of subsidiaries of OpTel.(9) 23.1 -- Consent of Kronish Lieb Weiner & Hellman LLP (included in exhibit 5.1). 23.2 -- Consent of Deloitte & Touche LLP.
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EXHIBIT NUMBER DESCRIPTION ------- ----------- 24.1 -- Power of Attorney (included as part of the signature page of OpTel's registration statement on Form S-1 filed with the Commission on June 5, 1998). 24.2 -- Power of Attorney.(8)
- --------------- (1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with the Commission on April 10, 1997, and incorporated herein by reference. (2) Filed as an exhibit to the Company's 10-K filed with the Commission for fiscal year ended August 31, 1997, and incorporated herein by reference. (3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for fiscal year ended August 31, 1997, and incorporated herein by reference. (4) Filed as an exhibit to OpTel's registration statement on Form S-1 filed with the Commission on June 5, 1998, and incorporated herein by reference. (5) Filed as an exhibit to Amendment No. 2 to OpTel's registration statement on Form S-1/A filed with the Commission on August 14, 1998, and incorporated herein by reference. (6) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with the Commission on September 4, 1998, and incorporated herein by reference. (7) Filed as an exhibit to Amendment No. 1 to OpTel's registration statement on Form S-4 filed with the Commission on October 9, 1998, and incorporated herein by reference. (8) Filed as an exhibit to Amendment No. 4 to OpTel's registration statement on Form S-1 filed with the Commission on March 25, 1999. (9) Filed as an exhibit to Amendment No. 6 to OpTel's registration statement on Form S-1 filed with the Commission on April 21, 1999. ** The Commission granted the Company's request for confidential treatment of portions of this document in an order dated October 9, 1998. *** Certain provisions of this exhibit have been filed separately with the Commission pursuant to an application for confidential treatment. (b) The financial statements and financial statement schedules filed as part of this Registration Statement are as follows: 1. Financial Statements. See Index to Financial Statements on page F-1 of the Prospectus included in this Registration Statement. 2. Financial Statement Schedule II. All schedules, other than Schedule II, have been omitted as they are not required under the related instructions, are inapplicable, or because the information required is included in the financial statements and related notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by OpTel pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement II-6 135 relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be initial bona fide offering thereof. (3) To provide to the Underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of OpTel pursuant to the foregoing provisions, or otherwise, OpTel has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by OpTel of expenses incurred or paid by a director, officer or controlling person of OpTel in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, OpTel will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-7 136 SIGNATURES Pursuant to the requirements of the Securities Act, the Company has duly caused this Amendment No. 7 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on this 18th day of May, 1999. OPTEL, INC. By: /s/ BERTRAND BLANCHETTE ---------------------------------- Bertrand Blanchette Chief Financial Officer Pursuant to the requirements of the Securities Act, this Amendment No. 7 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated below.
SIGNATURE TITLE DATE --------- ----- ---- Principal Executive Officer: * President and Chief Executive May , 1999 - ----------------------------------------------------- Officer Louis Brunel Principal Financial and Accounting Officers: /s/ BERTRAND BLANCHETTE Chief Financial Officer May 18, 1999 - ----------------------------------------------------- Bertrand Blanchette * Controller May , 1999 - ----------------------------------------------------- Craig Milacek Directors: * Chairman of the Board May , 1999 - ----------------------------------------------------- Andre Chagnon * Vice Chairman of the Board May , 1999 - ----------------------------------------------------- Alain Michel * Director May , 1999 - ----------------------------------------------------- Louis Brunel * Director May , 1999 - ----------------------------------------------------- Frederick W. Benn * Director May , 1999 - ----------------------------------------------------- Christian Chagnon * Director May , 1999 - ----------------------------------------------------- William O. Hunt * Director May , 1999 - ----------------------------------------------------- R. Douglas Leonhard
II-8 137
SIGNATURE TITLE DATE --------- ----- ---- * Director May , 1999 - ----------------------------------------------------- Lynn McDonald * Director May , 1999 - ----------------------------------------------------- Jayne L. Stowell
*By: /s/ BERTRAND BLANCHETTE ------------------------------- Bertrand Blanchette as attorney-in-fact II-9 138 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc.: We have audited the financial statements of OpTel, Inc. and subsidiaries (the "Company") as of August 31, 1997 and 1998, and for each of the three years in the period ended August 31, 1998 and have issued our report dated October 6, 1998; such financial statements and report are included herein. Our audits also included the financial statement schedule of OpTel, Inc., listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ DELOITTE & TOUCHE LLP Dallas, Texas October 6, 1998 S-1 139 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS ($ IN THOUSANDS)
DEDUCTIONS, BALANCE AT CHARGED TO WRITE-OFFS BALANCE AT BEGINNING OF COSTS AND AND END OF PERIOD EXPENSES RECOVERIES PERIOD ------------ ---------- ----------- ---------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended August 31, 1996..................... $ 473 $1,376 $(1,307) $ 542 Year ended August 31, 1997..................... 542 1,788 (1,205) 1,125 Year ended August 31, 1998..................... 1,125 2,707 (2,029) 1,803 Six months ended February 28, 1999 (unaudited)................................. 1,803 1,922 (1,366) 2,359
S-2 140 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 -- Proposed Form of Underwriting Agreement. 2.1 -- Purchase Agreement (the "ICS Purchase Agreement") among OpTel, ICS and ICS Licenses, Inc., dated as of March 4, 1998.(4) 2.2 -- Amendment Number One to the ICS Purchase Agreement, dated as of March 4, 1998.(4) 2.3 -- Purchase Agreement (the "Phonoscope Purchase Agreement"), dated as of August 13, 1997, among OpTel, Phonoscope, Ltd., Phonoscope Management L.C., Lee Cook, Alton Cook and Lee Cook Family Trust.(2) 2.4 -- Amendment Number One to the Phonoscope Purchase Agreement, dated as of August 13, 1997.(4) 2.5 -- Amendment Number Two to the Phonoscope Purchase Agreement, dated as of August 13, 1997.(4) 3.1 -- Restated Certificate of Incorporation of OpTel, together with all amendments thereto.(6) 3.1(A) -- Amended and Restated Certificate of Incorporation of OpTel, together with all amendments thereto to be effective as of the consummation of the Offering. 3.2 -- Bylaws of OpTel.(1) 3.2(A) -- Amended and Restated Bylaws of OpTel, to be effective as of the consummation of the Offering. 3.3 -- Certificate of Designation of Voting Power, Designations, Preferences, Limitations, Restrictions and Relative Rights of the Series A Preferred.(4) 3.4 -- Certificate of Designation of Voting Power, Designations, Preferences, Limitations, Restrictions and Relative Rights of the Series B Preferred.(4) 4.1 -- See the Amended and Restated Certificate of Incorporation and amendments thereto filed as Exhibit 3.1 and the Amended and Restated Bylaws filed as Exhibit 3.2. 4.2 -- Indenture, dated as of February 14, 1997, between OpTel and U.S. Trust Company of Texas, N.A., as Trustee and as Escrow Agent.(1) 4.3 -- Form of 1997 Note (included in Exhibit 4.2).(1) 4.4 -- Escrow Agreement, dated as of February 14, 1997, between OpTel and U.S. Trust Company of Texas, N.A., as Trustee and as Escrow Agent.(1) 4.5 -- Indenture dated as of July 7, 1998 between OpTel and U.S. Trust Company of Texas, N.A., as Trustee.(5) 4.6 -- Form of 1998 Note (included in Exhibit 4.5).(5) 4.7 -- Escrow Agreement, dated as of July 7, 1998 between OpTel and U.S. Trust Company of Texas, N.A., as Trustee and Escrow Agent.(5) 4.8 -- Form of Stock Certificate for the Common Stock. 5.1 -- Opinion of Kronish Lieb Weiner & Hellman LLP. 8.1 -- Opinion of Kronish Lieb Weiner & Hellman LLP re: Tax matters (included in Exhibit 5.1). 10.1 -- Stockholders' Agreement dated as of August 15, 1997 by and among VPC, CDPQ and OpTel.(3) 10.2 -- Stockholders' Agreement dated as of April 9, 1998 among OpTel, Nomura, MCI, GVL and ICS.(4)
141
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.3 -- Common Stock Registration Rights Agreement, dated as of February 14, 1997, among OpTel, VPC, GVL and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith Incorporated and U.S. Trust Company of Texas, N.A.(1) 10.4 -- Registration Rights Agreement, dated as of August 15, 1997, between OpTel and CDPQ.(2) 10.5 -- Registration Rights Agreement dated as of April 9, 1998, between OpTel, ICS, Nomura and MCI.(4) 10.6 -- Warrant Agreement dated as of September 1, 1996, between OpTel and James A. Kofalt.(1) 10.7 -- Warrant Agreement, dated as of July 11, 1997, between OpTel and Rory O. Cole.(2) 10.8 -- Lease Agreement dated July 25, 1995 between Space Center Dallas, Inc. and OpTel.(1) 10.9 -- First Amendment to Lease Agreement dated August 8, 1996 between Space Center Dallas, Inc. and OpTel.(1) 10.10 -- Restated Incentive Stock Plan of OpTel, dated June 4, 1998, as amended. 10.11 -- Annual Bonus Plan of OpTel.(1) 10.12 -- 1998 Employee Stock Purchase Plan of OpTel. 10.13 -- Employment Agreement between Bertrand Blanchette and OpTel, dated April 15, 1999. 10.14 -- Employment Agreement between Stephen Dube and OpTel, dated April 15, 1999. 10.15 -- Employment Agreement between Lynn Zera and OpTel, dated April 15, 1999. 10.16 -- Employment Agreement between Louis Brunel and OpTel dated April 15, 1999. 10.17 -- Employment Agreement between Michael Katzenstein and OpTel dated April 15, 1999. 10.18 -- Separation Agreement dated as of July 11, 1997, between OpTel and Rory O. Cole.(4) 10.19 -- City of Houston, Texas, Ordinance No. 89-338 dated March 29, 1989 granting to PrimeTime Cable Partners I, Ltd. the right to operate for 15 years a Community Antenna Television System, and subsequent ordinances consenting to assignment of rights to EagleVision and to TVMAX Communications (Texas), Inc.(1) 10.20 -- City of Houston, Texas, Ordinance No. 97-285 dated March 19, 1997, granting TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network.(1) 10.21 -- City of Houston, Texas, Ordinance No. 97-1088 dated September 3, 1997, extending to TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network (originally granted pursuant to the permit referenced in Exhibit 10.20 hereto).(2) 10.22 -- City of Houston, Texas, Ordinance No. 97-1567 dated December 23, 1997, granting to TVMAX Communications (Texas), Inc. a franchise to operate a Telecommunications Network (superseding and replacing the temporary permits referenced in Exhibits 10.20 and 10.21 hereto).(4) 10.23 -- Amendment Number 001 to the Videotron/Lucent Agreement, dated August 28, 1997, among Videotron Telecom Ltee and Lucent Technologies Canada Inc. and TVMAX and Lucent Technologies Inc.(2)
142
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.24 -- Interconnection Agreement under Sections 251 and 252 of the Telecom Act by and between Southwestern Bell Telephone Company and OpTel (Texas) Telecom, Inc.(2) 10.25 -- Residential Reseller Agreement dated as of May 29, 1998 by and between Teleport Communications Group Inc. and TVMAX.(7)** 10.26 -- Strategic Alliance Agreement dated as of March 10, 1998 between I(3)S, Inc. and TVMAX.(6)** 10.27 -- EchoStar Satellite Corporation MDU Dealer Agreement, dated as of January 14, 1999, by and between EchoStar and TVMAX Telecom, Inc.*** 10.28 -- Conversion and Exchange Agreement. 21.1 -- List of subsidiaries of OpTel.(9) 23.1 -- Consent of Kronish Lieb Weiner & Hellman LLP (included in exhibit 5.1). 23.2 -- Consent of Deloitte & Touche LLP. 24.1 -- Power of Attorney (included as part of the signature page of OpTel's registration statement on Form S-1 filed with the Commission on June 5, 1998). 24.2 -- Power of Attorney.(8)
- --------------- (1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with the Commission on April 10, 1997, and incorporated herein by reference. (2) Filed as an exhibit to the Company's 10-K filed with the Commission for fiscal year ended August 31, 1997, and incorporated herein by reference. (3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for fiscal year ended August 31, 1997, and incorporated herein by reference. (4) Filed as an exhibit to OpTel's registration statement on Form S-1 filed with the Commission on June 5, 1998, and incorporated herein by reference. (5) Filed as an exhibit to Amendment No. 2 to OpTel's registration statement on Form S-1/A filed with the Commission on August 14, 1998, and incorporated herein by reference. (6) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with the Commission on September 4, 1998, and incorporated herein by reference. (7) Filed as an exhibit to Amendment No. 1 to OpTel's registration statement on Form S-4 filed with the Commission on October 9, 1998, and incorporated herein by reference. (8) Filed as an exhibit to Amendment No. 4 to OpTel's registration statement on Form S-1 filed with the Commission on March 25, 1999. (9) Filed as an exhibit to Amendment No. 6 to OpTel's registration statement on Form S-1 filed with the Commission on April 21, 1999. ** The Commission granted the Company's request for confidential treatment of portions of this document in an order dated October 9, 1998. *** Certain provisions of this exhibit have been filed separately with the Commission pursuant to an application for confidential treatment. EX-1.1 2 PROPOSED FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 OpTel, Inc. [ ] Shares Class A Common Stock ($0.01 par value per share) UNDERWRITING AGREEMENT New York, New York , 1999 Salomon Smith Barney Inc. Goldman, Sachs & Co. Bear, Stearns & Co. Inc. CIBC World Markets Corp. As Representatives of the several Underwriters c/o Salomon Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: OpTel, Inc., a Delaware corporation (the "Company"), proposes to sell to the several underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the "Representatives") are acting as representatives, [ ] shares of Class A Common Stock, $0.01 par value per share (the "Common Stock") of the Company, and the persons named in Schedule II hereto (the "Selling Stockholders") propose to sell to the several Underwriters [ ] shares of Common Stock (said shares to be issued and sold by the Company and shares to be sold by the Selling Stockholders collectively being hereinafter called the "Underwritten Securities"). The Company also proposes to grant to the Underwriters an option to purchase up to [ ] additional shares of Common Stock to cover over-allotments (the "Option Securities"; the Option Securities, together with the Underwritten Securities, being hereinafter called the "Securities"). To the extent there are no additional Underwriters listed on Schedule I other than you, the term Representatives as used herein shall mean you, as Underwriters, and the terms Representatives and Underwriters shall mean either the singular or plural as the context requires. In addition, to the extent that there is not more than one Selling Stockholder named in Schedule II, the term Selling Stockholder shall mean either the singular or plural. The use of the neuter in this Agreement shall include the feminine and masculine wherever appropriate. Certain terms used herein are defined in Section 17 hereof. 2 -2- 1. Representations and Warranties. (i) The Company represents and warrants to, and agrees with, each Underwriter as set forth below in this Section 1. (a) The Company has prepared and filed with the Securities and Exchange Commission (the "SEC") a registration statement (file number 333-56231) on Form S-1, including a related preliminary prospectus, for the registration under the Act of the offering and sale of the Securities. The Company may have filed one or more amendments thereto, including a related preliminary prospectus, each of which has previously been furnished to you. The Company will next file with the SEC either (1) prior to the Effective Date of such registration statement, a further amendment to such registration statement (including the form of final prospectus) or (2) after the Effective Date of such registration statement, a final prospectus in accordance with Rules 430A and 424(b). In the case of clause (2), the Company has included in such registration statement, as amended at the Effective Date, all information (other than Rule 430A Information) required by the Act and the rules thereunder to be included in such registration statement and the Prospectus. As filed, such amendment and form of final prospectus, or such final prospectus, shall contain all Rule 430A Information, together with all other such required information, and, except to the extent the Representatives shall agree in writing to a modification, shall be in all substantive respects in the form furnished to you prior to the Execution Time or, to the extent not completed at the Execution Time, shall contain only such specific additional information and other changes (beyond that contained in the latest Preliminary Prospectus) as the Company has advised you, prior to the Execution Time, will be included or made therein. (b) On the Effective Date, the Registration Statement did or will, and when the Prospectus is first filed (if required) in accordance with Rule 424(b) and on the Closing Date (as defined herein) and on any date on which Option Securities are purchased, if such date is not the Closing Date (a "settlement date"), the Prospectus (and any supplements thereto) will, comply in all material respects with the applicable requirements of the Act and the rules thereunder; on the Effective Date and at the Execution Time, the Registration Statement did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date, the Prospectus, if not filed pursuant to Rule 424(b), will not, and on the date of any filing pursuant to Rule 424(b) and on the Closing Date and any settlement date, the Prospectus (together with any supplement thereto) will not, include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or 3 -3- warranty as to the information contained in or omitted from the Registration Statement, or the Prospectus (or any supplement thereto) in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically for inclusion in the Registration Statement or the Prospectus (or any supplement thereto). (c) Each of the Company and each subsidiary of the Company (a "Subsidiary"), has been duly incorporated or organized, and each is validly existing as a corporation or limited partnership, as the case may be, under the laws of its jurisdiction of incorporation or organization, with all requisite power and authority to own or lease its properties and to conduct its business as described in the Prospectus. Each of the Company and the Subsidiaries (x) has all necessary authorizations, approvals, orders, licenses and permits of and from regulatory or governmental officials, bodies and tribunals, to own or lease its properties and to conduct its businesses as now conducted as described in the Prospectus and (y) is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions where the ownership or leasing of its properties or the conduct of its businesses requires such qualification, except, in the case of clauses (x) and (y), where the failure to have such authorizations, approvals, orders, licenses and permits or to be so qualified could not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), assets, results of operations or prospects of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"). (d) This Agreement has been duly authorized, executed and delivered by the Company and (assuming the due authorization, execution and delivery by parties thereto other than the Company) constitutes the valid and binding obligations of the Company, enforceable against the Company in accordance with the terms hereof, subject only to (a) applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and (b) general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) (clauses (a) and (b) being referred to herein as the "Enforceability Limitations"). (e) No consent, authorization, approval, license or order of, or filing, registration or qualification with, any court or governmental or regulatory agency or body, domestic or foreign, is required for the performance by the Company of its obligations under this Agreement or for the consummation of the transactions contemplated hereby, except such as have been obtained under the Act and the Exchange Act and such as may be required by state securities or "blue sky" laws in connection with the offer and sale of the Securities by the Underwriters in the manner contemplated herein and in the Prospectus. 4 -4- (f) The issuance of the Securities to be sold by the Company and the sale and delivery of the Securities, the execution, delivery and performance by the Company of this Agreement, the consummation by the Company of the transactions contemplated hereby and as described in the Prospectus and the compliance by the Company with the terms of the foregoing do not, and, at the Closing Date, will not conflict with or constitute or result in a breach or violation by the Company or the Subsidiaries of (A) any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) by any of the Company or the Subsidiaries or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or the Subsidiaries under any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, franchise agreement, authorization, permit, certificate or other agreement or document to which any of the Company or the Subsidiaries is a party or by which any of them may be bound, or to which any of them or any of their respective assets or businesses is subject (and the Company has no knowledge of any conflict, breach or violation of such terms or provisions or of any such default, in any such case, which has occurred or will so result), (B) the articles or by-laws (each, an "Organizational Document") of each of the Company and the Subsidiaries or (C) any law, statute, rule or regulation, or any judgment, decree or order, in any such case, of any domestic or foreign court or governmental or regulatory agency or other body having jurisdiction over the Company or any of the Subsidiaries or any of their respective properties or assets. (g) The audited consolidated financial statements (and the related notes) and schedules of the Company and the Subsidiaries included in the Prospectus and the Registration Statement present fairly the consolidated financial position, results of operations and cash flows of the Company and the Subsidiaries, at the dates and for the periods to which they relate, and have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis, and the unaudited historical consolidated financial statements (and the related notes) of the Company and the Subsidiaries included in the Prospectus and the Registration Statement present fairly the consolidated financial position, results of operations and cash flows of the Company and the Subsidiaries, at the dates and for the periods to which they relate, and have been prepared in accordance with GAAP, subject, in the case of interim financial statements, to year-end adjustments as may be required by GAAP. To the knowledge of the Company, Deloitte & Touche LLP, which has examined certain of such financial statements and schedules as set forth in its report included in the Prospectus, is an independent public accounting firm with respect to the Company and the Subsidiaries as required by the Act and the Exchange Act and the rules and regulations 5 -5- of the SEC thereunder (the "Act Regulations") and Rule 101 of the American Institute of Certified Public Accountants (the "AICPA"). (h) Since the respective dates as of which information is given in the Prospectus, except as otherwise specifically stated therein, there has been no (A) significant change in or material adverse change in the condition (financial or otherwise), assets, results of operations or prospects of the Company or of the Company and the Subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, (B) transaction entered into by any of the Company or the Subsidiaries, other than in the ordinary course of business, that is material to the Company and the Subsidiaries taken as a whole or (C) dividend or distribution of any kind declared, paid or made by the Company on its capital stock. (i) At the Closing Date, the Company will have the authorized and issued and outstanding capitalization set forth in the Prospectus under the caption "Capitalization" (subject to the qualifications set forth therein); the outstanding capital stock of the Company (including the Securities being sold hereunder by the Selling Stockholders) and each Subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and was not issued in violation of any preemptive or similar rights (whether provided contractually or pursuant to Organizational Documents); the Securities being sold hereunder by the Company have been duly and validly authorized, and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be fully paid and nonassessable; the Securities being sold hereunder are duly listed, and admitted and authorized for trading, subject to official notice of issuance and evidence of satisfactory distribution, on the Nasdaq National Market; the certificates for the Securities are in valid and sufficient form; the holders of outstanding shares of capital stock of the Company are not entitled to preemptive or other rights to subscribe for the Securities or, if entitled to any such rights, have effectively waived such rights; and, except as set forth in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities for, shares of capital stock of or ownership interests in the Company are outstanding. (j) All of the outstanding shares of the Subsidiaries are owned beneficially and of record by the Company or by another Subsidiary, in each case, free and clear of all liens, encumbrances, equities or claims of any kind whatsoever or restrictions on transferability or voting. (k) None of the Company or any of the Subsidiaries is (A) in violation of its Organizational Documents, (B) in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, authorization, 6 -6- permit, certificate or other agreement or document to which the Company or any Subsidiary is a party or by which it or any of them may be bound, or to which any of the assets or businesses of the Company or any Subsidiary is subject, or (C) in violation of any applicable law, rule or regulation, or any judgment, order or decree of any domestic or foreign court with jurisdiction over the Company or any Subsidiary, or other governmental or regulatory authority with jurisdiction over the Company or any Subsidiary which, in the case of (B) or (C), could have a Material Adverse Effect. (l) Except as described or reflected in the Prospectus (exclusive of any supplement thereto) and except for matters not required to be described therein, there is not pending or, to the knowledge of the Company, threatened, any action, suit, proceeding, inquiry or investigation to which the Company or any Subsidiary is a party, or to which the rights of entry or assets of the Company or any of the Subsidiaries is subject, before, or brought by, any court or governmental or regulatory agency or body with jurisdiction over the Company or any Subsidiary. (m) Each of the Company and the Subsidiaries owns or possesses, or can acquire on reasonable terms, adequate patents, patent rights, licenses, trademarks, inventions, service marks, trade names, copyrights and know-how (including trade secrets and other proprietary or confidential information, systems or procedures, whether patented or unpatented) (collectively, "intellectual property") necessary to conduct the business as it is now or, to its belief, proposed to be operated by it as described in the Prospectus, except as described in the Prospectus and except where the failure to own, possess or have the ability to acquire any such intellectual property could not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect; and, except as disclosed in the Prospectus, neither the Company nor any of the Subsidiaries has received any notice of infringement of or conflict with (or knows of any such infringement of or conflict with) asserted rights of others with respect to any of such intellectual property which, if such assertion of infringement or conflict were sustained, would result in any Material Adverse Effect. (n) Each of the Company and the Subsidiaries has obtained all consents, approvals, orders, certificates, licenses, permits, franchises and other authorizations (collectively, the "Licenses") of and from, and has made all declarations and filings with, all governmental or regulatory authorities, including, without limitation, the Federal Communications Commission (the "FCC"), and all courts and other tribunals necessary to own, lease, license and use its assets and to conduct its businesses in the manner described in the Prospectus, except where the failure to obtain such Licenses and make such declarations and filings would not have a Material Adverse Effect. Neither the Company nor any of the Subsidiaries has received any notice of proceedings relating to the revocation or modification of, or denial of any application for, any 7 -7- License which, if the subject of an unfavorable decision, ruling or finding, would, singly or in the aggregate, have a Material Adverse Effect; the Company and each of the Subsidiaries, have fulfilled and performed all of their obligations with respect to all Licenses possessed by any of them, except where the failure to so fulfill and perform would not, singly or in the aggregate, have a Material Adverse Effect; and no event has occurred which allows, or after notice or lapse of time, or both, would allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such License, except where such revocation or termination would not, singly or in the aggregate, have a Material Adverse Effect; and the Licenses referred to above contain no restrictions on the Company or any of the Subsidiaries that are not described in the Prospectus, except where such restrictions would not, singly or in the aggregate, have a Material Adverse Effect. (o) There are no legal, governmental or regulatory proceedings affecting the business of the Company or any Subsidiary, including, without limitation, before the FCC, actions, suits, inquiries or investigations which, if applicable, would be required to be described in the Registration Statement or Prospectus that are not described, nor any laws, rules, regulations, contracts or other documents which, under such circumstances, would be required to be described in the Registration Statement or Prospectus by the Act or by the Act Regulations that have not been so described. (p) Each of the Company and the Subsidiaries has filed all necessary income, franchise and other tax returns due, and has paid any taxes assessed by the due date for payment thereof, except where such taxes are being contested in good faith or where the failure to file and pay such taxes would not have a Material Adverse Effect. (q) Except as described in the Prospectus (exclusive of any supplement thereto), none of the Company nor any of the Subsidiaries has incurred any liability for any prohibited transaction or funding deficiency or any complete or partial withdrawal liability with respect to any pension, profit sharing or other plan which is subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), to which the Company or the Subsidiaries makes or ever has made a contribution and in which any employee of the Company or any such Subsidiary is or has ever been a participant, which, individually or in the aggregate, could reasonably be expected to have or result in a Material Adverse Effect. With respect to such plans, each of the Company and the Subsidiaries is in compliance in all respects with all applicable provisions of ERISA, except where the failure to so comply could not, individually or in the aggregate, reasonably be expected to have or a result in a Material Adverse Effect. (r) Except as described in the Prospectus (exclusive of any supplement thereto) there are no mortgages, charges or security arrangements nor any consensual encumbrances or other arrangements which restrict the ability of any Subsidiary (i) to 8 -8- pay dividends or make any other distributions on such Subsidiary's shares or to pay any indebtedness owed to the Company or any other Subsidiary, (ii) to make any loans or advances to, or investments in, the Company or any other Subsidiary or (iii) to transfer any of its property or assets to the Company or any other Subsidiary. (s) Except as described in the Prospectus (exclusive of any supplement thereto), to the knowledge of the Company, there are no defaults under any Right of Entry (as defined in the Prospectus) by any party thereunder or notices of termination or non-renewal with respect thereto, except for such defaults or notices as, individually or in the aggregate, cannot reasonably be expected to have a Material Adverse Effect. (t) The market-related data and estimates included in the Prospectus are based on or derived from independent sources which the Company believes to be reliable and accurate. (u) The Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Prospectus, will not be an "investment company" within the meaning of the Investment Company Act of 1940, as amended, without taking account of any exemption arising out of the number of holders of the Company's securities. (v) Except for Securities included by Selling Stockholders in the Registration Statement and for rights that have been waived or have failed to be exercised in accordance with the terms thereof, no holders of securities of the Company have rights to require the registration of such securities under the Registration Statement. (w) There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance by the Company or sale by the Company of the Securities. (x) The Company has not taken, directly or indirectly (other than through the actions, if any, of the Underwriters), any action designed to or which has constituted or which might reasonably be expected to cause or result in, under the Exchange Act or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (y) Except as disclosed in the Registration Statement and the Prospectus, the Company (i) does not have any material lending or other relationship with any bank or lending affiliate of Salomon Smith Barney Holdings Inc. and (ii) does not intend to use any of the proceeds from the sale of the Securities hereunder to repay any outstanding debt owed to any affiliate of Salomon Smith Barney Holdings Inc. 9 -9- (z) The Company is in material compliance with the SEC's staff legal bulletin No. 5 dated October 8, 1997 related to Year 2000 compliance. Any certificate signed by any two officers of the Company and delivered to the Representatives or to Cahill Gordon & Reindel, counsel for the Underwriters ("Counsel for the Underwriters"), in connection with the offering of the Securities shall be deemed a representation and warranty by the Company, as to matters covered thereby, to each Underwriter. (ii) Each Selling Stockholder represents and warrants to, and agrees with, each Underwriter that: (a) Such Selling Stockholder is the lawful owner of the Securities to be sold by such Selling Stockholder hereunder and upon sale and delivery of, and payment for, such Securities, as provided herein, such Selling Stockholder will convey to the Underwriters good and marketable title to such Securities, free and clear of all liens, encumbrances, equities and claims whatsoever (other than those created by this Agreement or by the Custody Agreement and Power of Attorney dated as of the date hereof among each Selling Stockholder, the Attorney-in-Fact named therein and the Custodian named therein (the "Custody Agreement")). (b) Such Selling Stockholder has not taken, directly or indirectly (other than through the actions, if any, of the Underwriters), any action designed to or which has constituted or which might reasonably be expected to cause or result in, under the Exchange Act or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (c) Certificates in negotiable form for such Selling Stockholder's Securities have been placed in custody, for delivery pursuant to the terms of this Agreement, under a Custody Agreement and Power of Attorney duly authorized, executed and delivered by such Selling Stockholder, in the form heretofore furnished to you (the "Custody Agreement") with American Stock Transfer & Trust Company, as Custodian (the "Custodian"); the Securities represented by the certificates so held in custody for such Selling Stockholder are subject to the interests hereunder of the Underwriters; the arrangements for custody and delivery of such certificates, made by such Selling Stockholder hereunder and under the Custody Agreement, are not subject to termination by any acts of such Selling Stockholder, or by operation of law, whether by the death or incapacity of such Selling Stockholder or the occurrence of any other event; and if any such death, incapacity or any other such event shall occur before the delivery of such Securities hereunder, certificates for the Securities will be delivered by the Custodian in accordance with the terms and conditions of this Agreement and the Custody Agreement as if such death, incapacity or other event had not occurred, regardless of 10 -10- whether or not the Custodian shall have received notice of such death, incapacity or other event. (d) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by such Selling Stockholder of the transactions contemplated herein, except such as may have been obtained under the Act and such as may be required by state securities or "blue sky" laws in connection with the purchase and distribution of the Securities by the Underwriters in the manner contemplated herein and in the Prospectus. (e) Neither the sale of the Securities being sold by such Selling Stockholder nor the consummation of any other of the transactions herein contemplated by such Selling Stockholder or the fulfillment of the terms hereof by such Selling Stockholder will conflict with, result in a breach or violation of, or constitute a default under any law or the charter or by-laws or similar organizational documents of such Selling Stockholder, if such Selling Stockholder is not an individual, or the terms of any indenture or other agreement or instrument to which such Selling Stockholder or any of its subsidiaries is a party or bound, or any judgment, order or decree applicable to such Selling Stockholder or any of its subsidiaries of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder or any of its subsidiaries. (f) Such Selling Stockholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Prospectus or any supplement thereto which has adversely affected or may adversely affect the business of the Company or any of its subsidiaries; and the sale of Securities by such Selling Stockholder pursuant hereto is not prompted by any information concerning the Company or any of its subsidiaries which is not set forth in the Prospectus or any supplement thereto. (g) In respect of any statements in or omissions from the Registration Statement or the Prospectus or any supplements thereto made in reliance upon and in conformity with information furnished in writing to the Company by any Selling Stockholder specifically for use in connection with the preparation thereof, such Selling Stockholder hereby makes the same representations and warranties to each Underwriter as the Company makes to such Underwriter under paragraph (i)(b) of this Section. Any certificate signed by any officer, partner, trustee or similar person of any Selling Stockholder (or by such Selling Stockholder, if an individual) and delivered to the Representatives or Counsel for the Underwriters in connection with the offering of the Secu- 11 -11- rities shall be deemed a representation and warranty by such Selling Stockholder, as to matters covered thereby, to each Underwriter. 2. Purchase and Sale. (a) Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company and the Selling Stockholders agree, severally and not jointly, to sell to each Underwriter, and each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders, at a purchase price of $[ ] per share, the amount of the Underwritten Securities set forth opposite such Underwriter's name in Schedule I hereto. (b) Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company hereby grants an option to the several Underwriters to purchase up to [ ] Option Securities at the same purchase price per share as the Underwriters shall pay for the Underwritten Securities. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Securities by the Underwriters. Said option may be exercised in whole or in part at any time (but not more than once) on or before the 30th day after the date of the Prospectus upon written or telegraphic notice by the Representatives to the Company setting forth the number of shares of the Option Securities as to which the several Underwriters are exercising the option and the settlement date (the "Option Closing Date"). Delivery of certificates for the shares of Option Securities by the Company, and payment therefor to the Company, shall be made as provided in Section 3 hereof. The number of shares of the Option Securities to be purchased by each Underwriter shall be the same percentage of the total number of shares of the Option Securities to be purchased by the several Underwriters as such Underwriter is purchasing of the Underwritten Securities, subject to such adjustments as you in your absolute discretion shall make to eliminate any fractional shares. 3. Delivery and Payment. Delivery of and payment for the Underwritten Securities and the Option Securities (if the option provided for in Section 2(b) hereof shall have been exercised on or before the third Business Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on [ ], 1999, or at such time on such later date not more than three Business Days after the foregoing date as the Representatives shall designate, which date and time may be postponed by agreement among the Representatives, the Company and the Selling Stockholders or as provided in Section 9 hereof (such date and time of delivery and payment for the Securities being herein called the "Closing Date"). Delivery of the Securities shall be made to the Representatives for the respective accounts of the several Underwriters against payment by the several Underwriters through the Representatives of the respective aggregate purchase prices of the Securities being sold by the Company and each of the Selling Stockholders to or upon the order of the Company and the Selling Stockholders by wire transfer payable in same-day funds to the accounts specified by the Company and the Selling Stockholders. Delivery of the Underwritten Securities and the Option Securities shall 12 -12- be made through the facilities of The Depository Trust Company unless the Representatives shall otherwise instruct. Each Selling Stockholder will pay all applicable state transfer taxes, if any, involved in the transfer to the several Underwriters of the Securities to be purchased by them from such Selling Stockholder and the respective Underwriters will pay any additional stock transfer taxes involved in further transfers. If the option provided for in Section 2(b) hereof is exercised after the third Business Day prior to the Closing Date, the Company will deliver the Option Securities to the Representatives on the date specified by the Representatives (which shall be within three Business Days after exercise of said option) for the respective accounts of the several Underwriters, against payment by the several Underwriters through the Representatives of the purchase price thereof to or upon the order of the Company by wire transfer payable in same-day funds to the account specified by the Company. If settlement for the Option Securities occurs after the Closing Date, the Company will deliver to the Representatives on the settlement date for the Option Securities, and the obligation of the Underwriters to purchase the Option Securities shall be conditioned upon receipt of, supplemental opinions, certificates and letters confirming as of such date the opinions, certificates and letters delivered on the Closing Date pursuant to Section 6 hereof. The documents required to be delivered by this Section 3 and by Section 6 shall be delivered at the office of Counsel for the Underwriters at 80 Pine Street, 17th Floor, New York, New York 10005, on the Closing Date. 4. Offering by Underwriters. It is understood that the several Underwriters propose to offer the Securities for sale to the public as set forth in the Prospectus. 5. Agreements. (i) The Company agrees with the several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the Execution Time, and any amendment thereof, to become effective. Prior to the termination of the offering of the Securities, the Company will not file any amendment to the Registration Statement or supplement to the Prospectus or any Rule 462(b) Registration Statement unless the Company has furnished you a copy for your review prior to filing and will not file any such proposed amendment or supplement to which you reasonably object. Subject to the foregoing sentence, if the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will cause the Prospectus, properly completed, and any supplement thereto to be filed with 13 -13- the SEC pursuant to the applicable paragraph of Rule 424(b) within the time period prescribed and will provide evidence satisfactory to the Representatives of such timely filing. The Company will promptly advise the Representatives (1) when the Registration Statement, if not effective at the Execution Time, shall have become effective, (2) when the Prospectus, and any supplement thereto, shall have been filed (if required) with the SEC pursuant to Rule 424(b) or when any Rule 462(b) Registration Statement shall have been filed with the SEC, (3) when, prior to termination of the offering of the Securities, any amendment to the Registration Statement shall have been filed or become effective, (4) of any request by the SEC or its staff for any amendment of the Registration Statement, or any Rule 462(b) Registration Statement, or for any supplement to the Prospectus or for any additional information, (5) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (6) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the institution or threatening of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order or the suspension of any such qualification and, if issued, to obtain as soon as possible the withdrawal thereof. (b) If, at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event occurs as a result of which the Prospectus as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act or the rules thereunder, the Company promptly will (1) notify the Representatives of any such event; (2) prepare and file with the SEC, subject to the second sentence of paragraph (i)(a) of this Section 5, an amendment or supplement which will correct such statement or omission or effect such compliance; and (3) supply any supplemented Prospectus to you in such quantities as you may reasonably request. (c) As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement or statements of the Company and its subsidiaries which will satisfy the provisions of Section 11(a) of the Act and Rule 158 under the Act. (d) The Company will furnish to the Representatives and counsel for the Underwriters signed copies of the Registration Statement (including exhibits thereto) and to each other Underwriter a copy of the Registration Statement (without exhibits thereto) and, so long as delivery of a prospectus by an Underwriter or dealer may be 14 -14- required by the Act, as many copies of each Preliminary Prospectus and the Prospectus and any supplement thereto as the Representatives may reasonably request. (e) The Company will arrange, if necessary, for the qualification of the Securities for sale under the laws of such jurisdictions as the Representatives may designate and will maintain such qualifications in effect so long as required for the distribution of the Securities; provided, however, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to taxation or service of process in suits, in each case other than as to matters and transactions arising out of the offering or sale of the Securities, in any jurisdiction where it is not now so subject. (f) The Company will not, without the prior written consent of Salomon Smith Barney Inc., for a period of [180] days following the Execution Time, offer, sell or contract to sell, or otherwise dispose of (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock; provided, however, that (i) the Company may issue and sell Common Stock pursuant to any employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect on the Closing Date, (ii) the Company may issue Common Stock issuable upon the conversion of securities or the exercise of warrants or options outstanding at the Execution Time and (iii) the Company may issue Common Stock (or securities convertible into, or exchangeable for, shares of Common Stock) as consideration or partial consideration for acquisitions, whether by stock purchase, merger, purchase of all or substantially all of the assets of such person or otherwise, provided, further, that in connection with any issuance or issuance and sale permitted under clause (iii) of the previous proviso, the Company agrees (A) to obtain from each person receiving shares of Common Stock (or securities convertible into, or exchangeable for, shares of Common Stock) a letter substantially consistent with Exhibit A hereto and (B) not to grant any rights exercisable prior to the date [180] days after the date of this Agreement with respect to the registration under the Act of any shares of Common Stock (or securities convertible into, or exchangeable for, shares of Common Stock) issued in connection with such transaction. (g) The Company will not take, directly or indirectly (other than through the Underwriters), any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabi- 15 -15- lization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (h) The Company agrees to pay the costs and expenses relating to the following matters: (i) the preparation, printing or reproduction and filing with the SEC of the Registration Statement (including financial statements and exhibits thereto), each Preliminary Prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the Registration Statement, each Preliminary Prospectus, the Prospectus, and all amendments or supplements to any of them, as may, in each case, be reasonably requested for use in connection with the offering and sale of the Securities; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Securities, including any stamp or transfer taxes in connection with the original issuance and sale of the Securities sold by the Company; (iv) the printing (or reproduction) and delivery of this Agreement, any blue sky memorandum and all other agreements or documents printed (or reproduced) and delivered in connection with the offering of the Securities; (v) the registration of the Securities under the Exchange Act and the listing of the Securities on the Nasdaq National Market; (vi) any registration or qualification of the Securities for offer and sale under the securities or blue sky laws of the several states (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such registration and qualification); (vii) any filings required to be made with the National Association of Securities Dealers, Inc. (including filing fees and the reasonable fees and expenses of counsel for the Underwriters relating to such filings); (viii) the transportation and other expenses incurred by or on behalf of Company representatives in connection with presentations to prospective purchasers of the Securities; (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company; (x) all other costs and expenses incident to the performance by the Company of their obligations hereunder; and (xi) all fees, costs and expenses of the Selling Stockholders for which the Company is obligated pursuant to the terms of the applicable agreement granting such Selling Stockholders registration rights in the Offering. (ii) Each Selling Stockholder agrees with the several Underwriters that: (a) Such Selling Stockholder will not, without the prior written consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge or otherwise dispose of, or file (or participate in the filing of) a registration statement with the SEC in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act with respect to, any shares of capital stock of the Company or any securities convertible into or ex- 16 -16- ercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction, for a period of 180 days after the date of this Agreement, other than shares of Common Stock disposed of as bona fide gifts approved by Salomon Smith Barney Inc. or as distributions from a decedent's estate. (b) Such Selling Stockholder will not take any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (c) Such Selling Stockholder will advise you promptly, and if requested by you, will confirm such advice in writing, so long as delivery of a prospectus relating to the Securities by an underwriter or dealer may be required under the Act, of (i) any material change in the Company's condition (financial or otherwise), prospects, earnings, business or properties, (ii) any change in information in the Registration Statement or the Prospectus relating to such Selling Stockholder or (iii) any new material information relating to the Company or relating to any matter stated in the Prospectus which comes to the attention of such Selling Stockholder. 6. Conditions to the Obligations of the Underwriters. The obligations of the Underwriters to purchase the Underwritten Securities and the Option Securities, as the case may be, shall be subject to the accuracy of the representations and warranties on the part of the Company and the Selling Stockholders contained herein as of the Execution Time, the Closing Date and any settlement date pursuant to Section 3 hereof, to the accuracy of the statements of the Company and the Selling Stockholders made in any certificates delivered pursuant to the provisions hereof, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and to the following additional conditions: (a) If the Registration Statement has not become effective prior to the Execution Time, unless the Representatives agree in writing to a later time, the Registration Statement will become effective not later than (i) 6:00 PM New York City time on the date of determination of the public offering price, if such determination occurred at or prior to 3:00 PM New York City time on such date or (ii) 9:30 AM on the Business Day following the day on which the public offering price was determined, if such determination occurred after 3:00 PM New York City time on such date; if filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b), the Prospectus, and any such supplement, will be filed in the manner and within the time period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or threatened. 17 -17- (b) The Company shall have furnished to the Representatives the opinion of Kronish Lieb Weiner & Hellman LLP, counsel for the Company, dated the Closing Date in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) The Company has been duly incorporated and is validly existing under the laws of the State of Delaware, with corporate power and authority to own, lease and operate its assets and properties and conduct its business as described in the Prospectus and to enter into and perform its obligations under this Agreement; (ii) The authorized, and to the knowledge of such counsel based solely upon a review of the Company's stock ledger and corporate records and a certificate of the transfer agent, the issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (subject to the qualifications set forth therein); the capital stock of the Company conforms in all material respects to the description thereof contained in the Prospectus; the outstanding shares of Common Stock (including the Securities being sold hereunder by the Selling Stockholders) have been duly and validly authorized and issued and are fully paid and nonassessable; the Securities being sold hereunder by the Company have been duly and validly authorized, and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be fully paid and nonassessable; the Securities being sold hereunder are duly listed, and admitted and authorized for trading, subject to official notice of issuance and evidence of satisfactory distribution, on the Nasdaq National Market; the certificates for the Securities are in valid and sufficient form; the holders of outstanding shares of capital stock of the Company are not entitled to preemptive or other rights to subscribe for the Securities or, if entitled to any such rights, have effectively waived such rights; and, to the knowledge of such counsel except as set forth in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or rights to convert any obligations into or exchange any securities for, shares of capital stock of or ownership interests in the Company are outstanding; (iii) The Registration Statement has become effective under the Act; any required filing of the Prospectus, and any supplements thereto, pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued, no proceedings for that purpose have been instituted or threatened and the Registration State- 18 -18- ment and the Prospectus (other than the financial statements and related notes, the financial statement schedules and other financial and statistical information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the rules thereunder; (iv) This Agreement has been duly authorized, executed and delivered by the Company; (v) No consent, approval, authorization, license, qualification or order of or filing or registration with, any court or governmental or regulatory agency or body of the United States or the State of New York or under the General Corporation Law of the State of Delaware is required for the execution and delivery by the Company of this Agreement or for the issue and sale of the Securities or the consummation by the Company of any of the transactions contemplated herein, except (A) such as have been obtained under the Act, (B) such as may be required under the "blue sky" laws of any jurisdiction in connection with the purchase and distribution of the Securities by the Underwriters in the manner contemplated herein and in the Prospectus (as to which such counsel need express no opinion), (C) under the Rules and Regulations of the FCC ("FCC Rules") or under any rules or regulations of any State regulatory commissions ("State Rules") responsible for the regulation of cable/telecommunications services (as to which such counsel need express no opinion) and (D) such as have been obtained or made, as the case may be; (vi) The issuance, sale and delivery of the Securities, the execution, delivery and performance by the Company of this Agreement (in each case assuming due authorization and execution by each party other than the Company) and the consummation by the Company of the transactions contemplated hereby and the compliance by the Company with the terms of the foregoing do not, will not, conflict with or constitute or result in a breach or violation by the Company or any of the Subsidiaries of (A) any provision of the Certificate of Incorporation or By-laws of the Company, (B) any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) by the Company, or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any Subsidiary under any material agreements or instruments (excluding any licenses or authorizations granted under the FCC Rules or State Rules, as to which such counsel need express no opinion) known to such counsel or (C) any law, statute, rule, or regulation (ex- 19 -19- cept for the FCC Rules and State Rules, as to which such counsel need express no opinion) of the United States or the State of New York or under the General Corporation Law of the State of Delaware or any order, decree or judgment known to such counsel to be applicable to the Company or any Subsidiary, of any court or governmental or regulatory agency or body or arbitrator in the United States or the States of New York or Delaware; (vii) The statements in the Prospectus under the headings "Prospectus Summary -- The Offering", "Description of Capital Stock," and "Certain Relationships and Related Transactions," insofar as such statements purport to summarize certain provisions of the Offering, the Company's authorized and outstanding capital stock and certain agreements to which the Company is a party, provide a fair summary of such provisions of such agreements and instruments; (viii) Neither the Company nor any of the Subsidiaries is and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Prospectus, will be an "investment company" or a company "controlled by" or required to register as an investment company as such terms are defined in the Investment Company Act of 1940, as amended, and the rules and regulations thereunder; (ix) The statements in the Prospectus under the caption "Certain Federal Income Tax Considerations" provide a fair summary of the matters therein described; and (x) Except for Securities included by Selling Stockholders in the Registration Statement and for rights that have been waived or have failed to be exercised in accordance with the terms thereof, no holders of securities of the Company have rights to require the registration of such securities under the Registration Statement. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent certified public accountants of the Company and the Representatives and their representatives, at which the contents of the Prospectus and the Registration Statement and related matters were discussed and, although such counsel has not undertaken to investigate or verify independently, and do not assume any responsibility for, the accuracy, completeness or fairness of the statements contained in the Registration Statement (except as indicated above), on the basis of the foregoing, they have no reason to believe that at the Effective Date or at the Execution Time the Registration Statement contained or contains an untrue statement of a material fact or omitted or omits to state 20 -20- a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that the Prospectus as of its date and on the Closing Date included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (except, in each case, such counsel need express no comment as to the financial statements and related notes, the financial statement schedules and other financial and statistical data included therein). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the laws of the State of New York, the general corporate laws of the State of Delaware or the laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to Counsel for the Representatives, including Goldberg, Godles, Wiener & Wright and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. All references in this Section 6(b) to the Prospectus shall be deemed to include any amendment or supplement thereto at the Closing Date. The opinion of such counsel shall be rendered to the Underwriters at the request of the Company and shall so state therein. (c) The Company shall have furnished to the Representatives the opinion of Michael Katzenstein, Vice President and General Counsel of the Company, dated the Closing Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) The Company has been duly incorporated and each of the Company and the Subsidiaries is validly existing as a corporation or limited partnership in good standing under the laws of the jurisdiction in which it is organized, with full power and authority to own its properties and conduct its business as described in the Prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases material properties or conducts material business, except where the failure be in good standing or to so qualify would not have a Material Adverse Effect; (ii) All the outstanding shares of capital stock of the Company and each Subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and all outstanding shares of capital stock of the Sub- 21 -21- sidiaries are owned by the Company either directly or through other Subsidiaries free and clear of any security interests, liens or encumbrances; (iii) The issuance, sale and delivery of the Securities, the execution, delivery and performance by the Company of this Agreement (in each case assuming due authorization and execution by each party other than the Company) and the consummation by the Company of the transactions contemplated hereby and the compliance by the Company with the terms of the foregoing do not, and, at the Closing Date, will not, conflict with or constitute or result in a breach or violation by the Company or any of the Subsidiaries of (A) any provision of the Certificate of Incorporation or By-laws of the Company or any of the Subsidiaries, (B) any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) by the Company or any of the Subsidiaries, or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness under, or result in the creation of imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries under any material agreements or instruments known to such counsel or (C) any order, decree or judgment known to such counsel to be applicable to the Company or any Subsidiary, of any court or governmental or regulatory agency or body or arbitrator in the United States or the States of New York or Delaware; (iv) The statements in the Prospectus under the headings "Risk Factors -- Risks Associated with Rights of Entry", and "Business -- Legal Proceedings" fairly summarize the legal matters therein described; (v) To the knowledge of such counsel (no search of court or administrative records having been made), no material legal or governmental or regulatory proceedings (including proceedings by or before the FCC) are pending to which the Company or any of the Subsidiaries is a party or to which the business of the Company or any of the Subsidiaries is subject that is not described or reflected in the Registration Statement or Prospectus as required, and no such proceedings have been threatened against the Company or any of the Subsidiaries or with respect to any of their assets; and there is no material contract, agreement or other document not described or referred to in the Registration Statement or Prospectus; (vi) To such counsel's knowledge (no search of court or administrative records having been made), (i) no application, action, complaint, investigation or proceeding is pending or directly threatened that is likely to result in the denial of any pending application for the renewal, modification or assignment of any of the licenses, special temporary authorizations, conditional li- 22 -22- censes, construction permits and other authorizations issued by the FCC in favor of the Company and the Subsidiaries (collectively, "FCC Authorizations") for the conduct of their business as described in the Prospectus, and (ii) except for proceedings of general applicability, there are no proceedings or actions pending that could result in the revocation, materially adverse modification or suspension of any of the FCC Authorizations, the issuance of a cease and desist order, or the imposition of any administrative or judicial sanction, including but not limited to a monetary forfeiture, except in each case as disclosed in the Prospectus or such as, individually or in the aggregate, would not have a Material Adverse Effect; and (vii) To such counsel's knowledge, each FCC report, registration, certification and notice required to be filed at the FCC and relating to any of the FCC Authorizations or the Company and the Subsidiaries, including but not limited to annual Equal Employment Opportunity Reports, has been timely filed, except as disclosed in the Prospectus or for such reports the non-filing or failure to timely file of which individually or in the aggregate would not have a Material Adverse Effect. In addition, such counsel shall state that he has no reason to believe that at the Effective Date or at the Execution Time the Registration Statement contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading or that the Prospectus as of its date and on the Closing Date included or includes any untrue statement of a material fact or omitted or omits to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (except, in each case, such counsel need express no comment as to the financial statements and related notes, the financial statement schedules and other financial and statistical data included therein). In rendering such opinion, such counsel may rely as to matters involving the application of laws of any jurisdiction other than the laws of the State of New York or the laws of the United States, to the extent he deems proper and specified in such opinion, upon the opinion of other counsel of good standing whom he believes to be reliable and who are satisfactory to Counsel for the Underwriters. All references in this Section 6(c) to the Prospectus shall be deemed to include any amendment or supplement thereto at the Closing Date. The opinion of such counsel shall be rendered to the Underwriters at the request of the Company and shall so state therein. 23 -23- (d) The Company shall have furnished to the Underwriters the opinion of Goldberg, Godles, Wiener & Wright, FCC counsel for the Company, dated the Closing Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: (i) To such counsel's knowledge, the Company and the Subsidiaries are in compliance in all material respects with each of the FCC Authorizations for the conduct of their business as described in the Prospectus and all such FCC Authorizations represent all FCC Authorizations necessary for the conduct of the business of the Company and the Subsidiaries as presently conducted and described in the Prospectus; (ii) To such counsel's knowledge, (i) except as set forth on a schedule to such opinion letter, no application, action or proceeding is pending for the renewal, modification or assignment of any of the FCC Authorizations, (ii) no application, action, complaint, investigation or proceeding is pending or directly threatened that is likely to result in the denial of any such application and (iii) except for proceedings of general applicability, there are no proceedings or actions pending that are likely to result in the revocation, materially adverse modification or suspension of any of the FCC Authorizations, the issuance of a cease and desist order, or the imposition of any administrative or judicial sanction, including but not limited to a monetary forfeiture; and all renewal applications required to be filed by the FCC's Rules have been filed; (iii) To such counsel's knowledge, each FCC report, registration, certification and notice required to be filed at the FCC and relating to any of the FCC Authorizations or the Company and the Subsidiaries, including but not limited to annual Equal Employment Opportunity Reports, has been timely filed, except for such reports the non-filing of which individually or in the aggregate would not have a Material Adverse Effect; (iv) The execution, delivery and performance by the Company of its obligations under this Agreement and the transactions contemplated herein, did not or will not result in a violation of the Communications Act, the Cable Acts and the Telecommunications Act (each as defined in the Registration Statement) or any order, rule or regulation of the FCC; (v) No consent, approval, authorization, order or registration of or with the FCC is required under the Communications Act, the Cable Acts, the Telecommunications Act or the rules and regulations of the FCC for the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement; 24 -24- (vi) Other than matters described in the Prospectus and except as to any other matters relating to the multichannel television and telecommunications industries in general, such counsel does not know of any proceedings threatened or pending before the FCC against or involving the properties, businesses or franchises of the Company which could reasonably be expected to have a Material Adverse Effect; and (vii) The statements in the Prospectus under the captions "Risk Factors -- Regulation", "--Risks Associated with Telecommunications Strategy", "--Uncertainties Related to the Availability of Radio Spectrum", "--Foreign Ownership Restrictions" and "--Risks Associated with Rights of Entry" and "Business -- Regulation" insofar as such statements summarize applicable provisions of the Communications Act, the Cable Acts and the Telecommunications Act and the published orders, rules and regulations of the FCC promulgated thereunder are accurate summaries in all material respects of the provisions purported to be summarized under such captions in the Prospectus; and the statutes and regulations summarized in such captions are statutes and regulations enforced or promulgated by the FCC that are material to the Company's business as described in the Prospectus. In rendering such opinion, such counsel may state that it expresses no opinion with respect to any matters other than those arising under the Communications Act, the Telecommunications Act and the Cable Acts and the published rules and regulations promulgated thereunder by the FCC, and may rely as to all matters of fact relevant to such opinion on certificates and written statements of officers and employees of the Company; provided, however, that all such certificates and statements shall be satisfactory to the Representatives in all material respects and attached to such counsel's opinion. In addition, counsel may note that item (v) above is qualified by the requirement to file certain corporate and loan instruments with the FCC within 30 days of the Closing Date. (e) Each Selling Stockholder shall have furnished to the Representatives the opinion of counsel for such Selling Stockholder, in each case dated the Closing Date and in form and substance reasonably satisfactory to the Representatives. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the State of New York or Delaware or the Federal laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to counsel for the Underwriters, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Selling Stockholders and public officials. The opinion of such 25 -25- counsel shall be rendered to the Underwriters at the request of the Company and shall so state therein. (f) The Representatives shall have received from Counsel for the Underwriters, such opinion or opinions, dated the Closing Date and addressed to the Representatives, with respect to the issuance and sale of the Securities, the Registration Statement, the Prospectus (together with any supplement thereto) and other related matters as the Representatives may reasonably require, and the Company and each Selling Stockholder shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. The opinion or opinions of such counsel shall be rendered to the Underwriters at the request of the Company and shall so state therein. (g) The Company shall have furnished to the Representatives a certificate of the Company, signed by the Chairman of the Board or the President and the principal financial or accounting officer of the Company, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Registration Statement, the Prospectus, any supplements to the Prospectus and this Agreement and that: (i) the representations and warranties of the Company in this Agreement are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to the Company's knowledge, threatened; and (iii) since the date of the most recent financial statements included in the Prospectus (exclusive of any supplement thereto), there has been no material adverse effect on the condition (financial or otherwise), prospects, earnings, business or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). 26 -26- (h) Each Selling Stockholder shall have furnished to the Representatives a certificate, signed by an authorized officer, partner, trustee or similar person of such Selling Stockholder (or by such Selling Stockholder if any individual), dated the Closing Date, to the effect that the signer of such certificate have carefully examined the Registration Statement, the Prospectus, any supplement to the Prospectus and this Agreement and that the representations and warranties of such Selling Stockholder in this Agreement are true and correct in all material respects on and as of the Closing Date to the same effect as if made on the Closing Date. (i) At the Execution Time and at the Closing Date, Deloitte & Touche LLP shall have furnished to the Representatives a letter or letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Representatives, confirming that they are independent accountants within the meaning of the Act and the Exchange Act and the applicable published rules and regulations thereunder and Rule 101 of the Code of Professional Conduct of the American Institute of Certified Public Accountants ("AICPA") and containing statements and information of the type ordinarily included in accountants' "comfort letters" to Representatives with respect to financial statements and certain financial information contained in the Prospectus, in form and substance satisfactory to Counsel for the Underwriters. Deloitte & Touche LLP shall have also furnished to the Representatives a letter stating that the Company's system of internal accounting controls taken as a whole is sufficient to meet the broad objectives of internal accounting control insofar as those objectives pertain to the prevention or detection of errors or irregularities in amounts that would be material in relation to the financial statements of the Company and its subsidiaries. All references in this Section 6(i) to the Registration Statement shall be deemed to include any amendment or supplement thereto at the date of the letter. (j) Subsequent to the Execution Time or, if earlier, the dates as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (i) of this Section 6 or (ii) any change, or any development involving a prospective change, in or affecting the condition (financial or otherwise), earnings, business or properties of the Company and its subsidiaries taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto) the effect of which, in 27 -27- any case referred to in clause (i) or (ii) above, is, in the sole judgment of the Representatives, so material and adverse as to make it impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto). (k) The Securities shall have been approved for listing and admitted and authorized for trading on the Nasdaq National Market, and satisfactory evidence of such actions shall have been provided to the Representatives. (l) At the Execution Time, the Company shall have furnished to the Representatives a letter substantially in the form of Exhibit A hereto from each officer and director of the Company and each of the stockholders listed on Schedule III hereto addressed to the Representatives. (m) Prior to or simultaneously with the Closing Date, (i) the Company shall have effected a 5:1 stock split of the Common Stock; and (ii) all outstanding shares of Class C Common of the Company shall have converted into shares of Common Stock. (n) Prior to or simultaneously with the Closing Date, the Company, VPC and GVL shall have entered into the Conversion and Exchange Agreement (as defined in the Prospectus) in form and substance satisfactory to the Representatives, pursuant to which (i) all the Series A Preferred Stock will be converted into Class B Common, (ii) all the Class B Common issuable upon conversion of the Series A Preferred Stock and all other Class B Common held by VPC and GVL will be converted into shares of Common Stock. Such Conversion and Exchange Agreement shall be in full force and effect without waiver of any term thereof. (o) Prior to the Closing Date, the Company and the Selling Stockholders shall have furnished to the Representatives such further information, certificates and documents as the Representatives may reasonably request. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Representatives and counsel for the Underwriters, this Agreement and all obligations of the Underwriters hereunder may be cancelled at, or at any time prior to, the Closing Date by the Representatives. Notice of such cancellation shall be given to the Company and each Selling Stockholder in writing or by telephone or facsimile confirmed in writing. 28 -28- The several obligations of the Underwriters to purchase Option Securities hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 6, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (b) through (k) and paragraphs (m) and (n) shall be dated the Option Closing Date in question and the opinions called for shall be revised to reflect the sale of Option Securities. 7. Reimbursement of Underwriters' Expenses. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 6 hereof is not satisfied, because of any termination pursuant to Section 10 hereof or because of any refusal, inability or failure on the part of the Company or any Selling Stockholder to perform any agreement herein or comply with any provision hereof other than by reason of a default by any of the Underwriters, the Company will reimburse the Underwriters severally through Salomon Smith Barney Inc. on demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. If the Company is required to make any payments to the Underwriters under this Section 7 because of any Selling Stockholder's refusal, inability or failure to satisfy any condition to the obligations of the Underwriters set forth in Section 6, the Selling Stockholders pro rata in proportion to the percentage of Securities to be sold by each shall reimburse the Company on demand for all amounts so paid. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Underwriter, the directors, officers, employees and agents of each Underwriter and each person who controls any Underwriter within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Securities as originally filed or in any amendment thereof, or in any Preliminary Prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in 29 -29- conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives specifically for inclusion therein and provided further, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Prospectus which is corrected or contained, as the case may be, in the Prospectus and the Underwriters through the Representatives fail to deliver the Prospectus. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Selling Stockholder severally agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, each Underwriter, the directors, officers, employees and agents of each Underwriter and each person who controls the Company or any Underwriter within the meaning of either the Act or the Exchange Act and each other Selling Stockholder, if any, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with reference to written information furnished to the Company by or on behalf of such Selling Stockholder specifically for inclusion in the documents referred to in the foregoing indemnity. Notwithstanding any other provision herein, the expense reimbursement and indemnification liability of each Selling Stockholder hereunder shall be limited to the amount equal to the net proceeds received by such Selling Stockholder from the public offering of the Common Stock sold by such Selling Stockholder to the Underwriters. This indemnity agreement will be in addition to any liability which any Selling Stockholder may otherwise have. (c) Each Underwriter severally and not jointly agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, and each person who controls the Company within the meaning of either the Act or the Exchange Act and each Selling Stockholder, to the same extent as the foregoing indemnity to each Underwriter, but only with reference to written information relating to such Underwriter furnished to the Company by or on behalf of such Underwriter through the Representatives specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any Underwriter may otherwise have. The Company and each Selling Stockholder acknowledge that the statements set forth in the last paragraph of the cover page regarding delivery of the Securities and the last four paragraphs under the heading "Underwriting" and the sentences related to concessions and reallowance under the heading "Underwriting" in any Preliminary Prospectus and the Prospectus constitute the only information furnished in writing by or on behalf of the several Underwriters for inclusion in any Preliminary Prospectus or the Prospectus. 30 -30- (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a), (b) or (c) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a), (b) or (c) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ one additional and separate counsel (including one additional and separate local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (including local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (e) In the event that the indemnity provided in paragraph (a), (b) or (c) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company, the Selling Stockholders and the Underwriters agree to con- 31 -31- tribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company, one or more of the Selling Stockholders and one or more of the Underwriters may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company, by the Selling Stockholders and by the Underwriters from the offering of the Securities; provided, however, that in no case shall any Underwriter (except as may be provided in any agreement among underwriters relating to the offering of the Securities) be responsible for any amount in excess of the underwriting discount or commission applicable to the Securities purchased by such Underwriter hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company, the Selling Stockholders and the Underwriters shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company, of the Selling Stockholders and of the Underwriters in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company and by the Selling Stockholders shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses) received by each of them, and benefits received by the Underwriters shall be deemed to be equal to the total underwriting discounts and commissions, in each case as set forth on the cover page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether any untrue or any alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information provided by the Company, the Selling Stockholders on the one hand or the Underwriters on the other, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (e), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls an Underwriter within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of an Underwriter shall have the same rights to contribution as such Underwriter, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (e). 32 -32- 9. Default by an Underwriter. If any one or more Underwriters shall fail to purchase and pay for any of the Securities agreed to be purchased by such Underwriter or Underwriters hereunder and such failure to purchase shall constitute a default in the performance of its or their obligations under this Agreement, the remaining Underwriters shall be obligated severally to take up and pay for (in the respective proportions which the amount of Securities set forth opposite their names in Schedule I hereto bears to the aggregate amount of Securities set forth opposite the names of all the remaining Underwriters) the Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase; provided, however, that in the event that the aggregate amount of Securities which the defaulting Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of the aggregate amount of Securities set forth in Schedule I hereto, the remaining Underwriters shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Securities, and if such nondefaulting Underwriters do not purchase all the Securities, this Agreement will terminate without liability to any nondefaulting Underwriter, the Selling Stockholders or the Company. In the event of a default by any Underwriter as set forth in this Section 9, the Closing Date shall be postponed for such period, not exceeding five Business Days, as the Representatives shall determine in order that the required changes in the Registration Statement and the Prospectus or in any other documents or arrangements may be effected. Nothing contained in this Agreement shall relieve any defaulting Underwriter of its liability, if any, to the Company, the Selling Stockholders and any nondefaulting Underwriter for damages occasioned by its default hereunder. 10. Termination. This Agreement shall be subject to termination in the absolute discretion of the Representatives, by notice given to the Company prior to delivery of and payment for the Securities, if prior to such time (i) trading in the Company's Common Stock shall have been suspended by the SEC or the Nasdaq National Market or trading in securities generally on the New York Stock Exchange or the Nasdaq National Market shall have been suspended or limited or minimum prices shall have been established on either such Exchange or National Market, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war or other calamity or crisis the effect of which on financial markets is such as to make it, in the sole judgment of the Representatives, impractical or inadvisable to proceed with the offering or delivery of the Securities as contemplated by the Prospectus (exclusive of any supplement thereto). 11. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers, of each Selling Stockholder and of the Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter, any Selling Stockholder or the Company or any of the officers, directors or controlling persons referred to in Section 8 hereof, and will survive delivery of and 33 -33- payment for the Securities. The provisions of Sections 7 and 8 hereof shall survive the termination or cancellation of this Agreement. 12. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Representatives, will be mailed, delivered or telefaxed to the Salomon Smith Barney Inc., General Counsel, Investment Banking Division (fax no.: (212) 816-7912) and confirmed to the General Counsel, Investment Banking Division at Salomon Smith Barney Inc., at 388 Greenwich Street, New York, New York 10013, Attention: General Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed to OpTel, Inc., 1111 W. Mockingbird Lane, Dallas, Texas 75247, Attention: Michael Katzenstein, Vice President, Legal Affairs and General Counsel, with a copy to Ralph J. Sutcliffe, Esq., at Kronish Lieb Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036-7798; or if sent to any Selling Stockholder, will be mailed, delivered or telefaxed and confirmed to it at the address set forth in Schedule II hereto. 13. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 8 hereof, and no other person will have any right or obligation hereunder. 14. APPLICABLE LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THEREOF. 15. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original, but all such counterparts will together constitute one and the same instrument. 16. Headings. The section headings used herein are for convenience only and shall not affect the construction hereof. 17. Definitions. The terms which follow, when used in this Agreement, shall have the meanings indicated. "Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Business Day" shall mean any day other than a Saturday, a Sunday or a legal holiday or a day on which banking institutions or trust companies are authorized or obligated by law to close in The City of New York. 34 -34- "Effective Date" shall mean each date and time that the Registration Statement, any post-effective amendment or amendments thereto and any Rule 462(b) Registration Statement became or become effective. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. "Execution Time" shall mean the date and time that this Agreement is executed and delivered by the parties hereto. "Preliminary Prospectus" shall mean any preliminary prospectus referred to in paragraph 1(i)(a) above and any preliminary prospectus included in the Registration Statement at the Effective Date that omits Rule 430A Information. "Prospectus" shall mean the prospectus relating to the Securities that is first filed pursuant to Rule 424(b) after the Execution Time or, if no filing pursuant to Rule 424(b) is required, shall mean the form of final prospectus relating to the Securities included in the Registration Statement at the Effective Date. "Registration Statement" shall mean the registration statement referred to in paragraph 1(i)(a) above, including exhibits and financial statements, as amended at the Execution Time (or, if not effective at the Execution Time, in the form in which it shall become effective) and, in the event any post-effective amendment thereto or any Rule 462(b) Registration Statement becomes effective prior to the Closing Date, shall also mean such registration statement as so amended or such Rule 462(b) Registration Statement, as the case may be. Such term shall include any Rule 430A Information deemed to be included therein at the Effective Date as provided by Rule 430A. "Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the Act. "Rule 430A Information" shall mean information with respect to the Securities and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A. "Rule 462(b) Registration Statement" shall mean a registration statement and any amendments thereto filed pursuant to Rule 462(b) relating to the offering covered by the initial registration statement. [Signature Pages Follow] 35 S-1 If the foregoing is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this letter and your acceptance shall represent a binding agreement among the Company, the several Underwriters and the Selling Stockholders. Very truly yours, OpTel, Inc. By: ---------------------------------------- Name: Title: By: ---------------------------------------- Name: Title: Attorney-in-Fact for the Selling Stockholders By: ---------------------------------------- Name: Michael E. Katzenstein Title: Attorney-in-Fact 36 S-2 The foregoing Agreement is hereby confirmed and accepted as of the date first above written. Salomon Smith Barney Inc. Goldman, Sachs & Co. Bear, Stearns & Co. Inc. CIBC World Markets Corp. By: Salomon Smith Barney Inc. By: ------------------------------------ Name: Title: For themselves and the other several Underwriters named in Schedule I to the foregoing Agreement. 37 SCHEDULE I
NUMBER OF UNDERWRITTEN UNDERWRITERS SECURITIES TO BE PURCHASED - ------------ -------------------------- Salomon Smith Barney Inc. Goldman, Sachs & Co. Bear, Stearns & Co. Inc. CIBC World Markets Corp. -------------------------- Total........................... ==========================
38 SCHEDULE II
NUMBER OF UNDERWRITTEN SELLING STOCKHOLDERS: SECURITIES TO BE SOLD - --------------------- ---------------------- [name] [address, fax no.]................................ [name] [address, fax no.]................................ ---------------------- Total........................... ======================
39 SCHEDULE III STOCKHOLDERS FURNISHING LOCK-UP AGREEMENTS Le Groupe Videotron Ltee Caisse de depot et placement du Quebec [others to come] 40 [FORM OF LOCK-UP AGREEMENT] EXHIBIT A [LETTERHEAD OF OFFICER, DIRECTOR OR MAJOR STOCKHOLDER OF CORPORATION] OpTel, Inc. Public Offering of Common Stock , 1999 Salomon Smith Barney Inc. Goldman, Sachs & Co. Bear, Stearns & Co. Inc. CIBC Oppenheimer Corp. As Representatives of the several Underwriters, c/o Salomon Smith Barney Inc. 388 Greenwich Street New York, New York 10013 Ladies and Gentlemen: This letter is being delivered to you in connection with the proposed Underwriting Agreement (the "Underwriting Agreement"), among OpTel, Inc., a Delaware corporation (the "Company"), the selling stockholders named therein and each of you as representative[s] of a group of Underwriters named therein, relating to an underwritten public offering of Class A Common Stock, $0.01 par value per share (the "Common Stock"), of the Company. In order to induce you and the other Underwriters to enter into the Underwriting Agreement, the undersigned will not, without the prior written consent of Smith Barney Inc., offer, sell, contract to sell, pledge or otherwise dispose of, or file (or participate in the filing of) a registration statement with the Securities and Exchange Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder with respect to, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for such capital stock, or publicly announce an intention 41 -2- to effect any such transaction, for a period of 180 days after the date of this Agreement, other than (i) shares of Common Stock disposed of as bona fide gifts provided the transferee agrees to be bound by the terms hereof, (ii) shares of Common Stock acquired in the public market after the consummation of the Offering and (iii) transfers to affiliates of the undersigned provided that such affiliate transferee agrees to be bound by the terms hereof. If for any reason the Underwriting Agreement shall be terminated prior to the Closing Date (as defined in the Underwriting Agreement), the agreement set forth above shall likewise be terminated. Yours very truly, [ ] By: ----------------------------------- Name: Title: Address: EX-3.1(A) 3 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1(a) AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF OPTEL, INC. -------------------- Under Section 245 of the General Corporation Law -------------------- The undersigned DOES HEREBY CERTIFY as follows: I. The name of the Corporation is OPTEL, INC. (the "Corporation"). II. The date of filing of the Corporation's original Certificate of Incorporation with the Secretary of State of the State of Delaware was July 1, 1994. A Restated Certificate of Incorporation of the Corporation (the "Restated Certificate of Incorporation") was filed with the Secretary of State of the State of Delaware on December 19, 1994. III. The Restated Certificate of Incorporation, as heretofore amended, of the Corporation is amended hereby to increase the total number of authorized shares of the Corporation by increasing (i) the total number of shares of the Corporation's Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), from 8,000,000 shares to 180,000,000 shares, (ii) the total number of shares of the Corporation's Class B Common Stock, par value $.01 per share (the "Class B Common Stock"), from 6,000,000 shares to 60,000,000 shares, (iii) the total number of shares of the Corporation's Class C Common Stock, par value $.01 per share (the "Class C Common Stock"), from 300,000 to 3,000,000, and (iv) the total number of shares of the Corporation's Preferred Stock, par value $.01 per share, from 1,000,000 shares to 10,000,000 shares, as set forth in the Amended and Restated Certificate of Incorporation, which is attached hereto as Exhibit A, along with the Certificates of Designation of Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of the Corporation's 9.75% Series A Preferred Stock, par value $.01 per 2 share, and the Corporation's 8% Series B Preferred Stock, par value $.01 per share, respectively. IV. This Amended and Restated Certificate of Incorporation was duly adopted by the Board of Directors and authorized by written consent of the Corporation's stockholders pursuant to Sections 228 and 242 of the General Corporation Law of the State of Delaware and is effective as of __________, 1999 at ___ P.M. Delaware time. IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation of the Corporation has been signed, and the statements made herein affirmed as true under the penalties of perjury, this ___ day of _____, 1999. ATTEST: - ---------------------- ----------------------- Michael E. Katzenstein Louis Brunel Secretary President 2 3 EXHIBIT A AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF OPTEL, INC. a Delaware corporation ONE: The name of the Corporation is: OpTel, Inc. (the "Corporation"). TWO: The address of the Corporation's registered office in the State of Delaware shall be 15 East North Street, in the City of Dover, County of Kent, State of Delaware 19901. The name of the Corporation's registered agent in the State of Delaware is United Corporate Services, Inc. THREE: The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law (the "DGCL"). FOUR: The total number of shares of all classes of stock which the Corporation shall have authority to issue is two hundred fifty three million (253,000,000) shares divided into the following classes: (i) One hundred eighty million (180,000,000) shares of Class A Common Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class A Common Stock"); (ii) Sixty million (60,000,000) shares of Class B Common Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class B Common Stock"); (iii) Three million (3,000,000) shares of Class C Common Stock, par value of one cent ($.01) per share (hereinafter referred to as "Class C Common Stock"); and (iv) Ten million (10,000,000) shares of Preferred Stock, par value of one cent ($.01) per share (hereinafter referred to as "Preferred Stock"). A-1 4 The Corporation's Class A Common Stock, Class B Common Stock and Class C Common Stock are referred to hereinafter collectively as the "Common Stock". A. Powers and Rights of Holders of Class A Common Stock, Class B Common Stock and Class C Common Stock. 1. Except as stated in Sections 2 and 3 of this Subpart A of Article FOUR, the Class A Common Stock, Class B Common Stock and Class C Common Stock shall be identical in all respects and shall have equal powers, preferences, rights and privileges. 2. Except as may be otherwise required by law, and subject to the provisions of any series of Preferred Stock at the time outstanding, the holders of the Class A Common Stock and the Class B Common Stock issued and outstanding shall have and possess the exclusive right to notice of stockholders' meetings and the exclusive voting rights and powers, whether at a meeting of stockholders or in connection with any action taken by written consent. Except as otherwise may be required by law, the holders of Class C Common Stock are not entitled to notice of, or to vote at, stockholders' meetings or in connection with any action taken by written consent. 3. Each holder of the Class A Common Stock issued and outstanding shall be entitled to one (1) vote for each share of Class A Common Stock registered in such holder's name on the books of the Corporation, and each holder of the Class B Common Stock issued and outstanding shall be entitled to ten (10) votes for each share of Class B Common Stock registered in such holder's name on the books of the Corporation. Except as may be otherwise required by law, the holders of the Class A Common Stock and Class B Common Stock shall vote together as a single class. 4. Any direct or indirect transfer of issued and outstanding shares of Class B Common Stock other than to a Permitted Transferee (as defined herein) shall result in the automatic conversion of the shares of Class B Common Stock being transferred into a like number of shares of Class A Common Stock. No purported transfer of shares of Class B Common Stock shall be effective unless and until the transferor has surrendered to the Corporation, at its office or agency maintained for that purpose, the certificates representing the shares of Class B Common Stock to be transferred, which certificates shall be duly endorsed or accompanied by executed stock powers, with the signatures appropriately guaranteed. All such certificates shall be accompanied by written notice of the holder's intention to transfer the shares, including a statement of the number of shares of Class B Common Stock to be transferred and, if A-2 5 applicable, converted and the name or names and address or addresses in which the certificate or certificates for shares of Class B Common Stock or Class A Common issuable upon such conversion Stock, as the case may be, shall be issued and, if required, funds for the payment of any applicable transfer taxes. The Corporation, as soon as practicable thereafter, will deliver at said office to the transferee of converted shares of Class B Common Stock, or to any nominee or designee of such transferee, a certificate or certificates for the number of full shares of Class A Common Stock issuable upon such conversion and, in the event that the transferor is transferring less than the aggregate number of shares represented by the certificates surrendered, a certificate or certificates for the number of full shares of Class B Common Stock not being transferred. Shares of Class B Common Stock shall be deemed to have been converted as of the date of the surrender of the shares for transfer to a non-Permitted Transferee and conversion as hereinbefore provided, and the person or persons in whose name Class A Common Stock is issuable upon such conversion shall be treated for all purposes as the record holder or holders of such Class A Common Stock on such date. Shares of Class B Common Stock so converted shall be returned to the status of authorized and unissued shares of Class B Common Stock. The Corporation shall at all times reserve for issuance a number of shares of Class A Common Stock (which may include Class A Common Stock held by the Corporation as treasury stock) which shall be sufficient for issuance upon conversion of all of the then outstanding Class B Common Stock pursuant to this Section 4 or otherwise. The Corporation as a condition to the transfer or the registration of transfer of shares of Class B Common Stock to a purported Permitted Transferee, may require the furnishing of such affidavits or other proof as it reasonably deems necessary to establish that such transferee is a Permitted Transferee. For purposes hereof (1) "Permitted Transferee" shall mean a Person who acquires shares of Class B Common Stock otherwise than in a transaction (a) on a securities exchange or public quotation system, whether or not registered as such under the Securities and Exchange Act of 1934, as amended (or any successor statute (the "Exchange Act"), (b) effected to or through a Person acting as a broker or dealer (whether or not registered as such under the Exchange Act or any foreign system of registration or regulation), (c) pursuant to a registration statement under the Securities Act of 1933, as amended (or any successor or similar rule) (the "Securities Act"), or (e) that is (or if it occurred in the United States, would be) required to be registered under the Securities Act; (2) "Affiliate " shall mean, with respect to any Person, another Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person, provided, however, that no employee of the Corporation or any of its subsidiaries shall be deemed to be an Affiliate solely by reason of his or her capacity as an employee, or by reason of any employment agreement; and (3) A-3 6 "Person" shall mean and include an individual, a partnership, a limited liability company, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. All certificates evidencing shares of Class B Common Stock shall be endorsed with a legend making appropriate reference to the foregoing provisions regarding automatic conversion. 5. Each holder of Class B Common Stock issued and outstanding shall be entitled, at such holder's option, to convert shares of Class B Common Stock registered on the books of the Corporation in such holder's name into a like number of shares of Class A Common Stock. If VPC Corporation ("VPC") and its Affiliates shall at any time elect to convert all of the shares of Class B Common Stock then issued and outstanding and held by them into shares of Class A Common Stock, whether by transfer pursuant to Section 4 or by conversion pursuant to this Section 5, all of the other shares of Class B Common Stock issued and outstanding as of the date of such conversion shall be automatically converted into shares of Class A Common Stock on a share for share basis and shall otherwise cease to be outstanding, effective as of the date of such transfer and/or conversion by VPC and its Affiliates. All Persons registered as holders of shares of Class B Common Stock on the date of such conversion shall be treated for all purposes as the record holders of an equal number of shares of Class A Common Stock on such date. The Corporation, as soon as practicable thereafter, will deliver to each of the holders of the shares of Class B Common Stock converted into shares of Class A Common Stock a certificate or certificates for the Class A Common Stock against receipt from such holder of the certificate theretofore representing an equal number of shares of Class B Common Stock. Shares of Class B Common Stock so converted shall be returned to the status of authorized and unissued shares of Class B Common Stock. Pending delivery of certificates for shares of Class A Common Stock after such conversion, certificates for shares of Class B Common Stock so converted shall be deemed to be certificates for an equal number of shares of Class A Stock. 6. Upon any sale of Common Stock of the Corporation pursuant to a registration statement under the Securities Act, or any registration of Common Stock of the Corporation pursuant to the Exchange Act, the shares of Class C Common Stock automatically will be converted into an equal number of shares of Class A Common Stock or such other class of common equity securities of the Corporation that is registered with the Securities and Exchange Commission or is listed on a national securities exchange or otherwise subject to registration under the Exchange Act (the "Conversion Shares"), provided the terms thereof are no less favorable to holders thereof than were the terms of the shares of Class C Common Stock. The Corporation A-4 7 shall at all times reserve for issuance sufficient shares of Class A Common Stock (which may include Class A Common Stock held by the Corporation as treasury stock) or such other common equity securities, for issuance upon conversion of the Class C Common Stock. The Corporation, as soon as practicable thereafter, will deliver to the holder of the Class C Common Stock converted into the Conversion Shares a certificate or certificates for the Conversion Shares against receipt from such holder of the certificate theretofore representing an equal number of shares of Class C Common Stock. Shares of Class C Common Stock so converted shall be returned to the status of authorized and unissued shares of Class C Common Stock. 7. Dividends may be paid to the holders of the Class A Common Stock, Class B Common Stock and Class C Common Stock, as and when declared by the Board of Directors, out of any funds of the Corporation legally available for the payment of such dividends. If and when dividends on the Class A Common Stock, Class B Common Stock and Class C Common Stock are declared from time to time by the Board of Directors, whether payable in cash, in property or in shares of stock of the Corporation, the holders of the Class A Common Stock, Class B Common Stock and Class C Common Stock shall be entitled to share equally, on a per share basis, in such dividends. If shares of Class B Common Stock are paid on Class B Common Stock and shares of Class A Common Stock are paid on Class A Common Stock and shares of Class C Common Stock are paid on Class C Common Stock, in an equal amount per share of Class B Common Stock and Class A Common Stock and Class C Common Stock in proportionate amounts, such payment will be deemed to be a like dividend or other distribution. 8. Subject to the provisions of any series of Preferred Stock at the time outstanding, upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the net assets of the Corporation shall be distributed to the holders of the Class A Common Stock, Class B Common Stock and Class C Common Stock, on a pro rata basis, based on the number of shares held by each such holder, without regard to class. 9. If the Corporation shall in any manner split, subdivide, combine or reclassify any outstanding shares of a class of Common Stock, the outstanding shares of the other classes of Common Stock shall be proportionately split, subdivided, combined or reclassified in the same manner and on the same basis as the outstanding shares of the class of Common Stock that have been split, subdivided, combined or reclassified, unless a different basis has been consented to by the holders of a majority of the outstanding shares of the Class A Common Stock or Class B Common Stock, as applicable, or two-thirds of the A-5 8 outstanding shares of Class C Common Stock, to the extent any such class would be adversely affected by such action. Subject to the conversion rights of holders of Class C Common Stock, in the event of any corporate merger, consolidation, purchase or acquisition of property or stock or other reorganization in which any consideration is to be received by the holders of Class B Common Stock or the holders of Class A Common Stock, the holders of Class C Common Stock will receive the same consideration on a per share basis, except that, if such consideration shall consist in any part of voting securities (or of options or warrants to purchase voting securities, or of securities convertible into or exchangeable for voting securities), (i) the holders of Class B Common Stock may receive, on a per share basis, voting securities with ten times the number of votes per share as those voting securities to be received by the holders of Class A Common Stock (or options or warrants to purchase, or securities convertible into or exchangeable for voting securities with ten times the number of votes per share as those voting securities issuable upon the exercise of the options or warrants, or into which the convertible or exchangeable securities may be converted or exchanged, received by the holders of Class A Common Stock) and (ii) the holders of the Class C Common Stock may receive, on a per share basis, non-voting securities (or options or warrants to purchase non-voting securities or securities convertible into or exchangeable for non-voting securities). B. Preferred Stock. The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the approval of a majority of the votes entitled to be cast by the holders of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock. FIVE: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: A-6 9 A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by the DGCL or by this Amended and Restated Certificate of Incorporation or the Bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. B. The Board of Directors may adopt, amend or repeal the Bylaws of the Corporation. C. Election of directors need not be by written ballot. SIX: The officers of the Corporation shall be chosen in such a manner, shall hold their offices for such terms and shall carry out such duties as are determined solely by the Board of Directors, subject to the right of the Board of Directors to remove any officer or officers at any time with or without cause. SEVEN: No director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty by such a director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the DGCL or (iv) for any transaction from which such director derived an improper personal benefit. This Article SEVEN is also contained in Article VIII, Section 1 of the Corporation's Bylaws. No amendment to or repeal of this Article SEVEN shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the DGCL is amended hereafter to further eliminate or limit the personal liability of directors, the liability of a director of the Corporation shall be limited or eliminated to the fullest extent permitted by the DGCL, as amended. EIGHT: A. Right to Indemnification. Each person who was or is made a party to or is threatened to be made a party to or is involuntarily involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation, or is or was serving (during his or her tenure as director and/or officer) at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, A-7 10 trust or other enterprise, whether the basis of such Proceeding is an alleged action or inaction in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the DGCL (or other applicable law), as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection with such Proceeding. Such director or officer shall have the right to be paid by the Corporation for expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, if the DGCL (or other applicable law) requires, the payment of such expenses in advance of the final disposition of any such Proceeding shall be made only upon receipt by the Corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it should be determined ultimately that he or she is not entitled to be indemnified under this Article EIGHT or otherwise. B. Right of Claimant to Bring Suit. If a claim under paragraph A of this Article EIGHT is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, together with interest thereon, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim, including reasonable attorneys' fees incurred in connection therewith. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the DGCL (or other applicable law) for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (or of its full Board of Directors, its directors who are not parties to the Proceeding with respect to which indemnification is claimed, its stockholders, or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the DGCL (or other applicable law), nor an actual determination by any such person or persons that such claimant has not met such applicable standard of conduct, shall be a defense to such action or create a presumption that the claimant has not met the applicable standard of conduct. A-8 11 C. Non-Exclusivity of Rights. The rights conferred by this Article EIGHT shall not be exclusive of any other right which any director, officer, representative, employee or other agent may have or hereafter acquire under the DGCL or any other statute, or any provision contained in the Corporation's Amended and Restated Certificate of Incorporation or Bylaws, or any agreement, or pursuant to a vote of stockholders or disinterested directors, or otherwise. D. Insurance and Trust Fund. In furtherance and not in limitation of the powers conferred by statute: (1) the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the Corporation would have the power to indemnify him or her against such liability under the provisions of law; and (2) the Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the fullest extent permitted by law and including as part thereof provisions with respect to any or all of the foregoing, to ensure the payment of such amount as may become necessary to effect indemnification as provided therein, or elsewhere. E. Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, including the right to be paid by the Corporation the expenses incurred in defending any Proceeding in advance of its final disposition, to any employee or agent of the Corporation to the fullest extent of the provisions of this Article or otherwise with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. F. Amendment. This Article EIGHT is also contained in Article VIII, Sections 2 through 7, of the Corporation's Bylaws. Any repeal or modification of this Article EIGHT shall not change the rights of any officer or director to indemnification with respect to any action or omission occurring prior to such repeal or modification. A-9 12 NINE: The Corporation reserves the right to alter, amend, rescind or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. A-10 13 CERTIFICATE OF DESIGNATION OF VOTING POWERS, DESIGNATIONS, PREFERENCES, LIMITATIONS, RESTRICTIONS AND RELATIVE RIGHTS OF 9.75% SERIES A PREFERRED STOCK OF OPTEL, INC. ------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------- OpTel, Inc., a Delaware corporation (the "Company"), certifies that pursuant to the authority contained in Article Four of its Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware ("DGCL"), the Board of Directors of the Company (the "Board of Directors"), by Unanimous Written Consent made as of March 1, 1998, duly approved and adopted the following resolution: RESOLVED, that pursuant to the authority vested in the Board of Directors by the Certificate of Incorporation, the Board of Directors does hereby designate, create, authorize and provide for the issue of a series of non-voting preferred stock, to be known as the "Series A Preferred Stock", out of the authorized shares of preferred stock, par value $.01 per share, of the Corporation, the shares of such series to have a liquidation preference of $20,000 per share (the "Liquidation Preference"), consisting of 10,000 shares (which number may be increased or decreased by resolution of the Board of Directors, provided that no decrease shall reduce the number of shares of Series A Preferred Stock below 150% of the number of shares of Series A Preferred Stock at such time outstanding) to be entitled to dividends payable initially in additional shares of such series at the annual rate of 9.75% of the liquidation preference, to be convertible at the option of the holders of shares of such series into shares of Class B Common Stock of the Corporation (the "Class B Common Stock") at the Conversion Price, and, specifically, having voting powers, designations, preferences, limitations, restrictions, and relative rights as follows: A-11 14 1. Ranking. The Series A Preferred Stock shall rank, with respect to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company, (a) senior to all classes of common stock of the Company and to all shares of Series B Preferred Stock of the Company and senior to all shares of each other class of capital stock or series of preferred stock established after the Preferred Stock Issue Date by the Board of Directors the terms of which do not expressly provide that it ranks senior to or on a parity with the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company (collectively with the common stock and Series B Preferred Stock referred to as "Junior Securities"); (b) on a parity with any additional shares of preferred stock issued by the Company and any other class of capital stock or series of preferred stock issued by the Company established after the Series B Preferred Stock Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company (collectively referred to as "Parity Securities"); and (c) junior to each class of capital stock or series of preferred stock issued by the Company established after the Preferred Stock Issue Date by the Board of Directors the terms of which expressly provide that such class or series will rank senior to the Series A Preferred Stock as to dividend distributions and distributions upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Securities"). 2. Dividends. (a) The holders of shares of the Series A Preferred Stock shall be entitled to receive, when, as and if dividends are declared by the Board of Directors, cumulative preferential dividends (in the form described below) from the Preferred Stock Issue Date accruing at the rate per annum of 9.75% of the Liquidation Preference per share, payable annually in arrears on the last day of August, commencing on August 31, 1998 (each a "Dividend Payment Date"). If any such date is not a Business Day, such payment shall be made on the next succeeding Business Day, to the holders of record as of the next preceding August 15 (each, a "Record Date"). Dividends on Series A Preferred Stock shall be payable initially only in additional shares of Series A Preferred Stock (including fractional shares) having an aggregate Liquidation Preference equal to the amount of such dividends; provided, however, that dividends payable after the expiration of the Conversion Period shall be payable only in cash. The issuance of such additional shares of Series A Preferred Stock A-12 15 shall constitute "payment" of the related dividend for all purposes of this Certificate of Designation. The accrual of dividends payable on the Series A Preferred Stock will be computed on the basis of a 360-day year consisting of twelve 30- day months, and dividends will be deemed to accrue on a daily basis. (b) Dividends on the Series A Preferred Stock shall accumulate whether or not the Company has earnings or profits, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. Dividends will accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate. The Company shall take all actions required or permitted under the DGCL to permit the payment of dividends on the Series A Preferred Stock. (c) No dividend whatsoever shall be declared or paid upon any outstanding share of the Series A Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid upon all outstanding shares of Series A Preferred Stock. Unless full cumulative dividends on all outstanding shares of Series A Preferred Stock for all past dividend periods shall have been declared and paid, then: (i) no dividend (other than a dividend payable solely in shares of any Junior Securities) shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any shares of Junior Securities; (ii) no other distribution shall be declared or made upon, or any sum set apart for the payment of dividends upon, any shares of Junior Securities, other than a distribution consisting solely of Junior Securities; (iii) no shares of Junior Securities shall be purchased, redeemed or otherwise acquired or retired for value (excluding an exchange for shares of other Junior Securities) by the Company or any of its Subsidiaries; and (iv) no monies shall be paid into or set apart or made available for a sinking or other like fund for the purchase, redemption or other acquisition or retirement for value of any shares of Junior Securities by the Company or any of its Subsidiaries. Holders of the Series A Preferred Stock will not be entitled to any dividends in excess of the full cumulative dividends as herein described. (d) To the extent permitted by law, additional cumulative dividends shall accrue with respect to the outstanding shares of Series A Preferred Stock so long as any dividends on the Series A Preferred Stock shall remain accrued and unpaid after the respective Dividend Payment Dates therefor (whether or not such accrued and unpaid dividends shall have been declared). Such additional dividends shall accrue at the rate per annum of 9.75% of the Liquidation Preference of all shares of Series A Preferred Stock issuable with respect to such accrued but unpaid dividends A-13 16 from their respective Dividend Payment Dates for so long as such accrued but unpaid dividends and additional dividends accrued with respect thereto shall remain unpaid. 3. Conversion. (a) During the Conversion Period, at the option of a holder of Series A Preferred Stock, any outstanding shares of Series A Preferred Stock may be converted by the holder into Class B Common Stock at the Conversion Price. The number of shares of Class B Common Stock issuable for each share of Series A Preferred Stock upon conversion shall be determined by dividing the Liquidation Preference plus all accrued and unpaid dividends on such shares of Series A Preferred Stock by the Conversion Price. Immediately following such conversion, the rights of the holders of converted shares of Series A Preferred Stock shall cease and the Persons entitled to receive the Class B Common Stock upon the conversion of Series A Preferred Stock shall be treated for all purposes as having become the owners of such Class B Common Stock. (b) In order for a holder to exercise its rights to convert Series A Preferred Stock a holder must (i) surrender the certificate or certificates evidencing the shares of Series A Preferred Stock to be converted, duly endorsed in a form reasonably satisfactory to the Company, at the office of the Company or transfer agent for the Series A Preferred Stock, (ii) notify the Company at such office that such holder elects to convert Series A Preferred Stock and the number of shares to be converted, (iii) state in writing the name or names in which the holder wishes the certificate or certificates for shares of Class B Common Stock to be issued, and (iv) pay any transfer or similar tax if required pursuant to Section 15. The date on which the holder satisfies all such requirements shall be the "Conversion Date." As soon as practical, the Company shall deliver a certificate or certificates for the number of shares of Class B Common Stock issuable upon the conversion. The Person in whose name the Class B Common Stock certificate is registered shall be treated as the stockholder of record on and after the Conversion Date. (c) The Company has reserved and shall continue to reserve out of its authorized but unissued Class B Common Stock a sufficient number of shares of Class B Common Stock to permit the conversion of the Series A Preferred Stock in full. All shares of Class B Common Stock that may be issued upon conversion of Series A Preferred Stock shall be fully paid and nonassessable. The Company shall comply with all securities laws regulating the offer and delivery of shares of Class B Common Stock upon conversion of Series A Preferred Stock and shall list such shares on each national securities exchange or automated quotation system on which the Class B Common Stock is listed. A-14 17 (d) At any time after the consummation of an underwritten public offering as described in Section 3, in the case of any consolidation or reorganization of the Company or the merger of the Company with or into any other entity or the sale or transfer of all or substantially all the assets of the Company pursuant to which the Company's Class B Common Stock is converted into other securities, cash or assets (any of the foregoing, a "Consolidation"), upon consummation of such Consolidation, each holder of Series A Preferred Stock shall be entitled to elect to have each share of Series A Preferred Stock held by such holder to thereafter be convertible into the kind and amount of securities, cash or other assets receivable upon the consolidation, merger, sale or transfer by a holder of the number of shares of Class B Common Stock into which such share of Series A Preferred Stock might have been converted immediately prior to such consolidation, merger, transfer or sale. Appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Series A Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustment of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the conversion of Series A Preferred Stock. 4. Liquidation Rights. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company or reduction or decrease in its capital stock resulting in a distribution of assets to the holders of any class or series of the Company's capital stock, each holder of shares of the Series A Preferred Stock will be entitled to payment out of the assets of the Company available for distribution of an amount equal to the Liquidation Preference per share of Series A Preferred Stock held by such holder, plus accrued and unpaid dividends, to the date fixed for liquidation, dissolution, winding-up or reduction or decrease in capital stock, before any distribution is made on any Junior Securities, including, without limitation, Common Stock of the Company. After payment in full of the Liquidation Preference and all accrued dividends, to which holders of Series A Preferred Stock are entitled, such holders will not be entitled to any further participation in any distribution of assets of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the Series A Preferred Stock and all other Parity Securities are not paid in full, the holders of the Series A Preferred Stock and the Parity Securities will share equally and ratably in any distribution of assets of the Company in proportion to the full liquidation preference and accumulated and unpaid A-15 18 dividends, to which each is entitled. However, neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more Persons will be deemed to be a voluntary or involuntary liquidation, dissolution or winding-up of the Company or reduction or decrease in capital stock, unless such sale, conveyance, exchange or transfer shall be in connection with a liquidation, dissolution or winding-up of the business of the Company. 5. Redemption by the Company. a. At all times after the expiration of the Conversion Period, the Company shall have the option to redeem, in whole or in part, (subject to the legal availability of funds therefor) all outstanding shares of Series A Preferred Stock at a price (the "Redemption Price") in cash equal to the Liquidation Preference thereof, plus accrued and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend period) to the date of redemption. The Company shall not be required to make sinking fund payments with respect to the Series A Preferred Stock. b. In case of redemption of less than all of the shares of Series A Preferred Stock at the time outstanding, the shares to be redeemed shall be selected pro rata or by lot as determined by the Company in its sole discretion. c. Notice of any redemption shall be sent by or on behalf of the Company not less than 30 nor more than 60 days prior to the date specified for redemption in such notice (the "Redemption Date"), by first class mail, postage prepaid, to all holders of record of the Series A Preferred Stock at their last addresses as they shall appear on the books of the Company; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series A Preferred Stock except as to the holder to whom the Company has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which the Series A Preferred Stock may be listed or admitted to trading, such notice shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the number of A-16 19 shares of Series A Preferred Stock to be redeemed and, if less than all shares held by such holder are to be redeemed, the number of such shares to be redeemed; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price, including any procedures applicable to redemptions to be accomplished through book-entry transfers; and (v) that dividends on the shares to be redeemed will cease to accumulate on the Redemption Date. Upon the mailing of any such notice of redemption, the Company shall become obligated to redeem at the time of redemption specified thereon all shares called for redemption. d. If notice has been mailed in accordance with Section 5(c) above and provided that on or before the Redemption Date specified in such notice, all funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds in trust for the pro rata benefit of the holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, dividends on the shares of the Series A Preferred Stock so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series A Preferred Stock, and all rights of the holders thereof as stockholders of the Company (except the right to receive from the Company the Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Company shall so require and the notice shall so state), such shares shall be redeemed by the Company at the Redemption Price. In case fewer than all the shares represented by any such certificate are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof. e. Any funds deposited with a bank or trust company for the purpose of redeeming Series A Preferred Stock shall be irrevocable except that: i. the Company shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and A-17 20 ii. any balance of monies so deposited by the Company and unclaimed by the holders of the Series A Preferred Stock entitled thereto at the expiration of two years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Company, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Company shall look only to the Company for payment without interest or other earnings. f. No Series A Preferred Stock may be redeemed except with funds legally available for the purpose. The Company shall take all actions required or permitted under the DGCL to permit any such redemption. g. Notwithstanding the foregoing provisions of this Section 5, unless the full cumulative dividends on all outstanding shares of Series A Preferred Stock shall have been paid or contemporaneously are declared and paid for all past dividend periods, none of the shares of Series A Preferred Stock shall be redeemed. h. All shares of Series A Preferred Stock redeemed pursuant to this Section 5 shall be restored to the status of authorized and unissued shares of preferred stock, without designation as to series or class, and may thereafter be reissued as shares of any series or class of preferred stock other than shares of Series A Preferred Stock. 6. Voting Rights. The holders of record of shares of the Series A Preferred Stock shall have no voting rights, except as required by law and as hereinafter provided in this Section 6. (a) The Company shall not, without the affirmative vote or consent of the holders of at least a majority of the shares of Series A Preferred Stock then outstanding (with shares held by the Company or any of its affiliates not being considered to be outstanding for this purpose) voting or consenting as the case may be, as one class: (i) amend or otherwise alter this Certificate of Designation (including the provisions of paragraph 6 hereof) in any manner that adversely affects the specified rights, preferences, privileges or voting rights of holders of Series A Preferred Stock; A-18 21 (ii) waive compliance with any provision of this Certificate of Designation; or (iii) create or issue Senior Securities or Parity Securities. (b) Without the consent of each holder affected, an amendment or waiver of the Company's Certificate of Incorporation or of this Certificate of Designation may not (with respect to any shares of Series A Preferred Stock held by a non-consenting holder): (i) alter the voting rights with respect to the Series A Preferred Stock or reduce the number of shares of Series A Preferred Stock whose holders must consent to an amendment, supplement or waiver; (ii) reduce the Liquidation Preference of the Series A Preferred Stock; (iii) reduce the rate of or change the time for payment of dividends on any share of Series A Preferred Stock; (iv) waive the consequences of any failure to pay dividends on the Series A Preferred Stock; (v) make any share of Series A Preferred Stock payable in any form other than that stated in this Certificate of Designation; (vi) make any change in the provisions of this Certificate of Designation relating to waivers of the rights of holders of Series A Preferred Stock to receive the Liquidation Preference and dividends on the Series A Preferred Stock; or (vii) make any change in the foregoing amendment and waiver provisions. (c) The Company in its sole discretion may without the vote or consent of any holders of the Series A Preferred Stock amend or supplement this Certificate of Designation: (i) to cure any ambiguity, defect or inconsistency; (ii) to provide for uncertificated Series A Preferred Stock in addition to or in place of certificated Series A Preferred Stock; or A-19 22 (iii) to make any change that would provide any additional rights or benefits to the holders of the Series A Preferred Stock or that does not adversely affect the legal rights under this Certificate of Designation of any such holder. Except as set forth above, (A) the creation, authorization or issuance of any shares of Junior Securities, Parity Securities or Senior Securities or (B) the increase or decrease in the amount of authorized capital stock of any class, including any preferred stock, shall not require the consent of the holders of the Series A Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges, special rights or voting rights of holders of shares of Series A Preferred Stock. 7. Financial Reports. The Company shall furnish without cost to VPC Corporation, as the agent for each holder of the outstanding Series A Preferred Stock, all financial reports that the Company is required to deliver pursuant to Section 13 or 15(d) of the Exchange Act. VPC Corporation shall deliver copies of the financial reports to the respective holders. 8. Amendment. Subject to Section 6 hereof, this Certificate of Designation shall not be amended, either directly or indirectly, or through merger or consolidation with another entity, in any manner that would alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding Series A Preferred Stock, voting separately as a class. 9. Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series A Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this Certificate of Designation (as it may be amended from time to time) and in the Certificate of Incorporation. 10. Headings of Subdivisions. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. A-20 23 11. Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in this Certificate of Designation (as it may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof set forth in this Certificate of Designation (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series A Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 12. Reissuance of Series A Preferred Stock. Shares of Series A Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged or converted, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series or class of preferred stock of the Company other than shares of Series A Preferred Stock. 13. Mutilated or Missing Series A Preferred Stock Certificates. If any of the Series A Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and in substitution for and upon cancellation of the mutilated Series A Preferred Stock certificate, or in lieu of and substitution for the Series A Preferred Stock certificate lost, stolen or destroyed, a new Series A Preferred Stock certificate of like tenor and representing an equivalent amount of shares of Series A Preferred Stock, but only upon receipt of evidence of such loss, theft or destruction of such Series A Preferred Stock certificate and indemnity, if requested, A-21 24 satisfactory to the Company and the transfer agent (if other than the Company). 14. Notices. In case at any time or from time to time there shall be a Consolidation or any event described in the first sentence of Section 4, then the Corporation shall mail to each holder of shares of Series A Preferred Stock at such holder's address as it appears on the transfer books of the Corporation, as promptly as possible but in any event at least 10 days prior to the applicable date hereinafter specified, a notice stating (a) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants or, if a record is not to be taken, the date as of which the holder of the Class B Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (b) the date on which such Consolidation is expected to become effective. Such notice also shall specify the date as of which it is expected that holders of Class B Common Stock of record shall be entitled to exchange their Class B Common Stock for shares of stock or other securities or property or cash deliverable upon such Consolidation. 15. Transfer Taxes. The issuance or delivery of certificates for Class B Common Stock upon the conversion of shares of Series A Preferred Stock shall be made without charge to the converting holder of shares of Series A Preferred Stock for such certificates or for any tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or (subject to compliance with the applicable provisions of federal and state securities laws) in such names as may be directed by, the holders of the shares of Series A Preferred Stock converted; provided, however, that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the shares of Series A Preferred Stock converted, and the Corporation shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Corporation the amount of such tax or shall have established to the reasonable satisfaction of the Corporation that such tax has been paid. 16. Certain Remedies. Any registered holder of Series A Preferred Stock shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Certificate of Designations and to enforce specifically the terms and provisions of this Certificate of Designations in A-22 25 any court of the United States, or any state thereof having jurisdiction, this being in addition to any remedy to which such holder may be entitled at law or in equity. 17. Certain Definitions. As used in this Certificate of Designation, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "Business Day" means any day except a Saturday, a Sunday, or any day on which banking institutions in New York, New York are required or authorized by law or other governmental action to be closed. "Commission" means the Securities and Exchange Commission. "Class A Common Stock" means the Class A Common Stock, par value $.01 per share, of the Company. "Class B Common Stock" means the Class B Common Stock, par value $.01 per share, of the Company. "Class C Common Stock" means the Class C Common Stock, par value $.01 per share, of the Company. "Common Stock" means Class A Common Stock, Class B Common Stock, Class C Common Stock or other common stock of the Company. "Conversion Period" means (i) if the Conversion Period has not previously commenced or the Series A Shares have not previously been converted, the 180-day period commencing on the IPO Date or (ii), if such 180-day period has not previously commenced and expired or the Series A Shares have not previously been converted, the 90-day period commencing on April 30, 1999 (with the effect that if the Conversion Period has previously commenced by reason of the occurrence of the IPO Date but has not yet expired on April 30, 1999, the Conversion Period shall continue for 90 days after April 30, 1999 and the total Conversion Period may be more or less than 180 days but shall expire in any event on August 29, 1999). "Conversion Price" means, as of the date of commencement of the Conversion Period, (i) if such date is on or after the IPO Date, the price per share which is the highest of (x) $82.18, (y) the price per share at which Common Stock is first sold to the public in a public offering pursuant to an effective registration statement under the Securities Act, and (z) the quotient of $225 million divided by the number of shares of Common Stock outstanding, on a fully diluted basis (excluding shares sold in A-23 26 or after such public offering, the 225,000 shares of Class C Common Stock outstanding on the Preferred Stock Issue Date and shares issued or issuable upon conversion of such Class C shares or conversion of any other securities convertible into Common Stock that may be issued to VPC Corporation after the Preferred Stock Issue Date), or (ii) if such date is prior to the IPO Date, the price per share which is the higher of (x) $82.18 and (y) the quotient of $225 million divided by the number of shares of Common Stock outstanding (excluding the 225,000 shares of Class C Common Stock outstanding on the Preferred Stock Issue Date and shares issued or issuable upon conversion of such Class C shares or conversion of any other securities convertible into Common Stock that may be issued to VPC Corporation after the Preferred Stock Issue Date). "Exchange Act" means the Securities Exchange Act of 1934, as amended. "IPO Date" means the date on which the Company receives the net proceeds of an underwritten initial public offering for its account of any of its equity securities pursuant to an effective registration statement under the Securities Act. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Preferred Stock Issue Date" means the date on which a share of Series A Preferred Stock is first issued by the Company. "Securities Act" means the Securities Act of 1933, as amended. A-24 27 CERTIFICATE OF DESIGNATION OF VOTING POWERS, DESIGNATIONS, PREFERENCES, LIMITATIONS, RESTRICTIONS AND RELATIVE RIGHTS OF 8% SERIES B PREFERRED STOCK OF OPTEL, INC. ------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------- OpTel, Inc., a Delaware corporation (the "Company") certifies that pursuant to the authority contained in Article Four of its Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware ("DGCL"), the Board of Directors of the Company (the "Board of Directors") at a special meeting duly called and held on February 26, 1998, duly approved and adopted the following resolution which resolution remains in full force and effect on the date hereof: RESOLVED, that pursuant to the authority vested in the Board of Directors by the Certificate of Incorporation, the Board of Directors does hereby designate, create, authorize and provide for the issue of a series of nonvoting Series B Preferred Stock, to be known as the "Series B Preferred Stock", out of the authorized shares of Series B Preferred Stock, par value $.01 per share, of the Company, the shares of such series to have a liquidation preference of $60,000 per share (the "Liquidation Preference"), consisting of 1,000 shares (which number may be increased or decreased by resolution of the Board of Directors, provided that no decrease shall reduce the number of shares of Series B Preferred Stock below 150% of the number of shares of Series B Preferred Stock at such time outstanding) to be entitled to dividends payable in shares of such series at the annual rate of 8% (or, under certain circumstances, 13%) of the Liquidation Preference, to be convertible at the option of the Company or the holders of shares of such series into shares of Class A Common Stock of the Company (the "Class A Common Stock") at a conversion price equal to the price at which shares of Class A Common Stock of the Company are first offered to the public in an initial underwritten public offering by the Company, having such voting A-25 28 powers, designations, preferences, limitations, restrictions, and relative rights as follows: 1. Ranking. The Series B Preferred Stock shall rank, with respect to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company, (a) senior to all classes of common stock of the Company and to each other class of capital stock or series of preferred stock established after the Series B Preferred Stock Issue Date by the Board of Directors the terms of which do not expressly provide that it ranks senior to or on a parity with the Series B Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company (collectively referred to with the common stock of the Company as "Junior Securities"); (b) on a parity with any additional shares of preferred stock issued by the Company in the future and any other class of capital stock or series of preferred stock issued by the Company established after the Series B Preferred Stock Issue Date by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Series B Preferred Stock as to dividend distributions and distributions upon the liquidation, winding-up and dissolution of the Company (collectively referred to as "Parity Securities"); and (c) junior to each class of capital stock or series of preferred stock issued by the Company established after the Series B Preferred Stock Issue Date by the Board of Directors the terms of which expressly provide that such class or series will rank senior to the Series B Preferred Stock as to dividend distributions and distributions upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Securities"). No dividend whatsoever shall be declared or paid upon any outstanding share of the Series B Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid, or declared and a sufficient sum set apart for the payment of such dividend, upon all outstanding shares of Senior Securities. 2. Dividends. (a) The holders of shares of the Series B Preferred Stock shall be entitled to receive, when, as and if dividends are declared by the Board of Directors, cumulative preferential dividends (in the form described below) from the Series B Preferred Stock Issue Date accruing at the rate per annum, subject to the following sentence, of 8% of the Liquidation Preference per share (the "Dividend Rate"), payable A-26 29 quarterly in arrears on each of the last days of November, February, May and August, commencing on August 31, 1998 (each a "Dividend Payment Date"). Notwithstanding the aforesaid, if a registration statement under the Securities Act covering shares of Common Stock of the Company has not been declared effective (an "Effective Registration") on or prior to the 180th day after the later of (a) the fourth anniversary of the Series B Preferred Stock Issue Date and (b) the date on which the holders of the Series B Preferred Stock exercise registration rights under Section 2.1 of the Registration Rights Agreement (the "Demand Date"), the Dividend Rate shall be reset to an annual rate equal to 13% of the Liquidation Preference per share from and after the fourth anniversary of the Series B Preferred Stock Issue Date, payable in the same form and manner as the aforesaid, provided, that the Dividend Rate shall be reset to 8% from and after the date of Effective Registration. If any such date is not a Business Day, such payment shall be made on the next succeeding Business Day, to the holders of record as of the next preceding November 15, February 15, May 15 and August 15 (each, a "Record Date"). Dividends shall be payable by the issuance of additional shares of Series B Preferred Stock (including fractional shares) having an aggregate Liquidation Preference equal to the amount of such dividends. The issuance of such additional shares of Series B Preferred Stock shall constitute "payment" of the related dividend for all purposes of this Certificate of Designation. Dividends payable on the Series B Preferred Stock will be computed on the basis of a 360-day year consisting of twelve 30-day months and will be deemed to accrue on a daily basis. (b) Dividends on the Series B Preferred Stock shall accumulate whether or not the Company has earnings or profits, whether or not there are funds legally available for the payment of such dividends and whether or not dividends are declared. Dividends will accumulate to the extent they are not paid on the Dividend Payment Date for the period to which they relate. The Company shall take all actions required or permitted under the DGCL to permit the payment of dividends on the Series B Preferred Stock. (c) No dividend whatsoever shall be declared or paid upon any outstanding share of the Series B Preferred Stock with respect to any dividend period unless all dividends for all preceding dividend periods have been declared and paid upon all outstanding shares of Series B Preferred Stock. Unless full cumulative dividends on all outstanding shares of Series B Preferred Stock for all past dividend periods shall have been declared and paid, then: (i) no dividend (other than a dividend payable solely in shares of any Junior A-27 30 Securities) shall be declared or paid upon, or any sum set apart for the payment of dividends upon, any shares of Junior Securities; (ii) no other distribution shall be declared or made upon, or any sum set apart for the payment of dividends upon, any shares of Junior Securities, other than a distribution consisting solely of Junior Securities; (iii) no shares of Junior Securities shall be purchased, redeemed or otherwise acquired or retired for value (excluding an exchange for shares of other Junior Securities) by the Company or any of its Subsidiaries; and (iv) no monies shall be paid into or set apart or made available for a sinking or other like fund for the purchase, redemption or other acquisition or retirement for value of any shares of Junior Securities by the Company or any of its Subsidiaries. Holders of the Series B Preferred Stock will not be entitled to any dividends in excess of the full cumulative dividends as herein described. (d) To the extent permitted by law, all declared but unpaid dividends shall accrue dividends (payable in the form provided in Section 2(a)) at the rate per annum of 8% (or under certain circumstances 13%) of the aggregate unpaid amount from their respective Dividend Payment Date until paid in full. 3. Conversion. (a) Unless previously redeemed by the Company pursuant to Section 4, upon the consummation of an initial underwritten public offering pursuant to an effective registration statement under the Securities Act covering the offer and sale of Common Stock to the public (an "IPO"), at the option of either the Company or a holder of Series B Preferred Stock, all (but not less than all) outstanding shares of Series B Preferred Stock held by a holder of Series B Preferred Stock may be converted into Class A Common Stock at the Conversion Price, provided, that the Company shall only be permitted to convert all outstanding shares of Series B Preferred Stock. The number of shares of Class A Common Stock issuable for each share of Series B Preferred Stock upon conversion shall be determined by dividing the Liquidation Preference plus all accrued and unpaid dividends on such shares of Series B Preferred Stock by the Conversion Price. Immediately following such conversion, the rights of the holders of converted Series B Preferred Stock shall cease and the Persons entitled to receive the Class A Common Stock upon the conversion of Series B Preferred Stock shall be treated for all purposes as having become the owners of such Class A Common Stock. Additionally, promptly following the occurrence of such conversion, the Company shall give written notice thereof to each record holder of converted A-28 31 Series B Preferred Stock, including instructions to be followed to obtain a certificate for the shares of Class A Common Stock into which such holder's Series B Preferred Stock was converted. (b) In order for the Company to exercise its right to convert Series B Preferred Stock the Company must send a notice to each holder of Series B Preferred Stock stating that the Company is exercising its option to convert all of the outstanding Series B Preferred Stock and requesting (i) the surrender of all certificates evidencing the holder's shares of Series B Preferred Stock, duly endorsed in a form satisfactory to the Company, at the office of the Company or transfer agent for the Series B Preferred Stock and (ii) the name or names into which the certificate or certificates for shares of Class A Common Stock are to be issued. The date of delivery of such notice by first class or registered mail to a holder's address listed on the Company's stock ledger shall be the "Company Conversion Date" As soon as practical after receipt of certificates evidencing a holder's shares of Series B Preferred Stock, the Company shall deliver a certificate or certificates for the number of shares of Class A Common Stock issuable upon the conversion. The Person in whose name the Class A Common Stock certificate is registered shall be treated as the stockholder of record on and after the Company Conversion Date. (c) In order for a holder to exercise its rights to convert Series B Preferred Stock a holder must (i) surrender the certificate or certificates evidencing the shares of Series B Preferred Stock to be converted, duly endorsed in a form reasonably satisfactory to the Company, at the office of the Company or transfer agent for the Series B Preferred Stock, (ii) notify the Company at such office that he elects to convert Series B Preferred Stock and the number of shares to be converted, (iii) state in writing the name or names in which he wishes the certificate or certificates for shares of Class A Common Stock to be issued, and (iv) pay any transfer or similar tax if required pursuant to Section 15. The date on which the holder satisfies all such requirements shall be the "Conversion Date." As soon as practical, the Company shall deliver a certificate or certificates for the number of shares of Class A Common Stock issuable upon the conversion. The Person in whose name the Class A Common Stock certificate is registered shall be treated as the stockholder of record on and after the Conversion Date. (d) If the Company elects to convert shares of Series B Preferred Stock, the Company shall pay any documentary, stamp or similar issue or transfer tax due on the issue of shares of Class A Common Stock upon the conversion. A-29 32 (e) The Company has reserved and shall continue to reserve out of its authorized but unissued Class A Common Stock or its Class A Common Stock held in treasury a sufficient number of shares of Class A Common Stock to permit the conversion of the Series B Preferred Stock in full. All shares of Class A Common Stock that may be issued upon conversion of Series B Preferred Stock shall be duly authorized, fully paid and nonassessable. The Company shall comply with all securities laws regulating the offer and delivery of shares of Class A Common Stock upon conversion of Series B Preferred Stock and shall list such shares on each national securities exchange or automated quotation system on which the Class A Common Stock is listed. (f) At any time after the consummation of an IPO, in the case of any consolidation or reorganization of the Company or the merger of the Company with or into any other entity or the sale or transfer of all or substantially all the assets of the Company pursuant to which the Company's Class A Common Stock is converted into other securities, cash or assets (any of the foregoing, a "Consolidation"), upon consummation of such Consolidation, each holder of Series B Preferred Stock shall be entitled to elect to have each share of Series B Preferred Stock held by such holder to thereafter be convertible into the kind and amount of securities, cash or other assets receivable upon the consolidation, merger, sale or transfer by a holder of the number of shares of Class A Common Stock into which such share of Series B Preferred Stock might have been converted immediately prior to such consolidation, merger, transfer or sale. Appropriate adjustment (as determined by the Board of Directors) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of Series B Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustment of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other securities or property thereafter deliverable upon the conversion of Series B Preferred Stock in respect of any Consolidation. 4. Liquidation Rights. Upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company or reduction or decrease in its capital stock resulting in a distribution of assets to the holders of any class or series of the Company's capital stock, each holder of shares of the Series B Preferred Stock will be entitled to payment out of the assets of the Company available for distribution of an amount equal to the Liquidation Preference per share of Series B Preferred Stock held by such holder, plus accrued A-30 33 and unpaid dividends, to the date fixed for liquidation, dissolution, winding-up or reduction or decrease in capital stock, before any distribution is made on any Junior Securities, including, without limitation, Common Stock of the Company. After payment in full of the Liquidation Preference and all accrued and unpaid dividends, to which holders of Series B Preferred Stock are entitled, such holders will not be entitled to any further participation in any distribution of assets of the Company. If, upon any voluntary or involuntary liquidation, dissolution or winding-up of the Company, the amounts payable with respect to the Series B Preferred Stock and all other Parity Securities are not paid in full, the holders of the Series B Preferred Stock and the Parity Securities will share equally and ratably in any distribution of assets of the Company in proportion to the full Liquidation Preference and accrued and unpaid dividends, to which each is entitled. However, neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more Persons will be deemed to be a voluntary or involuntary liquidation, dissolution or winding-up of the Company or reduction or decrease in capital stock, unless such sale, conveyance, exchange or transfer shall be in connection with a liquidation, dissolution or winding-up of the business of the Company. 5. Redemption by the Company. a. At all times, the Company shall have the option to redeem, in whole or in part, (subject to the legal availability of funds therefor) all outstanding shares of Series B Preferred Stock at a price (the "Redemption Price") in cash equal to the Liquidation Preference thereof, plus accrued and unpaid dividends (including an amount in cash equal to a prorated dividend for any partial dividend period) to the date of redemption . The Company shall not be required to make sinking fund payments with respect to the Series B Preferred Stock. The Company shall take all actions required or permitted under the DGCL to permit such redemption. b. In case of redemption of less than all of the shares of Series B Preferred Stock at the time outstanding, the shares to be redeemed shall be selected pro rata or by lot as determined by the Company in its sole discretion. c. Notice of any redemption shall be sent by or on behalf of the Company not less than 30 nor more than 60 A-31 34 days prior to the date specified for redemption in such notice (the "Redemption Date"), by first class mail, postage prepaid, to all holders of record of the Series B Preferred Stock at their last addresses as they shall appear on the books of the Company; provided, however, that no failure to give such notice or any defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares of Series B Preferred Stock except as to the holder to whom the Company has failed to give notice or except as to the holder to whom notice was defective. In addition to any information required by law or by the applicable rules of any exchange upon which Series B Preferred Stock may be listed or admitted to trading, such notice shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the number of shares of Series B Preferred Stock to be redeemed and, if less than all shares held by such holder are to be redeemed, the number of such shares to be redeemed; (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price, including any procedures applicable to redemptions to be accomplished through book-entry transfers; and (v) that dividends on the shares to be redeemed will cease to accumulate on the Redemption Date. Upon the mailing of any such notice of redemption, the Company shall become obligated to redeem at the time of redemption specified thereon all shares called for redemption. d. If notice has been mailed in accordance with Section 5(c) above and provided that on or before the Redemption Date specified in such notice, all funds necessary for such redemption shall have been set aside by the Company, separate and apart from its other funds in trust for the pro rata benefit of the holders of the shares so called for redemption, so as to be, and to continue to be available therefor, then, from and after the Redemption Date, dividends on the shares of the Series B Preferred Stock so called for redemption shall cease to accumulate, and said shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series B Preferred Stock, and all rights of the holders thereof as stockholders of the Company (except the right to receive from the Company the Redemption Price) shall cease. Upon surrender, in accordance with said notice, of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Company shall so require and the notice shall so state), such shares shall be redeemed by the Company at the Redemption Price. In case fewer than all the shares represented by any such certificate A-32 35 are redeemed, a new certificate or certificates shall be issued representing the unredeemed shares without cost to the holder thereof. e. Any funds deposited with a bank or trust company for the purpose of redeeming Series B Preferred Stock shall be irrevocable except that: i. the Company shall be entitled to receive from such bank or trust company the interest or other earnings, if any, earned on any money so deposited in trust, and the holders of any shares redeemed shall have no claim to such interest or other earnings; and ii. any balance of monies so deposited by the Company and unclaimed by the holders of the Series B Preferred Stock entitled thereto at the expiration of two years from the applicable Redemption Date shall be repaid, together with any interest or other earnings earned thereon, to the Company, and after any such repayment, the holders of the shares entitled to the funds so repaid to the Company shall look only to the Company for payment without interest or other earnings. f. No Series B Preferred Stock may be redeemed except with funds legally available for the purpose. The Company shall take all actions required or permitted under the DGCL to permit any such redemption. g. Notwithstanding the foregoing provisions of this Section 5, unless the full cumulative dividends on all outstanding shares of Series B Preferred Stock shall have been paid or contemporaneously are declared and paid for all past dividend periods, none of the shares of Series B Preferred Stock shall be redeemed. h. All shares of Series B Preferred Stock redeemed pursuant to this Section 5 shall be restored to the status of authorized and unissued shares of Series B Preferred Stock, without designation as to series or class and may thereafter be reissued as shares of any series or class of preferred stock other than shares of Series B Preferred Stock. 6. Voting Rights. The holders of record of shares of the Series B Preferred Stock shall have no voting rights, except as required by law and as hereinafter provided in this Section 6. A-33 36 (a) The Company shall not, without the affirmative vote or consent of the holders of at least a majority of the shares of Series B Preferred Stock then outstanding (with shares held by the Company or any of its affiliates not being considered to be outstanding for this purpose) voting or consenting as the case may be, as one class: (i) amend or otherwise alter this Certificate of Designation (including the provisions of paragraph 6 hereof) in any manner that adversely affects the specified rights, preferences, privileges or voting rights of holders of Series B Preferred Stock, including, but not limited to, any change in the provisions of Section 3 hereof; (ii) waive compliance with any provision of this Certificate of Designation. (b) Without the consent of each holder affected, an amendment or waiver of the Company's Certificate of Incorporation or of this Certificate of Designation may not (with respect to any shares of Series B Preferred Stock held by a non-consenting holder): (i) alter the voting rights with respect to the Series B Preferred Stock or reduce the number of shares of Series B Preferred Stock whose holders must consent to an amendment, supplement or waiver; (ii) reduce the Liquidation Preference of the Series B Preferred Stock; (iii) reduce the rate of or change the time for payment of dividends on any share of Series B Preferred Stock; (iv) waive the consequences of any failure to pay dividends on the Series B Preferred Stock; (v) make any share of Series B Preferred Stock payable in any form other than that stated in this Certificate of Designation; (vi) make any change in the provisions of this Certificate of Designation relating to waivers of the rights of holders of Series B Preferred Stock to receive the Liquidation Preference and dividends on the Series B Preferred Stock; (vii) make any change in the foregoing amendment and waiver provisions. A-34 37 (c) The Company in its sole discretion may without the vote or consent of any holders of the Series B Preferred Stock amend or supplement this Certificate of Designation: (i) to cure any ambiguity, defect or inconsistency; (ii) to provide for uncertificated Series B Preferred Stock in addition to or in place of certificated Series B Preferred Stock; or (iii) to make any change that would provide any additional rights or benefits to the holders of the Series B Preferred Stock or that does not adversely affect the legal rights under this Certificate of Designation of any such holder. (d) If there has not been an Effective Registration on or prior to the later of 180 days after (a) the fourth anniversary of the Series B Preferred Stock Issue Date and (b) the Demand Date, then the holders of the Series B Preferred Stock shall have the exclusive right, voting separately as a class, to elect one director on the board of directors of the Company (the "Preferred Director"). The right of the holders of the Series B Preferred Stock to elect the Preferred Director shall continue until there is an Effective Registration. At such time, the term of the Preferred Director shall terminate. At any time when the holders of the Series B Preferred Stock shall have thus become entitled to elect the Preferred Director, the Company shall take all action necessary to ensure that the Preferred Director shall be elected to the board of directors of the Company, including, without limitation (i) amending the by-laws of the Company to increase the size of the board of directors, and (ii) causing a special meeting of the stockholders to be called to elect the Preferred Director. The special meeting of the stockholders that shall be called for the purpose of electing the Preferred Director shall be held within 30 days after such right to elect the Preferred Director arises, upon notice given in the manner provided in the by-laws of the Company or by law. At any such special meeting or at any annual meeting at which the holders of the Series B Preferred Stock shall be entitled to elect a Preferred Director, the holders of a majority of the then outstanding Series B Preferred Stock present in person or by proxy shall be sufficient to constitute a quorum for the election of such director. The person elected by the holders of the Series B Preferred Stock at any meeting in accordance with the terms of the preceding sentence shall become a director on the date of such election. A-35 38 Except as set forth above, (A) the creation, authorization or issuance of any shares of Junior Securities, Parity Securities or Senior Securities or (B) the increase or decrease in the amount of authorized capital stock of any class, including any Series B Preferred Stock, shall not require the consent of the holders of the Series B Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges, special rights or voting rights of holders of shares of Series B Preferred Stock. 7. Financial Reports. The Company shall furnish without cost to each record holder of the outstanding Series B Preferred Stock, all financial reports that the Company is required to deliver pursuant to Section 13 or 15(d) of the Exchange Act. 8. Amendment. Subject to Section 6 hereof, this Certificate of Designation shall not be amended, either directly or indirectly, or through merger or consolidation with another entity, in any manner that would alter or change the powers, preferences or special rights of the Series B Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding Series B Preferred Stock, voting separately as a class. 9. Exclusion of Other Rights. Except as may otherwise be required by law, the shares of Series B Preferred Stock shall not have any voting powers, preferences and relative, participating, optional or other special rights, other than those specifically set forth in this resolution (as such resolution may be amended from time to time) and in the Certificate of Incorporation. 10. Headings of Subdivisions. The headings of the various subdivisions hereof are for convenience of reference only and shall not affect the interpretation of any of the provisions hereof. 11. Severability of Provisions. If any voting powers, preferences and relative, participating, optional and other special rights of the Series B Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as such resolution may be amended from time to time) is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other voting powers, preferences and relative, participating, optional and other special rights A-36 39 of Series B Preferred Stock and qualifications, limitations and restrictions thereof set forth in this resolution (as so amended) which can be given effect without the invalid, unlawful or unenforceable voting powers, preferences and relative, participating, optional and other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof shall, nevertheless, remain in full force and effect, and no voting powers, preferences and relative, participating, optional or other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof herein set forth shall be deemed dependent upon any other such voting powers, preferences and relative, participating, optional or other special rights of Series B Preferred Stock and qualifications, limitations and restrictions thereof unless so expressed herein. 12. Reissuance of Series B Preferred Stock. Shares of Series B Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged or converted, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of Series B Preferred Stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series or class of Series B Preferred Stock of the Company other than shares of Series B Preferred Stock. 13. Mutilated or Missing Series B Preferred Stock Certificates. If any of the Series B Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the Company shall issue, in exchange and in substitution for and upon cancellation of the mutilated Series B Preferred Stock certificate, or in lieu of and substitution for the Series B Preferred Stock certificate lost, stolen or destroyed, a new Series B Preferred Stock certificate of like tenor and representing an equivalent amount of shares of Series B Preferred Stock, but only upon receipt of evidence of such loss, theft or destruction of such Series B Preferred Stock certificate and indemnity, if requested, satisfactory to the Company and the transfer agent (if other than the Company). 14. Notices. In case at any time or from time to time there shall be a Consolidation or any event described in the first sentence of Section 4, then the Company shall mail to each holder of shares of Series B Preferred Stock at such holder's address as it appears on the transfer books of the Company, as promptly as possible but in any event at least ten (10) days prior to the applicable date hereinafter specified, a notice stating (a) the date on which a record is to be taken for the purpose of such dividend, distribution or rights or warrants or, if a record is not to be taken, the date as of which the holder of the Class A Common Stock of record to be entitled to such dividend, distribution or rights are to be determined, or (b) the date on which such Consolidation is expected to become effective. A-37 40 Such notice also shall specify the date as of which it is expected that holders of Class A Common Stock of record shall be entitled to exchange their Class A Common Stock for shares of stock or other securities or property or cash deliverable upon which Consolidation. 15. Transfer Taxes. The issuance or delivery of certificates for Class A Common Stock upon the conversion of shares of Series B Preferred Stock shall be made without charge to the converting holder of shares of Series B Preferred Stock for such certificates or for any tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or (subject to compliance with the applicable provisions of federal and state securities laws) in such names as may be directed by, the holders of the shares of Series B Preferred Stock converted; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the holder of the shares of Series B Preferred Stock converted, and the Company shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Company the amount of such tax or shall have established to the reasonable satisfaction of the Company that such tax has been paid. 16. Certain Remedies. Any registered holder of Series B Preferred Stock shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Certificate of Designation and to enforce specifically the terms and provisions of this Certificate of Designation in any court of the United States, or any state thereof having jurisdiction, this being in addition to any remedy to which such holder may be entitled at law or in equity. 17. Certain Definitions. As used in this Certificate of Designation, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "Business Day" means any day except a Saturday, a Sunday, or any day on which banking institutions in New York, New York are required or authorized by law or other governmental action to be closed. "Commission" means the Securities and Exchange Commission. A-38 41 "Class A Common Stock" means the Class A Common Stock, par value $.01 per share, of the Company. "Class B Common Stock" means the Class B Common Stock, par value $.01 per share, of the Company. "Class C Common Stock" means the Class C Common Stock, par value $.01 per share, of the Company. "Common Stock" means Class A Common Stock, Class B Common Stock, Class C Common Stock or other common stock of the Company. "Conversion Price" means the price at which a share of Class A Common Stock is offered to the public pursuant to an initial underwritten public offering as set forth in paragraph 3 hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of April 9, 1998, between the Company, Interactive Cable Systems, Inc., Nomura Holding America, Inc. and MCI Telecommunications Corporation. "Series B Preferred Stock Issue Date" means the date on which the Series B Preferred Stock is originally issued by the Company under this Certificate of Designation. "Securities Act" means the Securities Act of 1933, as amended. A-39 EX-3.2(A) 4 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3.2(a) - ------------------------------------------------------------------------------- OPTEL, INC. AMENDED AND RESTATED BYLAWS - ------------------------------------------------------------------------------- (Amended and Restated as of _________ ___, 1999) 2 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..........................................................................3 Section 4. Notice of Meetings........................................................................3 Section 5. Nomination of Directors...................................................................4 Section 6. Quorum; Adjournment.......................................................................6 Section 7. Proxies and Voting........................................................................6 Section 8. Stock List................................................................................7 Section 9. Inspectors of Election....................................................................7 Section 10. Actions by Stockholders..................................................................7 ARTICLE III BOARD OF DIRECTORS..............................................................................9 Section 1. Duties and Powers.........................................................................9 Section 2. Number and Term of Office.................................................................9 Section 3. Vacancies.................................................................................9 Section 4. Meetings.................................................................................10 Section 5. Quorum...................................................................................10 Section 6. Actions of Board Without a Meeting.......................................................10 Section 7. Meetings by Means of Conference Telephone................................................................................11 Section 8. Committees...............................................................................11 Section 9. Compensation.............................................................................11 Section 10. Interested Directors....................................................................11 ARTICLE IV OFFICERS.......................................................................................12 Section 1. General..................................................................................12 Section 2. Election; Term of Office.................................................................12 Section 3. Chairman of the Board....................................................................13 Section 4. President................................................................................13 Section 5. Vice President...........................................................................13 Section 6. Secretary................................................................................13 Section 7. Assistant Secretaries....................................................................14 Section 8. Treasurer................................................................................14 Section 9. Assistant Treasurers.....................................................................14 Section 10. Other Officers..........................................................................15
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Page ---- ARTICLE V STOCK..........................................................................................15 Section 1. Form of Certificates.....................................................................15 Section 2. Signatures...............................................................................15 Section 3. Lost Certificates........................................................................15 Section 4. Transfers................................................................................15 Section 5. Record Date..............................................................................16 Section 6. Beneficial Owners........................................................................16 Section 7. Voting Securities Owned by the Corporation..............................................................................16 ARTICLE VI NOTICES........................................................................................17 Section 1. Notices..................................................................................17 Section 2. Waiver of Notice.........................................................................17 ARTICLE VII GENERAL PROVISIONS.............................................................................17 Section 1. Dividends................................................................................17 Section 2. Disbursements............................................................................17 Section 3. Corporation Seal.........................................................................18 ARTICLE VIII DIRECTORS' LIABILITY AND INDEMNIFICATION.......................................................18 Section 1. Directors' Liability.....................................................................18 Section 2. Right to Indemnification.................................................................18 Section 3. Right of Claimant to Bring Suit..........................................................19 Section 4. Non-Exclusivity of Rights................................................................19 Section 5. Insurance and Trust Fund.................................................................20 Section 6. Indemnification of Employees and Agents of the Corporation.......................................................................20 Section 7. Amendment................................................................................20 ARTICLE IX AMENDMENTS.....................................................................................21
-ii- 4 BYLAWS OF OPTEL, INC. (hereinafter called the "Corporation") ARTICLE I OFFICES Section 1. Registered Office. The registered office of the Corporation shall be in the City of Dover, County of Kent, State of Delaware. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware, as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual Meetings. The Annual Meetings of Stockholders shall be held on such date and at such time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which meetings the stockholders shall elect by a plurality vote a Board of Directors, and transact such other business as may properly be brought before the meeting. Any previously scheduled annual meeting of the stockholders may be postponed by resolution of the Board of Directors upon public announcement made on or prior to the date previously scheduled for such annual meeting of stockholders. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder of the Corporation who was a stockholder of record at the time of giving of the -1- 5 notice provided for in this Section 2, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 2. For business to be properly brought before an annual meeting by a stockholder, if such business is related to the election of directors of the Corporation, the procedures in Section 5 of this Article II must be complied with. If such business relates to any other matter, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed to and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual stockholder meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth in writing as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting, and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (ii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (A) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 2. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2, and if he or she should so determine, such chairman shall declare to the meeting that any such business not properly brought before the meeting shall not be transacted. For the purposes of this Section 2 and Sections 3 and 5 of this Article II, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition to the provisions of this Section 2, a stockholder -2- 6 shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. Section 3. Special Meetings. Special meetings of the stockholders may be called only by the Board of Directors, the Chairman of the Board or the President. Any previously scheduled special meeting of the stockholders may be postponed by resolution of the Board of Directors upon public announcement made on or prior to the date previously scheduled for such special meeting of the stockholders. The purpose or purposes of any special meeting of the stockholders shall be set forth in the notice of meeting, and, except as otherwise required by law or by the Certificate of Incorporation, no business shall be transacted at any special meeting of the stockholders other than the items of business stated in the notice of meeting. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 3, and if he or she should so determine, such chairman shall declare to the meeting that any such business not properly brought before the meeting shall not be transacted. Section 4. Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation. If mailed, such notice shall be directed to each stockholder at his or her address as it appears on the stock book unless he or she shall have filed with the Secretary of the Corporation a written request that notices intended for him or her be mailed to some other address, in which case it shall be mailed or transmitted to the address designated in such request. Such further notice shall be given as may be required by law. Except as otherwise expressly provided by statute, no notice of a meeting of stockholders shall be required to be given to any stockholder who shall attend such meeting in person or by proxy, or who shall, in person or by attorney thereunto authorized, waive such notice in writing or by telegraph, telecopy, cable, radio or wireless either before or after such meeting. Except where otherwise required by law, notice of any adjourned meeting of the stockholders of the Corporation shall not be required to be given. -3- 7 Section 5. Nomination of Directors. (a) Only persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation may be made at any annual meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who was a stockholder of record at the time of giving of the notice provided for in this Section 5 and who complies with the notice procedures set forth in this Section 5. Any such nomination by a stockholder shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely notice for an annual meeting, a stockholder's notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the 10th day following the day on which public announcement (as defined in Section 2 of this Article II) of the date of such meeting is first made. Notwithstanding anything in the foregoing sentence to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. Such stockholder's notice shall set forth in writing (i) as to each person whom the stockholder proposes to nominate for election or re-election as a director (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the number of shares of stock of the Corporation which are beneficially owned by such person and (D) any other information relating to such person that is required to be disclosed in connection with the solicitation of proxies for election of directors, or as otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including, without limitation, such person's written consent to -4- 8 being named in a proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made (A) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (b) Nominations of persons for election to the Board of Directors of the Corporation may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 5, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 5. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (c) At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 5. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by these Bylaws and in that event the defective nomination shall be disregarded. In addition to the provisions of this Section 5, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Section 6. Quorum; Adjournment. At any meeting of the stockholders, the holders of a majority of all of the shares of -5- 9 the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law or the Certificate of Incorporation. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date, or time without notice other than announcement at the meeting, until a quorum shall be present or represented. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date, and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 7. Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing filed in accordance with the procedure established for the meeting, provided, however, that no proxy shall be valid after three years from its date unless said proxy provides for a longer period. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided herein or required by law or the Certificate of Incorporation. Except as otherwise required by statute, by the Certificate of Incorporation or these Bylaws, or in electing directors, all matters coming before any meeting of the stockholders shall be decided by the vote of a majority of the votes of the stockholders of the Corporation present in person or by proxy at such meeting and entitled to vote thereat, a quorum being present. At all elections of directors, the voting may but need not be by ballot and a plurality of the votes cast thereat shall elect. Section 8. Stock List. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order for each class of stock and showing the address of each such stockholder and the number of shares registered in such stockholder's name, shall be open to the examination of any such stockholder, for any purpose germane to -6- 10 the meeting, during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The stock list shall also be kept at the place of the meeting during the whole time thereof and shall be open to the examination of any such stockholder who is present. This list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each of them. Section 9. Inspectors of Election. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chairman of such meeting shall appoint one or more inspectors to act at such meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his or her ability. The inspectors shall make a certificate of the result of the vote taken after the balloting and shall have such other duties as are prescribed by law. No director or candidate for the office of director shall be appointed as such inspector. The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting. Section 10. Actions by Stockholders. (a) Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. (b) Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent -7- 11 delivered to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation. (c) The record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be fixed by the Board of Directors. Any stockholder seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall, by written notice to the President, request the Board of Directors to fix a record date. Upon receipt of such a request, the President shall, as promptly as practicable, call a special meeting of the Board of Directors to be held as promptly as practicable, but in any event not more than 10 days following the date of receipt of such a request. At such a meeting, the Board of Directors shall fix a record date which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 10 days after the date that the resolution fixing the record date is adopted by the Board of Directors. If no record date has been so fixed by Board of Directors, the record date for determining the stockholders entitled to consent to corporate action in writing without a meeting, where no prior action by the Board of Directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the Corporation. If no date has been fixed by the Board of Directors and prior action by the Board of Directors is required by the Delaware General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (d) In the event of the delivery to the Corporation of a written consent or consents purporting to represent the requisite voting power to authorize or take corporate action and/or related revocations, the Secretary of the Corporation shall provide for the safekeeping of such consents and revocations and shall, as promptly as practicable, engage inspectors for the purpose of promptly performing a ministerial review of the validity of the consents and revocations. No action by written consent without a meeting shall be effective until such inspectors have completed their review, determined that the requisite number of valid and unrevoked consents has been obtained to authorize or take the actions specified in the consents and certified such determination for entry in the records of the Corporation for the purpose of recording the proceedings of meetings of the stockholders. -8- 12 (e) For the purposes of this Section 10, delivery to the Corporation shall be effected by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. ARTICLE III BOARD OF DIRECTORS Section 1. Duties and Powers. The business of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. Section 2. Number and Term of Office. The Board of Directors shall consist of one (1) or more members. The number of directors shall be fixed and may be changed from time to time by resolution duly adopted by the Board of Directors, except as otherwise provided by law or the Certificate of Incorporation. Except as provided in Section 3 of this Article, directors shall be elected by the holders of record of a plurality of the votes cast at Annual Meetings of Stockholders, and each director so elected shall hold office until the next Annual Meeting and until his or her successor is duly elected and qualified, or until his or her earlier resignation or removal. Any director may resign at any time upon written notice to the Corporation. Directors need not be stockholders. Section 3. Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director or by the stockholders entitled to vote at any Annual or Special Meeting held in accordance with Article II, and the directors so chosen shall hold office until the next Annual or Special Meeting duly called for that purpose and until their successors are duly elected and qualified, or until their earlier resignation or removal. Section 4. Meetings. The Board of Directors of the Corporation may hold meetings, both regular and special, either within or without the State of Delaware. The first meeting of each newly-elected Board of Directors shall be held immediately following the Annual Meeting of Stockholders and no notice of such meeting shall be necessary to be given the newly-elected -9- 13 directors in order legally to constitute the meeting, provided a quorum shall be present. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or a majority of the directors then in office. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not less than forty-eight (48) hours before the date of the meeting, by telephone, facsimile or telegram on twenty-four (24) hours' notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances. Meetings may be held at any time without notice if all the directors are present or if all those not present waive such notice in accordance with Section 2 of Article VI of these Bylaws. Section 5. Quorum. Except as may be otherwise specifically provided by law, the Certificate of Incorporation or these Bylaws, at all meetings of the Board of Directors, a majority of the directors then in office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 6. Actions of Board Without a Meeting. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 7. Meetings by Means of Conference Telephone. Unless otherwise provided by the Certificate of Incorporation or these Bylaws, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 7 shall constitute presence in person at such meeting. Section 8. Committees. The Board of Directors may, by resolution passed by a majority of the directors then in office, -10- 14 designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any committee, to the extent allowed by law and provided in the Bylaw or resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each committee shall keep regular minutes and report to the Board of Directors when required. Section 9. Compensation. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 10. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or any other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose if (i) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or their committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his, her or their -11- 15 relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV OFFICERS Section 1. General. The officers of the Corporation shall be appointed by the Board of Directors and shall consist of a Chairman of the Board (who must be a director) or a President, or both, a Secretary and a Treasurer (or a position with the duties and responsibilities of a Treasurer). The Board of Directors may also appoint one or more vice presidents, assistant secretaries or assistant treasurers, and such other officers as the Board of Directors, in its discretion, shall deem necessary or appropriate from time to time. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. Section 2. Election; Term of Office. The Board of Directors at its first meeting held after each Annual Meeting of Stockholders shall elect a Chairman of the Board or a President, or both, a Secretary and a Treasurer (or a position with the duties and responsibilities of a Treasurer), and may also elect at that meeting or any other meeting, such other officers and agents as it shall deem necessary or appropriate. Each officer of the Corporation shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors together with the powers and duties customarily exercised by such officer; and each officer of the Corporation shall hold office until such officer's successor is elected and qualified or until such officer's earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. The Board of Directors may at any time, with or without cause, by the affirmative vote of a majority of directors then in office, remove any officer. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be fixed by the Board of Directors. Section 3. Chairman of the Board. The Chairman of the Board, if there shall be such an officer, shall preside at all meetings of the stockholders and the Board of Directors and shall -12- 16 have such other duties and powers as may be prescribed by the Board of Directors from time to time. Section 4. President. The President shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall have and exercise such further powers and duties as may be specifically delegated to or vested in the President from time to time by these Bylaws or the Board of Directors. In the absence of the Chairman of the Board or in the event of his or her inability or refusal to act, or if the Board has not designated a Chairman, the President shall perform the duties of the Chairman of the Board, and when so acting, shall have all of the powers and be subject to all of the restrictions upon the Chairman of the Board. Section 5. Vice President. At the request of the President, in the absence of the President or in the event of his or her inability or refusal to act, the Vice President (or in the event there be more than one vice president, the vice presidents in the order designated by the directors, or in the absence of any designation, then in the order of their election) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. The vice presidents shall perform such other duties and have such other powers as the Board of Directors or the President may from time to time prescribe. Section 6. Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings thereat in a book or books to be kept for that purpose; the Secretary shall also perform like duties for the standing committees when required. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors or the President. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then either the Board of Directors or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing by his or her signature. The Secretary shall see that all books, reports, statements, certificates and other documents -13- 17 and records required by law to be kept or filed are properly kept or filed, as the case may be. Section 7. Assistant Secretaries. Except as may be otherwise provided in these Bylaws, Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, or the Secretary, and shall have the authority to perform all functions of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary. Section 8. Treasurer. The Treasurer shall have the custody of the corporate funds and securities, shall keep complete and accurate accounts of all receipts and disbursements of the Corporation, and shall deposit all monies and other valuable effects of the Corporation in its name and to its credit in such banks and other depositories as may be designated from time to time by the Board of Directors. The Treasurer shall disburse the funds of the Corporation, taking proper vouchers and receipts for such disbursements, and shall render to the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. The Treasurer shall, when and if required by the Board of Directors, give and file with the Corporation a bond, in such form and amount and with such surety or sureties as shall be satisfactory to the Board of Directors, for the faithful performance of his or her duties as Treasurer. The Treasurer shall have such other powers and perform such other duties as the Board of Directors or the President shall from time to time prescribe. Section 9. Assistant Treasurers. Except as may be otherwise provided in these Bylaws, Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the President, or the Treasurer, and shall have the authority to perform all functions of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. The Assistant Treasurers shall, when and if required by the Board of Directors, give and file with the Corporation a bond, in such form and amount and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of his or her performance as Assistant Treasurer. Section 10. Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any -14- 18 other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers. ARTICLE V STOCK Section 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board or the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such holder in the Corporation. Section 2. Signatures. Where a certificate is countersigned by a transfer agent other than the Corporation or its employees or a registrar other than the Corporation or its employees, any other signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Board of Directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or such owner's legal representative, to advertise the same in such manner as the Board of Directors shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by such person's attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be canceled before a new certificate shall be issued. Section 5. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at -15- 19 any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 6. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. Section 7. Voting Securities Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chairman of the Board, the President, any Vice President or the Secretary and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons. ARTICLE VI NOTICES Section 1. Notices. Whenever written notice is required by law, the Certificate of Incorporation or these Bylaws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at such person's address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. -16- 20 Written notice may also be given personally or by telegram, telex, facsimile or cable and such notice shall be deemed to be given at the time of receipt thereof if given personally or at the time of transmission thereof if given by telegram, telex, facsimile or cable. Section 2. Waiver of Notice. Whenever any notice is required by law, the Certificate of Incorporation or these Bylaws to be given to any director, member or a committee or stockholder, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to notice. ARTICLE VII GENERAL PROVISIONS Section 1. Dividends. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting or by any Committee of the Board of Directors having such authority at any meeting thereof, and may be paid in cash, in property, in shares of the capital stock or in any combination thereof. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. Section 2. Disbursements. All notes, checks, drafts and orders for the payment of money issued by the Corporation shall be signed in the name of the Corporation by such officers or such other persons as the Board of Directors may from time to time designate. Section 3. Corporation Seal. The corporate seal, if the Corporation shall have a corporate seal, shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII DIRECTORS' LIABILITY AND INDEMNIFICATION Section 1. Directors' Liability. No director of the Corporation shall be personally liable to the Corporation or its -17- 21 stockholders for monetary damages for any breach of fiduciary duty by such a director as a director. Notwithstanding the foregoing sentence, a director shall be liable to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which such director derived an improper personal benefit. No amendment to or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the Delaware General Corporation Law is amended hereafter to further eliminate or limit the personal liability of directors, the liability of a director of this Corporation shall be limited or eliminated to the fullest extent permitted by the Delaware General Corporation Law, as amended. Section 2. Right to Indemnification. Each person who was or is made a party to or is threatened to be made a party to or is involuntarily involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation, or is or was serving (during his or her tenure as director and/or officer) at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, whether the basis of such Proceeding is an alleged action or inaction in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law (or other applicable law), as the same exists or may hereafter be amended, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection with such Proceeding. Such director or officer shall have the right to be paid by the Corporation for expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law (or other applicable law) requires, the payment of such expenses in advance of the final disposition of any such Proceeding shall be made only upon receipt by the Corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it should be determined ultimately that he or she is not entitled to be indemnified under this Article or otherwise. -18- 22 Section 3. Right of Claimant to Bring Suit. If a claim under Section 2 of this Article is not paid in full by the Corporation within ninety (90) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, together with interest thereon, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim, including reasonable attorneys' fees incurred in connection therewith. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law (or other applicable law) for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (or of its full Board of Directors, its directors who are not parties to the Proceeding with respect to which indemnification is claimed, its stockholders, or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law (or other applicable law), nor an actual determination by any such person or persons that such claimant has not met such applicable standard of conduct, shall be a defense to such action or create a presumption that the claimant has not met the applicable standard of conduct. Section 4. Non-Exclusivity of Rights. The rights conferred by this Article shall not be exclusive of any other right which any director, officer, representative, employee or other agent may have or hereafter acquire under the Delaware General Corporation Law or any other statute, or any provision contained in the Corporation's Certificate of Incorporation or Bylaws, or any agreement, or pursuant to a vote of stockholders or disinterested directors, or otherwise. Section 5. Insurance and Trust Fund. In furtherance and not in limitation of the powers conferred by statute: (1) the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of -19- 23 his or her status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of law; and (2) the Corporation may create a trust fund, grant a security interest and/or use other means (including, without limitation, letters of credit, surety bonds and/or other similar arrangements), as well as enter into contracts providing indemnification to the fullest extent permitted by law and including as part thereof provisions with respect to any or all of the foregoing, to ensure the payment of such amount as may become necessary to effect indemnification as provided therein, or elsewhere. Section 6. Indemnification of Employees and Agents of the Corporation. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, including the right to be paid by the Corporation the expenses incurred in defending any Proceeding in advance of its final disposition, to any employee or agent of the Corporation to the fullest extent of the provisions of this Article VIII or otherwise with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. Section 7. Amendment. This Article VIII is also contained in Articles SEVEN and EIGHT of the Corporation's Certificate of Incorporation, and accordingly, may be altered, amended or repealed only to the extent and at the time the comparable Certificate Article is altered, amended or repealed. Any repeal or modification of this Article VIII shall not change the rights of an officer or director to indemnification with respect to any action or omission occurring prior to such repeal or modification. ARTICLE IX AMENDMENTS Except as otherwise specifically stated within an Article to be altered, amended or repealed, these Bylaws may be altered, amended or repealed and new Bylaws may be adopted at any meeting of the Board of Directors or of the stockholders, provided that with respect to a meeting of the stockholders, notice of the proposed change was given in the notice of such stockholders' meeting. -20- 24 THIS IS TO CERTIFY: That I am the duly elected, qualified and acting Secretary of OpTel, Inc. and that the foregoing amended and restated bylaws were adopted as the bylaws of said corporation effective as of the ___ day of ________, 1999, at a meeting of the Board of Directors duly held on __________ ___, 1999 by the vote of the directors entitled to exercise at least a majority of the voting power of said corporation. Dated as of _________ ___, 1999. --------------------------------- Michael E. Katzenstein, Secretary -21- EX-4.8 5 FORM OF STOCK CERTIFICATE FOR THE COMMON STOCK 1 EXHIBIT 4.8 CLASS A CLASS A COMMON STOCK COMMON STOCK BETTER CONNECTED TO THE FUTURE [OPTEL LOGO] VIDEO - VOICE - DATA INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR THE STATE OF DELAWARE OPTEL, INC. CERTAIN DEFINITIONS THIS IS TO CERTIFY THAT CUSIP 683817 30 8 is the owner of FULLY PAID AND NON-ASSESABLE SHARES, PAR VALUE ($.01) PER SHARE, OF CLASS A COMMON STOCK OF - -------------------------------------------- ------------------------------------------------- - -------------------------------------------- OPTEL, INC. ------------------------------------------------- - -------------------------------------------- ------------------------------------------------- (hereinafter called the "Corporation", transferable on the books of the Corporation by said owner in person or by this duly authorized attorney. Upon the surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to the provisions of the Amended and Restated Certificate of Incorporation of the Corporation as now or hereafter amended, (copies of which are on file with the Transfer Agent Transferred to which reference is hereby expressly made and to all of which the holder hereof by acceptance of this certificate hereby assents. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dates: /s/ /s/ [SEAL] VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED OFFICER
2 KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian ----------- ----------- TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of survivorship under Uniform Gifts to Minors and not as tenants in common Act ------------------------------- (State)
Additional abbreviations may also be used though not in the above list. A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OF THE CORPORATION OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS WILL BE FURNISHED BY THE CORPORATION WITHOUT CHARGE, TO EACH STOCKHOLDER WHO SO REQUESTS UPON APPLICATION TO THE TRANSFER AGENT OR TO THE SECRETARY OF THE CORPORATION. For value received________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - --------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- shares - ------------------------------------------------------------------------- of the capital stock represented by this Certificate, and do hereby irrevocably constitute and appoint ---------------------------------------------------------- Attorney - ----------------------------------------------------------------------- to transfer the said stock on the books of the within named Corporation with full power of substitution in the promises. Dated --------------------- X ------------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Certificate in every particular without alteration or enlargement or any change whatever. Signature(s) Guaranteed: - ----------------------------------------------------- THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTEE INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATES AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM). PURSUANT TO S.E.C RULE 17Ad-15. - ----------------------------------------------------------------------- THIS SPACE MUST NOT BE COVERED IN ANY WAY EX-5.1 6 OPINION OF KRONISH LIEB WEINER & HELLMAN LLP 1 EXHIBIT 5.1 May 19, 1999 OpTel, Inc. 1111 West Mockingbird Lane Dallas, Texas 75247 Ladies and Gentlemen: We have acted as counsel to OpTel, Inc., a Delaware corporation (the "Company"), in connection with its Registration Statement on Form S-1 (File No. 333-56231), filed pursuant to the Securities Act of 1933, as amended, related to the proposed underwritten public offering (the "Offering") of up to $128,823,790.00 aggregate value of shares of its Class A Common Stock, par value $.01 per share (the "Shares"), to be offered to the public (including Shares that may be so offered pursuant to an over-allotment option granted to the underwriters). Of the Shares, 390,370 Shares are being offered by certain stockholders of the Company (the "Selling Stockholders") and the balance is being offered by the Company. In that connection, we have reviewed the Amended and Restated Certificate of Incorporation of the Company, its Bylaws, resolutions of its Board of Directors and such other documents and records as we have deemed appropriate. On the basis of such review, and having regard to legal considerations that we deem relevant, it is our opinion that: 1. The Shares to be offered by the Company pursuant to the Offering have been duly authorized and, when issued in accordance with the terms set forth in the Registration Statement, will be validly issued, fully paid and nonassessable. 2. The Shares to be offered by the Selling Shareholders pursuant to the Offering have been duly authorized and validly issued and are fully paid and nonassessable. 3. The statements under the caption "Certain Federal Income Tax Considerations" in the prospectus relating to the Shares included in the Registration Statement, 2 OpTel, Inc. May 19, 1999 Page 2 insofar as such statements constitute summaries of federal income tax law, fairly summarize the matters referred to therein. We are members of the Bar of the State of New York and do not purport to be experts or give any opinion except as to matters involving the laws of such state, the general corporation laws of the State of Delaware and the federal laws of the United States. We hereby consent to the use of our name under the caption "Legal Matters" in the prospectus included in the Registration Statement and to the use of this opinion as an exhibit to the Registration Statement. Very truly yours, /s/ KRONISH LIEB WEINER & HELLMAN LLP EX-10.10 7 RESTATED INCENTIVE STOCK PLAN 1 EXHIBIT 10.10 OPTEL, INC. RESTATED INCENTIVE STOCK PLAN (APPROVED BY THE BOARD ON JUNE 4, 1998 AND AS AMENDED ON JANUARY 25, 1999 AND MAY____, 1999 AND TO BE EFFECTIVE ON THE IPO DATE, SUBJECT TO SHAREHOLDER APPROVAL) I. Purpose This Restated Incentive Stock Plan (the "Plan") is intended to attract, retain and provide incentives to senior executives and key employees of the Corporation, and to thereby increase overall shareholders' value. The Plan generally provides for the granting of stock, stock options, stock appreciation rights, restricted shares, performance based awards, other stock-based awards or any combination of the foregoing to the eligible participants. II. Definitions (a) "Award" includes, without limitation, stock options (including incentive stock options within the meaning of Section 422(b) of the Code), stock appreciation rights, stock awards, restricted share awards, dividend equivalent rights, performance based awards or other awards that are valued in whole or in part by reference to, or are otherwise based on, the Common Stock ("other Common Stock-based Awards"), all on a stand alone, combination or tandem basis, as described in or granted under this Plan. (b) "Award Agreement" means a written agreement setting forth the terms and conditions of each Award made under this Plan. (c) "Board" means the Board of Directors of the Corporation. (d) "Change in Control" means the occurrence of any one of the following events: (i) any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (other than Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci(1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec and their respective affiliates (collectively, all or any of the above constitute the "Existing Control Group")), is a "beneficial owner," as such term is used in Rule 13d- 3 promulgated under that act, of shares of the Voting Stock of the Company having more total votes in an election for directors than shares of Voting Stock of which the Existing Control Group is the beneficial owner and, at the same time, the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; 1 2 (ii) the majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the date of this Agreement; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by two-thirds of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director; (iii) the Corporation adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of the assets or business of the Corporation is disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of the Corporation immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Corporation, the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Corporation) and anytime thereafter the Existing Control Group shall not then have the right to elect or designate a majority of the members of the Board; or (v) the Corporation combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of the Corporation immediately prior to the combination hold, directly or indirectly, 50% or less of the Voting Stock of the combined company (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the combined company, any shares received by Affiliates of such other company in exchange for stock of such other company) and anytime thereafter the Existing Control Group shall not then have the right to elect or designate a majority of the members of the Board. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the Compensation Committee of the Board or such other committee of the Board as may be designated by the Board from time to time to administer this Plan. (g) "Common Stock" means the $.01 par value Class A Common Stock of the Corporation. (h) "Corporation" means OpTel, Inc., a Delaware corporation. (i) "Director" means a member of the Board. (j) "Employee" means an employee of the Corporation or a Subsidiary. 2 3 (k) "Executive" means the Directors, Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Vice Presidents reporting to the Chief Executive Officer and Chief Operating Officer, City General Managers reporting directly to the Vice Presidents, Chief Executive Officer or Chief Operating Officer, and other employees of the Corporation or a Subsidiary specifically designated by the Committee. (l) "Exchange Act" means the Securities Exchange Act of 1934, as amended. (m) "Fair Market Value" means the value determined by the Committee or the Board and, if shares of Common Stock are listed on a national securities exchange or traded on the over-the-counter market, the Fair Market Value shall be the mean of the highest and lowest trading prices or of the high bid and low asked prices of shares of Common Stock on such exchange, or on the over-the-counter market as reported by the NASDAQ system of the National Quotation Bureau, Inc., as the case may be, on the relevant date, and if there is no trading or bid or asked price on that day, the mean of the highest and lowest trading or high bid and low asked prices on the most recent day for which such prices are available preceding such relevant date; provided that the Committee and the Board acting reasonably may at any time specify some other definition of Fair Market Value; provided, further, that the Fair Market Value of Common Stock on the IPO Date shall be the initial offering price to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended. (n) "IPO Date" means the date on which the Corporation's Common Stock is first offered to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended. (o) "Participant" means an Executive who has been granted an Award under the Plan. (p) "Plan Year" means the fiscal year of the Corporation commencing September 1 and ending August 31. (q) "Subsidiary" means any corporation or other entity, whether domestic or foreign, in which the Corporation has or obtains, directly or indirectly, a proprietary interest of more than 50% by reason of stock ownership or otherwise. III. Eligibility Any Executive selected by the Committee is eligible to receive an Award pursuant to Section VI hereof. 3 4 IV. Plan Administration (a) The Plan shall be administered by the Committee. The Committee shall periodically make determinations with respect to the participation of Executives in the Plan and, except as otherwise required by law or this Plan, the terms of Awards granted, including performance objective, vesting or exercisability schedules, price, restriction, option or performance period, dividend rights, post-retirement and termination rights, payment alternatives such as cash, stock, contingent awards or other means of payment consistent with the purposes of this Plan, and such other terms and conditions as the Committee deems appropriate which shall be contained in an Award Agreement with respect to a Participant. (b) The Committee shall have authority to interpret and construe the provisions of the Plan and any Award Agreement and make determinations pursuant to any Plan provision or Award Agreement which shall be final and binding on all persons. No member of the Committee shall be liable for any action or determination made in good faith, and the members shall be entitled to indemnification and reimbursement in the manner provided in the Corporation's Certificate of Incorporation, as it may be amended from time to time. (c) The Committee shall have the authority at any time to provide for the conditions and circumstances under which Awards shall be forfeited. The Committee shall have the authority to accelerate the vesting of any Award and the time at which any Award becomes exercisable. V. Capital Stock Subject to the Provisions of this Plan (a) The capital stock subject to the provisions of this Plan shall be shares of authorized but unissued Common Stock and shares of Common Stock held as treasury stock. Subject to adjustment in accordance with the provisions of Section X, and subject to Section V(c) below, the maximum number of shares of Common Stock that shall be available for grants of Awards under this Plan shall be initially that number of shares of Common Stock that equals 12% of the Common Stock, on a fully diluted basis, issued or issuable under derivatives securities outstanding ("Issued and Issuable Common Stock") on the end of the IPO Date. If, as of January 1 of each year the Plan is in effect, the total number of shares of Issued and Issuable Common Stock, not including any shares issued under the Plan, exceed the total number of shares of Issued and Issuable Common Stock as of January 1 of the preceding year (or, for 1998, as of the IPO Date), the number of shares available for grants of Awards under this Plan shall equal 12% of the total number of shares of Issued and Issuable Common Stock at such date, not including any shares issued under the Plan. (b) The grant of a restricted share or performance based Award shall be deemed to be equal to the maximum number of shares which may be issued under the Award. Awards payable only in cash will not reduce the number of shares available for Awards granted under the Plan. 4 5 (c) There shall be carried forward and be available for Awards under the Plan, all of the following: (i) any unused portion of the limit set forth in paragraph (a) of this Section V; (ii) shares represented by Awards which are cancelled, forfeited, surrendered, terminated, paid in cash or expire unexercised; and (iii) the excess amount of variable Awards which become fixed at less than their maximum limitations. VI. Awards Under This Plan As the Committee may determine, the following types of Awards and other Common Stock-based Awards may be granted under this Plan on a stand alone, combination or tandem basis: (a) Stock Option. An Award which provides a right to buy a specified number of shares of Common Stock at a fixed exercise price during a specified time. Unless otherwise specifically provided in an Award Agreement, (i) the exercise price of each share of Common Stock covered by a stock option shall not be less than the Fair Market Value of the Common Stock on the date of the grant of such stock option and (ii) 25% of the shares covered by the stock option shall become exercisable on the second anniversary of its grant and an additional 25% of such shares shall become exercisable on each of the third, fourth and fifth anniversary of its grant. (b) Incentive Stock Option. An Award which may be granted only to Executives that are employees of the Corporation or a subsidiary in the form of a stock option which shall comply with the requirements of Code Section 422 or any successor section as it may be amended from time to time. The exercise price of any incentive stock option shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant of the incentive stock option Award. Unless otherwise specifically provided in the Award Agreement, 25% of the shares covered by the incentive stock option shall become exercisable on the second anniversary of its grant, and an additional 25% of such shares shall become exercisable on each of the third, fourth and fifth anniversary of its grant. An Executive who owns stock representing 10% of the voting power or value of all classes of stock of the Corporation or a Subsidiary shall only be granted an incentive stock option (i) with an exercise price of at least a 110% of the Fair Market Value of the Common Stock on the date of the grant of such option and (ii) that expires 5 years from the date of its grant. Subject to adjustment in accordance with the provisions of Section X, the aggregate number of shares which may be subject to incentive stock option Awards under this Plan shall not exceed 12% of the Issued and Issuable Common Stock on the end of the IPO Date. To the extent that Code Section 422 requires certain provisions to be set forth in a written plan, said provisions are incorporated herein by this reference. 5 6 (c) Stock Option in lieu of Compensation Election. A right given with respect to a year to an Executive to elect to exchange annual retainers, fees or compensation for stock options. (d) Stock Appreciation Right. A right which may or may not be contained in the grant of a stock option or incentive stock option to receive the excess of the Fair Market Value of a share of Common Stock on the date the option is surrendered over the option exercise price or other specified amount contained in the Award Agreement. (e) Restricted Shares. A transfer of Common Stock to a Participant subject to forfeiture until such restrictions, terms and conditions as the Committee may determine are fulfilled. (f) Dividend Equivalent Right. A right to receive dividends or their equivalent in value in Common Stock, cash or in a combination of both with respect to any new or previously existing Award. (g) Stock Award. An unrestricted transfer of ownership of Common Stock. (h) Performance Base Awards. An Award payable after specified performance goals have been satisfied. The performance period for a performance based Award shall be established prior to the time such Award is granted and may overlap with performance periods relating to other Awards granted hereunder to the same Executive. Each Award shall be contingent upon future performance and achievement of objectives described either in terms of Company-wide performance or in terms that are related to the performance of the Executive or of the division, subsidiary, department or function within the Corporation in which the Executive is employed. Such objectives shall be based on increases in share prices, operating income, net income or cash flow thresholds, sales results, return on common equity or any combination of the foregoing. Following the end of each performance period, the holder of each Award shall be entitled to receive payment of an amount, not exceeding the maximum value of the Award, based on the achievement of the performance measures for such performance period, as determined by the Committee. Unless the Award specifies otherwise, including restrictions in order to satisfy the conditions under Section 162(m) of the Code, the Committee may adjust the payment of Awards or the performance objectives if events occur or circumstances arise which would cause a particular payment or set of performance objectives to be inappropriate, as determined by the Committee. (i) Other Stock-Based Awards. Other Common Stock-based Awards which are related to or serve a similar function to those Awards set forth in this Section VI. 6 7 VII. Award Agreements Each Award under the Plan shall be evidenced by an Award Agreement setting forth the terms and conditions of the Award. Unless required by the Committee, a Participant shall not be required to execute the Participant's Award Agreement. VIII. Other Terms and Conditions (a) Assignability. Unless provided to the contrary in any Award, no Award shall be assignable or transferable except by will, by the laws of descent and distribution and during the lifetime of a Participant, the Award shall be exercisable only by such Participant. No Award granted under the Plan shall be subject to execution, attachment or process. (b) Termination of Employment or Other Relationship. The Committee shall determine the disposition of the grant of each Award in the event of the retirement, disability, death or other termination of a Participant's employment or other relationship with the Corporation or a Subsidiary. (c) Rights as a Stockholder. A Participant shall have no rights as a stockholder with respect to shares covered by an Award until the date the Participant is the holder of record. No adjustment will be made for dividends or other rights for which the record date is prior to such date. (d) No Obligation to Exercise. The grant of an Award shall impose no obligation upon the Participant to exercise the Award. (e) Payments by Participants. The Committee may determine that Awards for which a payment is due from a Participant may be payable: (i) in U.S. dollars by personal check, bank draft or money order payable to the order of the Corporation, by money transfers or direct account debits; (ii) through the delivery or deemed delivery based on attestation to the ownership of shares of Common Stock with a Fair Market Value equal to the total payment due from the Participant; (iii) pursuant to a broker-assisted "cashless exercise" program if established by the Corporation; (iv) by a combination of the methods described in (i) through (iii) above; or (v) by such other methods as the Committee may deem appropriate. (f) Withholding. Except as otherwise provided by the Committee, (i) the deduction of withholding and any other taxes required by law will be made from all amounts paid in cash and (ii) in the case of payments of Awards in shares of Common Stock, the Participant shall be required to pay the amount of any taxes required to be withheld prior to receipt of such stock, or alternatively, a number of shares the Fair Market Value of which equals the amount required to be withheld may be deducted from the payment. (g) Restrictions on Sale and Exercise. With respect to officers and directors for purposes of Section 16 of the Exchange Act, and if required to comply with rules 7 8 promulgated thereunder, (i) no Award providing for exercise, a vesting period, a restriction period or the attainment of performance standards shall permit unrestricted ownership of Common Stock by the Participant for at least six months from the date of grant, and (ii) Common Stock acquired pursuant to this Plan (other than Common Stock acquired as a result of the granting of a "derivative security") may not be sold for at least six months after acquisition. (h) Maximum Awards. Subject to adjustment in accordance with the provisions of Section X, the maximum number of shares of Common Stock that may be issued to any single Participant pursuant to options over the life of this Plan is 1,000,000. The maximum number of shares of Common Stock that may be issued, and the maximum amount of cash that may be received by any single Participant pursuant to a performance based Award in any one year is 50,000 and $750,000, respectively. (i) Change in Control. In the event of a Change in Control, all Awards shall vest, become immediately exercisable and/or cease to be subject to any risk of forfeiture, as the case may be. (j) Additional Restrictions. The Committee may include provisions in an Award Agreement which would limit the right of a Participant with respect to an Award in the event that the Participant conducts himself in a manner adversely affecting the Company or engages in other activities proscribed in the Award Agreement. IX. Termination, Modification and Amendments (a) The Plan may from time to time be terminated, modified or amended by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Corporation present or represented and entitled to vote at a duly held stockholders meeting. (b) The Board may at any time terminate the Plan or from time to time make such modifications or amendments of the Plan as it may deem advisable; provided, however, that the Board shall not make any material amendments to the Plan which require stockholder approval under applicable law, rule or regulation unless the same shall be approved by the requisite vote of the Corporation's stockholders. (c) No termination, modification or amendment of the Plan may adversely affect the rights conferred by an Award without the consent of the recipient thereof. X. Recapitalization The aggregate number of shares of Common Stock as to which Awards may be granted to Participants, the number of shares thereof covered by each outstanding Award, and 8 9 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. 9 10 XIV. Effective Date and Term The Plan, as restated, shall become effective upon, and is conditioned on the occurrence of, the IPO Date, subject to adoption by the Board and the approval of the Plan by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock of the Company entitled to vote thereon within one year following adoption of the Plan by the Board. All Awards granted prior to such adoption by the Board and approval by the stockholders shall be subject to such adoption and approval and shall not be exercisable and/or transferable prior thereto. In the event such adoption and/or approval is not obtained or there is no IPO Date, the Plan as restated and all Awards granted thereunder shall be null and void. The Plan shall terminate on the date which is ten years from the IPO Date. No Award shall be granted after the termination of the Plan. Unless otherwise provided, by the Committee, options granted prior to the adoption of this restatement of the Plan shall continue to be subject to the terms of the Plan prior to this restatement. 10 EX-10.12 8 1998 EMPLOYEE STOCK PURCHASE PLAN 1 EXHIBIT 10.12 OPTEL INC. 1998 EMPLOYEE STOCK PURCHASE PLAN (APPROVED BY THE BOARD ON JUNE 4, 1998) ARTICLE I PURPOSE AND SCOPE OF THE PLAN 1.1 PURPOSE The purpose of the OpTel Inc. 1998 Employee Stock Purchase Plan is to assist employees of OpTel Inc. and its subsidiaries in acquiring a stock ownership interest in the Company pursuant to a plan which is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended. 1.2 DEFINITIONS Whenever the following terms are used in this Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. The singular pronoun shall include the plural where the context so indicates. "Board" shall mean the Board of Directors of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Committee" shall mean the Stock Purchase Plan Committee of the Company, which Committee shall administer the Plan as provided in Section 1.3 hereof. "Common Stock" shall mean the $.01 par value Class A Common Stock of the Company. "Company" shall mean OpTel Inc., a Delaware corporation. "Compensation" shall mean the base salary, overtime, and commissions paid to an Employee by the Company or a Subsidiary in accordance with established payroll procedures. "Eligible Employee" shall mean with respect to an Option Period an Employee who, at the time of the Offering Date on which such Option Period commences, (a) is scheduled to work at least 20 hours per week, (b) whose customary employment is more than five (5) months in a calendar year, and (c) has been employed with the Company or a Subsidiary for at least six months; provided, however, with respect to the first Option Period only, the requirements of clause (c) above shall be waived. "Employee" shall mean any employee of the Company or a Subsidiary. 2 "Exercise Date" shall mean (i) if the Option Date is January 1 of any given year, June 30 of that same year, and (ii) if the Option Date is July 1 of any given year, December 31 of that same year; provided, however, the first Exercise Date shall mean December 31, 1998. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" means the closing price for the Common Stock as officially reported on the relevant date (or if there were no sales on such date, on the next preceding date on which such closing price was recorded) by the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any such national securities exchanges, the closing price as furnished by the National Association of Securities Dealers through Nasdaq or a similar organization if Nasdaq is no longer reporting such information, or, if the Common Stock is not quoted on Nasdaq, as determined in good faith by resolution of the Board (whose determination shall be conclusive), based on the best information available to it; notwithstanding the foregoing, the Fair Market Value of Common Stock on the IPO Date shall be the initial offering price to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended. "IPO Date" shall mean the date on which the Company's Common Stock is first offered to the public pursuant to an effective registration statement under the Securities Act of 1933, as amended. "Offering Date" shall mean January 1, or July 1, of each year until termination of the Plan; provided, however, the first Offering Date shall mean the IPO Date. "Option Period" shall mean the period beginning on an Offering Date and ending on the next succeeding Exercise Date. "Option Price" shall mean the purchase price of a share of Common Stock hereunder as provided in Section 3.1 hereof. "Participant" shall mean any Eligible Employee who elects to participate. "Plan" shall mean this OpTel Inc. 1998 Employee Stock Purchase Plan, as the same may be amended from time to time. "Plan Account" shall mean a bookkeeping account established and maintained by the Company in the name of a Participant. "Subsidiary" shall mean any present or future corporation which (i) is a corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other 2 3 corporations in such chain and (ii) is designated as a participating subsidiary in the Plan by the Board or the Committee. 1.3 ADMINISTRATION OF PLAN The Plan shall be administered by the Committee which shall be composed of not less than three officers of the Company. Each member of the Committee shall serve for a term commencing on a date specified by the Board and continuing until he or she dies or resigns or is removed from office by the Board. The Committee shall have the power to make, amend and repeal rules and regulations for the interpretation and administration of the Plan consistent with the qualifications of the plan under Section 423 of the Code, and the Committee also is authorized to change the Option Periods, Offering Dates and Exercise Dates under the Plan by providing written notice to all Employees at least 15 days prior to the Exercise Date following which such changes will take effect. The Committee may delegate administrative tasks under the Plan to one or more agents. The Committee's interpretation and decisions in respect to the Plan shall be final and conclusive. ARTICLE II PARTICIPATION 2.1 ELIGIBILITY An Eligible Employee may participate in an Option Period if immediately after the applicable Offering Date, such Employee would not be deemed for the purposes of Section 423(b)(3) of the Code to possess 5% or more of the total combined voting power or value of all classes of stock of the Company or any Subsidiary. 2.2 ELECTION TO PARTICIPATE; PAYROLL DEDUCTIONS An Eligible Employee may participate in the Plan only by means of payroll deduction. An Eligible Employee may elect to participate in the Plan during an Option Period by delivering to the Company in the calendar month preceding the Offering Date on which such Option Period commences a written payroll deduction authorization on a form prescribed by the Company; provided, however, that for the Option Period commencing on the IPO Date, an Eligible Employee may elect to participate in the Plan at any time designated by the Company on or prior to the IPO Date. Payroll deductions (a) shall be equal to at least 1%, but not more than 10%, of the Participant's Compensation during the Option Period; (b) must equal at least five dollars ($5.00) per pay period; and (c) must be expressed as a whole number percentage, subject to the provisions of Section 3.2 and 3.3 hereof. Amounts deducted from a Participant's Compensation pursuant to this Section 2.2 shall be credited to the Participant's Plan Account. 3 4 2.3 CONTINUED EFFECTIVENESS OF ELECTING TO PARTICIPATE An election to participate pursuant to Section 2.2, once made, shall remain in force for subsequent Option Periods until revoked or modified. Any revocation or modification must be made on a form prescribed by the Company and submitted to the Company at least eight business days prior to the subsequent Option Period. 2.4 LEAVE OF ABSENCE During leaves of absence approved by the Company and meeting the requirements of Regulation Section 1.421-7(h)(2) under the Code, a Participant may continue participation in the Plan by making cash payments to the Company on his or her normal payday equal to his or her authorized payroll deduction. ARTICLE III PURCHASE OF SHARES 3.1 OPTION GRANT; OPTION PRICE On each Offering Date of an Option Period with respect to which a Participant elects to participate, subject to Section 3.3, the Participant will automatically and without any action on his or her part be granted an option to purchase at the Option Price the number of shares (or part thereof) of Common Stock which can be purchased with the amount that shall be in the Participant's Plan Account on the Exercise Date. The Option Price per share of the Common Stock sold to Participants hereunder shall be 85% of the Fair Market Value of such share on either the Offering Date or the Exercise Date of the Option Period, whichever is lower, but in no event shall the Option Price per share be less than the par value per share of the Common Stock. 3.2 PURCHASE OF SHARES (a) On each Exercise Date on which he or she is employed, each Participant will automatically and without any action on his or her part exercise his or her option to purchase at the Option Price the number of shares (or part thereof) of Common Stock which can be purchased with the amount in the Participant's Plan Account; provided, however, that no Participant shall be permitted to purchase more than 4,000 shares of Common Stock (as adjusted pursuant to Section 4.2 hereof) pursuant to this Plan during an Option Period. The balance, if any, remaining in the Participant's Plan Account (after exercise of his or her option) as of an Exercise Date shall be carried forward to the next Option Period, unless the Participant has elected to withdraw from the Plan pursuant to Section 5.1 hereof or to revoke an election to participate pursuant to Section 2.3 hereto. 4 5 (b) As soon as practicable following each Exercise Date, shares of Common Stock acquired by each Participant shall be credited to an account in the Participant's name with a brokerage firm selected by the Committee to hold the shares in street name. (c) The balance, if any, remaining in the Participant's Plan Account after exercise of his or her option on the last Exercise Date under this Plan shall be refunded to him or her within 21 days after such Exercise Date. 3.3 LIMITATIONS ON PURCHASE No Employee shall be granted an option under the Plan which permits his or her rights to purchase Common Stock under the Plan or any other employee stock purchase plan of the Company or any of its Subsidiaries to accrue at a rate which exceeds $25,000 (as measured by the Fair Market Value of such Common Stock at the time the option is granted) for each calendar year such option is outstanding. For purposes of this Section 3.3, the right to purchase Common Stock under an option accrues when the option (or any portion thereof) becomes exercisable, and the right to purchase Common Stock which has accrued under one option under the Plan may not be carried over to any other option. 3.4 TRANSFERABILITY OF RIGHTS An option granted under the Plan shall not be transferable and is exercisable only by the Participant. No option or interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Participant or his or her successors in interest or shall be subject to disposition by alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) and any attempt at disposition thereof shall be null and void and of no effect. ARTICLE IV PROVISIONS RELATING TO COMMON STOCK 4.1 COMMON STOCK AVAILABLE FOR ISSUANCE There shall be available for issuance under this Plan that number of shares of Common Stock that equals 1% of the Common Stock outstanding, on the IPO Date, on a fully diluted basis, issued or issuable under derivative securities, subject to adjustment in accordance with Section 4.2 hereof. The Company shall take all appropriate actions to reserve such available shares for issuance under this Plan. 5 6 4.2 ADJUSTMENT FOR CHANGES IN COMMON STOCK In the event that adjustments are made in the number of outstanding shares of Common Stock or the shares are exchanged for a different class of stock of the Company by reason of stock dividend, stock split or other subdivision, the Committee shall make appropriate adjustments in (a) the number and class of shares or other securities that may be reserved for purchase hereunder and (b) the Option Price. 4.3 MERGER, ACQUISITION OR LIQUIDATION In the event of the merger or consolidation of the Company into another corporation, the acquisition by another corporation of all or substantially all of the Company's assets or 80% or more of the Company's then outstanding voting stock or the liquidation or dissolution of the Company, the date of exercise with respect to outstanding options shall be the business day immediately preceding the effective date of such merger, consolidation, acquisition, liquidation or dissolution unless the Committee administering the Plan shall, in its sole discretion, provide for the assumption or substitution of such options in a manner complying with Section 424(a) of the Code. 4.4 INSUFFICIENT SHARES If the aggregate funds available for the purchase of Common Stock on any Exercise Date would cause an issuance of shares in excess of the number provided for in Section 4.1 hereof, (a) the Committee shall proportionately reduce the number of shares that would otherwise be purchased by each Participant in order to eliminate such excess, and (b) the Plan shall automatically terminate immediately after such Exercise Date. 4.5 RIGHTS AS STOCKHOLDERS With respect to shares of Common Stock subject to an option, a Participant shall not be deemed to be a stockholder and shall not have any of the rights or privileges of a stockholder. A Participant shall have the rights and privileges of a stockholder when, but not until, the account in the Participant's name with the brokerage firm selected by the Committee has been credited following the exercise of his or her option. ARTICLE V TERMINATION OF PARTICIPATION 5.1 CESSATION OF CONTRIBUTIONS; VOLUNTARY WITHDRAWAL (a) A Participant may cease payroll deductions during an Option Period by delivering written notice of such cessation to the Company. Upon any such cessation, such Participant may 6 7 elect either to withdraw from the Plan pursuant to subsection (b) below or to have amounts credited to his or her Plan Account held in the Plan for the purchase of Common Stock pursuant to Section 3.2. A Participant who ceases contributions to the Plan during any Option Period shall not be permitted to resume contributions to the Plan during such Option Period. (b) A Participant may withdraw from the Plan at any time by written notice to the Company at least eight business days prior to the close of business on an Exercise Date. Within 21 days after the notice of withdrawal is delivered, the Company shall refund the entire amount, if any, in a Participant's Plan Account to him or her, and thereupon, the Participant's payroll deduction authorization, his or her interest in the Plan and his or her option under the Plan shall terminate. Any Eligible Employee who withdraws from the Plan may again become a Participant in accordance with Section 2.2 hereof. 5.2 TERMINATION OF ELIGIBILITY (a) A Participant whose employment with the Company or a Subsidiary terminates due to disability or retirement may elect by written notice to the Company either to (i) withdraw the entire amount, if any, in his or her Plan Account, in which event such amount shall be refunded to the Participant by the Company within 21 days of the notice, or (ii) have the amount used to purchase shares of Common Stock pursuant to Section 3.2 hereof on the next succeeding Exercise Date. (b) If a Participant's employment with the Company or a Subsidiary terminates for any reason other than retirement or disability, the amount in such Participant's Plan Account will be refunded to the Participant or his or her designated beneficiary or estate within 21 days of his or her termination of employment. (c) Upon payment by the Company to the Participant or his or her beneficiary or estate or the remaining balance, if any, in Participant's Plan Account, the Participant's interest in the Plan and the Participant's option under the Plan shall terminate. ARTICLE VI GENERAL PROVISIONS 6.1 CONDITION OF EMPLOYMENT Neither the creation of the Plan nor an Employee's participation therein shall be deemed to create any right of continued employment or in any way affect the right of the Company or a Subsidiary to terminate an Employee at any time with or without cause. 7 8 6.2 AMENDMENT OF THE PLAN The Board may amend, suspend or terminate the Plan at any time and from time to time; provided, however, that without approval of the Company's stockholders given within 12 months before or after action by the Board, the Board may not amend the Plan to increase the maximum number of shares subject to the Plan or change the designation or class of Eligible Employees; provided, further, however, that no amendment to the Plan may modify any option granted prior to the time of the amendment which modification might reasonably be expected to adversely affect the rights of any Participant, without the prior written consent of such Participant. Upon termination of the Plan, the balance in each Participant's Plan Account shall be refunded within 21 days of such termination. 6.3 USE OF FUNDS; NO INTEREST PAID All funds withheld or received by the Company for purchase of Common Stock hereunder will be included in the general funds of the Company free of any trust or other restriction and may be used for any corporate purpose. No interest will be paid to any Participant or credited under the Plan. 6.4 CONDITION; TERM; APPROVAL BY STOCKHOLDERS The effectiveness of the Plan is entirely conditioned upon the occurrence of the IPO Date. No option may be granted during any period of suspension of the Plan nor after termination of the Plan. If the Plan shall not have received written stockholder approval prior to the first meeting following the adoption of the Plan by the Board, the Plan will be submitted for the approval of the Company's stockholders at such first meeting. Options may be granted prior to such stockholder approval; provided, however, that such options shall not be exercisable prior to the time when the Plan is approved by the stockholders; provided further that if such approval has not been obtained by December 31, 1998, all options previously granted under the Plan shall thereupon be canceled and become null and void. 6.5 EFFECT UPON OTHER PLANS The adoption of the Plan shall not affect any other compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company or any Subsidiary (a) to establish any other forms of incentives or compensation for employees of the Company or any Subsidiary or (b) to grant or assume options otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition, by 8 9 purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. 6.6 CONFORMITY TO SECURITIES LAWS Notwithstanding any other provision of this Plan, this Plan and the participation in this Plan by any individual who is then subject to Section 16 of the Exchange Act shall be subject to any additional limitations set forth in any applicable exemptive rule under Section 16 of the Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the application of such exemptive rule. To the extent permitted by applicable law, the Plan shall be deemed amended to the extent necessary to conform to such applicable exemptive rule. 6.7 GOVERNING LAW The Plan and all rights and obligations thereunder shall be construed and enforced in accordance with the laws of the State of Texas. 9 EX-10.13 9 EMPLOYMENT AGREEMENT BERTRAND BLANCHETTE 1 EXHIBIT 10.13 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by and between OPTEL, INC., a Delaware corporation (the "Company"), and BERTRAND BLANCHETTE ("Executive"). W I T N E S S E T H : WHEREAS, Executive is currently employed by the Company as Chief Financial Officer of the Company; and WHEREAS, the Company desires to continue to employ Executive and Executive has agreed to such continuation, subject to the terms of this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the Company and Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. As used in this Agreement, unless the context otherwise requires: (a) "Affiliate" of a Person shall mean a Person that directly or indirectly controls, is controlled by, or is under common control with the Person specified. (b) "Aggregate Life Insurance Benefits" shall have the meaning set forth in Section 9(a)(ii). (c) "Average Annual Bonus" shall mean the average of the two most recent annual bonuses (not including any payments from long-term incentive programs) received by or due to Executive for completed fiscal years immediately prior to the termination of the Term of Employment. (d) "Base Salary" shall mean the salary provided for in Section 4. (e) "Board" shall mean the Board of Directors of the Company. (f) "Cause" shall mean: 1 2 (i) Executive's conviction of a crime involving moral turpitude (excluding offenses such as driving while intoxicated); or (ii) Executive's (A) commission of a fraud upon the Company or (B) material breach of this Agreement (including by wilfully failing or neglecting to perform Executive's duties hereunder), which breach, if curable, is not substantially cured within 10 days after written notice to Executive specifying the nature of the breach. (g) A "Change in Control" shall mean the occurrence of any one of the following events: (i) Any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (other than Executive, Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates (collectively, all or any of Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates constitute the "Existing Control Group")), is a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of shares of the Voting Stock of the Company having more total votes in an election for directors than shares of Voting Stock of which the Existing Control Group is the beneficial owner and, at the same time, the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; (ii) the majority of the members of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the date of this Agreement; provided that any individual becoming a director subsequent to such date whose election or nomination for election as a director was supported by two-thirds of the directors who were Incumbent Directors at the time of such election or nomination shall be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of the assets or business of the Company are disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Company, the Voting Stock or other ownership interests of the Person or Persons, if any, that succeed to the business of the Company) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; or (v) the Company combines with another Person and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, not more than 50% of the Voting Stock of the surviving corporation (there being excluded from the number of shares held by such 2 3 shareholders, but not from the Voting Stock of the surviving corporation, any shares received by Affiliates of such other Person in exchange for stock of such other Person) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board. (h) "Confidential Information" shall mean all information that is not known or available to the public concerning the business of the Company or any Subsidiary relating to its products, product development, trade secrets, customers, suppliers, finances, and business plans and strategies. For this purpose, information known or available generally within the trade or industry of the Company or any Subsidiary shall be deemed to be known or available to the public. Confidential Information shall include information that is, or becomes, known to the public as a result of a breach by Executive of the provisions of Section 13. (i) "Constructive Termination Without Cause" shall mean a termination of the Term of Employment by written notice given by Executive within 60 days following the occurrence, without Executive's prior written consent, of one or more of the following events (except in consequence of a prior termination): (i) a reduction in or elimination of (A) Executive's then current Base Salary, or (B) Executive's opportunity for any long-term incentive award for which he is eligible under Section 6 or the termination or material reduction of any material employee benefit or perquisite enjoyed by him including the bonus provided for under Section 5; provided, however, that in the case of clause (B), only if the reduction or elimination is greater than that applied to other executives of the Company of the same class or level as Executive; (ii) the failure to elect or reelect Executive to the position specified in Section 3(a), or Executive's removal, without Cause, from such position, or a material diminution in Executive's duties, authority or responsibility as described in Section 3(a), or the assignment to Executive of duties which are materially inconsistent with such duties or which materially impair Executive's ability to function in such position, and, in the case of any such assignment, the failure of the Company to cure such inconsistency or impairment within 15 days after its receipt of notice thereof from Executive; (iii) the failure to continue Executive's participation in any incentive compensation plan for which Executive is eligible unless executives of the same class or level as Executive also cease to participate in such plan or a plan providing a substantially similar opportunity is substituted; or (iv) the relocation of the Company's principal office outside the area comprised by Dallas and Tarrant Counties, Texas, having dimensions of approximately 58 miles by 29 miles and commonly referred to as the Dallas-Fort Worth Metroplex. 3 4 (j) "Disability" shall mean Executive's inability, due to physical or mental incapacity, to substantially perform Executive's duties and responsibilities under this Agreement for a period of 180 consecutive days or for 180 days in a 365-day period. (k) "MDU Business" shall mean the delivery of video and telecommunications services to residential multiple dwelling units. (l) "Minimum Severance Period" shall have the meaning set forth in Section 9(d)(vi)(A), subject to modification as provided in Section 9(e) in the event of a Change in Control. (m) "Non-Extension Event" shall mean any termination of the Term of Employment resulting from an election by the Company not to renew the Term of Employment. (n) "Person" shall mean an individual, firm, corporation, trust, joint venture, partnership, limited liability company, association, unincorporated organization or other entity or any governmental body or subdivision, agency, commission or authority thereof. (o) "Stock" shall mean the Common Stock of the Company. (p) "Subsidiary" shall mean any Person of which the Company owns, directly or indirectly, more than 50% of the Voting Stock or, in the case of a Person other than a corporation, more than 50% of the equity interest. (q) "Term of Employment" shall mean the period or periods specified in Section 2. (r) "Voting Stock" shall mean capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect a majority of the directors of a corporation. 2. Term of Employment. The Company hereby employs Executive, and Executive hereby accepts such employment, for the Term of Employment commencing April 15, 1999 and ending at the close of business on April 15, 2001, subject to earlier termination of the Term of Employment in accordance with the terms of this Agreement. The Term of Employment shall be automatically renewed from year to year unless either the Company or Executive provides the other with written notice of non-renewal at least 30 days prior to the date on which the Term of Employment would otherwise expire. 4 5 3. Position, Duties and Responsibilities. (a) During the Term of Employment, Executive shall be employed as Chief Financial Officer of the Company. In that capacity Executive shall have the duties, authority and responsibilities normally associated with such position and shall report to the Chief Executive Officer of the Company. Executive shall, at the request of the Board or the Chief Executive Officer of the Company, also serve as an officer and/or director of one or more Subsidiaries without additional compensation. (b) During the Term of Employment Executive shall devote his full attention and expend his best efforts, energies and skills on a full-time basis to the business of the Company and its Subsidiaries. (c) Executive's services to the Company will be rendered primarily at the Company's principal office. Executive acknowledges, however, that Executive's services may require extensive travel. (d) Nothing herein shall preclude Executive from (i) serving as a director of one or more other corporations not engaged in competition with the Company or of one or more trade associations and/or charitable organizations, subject in each case to prior approval by the Chief Executive Officer of the Company, (ii) engaging in charitable activities and community affairs, (iii) managing Executive's personal investments and affairs and those of Executive's family, and (iv) engaging in other business transactions, provided that such activities individually and in the aggregate do not reflect adversely on Executive's personal or business reputation or the Company or its business and do not interfere with the proper performance of Executive's duties and responsibilities to the Company and its Subsidiaries. 4. Base Salary. Executive shall receive Base Salary from the Company at the annual rate of $210,000, payable in accordance with the regular payroll practices of the Company, but in no event less frequently than monthly. Executive's Base Salary shall be subject to review by the Company on an annual basis but shall not be decreased. 5. Annual Bonus. Executive shall be entitled to be considered for receipt of an annual bonus, the calculation of which is to be determined in accordance with an incentive plan established and administered by the Board which includes a "target" bonus for Executive for each bonus period, as such plan may be modified by the Board from time to time. 5 6 6. Long-Term Incentive Programs. Executive shall be eligible to participate in any long-term incentive programs of the Company on the same basis as other senior executives of the Company. 7. Employee Benefit Programs and Vacation. (a) During the Term of Employment Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior executives generally, as such plans or programs may be in effect from time to time. (b) Executive shall be entitled to four weeks of vacation per year. 8. Reimbursement of Business and Other Expenses and Perquisites. (a) Executive is authorized to incur reasonable business expenses in carrying out his duties and responsibilities under this Agreement, and the Company shall promptly reimburse Executive for all such expenses, all subject to and in accordance with the Company's policies and procedures as adopted and in effect from time to time and applicable to its senior executives of comparable status. (b) To assist Executive in the performance of his duties and responsibilities under this Agreement, the Company shall provide to Executive an allowance for the use of an automobile in accordance with the Company's policies applicable generally to the Company's senior executives of comparable class or status; provided, however, that, if Executive currently uses a leased automobile provided by the Company, then in lieu of such allowance the Company may continue to provide Executive with the use of such leased automobile for the remaining initial term of the applicable lease. (c) Executive shall be eligible to receive all perquisites made generally available by the Company to its senior executives of comparable class or status. (d) Executive shall be reimbursed for cost of air travel (economy class) for up to two round trip tickets between Dallas and Canada for Executive and his immediate family during each calendar year covered by this Agreement. In addition, the event of a death of Executive's or Executive's wife's immediately family, the Company will reimburse Executive for the costs of round trip travel (economy class) for Executive and Executive's immediately family between Dallas and Canada. (e) Executive shall be reimbursed for all reasonable expenses associated with the preparation of his and his spouse's United States and Canadian income tax returns for tax years that end during the Term of Employment. 6 7 (f) During the Term of Employment, Executive shall be reimbursed for the cost of private school tuition for Executive's children. (g) The Company will contribute on Executive's behalf 5% of Executive's base salary to the pension fund of Executive's choice. Payments to the fund will be made bi-weekly during the Term of Employment. (h) The Company will reimburse Executive for the reasonable costs of English classes taken by Executive and members of his immediate family during the Term of Employment. 9. Termination of Term of Employment. (a) Termination Due to Death. The Term of Employment shall terminate upon Executive's death. In the event of such termination due to Executive's death, Executive's estate or Executive's beneficiaries, as the case may be, shall be entitled to: (i) the proceeds payable in the event of Executive's death under the group life insurance policy maintained by the Company for the benefit of its senior executive employees and others; (ii) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to Executive's death, over (B) the aggregate amount of life insurance proceeds payable to Executive's estate or beneficiaries pursuant to clause (i) of this Section 9(a) or pursuant to any other policy on Executive's life for which premiums are paid by the Company or any of its Affiliates (the "Aggregate Life Insurance Benefits"); (iii) if the date of Executive's death coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which Executive's death occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iv) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which Executive's death occurs; (v) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and 7 8 (vi) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. (b) Termination Due to Disability. The Term of Employment may be terminated by the Company by written notice to Executive in the case of Executive's Disability. In the event of such termination due to Disability, Executive shall be entitled to: (i) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, over (B) the amount of any disability benefits provided to Executive by the Company or under any disability insurance paid for, or for which premiums paid by Executive were reimbursed, by the Company; (ii) if such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period, (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. (c) Termination by the Company for Cause. In the event the Company terminates the Term of Employment for Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; (ii) any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iii) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (iv) any other or additional benefits provided for in accordance with applicable plans or programs of the Company. 8 9 (d) Termination Without Cause or Constructive Termination Without Cause. In the event the Term of Employment is terminated by the Company without Cause, other than due to Executive's Disability or death, or in the event the Term of Employment is terminated due to a Constructive Termination Without Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; (ii) if the date of such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and (vi) to elect, within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in section 9(d)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(d)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(d)(vi), then, subject to the requirements of Section 9(j), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base Salary for the period (the "Minimum Severance Period") that is the longer of 12 months or the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, plus (2) an amount equal to Average Annual Bonus pro-rata for the Minimum Severance Period. (B) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then, subject to the requirements of Section 9(j), Executive will remain an employee of the Company (but without any title) until the end of the Minimum Severance Period, and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that 9 10 (1) if Executive dies during such period, Executive's payments pursuant to this Section 9(d)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the Aggregate Life Insurance Benefits plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had Executive remained on the Company's payroll until the end of such period over (y) the amount of the Aggregate Life Insurance Benefits; and (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of Executive's intention to terminate his employment during such period, Executive will cease to be an employee of the Company effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had Executive remained on the Company's payroll until the end of such period. (C) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then during the period Executive remains on the payroll of the Company, Executive will continue to be eligible to receive the medical and life insurance benefits which all other employees of the Company are then entitled to receive, as such benefits may be amended, changed or eliminated from time to time. Executive shall not be entitled to any other perquisite or benefit provided by the Company to its senior executives or employees generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as Executive leaves the payroll of the Company. (e) Acceleration of Entitlements in Connection with a Change in Control or Termination. Upon a Change in Control (regardless of whether Executive continues in employment by the Company or the termination of the Term of Employment for any reason whatsoever) Executive shall become immediately entitled to exercise in full any stock option to acquire Stock during the remainder of the term of such option. Without limitation of the preceding sentence, upon the termination of the Term of Employment (including upon a Non- Extension Event or Disability or death) otherwise than for Cause, Executive shall become 10 11 immediately entitled to exercise in full any stock option to acquire Stock during the remainder of the term of such option, to the extent such option would otherwise have vested or become exercisable within 12 months after such termination of the Term of Employment but, unless a Change in Control shall have occurred, all such options that have not previously expired shall automatically expire on the date that is 12 months after such termination of the Term of Employment. If, in connection with a Change in Control or within 12 months after a Change in Control, the Term of Employment is terminated without Cause, other than due to Disability or death, or due to a Constructive Termination Without Cause, then, without limitation of the payments, benefits and elections provided in Section 9(d) and the first sentence of this Section 9(e), upon such Change in Control or such later termination, all amounts, entitlements and benefits awarded to Executive or to which Executive is otherwise entitled under any grant, plan or program of the Company but which are not yet vested shall become fully vested except to the extent such vesting would be inconsistent with the terms of the relevant plan. Without limitation of the benefits to Executive pursuant to the preceding sentence or any of the other provisions of this Agreement, if, in connection with a Change in Control or within 12 months after a Change in Control, the Term of Employment is terminated due to a Constructive Termination Without Cause or by the Company without Cause (other than due to Disability or death), then, (A) the "Minimum Severance Period" for purposes of Section 9(d) shall be not less than 24 months and (B) upon such Change in Control (or such later termination) all amounts, entitlements and benefits awarded to Executive or to which Executive is otherwise entitled under any grant, plan or program of the Company but which are not yet vested shall become fully vested except to the extent such vesting would be inconsistent with the terms of the relevant plan. In connection with the occurrence of a Change in Control, Executive and the Company agree to negotiate in good faith payment arrangements and covenant changes (without reducing the total amount payable pursuant to this Section 9(e)) designed to preserve to the Company the deductibility for federal income tax purposes of, and eliminate any excise tax imposed by Section 4999 of the Code payable in respect of, amounts paid or benefits inuring to Executive pursuant to this Section 9(e). (f) Voluntary Termination. A termination of the Term of Employment by Executive on his own initiative, other than a termination due to death or Disability or a Constructive Termination without Cause, shall be treated as a Termination for Cause, and, accordingly, Executive shall have only the entitlements provided in Section 9(c). (g) Termination Because of Non-Renewal. In the event of a Non- Extension Event, Executive shall be entitled to: (i) Base Salary through the date of expiration of the Term of Employment; (ii) if the expiration of the Term of Employment coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which the Term of Employment expires, determined pro rata with respect to Executive's target bonus for such bonus 11 12 period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which the Term of Employment expires; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and (vi) to elect within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in section 9(g)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(g)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(g)(vi), subject to the requirements of Section 9(j), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base Salary for a period of 12 months (or 24 months, if a Change in Control has occurred during the Term of Employment and the Term of Employment has not been renewed at least once after the Change in Control), plus (2) an amount equal to Average Annual Bonus pro-rata for the same period. (B) In the event Executive makes the election provided in clause (y) of Section 9(g)(vi), subject to the requirements of Section 9(j), Executive will remain an employee of the Company (but without any title) for the period of 12 months following the expiration of the Term of Employment (or 24 months, if a Change in Control has occurred during the Term of Employment and the Term of Employment has not been renewed at least once after the Change in Control), and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that (1) if Executive dies during such period, Executive's payments pursuant to this Section 9(g)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the Aggregate Life Insurance Benefits, plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until 12 13 the end of such period over (y) the amount of the Aggregate Life Insurance Benefits; and (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of Executive's intention to terminate Executive's employment during such period, Executive will cease to be an employee of the Company, effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until the end of such period. (C) In the event Executive makes an election provided in clause (y) of Section 9(g)(vi), then during the period Executive remains on the payroll of the Company, Executive will continue to be eligible to receive the medical and life insurance benefits all other employees of the Company are then entitled to receive, as amended, changed or eliminated, from time to time. Executive shall not be entitled to any other perquisite or benefit provided by the Company to its senior executives generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event of an election pursuant to clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as Executive leaves the payroll of the Company. (h) No Mitigation; No Offset. In the event of any termination of the Term of Employment under this Section 9, Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment obtained by Executive except as specifically provided in this Section 9. (i) Nature of Payments. Any amounts due under this Section 9 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. (j) General Release. In partial consideration for, and as a condition of, the Company's obligation to make the payments described in Sections 9(d)(vi) and 9(g)(vi), Executive shall execute and deliver to the Company a release of all claims Executive shall then have against the Company, its Affiliates and their related Persons arising out of or in connection with Executive's employment or termination of employment, including, but not limited to, a 13 14 release of all claims of discrimination. The Company will deliver such release to Executive at or about the time it delivers or receives the notice of termination, and Executive shall execute and deliver such release to the Company within 21 days thereafter, except that in case of expiration of the Term of Employment following a Non-Extension Event, the release will be delivered to Executive upon such expiration and shall be executed and delivered by Executive within 21 days after such expiration. If Executive fails to execute and deliver such release to the Company within such 21-day period, or if Executive revokes Executive's consent to such release as provided for therein, Executive will not be eligible to receive any further payments from the Company pursuant to Section 9(d)(vi) or 9(g)(vi). (k) Other Severance. In the event the Company's written severance pay policy applicable to Executive provides for greater severance pay and benefits than are provided for in Section 9(d) or 9(g), Executive may elect to receive termination pay and benefits under the terms and conditions of such policy in lieu of the payments and benefits under Section 9(d) or 9(g). It is understood by the Parties that Executive shall not be entitled to both the payments and benefits under the severance pay policy and those available under Section 9(d) or 9(g). Notwithstanding the foregoing, in addition to being entitled to the greater of the payments and benefits under the severance pay policy and under Section 9(d) or 9(g), as applicable, Executive shall be entitled to professional outplacement services (including office space and secretarial services), at a cost not exceeding 10% of Executive's annual Base Salary, in accordance with the Company's policies regarding outplacement services; provided, however, that payments pursuant to this sentence shall be made only for actual outplacement services, and Executive shall not have the option to elect to receive all or part of the maximum allowances therefor in lieu of outplacement services. (l) Relocation. Notwithstanding the provisions of Section 9(k), in the event Executive becomes entitled to payments and benefits under Section 9(b), 9(d) or 9(g), Executive shall also be entitled to receive from the Company relocation assistance payments, consisting of payment or reimbursement of: (i) costs incurred in the sale of Executive's primary residence in the Dallas area, including sales commissions not to exceed local custom, and all other normal closing costs in connection with such sale and, in the event the gross proceeds from the sale of Executive's primary residence are less than the contract purchase price paid by Executive on his purchase of such residence, the Company will reimburse Executive for the difference less amounts payable to Executive pursuant to the preceding clause of this paragraph (i); (ii) all reasonable moving expenses to another location in the United States or Canada, including packing, transport, temporary storage and unpacking (including the cost of moving one vehicle), all through movers or moving agents designated or approved by the Company; 14 15 (iii) reasonable costs (not exceeding costs of economy air fare and appropriate lodging) of one house-hunting trip for Executive and spouse; and (iv) a tax "gross-up" for all sums paid to Executive pursuant to clauses (i) through (iv) of this paragraph (l) that are includable in Executive's taxable income for U.S. Federal Income Tax purposes (i.e., an amount which, after the payment of the U.S. Federal, state and local income taxes to which Executive is subject on the payments made to or for Executive's benefit pursuant to this paragraph (l), calculated at the maximum rate applicable to individuals, irrespective of the actual tax payments made by Executive, will be equal to the costs for which reimbursement is to be provided pursuant to clauses (i) through (iii) of this paragraph (l)); provided, however, that payments pursuant to this paragraph (l) shall be made only for actual expenses in connection with Executive's relocation outside the Dallas area, and Executive shall not have the option to elect to receive all or part of the maximum allowances therefor in lieu of relocation expenses; and provided, further, that such payments shall only be available in respect of relocation that occurs within (x) nine months after the end of the Term of Employment and (y) February 28, 2002. 10. Indemnification. (a) The Company agrees that if Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that Executive is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another Person, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, Executive shall be indemnified and held harmless by the Company to the fullest extent permitted or authorized by the Company's certificate of incorporation or bylaws or, if greater, by the laws of the State of Delaware, against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, ERISA excise taxes (other than such as may be imposed with respect to compensation received by Executive) or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be a director, member, employee or agent of the Company or other Person and shall inure to the benefit of Executive's heirs, executors and administrators. The Company shall advance to Executive to the extent permitted by law all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 days after receipt by the Company of a written request, with appropriate documentation, for such advance. Such request shall include an undertaking by Executive to repay the amount of such advance if it shall ultimately be determined that Executive is not entitled to be indemnified against such costs and expenses. 15 16 (b) The Company agrees to continue and maintain a directors' and officers' liability insurance policy covering Executive to the extent the Company provides such coverage for its other executive officers. (c) Promptly after receipt by Executive of notice of any claim or the commencement of any action or proceeding with respect to which Executive is entitled to indemnity hereunder, Executive shall notify the Company in writing of such claim or the commencement of such action or proceeding, and the Company shall (i) assume the defense of such action or proceeding, (ii) employ counsel reasonably satisfactory to Executive and (iii) pay the reasonable fees and expenses of such counsel. Notwithstanding the preceding sentence, Executive shall be entitled to employ counsel separate from counsel for the Company and from any other party in such action if Company counsel reasonably determines that a conflict of interest exists which makes representation by counsel chosen by the Company not advisable. In such event, the reasonable fees and disbursements of such separate counsel for Executive shall be paid by the Company to the extent permitted by law. (d) After the Term of Employment, (i) at the request of the Company, Executive shall cooperate with and assist the Company (to the extent that such activities do not unreasonably interfere with the performance of Executive's other business activities or employment) to prepare for or defend against any action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party arising out of or based upon any matter or thing whatsoever arising out of or which may be related to matters as to which Executive has or acquires knowledge or information by reason of his employment by the Company or any of its Subsidiaries, and (ii) upon the request of Executive, the Company shall reimburse Executive for all reasonable travel, legal and other out-of-pocket expenses that may be incurred by Executive related to assisting the Company, at its request, to prepare for or defend against any such action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party and in providing evidence, producing documents or otherwise participating in any such action, suit, proceeding or claim. 11. Effect of Agreement on Other Benefits. Except as specifically provided in this Agreement, the existence of this Agreement shall not prohibit or restrict Executive's entitlement to full participation in the employee benefit and other plans or programs in which senior executives of the Company are eligible to participate. 16 17 12. Confidentiality. Executive acknowledges that Executive is bound by that certain nondisclosure agreement executed by Executive upon the commencement of his employment with the Company and that the terms thereof shall not be modified or affected by this Agreement. 13. Non-Competition. (a) During the Term of Employment and (unless the Term of Employment expires following a Non-Extension Event or is terminated by the Company without Cause or voluntarily by Employee due to a Constructive Termination Without Cause) for a period of nine months thereafter, Executive shall not, directly or indirectly, except when acting on behalf of the Company, whether as an employee, consultant, partner, principal, agent, distributor, representative, stockholder or otherwise, plan, develop, conduct or otherwise engage in the MDU Business in any metropolitan area world-wide in which the Company or any Subsidiary then conducts or is actively planning to conduct the MDU Business (except that he may be a stockholder holding not more than a 1% common stock interest in a Person whose shares are publicly traded and which engages in the MDU Business in any such area). Notwithstanding the foregoing, Executive shall be free at any time following the Term of Employment to accept employment with or provide other services to any Person whose business includes the MDU Business but only if (i) the MDU Business is not the principal or predominant business of such Person and (ii) the services of Executive do not principally or predominantly relate to the MDU Business. By way of example only, if the Term of Employment were to end on the date of this Agreement, Executive would be free to be employed by a typical incumbent local exchange or long distance carrier or by a typical franchised cable operator for so long as Executive's services did not principally or predominantly relate to the provision of video and telecommunications services to residential multiple dwelling units in the markets in which the Company now operates or is actively planning to operate. (b) During the Term of Employment and for a period of 12 months thereafter, Executive shall not, directly or indirectly, (i) solicit any customer of the Company or any Subsidiary to do business with any Person that engages in the MDU Business or (ii) solicit any Person, other than his secretary/administrative assistant, who is employed by the Company or any Subsidiary or who was employed by the Company or any Subsidiary within 12 months of such solicitation to (A) terminate his or her employment with the Company or any Subsidiary, (B) accept employment with anyone other than the Company or any Subsidiary or (C) in any manner interfere with the business of the Company or any Subsidiary. (c) Executive acknowledges that the Company has no adequate remedy at law and would be irreparably harmed if Executive breaches or threatens to breach any of the provisions of Section 12 or Section 13(a) or 13(b), and therefore Executive agrees that the Company or any Subsidiary, as the case may be, shall be entitled to temporary or permanent 17 18 mandatory or injunctive relief to terminate or forestall any breach or threatened breach of any of those provisions and to specific performance of the terms of each of those provisions, without the need to demonstrate irreparable injury or post bond or other security. Executive further agrees that he shall not, in any proceeding seeking injunctive or other equitable relief to enforce the provisions of Section 12 or Section 13(a) or 13(b), raise the defense that the Company or any Subsidiary has an adequate remedy at law. Nothing in this Section 13(c) shall be construed to prohibit the Company or any Subsidiary from pursuing any other rights or remedies available to it at law or in equity or which may be otherwise available to it. (d) If it is determined that any of the provisions of this Section 13, or any part thereof, is unenforceable because of the duration or geographical scope of such provision, it is the intention of the Parties that the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced. 14. Intellectual Property. Any processes, inventions, ideas, know-how and other similar data created or developed by Executive while employed by the Company which relate to the business then conducted by the Company or any of its Subsidiaries shall be the Company's exclusive and absolute property, and Executive hereby assigns to the Company, now and hereafter, all of his right, title and interest to any and all of the same. Any work in connection with the services rendered by Executive hereunder shall be considered "work made for hire" under the Copyright Law of 1976 or any successor law, and the Company shall be the owner of such work as if the Company were the author of such work. 15. Documents; Conduct; References. (a) Executive hereby expressly covenants and agrees that, following termination of the Term of Employment for any reason, or any time, upon the Company's request, Executive will promptly return to the Company all property of the Company and its Subsidiaries in his or her possession or control (whether maintained at his or her office, home or elsewhere), including, without limitation, all copies of all management studies, business or strategic plans, budgets, notebooks and other printed, typed electronically stored or written materials, documents, diaries, disks, calendars and data of or relating to the Company or its Subsidiaries or their respective personnel or affairs. (b) Executive hereby expressly covenants and agrees that Executive will not at any time, during or after the Term of Employment, publicly denigrate, ridicule or intentionally criticize the Company or any of its Subsidiaries or any of their respective products or services, properties, employees, officers or directors, including, without limitation, by way of news interviews or the expression of personal view, opinions or judgments to the news media. 18 19 (c) The Company hereby expressly covenants and agrees that the Company will not at any time, during or after the Term of Employment, publicly denigrate, ridicule or intentionally criticize Executive, including, without limitation, by way of news interviews or the expression of personal views, opinions or judgments to the news media. (d) The Company hereby expressly covenants and agrees that, following the Term of Employment, the Company will, unless otherwise requested by Executive in any instance or required by law, provide to any prospective employer seeking information regarding Executive's employment with the Company a neutral reference in accordance with the general policies of the Company applicable to requests for employment references. 16. Acknowledgment of Representation by Counsel. The Parties acknowledge that they have been represented by counsel or knowingly waive their right to be represented by counsel with regard to this Agreement and the subject matter hereof. Each Party agrees and acknowledges that he or it has not relied upon any tax advice, legal counsel or business advice provided by the other Party. 17. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Executive) and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company, except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the surviving corporation, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or by operation of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than Executive's rights to compensation and benefits. 18. Entire Agreement. Except as herein otherwise expressly provided, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto, including any agreement between Executive and any Affiliate of the Company dated prior to the date hereof. 19 20 19. Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. 20. Severability. In the event that any provision or portion of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions and portions remaining of any provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 21. Beneficiaries/References. Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 22. Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Texas without reference to principles of conflict of laws. 23. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration before a single arbitrator, to be held in Dallas, Texas, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator shall be final and subject to appeal only to the extent permitted by law. Each Party shall bear its or his own expenses incurred in connection with any arbitration. Anything to the contrary notwithstanding, each Party has the right to proceed with a court action for injunctive relief or relief from violations of law not within the jurisdiction of an arbitrator. 20 21 24. Notices. Any notice required or permitted hereunder to be given to a Party shall be effective only if given in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested or by Federal Express or other similar service, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may hereafter specify by notice to the other Party: If to the Company: OpTel, Inc. 1111 W. Mockingbird Lane, #1000 Dallas, Texas 75247 Attention: General Counsel If to Executive: 702 Essex Court Southlake, TX 76092 25. Headings. The captions or headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 26. Execution of Agreement and Further Actions. This Agreement may be executed in several counterpart copies each of which shall constitute an original and the same instrument notwithstanding that both Parties are not signatories to the same counterpart. The Parties agree to execute such other documents and to take such other action as may from time to time be necessary or appropriate to carry out the intent of this Agreement, provided that the same are not inconsistent with the provisions hereof. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. OPTEL, INC. By: ------------------------- ---------------------------- BERTRAND BLANCHETTE 21 EX-10.14 10 EMPLOYMENT AGREEMENT STEPHEN DUBE 1 EXHIBIT 10.14 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by and between OPTEL, INC., a Delaware corporation (the "Company"), and STEPHEN R. DUBE ("Executive"). W I T N E S S E T H: WHEREAS, Executive is currently employed by the Company as Chief Operating Officer of the Company; and WHEREAS, the Company desires to continue to employ Executive and Executive has agreed to such continuation, subject to the terms of this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the Company and Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. As used in this Agreement, unless the context otherwise requires: (a) "Affiliate" of a Person shall mean a Person that directly or indirectly controls, is controlled by, or is under common control with the Person specified. (b) "Aggregate Life Insurance Benefits" shall have the meaning set forth in Section 9(a)(ii). (c) "Average Annual Bonus" shall mean the average of the two most recent annual bonuses (not including any payments from long-term incentive programs) received by or due to Executive for completed fiscal years immediately prior to the termination of the Term of Employment. (d) "Base Salary" shall mean the salary provided for in Section 4. (e) "Board" shall mean the Board of Directors of the Company. (f) "Cause" shall mean: 2 (i) Executive's conviction of a crime involving moral turpitude (excluding offenses such as driving while intoxicated); or (ii) Executive's (A) commission of a fraud upon the Company or (B) material breach of this Agreement (including by wilfully failing or neglecting to perform Executive's duties hereunder), which breach, if curable, is not substantially cured within 10 days after written notice to Executive specifying the nature of the breach. (g) A "Change in Control" shall mean the occurrence of any one of the following events: (i) Any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (other than Executive, Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates (collectively, all or any of Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates constitute the "Existing Control Group")), is a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of shares of the Voting Stock of the Company having more total votes in an election for directors than shares of Voting Stock of which the Existing Control Group is the beneficial owner and, at the same time, the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; (ii) the majority of the members of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the date of this Agreement; provided that any individual becoming a director subsequent to such date whose election or nomination for election as a director was supported by two-thirds of the directors who were Incumbent Directors at the time of such election or nomination shall be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of the assets or business of the Company are disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Company, the Voting Stock or other ownership interests of the Person or Persons, if any, that succeed to the business of the Company) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; or 2 3 (v) the Company combines with another Person and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, not more than 50% of the Voting Stock of the surviving corporation (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the surviving corporation, any shares received by Affiliates of such other Person in exchange for stock of such other Person) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board. (h) "Confidential Information" shall mean all information that is not known or available to the public concerning the business of the Company or any Subsidiary relating to its products, product development, trade secrets, customers, suppliers, finances, and business plans and strategies. For this purpose, information known or available generally within the trade or industry of the Company or any Subsidiary shall be deemed to be known or available to the public. Confidential Information shall include information that is, or becomes, known to the public as a result of a breach by Executive of the provisions of Section 13. (i) "Constructive Termination Without Cause" shall mean a termination of the Term of Employment by written notice given by Executive within 60 days following the occurrence, without Executive's prior written consent, of one or more of the following events (except in consequence of a prior termination): (i) a reduction in or elimination of (A) Executive's then current Base Salary, or (B) Executive's opportunity for any long-term incentive award for which he is eligible under Section 6 or the termination or material reduction of any material employee benefit or perquisite enjoyed by him including the annual bonus provided for under Section 5; provided, however, that in the case of clause (B), only if the reduction or elimination is greater than that applied to other executives of the Company of the same class or level as Executive; (ii) the failure to elect or reelect Executive to the position specified in Section 3(a), or Executive's removal, without Cause, from such position, or a material diminution in Executive's duties, authority or responsibility as described in Section 3(a), or the assignment to Executive of duties which are materially inconsistent with such duties or which materially impair Executive's ability to function in such position, and, in the case of any such assignment, the failure of the Company to cure such inconsistency or impairment within 15 days after its receipt of notice thereof from Executive; (iii) the failure to continue Executive's participation in any incentive compensation plan for which Executive is eligible unless executives of the same class or level as Executive also cease to participate in such plan or a plan providing a substantially similar opportunity is substituted; or 3 4 (iv) the relocation of the Company's principal office outside the area comprised by Dallas and Tarrant Counties, Texas, having dimensions of approximately 58 miles by 29 miles and commonly referred to as the Dallas-Fort Worth Metroplex. (j) "Disability" shall mean Executive's inability, due to physical or mental incapacity, to substantially perform Executive's duties and responsibilities under this Agreement for a period of 180 consecutive days or for 180 days in a 365-day period. (k) "MDU Business" shall mean the delivery of video and telecommunications services to residential multiple dwelling units. (l) "Minimum Severance Period" shall have the meaning set forth in Section 9(d)(vi)(A), subject to modification as provided in Section 9(e) in the event of a Change in Control. (m) "Non-Extension Event" shall mean any termination of the Term of Employment resulting from an election by the Company not to renew the Term of Employment. (n) "Person" shall mean an individual, firm, corporation, trust, joint venture, partnership, limited liability company, association, unincorporated organization or other entity or any governmental body or subdivision, agency, commission or authority thereof. (o) "Stock" shall mean the Common Stock of the Company. (p) "Subsidiary" shall mean any Person of which the Company owns, directly or indirectly, more than 50% of the Voting Stock or, in the case of a Person other than a corporation, more than 50% of the equity interest. (q) "Term of Employment" shall mean the period or periods specified in Section 2. (r) "Voting Stock" shall mean capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect a majority of the directors of a corporation. 2. Term of Employment. The Company hereby employs Executive, and Executive hereby accepts such employment, for the Term of Employment commencing April 15, 1999 and ending at the close of business on April 15, 2001, subject to earlier termination of the Term of Employment in accordance with the terms of this Agreement. The Term of Employment shall be automatically renewed from year to year unless either the Company or Executive provides the other with 4 5 written notice of non-renewal at least 30 days prior to the date on which the Term of Employment would otherwise expire. 3. Position, Duties and Responsibilities. (a) During the Term of Employment, Executive shall be employed as Chief Operating Officer of the Company. In that capacity Executive shall have the duties, authority and responsibilities normally associated with such position and shall report to the Chief Executive Officer of the Company. Executive shall, at the request of the Board or the Chief Executive Officer of the Company, also serve as an officer and/or director of one or more Subsidiaries without additional compensation. (b) During the Term of Employment Executive shall devote his full attention and expend his best efforts, energies and skills on a full-time basis to the business of the Company and its Subsidiaries. (c) Executive's services to the Company will be rendered primarily at the Company's principal office. Executive acknowledges, however, that Executive's services may require extensive travel. (d) Nothing herein shall preclude Executive from (i) serving as a director of one or more other corporations not engaged in competition with the Company or of one or more trade associations and/or charitable organizations, subject in each case to prior approval by the Chief Executive Officer of the Company, (ii) engaging in charitable activities and community affairs, (iii) managing Executive's personal investments and affairs and those of his family, and (iv) engaging in other business transactions, provided that such activities individually and in the aggregate do not reflect adversely on Executive's personal or business reputation or the Company or its business and do not interfere with the proper performance of Executive's duties and responsibilities to the Company and its Subsidiaries. 4. Base Salary. Executive shall receive Base Salary from the Company at the annual rate of $245,000, payable in accordance with the regular payroll practices of the Company, but in no event less frequently than monthly. Executive's Base Salary shall be subject to review by the Company on an annual basis but shall not be decreased. 5. Annual Bonus. Executive shall be entitled to be considered for receipt of an annual bonus, the calculation of which is to be determined in accordance with an incentive plan established and 5 6 administered by the Board which includes a "target" bonus for Executive for each bonus period, as such plan may be modified by the Board from time to time. 6 7 6. Long-Term Incentive Programs. Executive shall be eligible to participate in any long-term incentive programs of the Company on the same basis as other senior executives of the Company. 7. Employee Benefit Programs and Vacation. (a) During the Term of Employment Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior executives generally, as such plans or programs may be in effect from time to time. (b) Executive shall be entitled to four weeks of vacation per year. 8. Reimbursement of Business and Other Expenses and Perquisites. (a) Executive is authorized to incur reasonable business expenses in carrying out his duties and responsibilities under this Agreement, and the Company shall promptly reimburse Executive for all such expenses, all subject to and in accordance with the Company's policies and procedures as adopted and in effect from time to time and applicable to its senior executives of comparable status. (b) To assist Executive in the performance of his duties and responsibilities under this Agreement, the Company shall provide to Executive an allowance for the use of an automobile in accordance with the Company's policies applicable generally to the Company's senior executives of comparable class or status; provided, however, that, if Executive currently uses a leased automobile provided by the Company, then in lieu of such allowance the Company shall continue to provide Executive with the use of such leased automobile for the remaining initial term of the applicable lease. (c) Executive shall be eligible to receive all perquisites made generally available by the Company to its senior executives of comparable class or status. (d) Executive shall be reimbursed for the cost of air travel (economy class) for up to four round trip tickets between Dallas and Canada for Executive and his immediate family during each calendar year covered by this Agreement. (e) Executive shall be reimbursed for 50% of all reasonable costs associated with his spouse's attendance at a university program of her choice in the greater Dallas area. 7 8 (f) Executive shall be reimbursed for all reasonable expenses associated with the preparation of his and his spouse's U.S. and Canadian income tax returns for tax years ending during the Term of Employment. 9. Termination of Term of Employment. (a) Termination Due to Death. The Term of Employment shall terminate upon Executive's death. In the event of such termination due to Executive's death, Executive's estate or Executive's beneficiaries, as the case may be, shall be entitled to: (i) the proceeds payable in the event of Executive's death under the group life insurance policy maintained by the Company for the benefit of its senior executive employees and others; (ii) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to Executive's death, over (B) the aggregate amount of life insurance proceeds payable to Executive's estate or beneficiaries pursuant to clause (i) of this Section 9(a) or pursuant to any other policy on Executive's life for which premiums are paid by the Company or any of its Affiliates (the "Aggregate Life Insurance Benefits"); (iii) if the date of Executive's death coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which Executive's death occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iv) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which Executive's death occurs; (v) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (vi) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. (b) Termination Due to Disability. The Term of Employment may be terminated by the Company by written notice to Executive in the case of Executive's Disability. In the event of such termination due to Disability, Executive shall be entitled to: 8 9 (i) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, over (B) the amount of any disability benefits provided to Executive by the Company or under any disability insurance paid for, or for which premiums paid by Executive were reimbursed, by the Company; (ii) if such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period, (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. (c) Termination by the Company for Cause. In the event the Company terminates the Term of Employment for Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; (ii) any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iii) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (iv) any other or additional benefits provided for in accordance with applicable plans or programs of the Company. (d) Termination Without Cause or Constructive Termination Without Cause. In the event the Term of Employment is terminated by the Company without Cause, other than due to Executive's Disability or death, or in the event the Term of Employment is terminated due to a Constructive Termination Without Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; 9 10 (ii) if the date of such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and (vi) to elect, within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in section 9(d)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(d)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(d)(vi), then, subject to the requirements of Section 9(j), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base Salary for the period (the "Minimum Severance Period") that is the longer of 12 months or the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, plus (2) an amount equal to Average Annual Bonus pro-rata for the Minimum Severance Period. (B) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then, subject to the requirements of Section 9(j), Executive will remain an employee of the Company (but without any title) until the end of the Minimum Severance Period, and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that (1) if Executive dies during such period, Executive's payments pursuant to this Section 9(d)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the Aggregate Life Insurance Benefits, plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual 10 11 Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had Executive remained on the Company's payroll until the end of such period over (y) the amount of the Aggregate Life Insurance Benefits; and (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of Executive's intention to terminate his employment during such period, Executive will cease to be an employee of the Company effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had Executive remained on the Company's payroll until the end of such period. (C) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then during the period Executive remains on the payroll of the Company, Executive will continue to be eligible to receive the medical and life insurance benefits which all other employees of the Company are then entitled to receive, as such benefits may be amended, changed or eliminated from time to time. Executive shall not be entitled to any other perquisite or benefit provided by the Company to its senior executives or employees generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as Executive leaves the payroll of the Company. (e) Acceleration of Entitlements in Connection with a Change in Control or Termination. Upon a Change in Control (regardless of whether Executive continues in employment by the Company or the termination of the Term of Employment for any reason whatsoever) Executive shall become immediately entitled to exercise in full any stock option to acquire Stock during the remainder of the term of such option. Without limitation of the preceding sentence, upon the termination of the Term of Employment (including upon a Non-Extension Event or Disability or death) otherwise than for Cause, Executive shall become immediately entitled to exercise in full any stock option to acquire Stock during the remainder of the term of such option, to the extent such option would otherwise have vested or become exercisable within 12 months after such termination of the Term of Employment but, unless a Change in Control shall have occurred, all such options that have not previously expired shall 11 12 automatically expire on the date that is 12 months after such termination of the Term of Employment. If, in connection with a Change in Control or within 12 months after a Change in Control, the Term of Employment is terminated without Cause, other than due to Disability or death, or due to a Constructive Termination Without Cause, then, without limitation of the payments, benefits and elections provided in Section 9(d) and the first sentence of this Section 9(e), upon such Change in Control or such later termination, all amounts, entitlements and benefits awarded to Executive or to which Executive is otherwise entitled under any grant, plan or program of the Company but which are not yet vested shall become fully vested except to the extent such vesting would be inconsistent with the terms of the relevant plan. Without limitation of the benefits to Executive pursuant to the preceding sentence or any of the other provisions of this Agreement, if, in connection with a Change in Control or within 12 months after a Change in Control, the Term of Employment is terminated due to a Constructive Termination Without Cause or by the Company without Cause (other than due to Disability or death), then, (A) the "Minimum Severance Period" for purposes of Section 9(d) shall be not less than 24 months and (B) upon such Change in Control (or such later termination) all amounts, entitlements and benefits awarded to Executive or to which Executive is otherwise entitled under any grant, plan or program of the Company but which are not yet vested shall become fully vested except to the extent such vesting would be inconsistent with the terms of the relevant plan. In connection with the occurrence of a Change in Control, Executive and the Company agree to negotiate in good faith payment arrangements and covenant changes (without reducing the total amount payable pursuant to this Section 9(e)) designed to preserve to the Company the deductibility for federal income tax purposes of, and eliminate any excise tax imposed by Section 4999 of the Code payable in respect of, amounts paid or benefits inuring to Executive pursuant to this Section 9(e). (f) Voluntary Termination. A termination of the Term of Employment by Executive on his own initiative, other than a termination due to death or Disability or a Constructive Termination without Cause, shall be treated as a Termination for Cause, and, accordingly, Executive shall have only the entitlements provided in Section 9(c). (g) Termination Because of Non-Renewal. In the event of a Non- Extension Event, Executive shall be entitled to: (i) Base Salary through the date of expiration of the Term of Employment; (ii) if the expiration of the Term of Employment coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which the Term of Employment expires, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; 12 13 (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which the Term of Employment expires; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and (vi) to elect within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in section 9(g)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(g)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(g)(vi), subject to the requirements of Section 9(j), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base Salary for a period of 12 months (or 24 months, if a Change in Control has occurred during the Term of Employment and the Term of Employment has not been renewed at least once after the Change in Control), plus (2) an amount equal to Average Annual Bonus pro-rata for the same period. (B) In the event Executive makes the election provided in clause (y) of Section 9(g)(vi), subject to the requirements of Section 9(j), Executive will remain an employee of the Company (but without any title) for the period of 12 months following the expiration of the Term of Employment (or 24 months, if a Change in Control has occurred during the Term of Employment and the Term of Employment has not been renewed at least once after the Change in Control), and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that (1) if Executive dies during such period, Executive's payments pursuant to this Section 9(g)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the Aggregate Life Insurance Benefits, plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until the end of such period over (y) the amount of the Aggregate Life Insurance Benefits; and 13 14 (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of Executive's intention to terminate Executive's employment during such period, Executive will cease to be an employee of the Company, effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until the end of such period. (C) In the event Executive makes an election provided in clause (y) of Section 9(g)(vi), then during the period Executive remains on the payroll of the Company, Executive will continue to be eligible to receive the medical and life insurance benefits all other employees of the Company are then entitled to receive, as amended, changed or eliminated, from time to time. Executive shall not be entitled to any other perquisite or benefit provided by the Company to its senior executives generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event of an election pursuant to clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as Executive leaves the payroll of the Company. (h) No Mitigation; No Offset. In the event of any termination of the Term of Employment under this Section 9, Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment obtained by Executive except as specifically provided in this Section 9. (i) Nature of Payments. Any amounts due under this Section 9 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. (j) General Release. In partial consideration for, and as a condition of, the Company's obligation to make the payments described in Sections 9(d)(vi) and 9(g)(vi), Executive shall execute and deliver to the Company a release of all claims Executive shall then have against the Company, its Affiliates and their related Persons arising out of or in connection with Executive's employment or termination of employment, including, but not limited to, a release of all claims of discrimination. The Company will deliver such release to Executive at or about the time it delivers or receives the notice of termination, and Executive shall execute and 14 15 deliver such release to the Company within 21 days thereafter, except that in case of expiration of the Term of Employment following a Non-Extension Event, the release will be delivered to Executive upon such expiration and shall be executed and delivered by Executive within 21 days after such expiration. If Executive fails to execute and deliver such release to the Company within such 21-day period, or if Executive revokes Executive's consent to such release as provided for therein, Executive will not be eligible to receive any further payments from the Company pursuant to Section 9(d)(vi) or 9(g)(vi). (k) Other Severance. In the event the Company's written severance pay policy applicable to Executive provides for greater severance pay and benefits than are provided for in Section 9(d) or 9(g), Executive may elect to receive termination pay and benefits under the terms and conditions of such policy in lieu of the payments and benefits under Section 9(d) or 9(g). It is understood by the Parties that Executive shall not be entitled to both the payments and benefits under the severance pay policy and those available under Section 9(d) or 9(g). Notwithstanding the foregoing, in addition to being entitled to the greater of the payments and benefits under the severance pay policy and under Section 9(d) or 9(g), as applicable, Executive shall be entitled to professional outplacement services (including office space and secretarial services), at a cost not exceeding 10% of Executive's annual Base Salary, in accordance with the Company's policies regarding outplacement services; provided, however, that payments pursuant to this sentence shall be made only for actual outplacement services, and Executive shall not have the option to elect to receive all or part of the maximum allowances therefor in lieu of outplacement services. (l) Relocation. Notwithstanding the provisions of Section 9(k), in the event Executive becomes entitled to payments and benefits under Section 9(b), 9(d) or 9(g), Executive shall also be entitled to receive from the Company relocation assistance payments, consisting of payment or reimbursement of: (i) costs incurred in the sale of Executive's primary residence in the Dallas area, including sales commissions not to exceed local custom, and all other normal closing costs in connection with such sale; provided that, at Executive's election, Executive may, in lieu of Executive himself selling such primary residence to a third party, sell the residence to the Company or its designee at fair market value as determined immediately below. Fair market value shall be deemed to be the average of two bona fide appraisals prepared at the time of the proposed sale by two accredited appraisers selected by Executive. In the event the fair market value, as determined above, is less than the actual contract purchase price paid by Executive for the purchase of said residence, then the Company will reimburse Executive for the difference between such purchase and sales prices; (ii) all reasonable moving expenses to another location in the United States or Canada, including packing, transport, temporary storage and unpacking 15 16 (including the cost of moving one vehicle), all through movers or moving agents designated or approved by the Company; (iii) reasonable costs (not exceeding costs of economy air fare and appropriate lodging) of one house hunting trip for Executive and spouse; and (iv) a tax "gross-up" for all sums paid to Executive pursuant to clauses (i) through (iv) of this paragraph (l) that are includable in Executive's taxable income for U.S. Federal Income Tax purposes (i.e., an amount which, after the payment of the U.S. Federal, state and local income taxes to which Executive is subject on the payments made to or for Executive's benefit pursuant to this paragraph (l), calculated at the maximum rate applicable to individuals, irrespective of the actual tax payments made by Executive, will be equal to the costs for which reimbursement is to be provided pursuant to clauses (i) through (iii) of this paragraph (l)); provided, however, that payments pursuant to this paragraph (l) shall be made only for actual expenses in connection with Executive's relocation outside the Dallas area, and Executive shall not have the option to elect to receive all or part of the maximum allowances therefor in lieu of relocation expenses; and provided, further, that such payments shall only be available in respect of relocation that occurs at or prior to nine months after the end of the Term of Employment. 10. Indemnification. (a) The Company agrees that if Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that Executive is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another Person, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, Executive shall be indemnified and held harmless by the Company to the fullest extent permitted or authorized by the Company's certificate of incorporation or bylaws or, if greater, by the laws of the State of Delaware, against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, ERISA excise taxes (other than such as may be imposed with respect to compensation received by Executive) or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be a director, member, employee or agent of the Company or other Person and shall inure to the benefit of Executive's heirs, executors and administrators. The Company shall advance to Executive to the extent permitted by law all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 days after receipt by the Company of a written request, with appropriate documentation, for such advance. Such request shall include an undertaking by 16 17 Executive to repay the amount of such advance if it shall ultimately be determined that Executive is not entitled to be indemnified against such costs and expenses. (b) The Company agrees to continue and maintain a directors' and officers' liability insurance policy covering Executive to the extent the Company provides such coverage for its other executive officers. (c) Promptly after receipt by Executive of notice of any claim or the commencement of any action or proceeding with respect to which Executive is entitled to indemnity hereunder, Executive shall notify the Company in writing of such claim or the commencement of such action or proceeding, and the Company shall (i) assume the defense of such action or proceeding, (ii) employ counsel reasonably satisfactory to Executive and (iii) pay the reasonable fees and expenses of such counsel. Notwithstanding the preceding sentence, Executive shall be entitled to employ counsel separate from counsel for the Company and from any other party in such action if Company counsel reasonably determines that a conflict of interest exists which makes representation by counsel chosen by the Company not advisable. In such event, the reasonable fees and disbursements of such separate counsel for Executive shall be paid by the Company to the extent permitted by law. (d) After the Term of Employment, (i) at the request of the Company, Executive shall cooperate with and assist the Company (to the extent that such activities do not unreasonably interfere with the performance of Executive's other business activities or employment) to prepare for or defend against any action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party arising out of or based upon any matter or thing whatsoever arising out of or which may be related to matters as to which Executive has or acquires knowledge or information by reason of his employment by the Company or any of its Subsidiaries, and (ii) upon the request of Executive, the Company shall reimburse Executive for all reasonable travel, legal and other out-of-pocket expenses that may be incurred by Executive related to assisting the Company, at its request, to prepare for or defend against any such action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party and in providing evidence, producing documents or otherwise participating in any such action, suit, proceeding or claim. 11. Effect of Agreement on Other Benefits. Except as specifically provided in this Agreement, the existence of this Agreement shall not prohibit or restrict Executive's entitlement to full participation in the employee benefit and other plans or programs in which senior executives of the Company are eligible to participate. 17 18 12. Confidentiality. Executive acknowledges that Executive is bound by that certain nondisclosure agreement executed by Executive upon the commencement of his employment with the Company and that the terms thereof shall not be modified or affected by this Agreement. 13. Non-Competition. (a) During the Term of Employment and (unless the Term of Employment expires following a Non-Extension Event or is terminated by the Company without Cause or voluntarily by Employee due to a Constructive Termination Without Cause) for a period of nine months thereafter, Executive shall not, directly or indirectly, except when acting on behalf of the Company, whether as an employee, consultant, partner, principal, agent, distributor, representative, stockholder or otherwise, plan, develop, conduct or otherwise engage in the MDU Business in any metropolitan area world-wide in which the Company or any Subsidiary then conducts or is actively planning to conduct the MDU Business (except that he may be a stockholder holding not more than a 1% common stock interest in a Person whose shares are publicly traded and which engages in the MDU Business in any such area). Notwithstanding the foregoing, Executive shall be free at any time following the Term of Employment to accept employment with or provide other services to any Person whose business includes the MDU Business but only if (i) the MDU Business is not the principal or predominant business of such Person and (ii) the services of Executive do not principally or predominantly relate to the MDU Business. By way of example only, if the Term of Employment were to end on the date of this Agreement, Executive would be free to be employed by a typical incumbent local exchange or long distance carrier or by a typical franchised cable operator for so long as Executive's services did not principally or predominantly relate to the provision of video and telecommunications services to residential multiple dwelling units in the markets in which the Company now operates or is actively planning to operate. (b) During the Term of Employment and for a period of 12 months thereafter, Executive shall not, directly or indirectly, (i) solicit any customer of the Company or any Subsidiary to do business with any Person that engages in the MDU Business or (ii) solicit any Person, other than his secretary/administrative assistant, who is employed by the Company or any Subsidiary or who was employed by the Company or any Subsidiary within 12 months of such solicitation to (A) terminate his or her employment with the Company or any Subsidiary, (B) accept employment with anyone other than the Company or any Subsidiary or (C) in any manner interfere with the business of the Company or any Subsidiary. (c) Executive acknowledges that the Company has no adequate remedy at law and would be irreparably harmed if Executive breaches or threatens to breach any of the provisions of Section 12 or Section 13(a) or 13(b), and therefore Executive agrees that the Company or any Subsidiary, as the case may be, shall be entitled to temporary or permanent 18 19 mandatory or injunctive relief to terminate or forestall any breach or threatened breach of any of those provisions and to specific performance of the terms of each of those provisions, without the need to demonstrate irreparable injury or post bond or other security. Executive further agrees that he shall not, in any proceeding seeking injunctive or other equitable relief to enforce the provisions of Section 12 or Section 13(a) or 13(b), raise the defense that the Company or any Subsidiary has an adequate remedy at law. Nothing in this Section 13(c) shall be construed to prohibit the Company or any Subsidiary from pursuing any other rights or remedies available to it at law or in equity or which may be otherwise available to it. (d) If it is determined that any of the provisions of this Section 13, or any part thereof, is unenforceable because of the duration or geographical scope of such provision, it is the intention of the Parties that the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced. 14. Intellectual Property. Any processes, inventions, ideas, know-how and other similar data created or developed by Executive while employed by the Company which relate to the business then conducted by the Company or any of its Subsidiaries shall be the Company's exclusive and absolute property, and Executive hereby assigns to the Company, now and hereafter, all of his right, title and interest to any and all of the same. Any work in connection with the services rendered by Executive hereunder shall be considered "work made for hire" under the Copyright Law of 1976 or any successor law, and the Company shall be the owner of such work as if the Company were the author of such work. 15. Documents; Conduct; References. (a) Executive hereby expressly covenants and agrees that, following termination of the Term of Employment for any reason, or any time, upon the Company's request, Executive will promptly return to the Company all property of the Company and its Subsidiaries in his or her possession or control (whether maintained at his or her office, home or elsewhere), including, without limitation, all copies of all management studies, business or strategic plans, budgets, notebooks and other printed, typed electronically stored or written materials, documents, diaries, disks, calendars and data of or relating to the Company or its Subsidiaries or their respective personnel or affairs. (b) Executive hereby expressly covenants and agrees that Executive will not at any time, during or after the Term of Employment, denigrate, ridicule or intentionally criticize the Company or any of its Subsidiaries or any of their respective products or services, properties, employees, officers or directors, including, without limitation, by way of news interviews or the expression of personal view, opinions or judgments to the news media. 19 20 (c) The Company hereby expressly covenants and agrees that the Company will not at any time, during or after the Term of Employment, publicly denigrate, ridicule or intentionally criticize Executive, including, without limitation, by way of news interviews or the expression of personal views, opinions or judgments to the news media. (d) The Company hereby expressly covenants and agrees that, following the Term of Employment, the Company will, unless otherwise requested by Executive in any instance or required by law, provide to any prospective employer seeking information regarding Executive's employment with the Company a neutral reference in accordance with the general policies of the Company applicable to requests for employment references. 16. Acknowledgment of Representation by Counsel. The Parties acknowledge that they have been represented by counsel or knowingly waive their right to be represented by counsel with regard to this Agreement and the subject matter hereof. Each Party agrees and acknowledges that he or it has not relied upon any tax advice, legal counsel or business advice provided by the other Party. 17. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Executive) and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company, except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the surviving corporation, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or by operation of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than Executive's rights to compensation and benefits. 18. Entire Agreement. Except as herein otherwise expressly provided, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto, including any agreement between Executive and any Affiliate of the Company dated prior to the date hereof. 20 21 19. Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. 20. Severability. In the event that any provision or portion of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions and portions remaining of any provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 21. Beneficiaries/References. Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 22. Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Texas without reference to principles of conflict of laws. 23. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration before a single arbitrator, to be held in Dallas, Texas, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator shall be final and subject to appeal only to the extent permitted by law. Each Party shall bear its or his own expenses incurred in connection with any arbitration. Anything to the contrary notwithstanding, each Party has the right to proceed with a court action for injunctive relief or relief from violations of law not within the jurisdiction of an arbitrator. 21 22 24. Notices. Any notice required or permitted hereunder to be given to a Party shall be effective only if given in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested or by Federal Express or other similar service, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may hereafter specify by notice to the other Party: If to the Company: OpTel, Inc. 1111 W. Mockingbird Lane, #1000 Dallas, Texas 75247 Attention: General Counsel 22 23 If to Executive: 4730 Chapel Hill Road Dallas, TX 75214 25. Headings. The captions or headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 26. Execution of Agreement and Further Actions. This Agreement may be executed in several counterpart copies each of which shall constitute an original and the same instrument notwithstanding that both Parties are not signatories to the same counterpart. The Parties agree to execute such other documents and to take such other action as may from time to time be necessary or appropriate to carry out the intent of this Agreement, provided that the same are not inconsistent with the provisions hereof. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. OPTEL, INC. By: -------------------------------------- ----------------------------------------- STEPHEN R. DUBE 23 EX-10.15 11 EMPLOYMENT AGREEMENT LYNN ZERA 1 EXHIBIT 10.15 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by and between OPTEL, INC., a Delaware corporation (the "Company"), and LYNN R. ZERA ("Executive"). W I T N E S S E T H : WHEREAS, Executive is currently employed by the Company as Vice President Human Resources of the Company; and WHEREAS, the Company desires to continue to employ Executive and Executive has agreed to such continuation, subject to the terms of this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the Company and Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. As used in this Agreement, unless the context otherwise requires: (a) "Affiliate" of a Person shall mean a Person that directly or indirectly controls, is controlled by, or is under common control with the Person specified. (b) "Aggregate Life Insurance Benefits" shall have the meaning set forth in Section 9(a)(ii). (c) "Average Annual Bonus" shall mean the average of the two most recent annual bonuses (not including any payments from long-term incentive programs) received by or due to Executive for completed fiscal years immediately prior to the termination of the Term of Employment. (d) "Base Salary" shall mean the salary provided for in Section 4. (e) "Board" shall mean the Board of Directors of the Company. (f) "Cause" shall mean: 1 2 (i) Executive's conviction of a crime involving moral turpitude (excluding offenses such as driving while intoxicated); or (ii) Executive's (A) commission of a fraud upon the Company or (B) material breach of this Agreement (including by wilfully failing or neglecting to perform Executive's duties hereunder), which breach, if curable, is not substantially cured within 10 days after written notice to Executive specifying the nature of the breach. (g) A "Change in Control" shall mean the occurrence of any one of the following events: (i) Any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (other than Executive, Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates (collectively, all or any of Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates constitute the "Existing Control Group")), is a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of shares of the Voting Stock of the Company having more total votes in an election for directors than shares of Voting Stock of which the Existing Control Group is the beneficial owner and, at the same time, the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; (ii) the majority of the members of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the date of this Agreement; provided that any individual becoming a director subsequent to such date whose election or nomination for election as a director was supported by two-thirds of the directors who were Incumbent Directors at the time of such election or nomination shall be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of the assets or business of the Company are disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Company, the Voting Stock or other ownership interests of the Person or Persons, if any, that succeed to the business of the Company) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; or 2 3 (v) the Company combines with another Person and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, not more than 50% of the Voting Stock of the surviving corporation (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the surviving corporation, any shares received by Affiliates of such other Person in exchange for stock of such other Person) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board. (h) "Confidential Information" shall mean all information that is not known or available to the public concerning the business of the Company or any Subsidiary relating to its products, product development, trade secrets, customers, suppliers, finances, and business plans and strategies. For this purpose, information known or available generally within the trade or industry of the Company or any Subsidiary shall be deemed to be known or available to the public. Confidential Information shall include information that is, or becomes, known to the public as a result of a breach by Executive of the provisions of Section 13. (i) "Constructive Termination Without Cause" shall mean a termination of the Term of Employment by written notice given by Executive within 60 days following the occurrence, without Executive's prior written consent, of one or more of the following events (except in consequence of a prior termination): (i) a reduction in or elimination of (A) Executive's then current Base Salary, or (B) Executive's opportunity for any long-term incentive award for which she is eligible under Section 6 or the termination or material reduction of any material employee benefit or perquisite enjoyed by her including the bonus provided for under Section 5; provided, however, that in the case of clause (B), only if the reduction or elimination is greater than that applied to other executives of the Company of the same class or level as Executive; (ii) the failure to elect or reelect Executive to the position specified in Section 3(a), or Executive's removal, without Cause, from such position, or a material diminution in Executive's duties, authority or responsibilities as described in Section 3(a), or the assignment to Executive of duties which are materially inconsistent with such duties or which materially impair Executive's ability to function in such position, and, in the case of any such assignment, the failure of the Company to cure such inconsistency or impairment within 15 days after its receipt of notice thereof from Executive; (iii) the failure to continue Executive's participation in any incentive compensation plan for which Executive is eligible unless executives of the same class or level as Executive also cease to participate in such plan or a plan providing a substantially similar opportunity is substituted; or 3 4 (iv) the relocation of the Company's principal office outside the area comprised by Dallas and Tarrant Counties, Texas, having dimensions of approximately 58 miles by 29 miles and commonly referred to as the Dallas-Fort Worth Metroplex. (j) "Disability" shall mean Executive's inability, due to physical or mental incapacity, to substantially perform Executive's duties and responsibilities under this Agreement for a period of 180 consecutive days or for 180 days in a 365-day period. (k) "MDU Business" shall mean the delivery of video and telecommunications services to residential multiple dwelling units. (l) "Minimum Severance Period" shall have the meaning set forth in Section 9(d)(vi)(A), subject to modification as provided in Section 9(e) in the event of a Change in Control. (m) "Non-Extension Event" shall mean any termination of the Term of Employment resulting from an election by the Company not to renew the Term of Employment. (n) "Person" shall mean an individual, firm, corporation, trust, joint venture, partnership, limited liability company, association, unincorporated organization or other entity or any governmental body or subdivision, agency, commission or authority thereof. (o) "Stock" shall mean the Common Stock of the Company. (p) "Subsidiary" shall mean any Person of which the Company owns, directly or indirectly, more than 50% of the Voting Stock or, in the case of a Person other than a corporation, more than 50% of the equity interest. (q) "Term of Employment" shall mean the period or periods specified in Section 2. (r) "Voting Stock" shall mean capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect a majority of the directors of a corporation. 2. Term of Employment. The Company hereby employs Executive, and Executive hereby accepts such employment, for the Term of Employment commencing April 15, 1999 and ending at the close of business on April 15, 2001, subject to earlier termination of the Term of Employment in accordance with the terms of this Agreement. The Term of Employment shall be automatically renewed from year to year unless either the Company or Executive provides the other with 4 5 written notice of non-renewal at least 30 days prior to the date on which the Term of Employment would otherwise expire. 3. Position, Duties and Responsibilities. (a) During the Term of Employment, Executive shall be employed as Vice President Human Resources of the Company. In that capacity Executive shall have the duties, authority and responsibilities normally associated with such position and shall report to the Chief Executive Officer of the Company. Executive shall, at the request of the Board or the Chief Executive Officer of the Company, also serve as an officer and/or director of one or more Subsidiaries without additional compensation. (b) During the Term of Employment Executive shall devote his full attention and expend his best efforts, energies and skills on a full-time basis to the business of the Company and its Subsidiaries. (c) Executive's services to the Company will be rendered primarily at the Company's principal office. Executive acknowledges, however, that Executive's services may require extensive travel. (d) Nothing herein shall preclude Executive from (i) serving as a director of one or more other corporations not engaged in competition with the Company or of one or more trade associations and/or charitable organizations, subject in each case to prior approval by the Chief Executive Officer of the Company, (ii) engaging in charitable activities and community affairs, (iii) managing Executive's personal investments and affairs and those of her family, and (iv) engaging in other business transactions, provided that such activities individually and in the aggregate do not reflect adversely on Executive's personal or business reputation or the Company or its business and do not interfere with the proper performance of Executive's duties and responsibilities to the Company and its Subsidiaries. 4. Base Salary. Executive shall receive Base Salary from the Company at the annual rate of $138,000, payable in accordance with the regular payroll practices of the Company, but in no event less frequently than monthly. Executive's Base Salary shall be subject to review by the Company on an annual basis but shall not be decreased. 5. Annual Bonus. Executive shall be entitled to be considered for receipt of an annual bonus, the calculation of which is to be determined in accordance with an incentive plan established and administered by the Board which includes a "target" bonus for Executive for each bonus period, as such plan may be modified by the Board from time to time. 6. Long-Term Incentive Programs. Executive shall be eligible to participate in any long-term incentive programs of the Company on the same basis as other senior executives of the Company. 5 6 7. Employee Benefit Programs and Vacation. (a) During the Term of Employment Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior executives generally, as such plans or programs may be in effect from time to time. (b) Executive shall be entitled to four weeks of vacation per year. 8. Reimbursement of Business and Other Expenses and Perquisites. (a) Executive is authorized to incur reasonable business expenses in carrying out his duties and responsibilities under this Agreement, and the Company shall promptly reimburse Executive for all such expenses, all subject to and in accordance with the Company's policies and procedures as adopted and in effect from time to time and applicable to its senior executives of comparable status. (b) To assist Executive in the performance of his duties and responsibilities under this Agreement, the Company shall provide to Executive an allowance for the use of an automobile in accordance with the Company's policies applicable generally to the Company's senior executives of comparable class or status; provided, however, that, if Executive currently uses a leased automobile provided by the Company, then in lieu of such allowance the Company may continue to provide Executive with the use of such leased automobile for the remaining initial term of the applicable lease. (c) Executive shall be eligible to receive all perquisites made generally available by the Company to its senior executives of comparable class or status. 9. Termination of Term of Employment. (a) Termination Due to Death. The Term of Employment shall terminate upon Executive's death. In the event of such termination due to Executive's death, Executive's estate or Executive's beneficiaries, as the case may be, shall be entitled to: (i) the proceeds payable in the event of Executive's death under the group life insurance policy maintained by the Company for the benefit of its senior executive employees and others; (ii) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to Executive's death, over (B) the aggregate amount of life insurance proceeds payable to Executive's estate or beneficiaries pursuant to clause (i) of 6 7 this Section 9(a) or pursuant to any other policy on Executive's life for which premiums are paid by the Company or any of its Affiliates (the "Aggregate Life Insurance Benefits"); (iii) if the date of Executive's death coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which Executive's death occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iv) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which Executive's death occurs; (v) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (vi) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. (b) Termination Due to Disability. The Term of Employment may be terminated by the Company by written notice to Executive in the case of Executive's Disability. In the event of such termination due to Disability, Executive shall be entitled to: (i) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, over (B) the amount of any disability benefits provided to Executive by the Company or under any disability insurance paid for, or for which premiums paid by Executive were reimbursed, by the Company; (ii) if such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period, (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and 7 8 (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. (c) Termination by the Company for Cause. In the event the Company terminates the Term of Employment for Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; (ii) any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iii) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (iv) any other or additional benefits provided for in accordance with applicable plans or programs of the Company. (d) Termination Without Cause or Constructive Termination Without Cause. In the event the Term of Employment is terminated by the Company without Cause, other than due to Executive's Disability or death, or in the event the Term of Employment is terminated due to a Constructive Termination Without Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; (ii) if the date of such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and (vi) to elect, within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in 8 9 section 9(d)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(d)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(d)(vi), then, subject to the requirements of Section 9(j), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base Salary for the period (the "Minimum Severance Period") that is the longer of 12 months or the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, plus (2) an amount equal to Average Annual Bonus pro-rata for the Minimum Severance Period. (B) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then, subject to the requirements of Section 9(j), Executive will remain an employee of the Company (but without any title) until the end of the Minimum Severance Period, and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that (1) if Executive dies during such period, Executive's payments pursuant to this Section 9(d)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the Aggregate Life Insurance Benefits plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had Executive remained on the Company's payroll until the end of such period over (y) the amount of the Aggregate Life Insurance Benefits; and (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of Executive's intention to terminate his employment during such period, Executive will cease to be an employee of the Company effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had Executive remained on the Company's payroll until the end of such period. 9 10 (C) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then during the period Executive remains on the payroll of the Company, Executive will continue to be eligible to receive the medical and life insurance benefits which all other employees of the Company are then entitled to receive, as such benefits may be amended, changed or eliminated from time to time. Executive shall not be entitled to any other perquisite or benefit provided by the Company to its senior executives or employees generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as Executive leaves the payroll of the Company. (e) Acceleration of Entitlements in Connection with a Change in Control or Termination. Upon a Change in Control (regardless of whether Executive continues in employment by the Company or the termination of the Term of Employment for any reason whatsoever) Executive shall become immediately entitled to exercise in full any stock option to acquire Stock during the remainder of the term of such option. Without limitation of the preceding sentence, upon the termination of the Term of Employment (including upon a Non- Extension Event or Disability or death) otherwise than for Cause, Executive shall become immediately entitled to exercise in full any stock option to acquire Stock during the remainder of the term of such option, to the extent such option would otherwise have vested or become exercisable within 12 months after such termination of the Term of Employment but, unless a Change in Control shall have occurred, all such options that have not previously expired shall automatically expire on the date that is 12 months after such termination of the Term of Employment. If, in connection with a Change in Control or within 12 months after a Change in Control, the Term of Employment is terminated without Cause, other than due to Disability or death, or due to a Constructive Termination Without Cause, then, without limitation of the payments, benefits and elections provided in Section 9(d) and the first sentence of this Section 9(e), upon such Change in Control or such later termination, all amounts, entitlements and benefits awarded to Executive or to which Executive is otherwise entitled under any grant, plan or program of the Company but which are not yet vested shall become fully vested except to the extent such vesting would be inconsistent with the terms of the relevant plan. Without limitation of the benefits to Executive pursuant to the preceding sentence or any of the other provisions of this Agreement, if, in connection with a Change in Control or within 12 months after a Change in Control, the Term of Employment is terminated due to a Constructive Termination Without Cause or by the Company without Cause (other than due to Disability or death), then, (A) the "Minimum Severance Period" for purposes of Section 9(d) shall be not less than 24 months and (B) upon such Change in Control (or such later termination) all amounts, entitlements and benefits awarded to Executive or to which Executive is otherwise entitled under any grant, plan or program of the Company but which are not yet vested shall become fully vested except to the 10 11 extent such vesting would be inconsistent with the terms of the relevant plan. In connection with the occurrence of a Change in Control, Executive and the Company agree to negotiate in good faith payment arrangements and covenant changes (without reducing the total amount payable pursuant to this Section 9(e)) designed to preserve to the Company the deductibility for federal income tax purposes of, and eliminate any excise tax imposed by Section 4999 of the Code payable in respect of, amounts paid or benefits inuring to Executive pursuant to this Section 9(e). (f) Voluntary Termination. A termination of the Term of Employment by Executive on his own initiative, other than a termination due to death or Disability or a Constructive Termination without Cause, shall be treated as a Termination for Cause, and, accordingly, Executive shall have only the entitlements provided in Section 9(c). (g) Termination Because of Non-Renewal. In the event of a Non- Extension Event, Executive shall be entitled to: (i) Base Salary through the date of expiration of the Term of Employment; (ii) if the expiration of the Term of Employment coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which the Term of Employment expires, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which the Term of Employment expires; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and (vi) to elect within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in section 9(g)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(g)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(g)(vi), subject to the requirements of Section 9(j), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base 11 12 Salary for a period of 12 months (or 24 months, if a Change in Control has occurred during the Term of Employment and the Term of Employment has not been renewed at least once after the Change in Control), plus (2) an amount equal to Average Annual Bonus pro-rata for the same period. (B) In the event Executive makes the election provided in clause (y) of Section 9(g)(vi), subject to the requirements of Section 9(j), Executive will remain an employee of the Company (but without any title) for the period of 12 months following the expiration of the Term of Employment (or 24 months, if a Change in Control has occurred during the Term of Employment and the Term of Employment has not been renewed at least once after the Change in Control), and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that (1) if Executive dies during such period, Executive's payments pursuant to this Section 9(g)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the Aggregate Life Insurance Benefits, plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until the end of such period over (y) the amount of the Aggregate Life Insurance Benefits; and (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of Executive's intention to terminate Executive's employment during such period, Executive will cease to be an employee of the Company, effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until the end of such period. (C) In the event Executive makes an election provided in clause (y) of Section 9(g)(vi), then during the period Executive remains on the payroll of the Company, Executive will continue to be eligible to receive the medical and life insurance benefits all other employees of the Company are then entitled to receive, as amended, changed or eliminated, from time to time. Executive shall 12 13 not be entitled to any other perquisite or benefit provided by the Company to its senior executives generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event of an election pursuant to clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as Executive leaves the payroll of the Company. (h) No Mitigation; No Offset. In the event of any termination of the Term of Employment under this Section 9, Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment obtained by Executive except as specifically provided in this Section 9. (i) Nature of Payments. Any amounts due under this Section 9 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. (j) General Release. In partial consideration for, and as a condition of, the Company's obligation to make the payments described in Sections 9(d)(vi) and 9(g)(vi), Executive shall execute and deliver to the Company a release of all claims Executive shall then have against the Company, its Affiliates and their related Persons arising out of or in connection with Executive's employment or termination of employment, including, but not limited to, a release of all claims of discrimination. The Company will deliver such release to Executive at or about the time it delivers or receives the notice of termination, and Executive shall execute and deliver such release to the Company within 21 days thereafter, except that in case of expiration of the Term of Employment following a Non-Extension Event, the release will be delivered to Executive upon such expiration and shall be executed and delivered by Executive within 21 days after such expiration. If Executive fails to execute and deliver such release to the Company within such 21-day period, or if Executive revokes Executive's consent to such release as provided for therein, Executive will not be eligible to receive any further payments from the Company pursuant to Section 9(d)(vi) or 9(g)(vi). (k) Other Severance. In the event the Company's written severance pay policy applicable to Executive provides for greater severance pay and benefits than are provided for in Section 9(d) or 9(g), Executive may elect to receive termination pay and benefits under the terms and conditions of such policy in lieu of the payments and benefits under Section 9(d) or 9(g). It is understood by the Parties that Executive shall not be entitled to both the payments and benefits under the severance pay policy and those available under Section 9(d) or 9(g). Notwithstanding the foregoing, in addition to being entitled to the greater of the payments and benefits under the severance pay policy and under Section 9(d) or 9(g), as applicable, Executive shall be entitled to professional outplacement services (including office space and 13 14 secretarial services), at a cost not exceeding 10% of Executive's annual Base Salary, in accordance with the Company's policies regarding outplacement services; provided, however, that payments pursuant to this sentence shall be made only for actual outplacement services, and Executive shall not have the option to elect to receive all or part of the maximum allowances therefor in lieu of outplacement services. 10. Indemnification. (a) The Company agrees that if Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that Executive is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another Person, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, Executive shall be indemnified and held harmless by the Company to the fullest extent permitted or authorized by the Company's certificate of incorporation or bylaws or, if greater, by the laws of the State of Delaware, against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, ERISA excise taxes (other than such as may be imposed with respect to compensation received by Executive) or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be a director, member, employee or agent of the Company or other Person and shall inure to the benefit of Executive's heirs, executors and administrators. The Company shall advance to Executive to the extent permitted by law all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 days after receipt by the Company of a written request, with appropriate documentation, for such advance. Such request shall include an undertaking by Executive to repay the amount of such advance if it shall ultimately be determined that Executive is not entitled to be indemnified against such costs and expenses. (b) The Company agrees to continue and maintain a directors' and officers' liability insurance policy covering Executive to the extent the Company provides such coverage for its other executive officers. (c) Promptly after receipt by Executive of notice of any claim or the commencement of any action or proceeding with respect to which Executive is entitled to indemnity hereunder, Executive shall notify the Company in writing of such claim or the commencement of such action or proceeding, and the Company shall (i) assume the defense of such action or proceeding, (ii) employ counsel reasonably satisfactory to Executive and (iii) pay the reasonable fees and expenses of such counsel. Notwithstanding the preceding sentence, Executive shall be entitled to employ counsel separate from counsel for the Company and from any other party in such action if Company counsel reasonably determines that a conflict of 14 15 interest exists which makes representation by counsel chosen by the Company not advisable. In such event, the reasonable fees and disbursements of such separate counsel for Executive shall be paid by the Company to the extent permitted by law. (d) After the Term of Employment, (i) at the request of the Company, Executive shall cooperate with and assist the Company (to the extent that such activities do not unreasonably interfere with the performance of Executive's other business activities or employment) to prepare for or defend against any action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party arising out of or based upon any matter or thing whatsoever arising out of or which may be related to matters as to which Executive has or acquires knowledge or information by reason of his employment by the Company or any of its Subsidiaries, and (ii) upon the request of Executive, the Company shall reimburse Executive for all reasonable travel, legal and other out-of-pocket expenses that may be incurred by Executive related to assisting the Company, at its request, to prepare for or defend against any such action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party and in providing evidence, producing documents or otherwise participating in any such action, suit, proceeding or claim. 11. Effect of Agreement on Other Benefits. Except as specifically provided in this Agreement, the existence of this Agreement shall not prohibit or restrict Executive's entitlement to full participation in the employee benefit and other plans or programs in which senior executives of the Company are eligible to participate. 12. Confidentiality. Executive acknowledges that Executive is bound by that certain nondisclosure agreement executed by Executive upon the commencement of his employment with the Company and that the terms thereof shall not be modified or affected by this Agreement. 13. Non-Competition. (a) During the Term of Employment and (unless the Term of Employment expires following a Non-Extension Event or is terminated by the Company without Cause or voluntarily by Employee due to a Constructive Termination Without Cause) for a period of nine months thereafter, Executive shall not, directly or indirectly, except when acting on behalf of the Company, whether as an employee, consultant, partner, principal, agent, distributor, representative, stockholder or otherwise, plan, develop, conduct or otherwise engage in the MDU Business in any metropolitan area world-wide in which the Company or any 15 16 Subsidiary then conducts or is actively planning to conduct the MDU Business (except that he may be a stockholder holding not more than a 1% common stock interest in a Person whose shares are publicly traded and which engages in the MDU Business in any such area). Notwithstanding the foregoing, Executive shall be free at any time following the Term of Employment to accept employment with or provide other services to any Person whose business includes the MDU Business but only if (i) the MDU Business is not the principal or predominant business of such Person and (ii) the services of Executive do not principally or predominantly relate to the MDU Business. By way of example only, if the Term of Employment were to end on the date of this Agreement, Executive would be free to be employed by a typical incumbent local exchange or long distance carrier or by a typical franchised cable operator for so long as Executive's services did not principally or predominantly relate to the provision of video and telecommunications services to residential multiple dwelling units in the markets in which the Company now operates or is actively planning to operate. (b) During the Term of Employment and for a period of 12 months thereafter, Executive shall not, directly or indirectly, (i) solicit any customer of the Company or any Subsidiary to do business with any Person that engages in the MDU Business or (ii) solicit any Person, other than his secretary/administrative assistant, who is employed by the Company or any Subsidiary or who was employed by the Company or any Subsidiary within 12 months of such solicitation to (A) terminate his or her employment with the Company or any Subsidiary, (B) accept employment with anyone other than the Company or any Subsidiary or (C) in any manner interfere with the business of the Company or any Subsidiary. (c) Executive acknowledges that the Company has no adequate remedy at law and would be irreparably harmed if Executive breaches or threatens to breach any of the provisions of Section 12 or Section 13(a) or 13(b), and therefore Executive agrees that the Company or any Subsidiary, as the case may be, shall be entitled to temporary or permanent mandatory or injunctive relief to terminate or forestall any breach or threatened breach of any of those provisions and to specific performance of the terms of each of those provisions, without the need to demonstrate irreparable injury or post bond or other security. Executive further agrees that he shall not, in any proceeding seeking injunctive or other equitable relief to enforce the provisions of Section 12 or Section 13(a) or 13(b), raise the defense that the Company or any Subsidiary has an adequate remedy at law. Nothing in this Section 13(c) shall be construed to prohibit the Company or any Subsidiary from pursuing any other rights or remedies available to it at law or in equity or which may be otherwise available to it. (d) If it is determined that any of the provisions of this Section 13, or any part thereof, is unenforceable because of the duration or geographical scope of such provision, it is the intention of the Parties that the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced. 16 17 14. Intellectual Property. Any processes, inventions, ideas, know-how and other similar data created or developed by Executive while employed by the Company which relate to the business then conducted by the Company or any of its Subsidiaries shall be the Company's exclusive and absolute property, and Executive hereby assigns to the Company, now and hereafter, all of his right, title and interest to any and all of the same. Any work in connection with the services rendered by Executive hereunder shall be considered "work made for hire" under the Copyright Law of 1976 or any successor law, and the Company shall be the owner of such work as if the Company were the author of such work. 15. Documents; Conduct; References. (a) Executive hereby expressly covenants and agrees that, following termination of the Term of Employment for any reason, or any time, upon the Company's request, Executive will promptly return to the Company all property of the Company and its Subsidiaries in his or her possession or control (whether maintained at his or her office, home or elsewhere), including, without limitation, all copies of all management studies, business or strategic plans, budgets, notebooks and other printed, typed electronically stored or written materials, documents, diaries, disks, calendars and data of or relating to the Company or its Subsidiaries or their respective personnel or affairs. (b) Executive hereby expressly covenants and agrees that Executive will not at any time, during or after the Term of Employment, publicly denigrate, ridicule or intentionally criticize the Company or any of its Subsidiaries or any of their respective products or services, properties, employees, officers or directors, including, without limitation, by way of news interviews or the expression of personal view, opinions or judgments to the news media. (c) The Company hereby expressly covenants and agrees that the Company will not at any time, during or after the Term of Employment, publicly denigrate, ridicule or intentionally criticize Executive, including, without limitation, by way of news interviews or the expression of personal views, opinions or judgments to the news media. (d) The Company hereby expressly covenants and agrees that, following the Term of Employment, the Company will, unless otherwise requested by Executive in any instance or required by law, provide to any prospective employer seeking information regarding Executive's employment with the Company a neutral reference in accordance with the general policies of the Company applicable to requests for employment references. 17 18 16. Acknowledgment of Representation by Counsel. The Parties acknowledge that they have been represented by counsel or knowingly waive their right to be represented by counsel with regard to this Agreement and the subject matter hereof. Each Party agrees and acknowledges that he or it has not relied upon any tax advice, legal counsel or business advice provided by the other Party. 17. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Executive) and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company, except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the surviving corporation, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or by operation of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than Executive's rights to compensation and benefits. 18. Entire Agreement. Except as herein otherwise expressly provided, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto, including any agreement between Executive and any Affiliate of the Company dated prior to the date hereof. 19. Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. 18 19 20. Severability. In the event that any provision or portion of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions and portions remaining of any provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 21. Beneficiaries/References. Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 22. Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Texas without reference to principles of conflict of laws. 23. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration before a single arbitrator, to be held in Dallas, Texas, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator shall be final and subject to appeal only to the extent permitted by law. Each Party shall bear its or his own expenses incurred in connection with any arbitration. Anything to the contrary notwithstanding, each Party has the right to proceed with a court action for injunctive relief or relief from violations of law not within the jurisdiction of an arbitrator. 24. Notices. Any notice required or permitted hereunder to be given to a Party shall be effective only if given in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested or by Federal Express or other similar service, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may hereafter specify by notice to the other Party: 19 20 If to the Company: OpTel, Inc. 1111 W. Mockingbird Lane, #1000 Dallas, Texas 75247 Attention: General Counsel If to Executive: 440 Sheffield Drive Richardson, TX 75081 25. Headings. The captions or headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 26. Execution of Agreement and Further Actions. This Agreement may be executed in several counterpart copies each of which shall constitute an original and the same instrument notwithstanding that both Parties are not signatories to the same counterpart. The Parties agree to execute such other documents and to take such other action as may from time to time be necessary or appropriate to carry out the intent of this Agreement, provided that the same are not inconsistent with the provisions hereof. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. OPTEL, INC. By: ------------------------- ---------------------------- LYNN R. ZERA 20 EX-10.16 12 EMPLOYMENT AGREEMENT LOUIS BRUNEL 1 EXHIBIT 10.16 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by and between OPTEL, INC., a Delaware corporation (the "Company"), and LOUIS BRUNEL ("Executive"). W I T N E S S E T H: WHEREAS, Executive is currently employed by the Company as President and Chief Executive Officer of the Company; and WHEREAS, the Company desires to continue to employ Executive and Executive has agreed to such continuation, subject to the terms of this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the Company and the Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. As used in this Agreement, unless the context otherwise requires: (a) "Affiliate" of a Person shall mean a Person that directly or indirectly controls, is controlled by, or is under common control with the Person specified. (b) "Average Annual Bonus" shall mean the average of the two most recent annual bonuses (not including any payments from long-term incentive programs) received by or due to Executive for completed fiscal years immediately prior to the termination of the Term of Employment. (c) "Base Salary" shall mean the salary provided for in Section 4. (d) "Board" shall mean the Board of Directors of the Company. (e) "Cause" shall mean: (i) Executive's conviction of a crime involving moral turpitude (excluding offenses such as driving while intoxicated); or 2 (ii) Executive's (A) commission of a fraud upon the Company or (B) material breach of this Agreement (including by wilfully failing or neglecting to perform Executive's duties hereunder), which breach, if curable, is not substantially cured within 10 days after written notice to Executive specifying the nature of the breach. (f) A "Change in Control" shall mean the occurrence of any one of the following events: (i) Any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (other than Executive, Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates (collectively, all or any of Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates constitute the "Existing Control Group")), is a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of shares of the Voting Stock of the Company having more total votes in an election for directors than shares of Voting Stock of which the Existing Control Group is the beneficial owner and, at the same time, the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; (ii) the majority of the members of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the date of this Agreement; provided that any individual becoming a director subsequent to such date whose election or nomination for election as a director was supported by two-thirds of the directors who were Incumbent Directors at the time of such election or nomination shall be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of the assets or business of the Company are disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Company, the Voting Stock or other ownership interests of the Person or Persons, if any, that succeed to the business of the Company) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; or (v) the Company combines with another Person and is the surviving corporation but, immediately after the combination, the shareholders of the Company 2 3 immediately prior to the combination hold, directly or indirectly, not more than 50% of the Voting Stock of the surviving corporation (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the surviving corporation, any shares received by Affiliates of such other Person in exchange for stock of such other Person) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board. (g) "Confidential Information" shall mean all information that is not known or available to the public concerning the business of the Company or any Subsidiary relating to its products, product development, trade secrets, customers, suppliers, finances, and business plans and strategies. For this purpose, information known or available generally within the trade or industry of the Company or any Subsidiary shall be deemed to be known or available to the public. Confidential Information shall include information that is, or becomes, known to the public as a result of a breach by Executive of the provisions of Section 13. (h) "Constructive Termination Without Cause" shall mean a termination of the Term of Employment by written notice given by Executive within 90 days following the occurrence, without Executive's prior written consent, of one or more of the following events (except in consequence of a prior termination): (i) a reduction in or elimination of (A) Executive's then current Base Salary, (B) Executive's bonus target under Section 5, or (C) Executive's opportunity for any long-term incentive award for which he is eligible under Section 6 or the termination or material reduction of any material employee benefit or perquisite enjoyed by Executive; (ii) the failure to elect or reelect Executive as President and Chief Executive Officer of the Company or his removal, without Cause, from such position, or a material diminution in Executive's duties as President and Chief Executive Officer of the Company, as described in Section 3(a), or the assignment to Executive of duties which are materially inconsistent with such duties or which materially impair Executive's ability to function as President and Chief Executive Officer of the Company and, in the case of any such assignment, the failure of the Company to cure such inconsistency or impairment within 15 days after its receipt of notice thereof from Executive; (iii) the failure to continue Executive's participation in any incentive compensation plan for which he is eligible unless a plan providing a substantially similar opportunity is substituted; (iv) the relocation of the Company's principal office, or Executive's own office location as assigned to him by the Company, which would result in a significant increase in the time required for Executive to travel once weekly to and from Montreal and would therefore make it impractical for Executive to do so; or 3 4 (v) the failure of the Company to obtain the confirmation in writing by any successor of the Company or any assignee of all or substantially all of the Company's assets of such successor or assignee's obligation to perform this Agreement at or within 45 days after the merger, consolidation, sale or similar transaction resulting in such succession or assignment, provided that Executive may not treat such failure as a Constructive Termination Without Cause unless such failure is not cured within 10 days of receipt of notice thereof by such successor or assignee from Executive. (i) "Disability shall mean Executive's inability, due to physical or mental incapacity, to substantially perform his duties and responsibilities under this Agreement for a period of 180 consecutive days or for 180 days in a 365-day period. (j) "MDU Business" shall mean the delivery of video and telecommunications services to residential multiple dwelling units. (k) "Non-Extension Event" shall mean any termination of the Term of Employment resulting from an election by the Company not to extend the Term of Employment. (l) "Person" shall mean an individual, firm, corporation, trust, joint venture, partnership, limited liability company, association, unincorporated organization or other entity or any governmental body or subdivision, agency, commission or authority thereof. (m) "Stock" shall mean the Common Stock of the Company. (n) "Subsidiary" shall mean any Person of which the Company owns, directly or indirectly, more than 50% of the Voting Stock or, in the case of a Person other than a corporation, more than 50% of the equity interest. (o) "Term of Employment" shall mean the period or periods specified in Section 2. (p) "Voting Stock" shall mean capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect a majority of the directors of a corporation. 2. Term of Employment. The Company hereby employs Executive, and Executive hereby accepts such employment, for the Term of Employment commencing April 15, 1999 and ending at the close of business on October 31, 2000, subject to earlier termination of the Term of Employment in accordance with the terms of this Agreement. The Term of Employment shall be automatically renewed from year to year unless either the Company or Executive provides the 4 5 other with written notice of non-renewal at least 90 days prior to the date on which the Term of Employment would otherwise expire. 3. Position, Duties and Responsibilities. (a) During the Term of Employment, Executive shall be employed as President and Chief Executive Officer of the Company and shall be responsible, subject to the control of the Board, for the establishment and implementation of corporate policy and general management of the Company. In that capacity Executive shall have the duties and responsibilities normally associated with the positions of President and Chief Executive Officer. It is the intention of the Parties that Executive serve as a member of the Board during the Term of Employment. In carrying out his duties under this Agreement, Executive shall report to, and be subject to the supervision of, the Board. Executive shall, at the request of the Board, also serve as an officer and/or director of one or more Subsidiaries without additional compensation. (b) During the Term of Employment Executive shall devote his full attention and expend his best efforts, energies and skills on a full-time basis to the business of the Company and its Subsidiaries. (c) Nothing herein shall preclude Executive from (i) serving as a director of one or more other corporations not engaged in competition with the Company or of one or more trade associations and/or charitable organizations, subject in each case to prior notice to the Board, (ii) engaging in charitable activities and community affairs, (iii) managing his personal investments and affairs, and (iv) being involved in other business transactions, provided that such activities individually and in the aggregate do not materially interfere with the proper performance of his duties and responsibilities as the Company's President and Chief Executive Officer. 4. Base Salary. Executive shall receive a Base Salary from the Company at the annual rate of $350,000, payable in accordance with the regular payroll practices of the Company, but in no event less frequently than monthly. Executive's Base Salary shall be subject to review by the Board on an annual basis but shall not be decreased. 5. Annual Bonus. Executive shall be entitled to be considered for receipt of an annual bonus, the calculation of which is to be determined in accordance with an incentive plan established and administered by the Board, as such plan may be modified by the Board from time to time, which includes a "target" bonus for Executive for each annual bonus period in an amount equal to at least 45% of Executive's Base Salary. 5 6 6. Long-Term Incentive Programs. Executive shall be eligible to participate in any long-term incentive programs of the Company on the same basis as other senior executives of the Company. 7. Employee Benefit Programs and Vacation. (a) During the Term of Employment, Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior executives generally, as such plans or programs may be in effect from time to time. (b) Executive shall be entitled to one month paid vacation per year. 8. Reimbursement of Business and Other Expenses; Certain Perquisites. (a) Executive is authorized to incur reasonable business expenses in carrying out his duties and responsibilities under this Agreement, and the Company shall promptly reimburse Executive for all such expenses, all subject to and in accordance with the Company's policies and procedures as adopted and in effect from time to time and applicable to its senior executives of comparable status. (b) To assist Executive in the performance of his duties and responsibilities under this Agreement, the Company shall provide to Executive an allowance for the use of an automobile having an initial purchase value of not more than $60,000 and all expenses of registration, insurance, operation and maintenance of such automobile; provided, however, that for the remaining initial term of the existing lease the Company may continue to provide Executive with the use of the leased automobile currently provided to Executive. (c) The Company shall maintain at Company's expense in Las Colinas, Texas (or another location reasonably proximate to the Company's principal office) a corporate apartment for Executive's use, provided, that the maximum net rental obligation of the Company pursuant to the provisions of this Section 8(c) shall not exceed $2,500 per month (subject to appropriate cost of living increases). Said apartment shall be reasonably satisfactory to Executive. (d) The Company shall reimburse Executive for his reasonable expenses incurred in connection with his travel once weekly to and from Montreal. (e) Executive shall be eligible to receive all perquisites made generally available by the Company to its senior executives. 6 7 (f) It is the intention of the Company that the Executive shall be kept whole in respect of U. S. Federal income taxes on the allowances, reimbursements, expenses and perquisites referred to in Sections 8(b), (c) and (d) above (the "Allowances"). Accordingly, the Company shall pay Executive a tax "gross-up" with respect to all such Allowances that are includable in Executive's taxable income for U.S. Federal Income Tax purposes (i.e., an incremental amount equal to the net U.S. Federal, state and local income taxes to which Executive is subject on the sum of the Allowances and the incremental amount, calculated at the maximum rates applicable to individuals, irrespective of the actual tax payments made by Executive). 9. Termination of Term of Employment. (a) Termination Due to Death. The Term of Employment shall terminate upon Executive's death. In the event of such termination due to Executive's death, his estate or his beneficiaries, as the case may be, shall be entitled to: (i) the proceeds payable in the event of Executive's death under the group life insurance policy maintained by the Company for the benefit of its senior executive employees and others and any other life insurance policy maintained by the Company or any of its Affiliates for the benefit of Executive; (ii) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to Executive's death, over (B) the amount of life insurance proceeds payable pursuant to clause (i) of this Section 9(a); (iii) if the date of Executive's death coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which Executive's death occurs, determined pro rata with respect to Executive's target bonus for such period based on the number of completed months of Executive's employment by the Company during such bonus period; (iv) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which Executive's death occurs; (v) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (vi) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. 7 8 (b) Termination Due to Disability. The Term of Employment may be terminated by the Company by written notice to Executive in the event of Executive's Disability. In the event of such termination due to Disability, Executive shall be entitled to: (i) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, over (B) the amount of any disability benefits provided to Executive by the Company or under any disability insurance paid for, or for which premiums paid by Executive were reimbursed, by the Company; (ii) if such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. (c) Termination by the Company for Cause. In the event the Company terminates the Term of Employment for Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; (ii) any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iii) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (iv) any other or additional benefits provided for in accordance with applicable plans or programs of the Company. (d) Termination Without Cause or Constructive Termination Without Cause. In the event the Term of Employment is terminated by the Company without Cause, 8 9 other than due to Executive's Disability or death, or in the event the Term of Employment is terminated due to a Constructive Termination Without Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; (ii) if the date of such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and (vi) to elect, within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in section 9(d)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(d)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(d)(vi), then, subject to the requirements of Section 9(k), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base Salary for the period (the "Minimum Severance Period") that is the longer of 24 months or the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, plus (2) an amount equal to Average Annual Bonus pro-rata for the Minimum Severance Period. (B) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then, subject to the requirements of Section 9(k), Executive will remain an employee of the Company (but without any title) until the end of the Minimum Severance Period, and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that 9 10 (1) if Executive dies during such period, Executive's payments pursuant to this Section 9(d)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the proceeds, if any, of the group life insurance maintained by the Company for the benefit of its senior executive employees and others, plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had Executive remained on the Company's payroll until the end of such period over (y) the amount of such life insurance proceeds; and (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of his intention to terminate his employment during such period, Executive will cease to be an employee of the Company effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had he remained on the Company's payroll until the end of such period. (C) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then during the period he remains on the payroll of the Company, Executive will continue to be eligible to receive the same medical and life insurance benefits which all other employees of the Company are then entitled to receive, as such benefits may be amended, changed or eliminated from time to time. Executive shall not be entitled to any other perquisite or benefit provided by the Company to its senior executives or employees generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as he leaves the payroll of the Company. (e) Acceleration of Entitlements in Connection with a Change in Control or Termination. Upon a Change in Control (regardless of whether Executive continues in employment by the Company or the termination of the Term of Employment for any reason whatsoever) or the termination of the Term of Employment (including upon a Non-Extension 10 11 Event or Disability or death) otherwise than for Cause, Executive shall become immediately entitled to exercise in full any stock option to acquire Stock during the remainder of the term of such option, which, unless a Change in Control shall have occurred or such option shall previously have expired, shall automatically expire on the date that is 12 months after such termination of the Term of Employment. If, in connection with a Change in Control or within 12 months after a Change in Control, the Term of Employment is terminated without Cause, other than due to Disability or death, or due to a Constructive Termination Without Cause, then, without limitation of the payments, benefits and elections provided in Section 9(d) and the immediately preceding sentence, upon such Change in Control or such later termination, all amounts, entitlements and benefits awarded to Executive or to which Executive is otherwise entitled under any grant, plan or program of the Company but which are not yet vested shall become fully vested except to the extent such vesting would be inconsistent with the terms of the relevant plan. In connection with the occurrence of a Change in Control, Executive and the Company agree to negotiate in good faith payment arrangements and covenant changes (without reducing the total amount payable pursuant to this Section 9(e)) designed to preserve to the Company the deductibility for U.S. Federal income tax purposes of, and avoid any liability for payment of excise tax ("Excise Tax"), if any, that might be imposed by Section 4999 of the U.S. Internal Revenue Code of 1986, as amended (the "Code"), in respect of, amounts paid or benefits inuring to Executive pursuant to this Section 9(e). (f) Voluntary Termination. A termination of the Term of Employment by Executive on his own initiative, other than a termination due to death or Disability or a Constructive Termination without Cause, shall be treated as a Termination for Cause, and, accordingly, Executive shall have only the entitlements provided in Section 9(c). (g) Termination Because of Non-Renewal. In the event of a Non- Extension Event, Executive shall be entitled to: (i) Base Salary through the date of expiration of the Term of Employment; (ii) if the expiration of the Term of Employment coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which the Term of Employment expires, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which the Term of Employment expires; 11 12 (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and (vi) to elect within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in section 9(g)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(g)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(g)(vi), subject to the requirements of Section 9(k), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base Salary for 24 months, plus (2) an amount equal to Average Annual Bonus pro-rata for the same period. (B) In the event Executive makes the election provided in clause (y) of Section 9(g)(vi), subject to the requirements of Section 9(k), Executive will remain an employee of the Company (but without any title) for the period of 24 months following the expiration of the Term of Employment, and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that (1) if Executive dies during such period, his payments pursuant to this Section 9(g)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the proceeds, if any, of the group life insurance maintained by the Company for the benefit of its senior executive employees and others, plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until the end of such period over (y) the amount of such life insurance proceeds; and (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of his intention to terminate his employment during such period, Executive will cease to be an employee of the Company, 12 13 effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until the end of such period. (C) In the event Executive makes an election provided in clause (y) of Section 9(g)(vi), then during the period he remains on the payroll of the Company, Executive will continue to be eligible to receive the medical and life insurance benefits all other employees of the Company are then entitled to receive, as amended, changed or eliminated, from time to time. Executive shall not be entitled to any other perquisite or benefit provided by the Company to its senior executives generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event of an election pursuant to clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as he leaves the payroll of the Company. (h) Limitation In Connection with a Change in Control. In the event that the termination of the Term of Employment and the aggregate of all payments or benefits made or provided to the Executive under this Section 9 and under all other plans and programs of the Company (the "Aggregate Payment") is determined to constitute a Parachute Payment, as such term is defined in Section 280G(b)(2) of the Code, the Company shall pay to Executive, prior to the time any Excise tax is payable with respect to such Aggregate Payment, an additional amount which, after the imposition of all income and Excise Tax thereon, is equal to the Excise Tax on the Aggregate Payment. The determination of whether the Aggregate Payment constitutes a Parachute Payment and, if so, the amount to be paid to the Executive and the time of payment pursuant to this Section 9(h) shall be made by an independent auditor (the "Auditor") jointly selected by the Company and the Executive and paid by the Company. The Auditor shall be a nationally recognized United States public accounting firm which has not, during the two years preceding the date of its selection, acted in any way on behalf of the Company or any Subsidiary or Affiliate thereof. If the Executive and the Company cannot agree on the firm to serve as the Auditor, then the Executive and the Company shall each select one accounting firm and those two firms shall jointly select the accounting firm to serve as the Auditor. (i) No Mitigation; No Offset. In the event of any termination of the Term of Employment under this Section 9, Executive shall be under no obligation to seek other 13 14 employment and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment obtained by Executive, except as specifically provided in this Section 9. (j) Nature of Payments. Any amounts due under this Section 9 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. (k) General Release. In partial consideration for, and as a condition of, the Company's obligation to make the payments described in Sections 9(d)(vi) and 9(g)(vi), Executive shall execute and deliver to the Company a release of all claims he shall then have against the Company, its Affiliates and their related Persons arising out of or in connection with his employment or termination of employment, including, but not limited to, a release of all claims of discrimination. The Company will deliver such release to Executive at or about the time it delivers or receives the notice of termination and Executive shall execute and deliver such release to the Company within 21 days thereafter, except that in case of expiration of the Term of Employment following a Non-Extension Event, the release will be delivered to Executive upon such expiration and shall be executed and delivered by Executive within 21 days after such expiration. If Executive fails to execute and deliver such release to the Company within such 21-day period, or if Executive revokes his consent to such release as provided for therein, he will not be eligible to receive any further payments from the Company pursuant to Section 9(d)(vi) or 9(g)(vi). (l) Alternative Benefits; Outplacement Services. In the event the Company's written severance pay policy applicable to Executive provides for greater severance pay and benefits than are provided for in Section 9(d) or 9(g), Executive may elect to receive termination pay and benefits under the terms and conditions of such policy in lieu of the payments and benefits under Section 9(d) or 9(g). It is understood by the Parties that Executive shall not be entitled to both the payments and benefits under the severance pay policy and those available under Section 9(d) or 9(g). Notwithstanding the foregoing, in addition to being entitled to the greater of the payments and benefits under the severance pay policy and under Section 9(d) or 9(g), as applicable, Executive shall be entitled to professional outplacement services (including office space and secretarial services), at a cost not exceeding [10% of Executive's annual Base Salary]; provided, however, that payments pursuant to this sentence shall be made only for actual outplacement services and relocation expense reimbursements, and Executive shall not have the option to elect to receive all or part of the maximum allowances therefor in lieu of outplacement services. (m) Relocation Expenses. Notwithstanding the provisions of Section 9(k), in the event Executive becomes entitled to payments and benefits under Section 9(b), 9(d) or 9(g), Executive shall also be entitled to receive from the Company relocation assistance payments, consisting of payment or reimbursement of: 14 15 (i) costs incurred in the sale of Executive's primary residence in the Dallas area, including sales commissions not to exceed local custom, and all other normal closing costs in connection with such sale; (ii) all reasonable moving expenses to another location in the United States or Canada, including packing, transport, temporary storage and unpacking (including the cost of moving one vehicle), all through movers or moving agents designated or approved by the Company; (iii) reasonable costs (not exceeding costs of economy air fare and appropriate lodging) of one house hunting trip for Executive and spouse; and (iv) a tax "gross-up" for all sums paid to Executive pursuant to clauses (i) through (iv) of this paragraph (m) that are includable in Executive's taxable income for U.S. Federal income tax purposes (i.e., an incremental amount equal to the net U.S. Federal, state and local income taxes to which Executive is subject on the sum of the payments made to or for Executive's benefit pursuant to this paragraph (m) and the incremental amount, calculated at the maximum rates applicable to individuals, irrespective of the actual tax payments made by Executive); provided, however, that payments pursuant to this paragraph (m) shall be made only for actual expenses in connection with Executive's relocation outside the Dallas area, and Executive shall not have the option to elect to receive all or part of the maximum allowances therefor in lieu of relocation expenses; and provided, further, that such payments shall only be available in respect of relocation that occurs within (x) nine months after the end of the Term of Employment and (y) five years after the date Executive commenced employment with the Company. 10. Indemnification. (a) The Company agrees that if Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that he is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another Person, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, Executive shall be indemnified and held harmless by the Company to the fullest extent permitted or authorized by the Company's certificate of incorporation or bylaws or, if greater, by the laws of the State of Delaware, against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, ERISA excise taxes (other than such as may be imposed with respect to compensation received by Executive) or penalties and amounts paid or to be paid in 15 16 settlement) reasonably incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if he has ceased to be a director, member, employee or agent of the Company or other Person and shall inure to the benefit of Executive's heirs, executors and administrators. The Company shall advance to Executive to the extent permitted by law all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 days after receipt by the Company of a written request, with appropriate documentation, for such advance. Such request shall include an undertaking by Executive to repay the amount of such advance if it shall ultimately be determined that he is not entitled to be indemnified against such costs and expenses. (b) The Company agrees to continue and maintain a directors' and officers' liability insurance policy covering Executive to the extent the Company provides such coverage for its other executive officers. (c) Promptly after receipt by Executive of notice of any claim or the commencement of any action or proceeding with respect to which Executive is entitled to indemnity hereunder, Executive shall notify the Company in writing of such claim or the commencement of such action or proceeding, and the Company shall (i) assume the defense of such action or proceeding, (ii) employ counsel reasonably satisfactory to Executive and (iii) pay the reasonable fees and expenses of such counsel. Notwithstanding the preceding sentence, Executive shall be entitled to employ counsel separate from counsel for the Company and from any other party in such action if Company counsel reasonably determines that a conflict of interest exists which makes representation by counsel chosen by the Company not advisable. In such event, the reasonable fees and disbursements of such separate counsel for Executive shall be paid by the Company to the extent permitted by law. (d) After the Term of Employment (i) at the request of the Company, Executive shall cooperate with and assist the Company (to the extent that such activities do not unreasonably interfere with the performance of Executive's other business activities or employment) to prepare for or defend against any action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party arising out of or based upon any matter or thing whatsoever arising out of or which may be related to matters as to which Executive has or acquires knowledge or information by reason of his employment by the Company or any of its Subsidiaries, and (ii) upon request by Executive, the Company shall reimburse Executive for all reasonable travel, legal and other out-of-pocket expenses that may be incurred by Executive related to assisting the Company, at its request, to prepare for or defend against any such action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party and in providing evidence, producing documents or otherwise participating in any such action, suit, proceeding or claim. 16 17 11. Effect of Agreement on Other Benefits. Except as specifically provided in this Agreement, the existence of this Agreement shall not prohibit or restrict Executive's entitlement to full participation in the employee benefit and other plans or programs in which senior executives of the Company are eligible to participate. 12. Confidentiality. Executive shall not, without the prior written consent of the Company and without limitation as to time, divulge, disclose or make accessible to any other Person any Confidential Information except (a) in the course of carrying out his duties under this Agreement or (b) when required to do so by any court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with apparent jurisdiction to order him to divulge, disclose or make accessible such information, provided that Executive shall as promptly as practicable notify Company of the action of such court, agency or other body which requires Executive to make such disclosure so that Company will have the opportunity, if available, to take appropriate action to prevent such disclosure and knowledge of the scope and extent of such disclosure. 17 18 13. Non-Competition. (a) During the Term of Employment and (unless the Term of Employment expires following a Non-Extension Event or is terminated by the Company without Cause or voluntarily by Employee due to a Constructive Termination Without Cause) for a period of nine months thereafter, Executive shall not, directly or indirectly, except when acting on behalf of the Company, whether as an employee, consultant, partner, principal, agent, distributor, representative, stockholder or otherwise, plan, develop, conduct or otherwise engage in the MDU Business in any metropolitan area world-wide in which the Company or any Subsidiary then conducts or is actively planning to conduct the MDU Business (except that he may be a stockholder holding not more than a 1% common stock interest in a Person whose shares are publicly traded and which engages in the MDU Business in any such area). Notwithstanding the foregoing, Executive shall be free at any time following the Term of Employment to accept employment with or provide other services to any Person whose business includes the MDU Business but only if (i) the MDU Business is not the principal or predominant business of such Person and (ii) the services of Executive do not principally or predominantly relate to the MDU Business. By way of example only, if the Term of Employment were to end on the date of this Agreement, Executive would be free to be employed by a typical incumbent local exchange or long distance carrier or by a typical franchised cable operator for so long as Executive's services did not principally or predominantly relate to the provision of video and telecommunications services to residential multiple dwelling units in the markets in which the Company now operates or is actively planning to operate. (b) During the Term of Employment and for a period of 12 months thereafter, Executive shall not, directly or indirectly, (i) solicit any customer of the Company or any Subsidiary to do business with any Person that engages in the MDU Business or (ii) solicit any Person, other than his secretary/administrative assistant, who is employed by the Company or any Subsidiary or who was employed by the Company or any Subsidiary within 12 months of such solicitation to (A) terminate his or her employment with the Company or any Subsidiary, (B) accept employment with anyone other than the Company or any Subsidiary or (C) in any manner interfere with the business of the Company or any Subsidiary. (c) Executive acknowledges that the Company has no adequate remedy at law and would be irreparably harmed if Executive breaches or threatens to breach any of the provisions of Section 12 or Section 13(a) or 13(b), and therefore Executive agrees that the Company or any Subsidiary, as the case may be, shall be entitled to temporary or permanent mandatory or injunctive relief to terminate or forestall any breach or threatened breach of any of those provisions and to specific performance of the terms of each of such provisions, without the need to demonstrate irreparable injury or post bond or other security. Executive further agrees that he shall not, in any proceeding seeking injunctive or other equitable relief to enforce the provisions of Section 12 or Section 13(a) or 13(b), raise the defense that the Company or any Subsidiary has an adequate remedy at law. Nothing in this Section 13(c) shall be construed to 18 19 prohibit the Company or any Subsidiary from pursuing any other rights or remedies available to it at law or in equity or which may be otherwise available to it. (d) If it is determined that any of the provisions of this Section 13, or any part thereof, is unenforceable because of the duration or geographical scope of such provision, it is the intention of the Parties that the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced. 14. Intellectual Property. Any processes, inventions, ideas, know-how and other similar data created or developed by Executive while employed by the Company which relate to the business then conducted by the Company or any of its Subsidiaries shall be the Company's exclusive and absolute property, and Executive hereby assigns to the Company, now and hereafter, all of his right, title and interest to any and all of the same. Any work in connection with the services rendered by Executive hereunder shall be considered "work made for hire" under the Copyright Law of 1976 or any successor law, and the Company shall be the owner of such work as if the Company were the author of such work. 15. Documents; Conduct; References. Executive hereby expressly covenants and agrees that: (a) Following termination of the Term of Employment for any reason, or any time, upon the Company's request, Executive will promptly return to the Company all property of the Company and its Subsidiaries in his or her possession or control (whether maintained at his or her office, home or elsewhere), including, without limitation, all copies of all management studies, business or strategic plans, budgets, notebooks and other printed, typed electronically stored or written materials, documents, diaries, disks, calendars and data of or relating to the Company or its Subsidiaries or their respective personnel or affairs. (b) Executive hereby expressly covenants and agrees that Executive will not at any time, during or after the Term of Employment, denigrate, ridicule or intentionally criticize the Company or any of its Subsidiaries or any of their respective products or services, properties, employees, officers or directors, including, without limitation, by way of news interviews or the expression of personal view, opinions or judgments to the news media. (c) The Company hereby expressly covenants and agrees that the Company will not at any time, during or after the Term of Employment, publicly denigrate, ridicule or intentionally criticize Executive, including, without limitation, by way of news interviews or the expression of personal views, opinions or judgments to the news media. 19 20 (d) The Company hereby expressly covenants and agrees that, following the Term of Employment, the Company will, unless otherwise requested by Executive in any instance or required by law, provide to any prospective employer seeking information regarding Executive's employment with the Company a neutral reference in accordance with the general policies of the Company applicable to requests for employment references. 16. Acknowledgment of Representation by Counsel. The Parties acknowledge that they have been represented by counsel or knowingly waive their right to be represented by counsel with regard to this Agreement and the subject matter hereof. Each Party agrees and acknowledges that he or it has not relied upon any tax advice, legal counsel or business advice provided by the other Party. 17. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Executive) and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company, except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the surviving corporation, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or by operation of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to compensation and benefits. 18. Entire Agreement. Except as herein otherwise expressly provided, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto, including any agreement between Executive and any Affiliate of the Company. 20 21 19. Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. 20. Severability. In the event that any provision or portion of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions and portions remaining of any provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 21. Beneficiaries/References. Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of his incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 22. Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Texas without reference to principles of conflict of laws. 23. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration before a single arbitrator, to be held in Dallas, Texas, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator shall be final and subject to appeal only to the extent permitted by law. Each Party shall bear its or his own expenses incurred in connection with any arbitration. Anything to the contrary notwithstanding, each Party has the right to proceed with a court action for injunctive relief or relief from violations of law not within the jurisdiction of an arbitrator. 21 22 24. Notices. Any notice required or permitted hereunder to be given to a Party shall be effective only if given in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested or by Federal Express or other similar service, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may hereafter specify by notice to the other Party: If to the Company: OpTel, Inc. 1111 W. Mockingbird Lane, #1000 Dallas, Texas 75247 Attention: General Counsel If to Executive: Mr. Louis Brunel 1111 W. Mockingbird Lane, #1000 Dallas, Texas 75247 in either case, with a copy to: Le Groupe Videotron Ltee 300 Avenue Viger East Montreal, Quebec Canada H2X 3W4 Attention: Secretary 25. Headings. The captions or headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 26. Execution of Agreement and Further Actions. This Agreement may be executed in several counterpart copies each of which shall constitute an original and the same instrument notwithstanding that both Parties are not signatories to the same counterpart. The Parties agree to execute such other documents and to take such other action as may from time to time be necessary or appropriate to carry out the intent of this Agreement, provided that the same are not inconsistent with the provisions hereof. 22 23 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. OPTEL, INC. By: ------------------------------ Name: Title: --------------------------------- Louis Brunel 23 EX-10.17 13 EMPLOYMENT AGREEMENT MICHAEL KATZENSTEIN 1 EXHIBIT 10.17 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement"), dated as of April 15, 1999, by and between OPTEL, INC., a Delaware corporation (the "Company"), and MICHAEL E. KATZENSTEIN ("Executive"). W I T N E S S E T H : WHEREAS, Executive is currently employed by the Company as Vice President, General Counsel and Secretary of the Company; and WHEREAS, the Company desires to continue to employ Executive and Executive has agreed to such continuation, subject to the terms of this Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants contained herein, the Company and Executive (individually a "Party" and together the "Parties") agree as follows: 1. Definitions. As used in this Agreement, unless the context otherwise requires: (a) "Affiliate" of a Person shall mean a Person that directly or indirectly controls, is controlled by, or is under common control with the Person specified. (b) "Aggregate Life Insurance Benefits" shall have the meaning set forth in Section 9(a)(ii). (c) "Average Annual Bonus" shall mean the average of the two most recent annual bonuses (not including any payments from long-term incentive programs) received by or due to Executive for completed fiscal years immediately prior to the termination of the Term of Employment. (d) "Base Salary" shall mean the salary provided for in Section 4. (e) "Board" shall mean the Board of Directors of the Company. (f) "Cause" shall mean: 2 (i) Executive's conviction of a crime involving moral turpitude (excluding offenses such as driving while intoxicated); or (ii) Executive's (A) commission of a fraud upon the Company or (B) material breach of this Agreement (including by wilfully failing or neglecting to perform Executive's duties hereunder), which breach, if curable, is not substantially cured within 10 days after written notice to Executive specifying the nature of the breach. (g) A "Change in Control" shall mean the occurrence of any one of the following events: (i) Any "person," as such term is used in Sections 3(a)(9) and 13(d) of the Securities Exchange Act of 1934 (other than Executive, Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates (collectively, all or any of Le Groupe Videotron Ltee, Sojecci Ltee, Sojecci (1995) Ltee, Andre Chagnon and his spouse and descendants, Caisse de depot et placement du Quebec, and their respective Affiliates constitute the "Existing Control Group")), is a "beneficial owner," as such term is used in Rule 13d-3 promulgated under that act, of shares of the Voting Stock of the Company having more total votes in an election for directors than shares of Voting Stock of which the Existing Control Group is the beneficial owner and, at the same time, the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; (ii) the majority of the members of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the date of this Agreement; provided that any individual becoming a director subsequent to such date whose election or nomination for election as a director was supported by two-thirds of the directors who were Incumbent Directors at the time of such election or nomination shall be an Incumbent Director; (iii) the Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) all or substantially all of the assets or business of the Company are disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Company, the Voting Stock or other ownership interests of the Person or Persons, if any, that succeed to the business of the Company) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board; or 2 3 (v) the Company combines with another Person and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, not more than 50% of the Voting Stock of the surviving corporation (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the surviving corporation, any shares received by Affiliates of such other Person in exchange for stock of such other Person) and at any time thereafter the Existing Control Group does not have the power, by contract or otherwise, to elect or designate a majority of the members of the Board. (h) "Confidential Information" shall mean all information that is not known or available to the public concerning the business of the Company or any Subsidiary relating to its products, product development, trade secrets, customers, suppliers, finances, and business plans and strategies. For this purpose, information known or available generally within the trade or industry of the Company or any Subsidiary shall be deemed to be known or available to the public. Confidential Information shall include information that is, or becomes, known to the public as a result of a breach by Executive of the provisions of Section 13. (i) "Constructive Termination Without Cause" shall mean a termination of the Term of Employment by written notice given by Executive within 60 days following the occurrence, without Executive's prior written consent, of one or more of the following events (except in consequence of a prior termination): (i) a reduction in or elimination of (A) Executive's then current Base Salary, or (B) Executive's opportunity for any long-term incentive award for which he is eligible under Section 6 or the termination or material reduction of any material employee benefit or perquisite enjoyed by him including the bonus provided for under Section 5; provided, however, that in the case of clause (B), only if the reduction or elimination is greater than that applied to other executives of the Company of the same class or level as Executive; (ii) the failure to elect or reelect Executive to the position specified in Section 3(a), or Executive's removal, without Cause, from such position, or a material diminution in Executive's duties, authority or responsibilities as described in Section 3(a), or the assignment to Executive of duties which are materially inconsistent with such duties or which materially impair Executive's ability to function in such position, and, in the case of any such assignment, the failure of the Company to cure such inconsistency or impairment within 15 days after its receipt of notice thereof from Executive; (iii) the failure to continue Executive's participation in any incentive compensation plan for which Executive is eligible unless executives of the same class or level as Executive also cease to participate in such plan or a plan providing a substantially similar opportunity is substituted; or 3 4 (iv) the relocation of the Company's principal office outside the area comprised by Dallas and Tarrant Counties, Texas, having dimensions of approximately 58 miles by 29 miles and commonly referred to as the Dallas-Fort Worth Metroplex. (j) "Disability" shall mean Executive's inability, due to physical or mental incapacity, to substantially perform Executive's duties and responsibilities under this Agreement for a period of 180 consecutive days or for 180 days in a 365-day period. (k) "MDU Business" shall mean the delivery of video and telecommunications services to residential multiple dwelling units. (l) "Minimum Severance Period" shall have the meaning set forth in Section 9(d)(vi)(A), subject to modification as provided in Section 9(e) in the event of a Change in Control. (m) "Non-Extension Event" shall mean any termination of the Term of Employment resulting from an election by the Company not to renew the Term of Employment. (n) "Person" shall mean an individual, firm, corporation, trust, joint venture, partnership, limited liability company, association, unincorporated organization or other entity or any governmental body or subdivision, agency, commission or authority thereof. (o) "Stock" shall mean the Common Stock of the Company. (p) "Subsidiary" shall mean any Person of which the Company owns, directly or indirectly, more than 50% of the Voting Stock or, in the case of a Person other than a corporation, more than 50% of the equity interest. (q) "Term of Employment" shall mean the period or periods specified in Section 2. (r) "Voting Stock" shall mean capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect a majority of the directors of a corporation. 2. Term of Employment. The Company hereby employs Executive, and Executive hereby accepts such employment, for the Term of Employment commencing April 15, 1999 and ending at the close of business on April 15, 2001, subject to earlier termination of the Term of Employment in accordance with the terms of this Agreement. The Term of Employment shall be automatically renewed from year to year unless either the Company or Executive provides the other with 4 5 written notice of non-renewal at least 30 days prior to the date on which the Term of Employment would otherwise expire. 3. Position, Duties and Responsibilities. (a) During the Term of Employment, Executive shall be employed as Vice President, General Counsel and Secretary of the Company. In that capacity Executive shall have the duties, authority and responsibilities normally associated with such position and shall report to the Chief Executive Officer of the Company. Executive shall, at the request of the Board or the Chief Executive Officer of the Company, also serve as an officer and/or director of one or more Subsidiaries without additional compensation. (b) During the Term of Employment Executive shall devote his full attention and expend his best efforts, energies and skills on a full-time basis to the business of the Company and its Subsidiaries. (c) Executive's services to the Company will be rendered primarily at the Company's principal office. Executive acknowledges, however, that Executive's services may require extensive travel. (d) Nothing herein shall preclude Executive from (i) serving as a director of one or more other corporations not engaged in competition with the Company or of one or more trade associations and/or charitable organizations, subject in each case to prior approval by the Chief Executive Officer of the Company, (ii) engaging in charitable activities and community affairs, (iii) managing Executive's personal investments and affairs and those of his family, (iv) engaging in other business transactions, provided that such activities individually and in the aggregate do not reflect adversely on Executive's personal or business reputation or the Company or its business and do not interfere with the proper performance of Executive's duties and responsibilities to the Company and its Subsidiaries. 4. Base Salary. Executive shall receive Base Salary from the Company at the annual rate of $235,000, payable in accordance with the regular payroll practices of the Company, but in no event less frequently than monthly. Executive's Base Salary shall be subject to review by the Company on an annual basis but shall not be decreased. 5. Annual Bonus. Executive shall be entitled to be considered for receipt of an annual bonus, the calculation of which is to be determined in accordance with an incentive plan established and administered by the Board which includes a "target" bonus for Executive for each bonus period, as such plan may be modified by the Board from time to time. 5 6 6. Long-Term Incentive Programs. Executive shall be eligible to participate in any long-term incentive programs of the Company on the same basis as other senior executives of the Company. 7. Employee Benefit Programs and Vacation. (a) During the Term of Employment Executive shall be entitled to participate in all employee pension and welfare benefit plans and programs made available to the Company's senior executives generally, as such plans or programs may be in effect from time to time. (b) Executive shall be entitled to four weeks of vacation per year. 8. Reimbursement of Business and Other Expenses and Perquisites. (a) Executive is authorized to incur reasonable business expenses in carrying out his duties and responsibilities under this Agreement, and the Company shall promptly reimburse Executive for all such expenses, all subject to and in accordance with the Company's policies and procedures as adopted and in effect from time to time and applicable to its senior executives of comparable status. (b) To assist Executive in the performance of his duties and responsibilities under this Agreement, the Company shall provide to Executive an allowance for the use of an automobile in accordance with the Company's policies applicable generally to the Company's senior executives of comparable class or status; provided, however, that, if Executive currently uses a leased automobile provided by the Company, then in lieu of such allowance the Company shall continue to provide Executive with the use of such leased automobile (including insurance and maintenance) for the remaining initial term of the applicable lease. (c) Executive shall be eligible to receive all perquisites made generally available by the Company to its senior executives of comparable class or status. 9. Termination of Term of Employment. (a) Termination Due to Death. The Term of Employment shall terminate upon Executive's death. In the event of such termination due to Executive's death, Executive's estate or Executive's beneficiaries, as the case may be, shall be entitled to: (i) the proceeds payable in the event of Executive's death under the group life insurance policy maintained by the Company for the benefit of its senior executive employees and others; 6 7 (ii) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to Executive's death, over (B) the aggregate amount of life insurance proceeds payable to Executive's estate or beneficiaries pursuant to clause (i) of this Section 9(a) or pursuant to any other policy on Executive's life for which premiums are paid by the Company or any of its Affiliates (the "Aggregate Life Insurance Benefits"); (iii) if the date of Executive's death coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which Executive's death occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iv) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which Executive's death occurs; (v) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (vi) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. (b) Termination Due to Disability. The Term of Employment may be terminated by the Company by written notice to Executive in the case of Executive's Disability. In the event of such termination due to Disability, Executive shall be entitled to: (i) an amount, payable promptly in a lump sum, equal to the excess, if any, of (A) Base Salary for the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, over (B) the amount of any disability benefits provided to Executive by the Company or under any disability insurance paid for, or for which premiums paid by Executive were reimbursed, by the Company; (ii) if such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period, (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; 7 8 (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company. (c) Termination by the Company for Cause. In the event the Company terminates the Term of Employment for Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; (ii) any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iii) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; and (iv) any other or additional benefits provided for in accordance with applicable plans or programs of the Company. (d) Termination Without Cause or Constructive Termination Without Cause. In the event the Term of Employment is terminated by the Company without Cause, other than due to Executive's Disability or death, or in the event the Term of Employment is terminated due to a Constructive Termination Without Cause, Executive shall be entitled to: (i) Base Salary through the date of such termination; (ii) if the date of such termination coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which such termination occurs, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which such termination occurs; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and 8 9 (vi) to elect, within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in section 9(d)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(d)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(d)(vi), then, subject to the requirements of Section 9(j), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base Salary for the period (the "Minimum Severance Period") that is the longer of 12 months or the unexpired portion of the Term of Employment remaining as of the time immediately prior to such termination, plus (2) an amount equal to Average Annual Bonus pro-rata for the Minimum Severance Period. (B) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then, subject to the requirements of Section 9(j), Executive will remain an employee of the Company (but without any title) until the end of the Minimum Severance Period, and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that (1) if Executive dies during such period, Executive's payments pursuant to this Section 9(d)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the Aggregate Life Insurance Benefits plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had Executive remained on the Company's payroll until the end of such period over (y) the amount of the Aggregate Life Insurance Benefits; and (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of Executive's intention to terminate his employment during such period, Executive will cease to be an employee of the Company effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(d)(vi)(B) had Executive remained on the Company's payroll until the end of such period. 9 10 (C) In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), then during the period Executive remains on the payroll of the Company, Executive will continue to be eligible to receive the medical and life insurance benefits which all other employees of the Company are then entitled to receive, as such benefits may be amended, changed or eliminated from time to time. Executive shall not be entitled to any other perquisite or benefit provided by the Company to its senior executives or employees generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event Executive makes the election provided in clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as Executive leaves the payroll of the Company. (e) Acceleration of Entitlements in Connection with a Change in Control or Termination. Upon a Change in Control (regardless of whether Executive continues in employment by the Company or the termination of the Term of Employment for any reason whatsoever) Executive shall become immediately entitled to exercise in full any stock option to acquire Stock during the remainder of the term of such option. Without limitation of the preceding sentence, upon the termination of the Term of Employment (including upon a Non- Extension Event or Disability or death) otherwise than for Cause, Executive shall become immediately entitled to exercise in full any stock option to acquire Stock during the remainder of the term of such option, to the extent such option would otherwise have vested or become exercisable within 12 months after such termination of the Term of Employment but, unless a Change in Control shall have occurred, all such options that have not previously expired shall automatically expire on the date that is 12 months after such termination of the Term of Employment. If, in connection with a Change in Control or within 12 months after a Change in Control, the Term of Employment is terminated without Cause, other than due to Disability or death, or due to a Constructive Termination Without Cause, then, without limitation of the payments, benefits and elections provided in Section 9(d) and the first sentence of this Section 9(e), upon such Change in Control or such later termination, all amounts, entitlements and benefits awarded to Executive or to which Executive is otherwise entitled under any grant, plan or program of the Company but which are not yet vested shall become fully vested except to the extent such vesting would be inconsistent with the terms of the relevant plan. Without limitation of the benefits to Executive pursuant to the preceding sentence or any of the other provisions of this Agreement, if, in connection with a Change in Control or within 12 months after a Change in Control, the Term of Employment is terminated due to a Constructive Termination Without Cause or by the Company without Cause (other than due to Disability or death), then, (A) the "Minimum Severance Period" for purposes of Section 9(d) shall be not less than 24 months and (B) upon such Change in Control (or such later termination) all amounts, entitlements and benefits awarded to Executive or to which Executive is otherwise entitled under any grant, plan or program of the Company but which are not yet vested shall become fully vested except to the 10 11 extent such vesting would be inconsistent with the terms of the relevant plan. In connection with the occurrence of a Change in Control, Executive and the Company agree to negotiate in good faith payment arrangements and covenant changes (without reducing the total amount payable pursuant to this Section 9(e)) designed to preserve to the Company the deductibility for federal income tax purposes of, and eliminate any excise tax imposed by Section 4999 of the Code payable in respect of, amounts paid or benefits inuring to Executive pursuant to this Section 9(e). (f) Voluntary Termination. A termination of the Term of Employment by Executive on his own initiative, other than a termination due to death or Disability or a Constructive Termination without Cause, shall be treated as a Termination for Cause, and, accordingly, Executive shall have only the entitlements provided in Section 9(c). (g) Termination Because of Non-Renewal. In the event of a Non- Extension Event, Executive shall be entitled to: (i) Base Salary through the date of expiration of the Term of Employment; (ii) if the expiration of the Term of Employment coincides with the last day of a bonus period, a bonus for such bonus period in accordance with the terms of the applicable incentive plan; otherwise, a bonus for the bonus period in which the Term of Employment expires, determined pro rata with respect to Executive's target bonus for such bonus period based on the number of completed months of Executive's employment by the Company during such bonus period; (iii) the balance of any bonus earned (but not yet paid) for any bonus period prior to the bonus period in which the Term of Employment expires; (iv) any amounts earned, accrued or owing but not yet paid under Section 6, 7 or 8; (v) any other or additional benefits provided for in accordance with applicable plans and programs of the Company; and (vi) to elect within 30 days after such termination, either (x) to cease being an employee of the Company and receive the lump-sum payment described in section 9(g)(vi)(A) or (y) to remain an employee of the Company for the period described in Section 9(g)(vi)(B). After Executive makes such election, the following provisions shall apply: (A) In the event Executive makes the election provided in clause (x) of Section 9(g)(vi), subject to the requirements of Section 9(j), the Company shall pay to Executive in a lump sum: (1) an amount equal to Base 11 12 Salary for a period of 12 months (or 24 months, if a Change in Control has occurred during the Term of Employment and the Term of Employment has not been renewed at least once after the Change in Control), plus (2) an amount equal to Average Annual Bonus pro-rata for the same period. (B) In the event Executive makes the election provided in clause (y) of Section 9(g)(vi), subject to the requirements of Section 9(j), Executive will remain an employee of the Company (but without any title) for the period of 12 months following the expiration of the Term of Employment (or 24 months, if a Change in Control has occurred during the Term of Employment and the Term of Employment has not been renewed at least once after the Change in Control), and the Company shall pay to Executive Base Salary for such period plus Average Annual Bonus pro-rata for such period; provided, however, that (1) if Executive dies during such period, Executive's payments pursuant to this Section 9(g)(vi)(B) shall cease, and Executive's estate or beneficiaries, as the case may be, will be entitled to receive the Aggregate Life Insurance Benefits, plus a lump sum amount (which shall be paid by the Company promptly after Executive's death) equal to the excess, if any, of (x) the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until the end of such period over (y) the amount of the Aggregate Life Insurance Benefits; and (2) if Executive accepts substantially full-time employment with any other Person during such period or notifies the Company in writing of Executive's intention to terminate Executive's employment during such period, Executive will cease to be an employee of the Company, effective upon the earlier of the effective date of such termination as specified by Executive in such notice or the commencement of such employment, and the Company shall promptly pay to Executive a lump sum equal to the balance of the payments of Base Salary and Average Annual Bonus that Executive would have been entitled to receive pursuant to this Section 9(g)(vi)(B) had Executive remained on the Company's payroll until the end of such period. (C) In the event Executive makes an election provided in clause (y) of Section 9(g)(vi), then during the period Executive remains on the payroll of the Company, Executive will continue to be eligible to receive the medical and life insurance benefits all other employees of the Company are then entitled to receive, as amended, changed or eliminated, from time to time. Executive shall 12 13 not be entitled to any other perquisite or benefit provided by the Company to its senior executives generally or otherwise specifically provided for in this Agreement and shall not be entitled to any additional awards or grants under any long-term incentive plan. In the event of an election pursuant to clause (y) of Section 9(d)(vi), Executive will continue to be an employee of the Company for purposes of any stock option and restricted shares agreements until such time as Executive leaves the payroll of the Company. (h) No Mitigation; No Offset. In the event of any termination of the Term of Employment under this Section 9, Executive shall be under no obligation to seek other employment and there shall be no offset against amounts due Executive under this Agreement on account of any remuneration attributable to any subsequent employment obtained by Executive except as specifically provided in this Section 9. (i) Nature of Payments. Any amounts due under this Section 9 are in the nature of severance payments considered to be reasonable by the Company and are not in the nature of a penalty. (j) General Release. In partial consideration for, and as a condition of, the Company's obligation to make the payments described in Sections 9(d)(vi) and 9(g)(vi), Executive shall execute and deliver to the Company a release of all claims Executive shall then have against the Company, its Affiliates and their related Persons arising out of or in connection with Executive's employment or termination of employment, including, but not limited to, a release of all claims of discrimination. The Company will deliver such release to Executive at or about the time it delivers or receives the notice of termination, and Executive shall execute and deliver such release to the Company within 21 days thereafter, except that in case of expiration of the Term of Employment following a Non-Extension Event, the release will be delivered to Executive upon such expiration and shall be executed and delivered by Executive within 21 days after such expiration. If Executive fails to execute and deliver such release to the Company within such 21-day period, or if Executive revokes Executive's consent to such release as provided for therein, Executive will not be eligible to receive any further payments from the Company pursuant to Section 9(d)(vi) or 9(g)(vi). (k) Other Severance. In the event the Company's written severance pay policy applicable to Executive provides for greater severance pay and benefits than are provided for in Section 9(d) or 9(g), Executive may elect to receive termination pay and benefits under the terms and conditions of such policy in lieu of the payments and benefits under Section 9(d) or 9(g). It is understood by the Parties that Executive shall not be entitled to both the payments and benefits under the severance pay policy and those available under Section 9(d) or 9(g). Notwithstanding the foregoing, in addition to being entitled to the greater of the payments and benefits under the severance pay policy and under Section 9(d) or 9(g), as applicable, Executive shall be entitled to professional outplacement services (including office space and 13 14 secretarial services), at a cost not exceeding 10% of Executive's annual Base Salary, in accordance with the Company's policies regarding outplacement services; provided, however, that payments pursuant to this sentence shall be made only for actual outplacement services, and Executive shall not have the option to elect to receive all or part of the maximum allowances therefor in lieu of outplacement services. (l) Relocation. Notwithstanding the provisions of Section 9(k), in the event Executive becomes entitled to payments and benefits under Section 9(b), 9(d) or 9(g), Executive shall also be entitled to receive from the Company relocation assistance payments, consisting of payment or reimbursement of: (i) costs incurred in the sale of Executive's primary residence in the Dallas area, including sales commissions not to exceed local custom, and all other normal closing costs in connection with such sale; (ii) all reasonable moving expenses to another location in the United States or Canada, including packing, transport, temporary storage and unpacking (including the cost of moving one vehicle), all through movers or moving agents designated or approved by the Company; (iii) reasonable costs (not exceeding costs of economy air fare and appropriate lodging) of one house-hunting trip for Executive and spouse; and (iv) a tax "gross-up" for all sums paid to Executive pursuant to clauses (i) through (iv) of this paragraph (l) that are includable in Executive's taxable income for U.S. Federal Income Tax purposes (i.e., an amount which, after the payment of the U.S. Federal, state and local income taxes to which Executive is subject on the payments made to or for Executive's benefit pursuant to this paragraph (l), calculated at the maximum rate applicable to individuals, irrespective of the actual tax payments made by Executive, will be equal to the costs for which reimbursement is to be provided pursuant to clauses (i) through (iii) of this paragraph (l)); provided, however, that payments pursuant to this paragraph (l) shall be made only for actual expenses in connection with Executive's relocation outside the Dallas area, and Executive shall not have the option to elect to receive all or part of the maximum allowances therefor in lieu of relocation expenses; and provided, further, that such payments shall only be available in respect of relocation that occurs within (x) nine months after the end of the Term of Employment and (y) February 28, 2002. 14 15 10. Indemnification. (a) The Company agrees that if Executive is made a party, or is threatened to be made a party, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that Executive is or was a director, officer or employee of the Company or is or was serving at the request of the Company as a director, officer, member, employee or agent of another Person, including service with respect to employee benefit plans, whether or not the basis of such Proceeding is Executive's alleged action in an official capacity while serving as a director, officer, member, employee or agent, Executive shall be indemnified and held harmless by the Company to the fullest extent permitted or authorized by the Company's certificate of incorporation or bylaws or, if greater, by the laws of the State of Delaware, against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines, ERISA excise taxes (other than such as may be imposed with respect to compensation received by Executive) or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be a director, member, employee or agent of the Company or other Person and shall inure to the benefit of Executive's heirs, executors and administrators. The Company shall advance to Executive to the extent permitted by law all reasonable costs and expenses incurred by him in connection with a Proceeding within 20 days after receipt by the Company of a written request, with appropriate documentation, for such advance. Such request shall include an undertaking by Executive to repay the amount of such advance if it shall ultimately be determined that Executive is not entitled to be indemnified against such costs and expenses. (b) The Company agrees to continue and maintain a directors' and officers' liability insurance policy covering Executive to the extent the Company provides such coverage for its other executive officers. (c) Promptly after receipt by Executive of notice of any claim or the commencement of any action or proceeding with respect to which Executive is entitled to indemnity hereunder, Executive shall notify the Company in writing of such claim or the commencement of such action or proceeding, and the Company shall (i) assume the defense of such action or proceeding, (ii) employ counsel reasonably satisfactory to Executive and (iii) pay the reasonable fees and expenses of such counsel. Notwithstanding the preceding sentence, Executive shall be entitled to employ counsel separate from counsel for the Company and from any other party in such action if Company counsel reasonably determines that a conflict of interest exists which makes representation by counsel chosen by the Company not advisable. In such event, the reasonable fees and disbursements of such separate counsel for Executive shall be paid by the Company to the extent permitted by law. (d) After the Term of Employment, (i) at the request of the Company, Executive shall cooperate with and assist the Company (to the extent that such activities do not 15 16 unreasonably interfere with the performance of Executive's other business activities or employment) to prepare for or defend against any action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party arising out of or based upon any matter or thing whatsoever arising out of or which may be related to matters as to which Executive has or acquires knowledge or information by reason of his employment by the Company or any of its Subsidiaries, and (ii) upon the request of Executive, the Company shall reimburse Executive for all reasonable travel, legal and other out-of-pocket expenses that may be incurred by Executive related to assisting the Company, at its request, to prepare for or defend against any such action, suit, proceeding or claim brought or threatened to be brought against the Company or to prepare for or institute any action, suit, proceeding or claim to be brought or threatened to be brought against a third party and in providing evidence, producing documents or otherwise participating in any such action, suit, proceeding or claim. 11. Effect of Agreement on Other Benefits. Except as specifically provided in this Agreement, the existence of this Agreement shall not prohibit or restrict Executive's entitlement to full participation in the employee benefit and other plans or programs in which senior executives of the Company are eligible to participate. 12. Confidentiality. Executive acknowledges that Executive is bound by that certain nondisclosure agreement executed by Executive upon the commencement of his employment with the Company and that the terms thereof shall not be modified or affected by this Agreement. 13. Non-Competition. (a) During the Term of Employment and (unless the Term of Employment expires following a Non-Extension Event or is terminated by the Company without Cause or voluntarily by Employee due to a Constructive Termination Without Cause) for a period of nine months thereafter, Executive shall not, directly or indirectly, except when acting on behalf of the Company, whether as an employee, consultant, partner, principal, agent, distributor, representative, stockholder or otherwise, plan, develop, conduct or otherwise engage in the MDU Business in any metropolitan area world-wide in which the Company or any Subsidiary then conducts or is actively planning to conduct the MDU Business (except that he may be a stockholder holding not more than a 1% common stock interest in a Person whose shares are publicly traded and which engages in the MDU Business in any such area). Notwithstanding the foregoing, Executive shall be free at any time following the Term of Employment to accept employment with or provide other services to any Person whose business includes the MDU Business but only if (i) the MDU Business is not the principal or predominant 16 17 business of such Person and (ii) the services of Executive do not principally or predominantly relate to the MDU Business. By way of example only, if the Term of Employment were to end on the date of this Agreement, Executive would be free to be employed by a typical incumbent local exchange or long distance carrier or by a typical franchised cable operator for so long as Executive's services did not principally or predominantly relate to the provision of video and telecommunications services to residential multiple dwelling units in the markets in which the Company now operates or is actively planning to operate. (b) During the Term of Employment and for a period of 12 months thereafter, Executive shall not, directly or indirectly, (i) solicit any customer of the Company or any Subsidiary to do business with any Person that engages in the MDU Business or (ii) solicit any Person, other than his secretary/administrative assistant, who is employed by the Company or any Subsidiary or who was employed by the Company or any Subsidiary within 12 months of such solicitation to (A) terminate his or her employment with the Company or any Subsidiary, (B) accept employment with anyone other than the Company or any Subsidiary or (C) in any manner interfere with the business of the Company or any Subsidiary. (c) Executive acknowledges that the Company has no adequate remedy at law and would be irreparably harmed if Executive breaches or threatens to breach any of the provisions of Section 12 or Section 13(a) or 13(b), and therefore Executive agrees that the Company or any Subsidiary, as the case may be, shall be entitled to temporary or permanent mandatory or injunctive relief to terminate or forestall any breach or threatened breach of any of those provisions and to specific performance of the terms of each of those provisions, without the need to demonstrate irreparable injury or post bond or other security. Executive further agrees that he shall not, in any proceeding seeking injunctive or other equitable relief to enforce the provisions of Section 12 or Section 13(a) or 13(b), raise the defense that the Company or any Subsidiary has an adequate remedy at law. Nothing in this Section 13(c) shall be construed to prohibit the Company or any Subsidiary from pursuing any other rights or remedies available to it at law or in equity or which may be otherwise available to it. (d) If it is determined that any of the provisions of this Section 13, or any part thereof, is unenforceable because of the duration or geographical scope of such provision, it is the intention of the Parties that the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced. 14. Intellectual Property. Any processes, inventions, ideas, know-how and other similar data created or developed by Executive while employed by the Company which relate to the business then conducted by the Company or any of its Subsidiaries shall be the Company's exclusive and absolute property, and Executive hereby assigns to the Company, now and hereafter, all of his 17 18 right, title and interest to any and all of the same. Any work in connection with the services rendered by Executive hereunder shall be considered "work made for hire" under the Copyright Law of 1976 or any successor law, and the Company shall be the owner of such work as if the Company were the author of such work. 15. Documents; Conduct; References. (a) Executive hereby expressly covenants and agrees that, following termination of the Term of Employment for any reason, or any time, upon the Company's request, Executive will promptly return to the Company all property of the Company and its Subsidiaries in his or her possession or control (whether maintained at his or her office, home or elsewhere), including, without limitation, all copies of all management studies, business or strategic plans, budgets, notebooks and other printed, typed electronically stored or written materials, documents, diaries, disks, calendars and data of or relating to the Company or its Subsidiaries or their respective personnel or affairs. (b) Executive hereby expressly covenants and agrees that Executive will not at any time, during or after the Term of Employment, publicly denigrate, ridicule or intentionally criticize the Company or any of its Subsidiaries or any of their respective products or services, properties, employees, officers or directors, including, without limitation, by way of news interviews or the expression of personal view, opinions or judgments to the news media. (c) The Company hereby expressly covenants and agrees that the Company will not at any time, during or after the Term of Employment, publicly denigrate, ridicule or intentionally criticize Executive, including, without limitation, by way of news interviews or the expression of personal views, opinions or judgments to the news media. (d) The Company hereby expressly covenants and agrees that, following the Term of Employment, the Company will, unless otherwise requested by Executive in any instance or required by law, provide to any prospective employer seeking information regarding Executive's employment with the Company a neutral reference in accordance with the general policies of the Company applicable to requests for employment references. 16. Acknowledgment of Representation by Counsel. The Parties acknowledge that they have been represented by counsel or knowingly waive their right to be represented by counsel with regard to this Agreement and the subject matter hereof. Each Party agrees and acknowledges that he or it has not relied upon any tax advice, legal counsel or business advice provided by the other Party. 18 19 17. Assignability; Binding Nature. This Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors, heirs (in the case of Executive) and assigns. No rights or obligations of the Company under this Agreement may be assigned or transferred by the Company, except that such rights or obligations may be assigned or transferred pursuant to a merger or consolidation in which the Company is not the surviving corporation, or the sale or liquidation of all or substantially all of the assets of the Company, provided that the assignee or transferee is the successor to all or substantially all of the assets of the Company and such assignee or transferee assumes the liabilities, obligations and duties of the Company, as contained in this Agreement, either contractually or by operation of law. The Company further agrees that, in the event of a sale of assets or liquidation as described in the preceding sentence, it shall take whatever action it legally can in order to cause such assignee or transferee to expressly assume the liabilities, obligations and duties of the Company hereunder. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than Executive's rights to compensation and benefits. 18. Entire Agreement. Except as herein otherwise expressly provided, this Agreement contains the entire understanding and agreement between the Parties concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the Parties with respect thereto, including any agreement between Executive and any Affiliate of the Company dated prior to the date hereof. 19. Amendment or Waiver. No provision in this Agreement may be amended unless such amendment is agreed to in writing and signed by Executive and an authorized officer of the Company. No waiver by either Party of any breach by the other Party of any condition or provision contained in this Agreement to be performed by such other Party shall be deemed a waiver of a similar or dissimilar condition or provision at the same or any prior or subsequent time. Any waiver must be in writing and signed by Executive or an authorized officer of the Company, as the case may be. 20. Severability. In the event that any provision or portion of any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, in whole or in part, the remaining provisions and portions remaining of any provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 19 20 21. Beneficiaries/References. Executive shall be entitled to select (and change, to the extent permitted under any applicable law) a beneficiary or beneficiaries to receive any compensation or benefit payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of Executive's incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative. 22. Governing Law/Jurisdiction. This Agreement shall be governed by and construed and interpreted in accordance with the laws of the State of Texas without reference to principles of conflict of laws. 23. Resolution of Disputes. Any disputes arising under or in connection with this Agreement shall be resolved by binding arbitration before a single arbitrator, to be held in Dallas, Texas, in accordance with the rules and procedures of the American Arbitration Association. Judgment upon the award rendered by the arbitrator shall be final and subject to appeal only to the extent permitted by law. Each Party shall bear its or his own expenses incurred in connection with any arbitration. Anything to the contrary notwithstanding, each Party has the right to proceed with a court action for injunctive relief or relief from violations of law not within the jurisdiction of an arbitrator. 24. Notices. Any notice required or permitted hereunder to be given to a Party shall be effective only if given in writing and shall be deemed to have been given when delivered personally or sent by certified or registered mail, postage prepaid, return receipt requested or by Federal Express or other similar service, duly addressed to the Party concerned at the address indicated below or to such changed address as such Party may hereafter specify by notice to the other Party: If to the Company: OpTel, Inc. 1111 W. Mockingbird Lane, #1000 Dallas, Texas 75247 Attention: Chief Executive Officer 20 21 If to Executive: 4352 Potomac Avenue Dallas, TX 75205 25. Headings. The captions or headings of the sections contained in this Agreement are for convenience only and shall not be deemed to control or affect the meaning or construction of any provision of this Agreement. 26. Execution of Agreement and Further Actions. This Agreement may be executed in several counterpart copies each of which shall constitute an original and the same instrument notwithstanding that both Parties are not signatories to the same counterpart. The Parties agree to execute such other documents and to take such other action as may from time to time be necessary or appropriate to carry out the intent of this Agreement, provided that the same are not inconsistent with the provisions hereof. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first written above. OPTEL, INC. By: ------------------------- ---------------------------- MICHAEL E. KATZENSTEIN 21 EX-10.27 14 ECHOSTAR AGREEMENT 1 EXHIBIT 10.27 ECHOSTAR SATELLITE CORPORATION MDU DEALER AGREEMENT This MDU Dealer Agreement ("Agreement") is effective as of the 14th day of January 1999, by and between EchoStar Satellite Corporation having a principal place of business at 5701 S. Santa Fe Drive, Littleton, Colorado 80120; Attn: General Counsel ("EchoStar"), and TVMAX Telecommunications, Inc., d/b/a OpTel, having a principal place of business at 1111 West Mockingbird Lane, 10th Floor, Dallas, Texas 75247; Attn: Vice President-Marketing ("MDU Dealer"). INTRODUCTION A. EchoStar is engaged, among other things, in the business of providing digital direct broadcast satellite (DBS) services through the DISH Network, a DBS service owned and operated by EchoStar and its Affiliates in the United States. B. MDU Dealer, acting as an independent contractor, desires to become authorized on a non-exclusive basis (an "Authorized MDU Dealer"), to market, promote, and solicit orders for certain DISH Network video and audio programming provided by EchoStar ("Programming") to MDU Buildings through the use of a common antenna system installed and maintained by MDU Dealer (an "MDU System"). C. EchoStar desires to appoint MDU Dealer as an Authorized MDU Dealer in accordance with and subject to the terms and conditions of this Agreement. AGREEMENT 1. DEFINITIONS In addition to the capitalized terms defined elsewhere in this Agreement, the following definitions shall apply to this Agreement: 1.1 "Affiliate" means any person or entity directly or indirectly controlling, controlled by or under common control with another person or entity. 1.2 "Commissionable Programming" means the Programming packages set forth in Exhibit A hereto, which EchoStar may change at any time in its sole discretion as provided in Section 3.1 below upon notice to MDU Dealer. Under no circumstances shall Commissionable Programming include pay-per-view or event broadcasts. 1.3 "Commissions" means the Residual Commissions, together with any Additional Commissions, as such terms are defined in Sections 5.1 and 5.2. 1.4 "DISH DBS Receiver" means an MPEG-2 DVB compliant satellite receiver and related components packaged therewith, to be utilized for the reception of Programming delivered to such system via satellite transponders owned and operated by EchoStar or its Affiliates, which is sold directly to MDU Dealer by EchoStar under the "EchoStar" brand name. 1.5 "EFT" means the electronic transfer of funds by a financial institution to an account designated by EchoStar. 1.6 "MDU Building" means a building located in the Territory subdivided into two or more individual single family residential dwelling units, which consists solely of apartment complexes, condominiums, townhomes, residential dormitories, gated private residential communities, and private single family residential buildings. If MDU Dealer desires that EchoStar classify a building as an MDU Building prior to beginning work on such building as provided hereunder, EchoStar agrees to use commercially reasonable efforts to provide a classification for the building upon receipt from MDU Dealer of a signed statement listing and verifying to EchoStar all relevant details concerning the building, including a description of how the building is used, whether common areas exist in the building, whether the general public is able to enter the building, etc. Notwithstanding anything to the contrary in this Section 1.6, MDU Dealer may not provide Programming to any building or portion of a building that: (i) is a common area, reception area, waiting area, or lobby accessible to more than one family (and their invited guests); (ii) charges an admission or other fee to enter; (iii) is accessible to members of the general public; (iv) is a commercial business or establishment, including without limitation a restaurant or bar; (v) is a hospital, hotel, motel, or other similar temporary lodging; (vi) is a prison, halfway house, mental institution, or other secured treatment or correctional facility; or (vii) is a private office or other room used to conduct business on a regular basis. MDU Dealer acknowledges that if the means of use or operation of an MDU Building change, it may no longer qualify as an MDU Building. 1.7 "Qualifying Subscriber" means a resident of an MDU Building who uses a DISH DBS Receiver that EchoStar verifies has been obtained from MDU Dealer. A Qualifying Subscriber shall not include any person who would otherwise qualify, but who: (a) uses a DISH DBS Receiver not obtained by the person from MDU Dealer; (b) no longer meets the definition of Qualifying Subscriber; or (c) EchoStar declines to activate or deactivates because EchoStar determines the person: (i) is or has been repeatedly or severely abusive or threatening to the business operations or reputation of EchoStar or its Affiliates or to any of its or their employees, agents, or representatives, or (ii) is or has been convicted of piracy or other fraud related to television programming. 1.8 "Subscriber Account" means the account set up and maintained by EchoStar for a Qualifying Subscriber who obtained a DISH DBS Receiver from MDU Dealer and for whom Commissionable Programming has been activated by EchoStar and which account is being paid by MDU Dealer under this Agreement and remains active and in good standing. 2 1.9 "Territory" consists of the geographic boundaries of the continental United States. 2. GENERAL 2.1 APPOINTMENT. EchoStar appoints MDU Dealer as a non-exclusive authorized representative to promote and solicit orders for the Programming listed in Exhibit A, which is attached hereto and incorporated by reference herein, subject to all of the terms and conditions of this Agreement. MDU Dealer's authorization herein is limited to the solicitation of orders from, and the promotion of Programming to, Qualifying Subscribers at MDU Buildings unless EchoStar, in its sole discretion, specifically agrees in writing to permit MDU Dealer to solicit orders from, or promote Programming to, others. 2.2 TERRITORY. MDU Dealer is only authorized, and shall limit its actions, to the promotion in the Territory of, and solicitation of orders in the Territory for, Programming in the packages (or a-la-carte for the Programming shown in Exhibit A as available on an a-la-carte basis), and at the prices shown in Exhibit A. 2.3. ACCEPTANCE. MDU Dealer accepts its appointment as an Authorized MDU Dealer. MDU Dealer understands that it may hold itself out to the public as an Authorized MDU Dealer of EchoStar only after fulfilling, and for so long as it continues to fulfill, all of the requirements in this Agreement, and only during the Term of this Agreement. 2.4 PROPERTY CONVERSION; NON-EXCLUSIVITY. Provided that no event of default as described in Section 9.3 below has occurred, if MDU Dealer is considering converting any then current Qualifying Subscribers at any MDU Building or portion thereof from the Programming then being provided by EchoStar to substantially similar programming (in terms of both content and method of delivery) provided by a third party, then MDU Dealer agrees that it will provide EchoStar with written notice thereof at least ninety (90) days prior to any such conversion. If requested by EchoStar, during such ninety (90) day period (the "Discussion Period") MDU Dealer will discuss with EchoStar the reasons that caused MDU Dealer to consider converting such Qualifying Subscribers to programming to be provided by a third party (including pricing information if price is mentioned as a reason), unless MDU Dealer is prohibited from doing so under the terms of a confidentiality agreement with the third party. MDU Dealer shall refrain from so converting those Qualifying Subscribers during the Discussion Period (provided no event of default by EchoStar has occurred under this Agreement and is then continuing). However, notwithstanding any discussions that the parties may have during the Discussion Period, MDU Dealer shall not be precluded from so converting such Qualifying Subscribers at any time following the expiration of the Discussion Period, nor shall either party be obligated to amend this Agreement or waive any right hereunder. Notwithstanding the preceding sentence or any other provision of this Agreement to the contrary, the parties agree that nothing in this Agreement is intended to confer, nor shall it be construed as conferring, any exclusive territory or any other exclusive rights to MDU Dealer or any exclusive rights to EchoStar. 2.5 PURCHASE OF DISH DBS RECEIVERS BY MDU DEALER FROM ECHOSTAR. 2.5.1 DISH DBS RECEIVER. (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY). No more than twice in any calendar year, MDU Dealer may deliver to EchoStar a written notice requesting that EchoStar conduct a review of its DISH DBS Receiver pricing. If the cost to EchoStar for the model 2700 (or if the model 2700 is no longer manufactured, the price of its successor model) has changed more than five percent (5%) since the last price review (or since execution of this Agreement, if no prior price reviews have been conducted), EchoStar will notify MDU Dealer of the change in cost within 30 days of receipt of the price review request from MDU Dealer, and 30 days following notice of price change from EchoStar the price to MDU Dealers for DISH DBS Receivers shall be adjusted to reflect the percentage amount of such change (the "Current Price", which shall be equal to the Initial Price prior to any price review). For example, if EchoStar determines in a price review that its costs for the model 2700 decreased 15%, the Price of the model 2700 to MDU Dealer would decrease 15%. If model 2700 is not available, EchoStar may, in its discretion, substitute another DISH DBS Receiver with equal or better functionality for the Current Price. Other models of DISH DBS Receivers may be purchased from time to time at prices agreed to by the parties (an "Agreed Price"). EchoStar agrees that a subscriber that acquires a DISH DBS Receiver from MDU Dealer may use such receiver to receive EchoStar programming even after such subscriber is no longer a resident of an MDU Building being served by MDU Dealer; provided that such use shall be subject to EchoStar's then applicable standard terms and conditions for service and MDU Dealer shall no longer have any rights or obligations with respect to that subscriber, including without limitation right to any commissions. 2.5.2 ORDERING RECEIVERS. When MDU Dealer orders any DISH DBS Receivers from EchoStar, MDU Dealer shall order such products by written purchase order ("Purchase Order") issued during the term of this Agreement. MDU Dealer acknowledges that it is not eligible to purchase subsidized DISH DBS Receivers, and agrees to pay the Current Price or Agreed Price (as applicable) for each DISH DBS Receiver ordered. A Purchase Order shall be a binding commitment by MDU Dealer. Purchase Orders of MDU Dealer shall state only the: (i) identity of goods; (ii) quantity of goods; (iii) purchase price of goods; and (iv) requested ship date of goods. Any additional terms stated in a Purchase Order shall not be binding upon EchoStar unless expressly agreed to in writing by EchoStar. In the event of any conflict between the terms of a Purchase Order and the terms of this Agreement, the terms of this Agreement shall prevail. MDU Dealer agrees to purchase DISH DBS Receivers exclusively from EchoStar during the term of this Agreement. EchoStar agrees to receive Purchase Orders by facsimile, mail or express delivery service. Within two business days of EchoStar's receipt of MDU Dealer's Purchase Order, EchoStar shall use commercially reasonable efforts to send MDU Dealer written confirmation (by facsimile) of its receipt of MDU Dealer's Purchase Order and EchoStar's acceptance or rejection of that order. Any failure to confirm a Purchase Order shall not be deemed acceptance by EchoStar. If EchoStar rejects a Purchase Order, EchoStar shall notify MDU Dealer and that Purchase Order shall be canceled. MDU Dealer shall have the option of resubmitting another Purchase Order to purchase those number of receivers that EchoStar has available or to purchase a substitute model (to the extent available), in which case MDU Dealer agrees to pay the Agreed Price of the substitute model. EchoStar agrees to use commercially reasonable 3 efforts to ship DISH DBS Receivers ordered by MDU dealer to the shipping address indicated by MDU Dealer on the Purchase Order on the same day as EchoStar accepts MDU dealer's Purchase Order if the acceptance is completed before 10:30 a.m., MST, otherwise to ship them the following business day. Under no circumstance shall EchoStar be liable for any reasonable delay in shipment. EchoStar will ship all Receivers using a delivery service offering delivery of not greater than five days. Unless there is a change in credit as provided below, MDU Dealer agrees to pay EchoStar for all DISH DBS Receivers ordered and received by MDU Dealer, including shipping costs and all applicable taxes, within thirty days following MDU Dealer's receipt of the invoice therefor. (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY). In the event that EchoStar reasonably determines there is a material adverse negative change to MDU Dealer's credit worthiness, then EchoStar may require that MDU Dealer pay for ordered DISH DBS Receivers in advance of shipment or make reasonable arrangements to provide security to assure payment to EchoStar. Each DISH DBS Receiver ordered shall be covered by Echosphere Corporation's ("Echosphere's") standard limited warranty. Echosphere may change the warranty it offers at any time, but the warranty on new DISH DBS Receivers at any given time shall not be different than the standard Echosphere warranty offered Dish Network customers who purchase the same model receiver (provided no additional payment is made for an alternate warranty) and who have no obligation to purchase programming or other goods or services in connection with the receiver. All other warranties are hereby expressly disclaimed. 2.6 INSTALLATION AND MAINTENANCE OF MDU SYSTEMS. MDU Dealer shall, at its sole cost throughout the term of this agreement: (i) sell, lease or rent DISH DBS Receivers and MDU System equipment to Qualifying Subscribers at such prices as MDU Dealer shall determine; (ii) offer to install and, if such offer is accepted, actually install in a timely manner, all DISH DBS Receivers and MDU System equipment which MDU Dealer sells, leases or rents to any Qualifying Subscriber; (iii) offer to maintain and, if such offer is accepted, actually maintain all DISH DBS Receivers and MDU System equipment that MDU Dealer sells, leases, or rents to any Qualifying Subscriber; (iv) provide and maintain in good working order and repair all facilities, vehicles, tools, and equipment necessary for performing its obligations pursuant to this Agreement; (v) provide, in a commercially reasonable manner, customer service to all qualifying Subscribers related to the lease, sale, installation and maintenance of the DISH DBS Receivers and MDU System equipment; and (vi) secure and maintain from MDU Building owners and operators, and from any applicable federal, state, and local government entities and agencies, all authority (including the right to enter into the MDU Building, if required by law) necessary to carry out the foregoing. MDU Dealer agrees that at any MDU Building where MDU Dealer is offering the Programming pursuant to this Agreement, MDU Dealer shall convert one of MDU Dealer's existing basic or expanded basic tier channels (to be selected jointly by the parties from those available channels as reasonably determined by MDU Dealer) from being provided by MDU Dealer's existing transport method to being provided by EchoStar so that EchoStar will be able to promote its Programming over MDU Dealer's basic or expanded basic tier by advertising inserts in EchoStar's Programming. MDU Dealer shall not be obligated to convert a channel as described in the preceding sentence if no conversion of any available channel (as reasonably determined by MDU Dealer) can be made without resulting in the violation of any programming, transport or other agreement to which MDU Dealer is bound or would result in any additional cost to MDU Dealer not paid by EchoStar. MDU Dealer shall have the right at any time and from time to time in its reasonable discretion to change such channel being converted to another channel jointly agreed to by the parties. Any fees MDU Dealer collects from Qualifying Subscribers which are related to the purchase, lease, or rental of DISH DBS Receivers or the installation or maintenance of the DISH DBS Receivers or the MDU systems, shall be the sole property of MDU Dealer. In selling, installing, and maintaining DISH DBS Receivers and/or other MDU System equipment related to distribution of the Programming, MDU Dealer shall: (a) comply with all applicable EchoStar manufacturers' policies; and (b) ensure that such MDU System design and installation complies with industry standard digital video distribution technical specifications. MDU Dealer shall be solely responsible for the installation and maintenance of all equipment necessary to allow Qualifying Subscribers to receive Programming. MDU Dealer shall not sell, lease or otherwise distribute DISH DBS Receivers except to Qualifying Subscribers at MDU Buildings. MDU Dealer agrees that it will distribute, to each person to whom it sells, leases, or delivers a DISH DBS Receiver: (i) the User and Installation Guide included in the DISH DBS receiver purchased from EchoStar; and (ii) a written statement that all questions, concerns, difficulties, and problems with DISH DBS Receivers and programming should be directed to MDU Dealer and not to EchoStar. 3. PROGRAMMING 3.1 PROGRAMMING. EchoStar, in its sole discretion, shall determine the Programming for which MDU Dealer may solicit orders, as set forth in Exhibit A. EchoStar may expand, reduce or otherwise modify Exhibit A and the content of any packages at any time and from time to time in its sole discretion; provided that any such modification or reduction must be consistent with a modification or reduction then being made to the programming being provided to other EchoStar customers at MDU Buildings receiving similar programming packages. Any changes shall be effective (and Exhibit A shall be deemed modified) on the date designated by EchoStar by written notice to MDU Dealer. EchoStar agrees that when it is able to do so it will use commercially reasonable efforts to provide MDU Dealer with at least 45 days prior written notice of any changes to any Programming packages or channel lineups. 3.2 CHANGES. If at any time or for any reason EchoStar changes the content of any programming package, MDU Dealer's authority to solicit orders for the prior Programming package shall cease immediately upon notice from EchoStar. 3.3 MDU PROGRAMMING ONLY. With respect to Qualifying Subscribers, MDU Dealer shall not solicit orders for Programming except for Programming which is specifically designated and authorized by EchoStar for reception at MDU Buildings. MDU Dealer shall not be entitled to any commission for Programming which has been ordered for any location other than a MDU Building, and shall immediately pay EchoStar the dollar amount of all Programming ordered in violation of this Section at the then applicable rate. MDU Dealer or Qualifying Subscribers may order any one or more separate Programming or Programming packages set forth on Exhibit A, as same may be amended. 4 3.4 ADDITIONAL RESTRICTIONS AND OBLIGATIONS OF MDU DEALER. MDU Dealer shall not resell, retransmit, or rebroadcast any Programming except as specifically contemplated under this Agreement. MDU Dealer shall further ensure that no MDU Building owner or operator engages directly or indirectly in: (a) the reselling of Programming; (b) the retransmission or rebroadcast of Programming, except as contemplated by this Agreement; or (c) modifying, adding to, or deleting from any of the Programming. 3.5 DEACTIVATION. EchoStar, shall deactivate the DISH DBS Receiver of any Subscriber Account (a "Deactivation") at MDU Dealer's written instruction (or e-mail or other electronic message if received by EchoStar). EchoStar shall not otherwise deactivate a receiver or discontinue or refuse to provide ordered Programming to any Qualifying Subscriber except in the event of a default as described in Section 9.3 below or in the event a Qualifying Subscriber no longer meets the definition of a Qualifying Subscriber set forth in Section 1.7 above. MDU Dealer understands and acknowledges that a Deactivation will disable the reception of all programming received through the DISH DBS Receiver, including EchoStar Programming, and MDU Dealer hereby forever waives and releases EchoStar from any and all claims related to, or arising out of a Deactivation, including but not limited to claims relating to the loss of revenue from programming or the sale, rental or lease of a DISH DBS Receiver. 4. PRICES AND PAYMENT. 4.1 RETAIL PRICES; CHANGE. EchoStar, in its sole discretion, shall determine the retail prices for Programming. MDU Dealer will only solicit orders for Programming at the retail prices set by EchoStar from time to time. The initial retail prices for the Programming are as set forth in Exhibit A. EchoStar may increase, decrease or otherwise modify those prices from time to time in its sole discretion; provided that any such modification must be consistent with a modification made to the Programming pricing for all other EchoStar customers at residential locations receiving identical programming packages. Any price changes shall be effective (and Exhibit A shall be deemed modified) on the date designated by EchoStar by written notice to MDU Dealer, which date shall in no event be less than 60 days from the date of MDU Dealer's receipt of such notice. 4.2 DETERMINATION OF PRICE; PAYMENT AND BILLING. The prices for Programming set forth on Exhibit A reflect the price per Subscriber Account for MDU Buildings. (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY.) Charges for all recurring Programming will commence on the activation date. (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY.) Payment not received when due shall accrue interest at the rate of 1.5% per month until paid, and MDU Dealer agrees to pay all interest charges due and payable by MDU Dealer hereunder. (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY.) Throughout the term and any renewal term of this Agreement and for two years thereafter, each party hereto agrees to maintain accurate books and records associated with its operations pertaining to the Programming, Qualifying Subscribers, Subscriber Accounts and DISH DBS Receivers. Each party agrees that it will account periodically to the other upon request and provide the other with the necessary information from its books and records to allow the other party to audit and confirm the accuracy of the information being provided by each party. Either party at its own expense, upon providing the other with at least 15 days prior written notice of its desire to do so, may audit the books and records of the other party relating to Qualifying Subscribers, Subscriber Accounts, the Programming and the DISH DBS Receivers. Any such audit shall be conducted during the other party's normal business hours at its principal business office. 5. COMMISSIONS. 5.1 RESIDUAL COMMISSIONS. 5.1.1 CALCULATION. (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY) 5.1.2 PAYMENT TERMS. Subject to the terms and conditions of this Agreement (including the exhibits attached hereto), commencing upon activation of a Subscriber Account and for every month thereafter in which the Subscriber Account receives Commissionable Programming, MDU Dealer shall be entitled to a Residual Commission. 5.2 ADDITIONAL COMMISSIONS. MDU Dealer shall be eligible to participate in, and receive payments ("Additional Commissions") under, such promotions or incentive programs as EchoStar may institute in its sole discretion from time to time. MDU Dealer acknowledges and agrees that: (i) under no circumstances shall EchoStar have at any time any obligation to offer Additional Commissions to MDU Dealer, or if Additional Commissions are offered, to permit MDU Dealer to be eligible to receive them; (ii) EchoStar may, in its sole discretion, add, discontinue, substitute, modify, or otherwise alter any or all of the terms of any promotion or incentive program involving the payment of Additional Commissions; and (iii) if EchoStar offers any Additional Commissions, MDU Dealer shall only be eligible to receive the Additional Commissions if it meets all of the applicable qualification criteria and other terms and conditions as EchoStar may establish in its sole discretion. 5 5.3 TERMINATION OF COMMISSIONS. In addition to any other rights and remedies available, If MDU Dealer defaults on the payment to EchoStar of Programming charges for any Qualifying Subscribers, and if EchoStar subsequently terminates this Agreement as a result of such payment default pursuant to the provisions of Section 9.3 and ceases to provide all Programming pursuant to this Agreement, MDU Dealer shall not be entitled to any Commissions on such Qualifying Subscribers with respect to any Programming changes not paid to EchoStar by MDU Dealer prior to collection efforts by EchoStar which would otherwise be due to MDU Dealer. EchoStar shall have no liability to MDU Dealer as a result of such termination. Upon cure of the breach or default, all amounts suspended shall be credited to MDU Dealer's account. 5.4 OFFSETS. Neither party may set off or take offsets against any amount owed to the other party hereunder, except for Commissions specifically provided for under this Agreement. 5.5 SOLE COMPENSATION. MDU Dealer acknowledges and agrees that the Commissions payable pursuant to this Agreement constitute the sole commissions or fees payable by EchoStar to MDU Dealer for MDU Dealer's role in soliciting orders for Programming or for any other audio, video, or other programming provided by EchoStar or any of its Affiliates pursuant to this Agreement. 5.6 NO ADMISSION. No acceptance of payment from MDU Dealer under this Agreement, whether in full or in part, shall be deemed to operate as EchoStar's acceptance or admission that MDU Dealer has complied with any provision of this Agreement. 6. USE OF INDEPENDENT CONTRACTORS: PROGRAMMING ORDERS. 6.1 If MDU Dealer uses independent contractors, sub-agents, or other persons or entities not employed by MDU Dealer to perform activities contemplated hereunder, MDU Dealer shall be responsible for the acts and omissions of such persons under this Agreement to the same extent it is responsible for the acts and omissions of its own employees. 6.2 MDU Dealer shall not sell Programming under any circumstances. All sales of Programming are transactions directly between EchoStar and Qualifying Subscribers. MDU Dealer also agrees that it shall not charge subscribers more than the then applicable retail price (i.e., the prices specified in Section 4.1 above, as such prices may be modified as provided in Section 4.1) for any Programming. 6.3 MDU Dealer shall forward to EchoStar all orders for Programming in the manner prescribed herein. EchoStar shall accept all such orders for Qualifying Subscribers and activate the ordered Programming in accordance with, and subject to, the terms and conditions of this Agreement. MDU Dealer shall use reasonably commercial efforts to ensure that all residents of any MDU Building served by MDU Dealer shall contact MDU Dealer and not EchoStar (a) to initiate, add, delete or cancel receipt of any Programming except EchoStar pay-per-view, (b) for any maintenance or service of, or problems or concerns with, their DISH DBS Receiver or other portion of any MDU System equipment, and (c) for any questions concerning reception, rates, billing or collection. To order Programming, MDU Dealer shall complete and send a complete and accurate "DBS Service Request Form" in the form of the attached Exhibit D (which exhibit may be changed by EchoStar from time to time upon notice to MDU Dealer, but shall always include the name, address, and telephone number of each requested subscriber) to EchoStar, Attn: EchoStar Commercial Activations, by facsimile (Fax No.: 800/454-0843, or as otherwise specified by EchoStar from time to time), mail or express delivery service. EchoStar will input all subscriber information and will use commercially reasonable efforts to set up Subscriber Accounts for Qualifying Subscribers for which satisfactory DBS Service Request Forms are received by EchoStar: (i) before 12:00 noon, Mountain Time, by the close of business on the day of receipt, and (ii) after noon MST, by the close of business on the next business day. EchoStar Commercial Activation's hours of operation are currently 7:00 a.m. to 7:00 p.m., Mountain Time, Monday through Friday (except during holidays). At the time MDU Dealer installs a DISH DBS Receiver at a Qualifying Subscriber's residence, MDU Dealer's technician shall telephone EchoStar's call center to request activation of Programming. EchoStar's call center is currently open to receive such requests 24 hours per day, 7 days per week (excluding standard holidays). EchoStar's call center shall use commercially reasonable efforts to activate Programming and authorize the Qualifying Subscriber's assigned "Smart Card" while the MDU Dealer technician is present at the Qualifying Subscriber's residence (i.e., within 30 minutes after MDU Dealer's technician's call) so that the MDU Dealer technician can confirm proper installation and activation. MDU Dealer shall also send all instructions to add, delete, cancel or otherwise modify any Programming for an existing Qualifying Subscriber to EchoStar Commercial Activations, which instructions EchoStar shall use commercially reasonable efforts to effect within one business day of receipt of MDU Dealer's instructions. See Exhibit C attached hereto for EchoStar's current procedures pertaining to Programming orders, activation, modification and cancellation. MDU Dealer agrees to promptly notify EchoStar in writing of any change, with respect to DISH DBS Receivers, in the name, address, or telephone number of the Qualifying Subscriber receiving Programming through such receiver. 6.4 MDU Dealer shall cooperate reasonably when requested by EchoStar to notify Qualifying Subscribers of information pertaining to the Programming; provided however, that MDU Dealer shall be solely liable for the failure to follow any such request. 7. TRADEMARK LICENSE AGREEMENT. MDU Dealer shall sign the Trademark License Agreement, in the form attached as Exhibit E hereto, which agreement is hereby incorporated by reference in its entirety. 8. CONDUCT OF BUSINESS. 8.1 SIGNAL THEFT MDU Dealer shall not directly or indirectly: (i) engage in any signal theft, piracy or similar activities; (ii) alter any DISH DBS Receivers or "Smart Cards", MDU Systems, or any other equipment compatible with programming delivered by EchoStar or any of its Affiliates to be capable of signal theft (or for any other reason without the express written consent of EchoStar); 6 (iii) sell any equipment altered to permit signal theft or other piracy; or (iv) aid any others in engaging in any of the above described activities. MDU Dealer shall immediately notify EchoStar if it becomes aware of any such activity. 8.2 HARDWARE EXPORT RESTRICTIONS. MDU Dealer agrees that it will not engage directly or indirectly in the export or sale outside of the Territory, of DISH DBS Receivers or Programming in whole or in part. 9. TERM, DISPUTE RESOLUTION AND TERMINATION. 9.1 TERM. This Agreement shall commence on the date of execution by both parties and shall continue until December 31, 2001 (the "Term") unless and until terminated by either party in accordance with the terms and conditions of this Agreement. The Term of this Agreement shall automatically renew for additional terms of one (1) year each unless either party provides the other with written notice at least twelve (12) months prior to the expiration of the Term or renewal term, as the case may be, or its desire for this Agreement not to renew. Notwithstanding the expiration of the Term or any renewal Term, for a period of twelve (12) months following the expiration of this Agreement (i.e., the expiration of the Term or any renewal term, as the case may be) EchoStar shall continue to offer Programming and DISH DBS Receivers pursuant to this Agreement for all MDU Buildings being served by MDU Dealer on the date of expiration of this Agreement, including activation of new Qualifying Subscribers at such MDU Buildings and modifications and cancellations of service. Notwithstanding anything to the contrary in this Agreement, at any time after December 31, 2001 during any renewal Term, either party may terminate this Agreement upon 120 days prior written notice to the other party. 9.2 EXPEDITED DISPUTE RESOLUTION. The parties agree that it is not in either party's best interest to engage in expensive and protracted litigation to resolve any dispute between the parties hereto. Accordingly, in the event of any dispute between the parties that has been or reasonably could be the subject of a notice of default under Section 9.3 Of this Agreement, each party, upon the written request of the other party (a "Resolution Request"), agrees to appoint a designated officer or other senior representative whose task it will be to meet with the representative of the other party on an expedited basis for the purpose of resolving the relevant dispute or controversy or to negotiate for an adjustment to any provision of this agreement which both parties agree would fairly and appropriately resolve such dispute or controversy. Such representatives will attempt in good faith to meet in person at EchoStar's principal place of business in Littleton, Colorado or at another location if mutually agreeable (unless both parties agree instead to conduct their meeting via telephone) within ten (10) business days of the date of the Resolution Request. If a party refuses to meet or fails to attend a meeting with the other during such ten (10) business day period, such party may not thereafter prevent the other party (by this Section 9.2) from terminating the Agreement pursuant to Section 9.3 or, until the parties actually meet or such party is genuinely available to meet, seek to terminate the Agreement pursuant to Section 9.3. The parties' representatives will discuss the dispute and negotiate in good faith in an effort to resolve the dispute or renegotiate the applicable provision of this Agreement without the necessity of any formal proceeding relating thereto; provided, neither party shall be obligated by this paragraph to waive a default by the other party or otherwise compromise any right that it may have. Nothing contained in this section 9.2 shall prevent either party from notifying the other at any time of an alleged default pursuant to the provisions of this Agreement. Any notice of default sent by a party pursuant to Section 9.3 of this Agreement shall automatically constitute a Resolution Request for purposes of this Section 9.2 and shall obligate each party to attempt in good faith to meet as described above. However, once a Resolution Request has been received by a party, neither party may thereafter terminate this Agreement pursuant to Section 9.3 or commence proceedings for the judicial or arbitrational resolution of a dispute or controversy that has been or reasonably could be the subject of a notice of default under Section 9.3 until either or both of the designated representatives, following such meeting, conclude in good faith that an amicable resolution through continued negotiation of the matter at issue is not likely to occur. To the extent any dispute relates to the payment of money to a party, the other party agrees to pay all amounts not legitimately in dispute within the time required by this Agreement. 9.3 TERMINATION BY EITHER PARTY UPON DEFAULT. This Agreement may be terminated by a party (the "Affected Party"), upon the occurrence of any of the following with respect to the other party (the "Other Party"): (i) the Other Party commits a payment default which is not cured within ten (1O) business days of receipt of written notice from the Affected Party; or (ii) the Other Party defaults on any obligation or breaches any representation, warranty or covenant in this Agreement or the Trademark License Agreement (regardless of whether breach or default of such obligation, representation, warranty or covenant is designated as giving rise to a termination right), and such default or breach, if curable, is not cured within thirty (30) days of receipt of written notice from the Affected Party. Notwithstanding the foregoing, in the event of a payment default notification made pursuant to item (i) in the sentence above, if the Other party furnishes to the Affected Party all payment amounts which it in good faith believes it owes the Affected Party, together with details and documentation establishing the Other Party's contention that the remaining amount claimed by the Affected Party is not in fact due and owing, then the cure period shall be extended an additional 16 days. The parties agree that all obligations, representations, warranties and covenants contained in this Agreement, whether or not specifically designated as such, are material to the agreement of the parties to enter into and continue this Agreement. 9.4 ADDITIONAL TERMINATION. This Agreement may be terminated by a party (the "Affected Party"), upon the occurrence of any of the following with respect to the other party (the "Other Party"): (i) the Other Party shall become insolvent, shall admit in writing its inability to pay its debts when due, shall make a transfer in fraud of its creditors, or all or substantially all of its assets or its interest in this Agreement are levied on by execution or other legal process, (ii) the Other Party shall file a petition under any section or chapter of the U.S. Bankruptcy Code, as amended, or under any similar federal or state law or statute, or shall be adjudged bankrupt or insolvent in proceedings filed against it, or a receiver or trustee shall be appointed for all or substantially all of its assets and such receivership or bankruptcy shall not be dismissed within sixty (60) days from the appointment of the receiver or trustee; (iii) the Other Party or any officer, director, or principal of the Other Party is convicted in a court of competent jurisdiction of any offenses substantially related to the specific business the subject of this Agreement; (iv) the Trademark License Agreement terminates for any reason; or (v) the Other Party intentionally falsifies any records or reports required hereunder. This Agreement may be terminated by EchoStar if MDU Dealer, for more than twenty (20) consecutive days following written notice from EchoStar, fails to maintain operations as a going business. 7 Further, in the event of an occurrence by MDU Dealer described in clause (ii) above and until such occurrence is cured or the Agreement is terminated, EchoStar shall have the right to condition any further EchoStar performance under this Agreement on MDU Dealer providing EchoStar with a security deposit in good funds, in an amount equal to the average net Programming charges due by MDU Dealer for the prior six months, to be used to pay any delinquent Programming charges due by MDU Dealer hereunder, payment in advance for all DISH DBS Systems or other equipment ordered, payment in full of all outstanding invoices, and such other reasonable security under the circumstances. 9.5 TERMINATION OF AGREEMENT. MDU Dealer agrees that if this Agreement terminates for any reason, then MDU Dealer shall: 9.5.1 immediately discontinue the marketing, promotion, and solicitation of orders for Programming, and immediately cease to represent and/or imply to any person or entity that MDU Dealer is an Authorized MDU Dealer for EchoStar; 9.5.2 immediately discontinue all use of the trademarks associated or included in any way whatsoever with the Programming, including, without limitation, DISH. Moreover, the Trademark License Agreement shall also terminate; 9.5.3 deliver to EchoStar, or destroy, at EchoStar's option all tangible things of every kind in the possession or control of MDU Dealer that bear any of the trademarks; 9.5.4 upon request by EchoStar, certify in writing to EchoStar that such delivery or destruction has taken place; 9.5.5 cease to be authorized to purchase DISH DBS Receivers from EchoStar or any Affiliate of EchoStar; 9.5.6 pay all sums due EchoStar; and 9.5.7 cease all communication with any subscriber of Programming relating to DISH DBS Receivers or Programming (except for any communications relating to the termination of the Programming, billing or collection of any sums due in respect of the Programming or the DISH DBS Receivers, responding to customer inquiries or disputes, return of leased or financed (or other disposition or transfer of) DISH DBS Receivers or other equipment, or MDU Dealer's own products or services). 10. INDEPENDENT CONTRACTOR. The relationship of the parties hereto is that of independent contractors. Each party shall conduct its business as an independent contractor, and all persons employed by a party in the conduct of its business shall be that party's employees only, and not employees or agents of the other party. Each party represents that it is not dependent on the other for a major part of its business. It is further understood and agreed that each party has no right or authority to make any representation, promise or agreement on behalf of the other except for such representations, promises, or agreements as the other shall specifically, in writing, authorize. Any such inconsistent or additional warranty or representation made by a party shall constitute a breach of, and serve as grounds for termination of this Agreement pursuant to Section 9.3. 11. LIMITATION OF LIABILITY. The provisions of this Section 11 shall survive termination or expiration of this Agreement indefinitely. IN NO EVENT SHALL EITHER PARTY OR ANY AFFILIATE OF EITHER PARTY BE LIABLE FOR ANY EXEMPLARY, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES TO THE OTHER (INCLUDING WITHOUT LIMITATION, ANY PAYMENT FOR LOST BUSINESS, FUTURE PROFITS, LOSS OF GOODWILL, REIMBURSEMENT FOR EXPENDITURES OR INVESTMENTS MADE OR COMMITMENTS ENTERED INTO, CREATION OF CLIENTELE, ADVERTISING COSTS, TERMINATION OF EMPLOYEES OR EMPLOYEES SALARIES, OVERHEAD OR FACILITIES INCURRED OR ACQUIRED BASED UPON THE BUSINESS DERIVED OR ANTICIPATED UNDER THIS AGREEMENT), WHETHER FORESEEABLE OR NOT, CLAIMS UNDER DEALER TERMINATION, PROTECTION, NON-RENEWAL OR SIMILAR LAWS, FOR ANY CAUSE WHATSOEVER WHETHER OR NOT CAUSED BY THE OTHER PARTY'S NEGLIGENCE. IN NO EVENT SHALL ANY PROJECTIONS OR FORECASTS BY EITHER PARTY BE BINDING AS COMMITMENTS OR PROMISES BY SUCH PARTY. THE FOREGOING LIMITATIONS OF LIABILITY CONTAINED IN THIS SECTION SHALL NOT APPLY TO A PARTY'S BREACH OF THE COVENANTS SET FORTH IN SECTION 13 REGARDING CONFIDENTIALITY OR A BREACH OF THE TRADEMARK LICENSE AGREEMENT ATTACHED HERETO AS EXHIBIT E. Each party agrees that in the event of termination of this Agreement for any reason, no amounts spent in its fulfillment or other consequential damages will be recoverable from the other party or any of its Affiliates. 12. INDEMNIFICATION. The provisions of this Section 12 shall survive termination or expiration of this Agreement indefinitely. 12.1 BY ECHOSTAR. EchoStar shall indemnify, defend and hold MDU Dealer and its Affiliates, and its and their respective officers, directors, employees, agents and shareholders, and its and their respective assigns, heirs, successors and legal representatives harmless from and against, any and all costs, losses, liabilities, damages, lawsuits, judgments, claims, actions, penalties, fines and expenses (including, without limitation, interest, penalties, reasonable attorneys' fees and all monies paid in the investigation, defense or settlement of any or all of the foregoing) ("Claims"), that arise out of, or are incurred in connection with: (i) EchoStar's failure of performance under this Agreement and any direct or indirect results thereof; (ii) the breach of any of EchoStar's representations or warranties herein; (iii) all purchases, contracts, debts and/or obligations made by EchoStar; (iv) the failure of EchoStar to comply with, or any violation of, any applicable laws, statute, ordinance, governmental administrative order, rule or regulation; (v) the failure of EchoStar to comply with any provision of this Agreement; (vi) the failure of EchoStar to collect adequate taxes and remit same to EchoStar as required herein; and (vii) any claim brought by EchoStar's employees or agents for compensation and/or damages arising out of the expiration or termination of this Agreement. 8 12.2 BY MDU DEALER. MDU Dealer shall indemnify, defend and hold EchoStar and its Affiliates, and its and their respective officers, directors, employees, agents and shareholders, and its and their respective assigns, heirs, successors and legal representatives harmless from and against, any and all Claims that arise out of, or are incurred in connection with: (i) MDU Dealer's failure of performance under this Agreement and any direct or indirect results thereof; (ii) MDU Dealer's unlawful acts or omissions (or those of any of MDU Dealer's employees or agents, whether or not such acts are within the scope of employment of such employees or agents) relating to the sale, marketing, advertisement, promotion or distribution of Programming and DISH DBS Receivers and equipment; (iii) the breach of any of MDU Dealers representations or warranties herein; (iv) the failure of MDU Dealer to comply with, or any violation of, any applicable laws, statute, ordinance, governmental administrative order, rule or regulation; (v) the failure of MDU Dealer to comply with any provision of this Agreement; (vi) the failure of MDU Dealer to collect adequate taxes and remit same to EchoStar as required herein; (vii) any claim brought by MDU Dealer's employees or agents for compensation and/or damages arising out of the expiration or termination of this Agreement; (viii) any claim of pirating infringement or imitation of the logos, trademarks or service marks of programming providers by MDU Dealer or any party for which it is responsible; (ix) any Deactivation; (x) billing (including the collection and payment of any applicable taxes), customer service and support, or failure to adequately provide same; (xi) the installation, operation or maintenance of an MDU System or DISH DBS System, or failure to adequately provide same; and (xii) MDU Dealer's failure to comply in whole or in part with any applicable federal state or local consumer leasing or financing laws. MDU Dealer shall further (i.e., expanding rather than limiting the provisions of the preceding sentence) indemnify, defend and hold EchoStar and its Affiliates, and its and their respective officers, directors, employees, agents and shareholders, and its and their respective assigns, heirs, successors and legal representatives harmless from and against, any and all Claims by MDU Dealer customers only (including without limitation Qualifying Subscribers, MDU Building owners, operators, and residents, and all persons and entities solicited as potential customers by MDU Dealer) that arise out of, or are incurred in connection with: (i) MDU Dealer's performance or failure of performance under this Agreement and any direct or indirect results thereof; (ii) MDU Dealer's actual or alleged acts or omissions (or those of any of MDU Dealer's employees or agents, whether or not such acts are within the scope of employment of such employees or agents) relating to the sale, marketing, advertisement, promotion or distribution of Programming and DISH DBS Receivers and equipment; and (iii) the failure of MDU Dealer to comply with, or any actual or alleged violation of, any applicable laws, statute, ordinance, governmental administrative order, rule or regulation. The provisions of this section 12 shall survive termination or expiration of this Agreement indefinitely. 13. CONFIDENTIALITY. 13.1 GENERAL. At all times during the term of this Agreement and for a period of three (3) years thereafter, each party and its employees will maintain, in confidence, the terms and provisions of this Agreement, as well as all customer or subscriber lists, marketing information and reports, forecasts, business plans, data, summaries, reports or information of all kinds, whether oral or written, acquired, devised or developed in any manner from the other party's personnel or files, or as a direct or indirect result of such party's actions or performance under this Agreement, and each party represents that it has not and will not reveal the same to any persons not employed by such party, except: (i) at the written direction of the other party; (ii) to the extent necessary to comply with law, the valid order of a court of competent jurisdiction or the valid order or requirement of a governmental agency or any successor agency thereto, in which event such party shall notify the other of the information in advance, prior to making any disclosure, and shall afford the other party reasonable opportunity to seek confidential treatment of such information; (iii) as part of its normal reporting or review procedure to its parent or otherwise affiliated companies, their auditors and attorneys, provided such affiliates, auditors and attorneys agree to be bound by the provisions of this paragraph; or (iv) to the extent necessary to permit the performance of obligations under this Agreement. 13.2 SUBSCRIBER INFORMATION. All subscribers who subscribe to Programming services shall be deemed customers of EchoStar for purposes relating to the Programming and DISH DBS Receivers, and shall be deemed customers of MDU Dealer for other purposes. MDU Dealer acknowledges and agrees that the names, addresses and related information of such subscribers ("Subscriber Information") are as between MDU Dealer and EchoStar, but only to the extent such information relates to the delivery of Programming and DISH DBS Receivers, proprietary to EchoStar, and shall be treated with the highest degree of confidentiality by MDU Dealer. MDU Dealer shall under no circumstance directly or indirectly reveal any Subscriber Information relating specifically to the delivery of Programming and DISH DBS Receivers to any third party for any reason without the express prior written consent of EchoStar, which EchoStar may withhold in its sole and absolute discretion; provided however, that nothing shall prohibit MDU Dealer from otherwise utilizing its own customer lists and business information for any purpose. 13.3 REMEDIES. Each party agrees that a breach of these obligations of confidentiality will result in the substantial likelihood of irreparable harm and injury to the other party for which monetary damages alone would be an inadequate remedy, and which damages are difficult to accurately measure. Accordingly, each party agrees that the other shall have the right, in addition to any other remedies available, to obtain immediate injunctive relief as well as other equitable relief allowed by the federal and state courts. The foregoing remedy of injunctive relief is agreed to without prejudice to the other party's right to exercise any other rights and remedies it may have, including without limitation, the right to terminate this Agreement and seek damages or other legal or equitable relief. The foregoing confidentiality obligations will survive termination of this Agreement. 14. MISCELLANEOUS. 14.1 WAIVER. The failure of any party to insist upon strict performance of any provision of this Agreement shall not be construed as a waiver of any subsequent breach of the same or similar nature. All rights and remedies reserved to either party shall be cumulative and shall not be in limitation of any other right or remedy which such party may have at law or in equity. 9 14.2 ATTORNEY FEES. In the event of any suit or action to enforce or interpret this Agreement or any provision thereof, the prevailing party shall be entitled to recover its costs, expenses and reasonable attorney fees, both at trial and on appeal, in addition to all other sums allowed by law. 14.3 SUCCESSOR INTERESTS; ASSIGNMENT. This Agreement is binding upon the heirs, legal representatives, successors and assigns of EchoStar and MDU Dealer. Either party may assign this Agreement to an Affiliate in whole or in part at any time without the consent of the other, provided however that the assigning party remains liable for all of its obligations under this Agreement. Other than as provided above, this Agreement shall not be assigned by either party without the prior written consent of the other party. For purposes of this subsection, an "Affiliate" shall include, without limitation, any person or entity succeeding to substantially all of the assets of a party by way of asset purchase, merger, consolidation or otherwise; provided, however, without EchoStar's prior written consent, an "Affiliate" may not include any entity engaged in the direct broadcast satellite (DBS) business. 14.4 CHOICE OF LAW AND EXCLUSIVE JURISDICTION. 14.4.1 The relationship between the parties including all disputes and claims, whether arising in contract, tort, or under statute, shall be governed by and construed in accordance with the laws of the State of Colorado without giving any effect to its conflict of law provisions. 14.4.2 Any and all disputes arising out of, or in connection with, the interpretation, performance or the nonperformance of this Agreement or any and all disputes arising out of, or in connection with, transactions in any way related to this Agreement and/or the relationship between the parties (including but not limited to the termination of this Agreement or the relationship and either party's rights thereunder or disputes under rights granted pursuant to statutes or common law, including those in the state in which MDU Dealer is located) shall be litigated solely and exclusively before a state or federal court situated in the State of Colorado. The parties consent to the in personam jurisdiction of said court for the purposes of any such litigation, and waive, fully and completely, any right to dismiss and/or transfer any action pursuant to 28 U.S.C.S. 1404 or 1406 (or any successor statute). 14.5 SEVERABILITY. The parties agree that each provision of this Agreement shall be construed as separable and divisible from every other provision and that the enforceability of any one provision shall not limit the enforceability, in whole or in part, of any other provision hereof. In the event that a court of competent jurisdiction determines that any term or provision herein, or the application thereof to any person, entity, or circumstance, shall to any extent be invalid or unenforceable, the remaining terms and provisions of this Agreement shall not be affected thereby, and shall be interpreted as if the invalid term or provision were not a part hereof. 14.6 ENTIRE AGREEMENT. This Agreement sets forth the entire, final and complete understanding between the parties hereto relevant to the subject matter of this Agreement, and it supersedes and replaces all previous understandings or agreements, written, oral, or implied, relevant to the subject matter of this Agreement made or existing before the date of this Agreement. Except as expressly provided by this Agreement, no waiver or modification of any of the terms or conditions of this Agreement shall be effective unless in writing and signed by both parties. 14.7 COMPLIANCE WITH LAW. The parties shall comply with, and agree that this Agreement is subject to, all applicable federal, state, and local laws, rules and regulations, and all amendments thereto, now enacted or hereafter promulgated in force during the term of this Agreement. 14.8 FORCE MAJEURE. Notwithstanding anything to the contrary in this Agreement, neither party shall be liable to the other (nor shall an event of default hereunder be deemed to exist) for failure to fulfill its obligations hereunder if such failure is caused by or arises out of an act of force majeure including acts of God, war, riot, natural disaster, technical failure beyond such party's reasonable control (including the failure of all or part of the communications satellite, or transponders on which the programming is delivered to Qualifying Subscribers, or of the related uplinking or other equipment, or failure of the signal from a programmer supplying EchoStar with the Programming), or any other reason beyond the reasonable control of such party. This subsection shall not apply to an obligation by either party for the payment of money. 14.9 REMEDIES CUMULATIVE. It is agreed that the rights and remedies herein provided in case of default or breach by a party of this Agreement are cumulative and shall not affect in any manner any other remedies that the other party may have by reason of such default or breach by such party. The exercise of any right or remedy herein provided shall be without prejudice to the right to exercise any other right or remedy provided herein, at law, or in equity. 14.10 GENERAL PROVISIONS. The terms and conditions attached as exhibits hereto are fully incorporated into and made a part of this Agreement. 14.11 NOTICES. Any notice required or permitted to be delivered hereunder shall be in writing and shall be deemed to be delivered (i) upon first attempted delivery (whether actually received or not) when postmarked by the U.S. Postal Service, postage prepaid, registered or certified mail, return receipt requested, or (ii) when delivered by courier or express mail where evidence of delivery is retained, addressed to the parties at their respective mailing addresses set forth in the first paragraph of this Agreement, or at such other address as they have at least ten days theretofore specified by written notice delivered in accordance herewith. 14.12 YEAR 2000 COMPLIANCE. Each party shall use commercially reasonable efforts to ensure that: (i) the services and products used to perform its obligations hereunder, are or will be year 2000 compliant, and (ii) any failure of the services or products to properly operate during and after the calendar year 2000 A.D. relating to date data which represents or references different centuries 10 or more than one century will be corrected, repaired, or replaced (at such party's option), notwithstanding anything to the contrary in Sections 2.5.2 and 2.6, as soon as possible after detection at such party's sole cost. 14.13 SURVIVAL. All provisions of this Agreement shall survive termination for a time which is reasonable under the circumstances, regardless of whether or not such provision is explicitly stated to survive. 14.14 NO PARTNERSHIP. Nothing herein contained shall be construed to create any partnership or joint venture between the parties. By signing below, MDU Dealer hereby indicates its acceptance of the terms of, and agreement to, this Agreement. Approved by: ECHOSTAR SATELLITE CORPORATION TVMAX TELECOMMUNICATIONS, INC. By: /s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] --------------------------------- ------------------------------- Title: Executive Vice President Title: President & CEO ------------------------------ ---------------------------- Date: January 14, 1999 Date: January 13, 1999 ------------------------------- ----------------------------- 11 EXHIBIT A DISH NETWORK PROGRAMMING PACKAGES ECHOSTAR I AND II
AMERICA'S TOP 40 ---------------------------------------------------------- $19.99 PER MONTH $220.00 PER YEAR ========================================================== A&E History Channel (The) America's Voice Home & Garden TV Angel One Home Shopping Network Cartoon Network (The) Learning Channel (The) CNBC Lifetime CNN MTV Comedy Central Nashville Network (The) Country Music Television Nickelodeon (East) Court TV Nickelodeon (West) C-SPAN Nick at Nite (East) C-SPAN2 Nick at Nite (West) Discovery Channel Nick at Nite's TV Land Disney Channel (East) QVC Disney Channel (West) Sci-Fi Channel E! Entertainment TBN ESPN TBS ESPN2 TNT ESPNEWS Travel Channel (The) EWTN USA Network Food Network VH1 FOX Family Channel Weather Channel (The) Headline News ----------------------------------------------------------
- -------------------------------------------------------------------------------- AMERICA'S TOP 100 CD $28.99 PER MONTH $320.00 PER YEAR - -------------------------------------------------------------------------------- AMERICA'S TOP 40 PLUS AMC WGN Country Currents CD Animal Planet ZDTV Easy Instrumentals CD BBC America (1) FOX/SportsChannel Regional Network Eurostyle CD Black Entertainment Television (BET) Fiesta Mexicana CD Bravo Hot Hits CD Classic Sports CD Channels Jazz Traditions CD CNNFN/CNNI 70s Songbook CD Jukebox Gold CD CBS Eye on People Adult Alternative CD Kidtunes CD F/X Adult Contemporary CD Latin Styles CD Galavision Adult Favorites CD LDS Radio Network CD Game Show Network Americana CD Light Classical CD Independent Film Channel Big Band Era CD Modern Rock Alternative CD M2 Blues CD New Age CD MSNBC Classic Rock CD New Country CD Noggin (Available January 1999) Concert Classics CD Non-Stop Hip Hop CD Romance Classics Contemporary Christian CD Power Rock CD Toon Disney Contemporary Instrumentals CD Reggae CD Turner Classic Movies Contemporary Jazz CD Urban Beat CD Univision Country Classics CD - --------------------------------------------------------------------------------------------------------------------------------
12 DISH NETWORK PROGRAMMING PACKAGES ECHOSTAR I AND II
- ------------------------------------------------------------------------------------------------------------------------------------ DISH PIX PACKAGE PPV $15.00 PER MONTH NO ANNUAL AVAILABLE - ------------------------------------------------------------------------------------------------------------------------------------ A package of 10 channels - NO A LA CARTE AVAILABLE DISH on Demand Prices beginning at $2.99 Choose from services available in AT 40, AT 100 CD or Superstations (excluding 12 Channels Disney Channel, Toon Disney, Regional Sports Networks, MTV, M2, Nickelodeon, VH1, Nick At Nite's TV Land, FX, Romance Classics, IFC, Galavision, Univision, BBC America and ZDTV, Outdoor Channel) - ------------------------------------------------------------------------------------------------------------------------------------ INTERNATIONAL SERVICES SPANISH LANGUAGE PACKAGE A LA CARTE $4.99 PER MONTH $59.88 PER YEAR - ------------------------------------------------------------------------------------------------------------------------------------ RAI: $ 9.99 per month or $119.88 per year Includes the following 3 services: Fox Sports Americas ANTENNA: $14.99 per month or $179.88 per year Telemundo HTV - ------------------------------------------------------------------------------------------------------------------------------------ COMBINATION SUPERSTATION/BROADCAST NETWORKS PREMIUM SERVICES - ------------------------------------------------------------------------------------------------------------------------------------ Choose Any One: $4.99 per month or $59.88 per year Choose One Premium Pkg: $10.99 per month or $121.00 per year Choose Any Two: $7.99 per month or $95.88 per year Choose Two Premium Pkgs: $19.99 per month or $220.00 per year Choose All Three: $9.99 per month or $119.88 per year Choose Three Premium Pkgs: $27.99 per month or $308.00 per year Choose Four Premium Pkgs: $34.99 per month or $385.00 per year PACKAGES AVAILABLE PREMIUM PACKAGES AVAILABLE DISHNETS EAST Package ABC, CBS, NBC, FOX o HBO Package (6 channels) PBS - National Network Includes 5 channels of HBO plus HBO Family DISHNETS WEST Package o Showtime Package (8 channels) ABC, CBS, NBC, FOX* Includes 3 channels of Showtime plus Showtime PBS - National Network Extreme, 2 channels of TMC, FLIX and Sundance Channel *The West Coast FOX feed available September 1, 1998. o MultiChannel Cinemax (3 channels) Includes 3 channels of Cinemax SuperStation Package o Encore/STARZ! (4 channels) KTLA, KWGN, WPIX, WSBK, WWOR Includes 1 channel of Encore, 2 channels of Starz! and 1 channel of Encore Westerns - ------------------------------------------------------------------------------------------------------------------------------------ DISH NETS LOCAL BROADCAST NETWORKS PACKAGES ADDITIONAL SERVICES $4.99 PER MONTH EACH A LA CARTE - ------------------------------------------------------------------------------------------------------------------------------------ LOS ANGELES NEW YORK Disney Channel: $9.99 per month DMA DMA (Both East and West) ABC - KABC ABC - WABC The Golf Channel: $4.99 per month or $59.88 per year CBS - KCBS CBS - WCBS NBC - KNBC NBC - WNBC Outdoor Channel: $1.99 month or $23.88 per year FOX - KTTV FOX - WNYW PBS - National PBS - National DISH CD: $4.99 per month or $59.88 per year - -------------------------------------------------------------------------------- ADULT SERVICES Single Broadcast Networks: $1.50 each A LA CARTE - -------------------------------------------------------------------------------- MultiSport Package: $4.99 per month or Playboy: $12.99 per month (must subscribe to AT 100 CD) $59.88 per year Adult Vision: $5.99 per 90 minute block TeN $14.95 per month $164.45 per year - ------------------------------------------------------------------------------------------------------------------------------------
All prices, packages and programming subject to change without notice. Updated 12/14/98 13 DISH NETWORK ECHOSTAR III
- ----------------------------------------------------------------------------------------------------------------------------------- LOCAL NETWORK PACKAGES $4.99 PER MONTH EACH INTERNATIONAL SERVICES - ----------------------------------------------------------------------------------------------------------------------------------- ATLANTA BOSTON TV5 (French): $ 9.99 per month DMA DMA $119.88 PER YEAR ABC - WSB ABV - WCVB RTPi (Portuguese) $ 4.00 per month CBS - WGNX CBS - WBZ (must subscribe to AT40 or AT 100) $ 48.00 per year FOX - WAGA FOX - WFXT NBC - WXIA NBC - WHDH TV Japan (Japanese) $ 25.00 per month PBS - NATIONAL PBS - NATIONAL $300.00 per year TV Polonia (Polish) $ 14.99 per month* (must also subscribe to 2 Polskie $179.88 per year* Radio Services) ART (Arabic) $ 19.99 per month - ----------------------------------------------------------------------- ART Movies (Arabic) $239.88 per year CHICAGO DALLAS LBC (Arabic from Lebanon) DMA DMA (these three services sold only as a package/no a la carte available) ABC - WLS ABC - WFAA CBS - WBBM CBS - KTVT ZEE TV (Hindi) $ 14.99 per month FOX - WFLD FOX - KDFW $ 179.88 per year NBC - WMAQ NBC - KXAS PBS - NATIONAL PBS - NATIONAL TV Asia (Hindi/English/Gujarati) $ 14.99 per month $179.88 per year ZEE TV and TV Asia Package $ 24.99 per month $299.88 per year - ----------------------------------------------------------------------------------------------------------------------------------- MIAMI NEW YORK INTERNATIONAL RADIO SERVICES DMA DMA ----------------------------------------------------------- RFI: $ 1.00 per month ABC - WPLG ABC - WABC (Radio France Internationale) $12.00 per year CBS - WFOR CBS - WCBS FOX - WSVN FOX - WNYW Polskie Radio Program 1 $ 4.99 month* NBC - WTVJ NBC - WNBC Polskie Radio Program 3 $59.88 per year* PBS - NATIONAL PBS - NATIONAL (must subscribe to the 2 Polskie Radio and I TVPolonia video services) Radio Maria Italy (Italian) $ 5.00 per month $55.00 per year Radio Maria Poland (Polish) $ 5.00 per month $55.00 per year Radio Maria Spanish $ 5.00 per month $55.00 per year - ----------------------------------------------------------------------------------------------------------------------------------- PITTSBURGH WASHINGTON, D.C. A LA CARTE DMA DMA ------------------------------------------------------------ NASA Channel Free Access ABC - WTAE ABC - WJLA CBS - KDKA CBS - WUSA Bloomberg $ 1.50 per month NBC - WPXI FOX - WTTG $18.00 per year FOX - WPGH NBC - WRC PBS - National PBS - NATIONAL ----------------------------------------------------------- PPV ----------------------------------------------------------- Dish on Demand Prices beginning at $2.99 5 Channels *Must subscribe to 1 TVPolonia video and 2 Polskie Radio Services All prices, packages and programming subject to change without notice. Updated 12/14/98 - -----------------------------------------------------------------------------------------------------------------------------------
14 DISH NETWORK ECHOSTAR IV
- ------------------------------------------------------------------------------------------------------------------------------------ INTERNATIONAL SERVICES - ------------------------------------------------------------------------------------------------------------------------------------ DENVER PHOENIX TV Japan (Japanese) $ 25.00 per month DMA DMA $300.00 per year ABC - KMGH ABC - KNXV ART (Arabic) $ 19.99 per month CBS - KCNC CBS - KPHO ART Movies (Arabic) $239.88 per year NBC - KUSA NBC - KPNX LBC (Arabic from Lebanon) FOX - KDVR FOX - KSAZ (these three services sold only PBS - NATIONAL PBS - NATIONAL as a package/no a la carte available) - -------------------------------------------------------------------------------- ZEE TV (Hindi) $ 14.99 per month SALT LAKE CITY SAN FRANCISCO $ 179.88 per year DMA DMA TV Asia (Hindi/English/Gujarati) $ 14.99 per month ABC - KTVX ABC - KGO $ 179.88 per year CBS - KUTV CBS - KPIX ZEE TV and TV Asia Package $ 24.99 per month NBC - KSL NBC - KRON $ 299.88 per year FOX - KSTU FOX - KTVU PBS - NATIONAL PBS - NATIONAL - ------------------------------------------------------------------------------------------------------------------------------------ PPV A LA CARTE - ------------------------------------------------------------------------------------------------------------------------------------ DISH on Demand Prices beginning at $2.99 Bloomberg $1.50 per month 5 Channels $ 18.00 per year - ------------------------------------------------------------------------------------------------------------------------------------ All prices, packages and programming subject to change without notice. Updated 12/14/98
15 EXHIBIT B BILLING AND PAYMENT TERMS AND CONDITIONS The following are EchoStar's current billing and payment terms and conditions, and (except for payment terms) are subject to change. In the event of a conflict between this Exhibit B and the agreement to which this Exhibit B is attached, the agreement shall control. ORDERING EQUIPMENT
Event Responsibility - ------------------------------------------------------------------------------------------------------------------------------------ 1. OpTel faxes purchase order for hardware to EchoStar Commercial Services OpTel 2. EchoStar Commercial Services accepts or rejects purchase order: -Orders accepted before 10:30 AM Mountain time ordinarily shipped same day EchoStar -Orders accepted after 10:30 AM Mountain time ordinarily shipped next business day 3. Receivers purchased in this manner or from one of the Echosphere Regional offices OpTel/EchoStar will be eligible for 20% programming commissions (subject to the terms of the agreement). **(MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY) OpTel/EchoStar
PROGRAM BILLING
Event Responsibility - ------------------------------------------------------------------------------------------------------------------------------------ 1. All billing of programming will be as set forth in this Agreement EchoStar BILLING CYCLE FLOW CHART (CALENDAR DATES ARE HYPOTHETICAL AND FOR ILLUSTRATION ONLY): Account Activated on: date activation requested June 8, 1998 First Bill Sent: approx. activation date [June and July service) First Bill Due: (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION First Bill Delinquent: PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY) First Bill Late Second Bill Sent: July 16, 1998 [August service) (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION Soft Disconnect*: PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY) Second Bill Due: Hard Disconnect*: FEES AND DISCLOSURES: (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY) Transaction Fee $5.00 Sidegrades or downgrades of service; PPV movie purchase done by CSR (non-impulse) Additional Outlet Fee $4.99 Programming charge for additional receivers. PPV Disclosures Dish-on-Demand PPV is NON-REFUNDABLE; Channel locks should be set up to prevent accidental purchase; Phone line must be connected.
16 INVOICE INFORMATION AND FORMAT: (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY) PAYMENT TERMS BILLING OF NOT-RECURRING PROGRAMMING: (MATERIAL DENOTED *** HAS BEEN SEPARATELY FILED WITH THE COMMISSION PURSUANT TO AN APPLICATION FOR CONFIDENTIALITY) 17 EXHIBIT C PROGRAMMING ORDERS AND ACTIVATION The following are EchoStar's current procedures for programming orders and activation, and are subject to change. In the event of a conflict between this Exhibit B and the agreement to which this Exhibit B is attached, the agreement shall control. All time limits represent intended limits and are not to be interpreted as a guarantee. OpTel/EchoStar Order Entry Process Expected Flow Process
NEW CUSTOMER Event Responsibility - ------------------------------------------------------------------------------------------------------------------ 1. OpTel Call Center accepts new order from resident OpTel 2. OpTel Call Center schedules order for installation OpTel 3. Work order is fulfilled by technician OpTel 4. Technician installs set top equipment and calls EchoStar for authorization OpTel/EchoStar 5. Authorization signal is sent and records are updated with EchoStar EchoStar 6. Technician confirms installation and activation of programming and closes work order through dispatch center OpTel 7. Billing begins for new customer effective upon activation OpTel 8. OpTel is invoiced for customer subscription EchoStar MOVES, ADDS, CHANGES Event Responsibility - ------------------------------------------------------------------------------------------------------------------ 1. OpTel Call Center accepts change of service request from customer OpTel 2. OpTel Call Center commits 48-hour completion of order to customer OpTel 3. OpTel Call Center codes order as "office only" with special campaign code and "future billing" codes to generate automatic billing OpTel 4. Report is generated nightly selecting codes used for EchoStar changes OpTel 5. Report is faxed to EchoStar with authorization request within 24 hours of order OpTel 6. Authorization signal is sent within 24 hours from receipt of OpTel report and records are updated with EchoStar EchoStar 7. OpTel is invoiced for customer subscription EchoStar DISCONNECTS Event Responsibility - ------------------------------------------------------------------------------------------------------------------ 1. OpTel Call Center accepts disconnect request OpTel 2. OpTel Call Center schedules disconnect of service and set top recovery OpTel 3. Work order is fulfilled by technician OpTel 4. Technician disconnects set top and calls EchoStar for de-authorization OpTel/EchoStar 5. Authorization signal is terminated and records are updated with EchoStar EchoStar 6. Technician closes work order through dispatch center OpTel 7. Billing terminates for customer OpTel 8. OpTel is no longer billed for customer subscriber EchoStar
18
Today's Date: Your company Dealer Rec ------- xxxxxxxxxxxxxx Est. Final Activation Date: # ------ OpTel - DISH Network DBS Service Request Form Exhibit D to MDU Dealer Agreement 1. PLEASE CHECK THE COMMERCIAL PROPERTY TYPE THAT APPLIES: Hotel Hospital Condo MHP Other Bulk Nun Retirement Home -------- --------- --------- ---------- -------------------------- =========================================================================================================================== 2. DBS SYSTEM TYPE: L-Band: Transport: L-Band/Tranport ---------------------- ----------------- ----------------------------- AGENT CODE: --------- --------- --------- 3. PROPERTY INFORMATION: 4. BILLING INFORMATION: PROPERTY NAME: COMPANY NAME - -------------------------------------------------- -------------------------------------------------- ADDRESS MAILING ADDRESS - -------------------------------------------------- -------------------------------------------------- - -------------------------------------------------- -------------------------------------------------- CITY STATE CITY STATE - -------------------------------------------------- -------------------------------------------------- ZIP CODE ZIP CODE - -------------------------------------------------- -------------------------------------------------- TELEPHONE NUMBER: TELEPHONE NUMBER: - -------------------------------------------------- -------------------------------------------------- GENERAL CONTACT: FAX NUMBER: - -------------------------------------------------- -------------------------------------------------- BILLING CONTACT: -------------------------------------------------- TOTAL NUM. OF UNITS @ SITE: TECHNICAL CONTACT: - -------------------------------------------------- -------------------------------------------------- MARKETING CONTACT: -------------------------------------------------- 5. IF L-BAND - NUMBER OF BOXES NEEDED: 6. TOTAL NUMBER OF RECEIVERS Total Number of Services Requested: -------------------------------------------------- n/a (# of boxes X $200.00) (taken from the attached Activation Form) - -------------------------------------------------- Multiply this # by the figure in Schedule A of the 7. TOTAL DUE: (from #4 & #5 above) Attachment to the Affiliate Agreement. $ X $7.00 X 12 = #VALUE! - -------------------------------------------------- --------------------------------------------------- SERVICE DSR RECEIVER NO. DSR SMART CARD NO (include e or w) Example: R009912345 (11 digits) S0000123456 (11 digits) - ---------------- ------------------------------- ----------------------- - --------------- ------------------------------------ ------------------------------------------- - --------------- ------------------------------------ ------------------------------------------- - --------------- ------------------------------------ ------------------------------------------- - --------------- ------------------------------------ ------------------------------------------- - --------------- ------------------------------------ ------------------------------------------- - --------------- ------------------------------------ ------------------------------------------- - --------------- ------------------------------------ ------------------------------------------- - --------------- ------------------------------------ ------------------------------------------- - --------------- ------------------------------------ ------------------------------------------- - --------------- ------------------------------------ ------------------------------------------- OpTel - ----------------------------------------------------------------- Signature - ----------------------------------------------------------------- Type Name and Title - -----------------------------------------------------------------
Page 1 of _______ ECHO FAX: 800-906-4826 Voice: 800-454-0843 19 EXHIBIT E TRADEMARK LICENSE AGREEMENT THIS TRADEMARK LICENSE AGREEMENT (the "Agreement") is effective as of the ____________ day of ___________________________, 1999, by and between EchoStar Satellite Corporation having a principal place of business at 5701 S. Santa Fe Drive, Littleton, Colorado 80120 ("EchoStar"), and TVMAX Telecommunications, Inc., d/b/a OpTel, having a principal place of business at 1111 West Mockingbird Lane, 10th Floor, Dallas, Texas 75247, Attn: Vice President - Marketing ("Licensee"). A. ESC conducts business in worldwide locations as, among other things, a provider of direct broadcast satellite-delivered, multi-channel, digital audio and video services ("Programming") to commercial subscribers; and B. Licensee conducts business as, among other things, an MDU Dealer of satellite television products and services to commercial subscribers; and C. Licensee desires to be permitted to use the EchoStar trademarks, service marks and trade names set forth in Exhibit A hereto, as amended from time to time in ESC's sole discretion (the "Trademarks") as ESC, in its sole discretion, may authorize, from time to time, under a non-exclusive license, to promote and solicit orders for DISH Network Programming. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. ESC hereby grants to Licensee a non-exclusive, non-transferable, revocable license (the "License") to use the Trademarks and such other trademarks as ESC may from time to time expressly in writing permit Licensee to use during the term of this Agreement, and no other term or license whatsoever, in its local advertising and promotional materials and at its business locations. Licensee shall have no right to use the logos, service marks or trademarks of any programming providers, other than the logos, service marks and trademarks of programming providers that are contained in the advertising and promotional material provided to Licensee by ESC. No such materials shall indicate that any agreement of agency, partnership, joint venture, franchise or of exclusive or non-exclusive distributor exists between Licensee and ESC, unless ESC and Licensee enter into a separate written agreement permitting Licensee to do so. Notwithstanding the above, Licensee shall provide to ESC, at least fifteen (15) days prior to first use, an example of any advertising or promotional materials in which Licensee intends to use any Trademarks, and any such other trademarks, which use has not, within the past twelve months, been approved by ESC in substantially the form intended for use. ESC may reject and prohibit Licensee from using such materials if ESC believes that MDU Dealer's intended use would violate any agreement to which ESC is bound concerning the Trademarks or if ESC believes that MDU Dealer's intended use could tend to damage, disparage, diminish or otherwise injure any of the Trademarks or ESC or ESC's image or goodwill. ESC shall notify MDU Dealer in writing of its approval or disapproval of any proposed advertising or promotional materials or other use of any Trademark within ten (10) days from its receipt of same, failing which (evidenced by the passage of one business day following receipt by ESC of notice from MDU Dealer of such failure) ESC shall be deemed to have approved of MDU Dealer's intended use. If Licensee is required to, but fails to provide ESC with proposed advertising or promotional materials at least fifteen (15) days prior to first use, ESC shall have just cause to immediately terminate the License by providing written notice to Licensee to that effect. This Agreement is not intended, nor shall it be construed, as creating any agreement of agency, partnership, joint venture, franchise or of exclusive or non-exclusive distributor, or as creating any obligation on the part of ESC to enter into any such agreement with Licensee. Further, this Agreement is not intended, nor shall it be construed, as providing any rights to Licensee to purchase or sell products or programming manufactured and/or distributed by ESC. Licensee expressly recognizes and agrees that any goodwill now existing or hereafter created through any sales by Licensee of products or programming manufactured and/or distributed by ESC, shall inure to ESC's sole benefit. This License shall be effective until terminated by either party in accordance with the terms of this Agreement, or until termination of the MDU Dealer Agreement between ESC and Licensee. 2. The License granted by ESC is granted to Licensee only. Licensee has no authority to transfer or grant any sublicense to any other entity or individual (except for any subsidiary or affiliated entity through which MDU Dealer, in accordance with Section 6.1 of the MDU Dealer Agreement, may provide programming to an MDU Building (as defined in the MDU Dealer Agreement), which entity shall also be bound by the restrictions, terms and conditions contained herein) for any reason, and if Licensee does so, such action shall terminate the License granted herein, at ESC's option, at any time thereafter. Licensee shall immediately cease using Trademarks upon termination or expiration of this Agreement for any reason. Upon expiration or termination of this Agreement, at ESC's option Licensee shall immediately destroy or deliver to ESC any and all advertising and promotional materials in Licensee's possession with Trademarks on them. If ESC requests destruction of advertising and promotional materials, Licensee shall promptly execute an affidavit representing at a minimum that such materials were destroyed, and the date and means of destruction. 3. Licensee expressly recognizes and acknowledges that the License, as well as any past use of the Trademarks in any manner whatsoever by Licensee (including but not limited to use on signs, business cards, or in advertisements), shall not confer upon Licensee any proprietary rights or interest to any Trademarks including, but not limited to any existing or future goodwill in the Trademarks. All goodwill in the Trademarks shall inure to ESC's sole benefit. Further, Licensee waives any and all past, present, or future claims it has or might have to the Trademarks, and acknowledges that as between ESC and Licensee, ESC has the exclusive rights to own and use the Trademarks, and that ESC retains full ownership of the Trademarks notwithstanding the License granted herein. While Licensee has no right or authority to do so, in the event that Licensee has previously, or in the future reserves, files, or registers any of the Trademarks of ESC, Licensee agrees to notify ESC immediately, and immediately upon request of ESC, to assign any and all interest to ESC that is obtained through the reservation, filing, or registration of the Trademarks in the U.S. or any foreign jurisdiction, and hereby acknowledges that any such reservation, filing, or registration of the Trademarks, whenever occurring, shall be on behalf of and for the sole benefit of ESC, and Licensee waives all claims or rights to any compensation whatsoever therefor. Licensee's obligations in this paragraph shall survive the expiration or termination of this Agreement. 4. Nothing in this Agreement shall be construed to bar ESC from protecting its right to the exclusive use of its Trademarks against infringement thereof by any party or parties, including Licensee, either during the term of this Agreement or following any expiration or termination 20 EXHIBIT E TRADEMARK LICENSE AGREEMENT THIS TRADEMARK LICENSE AGREEMENT (the "Agreement") is effective as of the _______ day of _____________________, 1999, by and between EchoStar Satellite Corporation having a principal place of business at 5701 S. Santa Fe Drive, Littleton, Colorado 80120 ("EchoStar"), and TVMAX Telecommunications, Inc., d/b/a OpTel, having a principal place of business at 1111 West Mockingbird Lane, Dallas, Texas 75247, Attn: Vice President - Marketing ("Licensee"). A. ESC conducts business in worldwide locations as, among other things, a provider of direct broadcast satellite-delivered, multi-channel, digital audio and video services ("Programming") to commercial subscribers; and B. Licensee conducts business as, among other things, an MDU Dealer of satellite television products and services to commercial subscribers; and C. Licensee desires to be permitted to use the EchoStar trademarks, service marks and trade names set forth in Exhibit A hereto, as amended from time to time in ESC's sole discretion (the "Trademarks") as ESC, in its sole discretion, may authorize, from time to time, under a non-exclusive license, to promote and solicit orders for DISH Network Programming. Now, THEREFORE, the parties hereto hereby agree as follows: 1. ESC hereby grants to Licensee a non-exclusive, non-transferable, revocable license (the "License") to use the Trademarks and such other trademarks as ESC may from time to time expressly in writing permit Licensee to use during the term of this Agreement, and no other term or license whatsoever, in its local advertising and promotional materials and at its business locations. Licensee shall have no right to use the logos, service marks or trademarks of any programming providers, other than the logos, service marks and trademarks of programming providers that are contained in the advertising and promotional material provided to Licensee by ESC. No such materials shall indicate that any agreement of agency, partnership, joint venture, franchise or of exclusive or non-exclusive distributor exists between Licensee and ESC, unless ESC and Licensee enter into a separate written agreement permitting Licensee to do so. Notwithstanding the above, Licensee shall provide to ESC, at least fifteen (15) days prior to first use, an example of any advertising or promotional materials in which Licensee intends to use any Trademarks, and any such other trademarks, which use has not, within the past twelve months, been approved by ESC in substantially the form intended for use. ESC may reject and prohibit Licensee from using such materials if ESC believes that MDU Dealer's intended use would violate any agreement to which ESC is bound concerning the Trademarks or if ESC believes that MDU Dealers intended use could tend to damage, disparage, diminish or otherwise injure any of the Trademarks or ESC or ESC's image or goodwill. ESC shall notify MDU Dealer in writing of its approval or disapproval of any proposed advertising or promotional materials or other use of any Trademark within ten (10) days from its receipt of same, failing which (evidenced by the passage of one business day following receipt by ESC of notice from MDU Dealer of such failure) ESC shall be deemed to have approved of MDU Dealer's intended use. If Licensee is required to, but fails to provide ESC with proposed advertising or promotional materials at least fifteen (15) days prior to first use, ESC shall have just cause to immediately terminate the License by providing written notice to Licensee to that effect. This Agreement is not intended, nor shall it be construed, as creating any agreement of agency, partnership, joint venture, franchise or of exclusive or non-exclusive distributor, or as creating any obligation on the part of ESC to enter into any such agreement with Licensee. Further, this Agreement is not intended, nor shall it be construed, as providing any rights to Licensee to purchase or sell products or programming manufactured and/or distributed by ESC. Licensee expressly recognizes and agrees that any goodwill now existing or hereafter created through any sales by Licensee of products or programming manufactured and/or distributed by ESC, shall inure to ESC's sole benefit. This License shall be effective until terminated by either party in accordance with the terms of this Agreement, or until termination of the MDU Dealer Agreement between ESC and Licensee. 2. The License granted by ESC is granted to Licensee only. Licensee has no authority to transfer or grant any sublicense to any other entity or individual (except for any subsidiary or affiliated entity through which MDU Dealer, in accordance with Section 6.1 of the MDU Dealer Agreement, may provide programming to an MDU Building (as defined in the MDU Dealer Agreement), which entity shall also be bound by the restrictions, terms and conditions contained herein) for any reason, and if Licensee does so, such action shall terminate the License granted herein, at ESC's option, at any time thereafter. Licensee shall immediately cease using Trademarks upon termination or expiration of this Agreement for any reason. Upon expiration or termination of this Agreement, at ESC's option Licensee shall immediately destroy or deliver to ESC any and all advertising and promotional materials in Licensee's possession with Trademarks on them. If ESC requests destruction of advertising and promotional materials, Licensee shall promptly execute an affidavit representing at a minimum that such materials were destroyed, and the date and means of destruction. 3. Licensee expressly recognizes and acknowledges that the License, as well as any past use of the Trademarks in any manner whatsoever by Licensee (including but not limited to use on signs, business cards, or in advertisements), shall not confer upon Licensee any proprietary rights or interest to any Trademarks including, but not limited to any existing or future goodwill in the Trademarks. All goodwill in the Trademarks shall inure to ESC's sole benefit. Further, Licensee waives any and all past, present, or future claims it has or might have to the Trademarks, and acknowledges that as between ESC and Licensee, ESC has the exclusive rights to own and use the Trademarks, and that ESC retains full ownership of the Trademarks notwithstanding the License granted herein. While Licensee has no right or authority to do so, in the event that Licensee has previously, or in the future reserves, files, or registers any of the Trademarks of ESC, Licensee agrees to notify ESC immediately, and immediately upon request of ESC, to assign any and all interest to ESC that is obtained through the reservation, filing, or registration of the Trademarks in the U.S. or any foreign jurisdiction, and hereby acknowledges that any such reservation, filing, or registration of the Trademarks, whenever occurring, shall be on behalf of and for the sole benefit of ESC, and Licensee waives all claims or rights to any compensation whatsoever therefor. Licensee's obligations in this paragraph shall survive the expiration or termination of this Agreement. 4. Nothing in this Agreement shall be construed to bar ESC from protecting its right to the exclusive use of its Trademarks against infringement therefore by any party or parties, including Licensee, either during the term of this Agreement or following any expiration or termination 21 of Licensee's right to use the Trademarks pursuant to this Agreement. Licensee will promptly and fully advise ESC of any use of any mark that may appear to infringe the Trademarks. Licensee will also fully cooperate with ESC in defense and protection of the Trademarks, at ESC's expense. Similarly, nothing in this Agreement shall be construed to require that ESC take any action to protect the Trademarks in any instance, and ESC shall not be liable to Licensee in any manner whatsoever for failure to take any such action. 5. This Agreement shall continue for a period of time equal to the term of the MDU Dealer Agreement between ESC and Licensee, unless terminated earlier for a reason provided herein. 6. Any and all disputes, claims or actions that may arise under or out of this Agreement shall be governed, interpreted and enforced in accordance with the laws of the State of Colorado, and shall otherwise be resolved in accordance with the provisions set forth in Section 14.4 of the MDU Dealer Agreement between ESC and Licensee, to which this Trademark License Agreement is attached. 7. This Agreement may be executed in two or more counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by their duly authorized representatives as of the day and year first above written. ECHOSTAR SATELLITE CORPORATION TVMAX TELECOMMUNICATIONS, INC. By: [ILLEGIBLE] By: [ILLEGIBLE] ---------------------------------- ------------------------------------- Title: Executive Vice President Title: President & CEO ------------------------------- ---------------------------------- 22 EXHIBIT A TO TRADEMARK LICENSE AGREEMENT [ECHOSTAR LOGO] [DISH [NETWORK LOGO] [DISH LOGO] EX-10.28 15 CONVERSION AND EXCHANGE AGREEMENT 1 EXHIBIT 10.28 VPC CORPORATION 300 VIGER AVENUE EAST MONTREAL, QUEBEC H2X 3W4 CANADA LE GROUPE VIDEOTRON LTEE 300 VIGER AVENUE EAST MONTREAL, QUEBEC H2X 3W4 CANADA May 18, 1999 OpTel, Inc. 1111 West Mockingbird Lane Dallas, Texas 75247 Ladies and Gentlemen: This letter (this "Agreement") shall confirm the agreement of the undersigned as follows: 1. On or before the earlier to occur of August 29, 1999 or the 90th day following the consummation of an initial public offering by OpTel, Inc. (the "Company"), VPC Corporation ("VPC") shall convert (i) all of its shares of Class B Common Stock, par value $.01 per share (the "Class B Common"), of the Company into shares of the Company's Class A Common Stock, par value $.01 per share (the "Class A Common"), on a share for share basis and (ii) all of its shares of the 9.75% Series A Preferred Stock, par value $.01 per share (the "Series A Preferred"), of the Company into shares of Class B Common Stock and, immediately thereafter, VPC shall exchange VPC's shares of Class B Common for shares of the Class A Common, on a share for share basis. Notwithstanding the foregoing, VPC shall only be obligated to convert its shares of Class B Common and Series A Preferred into Class A Common if the initial public offering of the Class A Common, on substantially the same terms as are described in the Company's Registration Statement on Form S-1 (SEC File No. 333-56231), is consummated. 2. VPC and Le Groupe Videotron Ltee ("GVL") jointly and severally shall indemnify, defend and hold the Company harmless from and against any and all losses, liabilities, obligations, damages, claims, deficiencies, costs and expenses based upon, attributable to or resulting from or arising out of or relating to any failure by VPC to satisfy its obligations under this Agreement. 3. VPC agrees that due to the unique subject matter of this Agreement, monetary damages will be insufficient to compensate the Company in the event of VPC's failure to satisfy 2 its obligations under this Agreement. Accordingly, VPC agrees that the Company shall be entitled (without prejudice to any other right or remedy to which it may be entitled) to an appropriate decree of specific performance, or an injunction restraining any violation of this Agreement or other equitable remedies to enforce this Agreement (without establishing the likelihood of irreparable injury or posting bond or other security), and VPC waives in any action or proceeding brought to enforce this Agreement the defense that there exists an adequate remedy at law. 4. EACH PARTY HERETO IRREVOCABLY CONSENTS AND AGREES THAT ANY LEGAL ACTION, SUIT OR PROCEEDING AGAINST IT WITH RESPECT TO ITS OBLIGATIONS OR LIABILITIES UNDER OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT BY SUCH PARTY ONLY IN THE COURTS OF THE STATE OF DELAWARE SITTING IN THE COUNTY OF KENT, STATE OF DELAWARE OR, IN THE EVENT (BUT ONLY IN THE EVENT) SUCH COURT DOES NOT HAVE JURISDICTION OVER SUCH ACTION, SUIT OR PROCEEDING, IN THE UNITED STATES DISTRICT COURT SITTING IN COUNTY OF KENT, STATE OF DELAWARE, AND EACH PARTY HERETO HEREBY IRREVOCABLY ACCEPTS AND SUBMITS TO THE JURISDICTION OF EACH OF THE AFORESAID COURTS IN PERSONAM, WITH RESPECT TO ANY SUCH ACTION, SUIT OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, CLAIMS FOR INTERIM RELIEF, COUNTERCLAIMS, ACTIONS WITH MULTIPLE DEFENDANTS AND ACTIONS IN WHICH SUCH PARTY IS IMPLIED). EACH PARTY IRREVOCABLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A JURY TRIAL IN ANY LEGAL ACTION, SUIT OR PROCEEDING WITH RESPECT TO, OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. 5. GVL AND VPC CONSENT TO THE SERVICE OF PROCESS UPON EACH OF THEM IN CONNECTION WITH ANY PROCEEDING INSTITUTED UNDER THIS AGREEMENT BY TELECOPY OR BY CERTIFIED OR REGISTERED MAIL, POSTAGE PREPAID, WHICH SERVICE OF PROCESS WILL BE DEEMED DELIVERED, IF SENT BY TELECOPY, UPON CONFIRMATION OF RECEIPT BY THE ADDRESSEE, OR IF SENT BY MAIL, THREE DAYS AFTER THE DATE OF MAILING, TO THE PARTIES AT THE FOLLOWING ADDRESSES: TO VPC CORPORATION AT: VPC CORPORATION 300 VIGER AVENUE EAST MONTREAL, QUEBEC H2X 3W4 CANADA TELECOPY: (514) 985-8515 3 TO LE GROUPE VIDEOTRON LTEE AT: LE GROUPE VIDEOTRON LTEE 300 VIGER AVENUE EAST MONTREAL, QUEBEC H2X 3W4 CANADA TELECOPY: (514) 985-8515 6. THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS. Sincerely yours, VPC Corporation By: /s/ JAYNE L. STOWELL --------------------------- Name: Jayne L. Stowell Title: Director Le Groupe Videotron Ltee By: /s/ ALAIN MICHEL --------------------------- Name: Alain Michel Title: Director ACCEPTED AND AGREED this 18th day of May, 1999 OpTel, Inc. By: /s/ MICHAEL E. KATZENSTEIN ----------------------------- Name: Michael E. Katzenstein Title: Vice President, Legal Affairs, General Counsel and Secretary EX-23.2 16 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 7 to the Registration Statement No. 333-56231 of OpTel, Inc. on Form S-1 of our reports dated October 6, 1998, on the financial statements and financial statement schedule of OpTel, Inc. and to the use of our report dated May 15, 1998 on the financial statement of the Assets and Liabilities of ICS Communications, LLC acquired by OpTel, Inc. for the year ended December 31, 1997, appearing in the Prospectus or elsewhere in this Registration Statement. We also consent to the reference to us under the headings "Summary Consolidated Financial and Operating Data", "Selected Historical Consolidated Financial and Operating Data" and "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLP May 18, 1999 Dallas, Texas -----END PRIVACY-ENHANCED MESSAGE-----