-----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, PyWsoJmOU2P2F5NrTANPRDWKqApYI0hUy5Iyv+rOIwxq7oLmPGQyFy1qJAb/6jyg PdAvqlrJ14K/9fPElh2RYQ== 0000950134-98-006038.txt : 19980721 0000950134-98-006038.hdr.sgml : 19980721 ACCESSION NUMBER: 0000950134-98-006038 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19980720 SROS: NASD 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: 98668605 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: 1114 W MOCKINGBIRD LANE CITY: DALLAS STATE: TX ZIP: 75247 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 20, 1998 REGISTRATION NO. 333-56231 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- AMENDMENT NO. 2 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: ERIC SIMONSON, ESQ. MICHAEL E. KATZENSTEIN, ESQ. JONATHAN A. SCHAFFZIN, ESQ. KRONISH, LIEB, WEINER & HELLMAN LLP OPTEL, INC. CAHILL GORDON & REINDEL 1114 AVENUE OF THE AMERICAS 1111 W. MOCKINGBIRD LANE 80 PINE STREET NEW YORK, NEW YORK 10036-7798 DALLAS, TEXAS 75247 NEW YORK, NEW YORK 10005 (212) 479-6000 (214) 634-3800 (212) 701-3000
--------------------- 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.... $100,000,000 $29,500(2) - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act. (2) Previously paid on June 5, 1998. --------------------- 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 OPTEL, INC. CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K, SHOWING THE LOCATION IN THE PROSPECTUS OF THE ITEMS ON FORM S-1
NAME AND CAPTION IN FORM S-1 CAPTION OR LOCATION IN PROSPECTUS ---------------------------- --------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus..... Outside Front Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus.............................. Inside Front Cover Page; Additional Information; Outside Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............... Prospectus Summary; Risk Factors 4. Use of Proceeds............................ Use of Proceeds 5. Determination of Offering Price............ Underwriting 6. Dilution................................... Dilution 7. Selling Stockholders....................... Principal and Selling Stockholders 8. Plan of Distribution....................... Outside Front Cover Page; Underwriting 9. Description of Capital Stock to be Registered................................. Outside Front Cover Page; Prospectus Summary; Description of Capital Stock; Certain Federal Income Tax Considerations 10. Interests of Named Experts and Counsel..... Legal; Experts 11. Information with Respect to the Registrant................................. Prospectus Summary; Risk Factors; Dividend Policy; Capitalization; Selected Historical Consolidated Financial and Operating Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Principal and Selling Stockholders; Certain Relationships and Related Transactions; Description of Capital Stock; Description of Certain Indebtedness; Certain Market Information; Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................ Management
3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 20, 1998 PROSPECTUS SHARES OPTEL, INC. [LOGO] CLASS A COMMON STOCK ------------------ Of the shares (the "Shares") of Class A Common Stock, par value $.01 per share (the "Class A Common Stock"), offered hereby (the "Offering"), Shares are being offered by OpTel, Inc. ("OpTel" or the "Company") and Shares are being offered by certain stockholders of the Company (the "Selling Stockholders"). See "Principal and Selling Stockholders." The Company will not receive any proceeds from the sale of Shares by the Selling Stockholders. Prior to the Offering, there has been no public market for the Class A Common Stock of the Company. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. OpTel has applied for quotation of the Class A Common Stock on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") National Market System (the "Nasdaq National Market") under the symbol "OTEL" upon effectiveness of the Registration Statement. Immediately following the Offering, the Company will have outstanding shares of two classes of common stock, the Class A Common Stock and the Class B Common Stock, par value $.01 per share (the "Multi-Vote Common" and, together with the Class A Common Stock, the "Common Stock"). The rights of the holders of the Class A Common Stock and the Multi-Vote Common are substantially identical, except that (i) holders of the Class A Common Stock are entitled to one vote for each issued and outstanding share and holders of the Multi-Vote Common are entitled to 10 votes for each issued and outstanding share and (ii) the Multi-Vote Common is fully convertible into Class A Common Stock at any time at the option of the holder or automatically upon the occurrence of a Conversion Event (as defined herein), on a one-for-one basis. Except as provided by law, holders of both classes vote together as one class on all matters submitted to a vote of stockholders including the election of directors. See "Description of Capital Stock." Immediately following the Offering, Le Groupe Videotron Ltee ("GVL"), owner of the second largest cable television operator in Canada, will own approximately % of the outstanding Multi-Vote Common, representing approximately % of the total voting power of the outstanding Common Stock. See "Risk Factors -- Control by GVL" and "Principal and Selling Stockholders." SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS (1) COMPANY(2) STOCKHOLDERS - -------------------------------------------------------------------------------------------------------------------------- Per Share............................ $ $ $ $ - -------------------------------------------------------------------------------------------------------------------------- Total(3)............................. $ $ $ $ - -------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted to the Underwriters a 30-day option to purchase up to an aggregate of additional shares of the Class A Common Stock on the same terms and conditions as set forth above solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ------------------ The Shares are being offered by the several Underwriters named herein, subject to prior sale, when, as and if delivered and accepted by them and subject to certain conditions. The Underwriters reserve the right to withdraw, cancel or modify the Offering and to reject orders in whole or in part. It is expected that delivery of the Class A Common Stock will be made against payment therefor on or about , 1998, at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. SALOMON SMITH BARNEY GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC. CIBC OPPENHEIMER , 1998 4 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ALSO ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET. SEE "UNDERWRITING." 2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information included elsewhere in this Prospectus, including the Consolidated Financial Statements and the notes thereto. As used in this Prospectus, the terms "Company" or "OpTel" mean OpTel, Inc., a Delaware corporation, and its subsidiaries, except where the context otherwise requires. Certain terms used herein are defined in the glossary attached hereto as Appendix A. References to fiscal years throughout this Prospectus are to the Company's fiscal years, which end on August 31 of each calendar year. Unless otherwise indicated, the information in this Prospectus (i) assumes an initial public offering price of $ per share, (ii) assumes the Underwriters' over-allotment option will not be exercised, (iii) gives effect to the conversion of the outstanding shares of OpTel's Class C Common Stock, par value $.01 per share ("Non-Voting Common"), into shares of Class A Common Stock upon consummation of the Offering, (iv) gives effect to the conversion of the outstanding shares of OpTel's 9.75% Series A Preferred Stock, par value $.01 per share ("Series A Preferred"), into shares of Multi-Vote Common upon consummation of the Offering, (v) gives effect to the conversion of the outstanding shares of OpTel's 8% Series B Preferred Stock, par value $.01 per share ("Series B Preferred"), into shares of Class A Common Stock promptly following the consummation of the Offering and (vi) gives effect to a for 1 stock split which will be effected concurrently with the consummation of the Offering (the "Split"). Prospective investors should carefully consider the factors set forth in "Risk Factors." This Prospectus contains "forward-looking" statements concerning the Company's operations, economic performance and financial condition, which are subject to inherent risks and uncertainties, including those identified under "Risk Factors." THE COMPANY OpTel is a leading network based provider of integrated communications services, including local and long distance telephone and cable television services, to residents of multiple dwelling units ("MDUs") in the United States. As a rapidly growing integrated communications provider ("ICP"), OpTel continues to build upon its position as the largest provider of private cable television services to MDUs in the United States. In each market that it serves, OpTel seeks to become the principal competitor in the MDU marketplace to the incumbent local exchange carrier ("ILEC") and the incumbent franchise cable television operator by providing a package of voice, video and Internet access services at competitive prices. OpTel believes its contractual relationships with MDU owners and associations and its ability to deliver an integrated service offering to MDU residents over its own networks provide it with a competitive advantage. Industry sources estimate that annual revenues generated by the U.S. communications industry in 1997 were approximately $223 billion (consisting of approximately $192 billion in telecommunications revenues and $31 billion in cable television revenues). The Company believes that a significant portion of such revenue is attributable to residential users. OpTel recognizes the opportunity to address the residential market by focusing on providing integrated services to MDUs. MDUs comprise a wide variety of high density residential complexes, including high- and low-rise apartment buildings, condominiums, cooperatives, town houses and mobile home communities. According to 1990 U.S. Census Bureau data, there are more than 13.2 million dwelling units in MDUs with greater than 10 dwelling units in the United States. Within the MDU market, the Company focuses on MDUs of 150 or more dwelling units ("Large MDUs"). Based on industry sources, the Company believes that, within its existing markets, as of March 25, 1998, there were approximately 3.0 million dwelling units within these Large MDUs. The Company is currently building telecommunications infrastructure in its serviced markets and expects, by the end of calendar 1999, to be in a position to offer facilities based telecommunications services in each of its major markets. The Company presently offers services where it has a right of entry agreement ("Right of Entry") with an MDU owner to provide its cable television and/or telecommunications services. The Company classifies a unit as "passed" if it is within an MDU for which the Company has a Right of Entry and the Company has connected the equipment necessary to provide services. As of May 31, 1998, the Company had 369,968 units passed for cable television services. At that date, OpTel had 202,355 cable television subscribers and 7,046 telecommunication lines in service. 3 6 OpTel began operations in April 1993 with a strategy of consolidating the then fragmented "private cable" television, or non-franchise cable television, industry serving MDUs. Securing long-term Rights of Entry has been an integral element of this strategy. The Company's Rights of Entry typically have original terms of 10 to 15 years (five years for Rights of Entry with condominium associations). The weighted average unexpired term of the Company's Rights of Entry was approximately eight years as of May 31, 1998 (assuming the Company's exercise of available renewal options). Rights of Entry generally provide financial incentives to the property owners to promote and sell the Company's cable television and telecommunications services to MDU residents. The Company provides video programming to MDUs primarily under exclusive Rights of Entry. The Company initially offered shared tenant telecommunications services ("STS") to MDUs serviced under telephone Rights of Entry utilizing remote private branch exchange ("PBX") switches. In accordance with its communications strategy, the Company has begun the process of migrating its STS traffic to its own central office switches and its own network facilities. The Company intends to grow its business by negotiating additional Rights of Entry to serve MDUs currently served by other providers and newly-constructed MDUs, by acquiring other existing operators that serve MDUs, as appropriate, and by providing MDUs it currently serves for cable television with additional services, such as telephone and Internet access. The Company currently provides cable television and telecommunications services in a number of metropolitan areas including Houston, Dallas-Fort Worth, Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco, Chicago, Atlanta and Orlando-Tampa. The Company has commenced offering central office switched local exchange services in Houston and Dallas-Fort Worth and is licensed as a competitive local exchange carrier ("CLEC") in each of its other major markets. The Company selected its current markets based upon their growth characteristics, competitive conditions, MDU concentrations, favorable demographics and regulatory environment. Since April 1995, OpTel has been indirectly majority owned by Le Groupe Videotron Ltee ("GVL"), which also owns the second largest cable television operator in Canada (based on number of subscribers). GVL has invested approximately $250 million in OpTel in the form of equity capital and subordinated convertible notes (including accrued interest). See "-- Recent Developments." These invested amounts have been critical to OpTel's growth. In addition, key members of the Company's management team gained experience in the competitive offering of telecommunications and cable television to residential markets while serving as executives of a GVL affiliate in the United Kingdom. OpTel management's extensive operating experience in both the telecommunications and cable television industries, including the construction and design of networks and sales and customer support, provides OpTel with significant expertise in managing and developing an infrastructure to support voice, video and Internet access operations. OpTel was incorporated in Delaware in July 1994 as the successor to a California limited partnership that was organized in April 1993. The Company's principal offices are located at 1111 W. Mockingbird Lane, Dallas, Texas 75247, and its telephone number is (214) 634-3800. STRATEGY OpTel's goal is to become the nation's largest ICP focusing on MDU markets. OpTel's strategy for achieving this goal includes the following key components: Provide an Integrated Service Offering. OpTel believes that by utilizing a single advanced network infrastructure it can be among the first to market a competitive integrated package of voice and video services in its target markets. The Company plans to supplement its voice and video offerings with high speed Internet access in all of its serviced markets. The Company also intends to introduce integrated billing of its bundled services during fiscal 1999. Deploy Cost Effective Networks. OpTel's networks are specifically designed to provide services to MDUs. A substantial amount of the capital required to provide property-specific voice and video services to an individual MDU is invested only after the Company and the owner of the MDU have entered into a Right of Entry for the MDU and therefore will only be incurred shortly before properties are first brought into service or as needed to bring non-network served MDUs onto the Company's networks. In markets served by the Company's microwave networks, OpTel expects that the incremental capital required for it to launch central 4 7 office switched telecommunications services and to connect customers will be lower than that of its competitors. As a result, OpTel expects to enjoy a lower network cost structure than certain of its competitors. Pursue Focused Marketing Strategy. The Company negotiates long term Rights of Entry with MDU owners under which the Company obtains, among other things, the exclusive right to provide cable television services to an MDU or group of MDUs and an undertaking by the MDU owner to promote OpTel as the preferred telecommunications alternative to the ILEC within the MDU. The Rights of Entry generally provide MDU owners with financial incentives to work closely with the Company to promote its products and services. The Company offers prospective customers the opportunity to subscribe for Company services at the same time they sign their unit leases. The Company believes this access, coupled with customer preference for a single source of cable television and telecommunications services, significantly enhances its customer marketing efforts. Provide Superior Customer Service. The Company has dedicated resources to providing services that attract and retain subscribers. The Company has a national customer service center staffed with knowledgeable representatives to address the needs of customers 24-hours-a-day, seven-days-a-week and dedicated local service teams that provide prompt installation and response to customer service calls. Because the Company believes that the best way to control the quality and consistency of technical and field services is to train and supervise the service technicians, the Company relies primarily on its own personnel to perform these functions. Pursue Selective Acquisitions and Strategic Relationships. To expand its markets and to achieve critical mass in its existing markets, the Company often evaluates opportunities to make acquisitions. Since May 1996, the Company has completed six acquisitions representing approximately 700 MDUs served and 103,000 subscribers. In addition, the Company has entered into a strategic relationship for the delivery of high speed Internet access services and will continue to evaluate other alliances, including those permitting it to host additional third-party traffic on its switches. 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 has recently begun introducing central office switched telecommunications services to MDUs. 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 Class A Common Stock. RECENT DEVELOPMENTS The Company commenced operating a central office telephone switch in Houston in September 1997 and has migrated most of its telecommunications subscribers in the Houston market to this switch. The Company has recently commenced operating a central office telephone switch in the Dallas-Fort Worth market and intends to migrate the MDUs it currently serves through PBX switches in that market to that central office switch over the coming months. On April 13, 1998, OpTel closed the initial phase of the acquisition of the private cable television and telecommunications service agreements and related assets of Interactive Cable Systems, Inc. ("ICS") in Houston, Dallas-Fort Worth, Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco, Chicago, Atlanta, Orlando-Tampa, Indianapolis, Austin and greater Washington, D.C. (the "ICS Operations"). As of May 31, 1998, OpTel had acquired approximately 66,000 cable television and telecommunications units under contract (or approximately 72% of the approximately 90,000 units under contract to be acquired). A corresponding percentage of the aggregate $80.8 million purchase price remains in escrow 5 8 subject to release upon fulfillment of closing conditions. While the Company expects the acquisition of the remaining units to be completed over the next few months, the acquisition of these units is subject to certain conditions, including the receipt of third party consents, and there can be no assurance that the balance of the acquisition will be consummated. See "Risk Factors -- Risks Associated with Acquisitions." The $80.8 million purchase price comprises approximately $4.5 million in cash, approximately $16.1 million in shares of Class A Common Stock, approximately $59.4 million in shares of Series B Preferred plus assumed liabilities of $0.8 million. Promptly following the consummation of the Offering, the Series B Preferred will be converted into shares of Class A Common Stock (based on an assumed initial public offering price of $ per share). Effective March 1, 1998, the Company's majority stockholder, VPC Corporation ("VPC"), an indirect wholly-owned subsidiary of GVL, exchanged $139.2 million of the Company's 15% Convertible Notes (the "GVL Notes"), constituting all of the outstanding GVL Notes (including accrued interest), for approximately 6,962 shares of Series A Preferred. Upon consummation of the Offering, the Series A Preferred will be converted into shares of Multi-Vote Common (based on an assumed initial public offering price of $ per share). On July 7, 1998, the Company consummated a private placement (the "Notes Offering") of $200 million principal amount of 11 1/2% Senior Notes Due 2008 (the "1998 Notes"). The net proceeds of the Notes Offering were approximately $194.1 million. Of this amount, approximately $126.3 million was used to repay all outstanding amounts under the Company's senior secured credit facility (the "Senior Credit Facility") and to pay other costs associated with terminating the Senior Credit Facility (the "Senior Credit Facility Retirement"), and approximately $22.0 million was placed in an escrow account to fund the first two interest payments on the 1998 Notes. See "Description of Certain Indebtedness -- The 1998 Notes." 6 9 THE OFFERING Class A Common Stock offered by the Company...................... ________ shares Class A Common Stock offered by the Selling Stockholders......... ________ shares Total....................... ________ shares Common Stock outstanding after the Offering..................... ________ shares of Class A Common Stock(1) shares of Multi-Vote Common(2) shares of Common Stock(1) Use of Proceeds.................. The Company intends to use the net proceeds from the Offering for capital expenditures related to the purchase and installation of communications equipment and for general corporate purposes, including working capital related to its expansion into new markets. The Company will not receive any proceeds from the sale of Shares by the Selling Stockholders. See "Use of Proceeds." Proposed Nasdaq National Market Symbol........................... OTEL Risk Factors..................... For a description of certain risks inherent in an investment in the Class A Common Stock, see "Risk Factors." - --------------- (1) Excludes (i) 15,657.87 shares of Class A Common Stock issuable upon exercise of presently exercisable stock options granted to officers, employees and consultants at a weighted average exercise price of $84.10 per share and (ii) 35,127.22 shares of Class A Common Stock issuable upon exercise of presently exercisable warrants at a weighted average exercise price of $59.81 per share. (2) The Multi-Vote Common is fully convertible into Class A Common Stock, on a one-for-one basis, at any time at the option of the holder or upon the occurrence of a Conversion Event. Upon consummation of the Offering, each of (i) the transfer of beneficial ownership of the Multi-Vote Common to any person or entity that is not a Permitted Holder (defined generally as certain affiliates of GVL and Caisse de depot et placement du Quebec ("Caisse")) or (ii) any event or circumstance which results in such holder of Multi-Vote Common ceasing to be a Permitted Holder will be a Conversion Event. See "Description of the Capital Stock." 7 10 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The summary consolidated financial data as of and for the eight month period ended August 31, 1995 and the years ended August 31, 1996 and 1997 have been derived from the consolidated financial statements of the Company included elsewhere herein and audited by Deloitte & Touche LLP, independent auditors, as set forth in their report thereon also included herein. The summary historical consolidated financial and operating data presented below as of and for the nine month periods ended May 31, 1997 and 1998 have been derived from unaudited consolidated financial statements of the Company. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position and results of operation for these periods. In 1995, the Company changed its fiscal year end to August 31 to match that of its majority stockholder. As a result of the change in fiscal year end and the Company's history of growth through acquisitions, the Company's historical financial results are not directly comparable from period to period, nor are they indicative of future results of operations in many respects. The unaudited pro forma balance sheet data as of May 31, 1998 give effect to the Notes Offering and the Senior Credit Facility Retirement, as though such events occurred on such date. The unaudited pro forma as adjusted balance sheet data as of May 31, 1998 give effect to each of the above pro forma adjustments as well as the Offering as if such events had occurred on such date. The unaudited pro forma consolidated operations data for the year ended August 31, 1997 and the nine months ended May 31, 1998 give effect to each of the above pro forma adjustments as if such events had occurred at the beginning of the periods presented. The unaudited pro forma consolidated statements of operations data and the unaudited pro forma balance sheet data are not necessarily indicative of what the actual results of operations or financial position of the Company would have been had such events occurred at such dates, nor do they purport to represent the Company's results of operations or financial position for future periods. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," the Consolidated Financial Statements of the Company and the notes thereto and the Pro Forma Financial Information, appearing elsewhere in this Prospectus.
HISTORICAL PRO FORMA -------------------------------------------------------- ----------------------------- EIGHT MONTH YEAR ENDED NINE MONTHS PERIOD ENDED AUGUST 31, NINE MONTHS ENDED YEAR ENDED ENDED AUGUST 31, ------------------- MAY 31, MAY 31, AUGUST 31, MAY 31, 1995 1996 1997 1997 1998(1) 1997(1)(2)(3) 1998(1)(2)(3) ------------ -------- -------- -------- -------- ------------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED OPERATIONS DATA Revenues: Cable television........ $ 8,783 $ 25,893 $ 36,915 $ 26,915 $ 42,195 $ 51,334 $ 51,808 Telecommunications...... 788 1,711 2,922 2,202 2,721 5,131 3,810 -------- -------- -------- -------- -------- -------- -------- Total revenues...... 9,571 27,604 39,837 29,117 44,916 56,465 55,618 Operating expenses: Cost of services........ 4,558 11,868 19,202 14,016 20,213 28,149 25,030 Customer support, general and administrative....... 12,055 19,636 28,926 19,842 25,044 35,530 28,861 Depreciation and amortization......... 2,420 8,676 14,505 9,934 18,432 25,952 25,930 -------- -------- -------- -------- -------- -------- -------- Total operating expenses................ 19,033 40,180 62,633 43,792 63,689 89,631 79,821 -------- -------- -------- -------- -------- -------- -------- Loss from operations...... (9,462) (12,576) (22,796) (14,675) (18,773) (33,166) (24,203) Interest expense, net(4).................. (1,169) (5,854) (25,739) (16,993) (29,459) (33,677) (38,605) -------- -------- -------- -------- -------- -------- -------- Loss before income taxes................... (10,631) (18,430) (48,535) (31,668) (48,232) (66,843) (62,808) Net loss(5)............... $(10,161) $(18,430) $(48,535) $(31,668) $(48,232) $$(66,843) $(62,808) -------- -------- -------- -------- -------- -------- -------- Dividends on preferred stock................... -- -- -- -- (4,068) -- -- Loss attributable to common equity........... $(10,161) $(18,430) $(48,535) $(31,668) $(52,300) $(66,843) $(62,808) ======== ======== ======== ======== ======== ======== ======== Basic and diluted loss per share of common equity(6)............... $ (6.89) $ (8.30) $ (19.98) $ (13.23) $ (20.04) $ $
8 11
HISTORICAL PRO FORMA --------------------- PRO FORMA AS ADJUSTED AUGUST 31, MAY 31, MAY 31, MAY 31, 1997 1998(1) 1998(2) 1998(2)(3) ---------- -------- --------- ----------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA Cash and cash equivalents......................... $ 87,305 $ 99,704 $145,619 $ Restricted investments............................ 67,206 55,294 77,079 Property, plant and equipment, net................ 160,442 251,324 251,324 Intangible assets................................. 82,583 160,255 160,956 Total assets...................................... 403,416 576,098 644,499 Convertible notes due stockholder................. 129,604 -- -- -- Total indebtedness................................ 358,177 353,786 428,786 Total liabilities................................. 383,051 393,224 468,224 Stockholders' equity.............................. 20,365 182,874 176,275
NINE MONTHS EIGHT MONTH YEAR ENDED ENDED PERIOD ENDED AUGUST 31, MAY 31, AUGUST 31, -------------------- --------------------- 1995 1996 1997 1997 1998 ------------ -------- --------- --------- --------- (DOLLARS IN THOUSANDS) OTHER FINANCIAL DATA Net cash flows used in operating activities....................... $ (3,494) $ (453) $ (15,935) $ (2,623) $ (15,151) Net cash flows used in investing activities....................... (72,144) (72,037) (143,125) (129,127) (88,675) Net cash flows provided by financing activities............. 72,655 72,131 244,688 243,570 116,225 Capital expenditures(7)............ 22,170 62,121 71,505 44,470 62,015 EBITDA(8).......................... (7,042) (3,900) (8,291) (4,741) (341)
AS OF ----------------------------------------- AUGUST 31, ------------------------------ MAY 31, 1995 1996 1997 1998(1) -------- -------- -------- -------- OPERATING DATA CABLE TELEVISION Units under contract(9)............................. 173,324 241,496 295,149 431,384 Units passed(10).................................... 170,336 225,433 254,032 397,281 Basic subscribers................................... 75,944 114,163 132,556 217,106 Basic penetration(11)............................... 44.6% 50.6% 52.2% 54.6% Premium units(12)................................... 39,753 60,641 95,150 175,478 Pay-to-basic ratio(12)(13).......................... 52.3% 53.1% 71.8% 86.7% Average monthly revenue per basic subscriber(14).... $ 22.84 $ 22.70 $ 24.94 $ 27.74 TELECOMMUNICATIONS Units under contract(9)............................. 10,322 20,945 39,831 89,911 Units passed(10).................................... 9,116 12,364 16,572 33,131 Lines(15)........................................... 2,650 4,126 6,185 7,700 Line penetration(16)................................ 29.1% 33.4% 37.3% 26.6% Average monthly revenue per line(17)................ $ 36.86 $ 42.10 $ 47.23 $ 50.63
- --------------- (1) The Company began including 100% of the ICS Operations in its financial statements on April 13, 1998, the date the initial phase of the acquisition of the ICS Operations was consummated. As of May 31, 1998, the acquisition of approximately 72% of the ICS Operations had been consummated. See "Risk Factors -- Risks Associated with Acquisitions." The pro forma operations data give effect to the acquisition of 100% of the ICS Operations and the conversion of the GVL Notes into Series A Preferred. (2) Gives effect to the Notes Offering and the Senior Credit Facility Retirement. (3) Gives effect to the Offering. The conversion of Non-Voting Common into Class A Common Stock and the Series A Preferred into Multi-Vote Common upon consummation of the Offering and the Series B Preferred into Class A Common Stock promptly following consummation of the Offering will have no impact on stockholders' equity. 9 12 (4) 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, $10,671,000 and $9,640,000 for the eight month period ended August 31, 1995, the years ended August 31, 1996 and 1997 and the nine months ended May 31, 1997 and 1998, respectively. (5) The Company had no taxable income for the periods reported. The Company reported an income tax benefit of approximately $470,000 for the eight month period ended August 31, 1995. (6) Loss per share has been restated to reflect the adoption of Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic and diluted loss per share are computed in the same manner since common stock equivalents are antidilutive. (7) Capital expenditures include expenditures on property, plant and equipment together with intangible assets excluding expenditures for business acquisitions. (8) 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. (9) Units under contract represents the number of units currently passed and additional units with respect to which the Company has entered into Rights of Entry for the provision of cable television and telecommunications services, respectively, but which the Company has not yet passed and which the Company expects to pass within the next five years. At this time substantially all units under contract for telecommunications are also under contract for cable television. (10) 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. (11) Basic penetration is calculated by dividing the total number of basic subscribers at such date by the total number of units passed. (12) 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 May 31, 1998 presented under the previous method of reporting are 84,875 and 129,553, respectively, and 64.0% and 64.0%, respectively. (13) Pay-to-basic ratio is calculated by dividing the total number of premium units by the total number of basic subscribers. (14) Represents average monthly revenue per the average number of basic subscribers for the fiscal periods ended as of the date shown. (15) 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. (16) Line penetration is calculated by dividing the total number of telecommunications lines at such date by the total number of units passed. (17) Represents average monthly revenue per the average number of lines for the fiscal periods ended as of the date shown. 10 13 RISK FACTORS Any investment in the Class A Common Stock offered hereby involves a high degree of risk. Prospective investors should consider carefully the following factors in addition to other information set forth elsewhere in this Prospectus. LIMITED OPERATIONS OF CERTAIN SERVICES; HISTORY OF NET LOSSES AND NEGATIVE CASH FLOW OpTel's business commenced in 1993. Historically, substantially all of OpTel's revenues were derived from providing cable television services. The Company's telephone and Internet access services only recently have been initiated or their availability only recently expanded in new market areas. OpTel expects to increase substantially the size of these operations in the near future. Prospective investors, therefore, have limited historical financial information about OpTel upon which to base an evaluation of OpTel's performance in the markets and for the services that will be its principal focus in the future. Given OpTel's limited experience operating telecommunications networks, there can be no assurance that it will be able to compete successfully in the telecommunications industry. The development of OpTel's business and the expansion of its networks will require substantial capital, operational and administrative expenditures, a significant portion of which may be incurred before the realization of revenues. These expenditures will result in negative cash flow until an adequate customer base is established and revenues are realized. Although its revenues have increased in each of the last three years, OpTel has incurred substantial up-front operating expenses for marketing, customer operations, administration and maintenance of facilities, general and administrative expenses and depreciation and amortization in order to solicit and service customers in advance of generating significant revenues. As a result of these factors, the Company has generated operating losses of $14.2 million, $22.8 million, $12.6 million, and $9.5 million for the quarter ended May 31, 1998, fiscal 1997, fiscal 1996 and the eight months ended August 31, 1995, respectively, as its cable television and telecommunications customer base has grown. The Company reported positive EBITDA (as defined in the Glossary) of $1.0 million for the quarter ended May 31, 1998 as compared with negative EBITDA of $8.3 million, $3.9 million and $7.0 million for fiscal 1997, fiscal 1996 and the eight months ended August 31, 1995, respectively. There can be no assurance that OpTel will achieve or sustain profitability or positive EBITDA in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." SUBSTANTIAL INDEBTEDNESS; INSUFFICIENCY OF EARNINGS TO COVER FIXED CHARGES; ABILITY TO SERVICE DEBT The Company's indebtedness is substantial in relation to its stockholders' equity and cash flow. As of May 31, 1998, after giving pro forma effect to the Offering, the Notes Offering and the application of a portion of the proceeds therefrom to effect the Senior Credit Facility Retirement, the Company had total consolidated indebtedness of approximately $429 million (including approximately $200 million principal amount of 1998 Notes and $219 million principal amount of 13% Senior Notes Due 2005 (the "1997 Notes")) and stockholders' equity of approximately $176 million. After giving effect to the Offering, the Notes Offering and the Senior Credit Facility Retirement as if such events had occurred on the first day of each respective period, the Company's earnings would have been insufficient to cover its fixed charges and preferred stock dividends by approximately $74 million for fiscal 1997 and $63 million for the nine month period ended May 31, 1998. See "Capitalization" and "Selected Historical Consolidated Financial and Operating Data." Both the indenture governing the 1998 Notes (the "1998 Indenture") and the indenture governing the 1997 Notes (the "1997 Indenture" and together with the 1998 Indenture, the "Indentures") impose certain restrictions on the operations and activities of the Company. See "Description of Certain Indebtedness." The Company's ability to meet its financial maintenance covenants and to make scheduled payments of principal of, or to pay interest on, or to refinance, its indebtedness depends upon the success of its business strategies and its future performance, which to a significant extent are subject to general economic, financial, competitive, regulatory and other factors beyond its control. There can be no assurance that the Company will be able to generate the substantial increases in cash flow from operations that will be necessary to service its indebtedness. In the absence of such operating results, the Company could face substantial liquidity problems 11 14 and might be required to raise additional financing through the issuance of debt or equity securities. Further, the Company expects that it may need to refinance the principal amount of both the 1998 Notes and the 1997 Notes at their respective maturities. There can be no assurance that the Company will be successful in raising such financing when required or that the terms of any such financing will be attractive. See "-- Significant Capital Requirements and Need for Additional Financing" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The degree to which OpTel is leveraged could have adverse consequences to holders of the Common Stock, including the following: (i) a substantial portion of OpTel's cash flow from operations will be dedicated to the payment of the principal of and interest on its indebtedness thereby reducing funds available for other purposes, (ii) OpTel's vulnerability to changes in general economic conditions or increases in prevailing interest rates could be increased, (iii) OpTel's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes could be impaired, and (iv) OpTel may be more leveraged than certain of its competitors, which may be a competitive disadvantage. SIGNIFICANT CAPITAL REQUIREMENTS AND NEED FOR ADDITIONAL FINANCING The Company will require substantial capital on a continuing basis to finance cable television and telecommunications network expansion related to subscriber and market growth, to upgrade existing facilities to desired technical and signal quality standards and to finance any acquisitions of other operators. The Company believes, based on its current business plan, that the net proceeds from the Offering, together with its cash on hand, will provide the Company with sufficient financial resources to fund its capital requirements through the third quarter of fiscal 2000. However, the Company's future capital requirements will depend upon a number of factors, including the Company's success in obtaining new Rights of Entry, the extent of its telecommunications roll out, the size and timing of any acquisitions, marketing expenses, staffing levels and customer growth, as well as other factors that are not within the Company's control, such as competitive conditions, changes in technology, government regulation and capital costs. The Company expects to fund additional capital requirements through internally generated funds and public or private debt and/or equity financing. There can be no assurance, however, that OpTel will be successful in raising sufficient debt or equity when required or on terms that it will consider acceptable. Moreover, the terms of OpTel's outstanding indebtedness impose certain restrictions upon OpTel's ability to incur additional indebtedness or issue additional stock. See "Description of Certain Indebtedness." In addition, GVL has the power to prevent the Company from obtaining additional debt or equity financing. See "-- Control by GVL." Failure to generate or raise sufficient funds may require OpTel to delay or abandon some of its future expansion or expenditures, which would have a material adverse effect on its growth and its ability to compete in the cable television and telecommunications industries. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." RISKS ASSOCIATED WITH ACQUISITIONS OpTel expects to continue to make acquisitions of strategically important businesses in the future when sufficiently attractive opportunities arise. Acquisitions may divert the resources and management time of OpTel and will require integration of the acquired operations with OpTel's existing networks and services. There can be no assurance that any acquisition of assets, operations or businesses, including the acquisition of the ICS Operations, will be successfully integrated into OpTel's operations. The Company typically has acquired businesses that were privately held by entrepreneurs, many of which businesses were without the same regulatory compliance practices and internal accounting controls and procedures as the Company. Accordingly, the Company frequently is required to take remedial actions, which may include the expenditure of funds and take extensive time to implement. In general, the Company factors the costs associated with these matters into the terms of its acquisitions, including, where practicable, through indemnification rights. However, there can be no assurance that the Company's results of operations will not be adversely affected by these or other matters arising from past or future acquisitions. Consistent with its consolidation strategy, OpTel is currently evaluating and often engages in discussions regarding various acquisition opportunities. These acquisitions may be funded by cash on hand and/or through the issuance of OpTel's debt and/or equity 12 15 securities. It is possible that one or more of such possible future 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. OpTel recently closed the initial phase of its acquisition of the ICS Operations. A portion of the purchase price paid for the acquisition of the ICS Operations was deposited in escrow subject to the closing of the balance of the acquisition. The consummation of the balance of the acquisition is subject to certain conditions, including the receipt of third party consents. There can be no assurance that the Company will consummate the acquisition of all or part of the balance of the ICS Operations. The Company began including 100% of the ICS Operations in its financial statements on April 13, 1998, the date the initial phase of the acquisition of the ICS Operations was consummated. Accordingly, this prospectus contains certain financial information which gives effect to the acquisition of 100% of the ICS Operations. This financial information is not indicative of the actual results or financial position that would have been achieved had the acquisition in fact been consummated at the beginning of the periods presented. As of May 31, 1998, the acquisition of approximately 72% of the ICS Operations had been consummated. RISK ASSOCIATED WITH TELECOMMUNICATIONS STRATEGY The Company is currently introducing central office switched telecommunications services to MDUs served by its existing networks. The Company believes that a successful introduction of these telecommunications services is important to its long-term growth. Its success will be dependent upon, among other things, the Company's ability to assess markets, design and install telecommunications networks, including switches, obtain cooperation of the ILECs, when needed, and obtain any required government authorizations and permits, all in a timely manner, at reasonable costs and on satisfactory terms and conditions, and the willingness of MDU residents to accept a new provider of telecommunications services. There can be no assurance that the Company will be able to successfully introduce central office switched telecommunications services in each of its markets in a timely manner in accordance with its strategic objectives and failure to do so could have a material adverse effect on the Company. Specific risks associated with the Company's telecommunications strategy include: Switch Installation and Network Enhancement; Lack of Redundant Switches. An essential element of the Company's telecommunications strategy is the provision of switched local exchange service. The Company has recently commenced operating central office switches in 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 13 16 require the Company to have multiple interconnection agreements. While the Company has entered into interconnection agreements with ILECs serving portions of its markets, the Company is currently negotiating agreements for the interconnection of its networks with the network of other ILECs in certain of the metropolitan areas the Company serves. There can be no assurance that the Company will be able to successfully negotiate interconnection agreements with the ILEC or any other local exchange carrier ("LEC") in each market where the Company plans to offer central office switched telecommunications services or that it will be able to do so on favorable terms. In addition, the Company has experienced delays and difficulties accessing inside wiring used or owned exclusively by the ILEC even in circumstances where it has a Right of Entry. The failure to negotiate the necessary interconnection agreements or gain access to inside wiring used or owned exclusively by the ILEC could have a material adverse effect upon the Company's ability to expand its telecommunication services. Currently, the Company provides local telephone service as an STS provider in most of its markets. STS providers generally use the ILEC's facilities (although in many states CLECs can now supply STS operators with facilities) to provide local telephone service as a reseller, subject to state regulation. If LECs were no longer required to provide tariffed services to STS providers or if STS-type service classifications were to be eliminated, the Company's telephone operations could be materially adversely affected. The Company relies on the services of a third-party vendor to provide certain carrier-to-carrier billing services. The failure by such vendor to accurately bill interexchange carriers' ("IXCs") access charges could have a material adverse effect on the Company. Uncertainties Related to Reciprocal Compensation. The Telecommunications Act of 1996, as amended (the "Telecom Act"), requires ILECs to provide reciprocal compensation to other carriers for local traffic terminated on such other carrier's network. Notwithstanding this requirement, a number of ILECs have taken the position that traffic terminated to Internet service providers ("ISPs") is not local traffic. Competitive carriers generally have been successful in challenging this position before the public utility commissions ("PUCs") in several states. However, this issue is under consideration and subject to review at the Federal Communications Commission (the "FCC"), various state PUCs and state and federal courts. There can be no assurance that traffic terminated to an ISP will not ultimately be held to be exempt from the reciprocal compensation requirements. Potential 911, E-911 and Intrusion Alarm Liability. The Company delivers local exchange service, including access to emergency ("911") services, to MDU residents through either its central office switches or PBX switches installed by the Company at each property. Mechanical or electrical defects, power failures or catastrophic events may temporarily disrupt operation of the Company's switches, preventing, delaying or impeding access to 911 service. In many jurisdictions, telecommunications carriers are required to implement services which permits a 911 operator to immediately identify the location of the caller ("E-911 service"). To provide E-911 service at an MDU, the telecommunications service provider or its agent must maintain a database with certain information relating to the MDU residents. The failure of the Company or its agent to maintain such database in a timely and accurate manner could prevent, delay or impede the operation of E-911 service. In addition, because of the configuration of the Company's telecommunications networks, the Company's telecommunications traffic may cross more than one E-911 jurisdiction. This will require the Company to coordinate among these various jurisdictions. There can be no assurance that the Company will not be liable for damage to property or personal injuries that may directly or indirectly result from any failure of 911 or E-911 service to operate properly. Moreover, the Company may provide 911, E-911 or operator services by contracting such services from other carriers in its markets. The providers of these services will generally require the Company to indemnify them for any losses or liability incurred in connection with such services except for those caused exclusively by the gross negligence or malfeasance of the carrier. In addition, the Company currently provides certain intrusion alarm services through subcontractors. There can be no assurance that the Company will not be liable for any property damage or personal injuries that may result from intrusion alarm malfunctions or from a subcontractor's failure to appropriately monitor the intrusion alarm systems under contract. RISKS ASSOCIATED WITH RIGHTS OF ENTRY The Company's business depends upon its ability to enter into and exploit favorable new long-term Rights of Entry for demographically attractive MDUs and to exploit and renew its existing Rights of Entry. Its 14 17 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. Although the Company does not believe that any of its existing arrangements will be cancelled or will not be renewed as needed in the near future, cancellation or non-renewal of certain of such arrangements could materially adversely affect the Company's business in any such affected area. In addition, the failure by the Company to enter into and maintain any such arrangements for a particular network which is already under development may affect the Company's ability to acquire or develop that network. See "Business -- Competition" and "-- Regulation." The Company's Rights of Entry generally provide that the Company will have the exclusive right to provide residents within the applicable MDU with multichannel television services and, where Rights of Entry extend to telecommunications services, an undertaking by the MDU owner to promote OpTel as the preferred telecommunications alternative to the ILEC. While the Company believes that the exclusivity provisions in its cable television Rights of Entry are now generally enforceable under applicable law, current trends at the state and federal level suggest that the future enforceability of these provisions may be uncertain. Certain states in which the Company operates, including Illinois and Florida (for condominiums only), and certain cities and municipalities in states in which the Company operates, have adopted "mandatory access" laws that provide that no resident of an MDU may be denied access to programming provided by incumbent franchise cable systems, regardless of any rights granted by an MDU owner to another multichannel television operator. Texas has adopted a "mandatory access" law for state certified telecommunications service providers. In addition, Virginia prohibits private cable television operators from entering into revenue sharing or up front incentive payment arrangements with MDU owners. The ICS Operations included several MDUs located in Virginia. Further, the FCC has initiated a notice of proposed rule making seeking comment on whether the FCC should adopt regulations restricting exclusive contracts. While the constitutionality of present "mandatory access" laws is uncertain, there can be no assurance that such laws will not be adopted elsewhere or upheld as constitutional which may have a material adverse effect on the Company's business. Broad mandatory access would likely increase the Company's capital costs associated with new Rights of Entry if installing duplicate wiring were required and result in competitive services being offered at MDUs where the Company presently has exclusive rights of entry. See "-- Regulation." In a number of instances individual Rights of Entry are subordinate by their terms to indebtedness secured by the MDU, with the effect that enforcement of the security interest or default under such indebtedness could result in termination of such Right of Entry. Bankruptcy of an MDU owner could also result in rejection of a Right of Entry as an "executory contract." Moreover, the terms of a number of the Company's Rights of Entry require it to remain competitive with other competitors in that market in general or competitive in terms of price of offering, technology, number of programming channels and levels of service. To meet these requirements, the Company could be required to upgrade its networks and equipment, which would require capital expenditures. The failure to remain competitive under any of these standards in a market could result in a loss or cancellation of the related Right of Entry. Such losses or cancellations could, in the aggregate, have a material adverse effect on the Company's business. See "Business -- Strategic Relationships with MDU Owners." DISTANCE AND WEATHER LIMITATIONS; LINE OF SIGHT; AVAILABILITY OF TRANSMISSION SITES Point-to-point microwave transmission requires a direct line of sight between two dishes comprising a link and is subject to distance and rain attenuation. The Company expects that its average coverage radius of Network Hubs will be approximately five miles, depending on local conditions, and it is expected that the Company's Network Hubs will utilize power control to increase signal strength and mitigate the effects of rain attenuation. In areas of heavy rainfall, transmission links are engineered for shorter distances and greater power to maintain transmission quality. The reduction of path link distances to maintain transmission quality 15 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. RAPID TECHNOLOGICAL CHANGES AND UNCERTAIN MARKET DEVELOPMENT The multichannel television and telecommunications industries are subject to rapid and significant changes in technology and frequent service innovations. The effect on the business of the Company of future technological changes, such as changes relating to emerging transmission technologies, cannot be predicted. The Company believes that its future success will depend on its ability, as to which no assurance can be given, to enhance its existing systems or implement new systems to respond to new technologies and to develop and introduce in a timely fashion new products and services on a competitive basis. The markets in which the Company competes are constantly evolving. The convergence of traditional telecommunications services and multichannel television services is a recent trend in the industries within which the Company competes. As part of this trend, many telecommunications and cable television operators are attempting to integrate network components. For example, video distribution equipment is being considered for voice and data telecommunications and vice versa. The convergence of these traditional services towards integrated multimedia services presents both opportunity and material risk to companies such as OpTel. The Company will face enhanced competition from competitors with greater financial, technical, marketing and other resources. Many of these competitors may offer packages of services that are more extensive than the services which the Company plans to offer. There can be no assurance that the Company will be able to predict accurately the direction of this evolving market or be able to respond effectively to the highly competitive environment. See "-- Competition" and "Business -- Competition." INFORMATION SYSTEMS AND AUTOMATION The Company has ordered a new customer management information system which is to be implemented during fiscal 1999 and which the Company expects to be an important factor in its operations. If the customer management information system is not implemented in a timely manner, or is not implemented at all or if it fails or is unable to perform as expected, it could have a material adverse effect on the Company. Furthermore, as the Company's business expands, problems may be encountered with higher processing volumes or with additional automation features, in which case the Company might experience system breakdowns, delays and additional unbudgeted expense to remedy the defect or to replace the defective system with an alternative system. MANAGEMENT OF GROWTH AND DEPENDENCE ON QUALIFIED PERSONNEL The Company is highly dependent upon the efforts of its senior management, the loss of any of whom could impede the achievement of service delivery and marketing objectives and could have a material adverse effect on the Company. The Company has undertaken a rapid expansion of its networks and services. This growth has increased the operating complexity of the Company as well as the level of responsibility for both existing and new management personnel. The Company's ability to manage its expansion effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and 16 19 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 OpTel competes with a wide range of service providers for each of the services it provides. See "Business -- Competition." Substantially all markets for voice and video services are highly competitive and the Company expects that competition will intensify. In each of its markets, the Company faces significant competition from larger companies with greater access to capital, technology and other competitive resources. The Company's switched local exchange services compete with ILECs, other STS providers, CLECs and competitive access providers ("CAPs") and will compete with long distance telephone companies and franchise cable television operators as they begin to enter the local telephone business. The Company's long distance service competes with established IXCs and resellers. In addition, recent telecommunications offerings, including PCS, and future offerings may increase competition in the telecommunications industry. The Company's private cable television services compete with incumbent franchise cable television operators as well as wireless cable television operators, other private cable television operators, DBS operators and stand-alone satellite service providers. Recent and future legislative, regulatory and technological developments likely will result in additional competition, as telecommunications companies enter the cable television market and as franchise cable television operators and IXCs begin to enter the local telephone market. See "Business -- Regulation." Similarly, mergers, joint ventures and alliances among franchise, wireless or private cable television operators, 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. The Company competes with multichannel television operators and telecommunications service providers to obtain Rights of Entry and to enroll subscribers. In most markets serviced by the Company, franchise cable television operators now offer revenue sharing and access fee arrangements to MDU owners. There can be no assurance that these payments will not increase in the future as competition increases for access to the higher quality MDUs. Another basis of competition is the breadth of programming and range of services offered. Although the Company as a matter of course investigates new sources of programming and technologies that may increase its range of services, other larger and more diversified competitors may attract the targeted MDUs based on their increased menu of services. There can be no assurance that the Company will be able to compete successfully with existing competitors or new entrants in the market for such services. See "Business -- Competition." Competition also may be enhanced by technological developments that allow competitors of the Company to bypass property owners altogether and market their services directly to the tenants of MDUs. Although the Company's Rights of Entry prohibit tenants from installing receiving equipment on the exterior of the building, these provisions are not always enforced and do not prohibit tenants from utilizing other services and technologies. For example, the Rights of Entry do not prevent a resident from using cellular telephone service offered by another provider. While the Company believes that the exclusivity provisions of its Rights of Entry provide it with competitive advantages, such advantages may be significantly diminished by technological, regulatory and other developments beyond the control of the Company. Such developments may impact the Company's strategies and may require it to expend funds beyond the levels currently contemplated. As an emerging CLEC in each of its markets, OpTel faces significant competition for the local exchange services it offers from ILECs which currently dominate their local telecommunications markets. ILECs have longstanding relationships with their customers, which relationships may create competitive barriers. Furthermore, ILECs may have the potential to subsidize competitive service from monopoly service revenues. OpTel believes that various legislative initiatives, including the Telecom Act have removed most of the remaining legislative barriers to local exchange competition. Nevertheless, in light of the passage of the Telecom Act, regulators also are likely to provide ILECs with increased pricing flexibility as competition increases. If ILECs are permitted to lower their rates substantially or engage in excessive volume or term discount pricing 17 20 practices for their customers, the net income or cash flow of ICPs and CLECs, including OpTel, could be materially adversely affected. In addition, while OpTel currently competes with AT&T, Inc. ("AT&T"), MCI Telecommunications Corporation ("MCI") and others in the interexchange services market, recent federal legislation permits the RBOCs to provide interexchange services once certain criteria are met. Once the RBOCs begin to provide such services, they will be in a position to offer single source telecommunications service similar to that being offered by OpTel. On December 31, 1997, a Federal District Court in Texas found unconstitutional certain provisions of the Telecom Act restricting the RBOCs from offering long distance service in their operating regions until they could demonstrate that their networks have been made available to competitive providers of local exchange services in those regions. This decision has been stayed pending appeal. If this decision is permitted to stand, it could result in RBOCs providing interexchange service in their operating regions sooner than previously expected. In addition, AT&T and MCI have entered, and other IXCs have announced their intent to enter, the local exchange services market, which is facilitated by the Telecom Act's resale and unbundled network element provisions. OpTel cannot predict the number of competitors that will emerge as a result of existing or new federal and state regulatory or legislative actions. Competition from the RBOCs with respect to interexchange services or from AT&T, MCI or others with respect to local exchange services could have a material adverse effect on OpTel's business. In addition, a continuing trend toward business combinations and alliances in the telecommunications industry may create significant new competitors for OpTel. Many of OpTel's existing and potential competitors have financial, personnel and other resources significantly greater than those of OpTel. DEPENDENCE UPON PROGRAM MATERIAL The Company has fixed-term contracts with various program suppliers. The average term of such contracts is approximately five years and such contracts are typically renewed upon expiration. If the contracts were terminated or not renewed, the Company would be required to seek program material from other sources, which could place the Company at a competitive disadvantage. Although federal law and FCC regulations require that vertically integrated franchise cable television system operators and cable television programmers sell programming to other video distributors, such as the Company, on fair and non-discriminatory terms, the Company has been denied certain popular sports programming by certain providers who claim that the programming is not required to be licensed to the Company. These denials have adversely impacted, and any such denials in the future could adversely impact, the Company's activities in the affected markets. There can be no assurance that the equal program access laws and regulations will not be invalidated, changed or repealed, which could limit the Company's ability to obtain programming or raise the cost of programming. In addition, one aspect of the equal program access laws, the prohibition on the sale of exclusive distribution rights by certain programmers, is scheduled to expire on October 5, 2002, unless the FCC finds, during a proceeding to be conducted in 2001, that the prohibition continues to be necessary to promote competition in the multichannel television market. See "Business -- Regulation." REGULATION The cable television and telecommunications industries are subject to extensive regulation at the federal, state and local levels. Many aspects of regulation at the federal, state and local levels currently are subject to judicial review or are the subject of administrative or legislative proposals to modify, repeal, or adopt new laws and administrative regulations and policies, the results of which the Company is unable to predict. The United States Congress and the FCC have in the past, and may in the future, adopt new laws, regulations and policies regarding a wide variety of matters, including rulemakings arising as a result of the Telecom Act, that could, directly or indirectly, affect the operation of the Company's business. The business prospects of the Company could be materially adversely affected (i) by the application of current FCC rules or policies in a manner leading to the denial of applications by the Company for FCC licenses or a change in the regulatory status of the Company's private cable television and telecommunications operations, (ii) by the adoption of new laws, policies or regulations, (iii) by changes in existing laws, policies or regulations, including changes to their interpretations or applications, that modify the present regulatory environment or (iv) by the failure of certain rules or policies to change in the manner anticipated by the Company. See "Business -- Regulation." 18 21 The Company believes that its exclusive Rights of Entry are now generally enforceable under applicable law; however, current trends at the state and federal level suggest that the future enforceability of these provisions may be uncertain. The FCC is seeking comment on whether such exclusive contracts should be limited to a maximum period of seven years and whether such an amount of time is reasonably necessary to recover the capital costs of providing service to that MDU. In another proceeding, the FCC is seeking comment on the legal, technical and practical issues relating to whether the FCC should issue a rule preempting state, local and private restrictions on over-the-air reception antennas placed on rental properties or properties not within the exclusive control of the viewer. Although it is open to question whether the FCC has statutory and constitutional authority to compel mandatory access or preempt private restrictions on antennas located on property owned or controlled by others, there can be no assurance that it will not attempt to do so. Any such action would tend to undermine the exclusivity provisions of the Company's Rights of Entry. See "-- Risks Associated with Rights of Entry." There can be no assurance that future state or federal laws or regulations will not restrict the ability of the Company to offer revenue sharing or access payments, limit MDU owners from receiving revenue sharing, or prohibit MDU owners from entering into exclusive access agreements, any of which could have a material adverse effect on the Company's business. See "Business -- Sales and Marketing," "-- Strategic Relationships with MDU Owners" and "-- Regulation." The Company uses a substantial number of point-to-point microwave paths, using frequencies in the 18GHz band, in its network architecture. In addition, the Company intends to obtain licenses for paths in other frequency bands, principally in the 23GHz band, in the future. The 18GHz, 23GHz and other frequency bands are licensed by the FCC. After paths are licensed by the FCC, FCC rules require that facilities utilizing such paths must be constructed and fully operational within 18 months of the grant of the license. There can be no assurance that the Company will be able to acquire licenses for the microwave paths that it seeks in the future, or that changes in the FCC's regulations will not limit the Company's ability to use the 18GHz, 23GHz or other desirable frequencies for the distribution of its services, or otherwise impair the Company's microwave licenses. If the Company cannot license the necessary paths on the desired frequencies, it may be necessary to utilize other frequencies for signal transport or other means of signal transport. There can be no assurance that the cost of such alternate means of transport will not exceed those associated with the desired microwave frequency. Further, even if the FCC grants the desired licenses, the Company may not have the financial resources to construct the necessary facilities within the mandated 18 month period. Failure to complete the construction within the mandated period may result in forfeiture of the license. In addition, state and local zoning and land use laws may impede the efficient deployment of the Company's microwave antennas. Any of the foregoing developments could have a material adverse effect on the Company's business. See "Business -- Network Architecture." As an emerging CLEC, OpTel is subject to varying degrees of federal, state and local regulation. OpTel is not currently subject to price cap or rate of return regulation at the state or federal level. OpTel is, however, generally subject to certification or registration and tariff or price list filing requirements for intrastate services by state regulators. Although passage of the Telecom Act should result in increased opportunities for companies that are competing with the ILECs, no assurance can be given that changes in current or future regulations adopted by the FCC or state regulators or other legislative or judicial initiatives relating to the telecommunications industry would not have a material adverse effect on OpTel. Moreover, while the Telecom Act reduces regulation to which non-dominant LECs are subject, it also reduces the level of regulation that applies to the ILECs and increases their ability to respond quickly to competition from OpTel and others. In addition, the Telecom Act will permit RBOCs, for the first time, to offer long distance service in the regions where they provide local exchange service upon demonstrating to the FCC and state regulatory agencies that they have complied with the FCC's interconnection regulations designed to foster local exchange competition. While the FCC has not approved the applications to provide in-region long distance service filed to date, it may do so in the future. On December 31, 1997, a federal District Court in Texas found unconstitutional the provisions of the Telecom Act restricting RBOCs from providing long distance service in-region until they could demonstrate that their networks have been made available to competitive providers of local exchange services. The Court has stayed the decision and the issue is under appeal but if the decision is upheld, RBOCs may be able to offer in-region long distance service earlier than otherwise expected. RBOCs 19 22 would then be able to offer a combination of local and interexchange service to customers in direct competition with OpTel's service offerings. In addition, the FCC has put in place access charge reform rules which may over time result in a net decrease in the access charges paid by IXCs to LECs for originating or terminating long distance traffic. To the extent ILECs are afforded increased pricing flexibility or access charges are reduced, the ability of the Company to compete with ILECs for certain services may be adversely affected. On May 8, 1997, the FCC issued an order establishing a new Universal Service support fund. The new Universal Service support fund rules will be administered jointly by the FCC and state regulatory authorities, many of which rules are still in the process of being formulated. The net revenue effect on the Company of these rules is incalculable at this time. The majority of states currently permit STS services with relatively few regulatory barriers. However, several states require certification and place some conditions or restraints on the provision of STS services. Additionally, STS providers must comply with the conditions of service set forth in the LEC's tariffs under which STS providers receive service. There can be no assurance that the regulatory environment will continue to be favorable for STS providers or that regulatory changes will not slow or stop the Company's planned migration from an STS provider into a CLEC in each of its markets. Although the current regulatory environment enables competition for local exchange services, there is no assurance that the Company will be able to compete successfully against established providers and new entrants in that marketplace. In addition, various state and federal laws and regulations limit the Company's ability to enforce exclusivity provisions of Rights of Entry so as to exclude other telecommunications providers from an MDU. CONTROL OF LICENSES BY UNAFFILIATED COMPANY The Telecom Act prohibits any corporation directly or indirectly controlled by any other corporation of which more than 25 percent of the capital stock is owned or voted by non-U.S. citizens from holding a common carrier radio station license absent a finding by the FCC that the grant of such a license to such a licensee would serve the public interest. In 1997, the United States agreed, in the context of the World Trade Organization ("WTO") Basic Telecom Agreement, to allow foreign suppliers from WTO member nations, including Canada, to provide a broad range of basic telecommunications services in the United States. Those commitments became effective in February 1998. In light of those commitments, the FCC has determined that it will adopt an "open entry standard" for suppliers of telecommunications services from WTO member nations, including Canada. In conjunction with its new open entry policies, the FCC has adopted a presumption favoring grant of applications to exceed the 25 percent limit on non-U.S. ownership described above when the non-U.S. investment is from a WTO member nation. GVL, the Company's principal stockholder, is a Canadian corporation. Prior to the recent developments described above, the Company assigned substantially all of its frequency licenses to Transmissions Holding, Inc. ("THI"), a Delaware corporation controlled by United States citizens, to permit the Company to use its frequency licenses to provide "common carrier" telecommunications services in the event that the Company should desire to do so. The Company has an option to purchase the assets (or the stock) of THI, exercisable at any time, subject to FCC approval. THI is not an affiliate of the Company. While the Company is in the process of reevaluating whether it should hold FCC authorizations directly and, specifically, whether it should exercise its option to purchase the assets or stock of THI, the current ownership of these licenses by THI is subject to a number of risks, including the risk that acts or omissions of THI or its stockholders could result in the revocation of such licenses or the unavailability of such licenses to the Company and the risk that THI may be subject to bankruptcy or similar proceedings which could result in the rejection or termination of the arrangements between THI and the Company with respect to the use of such licenses. While THI and its stockholders have made various affirmative and negative covenants intended to limit the risk to the Company, there can be no assurance that such covenants will not be violated or will be adequate to protect the Company. See "Certain Relationships and Related Transactions -- License Holding Company." 20 23 USE OF THE NAME OPTEL On April 27, 1998, an action was commenced against the Company in the United States District Court for the Northern District of California by Octel Communications Corp. ("Octel"), charging the Company with trademark infringement, trade name infringement, trademark dilution, and unfair competition (the "Civil Action") based on its use of the name "OpTel" and seeking to enjoin the Company from using the name and trademark "OpTel." The Civil Action follows a now-suspended administrative proceeding in the United States Patent and Trademark Office ("PTO"), pending since November 7, 1995, relating to registration of the "OpTel" mark by the Company. The PTO found the Company's application for registration to be allowable; however, Octel commenced an opposition proceeding claiming that the Company's mark is confusingly similar to the "Octel" mark used by that party in a related field, and claiming that the Company's application had procedural deficiencies. During the course of the PTO proceeding, the Company acquired rights to the marks "Optel" and "Optel Communications" in the telecommunications field which are believed to predate the rights of Octel to its trademark, and the Company commenced two further proceedings against Octel in the PTO seeking cancellation of two trademark registrations held 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 rights or trade name rights of Octel or any other person, there can be no assurance as to the outcome of the Civil Action or the proceedings in the PTO (if reinstated) or that any such outcome would not materially adversely affect the Company. LATE FEES CLASS ACTION LITIGATION On April 9, 1998, a purported class action complaint was filed in the District Court of Harris County, Texas by Gavin Stewart Clarkson, individually and on behalf of all cable subscribers in the U.S. that have paid late fees to either the group of affiliated entities known as Phonoscope (collectively, "Phonoscope") or the Company. The plaintiff, who formerly subscribed to cable television services provided by Phonoscope, alleges that Phonoscope's charging pre-established late fees for delinquent payments of cable subscription charges constitutes an illegal collection of a penalty and that cable service providers should only be entitled to their actual collection costs. The plaintiff seeks to enjoin Phonoscope and OpTel from collecting, or attempting to collect, such late fees. The case is in its very early stages, and 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. CONTROL BY GVL General. After the consummation of the Offering, VPC, an indirect wholly-owned subsidiary of GVL, will own shares of the Company's Multi-Vote Common, representing % of the voting rights of the Company. Accordingly, VPC can and, following consummation of the Offering, will continue to be able to elect a majority of the Board of Directors of the Company (the "Board") and to control the vote on matters submitted to the vote of the Company's stockholders. 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 multipoint multichannel distribution systems ("MMDS"), satellite master antenna television ("SMATV") systems or hard wire franchise cable television systems. As a result, affiliates of GVL may compete with the Company in markets where their services overlap. In addition, an affiliate of GVL has recently announced its intention to deliver high speed Internet access in the San Francisco area. These services may compete with the Company's high speed Internet offering. GVL 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 21 24 operating results of its subsidiaries other than the Company may affect the ability of the Company to incur additional indebtedness. As of May 31, 1998, GVL was able to incur approximately Cdn $612 million (approximately $420 million based on an exchange rate of $1.00 = Cdn $1.4569 as reported by the Wall Street Journal on May 29, 1998) of indebtedness under its indenture, but there can be no assurance that this number may not decrease substantially in the future. There can be no assurance that GVL will not restrain the Company's growth or limit the indebtedness incurred by the Company so as to ensure GVL's compliance with the terms of its debt instruments. 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, CDPQ was granted the right to elect certain directors of OpTel, preemptive rights to acquire new securities issued by the Company subject to certain exceptions (including a registered public offering) and tag along rights upon the sale by VPC of its interest in OpTel. In addition, CDPQ agreed to certain restrictions on the transfer of its shares of Multi-Vote Common. See "Principal and Selling Stockholders -- Stockholders' Agreement." 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 an election by VPC to convert its Multi-Vote Common into shares of Class A Common Stock may result in a "Change of Control" under the Indentures, which could require the Company to offer to purchase the 1998 Notes and the 1997 Notes. There can be no assurance that the Company would have the financial resources to meet this obligation. Neither VPC nor GVL is under any obligation to prevent a "Change of Control." The occurrence of a "Change of Control" could have a material adverse effect on the Company, including the loss of GVL's strategic involvement with the Company. YEAR 2000 RISK OpTel has implemented a Year 2000 program to ensure that its computer systems and applications will function properly beyond 1999. OpTel believes that it has allocated adequate resources for this purpose and expects its Year 2000 conversion program to be successfully completed on a timely basis. However, successful completion of the Year 2000 conversion program is substantially dependent upon successful implementation of the Company's new customer management information system. The Company's financial accounting system has not been upgraded to eliminate potential Year 2000 related malfunctions. The Company has undertaken a selection process for a new financial accounting system and plans to have the new system selected and implemented within the next 12 months. There can be no assurance that the new customer management information system and financial accounting system will be implemented on schedule or that other components of the Year 2000 conversion program will be completed in a timely manner. See "-- Information Systems and Automation." Other than expenses relating to the acquisition of the customer management information system and the financial accounting system, OpTel does not expect to incur significant expenditures to address this issue. The ability of third parties with which OpTel transacts business to adequately address their Year 2000 issues is outside of OpTel's control. There can be no assurance that the failure of OpTel or such third parties to adequately address their respective Year 2000 issues will not have a material adverse effect on OpTel's business, financial condition, cash flows and results of operations. LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Class A Common Stock and there can be no assurance that an active trading market will develop or be sustained. The initial public offering price for the Shares will be determined through negotiations among the Company and the Underwriters and may not be indicative of the market price of the Class A Common Stock after the Offering. See "Underwriting." The market prices of securities of early stage communications companies similar to the Company have historically been highly volatile. Future announcements concerning the Company or its competitors, including quarterly results, technological innovations, services offered, government legislation or regulation and general market, economic and political conditions, may have a significant effect on the market price of the Class A Common Stock. 22 25 DILUTION There will be an immediate and substantial dilution of a purchaser's investment in the Class A Common Stock in that the net tangible book value per share of Class A Common Stock after the Offering will be substantially less than the per share offering price of the Class A Common Stock. See "Dilution." LACK OF DIVIDEND HISTORY; RESTRICTIONS ON PAYMENT OF DIVIDENDS OpTel has never declared or paid any cash dividends on its Common Stock and does not expect to declare any such dividends in the foreseeable future. Payment of any future dividends will depend upon earnings and capital requirements of OpTel, OpTel's debt facilities and other factors the Board considers appropriate. OpTel intends to retain earnings, if any, to finance the development and expansion of its business, In addition, the terms of OpTel's outstanding indebtedness, including the Indentures, and preferred stock restrict the payment of dividends on Common Stock. See "Description of Capital Stock" and "Description of Certain Indebtedness." ANTI-TAKEOVER PROVISIONS VPC's voting control of OpTel, certain other provisions of OpTel's Certificate of Incorporation, the provisions of the Delaware General Corporation Law (the "DGCL") and OpTel's outstanding indebtedness may make it difficult in some respects to effect a change in control of OpTel and replace incumbent management. The existence of these provisions may have a negative impact on the price of the Common Stock, may discourage third-party bidders from making a bid for OpTel or may reduce any premiums paid to stockholders for their Class A Common Stock. In addition, the Board has the authority to fix the rights and preferences of, and to issue shares of, OpTel's preferred stock, which may have the effect of delaying or preventing a change in control of OpTel without action by its stockholders. See "Description of Capital Stock -- Certain Provisions of OpTel's Certificate of Incorporation and of Delaware Law." SHARES ELIGIBLE FOR FUTURE SALE Future sales of shares, or the perception that such sales may occur, by existing stockholders under Rule 144 of the Securities Act, or through the exercise of outstanding registration rights or the issuance of shares of Common Stock upon the exercise of options or warrants or conversion of convertible securities, could materially adversely affect the market price of shares of Class A Common Stock and could materially impair OpTel's future ability to raise capital through an offering of equity securities. No predictions can be made as to the effect, if any, that market sales of such shares or the availability of such shares for future sale will have on the market price of shares of Class A Common Stock prevailing from time to time. See "Description of Capital Stock -- Shares Eligible for Future Sales" and "-- Registration Rights of Certain Security Holders." FORWARD LOOKING STATEMENTS The statements contained in this Prospectus that are not historical facts are "forward-looking statements" (as such term is defined in the Private Securities Litigation Reform Act of 1995), which can be identified by the use of forward-looking terminology such as "estimates," "projects," "anticipates," "expects," "intends," "believes" or the negative thereof or other variations thereon or comparable terminology or by discussions of strategy that involve risks and uncertainties. Management wishes to caution the reader that these forward-looking statements are only estimates or predictions. No assurance can be given that future results will be achieved. Actual events or results may differ materially as a result of risks facing OpTel or actual events differing from the assumptions underlying such statements. All forward-looking statements made in connection with this Prospectus which are attributable to OpTel or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. The safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995 does not apply to initial public offerings. 23 26 USE OF PROCEEDS The net proceeds to the Company from the Offering (based on an assumed initial public offering price of $ per share) are estimated to be approximately $ million ($ million if the over-allotment option granted to the Underwriters is exercised in full) after deducting estimated underwriting discounts and commissions and other offering expenses payable by the Company. Upon consummation of the Offering, the Company will have cash on hand of approximately $ , including $ from the Notes Offering. The Company anticipates its capital requirements over the next five years to be $550 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 related to its expansion into new markets. 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 principal to effect any material acquisition has been reached. Pending such uses, the net proceeds of the Offering will be invested in short-term investment grade securities. The Company will not receive any of the proceeds from the sale of Shares 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, including the Indentures, and preferred stock. See "Risk Factors -- Lack of Dividend History; Restrictions on Payment of Dividends." 24 27 CAPITALIZATION The following table sets forth, on an unaudited basis at May 31, 1998, (i) the capitalization of the Company, (ii) the pro forma capitalization after giving effect to Notes Offering and the Senior Credit Facility Retirement and (iii) the pro forma capitalization as adjusted to give effect to the Offering and the conversion of all outstanding shares of Non-Voting Common and Series B Preferred into shares of Class A Common Stock and the conversion of all outstanding shares of Series A Preferred into shares of Multi-Vote Common. This table should be read in connection with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Consolidated Financial Statements of the Company and the notes thereto and the Pro Forma Financial Information appearing elsewhere in this Prospectus.
AS OF MAY 31, 1998 ----------------------------------------- PRO PRO FORMA AS ACTUAL(1) FORMA(2) ADJUSTED(1)(2)(3) --------- --------- ----------------- (DOLLARS IN THOUSANDS) Cash and cash equivalents................................ $ 99,704 $ 145,619 $ Restricted Investments................................... 55,294 77,079 --------- --------- -------- Total.................................................. $ 154,998 $ 222,698 $ ========= ========= ======== Indebtedness: 13% Senior Notes Due 2005.............................. $ 219,130 $ 219,130 $219,130 11 1/2% Senior Notes Due 2008.......................... -- 200,000 200,000 Notes payable and other long-term liabilities.......... 129,503 4,503 4,503 Deferred acquisition liabilities....................... 5,153 5,153 5,153 --------- --------- -------- Subtotal.......................................... 353,786 428,786 428,786 Stockholders' equity: Class A common stock, $0.01 par value ("Class A Common Stock"); 8,000,000 shares authorized; 164,272 issued and outstanding; 164,272 issued and outstanding pro forma; issued and outstanding pro forma as adjusted............................................ 2 2 Class B common stock, $0.01 par value ("Multi-Vote Common"); 6,000,000 shares authorized; 2,353,498 issued and outstanding; 2,353,498 issued and outstanding pro forma; issued and outstanding pro forma as adjusted............................... 24 24 Class C common stock, $0.01 par value ("Non-Voting Common"); 300,000 shares authorized; 225,000 issued and outstanding; 225,000 issued and outstanding pro forma; none issued and outstanding pro forma as adjusted............................................ 2 2 -- Series A Preferred Stock, $0.01 par value, 10,000 shares authorized; 6,962.2 issued and outstanding; 6,962.2 shares issued and outstanding pro forma; none issued and outstanding pro forma as adjusted... 139,244 139,244 -- Series B Preferred Stock, $0.01 par value; 1,000 shares authorized; 991.1 issued and outstanding; 991.1 shares issued and outstanding pro forma; none issued and outstanding pro forma as adjusted............... 59,466 59,466 -- Additional paid-in capital............................. 113,780 113,780 Accumulated deficit.................................... (129,644) (136,243) --------- --------- -------- Subtotal.......................................... 182,874 176,275 --------- --------- -------- Total capitalization........................... $ 536,660 $ 605,061 $ ========= ========= ========
- --------------- (1) The Company began including 100% of the ICS Operations in its financial statements on April 13, 1998, the date the initial phase of the acquisition of the ICS Operations was consummated. As of May 31, 1998, the acquisition of approximately 72% of the ICS Operations had been consummated. See "Risk Factors -- Risks Associated with Acquisitions." (2) Gives effect to the Notes Offering and the Senior Credit Facility Retirement as if such events had occurred on May 31, 1998. (3) Gives effect to the Offering (assuming an initial public offering price of $ per share and after deducting the Underwriters' discounts and commissions and estimated fees and expenses of $ ) and to (i) the conversion of all outstanding shares of Non-Voting Common into shares of Class A Common Stock upon consummation of the Offering, (ii) the conversion of all outstanding shares of Series B Preferred into shares of Class A Common Stock promptly following consummation of the Offering and (iii) the conversion of all outstanding shares of Series A Preferred into shares of Multi-Vote Common upon consummation of the Offering. 25 28 DILUTION The net tangible book value per share of the Class A Common Stock is the difference between the Company's tangible assets and its liabilities, divided by the number of shares of Class A Common Stock, Multi-Vote Common and Non-Voting Common outstanding. For investors in the Class A Common Stock, dilution is the per share difference between the assumed $ per share initial offering price of the Class A Common Stock offered hereby and the net tangible book value of the Class A Common Stock immediately after completing the Offering. Dilution in this case results from the fact that the per share offering price of the Class A Common Stock is substantially in excess of the per share net tangible book value of the Class A Common Stock prior to the Offering. On May 31, 1998, the Company's net tangible book value was approximately $22.6 million and the per share net tangible book value based on 2,742,769.54 shares of Class A Common Stock, Multi-Vote Common and Non-Voting Common outstanding was approximately $8.25 per share. As of May 31, 1998, without taking into account any changes in the Company's net tangible book value subsequent to that date other than to give effect to the sale of the Class A Common Stock offered hereby based on an assumed offering price of $ per share (after deducting the estimated offering expenses, including underwriting discounts and commissions) and to give effect to the conversion of the Non-Voting Common into shares of Class A Common Stock and the conversion of the Series A Preferred and Series B Preferred into shares of Multi-Vote Common and shares of Class A Common Stock, respectively (based on an assumed offering price of $ per share), the pro forma net tangible book value of each of the assumed outstanding shares of Common Stock would have been $ per share after the Offering. Therefore, investors in the Class A Common Stock would have paid $ for a share of Class A Common Stock having a net tangible book value of approximately $ per share after the Offering; that is, their investment would have been diluted by approximately $ per share. At the same time, existing stockholders would have realized an increase in net tangible book value of $ per share after the Offering without further cost or risk to themselves. The following table illustrates this per share dilution: Assumed initial public offering price per share of Class A Common Stock.............................................. $ Net tangible book value per share of Class A Common Stock before the Offering.................................... $ Increase in net tangible book value per share of Class A Common Stock attributable to investors in the Offering(1)(2)......................................... $ Pro forma net tangible book value per share of Class A Common Stock after the Offering(1)(2)..................... $ -------- Dilution to new investors(2)................................ $ ========
- --------------- (1) After deduction of the estimated offering expenses payable by the Company (including the underwriting discounts and commissions). (2) Assumes that none of the Company's outstanding options or warrants are exercised. See "Management -- Incentive Stock Plan," and "-- Stock Purchase Plan" and "Description of Capital Stock." Assumes the conversion of the Non-Voting Common into shares of Class A Common Stock and the conversion of the Series A Preferred and the Series B Preferred into shares of Multi-Vote Common and shares of Class A Common Stock, respectively, all based on an assumed offering price of $ per share of Class A Common Stock. 26 29 SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA The following selected historical consolidated financial data for the year ended December 31, 1994, the eight month period ended August 31, 1995 and as of and for the years ended August 31, 1996 and 1997 have been derived from the consolidated financial statements of the Company included elsewhere herein and audited by Deloitte & Touche LLP, independent auditors as set forth in their report thereon also included herein. The selected financial data of the Company as of and for the period ended December 31, 1993 and as of December 31, 1994 and August 31, 1995 is derived from the Company's audited financial statements not included herein. The selected financial data presented below as of and for the nine month periods ended May 31, 1997 and 1998 have been derived from unaudited consolidated financial statements of the Company. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which consist only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position and results of operation for these periods. In 1995, the Company changed its fiscal year end to August 31 to match that of its majority stockholder. As a result of the change in fiscal year and the Company's history of growth through acquisitions the Company's historical financial results are not directly comparable from period to period, nor are they indicative of future results of operations in many respects. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Consolidated Financial Statements of the Company and the notes thereto, appearing elsewhere in this Prospectus.
PERIOD FROM APRIL 20, 1993 EIGHT MONTH (DATE OF INCEPTION) YEAR ENDED PERIOD ENDED TO DECEMBER 31, DECEMBER 31, AUGUST 31, 1993 1994 1995 ------------------- ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED OPERATIONS DATA Revenues: Cable television.............. $ 12 $ 240 $ 8,783 Telecommunications............ -- 202 788 ----- ------- -------- Total revenues................ 12 442 9,571 Operating expenses: Cost of services.............. 6 470 4,558 Customer support, general and administrative............. 304 7,733 12,055 Depreciation and amortization............... 8 117 2,420 ----- ------- -------- Total operating expenses........ 318 8,320 19,033 ----- ------- -------- Loss from operations............ (306) (7,878) (9,462) Interest expense, net(1)........ (1) (66) (1,169) ----- ------- -------- Loss before income taxes........ (307) (7,944) (10,631) Net loss(2)..................... $(307) $(7,944) $(10,161) ===== ======= ======== Basic and diluted loss per share of Common Stock(3)............ N/A N/A $ (6.89) NINE MONTHS YEAR ENDED ENDED AUGUST 31, MAY 31, ----------------------- --------------------------- 1996 1997 1997 1998 ---------- ---------- ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED OPERATIONS DATA Revenues: Cable television.............. $ 25,893 $ 36,915 $ 26,915 $ 42,195 Telecommunications............ 1,711 2,922 2,202 2,721 -------- -------- -------- -------- Total revenues................ 27,604 39,837 29,117 44,916 Operating expenses: Cost of services.............. 11,868 19,202 14,016 20,213 Customer support, general and administrative............. 19,636 28,926 19,842 25,044 Depreciation and amortization............... 8,676 14,505 9,934 18,432 -------- -------- -------- -------- Total operating expenses........ 40,180 62,633 43,792 63,689 -------- -------- -------- -------- Loss from operations............ (12,576) (22,796) (14,675) (18,773) Interest expense, net(1)........ (5,854) (25,739) (16,993) (29,459) -------- -------- -------- -------- Loss before income taxes........ (18,430) (48,535) (31,668) (48,232) Net loss(2)..................... $(18,430) $(48,535) $(31,668) $(48,232) ======== ======== ======== ======== Basic and diluted loss per share of Common Stock(3)............ $ (8.30) $ (19.98) $ (13.28) $ (20.04)
DECEMBER 31, AUGUST 31, -------------- ------------------------------ MAY 31, 1993 1994 1995 1996 1997 1998 ---- ------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA Cash and cash equivalents.......................... $ 41 $ 5,019 $ 2,036 $ 1,677 $ 87,305 $ 99,704 Restricted investments............................. -- -- -- -- 67,206 55,294 Property, plant and equipment, net................. 509 11,379 48,060 103,800 160,442 251,324 Intangible assets.................................. -- 16,189 55,443 65,876 82,583 160,255 Total assets....................................... 588 33,820 108,072 175,978 403,416 576,098 Convertible notes due stockholder.................. -- 15,000 17,950 89,414 129,604 -- Total liabilities.................................. 206 31,007 39,527 116,700 383,051 393,224 Stockholders' equity............................... 382 2,813 68,545 59,279 20,365 182,874
27 30
PERIOD FROM APRIL 20, 1993 NINE MONTHS (DATE OF EIGHT MONTH YEAR ENDED ENDED INCEPTION) YEAR ENDED PERIOD ENDED AUGUST 31, MAY 31, TO DECEMBER 31, DECEMBER 31, AUGUST 31, ----------------------- --------------------- 1993 1994 1995 1996 1997 1997 1998 --------------- ------------ ------------ ---------- ---------- --------- --------- (DOLLARS IN THOUSANDS) OTHER FINANCIAL DATA Net cash flows used in operating activities.................... $(183) $ (3,332) $ (3,494) $ (453) $ (15,935) $ (2,623) $ (15,151) Net cash flows used in investing activities.................... (517) (10,576) (72,144) (72,037) (143,125) (129,127) (88,675) Net cash flows provided by financing activities.......... 741 18,886 72,655 72,131 244,688 243,570 116,225 Capital expenditures(4)......... 517 9,278 22,170 62,121 71,505 44,470 62,015 EBITDA(5)....................... (298) (7,761) (7,042) (3,900) (8,291) (4,741) (341)
AS OF ------------------------------------------ AUGUST 31, ------------------------------- MAY 31, 1995 1996 1997 1998 ------- ------- ------- ------- OPERATING DATA CABLE TELEVISION Units under contract(6)..................................... 173,324 241,496 295,149 431,384 Units passed(7)............................................. 170,336 225,433 254,032 397,281 Basic subscribers........................................... 75,944 114,163 132,556 217,106 Basic penetration(8)........................................ 44.6% 50.6% 52.2% 54.6% Premium units(9)............................................ 39,753 60,641 95,150 175,478 Pay-to-basic ratio(9)(10)................................... 52.3% 53.1% 71.8% 86.7% Average monthly revenue per basic subscriber(11)............ $ 22.84 $ 22.70 $ 24.94 $ 27.71 TELECOMMUNICATIONS Units under contract(6)..................................... 10,322 20,945 39,831 89,911 Units passed(7)............................................. 9,116 12,364 16,572 33,131 Lines(12)................................................... 2,650 4,126 6,185 7,700 Line penetration(13)........................................ 29.1% 33.4% 37.3% 26.6% Average monthly revenue per line(14)........................ $ 36.86 $ 42.10 $ 47.23 $ 50.63
- --------------- (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, $10,671,000 and $9,640,000 for the eight month period ended August 31, 1995, the years ended August 31, 1996 and 1997 and the nine months ended May 31, 1997 and 1998, respectively. (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. (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." 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. (5) EBITDA represents earnings before interest expense (net of interest income and amounts capitalized), income tax benefits, depreciation and amortization. EBITDA is not intended to represent cash flow from operations or an alternative to net loss, each as defined by generally accepted accounting principles. In addition, the measure of EBITDA presented herein may not be comparable to other similarly titled measures by other companies. The Company believes that EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in the cable television and telecommunications industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in its industry. (6) Units under contract represents the number of units currently passed and additional units with respect to which the Company has entered into Rights of Entry for the provision of cable television and telecommunications services, respectively, but which the Company has not yet passed and which the Company expects to pass within the next five years. At this time substantially all units under contract for telecommunications are also under contract for cable television. (7) Units passed represents the number of units with respect to which the Company has connected its cable television and telecommunications systems, respectively. The difference between units under contract and units passed represents units for which Rights of Entry have been entered into, but which are not yet connected for cable television and telecommunications services, respectively. (8) Basic penetration is calculated by dividing the total number of basic subscribers at such date by the total number of units passed. 28 31 (9) Beginning with the year ended August 31, 1997, to be consistent with most other cable television providers, the Company has revised the method of reporting premium penetration to include all premium units in the calculation. Historically the calculation excluded premium channels that were provided to customers as part of an expanded basic line up or other special arrangements. Prior years have not been restated. For comparative purposes, the premium units and the pay-to-basic ratios as of August 31, 1997 and May 31, 1998, presented under the previous method of reporting are 84,875 and 129,553, respectively, and 64.0% and 64.0%, respectively. (10) Pay-to-basic ratio is calculated by dividing the total number of premium units by the total number of basic subscribers. (11) Represents average monthly revenue per the average number of basic subscribers for the fiscal periods ended as of the date shown. (12) Lines represent the number of telephone lines currently being provided to telecommunications subscribers. A telecommunications subscriber can subscribe for more than one line. The Company has revised its method of reporting lines to reflect only one line in service where multiple customers share a single line. The Company has restated the number of lines previously reported to reflect this change. (13) Line penetration is calculated by dividing the total number of telecommunications lines at such date by the total number of units passed. (14) Represents average monthly revenue per the average number of lines for the fiscal period ended as of the date shown. 29 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus. Except as otherwise indicated, the following analysis relates solely to historical results and does not consider any potential impact that the Offering or the proposed use of proceeds may have on the operations and financial condition of the Company. OVERVIEW OpTel is a leading network based provider of integrated communications services, including local and long distance telephone and cable television services, to residents of MDUs in the United States. The Company was organized in April 1993 to build, acquire and operate private cable television and telecommunications systems. The Company seeks to capitalize on opportunities created by the Telecom Act to become the principal competitor in the MDU market to the ILEC and the incumbent franchise cable television operator. The Company has commenced offering central office switched telecommunications services in Houston and Dallas-Fort Worth and expects to offer such services in substantially all of its major markets by the end of calendar 1999. Since inception, the Company has experienced substantial growth. This growth has been achieved through a combination of acquisitions of other operators, many of which operated SMATV systems, and the negotiation of new Rights of Entry. On April 13, 1998, OpTel closed the initial phase of the acquisition of the ICS Operations. As of May 31, 1998, OpTel had acquired approximately 66,000 of the ICS cable television and telecommunications units under contract (or approximately 72% of the approximately 90,000 ICS units under contract to be acquired). While the Company expects the acquisition of the remaining units to be completed over the next few months, the acquisition of these units is subject to certain conditions, including the receipt of third party consents, and there can be no assurance that the balance of the acquisition will be consummated. See "Risk Factors -- Risks Associated with Acquisitions." As of May 31, 1998, the Company had 369,968 and 28,971 units passed for cable television and telecommunications, respectively. As of such date, OpTel had 202,355 cable television subscribers and 7,046 telecommunication lines in service. In general, the conduct of the acquired operations prior to acquisition was materially different from the conduct of operations following acquisition. Among the changes made in many of the businesses after acquisition were (i) commencing conversion of SMATV systems to 18GHz or fiber optic networks, (ii) delivering customer service from a more advanced national call center in Dallas, (iii) increasing the number of programming channels, (iv) improving technical and field service and system reliability, (v) improving regulatory and financial controls and (vi) initiating telecommunications services offerings. OpTel believes that by utilizing a single advanced network infrastructure it can be the first to market a competitive integrated package of voice and video services in its serviced markets. As of March 31 and May 31, 1998, respectively, the Company's networks delivered cable television services to approximately 229,935 and 249,549 units representing approximately 72% and 63% of the Company's units passed for cable television. The decrease in the percentage of units passed served by the Company's networks is a direct result of the acquisition of the ICS Operations on April 13, 1998. OpTel expects to connect substantially all of the MDUs currently served by SMATV systems to 18GHz or fiber optic networks by the end of calendar 2000. Once an MDU is brought onto the Company's networks, gross profit per subscriber at the MDU generally increases. In addition, networks provide OpTel with the infrastructure necessary to deliver an integrated package of communications services to subscribers at the MDU. The Company's telecommunications revenue is comprised of monthly recurring charges, usage charges and initial non-recurring charges. Monthly recurring charges include fees paid by subscribers for line rental and additional features. Usage charges consist of fees paid by end users for long distance, fees paid by the ILEC for terminating intraLATA traffic to the Company's network and access charges paid by carriers for long distance traffic originated and terminated to and from local customers. Initial non-recurring charges include fees paid by subscribers for installation. 30 33 The Company's cable television revenue is comprised of monthly recurring charges paid by subscribers, monthly recurring charges paid by MDU-owners for bulk services and fees paid by subscribers for premium services and some non-recurring charges. The Company offers its cable services under either retail or bulk agreements. Under retail agreements, the Company contracts directly with MDU residents. Under bulk agreements, the Company contracts directly with MDU owners for basic cable to be provided to all units in a particular MDU, but generally at lower prices than under retail agreements. This lower per unit rate is generally offset by the 100% penetration achieved by bulk agreements. Premium services are contracted for directly by subscribers under both types of agreements and include fees paid for premium channels and pay-per-view. The Company anticipates that its overall revenue per subscriber will increase as the number of bulk contracts declines as a percentage of the Company's Rights of Entry. Additionally, the Company believes that its revenue per subscriber will increase as it migrates its SMATV properties onto the Company's networks. See "Business -- Network Architecture." The cost of services for the Company's telecommunications services consists of leased transport facilities, terminating access charges from ILECs, fees paid to IXCs for long distance and revenue sharing. Leased transport facility costs may include the rental of T-1s to connect the MDU's to the ILEC and may include costs associated with connecting the Company's Network Hubs to each other and to its central office switch. Terminating access charges are fees paid to the ILEC for intraLATA calls which are originated by OpTel's subscribers and terminated on the ILECs network. Fees paid to IXCs for long distance include costs associated with terminating toll calls initiated by OpTel's subscribers. Revenue sharing costs include a commission type payment to owners of MDUs for marketing the Company's telephone product. The cost of services for the Company's cable television services consists of programming costs, franchise fees and revenue sharing. Programming costs include those fees paid to obtain the rights to broadcast certain video programming. Revenue sharing costs include a commission type payment to owners of MDUs. The Company's selling, general and administrative expenses include selling and marketing costs, customer service, engineering, facilities and corporate and regional administration. Through May 31, 1998, the Company had invested approximately $444 million primarily in its cable television and telecommunications assets. The Company's revenues have grown from $0.4 million for the year ended December 31, 1994 to $39.8 million for fiscal 1997. While pursuing its investment and development strategy, the Company has incurred substantial up-front operating expenses for marketing, customer operations, administration and maintenance of facilities, general and administrative expenses and depreciation and amortization in order to solicit and service customers in advance of generating significant revenues. As a result of these factors, the Company has generated operating losses of $6.5 million, $22.8 million, $12.6 million, and $9.5 million for the quarter ended May 31, 1998, fiscal 1997, fiscal 1996 and the eight months ended August 31, 1995, respectively, as its cable television and telecommunications customer base has grown. The Company reported positive EBITDA (as defined in the Glossary) of $1.0 million for the quarter ended May 31, 1998 as compared with negative EBITDA of $2.3 million, $8.3 million, $3.9 million and $7.0 million for the nine months ended May 31, 1998 and for fiscal 1997, fiscal 1996 and the eight months ended August 31, 1995, respectively. The Company expects that the incremental operating costs associated with the addition of new customers in its existing markets will be principally limited to customer operations and marketing expenses and, therefore, that its EBITDA will improve significantly. There can be no assurance that the Company will generate operating profits or continue to generate positive EBITDA in the future. FACTORS AFFECTING FUTURE OPERATIONS The principal operating factors affecting the Company's future results of operations are expected to include (i) changes in the number of MDUs under Rights of Entry, (ii) penetration rates for its services, (iii) the terms of its arrangements with MDU owners, including revenue sharing and length of contract, (iv) the prices that it charges its subscribers, (v) normal operating expenses, which in the cable television business principally consist of programming expenses and in the telecommunications business principally consist of fees paid to long distance carriers, the cost of trunking services and other LEC charges, as well as, in each case, billing and collection costs, technical service and maintenance expenses and customer support 31 34 services, and (vi) capital expenditures as the Company commences offering central office switched telecommunication services in additional markets and completes its conversion of SMATV systems. The Company's results of operations may also be impacted by future acquisitions. The Company anticipates that it will continue to have higher churn than is typical of an incumbent franchise cable television operator due to the frequent turnover of MDU tenants. This churn generally does not result in a reduction in overall penetration rates since the outgoing subscriber is generally quickly replaced by a new tenant in the unit. This may result in average installation revenue per subscriber that is higher than for a franchise cable television operator. Although this may also require higher installation expenses per subscriber, because of the layout of MDUs and the Company's ability to obtain "permission to enter" from the MDU owner, installations can often be completed when the subscriber is not home, limiting the expense of installation. Accordingly, the Company does not believe that churn is as significant an operating statistic as would be the case for franchise cable television operators. With respect to the Company's telecommunications services, the Company believes that its best opportunity for a sale arises when a subscriber first signs a lease and takes occupancy in an MDU. Accordingly, the Company believes that during the early stages of the roll out its central office switched telecommunications services in a market it benefits from the high rate of MDU resident turnover. RESULTS OF OPERATIONS In 1995, the Company changed its fiscal year end to August 31 to match that of its majority stockholder. In addition, all of the Company's acquisitions have been accounted for by the purchase method of accounting. As a result of the Company's growth through acquisitions and the change in fiscal year, the Company's historical financial results are not directly comparable from period to period, nor are they indicative of future results of operations in many respects. The following table sets forth, for the periods indicated, certain operating and financial information relating to the Company.
AS OF AS OF AUGUST 31, MAY 31, --------------------------- ----------------- 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- OPERATING DATA CABLE TELEVISION Units passed(1).............................. 170,336 225,433 254,032 252,481 369,968 Basic subscribers............................ 75,944 114,163 132,556 134,147 202,355 Basic penetration(2)......................... 44.6% 50.6% 52.2% 53.1% 54.7% Average monthly revenue per basic subscriber(3).............................. $ 22.84 $ 22.70 $ 24.94 $ 25.00 $ 27.74 TELECOMMUNICATIONS Units passed(1).............................. 9,116 12,364 16,572 15,248 28,971 Lines(4)..................................... 2,650 4,126 6,185 5,402 7,046 Line penetration(5).......................... 29.1% 33.4% 37.3% 35.4% 24.3% Average monthly revenue per line(6).......... $ 36.86 $ 42.10 $ 47.23 $ 50.00 $ 50.63
32 35
EIGHT MONTH YEAR ENDED NINE MONTH PERIOD PERIOD ENDED AUGUST 31, ENDED MAY 31, AUGUST 31, -------------------- -------------------- 1995 1996 1997 1997 1998 ------------ -------- --------- --------- -------- (DOLLARS IN THOUSANDS) FINANCIAL DATA Revenues: Cable television.................. $ 8,783 $ 25,893 $ 36,915 $ 26,915 $ 42,195 Telecommunications................ 788 1,711 2,922 2,202 2,721 -------- -------- --------- --------- -------- Total revenues............ $ 9,571 $ 27,604 $ 39,837 $ 29,117 $ 44,916 Total revenues minus cost of services.......................... $ 5,013 $ 15,736 $ 20,635 $ 15,101 $ 24,703 Total revenues minus cost of services as a percentage of total revenues.......................... 52.4% 57.0% 51.8% 51.9% 55.0% EBITDA(7)........................... $ (7,042) $ (3,900) $ (8,291) $ (4,714) $ (341) Net cash flows used in operating activities........................ $ (3,494) $ (453) $ (15,935) $ (2,623) $(15,151) Net cash flows used in investing activities........................ (72,144) (72,037) (143,125) (129,127) (88,675) Net cash flows provided by financing activities........................ 72,655 72,131 244,688 243,570 116,225
- --------------- (1) Units passed represents the number of units with respect to which the Company has connected its cable television and telecommunications systems, respectively. (2) Basic penetration is calculated by dividing the total number of basic subscribers at such date by the total number of units passed. (3) Represents average monthly revenue per the average number of basic subscribers for the fiscal periods ended as of the date shown. (4) Lines represent the number of telephone lines currently being provided to telecommunications subscribers. A telecommunications subscriber can subscribe for more than one line. The Company has revised its method of reporting lines to reflect only one line in service where multiple customers share a single line. The Company has restated the number of lines previously reported to reflect this change. (5) Line penetration is calculated by dividing the total number of telecommunications lines at such date by the total number of units passed. (6) Represents average monthly revenue per the average number of lines for the fiscal period ended as of the date shown. (7) EBITDA represents income (loss) from operations before interest (net of interest income and amounts capitalized), income taxes and depreciation and amortization. EBITDA is not intended to represent cash flow from operations or an alternative to net loss, each as defined by generally accepted accounting principles. In addition, the measure of EBITDA presented herein may not be comparable to other similarly titled measures by other companies. The Company believes that EBITDA is a standard measure commonly reported and widely used by analysts, investors and other interested parties in the cable television and telecommunications industries. Accordingly, this information has been disclosed herein to permit a more complete comparative analysis of the Company's operating performance relative to other companies in its industry. Nine months ended May 31, 1998 compared with nine months ended May 31, 1997 Total Revenues. Total revenues for the nine months ended May 31, 1998 increased by $15.8 million or 54.3% to $44.9 million compared to revenues of $29.1 million for the nine months ended May 31, 1997. Cable Television. Cable television revenues for the nine months ended May 31, 1998 increased by $15.3 million, or 56.8%, to $42.2 million from $26.9 million in the comparable period of fiscal 1997, reflecting a 61.8% increase in the number of customers and an 11.0% increase in the average monthly revenue per customer. These increases resulted from a combination of rate increases, a change in the mix of customers from bulk to retail, a shift in mix to the cities with higher revenues per customer and increased premium revenues as the Company's pay-to-basic ratio improved from 69.9% to 86.7%. The Company also continued to grow basic penetration, which increased by 1.5% compared to the third quarter of fiscal 1997. Telecommunications. Telecommunications revenues for the nine months ended May 31, 1998 increased by 23.6% to $2.7 million from $2.2 million in the comparable period in of fiscal 1997, reflecting a 42.5% increase in the number of lines. In Houston, the Company is in the final stages of converting properties previously served by PBX switches to the Company's central office switch. In addition, the Company recently 33 36 launched its central office switch in Dallas-Fort Worth. The Company is also reviewing a series of alternatives for rapid switch deployment in other markets. Cost of Services. Cost of services (programming costs, telecommunication service costs and revenue sharing with owners of MDUs) increased by 44.2% to $20.2 million from $14.0 million because of an increase in subscribers primarily due to the acquisitions of Phonoscope and ICS Operations. Expenses. Expenses (customer support, selling, general and administrative expenses) were $25.0 million for the nine months ended May 31, 1998 compared to $19.8 million for the comparable period of fiscal 1997. As a percent of revenues, selling, general and administrative expenses declined from 68.1% to 55.8%. The increase in overall customer support, selling, general and administrative expenses was in line with the Company's budget and largely due to an increase in personnel associated with the expansion of the Company's operations and the planned roll out of the Company's telecommunications services. EBITDA. The Company's EBITDA for the nine months ended May 31, 1998 were negative $0.3 million, compared to negative $4.7 million in the comparable period of fiscal 1997. The Company's net cash flows used in operating activities were $15.2 million, compared to $2.6 million in the preceding fiscal year. The Company's net cash flows used in investing activities were $176.2 million, compared to $129.1 million in the preceding fiscal year. The Company's net cash flows provided by financing activities were $116.2 million, compared to $243.6 million in the preceding fiscal year. Depreciation and Amortization. Depreciation and amortization was $18.4 million for the third quarter of fiscal 1998 compared to $9.9 million in the third quarter of fiscal 1997. The 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 $35.9 million for the first nine months of fiscal 1998, an increase of $18.9 million over net interest expense of $17.0 million for the first nine months of fiscal 1997, reflecting the increase in the Company's debt incurred principally to fund the build out of its network. See "-- Liquidity and Capital Resources." Interest income and other income. Interest income and other income was $6.5 million for the nine month period ended May 31, 1998, an increase of $6.5 million over nominal interest income and other income from the comparable period for fiscal 1997. 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. Fiscal year ended August 31, 1997 compared to fiscal year ended August 31, 1996 Total revenues. Total revenues for the fiscal year ended August 31, 1997 increased by $12.2 million or 44% to $39.8 million compared to revenues of $27.6 million for the fiscal year ended August 31, 1996. Cable television. Compared to fiscal 1996, cable television revenues increased by $11.0 million, or 42%, to $36.9 million from $25.9 million, reflecting both a 16% increase in the number of subscribers and a 10% increase in the average monthly revenue per basic subscriber which rose from $22.7 for fiscal 1996 to $24.9 for fiscal 1997. The increase in revenue per subscriber resulted from a combination of rate increases following property upgrades, annual rate increases and increased premium revenues as the Company's pay to basic ratio improved from 53% to 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 34 37 number of units where telephone service is offered from 12,364 at the end of fiscal 1996 to 16,572 at the end of fiscal 1997. Cost of Services. Cost of services (programming costs, telecommunications service costs and revenue sharing with owners of MDUs) 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, total revenues minus cost of services as a percentage of total revenues decreased over the year from 57.0% to 51.8%, largely due to costs associated with the increase in the number of subscribers served by PBX telephone service, the increase in premium cable penetration which has lower associated margins and, to a lesser extent, an increase in the proportion of the Company's portfolio under revenue sharing arrangements with property owners. The PBX costs represent the costs of interconnecting individual properties with the ILEC's central office switch. These costs will be substantially reduced once the Company is able to utilize its own networks to pass telephone traffic to Company owned central office switches. Consequently the Company expects total revenues minus cost of services as a percentage of total revenues to improve once its central office switches are employed to serve telephone customers. Expenses. Expenses (customer support, selling, general and administrative expenses) were $28.9 million for fiscal 1997 compared to $19.6 million for fiscal 1996. The increase in expenses was largely due to an increase in personnel associated with the expansion of the Company's operations and recruitment for the roll out of the Company's telecommunications services in advance of the expected revenues. In addition the Company incurred a one time reorganization charge of $1.4 million associated with the restructuring of certain senior management positions during the year which was included in operating expenses. EBITDA. The Company's EBITDA decreased from negative $3.9 million to negative $8.3 million over the year, largely due to the reduced gross margins and the expansion of the Company's operations in anticipation of the roll out of telecommunications services. The increase in negative EBITDA was largely within expectations given that the Company increased its personnel in the middle of fiscal 1997 in anticipation of two significant events that occurred after the end of the fiscal year: the launch of the Houston central office switch and the consummation of the acquisition of the residential cable television and associated fiber optic network assets of Phonoscope. 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 income and other income. Interest income 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. Fiscal year ended August 31, 1996 compared with eight months ended August 31, 1995 Total revenues. Revenues were $27.6 million for fiscal 1996, an increase of 188% over revenues of $9.6 million for the eight months ended August 31, 1995. Of the revenues generated in fiscal 1996, 93.8% and 6.2% represented revenues from cable television and telecommunications, respectively, compared to 91.8% and 8.2%, respectively, for the eight months ended August 31, 1995. 35 38 Cable television. Cable television revenues were $25.9 million for fiscal 1996, an increase of 194%, over cable television revenues of $8.8 million for the eight months ended August 31, 1995. The growth was attributable in part to an increase in the average number of cable television subscribers, which accounted for approximately $15.6 million of the increase. Cable television revenues also grew in part from an increase in the retail price of the Company's cable television services which accounted for approximately $1.5 million of the increase. Telecommunications. Telecommunications revenues were $1.7 million for fiscal 1996, an increase of 113% over the eight months ended August 31, 1995. This growth was largely due to an increase in the average number of telecommunications lines. Cost of Services. Cost of services (programming costs, telecommunications service costs and revenue sharing with owners of MDUs) was $11.9 million for fiscal 1996, an increase of 159%, from $4.6 million for the eight months ended August 31, 1995. The increases in costs were primarily attributable to the growth in the number of cable television subscribers and telecommunications lines. Total revenues less costs of services as a percentage of total revenues increased from 52.4% for the eight months ended August 31, 1995 to 57.0% for fiscal 1996. Expenses. Expenses (customer support, selling, general and administrative expenses) increased to $19.6 million from $12.1 million, or 111%, over the eight months ended August 31, 1995. The increase was largely due to an increase in personnel associated with the expansion of the Company's operations and the rapid growth in the size of the cable television and telecommunications networks and the number of subscribers. Included in the above amounts are costs of $2.3 million for fiscal 1996 and $3.8 million for the eight months ended August 31, 1995, relating to assimilating acquisitions made by the Company and including severance, relocation and recruitment costs. EBITDA. Negative EBITDA increased to $3.9 million for fiscal 1996. The improvement in negative EBITDA represents an increase of $3.1 million over negative EBITDA of $7.0 million for eight months ended August 31, 1995. Negative EBITDA represented 14.1% of total revenues for fiscal 1996 compared to 73.6% of total revenues for the eight months ended August 31, 1995. Depreciation and amortization. Depreciation and amortization was $8.7 million for fiscal 1996 compared to $2.4 million for the eight months ended August 31, 1995. The 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 $6.0 million for year ended August 31, 1996, an increase of $4.7 million over interest expense of $1.3 million for eight months ended August 31, 1995, reflecting the increase in the Company's debt incurred principally to fund the build out of its network. Income tax benefit. The Company has experienced net operating losses for the year ended August 31, 1996 and the eight months ended August 31, 1995. 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. Eight months ended August 31, 1995 compared with the year ended December 31, 1994 Total revenues. Revenues were $9.6 million for the eight months ended August 31, 1995, an increase of $9.2 million over revenues of $0.4 million for the year ended December 31, 1994. Of the revenues generated in the eight months ended August 31, 1995, 91.8% and 8.2% represented revenues from cable television and telecommunications, respectively, compared to 54.3% and 45.7% respectively, for the year ended December 31, 1994. Cable television. Cable television growth was primarily attributable to an increase in the average number of cable television subscribers. 36 39 Telecommunications. Telecommunications revenue growth was primarily due to an increase in the average number of telecommunications subscribers. Cost of services. Cost of services was $4.6 million for the eight months ended August 31, 1995, an increase of $4.1 million from $0.5 million for the year ended December 31, 1994. These expenses represent variable costs of the Company, including programming costs, interconnection costs and revenue sharing with MDUs. The increase was primarily attributable to the growth in the number of cable television subscribers and telecommunications lines. Expenses. Expenses (customer support, selling, general and administrative expenses) were $8.2 million for the eight months ended August 31, 1995, an increase of 6.5% over the year ended December 31, 1994. The increase was largely due to an increase in personnel associated with the expansion of the Company's operations generated primarily by the acquisition of private cable companies in five markets and the rapid growth in the size of the Company's cable television and telecommunications networks and in the number of subscribers. The Company incurred reorganization costs of $3.8 million for the eight month period ended August 31, 1995, related to the costs of assimilating the acquisitions made by the Company and include severance, relocation and recruitment costs. EBITDA. Negative EBITDA increased to ($7.0) million for the eight months ended August 31, 1995. The increase in negative EBITDA represents an increase of $0.8 million from negative EBITDA of $(7.8) million for the year ended December 31, 1994. Negative EBITDA represented (73.6)% of total revenues for the eight months ended August 31, 1995. Depreciation and amortization. Depreciation and amortization was $2.4 million for eight months ended August 31, 1995 compared to $0.1 million for the year ended December 31, 1994. The 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 was $1.3 million for eight months ended August 31, 1995, an increase of $1.2 million over interest expense for year ended December 31, 1994, reflecting the increase in the Company's debt incurred principally to fund the build out of its network. Income tax benefit. The Company recorded an income tax benefit of $0.5 million for the eight months ended August 31, 1995 which was the result of the reduction of a deferred tax liability no longer required due to increased tax losses being available. No income tax expense was recorded for the year ended December 31, 1994. LIQUIDITY AND CAPITAL RESOURCES The 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 $18.8 million, $22.8 million, $12.6 million, $9.5 million and $7.9 million for the nine months ended May 31, 1998, fiscal 1997, fiscal 1996, the eight months ended August 31, 1995 and the year ended December 31, 1994, respectively, as its cable television and telecommunications customer base has grown. The Company reported net losses of $48.2 million for the nine months ended May 31, 1998 as compared with net losses of $48.5 million, $18.4 million, $10.2 million and $7.9 million for fiscal 1997, fiscal 1996, the eight months ended August 31, 1995 and the year ended December 31, 1994, 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 building the Company's cable television and telecommunications networks and related business 37 40 activities was $103.3 million for the first nine months of fiscal 1998 (including $36.5 million for the acquisition of Phonoscope) compared to $49.5 million for the first nine months of fiscal 1997. From inception and until the issuance of the 1997 Notes, the Company relied primarily on investments from GVL, its principal stockholder, in the form of equity and convertible notes to fund its operations. Effective March 1, 1998, GVL converted all of the outstanding GVL Notes, including accrued interest, into shares of Series A Preferred with an aggregate liquidation preference of approximately $139.2 million. The Series A Preferred earns dividends at the annual rate of 9.75%, initially payable in additional shares, and is convertible under certain circumstances and at certain prices at the option of the holder into shares of Multi-Vote Common. See "Description of Capital Stock -- Preferred Stock." VPC has advised the Company that upon consummation of the Offering it intends to convert the Series A Preferred into shares of Multi-Vote Common. Based on an initial public offering price of $ per share, the Series A Preferred will convert into shares of Multi-Vote Common. None 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 the 1997 Notes along with 225,000 shares of Non-Voting Common for aggregate net proceeds of $219.2 million. Of this amount, approximately $79.8 million was placed in an escrow account in order to cover the first six semi-annual interest payments due on the 1997 Notes. At May 31, 1998, approximately $54.5 million remained in such escrow account. See "Description of Certain Indebtedness -- The 1997 Notes." In December 1997, the Company obtained the Senior Credit Facility which consisted of a $125 million term loan bearing interest at LIBOR plus 3.5% and a $25 million revolving credit commitment. The Senior Credit Facility was terminated on July 7, 1998. To comply with certain covenants of the Senior Credit Facility and to reduce the impact of changes in interest rates on the Senior Credit Facility, the Company entered into interest rate swap agreements with total notional amounts of $75 million in which the Company has 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. On July 7, 1998, the Company issued $200 million principal amount of 1998 Notes. The net proceeds of the Notes Offering was approximately $194.1 million. Of this amount, approximately $126.3 million was used to effect the Senior Credit Facility Retirement and approximately $22.0 million was placed in an escrow account to fund the first two interest payments on the 1998 Notes. See "Description of Certain Indebtedness -- The 1998 Notes." 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 $550 million on capital expenditures over the next five years. Additionally, the Company will incur approximately $261 million in cash interest expense over the next five years. The Company currently has approximately $77 million restricted for scheduled interest payments over the next eighteen months. In addition to the Offering, the Company expects it will need approximately $100 million in additional financing over the next five years in order to achieve its business strategy within its targeted markets. 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 raise future financings 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. In addition, GVL has the power to prevent the Company from obtaining additional debt or equity financing. See "Risk Factors -- Control by GVL" and "Principal Stockholders -- Stockholders' Agreement." GVL is party to an indenture which limits the aggregate amount of indebtedness which can be incurred by GVL and its subsidiaries, including the Company, taken as a whole (based upon a ratio of total consolidated indebtedness to consolidated operating cash flow). As a result, GVL's strategies and the operating results of its 38 41 subsidiaries other than the Company may affect the ability of the Company to incur additional indebtedness. As of May 31, 1998, GVL was able to incur approximately Cdn. $612 million (approximately $420 million based on an exchange rate of $1.00 = Cdn. $1.4569 as reported by the Wall Street Journal on May 29, 1998) of indebtedness under its indenture, but there can be no assurance that this number may not decrease substantially in the future. There can be no assurance that GVL will not restrain the Company's growth or limit the indebtedness incurred by the Company so as to ensure GVL's compliance with the terms of its debt instruments. The Company benefits from the fact that it does not require a substantial capital investment in its cable television and telecommunications networks in advance of connecting subscribers to its networks since a significant proportion of the costs comprises the internal wiring and the erection of microwave transmitting and receiving equipment specific to the MDU. These expenditures are, to a large extent, "success-based" and will only be incurred when new properties are brought into service or when existing properties serviced by SMATV or PBX systems are connected to the networks. When a new Right of Entry is signed, it takes approximately four months of construction work to activate signal at the property. Once the property is activated, penetration rates increase rapidly. The balance of the budgeted capital expenditures is for infrastructure assets not related to individual MDUs. These assets include central office switches, cable television head ends, computer hardware and software and capitalized construction costs. The Company can to some degree control the timing of the infrastructure capital expenditures by controlling the timing of the telecommunications roll out and the scope of its expansion. In order to accelerate the achievement of the Company's strategic goals, the Company 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 OpTel has implemented a Year 2000 program to ensure that its computer systems and applications will function properly beyond 1999. OpTel believes that it has allocated adequate resources for this purpose and expects its Year 2000 conversion program to be successfully completed on a timely basis. However, successful completion of the Year 2000 conversion program is substantially dependent upon successful implementation of the Company's new customer management information system. The Company's financial accounting system has not been upgraded to eliminate potential Year 2000 related malfunctions. The Company has undertaken a selection process for a new financial accounting system and plans to have the new system selected and implemented within the next 12 months. Other than expenses relating to the acquisition of the customer management information system and the financial accounting system, OpTel does not expect to incur significant expenditures to address this issue. See "Risk Factors -- Year 2000 Risk." RECENTLY ISSUED ACCOUNTING PRINCIPLES Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," is effective for earnings per share calculations and disclosures for periods ending after December 15, 1997, including interim periods, and requires restatement of all prior period earnings per share data that is presented. SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share," and provides reporting standards for calculating "Basic" and "Diluted" earnings per share. The Company has adopted SFAS No. 128 and its earnings per share computations have been restated for all prior periods. The Financial Accounting Standards Board ("FASB") issued, in February 1997, SFAS No. 129, "Disclosure of Information about Capital Structure," which establishes standards for disclosing information about an entity's capital structure and is effective for financial statements for periods ending after December 15, 1997. The Company's financial statements comply with the requirements of SFAS No. 129 and there will be no impact on the Company's results of operations or financial position. 39 42 In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The Company has evaluated the requirements of SFAS No. 130 and will begin disclosing the appropriate information in the first quarter of fiscal 1999. There will be no impact on the Company's results of operations or financial position. The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way public companies disclose information about operating segments, products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. The Company is currently evaluating the applicability of the requirements of SFAS No. 131. Depending on the outcome of the Company's evaluation, additional disclosure may be required beginning in fiscal 1999. There will be no impact on the Company's results of operations or financial position. INFLATION The Company does not believe that inflation has had a material effect on its results of operations to date. However, there can be no assurance that the Company's business will not be adversely affected by inflation in the future. 40 43 BUSINESS THE COMPANY OpTel is a leading network based provider of integrated communications services, including local and long distance telephone and cable television services, to residents of MDUs in the United States. As a rapidly growing ICP, OpTel continues to build upon its position as the largest provider of private cable television services to MDUs in the United States. In each market that it serves, OpTel seeks to become the principal competitor in the MDU marketplace to the ILEC and the incumbent franchise cable television operator by providing a package of voice, video and Internet access services at competitive prices. OpTel believes its contractual relationships with MDU owners and associations and its ability to deliver an integrated service offering to MDU residents over its own networks provide it with a competitive advantage. Industry sources estimate that annual revenues generated by the U.S. communications industry in 1997 were approximately $223 billion (consisting of approximately $192 billion in telecommunications revenues and $31 billion in cable television revenues). The Company believes that a significant portion of such revenue is attributable to residential users. OpTel recognizes the opportunity to address the residential market by focusing on providing integrated services to MDUs. MDUs comprise a wide variety of high density residential complexes, including high- and low-rise apartment buildings, condominiums, cooperatives, town houses and mobile home communities. According to 1990 U.S. Census Bureau data, there are more than 13.2 million dwelling units in MDUs with greater than 10 dwelling units in the United States. Within the MDU market, the Company focuses on Large MDUs. Based on industry sources, the Company believes that, within its existing markets, as of March 25, 1998, there are approximately 3.0 million dwelling units within these Large MDUs. The Company is currently building telecommunications infrastructure in its serviced markets and expects, by the end of calendar 1999, to be in a position to offer facilities based telecommunications services in each of its major markets. The Company presently offers services where it has a Right of Entry with an MDU owner to provide its cable television and/or telecommunications services. The Company classifies a unit as "passed" if it is within an MDU for which the Company has a Right of Entry and the Company has connected the equipment necessary to provide services. As of May 31, 1998, the Company had 369,968 units passed for cable television services. At that date, OpTel had 202,355 cable television subscribers and 7,046 telecommunication lines in service. OpTel began operations in April 1993 with a strategy of consolidating the then fragmented "private cable" television, or non-franchise cable television, industry serving MDUs. Securing long-term Rights of Entry has been an integral element of this strategy. The Company's Rights of Entry typically have original terms of 10 to 15 years (five years for Rights of Entry with condominium associations). The weighted average unexpired term of the Company's Rights of Entry was approximately eight years as of May 31, 1998 (assuming the Company's exercise of available renewal options). Rights of Entry generally provide financial incentives to the property owners to promote and sell the Company's cable television and telecommunications services to MDU residents. The Company provides video programming to MDUs primarily under exclusive Rights of Entry. The Company initially offered STS to MDUs serviced under telephone Rights of Entry utilizing remote PBX switches. In accordance with its communications strategy, the Company has begun the process of migrating its STS traffic to its own central office switches and its own network facilities. The Company intends to grow its business by negotiating additional Rights of Entry to serve MDUs currently served by other providers and newly-constructed MDUs, by acquiring other existing operators that serve MDUs, as appropriate, and by providing MDUs it currently serves for cable television with additional services, such as telephone and Internet access. The Company currently provides cable television and telecommunications services in a number of metropolitan areas including Houston, Dallas-Fort Worth, Los Angeles, San Diego, Miami-Ft. Lauderdale, Phoenix, Denver, San Francisco, Chicago, Atlanta and Orlando-Tampa. The Company has commenced offering central office switched local exchange services in Houston and Dallas-Fort Worth and is licensed as a CLEC in each of its other major markets. The Company selected its current markets based upon their growth 41 44 characteristics, competitive conditions, MDU concentrations, favorable demographics and regulatory environment. Since April 1995, OpTel has been indirectly majority owned by GVL, which also owns the second largest cable television operator in Canada (based on number of subscribers). GVL has invested approximately $250 million in OpTel in the form of equity capital and subordinated convertible notes (including accrued interest). See "Prospectus Summary -- Recent Developments." These invested amounts have been critical to OpTel's growth. In addition, key members of the Company's management team gained experience in the competitive offering of telecommunications and cable television to residential markets while serving as executives of a GVL affiliate in the United Kingdom. OpTel management's extensive operating experience in both the telecommunications and cable television industries, including the construction and design of networks and sales and customer support, provides OpTel with significant expertise in managing and developing an infrastructure to support voice, video and Internet access operations. 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 42 45 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 cross-ownership restriction, which prohibited LECs from providing multichannel television directly to subscribers in their telephone service areas. See "-- Regulation." Deregulation of Cable Television. Unlike the local telephone market, the cable television market is not subject to regulatory or statutory prohibitions on competition. Nevertheless, competition to incumbent franchised cable television operators has developed in only a handful of markets nationwide. Because of the lack of any meaningful competition, in 1992 Congress passed legislation providing for the regulation of certain cable rates. Subsequently, as part of its general goal of supplanting regulation with competition, the Telecom Act took further steps to provide alternative regulatory structures to encourage entry into the multichannel video programming distribution market. OpTel's Opportunity. The incumbent local telephone and cable television providers to date have generally been slow to expand their services beyond their traditional lines of business. In particular, the LECs generally have not offered video programming services, nor have the incumbent cable operators generally entered the telephone services market. In addition, most of the other new competitive entrants, including most CLECs, have focused almost exclusively on providing telephone service to medium to large commercial customers and have tailored the coverage area of their networks and the configuration of their business operations to provision services accordingly. Similarly, while a number of companies have begun to market wireless alternatives to cable television service, those companies have not generally begun to offer telephone services to their customers. Typically, the last mile connection between an ILEC and its customer is a copper wire twisted pair and the last mile connection of a cable television company is coaxial cable. The Company believes that in its markets, it is the only competitor able to serve a single subscriber with both twisted pair and coaxial cable last mile connections. Accordingly, OpTel believes that it is well-positioned to take advantage of the new regulatory and market environment and that it will be among the first to offer a single-source package of integrated voice, video and Internet access services in its MDU markets. By combining the enhanced telephone and Internet access services offered by CLECs with high quality video programming, OpTel will act as a single source provider of a wide range of voice, video and Internet access services to the MDU market. OpTel's integrated service offerings are available either individually or in bundled packages, providing the consumer with added choice and convenience. STRATEGY OpTel's goal is to become the nation's largest ICP focusing on MDU markets. OpTel's strategy for achieving this goal includes the following key components: Provide an Integrated Service Offering. OpTel believes that by utilizing a single advanced network infrastructure it can be among the first to market a competitive integrated package of voice and video services in its target markets. OpTel focuses exclusively on the integrated communications needs of the MDU resident, which distinguishes OpTel from other competitors. OpTel believes that MDU residents are attracted by bundled service offerings, competitive pricing and integrated billing. The Company plans to supplement its voice and video offerings with high speed Internet access in all of its serviced markets. The Company also intends to introduce integrated billing of its bundled services during fiscal 1999. 43 46 Deploy Cost Effective Networks. OpTel's networks are specifically designed to provide services to MDUs. The Company uses a combination of point-to-point microwave transmission equipment and fiber optic cable in order to offer a single source for video, voice telecommunications and eventually high speed Internet access services. A substantial amount of the capital required to provide property-specific voice and video services to an individual MDU is invested only after the Company and the owner of the MDU have entered into a Right of Entry for the MDU. The capital expenditures required to serve an MDU are therefore, to a large extent, "success-based" and will only be incurred shortly before properties are first brought into service or as needed to bring non-network served MDUs onto the Company's networks. In markets served by the Company's microwave networks, OpTel expects that the incremental capital required for it to launch central office switched telecommunications services and to connect customers will be lower than that of its competitors. Unlike copper- and fiber-based systems that require installation and maintenance of a significant amount of wire and cable, the Company's microwave networks generally will not require the installation and maintenance of physical wires between the MDU based equipment and the Company's Network Hubs. As a result, OpTel expects to enjoy a lower network cost structure than certain of its competitors. Pursue Focused Marketing Strategy. Strategic relationships with MDU owners are a key element of the Company's marketing strategy. The Company negotiates long term Rights of Entry with MDU owners under which the Company obtains, among other things, the exclusive right to provide cable television services to an MDU or group of MDUs and an undertaking by the MDU owner to promote OpTel as the preferred telecommunications alternative to the ILEC within the MDU. The Rights of Entry generally provide MDU owners with financial incentives to work closely with the Company to promote its products and services. The Company offers prospective customers the opportunity to subscribe for Company services at the same time they sign their unit leases. The Company believes this access, coupled with customer preference for a single source of cable television and telecommunications services, significantly enhances its customer marketing efforts. In addition, the Company markets to MDU residents through (i) direct mail and direct sales campaigns, (ii) special promotion and sign-up parties, (iii) establishment of a physical presence at a MDU and (iv) distribution of point-of-sale marketing materials. Provide Superior Customer Service. The Company believes that superior customer service is important to MDU residents. Therefore, the Company has dedicated resources to providing services that attract and retain subscribers. The Company has a national customer service center staffed with knowledgeable representatives to address the needs of customers 24-hours-a-day, seven-days-a-week. The Company has established direct lines to facilitate rapid response to calls initiated by MDU owners and managers. The Company also has dedicated local service teams that provide prompt installation and response to customer service calls. Because the Company believes that the best way to control the quality and consistency of technical and field services is to train and supervise the service technicians, the Company relies primarily on its own personnel to perform these functions. The Company also has established stringent staff training procedures, including its Operational Excellence continuous improvement program, and internal customer service standards. Pursue Selective Acquisitions and Strategic Relationships. To expand its markets and to achieve critical mass in its existing markets, the Company often evaluates opportunities to make acquisitions. Since May 1996, the Company has completed six acquisitions representing approximately 700 MDUs served and 103,000 subscribers. In addition, the Company has entered into a strategic relationship for the delivery of high speed Internet access services and will continue to evaluate other alliances, including those permitting it to host additional third-party traffic on its switches. MARKETS Historically, the Company's strategy has been to enter markets either through the acquisition of private cable television operators serving the target market or by entering into Rights of Entry with a major MDU owner in the market. Upon acquisition of an operator, the Company historically has begun the process of upgrading the acquired systems by converting MDUs from SMATV technology to the Company's microwave or, in Houston, fiber optic networks, adding additional programming and improving customer service. In addition, the Company has been able to achieve cost efficiencies by consolidating acquired operations into its existing organization. The Company's strategy for entering new telecommunications markets is through the 44 47 deployment of network infrastructure and interconnecting such infrastructure to the Company's existing video distribution network. See "-- Network Architecture." The following table sets forth, as of May 31, 1998 the markets where OpTel currently operates and, for each such market, certain additional information including the date the Company launched, or intends to launch, its central office switched telecommunications service offering. The timing and order of the launch of central office switched telecommunications services in each of the Company's markets may vary and will depend on a number of factors, and no assurance can be given the Company will launch such services in each of its markets.
NUMBER OF UNITS NUMBER OF IN MDUS CABLE UNITS IN WITH OVER 150 UNITS PASSED TELEVISION TELECOMMUNICATIONS EXPECTED CLEC SERVICES LOCATION MARKET(1) UNITS(2) FOR CABLE(3) SUBSCRIBERS LINES IN SERVICE LAUNCH DATE -------- --------- ------------- ------------ ----------- ------------------ ---------------------- Houston.................... 363,000 315,000 137,122 67,265 2,143 In service Dallas-Fort Worth.......... 486,000 405,000 44,217 21,929 2,187 In service Los Angeles................ 730,000 295,000 17,777 11,072 75 Fiscal 1999 San Diego.................. 504,000 304,000 21,224 12,428 164 Fiscal 1999 Miami-Ft. Lauderdale....... 234,000 225,000 21,205 16,497 162 Fiscal 1999 Phoenix.................... 219,000 155,000 24,648 10,047 117 Fiscal 1999 Denver..................... 142,000 106,000 17,006 9,804 291 Fiscal 1999 San Francisco.............. 410,000 246,000 24,466 17,065 68 Fiscal 1999 Chicago.................... 417,000 342,000 29,708 18,017 133 Fiscal 1999 Atlanta.................... 285,000 233,000 9,456 5,146 75 Fiscal 2000 Orlando-Tampa.............. 240,000 205,000 11,396 7,202 245 Fiscal 2000 Other markets(4)........... -- -- 11,743 5,883 1,386 --------- --------- ------- ------- ----- Total(5)........... 4,030,000 2,831,000 369,968 202,355 7,046 ========= ========= ======= ======= =====
- --------------- (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. The Company has connected telecommunications infrastructure at only 28,971 of the units passed for cable television services. (4) Other markets include Austin, Corpus Christi and San Antonio, Texas; Daytona Beach and Tallahassee, Florida; Las Vegas, Nevada; Indianapolis, Indiana; and greater Washington, D.C. Other than with respect to Austin, Texas and Indianapolis, Indiana, the Company has not yet decided whether to concentrate in these markets and launch telecommunication services or to dispose of assets in these markets. (5) Excludes 27,313 units passed for cable, 14,751 cable television subscribers, and 654 telecommunications lines in services related to the portion of the acquisition of the ICS Operations not consummated as of May 31, 1998. The Company installed its first central office switch in the Houston market in October 1997 and currently offers switched access local exchange services to most of its telecommunications customers in Houston. The Company installed, activated and tested its central office switch in the Dallas-Fort Worth market in April 1998 and is currently providing switched access local exchange services to select customers in Dallas-Fort Worth. As of May 31, 1998, the Company had 48,472 units under contract for telecommunications in Houston and Dallas-Fort Worth. The Company intends to progressively commence full scale marketing of local exchange based telecommunications services in all of its major markets by the end of calendar 1999. The Company is licensed as a CLEC in all of its major markets and has completed or is negotiating interconnection agreements with the principal ILECs in each of these markets. 45 48 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. OpTel contracts or plans to contract for other ancillary services, including operator service, directory listings and emergency 911 service and, in certain markets, transport, from the local ILEC and other service providers. The Company currently provides telephone service under two regulatory frameworks. In Houston and Dallas-Fort Worth, the Company provides telephone services as a CLEC through Company owned central office switches. In other markets, and to a limited extent in Houston and Dallas-Fort Worth, OpTel provides telephone services as an STS provider. The Company intends to convert substantially all of its STS telephone operations to CLEC operations and to provide switched access local exchange services to substantially all of its telephone customers by the end of calendar 1999. Video. OpTel offers its subscribers a full range of popular cable television programming at competitive prices. The Company's networks are capable of delivering up to 72 uncompressed analog channels of programming. The Company offers various programming packages to its cable television subscribers. The Company's basic video programming package provides extensive channel selection featuring all major cable and broadcast networks. The Company's premium video programming package features uninterrupted, full-length motion pictures, sporting events, concerts and other entertainment programming and includes HBO, Cinemax, Showtime and The Movie Channel, as well as supplementary channels such as HBO 2, HBO 3 and Cinemax 2. Premium services are offered individually or in discounted packages with basic or other services. Certain of the Company's systems are capable of offering movies, sporting events, concerts and other special events on a pay-per-view basis. In addition, the programming selections available at an MDU served by the Company's microwave networks can be tailored to the demographics of each MDU 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 DBS service provider for distribution of additional video programming via DBS technology. The Company currently provides this programming on a limited basis to MDUs in its San Francisco and Miami-Ft. Lauderdale markets using a single, standard direct broadcast satellite receiving antenna at each serviced MDU. The DBS signal is received in digital form, converted at the MDU receiver site to analog form and over coaxial cable distributed to the subscriber's unit. DBS transport permits the Company to provide basic programming or to supplement the Company's other programming services. High-Speed Internet Access. OpTel currently provides Internet access service to residents of certain properties in the Houston market in collaboration with a local ISP and a local CAP. OpTel is currently testing a high-speed Internet access service in Dallas-Fort Worth in conjunction with I(3)S, Inc. ("I(3)S"), an ISP. The Company and I(3)S have a strategic alliance to provide high-speed Internet services in the Company's major markets. Following successful completion of its testing, the Company intends to roll out its high speed Internet access service in substantially all of its major markets. 46 49 The Company expects to offer customers a choice of transmission speeds ranging from approximately 64 kilobits ("KB") per second (normal dial-up Internet speed is typically 28.8 KB per second) to 10 megabits ("MB") per second. In MDUs where data transport is to be provided via the Company's networks, the Company expects to be able to offer transmission speeds of up to 10 MB per second. In MDUs where the Company utilizes leased transport facilities, the Company may choose to offer transmission speeds of up to 1.5 MB per second; however, higher transmission speeds could be offered through the lease of incremental bandwidth. Internet connections providing transmission speeds over 0.5 MB per second are generally referred to as "high-speed." The transmission speeds that the Company intends to offer will greatly exceed the 64 KB per second speed available from many LECs through Integrated Services Digital Network ("ISDN") technology. OpTel initially will connect each property to the ISP's point of presence using OpTel's microwave transport or its owned or leased fiber transport. At each property, the data stream will be carried to the subscriber's unit via the property's existing coaxial cable distribution wiring. The subscriber will connect a personal computer to the high-speed Internet service using software provided by the ISP and the subscriber's cable modem which will be connected to a standard cable television outlet. Wholesale Services to ISPs. The Company believes that with the recent growth in demand for Internet services, numerous ISPs are unable to obtain network capacity rapidly enough to meet customer demand and eliminate network congestion problems. The Company plans to supplement its core end user product offerings by providing a full array of local services to ISPs, including telephone numbers and switched and dedicated access to the Internet. NETWORK ARCHITECTURE The Company's strategy is to deliver all of its service offerings through integrated networks. OpTel's networks are designed specifically to provide services to MDUs. The Company uses a combination of point-to-point microwave transmission equipment and fiber optic cable in order to offer a single source for video, voice telecommunications and eventually high speed Internet access services. As of May 31, 1998, the Company had 46 microwave networks in service in eleven metropolitan areas, and, in Houston, three fiber optic networks, covering over 400 route miles. In order to integrate service offerings, the Company actively adds properties it services within existing network coverage to these networks and seeks to cost effectively develop new networks to cover MDU clusters serviced by the Company in new or expanded markets. To maximize network coverage of its microwave networks, the Company establishes hubs designed to service MDU clusters (each a "Network Hub"). Network Hubs usually are located on rooftops or towers. The network is extended from the Network Hubs to the serviced MDUs via point-to-point microwave. Each Network Hub includes equipment to receive and transmit the Company's video programming. The signal is transmitted to a receiving dish at the MDU which must be within the line of site of the Network Hub or a repeater site. To ensure transmission quality, the Company limits the radius of each microwave link to between four and ten miles, depending on topographic and climatic conditions. Within the MDUs it serves the Company distributes video programming via conventional coaxial cable. The on-property network uses a combination of traps (electronic filtering devices), addressable decoder-converter boxes and interdiction. The Company has recently completed field testing interdiction devices and has begun deploying them in several of its current systems. Interdiction devices will permit the Company to activate and deactivate services or specific channels by remote command from a centralized location. When implemented, these devices will afford quicker activation and disconnection, eliminate or significantly reduce the need for traps and for decoder-converter boxes in the home, eliminate or significantly reduce service calls and provide better picture quality. The Company believes that these devices will also result in better collection experience, higher premium service penetration and greater customer satisfaction. OpTel's network design is digital capable. All voice traffic over OpTel's networks is digitally compressed. The networks will facilitate digital compression for video signal when economical and required by the marketplace. If OpTel is required to carry digital broadcast programming (e.g., HDTV), then the networks may be upgraded to transmit such programming without material architectural change. See "-- Regulation." 47 50 The Company transports video programming to MDUs which are not yet on the Company's networks by receiving video programming at a self-contained SMATV head end located at the MDU. The Company intends to convert substantially all of its SMATV systems to 18GHz, 12GHz (principally in Denver) or fiber optic networks by the end of fiscal 2000. To roll out its central office switched voice telecommunications offering in areas covered by its microwave networks, the Company will link its Network Hubs to both the central office switch and other Network Hubs to form a network backbone. This network backbone will utilize either of 6GHz or 11GHz microwave or fiber optic transmission capacity to form synchronous optical network ("SONET") self-healing rings that provide high speed redundant connections for the delivery of voice traffic. Where it uses fiber, the Company either will install its own fiber optic facilities or on a limited basis will lease fiber from other providers. Voice traffic will be delivered from a Network Hub to a serviced MDU over 23GHz microwave links. The 23GHz microwave links will use the same microwave transmission equipment that is used to relay video signal. Voice traffic is delivered to the individual unit using a traditional copper wire twisted pair. The Company has recently commenced offering network based central office switched telecommunication services on its fiber optic networks in Houston and in Dallas-Fort Worth over its microwave networks. The Company has chosen the 5ESS-2000 digital switch manufactured by Lucent. Unlike traditional long distance or local switches, the Lucent switch enables the Company to provide local and long distance services from a single platform. This uniform and advanced switch platform enables the Company to (i) deploy features and functions quickly in all of its networks, (ii) expand switch capacity in a cost effective manner and (iii) lower maintenance costs through reduced training and spare part requirements. The Company expects to continue to deploy Lucent switches to provide a consistent technology platform throughout its network. The Company will use its networks to aggregate MDU long distance and local traffic at its central office switch. As an initial entry strategy in certain markets, the Company intends to lease telecommunication switch capacity in certain markets from third-party providers in order to accelerate the roll out of telephone services and to migrate telecommunications services to its own switch over time. OpTel has entered into an agreement with a national CLEC, pursuant to which OpTel may purchase local telephone service and local loop elements. During any time period and in any market that the Company is purchasing such services from the CLEC, the CLEC has the exclusive right to provide OpTel with these services. OpTel is required to maintain each service ordered for a 24-month minimum period. In areas where the Company offers telecommunications services but where it has not yet migrated to its networked central office switch architecture, a PBX switch is installed at the MDU and traffic from the MDU is transported via leased trunk lines to the LEC's central office. From the LEC's central office, local calls are routed through the LEC's network. The Company intends to convert all of its PBX serviced properties to its central office switched telecommunications offering. OpTel has contracted with a third party to monitor its networked telecommunications services. In 1998, OpTel will establish a Network Operations Center to internalize the functions now provided by the third party and to enhance monitoring, control and maintenance of its networks. OpTel's Network Operational Center is intended to be operational in August, 1998 at its Dallas headquarters and will be staffed 24-hours-a-day, seven-days-a-week. The Network Operations Center will monitor and manage OpTel's central office telephone switches, PBX switches, video headend equipment and certain additional elements of its telecommunications and cable television networks. SALES AND MARKETING A critical aspect of the Company's sales and marketing efforts is the development of strategic contractual relationships with MDU owners. These relationships encourage the owners to promote and sell the Company's cable television and telecommunications services to MDU residents. The Company intends to grow its business by negotiating additional Rights of Entry to serve MDUs currently served by other providers and newly-constructed MDUs, by acquiring other existing operators that serve MDUs, as appropriate, and by providing MDUs it currently serves for cable television with additional services, such as telephone and Internet access. 48 51 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 and Marketing to MDU Owners The Company maintains a full-time professional sales force dedicated to securing Rights of Entry from owners of MDUs. Many of the Company's sales representatives have previous experience in commercial real estate sales and leasing. The Company has developed an incentive compensation plan for sales personnel which the Company believes encourages sales personnel to target MDUs with more favorable demographic characteristics. Marketing to local MDU owners is conducted primarily by (i) using established relationships with property developers, owners and management companies, (ii) direct mail and direct sales campaigns to owners and apartment managers, (iii) canvassing MDU owners with properties within the coverage of the Company's existing and planned networks and (iv) attending and participating in trade shows, conventions and seminars targeted to the MDU industry. In addition, the Company markets to owners of large multiregional portfolios of MDUs via a dedicated sales team. When marketing to MDUs, the Company emphasizes the following competitive advantages: New Revenue Source for MDU Owner. An MDU owner who enters into Rights of Entry with the Company generally receives a percentage of the revenue generated by the MDU. The revenue sharing percentages generally range between six and ten percent of such revenue, are often scaled based on penetration and are fixed over the term of the Right of Entry. The Company may from time to time pay up-front "key-money" in lieu of or in combination with revenue participation. While some franchise cable television operators and ILECs now offer revenue sharing and access fee arrangements to some MDU owners, it is the Company's experience that neither the ILECs nor the incumbent franchise cable television operators are willing to offer broad-based, revenue-based incentive compensation to MDU owners generally. Property Enhancements. The Company often installs a package of telecommunications and security enhancements at the MDUs it serves, at a nominal cost or at no cost to the MDU owner. For example, the Company can install a monitoring camera at the main entrance that permits MDU residents to identify guests by tuning their television set to the building's security channel. In addition, the Company often provides a dedicated information channel that permits the building's management to send messages to the MDU residents over the private cable television system. These enhancements are relatively inexpensive for the Company to provide and can be important to MDU owners and property managers. New Marketing Tool and Amenity to Rent Apartments. The principal concern of an MDU owner is to rent apartments. The Company believes that its services and property enhancements can serve as an important marketing tool for owners to attract prospective tenants because its services are generally provided at a price competitive with those charged by the franchise cable operator and lower than those charged by the ILEC and long distance carriers. The Company works with on-site managers to emphasize the benefits of the Company's services and the added value and convenience provided by the Company. The Company also maintains direct lines to facilitate rapid response to customer support calls initiated by MDU owners and managers. Marketing to MDU Residents Once an MDU owner executes a Right of Entry, the Company aggressively markets its services to actual and potential subscribers within the MDU in order to increase penetration rates for basic and additional services. The Company believes that its best opportunity for a sale arises when a resident first signs a lease and takes occupancy in an MDU. Accordingly, the Company believes that during the first few years after it activates cable television or telecommunications services at an MDU it benefits from the high rate of MDU resident turnover. The Company has developed orientation and incentive programs for on-site property managers and leasing agents, with the objective of enlisting them as the Company's subscriber sales force. In addition, the Company markets to MDU residents through (i) direct mail and direct sales campaigns, (ii) special promotions and sign-up parties, (iii) establishment of a physical presence at a building and 49 52 (iv) distribution of point-of-sale marketing materials. The Company stresses the following themes when marketing its services to MDU tenants: Simplicity and Convenience. In general, a subscriber can order any of the Company's services through the MDU's leasing agent at the time of lease signing. In addition, in certain of its markets, the Company is able to provide one-stop shopping for both cable television and telecommunications services. Competitive Pricing. The Company believes it offers a competitive telecommunications offering and cable television channel line-up (often including pay-per-view and premium services) at prices that are generally competitive with those charged by the ILEC and local franchise cable television operator. Upon introduction of its integrated billing system, the Company plans to offer pricing incentives to purchase more than one service from OpTel. Superior Video Offering. The number of channels provided by the Company at an MDU generally equals or exceeds that of the local franchise operator in that market. In addition, the programming selections available at an MDU served by the Company's microwave networks can be tailored to the demographic characteristics of the MDU 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. Better Service and Quality. The Company is upgrading its networks and support systems to ensure continued reliable, high quality delivery of a range of cable television and telecommunications services and expanding its offerings to encompass a broad range of value-added telecommunications services. The Company is committed to providing excellent customer service. The Company believes the most effective means of attracting and retaining MDU owners and subscribers is by providing high quality subscriber service, including: (i) 24-hour-a-day, seven-day-a-week subscriber telephone support, (ii) computerized tracking of all incoming calls to minimize waiting times, (iii) service calls generally made the same day the subscriber indicates a service problem, (iv) flexible, seven-day-a-week installation and service appointments, (v) follow-up calls and on-site inspections to verify subscriber satisfaction and (vi) 80% of installations completed within three business days of receiving the initial installation request, often within 24 hours. The Company also uses focus groups and subscriber surveys to monitor subscriber satisfaction. STRATEGIC RELATIONSHIPS WITH MDU OWNERS A critical aspect of the Company's growth strategy is the development of strategic relationships with owners of MDU portfolios. These relationships encourage the MDU owner (which may be an ownership association) to promote and sell the Company's cable television and telecommunications services to MDU residents. The Company solicits and negotiates Rights of Entry with owners of national, regional and local portfolios of MDUs, as well as with institutions such as hospitals, universities and hotels. The Company's Rights of Entry typically have original terms of ten to fifteen years (five years for Rights of Entry with condominium associations). The weighted average unexpired term of the Company's Rights of Entry was approximately eight years as of May 31, 1998 (assuming the Company's exercise of available renewal options). Many Rights of Entry provide MDU owners with financial incentives to work closely with the Company to promote its products and services. Financial incentives may include revenue sharing or payment of up-front inducements to MDU owners. In addition, the Company believes that the delivery of special services tailored to MDU owners and residents provides marketing advantages to the MDU owner in leasing its units. The Rights of Entry acquired by the Company through its various acquisitions (which represent approximately 77% of the Company's units under contract as of May 31, 1998) have not always contained all of the foregoing terms and provisions. The long-term Rights of Entry negotiated with MDU owners effectively make the Company the exclusive multichannel television provider, leaving MDU residents with the option of receiving multichannel television from the Company or receiving off-air programming from local broadcasters. Rights of Entry covering telecommunications include an undertaking by the MDU owner to promote OpTel as the preferred 50 53 telecommunications alternative to the ILEC within the MDU. The Company believes that the development of strategic relationships with MDU owners will enable the Company to maintain its preferred competitive position even if the exclusivity of the Rights of Entry becomes limited by future developments. However, statutory limitations on exclusivity could adversely affect the Company's ability to form new strategic relationships with MDU owners and could increase the capital costs associated therewith. See "Risk Factors -- Risks Associated with Rights of Entry." COMPETITION OpTel competes with a wide range of service providers for each of the services it provides. Substantially all markets for voice, video and Internet services are highly competitive and the Company expects that competition will intensify. In each of its markets, the Company faces significant competition from larger companies with greater access to capital, technology and other competitive resources. The Company's switched local exchange services compete with the ILEC, other STS providers, CLECs and CAPs and will compete with long distance telephone companies and franchise cable television operators as they begin to enter the local telephone business. The Company's long distance services compete with established IXCs and resellers. In addition, recent telecommunications offerings, including PCS, and future offerings may increase competition in the telecommunications industry. The Company's private cable television services compete with incumbent franchise cable television operators as well as wireless cable television operators, other private cable television operators, DBS operators and stand-alone satellite service providers. Recent and future legislative, regulatory and technological developments likely will result in additional competition in each of the markets in which the Company competes. Moreover, mergers, joint ventures and alliances among franchise, wireless or private cable television operators, RBOCs and IXCs may result in providers capable of offering bundled cable television and telecommunications services in direct competition with the Company. Although the Company as a matter of course investigates new sources of programming and technologies that may increase its range of services, other larger and more diversified competitors may attract the targeted MDUs based on their increased menu of services. While the Company believes that the exclusivity provisions of its Rights of Entry provide it with competitive advantages, such advantages may be significantly diminished by technological and other developments beyond the control of the Company. In addition, technological developments may allow competitors of the Company to bypass property owners altogether and market their services directly to tenants of MDUs. See "Risk Factors -- Risks Associated with Rights of Entry" and "-- Competition." Certain of the Company's current and potential competitors are described below. ILECs. In each of its markets, OpTel faces, and expects to continue to face, significant competition for the local exchange services it offers from the ILECs, which currently dominate their local telephone markets. OpTel competes with the ILECs in its markets on the basis of product offerings (including the ability to offer integrated voice and video services), reliability, technology and customer service, as well as price. In addition, under the Telecom Act and ensuing federal and state regulatory initiatives, barriers to local exchange competition are being removed. The introduction of such competition, however, also establishes the predicate for the incumbent RBOCs to provide in-region interexchange long distance services. The RBOCs are currently allowed to offer "incidental" long distance service in-region and to offer out-of-region long distance service. Once the RBOCs are allowed to offer in-region long distance services, they will also be in a position to offer single source local and long distance service similar to that offered by OpTel and proposed by the three largest IXCs (AT&T, MCI and Sprint Corporation). The Company expects that the increased competition made possible by regulatory reform will result in certain pricing and margin pressures in the telecommunications services businesses. See "Risk Factors -- Regulation" and "-- Regulation." OpTel has sought, and will continue to seek, to provide a full range of local voice services in competition with ILECs in its service areas. The Company expects to compete in this market by (i) establishing strategic relationships with MDU owners so as to allow the Company to market effectively to MDU residents, (ii) providing value added, enhanced services to MDU residents, (iii) bundling its telecommunications and 51 54 cable television services, (iv) providing a high level of customer service and responsiveness, and (v) competitively pricing its products. The Telecom Act permits the ILECs and others to provide a wide variety of video services directly to subscribers in competition with OpTel. Various LECs currently provide video services within and outside their telephone service areas through a variety of distribution methods, including both the deployment of broadband wire facilities and the use of wireless transmission facilities. The Company cannot predict the likelihood of success of video service ventures by LECs or the impact on the Company of such competitive ventures. CLECs and Other Competitors. OpTel also faces, and expects to continue to face, competition from other potential competitors in certain of its markets. Other CLECs compete for local telephone services, although they have to date focused primarily on the market for corporate customers. In addition, potential competitors capable of offering private line and special access services also include other smaller long distance carriers, cable television companies, electric utilities, microwave carriers, wireless telephone system operators and private networks built by large end-users. However, OpTel believes that it will be among the first to offer an integrated package of voice, video and Internet access services to customers in MDUs. Incumbent Franchise Cable Systems. The Company's major competition for cable television Rights of Entry in each market comes from the incumbent franchise cable television operator. In certain markets serviced by the Company, franchise cable television operators now offer revenue sharing and access fee arrangements to MDU owners. There can be no assurance that these payments will not increase in the future as competition increases for access to the higher quality MDUs. Another basis of competition is the breadth of programming and range of services offered. The Company competes with franchise cable operators by (i) focusing exclusively on MDUs, (ii) sharing profits with MDU owners, (iii) providing an integrated product offering that to an increasing extent in the future will include Internet services, (iv) offering customized programming and (v) charging lower cable and local telephone rates to subscribers. Multipoint Multichannel Distribution Systems. MMDS systems are similar to the Company's 18GHz and 12GHz networks in that they use microwave transmitting and receiving equipment. MMDS differs from 18GHz and 12GHz in that (i) it "broadcasts" its video programming directly to individual subscribers and generally not to an MDU's receiver and (ii) its systems transmit in an omni-directional manner, while 18GHz systems are point-to-point. As a result, MMDS wireless cable can provide service to all households within a wireless operator's "line-of-sight." The 2.5GHz spectrum utilized by MMDS wireless cable was initially allocated by the FCC to applicants other than MMDS operators within a given market, with 20 of the available channels generally allocated to educational institutions. As a result, MMDS wireless operators have had difficulty acquiring or leasing the critical mass of channels required to offer a diverse programming lineup. Moreover, absent digital compression technology, channel capacity is limited to 33 analog channels. Local Multipoint Distribution Service. The FCC has issued rules reallocating the 28GHz band to create a new local exchange and video programming delivery service referred to as local multipoint distribution service ("LMDS"). LMDS licensees may hold up to 1000MHz of spectrum in each prescribed geographic area. LMDS systems, like MMDS, will use point-to-multipoint microwave distribution. Unlike MMDS, however, LMDS systems, using the proposed allocation in the 28GHz band, will be able to provide channel capacity equal or greater to that of most cable systems, including the Company's. In addition, LMDS systems may include subscriber-to-hub transmission capabilities, which would allow them to provide interactive and telecommunication services. In March 1998, the FCC completed its auction of LMDS licenses. So far, however, there has been no significant commercial deployment of LMDS systems in the Company's serviced markets. SMATV Systems. The largest number of private cable companies are operators of SMATV systems. Like the Company, these SMATV operators offer a multichannel television service pursuant to Rights of Entry with MDU owners. Where the Company has introduced or will introduce 18GHz systems, the Company competes with SMATV systems on the basis of (i) larger channel offerings (typically SMATV offers 33 to 45 channels), (ii) the quality of its video programming delivery, (iii) customer service and (iv) the perceived high price of SMATV relative to the programming package provided. 52 55 Direct Broadcast Satellite. DBS systems involve the transmission of encoded video programming direct from a satellite to the home user without any intermediate processing or retransmission by a terrestrial operator. Although prices have been decreasing, DBS service typically requires the purchase of equipment and installation fees which are a significant cost to the subscriber. In addition, subscribers generally pay a monthly programming fee to receive DBS service, which can be lower than those charged by the Company before consideration of the equipment costs. However, the Company believes that it can effectively compete with DBS systems in the MDU marketplace for the following reasons. First, DBS line-of-sight problems are significant (unless an entire MDU is connected to the service) because a DBS antenna must be pointed in the proper direction to receive video programming from the satellite. In addition, most MDU owners prohibit the placement of individual antennas on their property by MDU residents. More importantly, DBS operators are generally not permitted to retransmit network or local broadcasting programming. Certain DBS operators have announced "MDU programs" which generally consist of either (i) paying commissions to a local satellite dish dealer who has, at its own expense, overbuilt an MDU or (ii) billing MDU owners for the service on a bulk basis. The Company's Rights of Entry currently prohibit an MDU owner from allowing a DBS system to be installed at the MDU. Internet Services. The market for Internet access services is extremely competitive and highly fragmented. No significant barriers to entry exist, and competition in this market is expected to intensify as use of the Internet grows. The Company competes (or in the future may compete) directly or indirectly with (i) national and regional ISPs, (ii) national telecommunications companies, (iii) LECs, (iv) cable operators, and (v) nonprofit or educational ISPs. Some of these present or potential future competitors have or can be expected to have substantially greater market presence and financial, technical, marketing and other resources than the Company. Certain of the Company's online competitors have introduced unlimited access to the Internet and their proprietary content at flat rates, and certain of the LECs have also introduced competitive flat-rate pricing for unlimited access (without a set-up fee for at least some period of time). There can be no assurance that competition will not lead to pricing pressures in the Internet business. Advances in communications technology as well as changes in the marketplace and the regulatory and legislative environment are constantly occurring. In addition, a continuing trend 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 ACT OF 1996 The Telecom Act, which amended the Communications Act of 1933 (as amended, the "Communications Act"), has altered, and will continue to alter, federal, state and local laws and regulations regarding telecommunications providers and services. The law is intended, in part, to promote competition in the marketplace for local telephone service and in the delivery of video and other services. Although the Company 53 56 believes that certain provisions of the Telecom Act will help the Company compete with ILECs and with franchised cable operators, it is not possible at this time to predict the effect of the Telecom Act on the telecommunications and multichannel television industries in general or the Company in particular. In large part, the impact of the Telecom Act will depend upon the outcome of various FCC rulemaking proceedings to interpret and implement the Telecom Act. TELECOMMUNICATIONS REGULATION The telecommunications services provided by the Company are subject to regulation by federal, state and local government agencies. As the Company implements its telecommunications strategy, which includes replacing many of its current PBX switches with networked central office switches, the Company will increasingly become regulated as a CLEC. The FCC has jurisdiction over interstate services, and state regulatory commissions exercise jurisdiction over intrastate services. Additionally, local authorities may regulate limited aspects of the Company's business, such as the use of public rights-of-way. The following subsections summarize the local, state and federal regulations that pertain to the Company's current and projected telecommunications services. Competitive Local Exchange Carrier Regulation Recent and impending changes in federal law and regulation likely will affect the conduct of the Company's telecommunication service business. The FCC historically has left the regulation of the intrastate aspects of local exchange service to the states. It has, however, exercised its jurisdiction over interstate matters and jurisdictionally mixed matters respecting local telephone service. The Telecom Act expands the FCC's authority to regulate local exchange service and there can be no assurance that the FCC will not exercise this authority aggressively. State regulation of local exchange service traditionally has favored the ILECs. The state laws have, with the exception of STS, generally prohibited competition in the local exchange services market. The Telecom Act expressly preempts such prohibitions. The Telecom Act declares that no state or local laws or regulations may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service. States may, however, impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality and consumer protection. Local authorities may also require reasonable, competitively neutral compensation for use of the public rights-of-way. The Company anticipates that it will, in the future, increasingly compete in telecommunications markets as a CLEC. For purposes of the Telecom Act, CLECs and ILECs are subject to the same basic set of requirements. However, certain additional obligations are imposed on ILECs, but not on CLECs. Although the Company does not believe that the regulatory burdens applicable to CLECs will have a material effect on its business, no assurance can be given at this time regarding the extent or impact of such regulation. The Telecom Act requires all carriers, both CLECs and ILECs, to interconnect with the facilities of other carriers, resell their services, provide number portability, provide dialing parity, afford access to their poles, ducts, conduits and rights-of-way, and to establish reciprocal compensation for the transport and termination of other LECs' telephone traffic. All providers of telecommunications services are also subject to the Telecom Act's requirements that they contribute to state and federal universal service funds. ILECs are subject to certain additional requirements, such as a duty to negotiate interconnection agreements in good faith, to unbundle elements of their networks, to provide nondiscriminatory interconnection with their networks, to comply with specific resale obligations, to provide notice of changes to their networks and to allow collocation of other carriers' equipment on their premises. The Company is not, however, considered an ILEC in any state. The FCC and various state PUCs are in the process of defining the precise contours of the requirements that will govern local exchange service in the future. Although the Telecom Act sets forth certain standards, it also authorizes the states to adopt additional regulations provided that such regulations do not conflict with the federal standards. It is unclear at this time how the states will respond to the Telecom Act, and what additional regulations they may adopt. Moreover, the United States Court of Appeals for the Eighth Circuit 54 57 overturned portions of the FCC's First Report and Order that had set forth pricing methodologies for unbundling, resale and interconnection, and that had also set forth certain technical requirements, such as obligations relating to quality of service and combination of unbundled network elements. The Supreme Court has granted certiorari and agreed to review the Eighth Circuit decision. Further, a U.S. District Court has held unconstitutional certain provisions of the Telecom Act that limit the ability of the RBOCs to provide in-region long-distance telecommunications services. This decision has been stayed pending appeal. Absent these restrictions, the RBOCs may have less incentive to cooperate with CLECs seeking to enter local exchange markets. The Company cannot predict the outcome of this litigation or the impact of any court decision on the Company's operations. It is not possible for the Company to predict the outcome of these or any other proceedings relating to the Telecom Act. Nonetheless, at this time it is clear that an increasing number of service providers will be seeking to compete as CLECs in the local exchange markets and that state and federal regulations will, to some extent, allow for such market entry. Although jurisdictional lines of authority and basic implementation issues are being determined by the FCC and the federal courts in accordance with the statutory provisions outlined above, several states already have begun the process of opening the local exchange market to competition. Most states require companies seeking to compete in intrastate telecommunications services to be certified to provide such services. These certifications generally require a showing that the carrier has the financial, managerial and technical resources to offer the proposed services consistent with the public interest. State regulation of telecommunications services may impose upon the Company additional regulatory burdens, including quality of service obligations and universal service contributions. Shared Tenant Services The resale of STS is subject to the terms and conditions in the tariffs of the telecommunications company whose services it resells and to regulation by the states in which the Company resells such services. Historically, virtually all such telecommunications company tariffs flatly prohibited resale of local exchange service. However, in recent years several state legislatures and PUCs determined that resale of local exchange service is in the public interest and have directed telecommunications companies within their jurisdictions to allow for resale of local exchange service, opening the way for STS operations. Moreover, the Telecom Act requires such resale pursuant to interconnection agreements with the ILEC. In some states, PUCs have issued detailed regulations governing the provision of STS and other resale services. In other jurisdictions where no formal requirements have been adopted, most telecommunications companies have nonetheless modified their tariffs to provide for resale of local exchange services. The precise terms and conditions under which such resale services may be provided varies from state to state, and from LEC to LEC, and may include significant restrictions and limitations. These include: (i) a requirement to be certified by the state PUC, (ii) restrictions with respect to the location and ownership of MDUs to which STS service may be provided and the crossing of public rights-of-way by STS operator facilities, (iii) regulations allowing telecommunications companies to apply different local service rate structures (e.g., measured use vs. flat rate) to STS providers and other subscribers, in some cases lessening or even eliminating efficiencies which might otherwise be realized through the use of the LECs' trunking facilities, (iv) regulations providing for LEC access or rights-of-way to directly service individual customers within an MDU, and (v) in certain states, limits or prohibitions on resale of intrastate long distance and local service at a profit. None of the states in which the Company has significant operations has adopted regulations governing the provision of STS services. The California PUC has, however, adopted informal STS "guidelines." In addition, Florida requires providers of STS services to be certified to resell local exchange services. Other than the California "guidelines" and Florida's certification requirement, the Company may provide STS services in each of its major markets, subject only to individual telecommunications company tariff provisions. The tariffs of all major LECs serving these jurisdictions provide for resale of local exchange service pursuant to varying 55 58 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. In addition, the FCC has pending a proceeding in which it will determine whether CLECs that serve as information service providers are entitled to reciprocal compensation from other LECs for terminating Internet traffic that originates on the other LEC's network. An FCC determination that information service provider traffic should not be included within reciprocal compensation calculations could have a negative effect on the Company's revenues. There also have been efforts at the federal and state level to impose taxes and other burdens on information service providers and to regulate content provided via the Internet and other information services. These efforts have not generally been upheld when challenged in court. Nonetheless, the Company expects that proposals of this nature will continue to be debated in Congress and state legislatures in the future. No assurance can be given that changes in current or future regulations adopted by the FCC or state regulators or other legislative or judicial initiatives relating to Internet services would not have a material adverse effect on OpTel. In addition, although there is a trend in the law away from ISP liability for content posted or published on the Internet, there can be no assurance that the Company's involvement in the provision of ISP services will not subject it to liability for acts performed by third parties using the Internet. Long Distance Resale Regulation Non-dominant IXCs, such as the Company, are subject to limited federal regulation. Nonetheless, carriers are required by statute to offer their services under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory, and to file tariffs for their international and interexchange services. As a non-dominant carrier, the Company is permitted to make tariff filings on a single day's notice and without cost support to justify specific rates. The FCC generally does not exercise direct oversight over cost justification and the level of charges for service of non-dominant carriers, although it has the statutory power to do so. The FCC has jurisdiction to act upon complaints brought by third parties, or on the FCC's own motion, against a carrier for failure to comply with its statutory obligations. Foreign Ownership Restrictions Section 310(b) of the Communications Act limits the extent to which foreign controlled companies may hold common carrier radio licenses. Under Section 310(b)(4) of the Communications Act, the FCC has discretion to permit common carrier licensees to exceed some of these limits. To allow the Company to provide common carrier telecommunications services using its networks, in the event that the Company should desire to do so, the Company assigned substantially all of its frequency licenses (the "Assigned Licenses") to THI, an entity controlled by United States citizens. To establish the terms of the Company's continued and unencumbered use of the Assigned Licenses, the Company entered into a license and services 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 non-exclusive license to use all of the Company's facilities and related equipment, such as microwave transmitting and receiving equipment, required to provide transmission capacity. The Company also obtained an option to acquire the assets or equity of THI, subject to FCC approval. 56 59 In 1997, the United States agreed, as part of the WTO Basic Telecom Agreement, to allow foreign suppliers from WTO member nations, including Canada, to provide a broad range of basic telecommunications services in the United States. In light of those commitments, which became effective in February 1998, and consistent with its authority under Section 310(b)(4) of the Communications Act, the FCC adopted a presumption favoring grant of applications to exceed the limits on non-U.S. ownership of common carrier licensees when the non-U.S. investment is from a WTO member nation. Accordingly, the Company is in the process of reevaluating whether it should hold FCC authorizations directly and, specifically, whether it should exercise its option to purchase the assets of THI. 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 18GHz networks, its 12GHz networks to be developed and SMATV systems are not considered Cable Systems and thus are not subject to local franchising requirements and are free from most Cable System regulation. The Company's Houston system, a portion of its Fort Worth system and certain other small systems are regulated as Cable Systems. However, the Company's Houston, Fort Worth and other small franchise cable television systems are exempt from federal rate regulation and the universal service obligation, even though they are Cable Systems, because they are subject to "effective competition" as discussed in greater detail below. Set forth below is a discussion of the principal laws and regulations governing the Company's private and franchise cable television operations. Federal "Cable System" Regulation. The Communications Act governs the regulation of Cable Systems. The regulations imposed on Cable Systems include requirements to (i) obtain a local franchise (which may require the franchisee to pay franchise fees to local governments of up to 5% of yearly gross revenues), (ii) delete certain programs from cablecasts, (iii) comply with certain customer service standards, (iv) retransmit certain broadcast television programming, (v) in most circumstances, conform subscriber service and equipment rates to applicable federal regulations, (vi) comply with FCC equal employment opportunity ("EEO") rules and policies, (vii) make available channels for leased-access programmers at rates that are to be calculated on a formula established by the FCC and (viii) offer customer service to all buildings passed by its network. In addition, rates for basic cable service on Cable Systems not subject to "effective competition" are regulated by local franchising authorities. Rates for upper tier or "cable programming services" on such systems are regulated by the FCC. The Telecom Act eliminates cable programming service tier rate regulation effective March 31, 1999, for all Cable System operators. The Company's networks that are Cable Systems are subject to these requirements, which impose regulatory costs and reduce the speed and flexibility with which the Company and its Cable System competitors can respond to competitive challenges from other video distribution technologies. The Company's Cable Systems, however, are exempt from rate regulation because they are, the Company believes, subject to "effective competition." Prior to the enactment of the Telecom Act, Cable Systems were deemed to be subject to "effective competition" if any of: (i) fewer than 30% of the households in the franchise area subscribe to the service of the Cable System, (ii) the area is served by at least two unaffiliated multichannel television operators, both of which are able to provide service to at least 50% of the households in the franchise area, and the number of households actually subscribing to all but the largest multichannel television operator exceeds 15%, or (iii) the local franchising authority itself offers multichannel television to at least 50% of the households in the franchise area. The Telecom Act expanded the definition of "effective competition" to include situations in which a LEC or its affiliate offers multichannel television directly to subscribers by any means (other than direct-to-home satellite services) in the franchise area. It is expected that this change will provide franchise cable television operators with increased pricing flexibility to the extent that LECs begin to provide multichannel television services. No assurance can be given that the Company does not, or will not in the future, constitute "effective competition" to any franchise cable television operator with which it competes. 57 60 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., commercial satellite-delivered independent stations such as WTBS), commercial radio stations and certain low- powered television stations, without obtaining those stations' explicit written consent for the retransmission of their programming. Retransmission consent agreements do not obviate a copyright license for the programming carried on the broadcaster's signal. However, Cable Systems and private cable television systems may obtain a compulsory copyright license for broadcast programming as described above. To date, the "must carry/retransmission consent" regulations have not had a significant impact on either the operations or profitability of the Company. The Company has had little difficulty obtaining retransmission consent agreements with local broadcasters. Nonetheless, there can be no assurance that broadcasters, in some circumstances, will not withhold retransmission consent, require excessive compensation for that consent or impose onerous conditions thereon which could adversely affect the Company. Furthermore, it is unclear at this time the extent to which Cable Systems will be required to carry multiple signals of digital television broadcast stations or high definition television ("HDTV") signals. The resolution of these must-carry issues may have a significant impact on the programming carried on the Company's systems. Changes in the Definition of a "Cable System." Formerly, to avoid being classified as a Cable System, private cable television systems were limited to linking with hard wire only commonly owned or managed MDUs without crossing a public right-of-way. The Telecom Act amended the definition of Cable System such that systems which make no use of public streets or public rights-of-way no longer are deemed to be Cable Systems, regardless of the type or ownership of properties served by the system. Thus, for example, the Company's private cable television systems now may serve mobile home parks and private communities without a local franchise and free of most federal Cable System regulations. Elimination of the Telco-Cable Cross-Ownership Restriction. The Telecom Act repealed the LEC cable television cross-ownership restriction, which prohibited LECs from providing multichannel television directly to subscribers in their telephone service areas. This change may increase the level of competition in the multichannel television market. LECs now have several options for entering and competing in the multichannel television marketplace. LECs now may (i) provide video programming to subscribers through radio communications under Title III of the Communications Act, (ii) provide transmission of video programming on a common carrier basis under Title II of the Communications Act (i.e., provide a common carrier video platform), (iii) provide video programming as a Cable System under Title VI of the Communications Act (franchise cable), and (iv) provide video programming by means of an "open video system." Open video systems are not required to comply with the full panoply of federal Cable System regulation, but they are 58 61 subject to certain additional programming selection limitations. It is unclear at this time the extent to which any of these market entry options will be used by LECs. Rate Relief for Small Cable Operators. The Telecom Act deregulated the rates charged for cable programming services in any Cable System operated by a "small cable operator" that serves 50,000 or fewer subscribers. The law defines a "small cable operator" as one which, in the aggregate, serves fewer than one percent of all subscribers in the United States and which is not affiliated with any entity with gross annual revenues in excess of $250 million. This provision may provide increased pricing flexibility for certain of the Company's competitors who qualify as "small cable operators." The Uniform Rate Requirement. Prior to enactment of the Telecom Act, the Communications Act generally provided that Cable Systems were required to have a rate structure for the provision of cable service that was uniform throughout its geographic area. The Telecom Act provides that this requirement is applicable only where "effective competition" is absent. Further, the Telecom Act exempts from the uniform rate requirement non-predatory bulk discounts offered to MDUs. Consequently, the franchise cable television operators with which the Company competes now have increased pricing flexibility with respect to MDU bulk discounts. Program Access. The program access provisions of the Communications Act were intended to eliminate unfair competitive practices and facilitate competition by providing competitive access to certain defined categories of programming. Generally, these restrictions are applicable to Cable System operators, satellite cable programming vendors in which a Cable System operator has an attributable interest and satellite broadcast programming vendors. The programming access provisions prohibit these entities from charging unfair, unreasonable or discriminatory prices for programming. Further, the programming access provisions prohibit most exclusive dealing arrangements pursuant to which Cable Systems obtain the exclusive right to distribute the subject programming within their franchise areas. Such exclusive distribution arrangements have been found to inhibit the ability of new entrants to compete in the multichannel television market. The prohibition on exclusive contracts, however, is scheduled to expire on October 5, 2002 unless the FCC determines, during a proceeding that is to be conducted in 2001, that the prohibition continues to be necessary to promote competition in the multichannel television market. The Telecom Act amended the program access provisions by adding that the provisions shall also apply to common carriers and their affiliates. Thus, telecommunications companies entering the market will find it more difficult to limit their competitors' access to programming. Subscriber Access. The FCC has initiated a notice of proposed rulemaking seeking comment on whether the FCC should adopt regulations restricting exclusive contracts. The FCC has indicated that it seeks to ensure a level competitive playing field in the emerging multichannel television market. One possibility raised by the FCC is the establishment of a federal mandatory access requirement or a limit on the duration of exclusive service agreements between MDU owners and video programming providers. In another proceeding, the FCC is contemplating an order preempting state, local and private restrictions on over-the-air reception antennas placed on rental properties or properties not within the exclusive control of the viewer. Although it is open to question whether the FCC has statutory and constitutional authority to compel mandatory access, restrict exclusive agreements or preempt private restrictions on antennas located on property owned or controlled by others, there can be no assurance that it will not attempt to do so. Either such action would tend to undermine the exclusivity provisions of the Company's Rights of Entry with MDU owners. State and Local Cable System Regulation. Because Cable Systems use public rights-of-way, they are subject to state and local regulation, typically imposed through the franchising process. State and/or local officials often are involved in the franchisee selection, system design and construction, safety, consumer relations, billing, and community-related programming and services among other matters. Cable Systems generally are operated pursuant to nonexclusive franchises, permits, or licenses granted by a municipality or other state or local government entity. Franchises generally are granted for fixed terms and in many cases are terminable if the franchise operator fails to comply with material provisions of the franchise. Franchising authorities are immune from monetary damage awards arising out of regulation of Cable Systems or decisions made on franchise grants, renewals, transfers and amendments. 59 62 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 (typically set by statute or regulation to be as low as $1.00), the owners of rental apartments (and, in some instances, the owners of condominiums and manufactured housing parks) must allow the local franchise cable television operator to have access to the property to install its equipment and provide cable service to residents of the MDU. Such state mandatory access laws effectively eliminate the ability of the property owner to enter into an exclusive Right of Entry with a provider of cable or other video programming services. To the best of the Company's knowledge, states that have enacted cable mandatory access statutes in some form are: Connecticut, Delaware, Illinois, Kansas, Maine, Minnesota, Nevada, New Jersey, New York, Pennsylvania, Rhode Island and Wisconsin. The District of Columbia and the cities of Scottsdale and Glendale, Arizona, and Lewisville, Texas also have adopted municipal ordinances requiring mandatory access. Florida currently has a mandatory access statute for condominiums, but the validity of that statute has been called into question because an identical provision of Florida law that applied to rental properties has been held to be unconstitutional. Virginia has an anti-compensation statute that forbids an owner of an MDU from accepting compensation from whomever the owner permits to provide cable or other video programming services to the property. Such a statute limits the ability of a cable or other video programming provider to enter into an exclusive Right of Entry with an owner of an MDU because an owner usually is induced to enter an exclusive agreement through financial incentives. These statutes have been and are being challenged on constitutional grounds in various states. The Company does not have significant operations in any mandatory access state other than Florida (with respect to condominiums) and Illinois. When operating in Illinois, the Company generally enters into bulk sales agreements with MDU owners, whereby the MDU owner agrees to purchase cable television, at a discount, for each unit in the MDU and provides the service to the MDU resident as one of the amenities included in their rent. Microwave and Private Cable Regulation The Company uses microwave distribution networks, which typically operate in the 18GHz band, to interconnect individual private cable systems with each other and with head-end facilities. The FCC exercises jurisdiction over 18GHz microwave and other transport technologies using the radio frequency spectrum pursuant to Title III of the Communications Act, which vests authority in the FCC to regulate radio transmissions and to issue licenses for radio stations. The scope, content, and meaning of existing laws, rules and regulations governing all microwave technologies are subject to legislative, judicial and administrative changes. There can be no assurance that future legislative or regulatory actions will not adversely affect the 60 63 Company's ability to deliver video or telecommunications programming using the radio frequency spectrum or raise the cost of such delivery. The Company's microwave networks must comply with the FCC's licensing procedures and rules governing a licensee's operations. Application to use microwave "paths" and frequencies is made to the FCC and is subject to certain technical requirements and eligibility qualifications. After microwave paths are licensed to an applicant, the facilities must normally be constructed and fully operational within 18 months of the grant. The facilities must be built in strict accordance with the terms of the granted application. Most of the Company's licenses are valid for a period of five years from the grant date, however, new licenses are valid for ten years from the date of grant, after which the licensee must apply to the FCC for license renewal. 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. In addition, there have been proposals by certain satellite operators to blanket license satellite downlink transmissions in the 18GHz band. If adopted, such blanket licensing could impair the use of the 18GHz band by private microwave operators such as the Company. The Company anticipates that in the future it will use 6GHz, 11GHz and 23GHz microwave frequencies, which are available for both private or common carrier communications, to provide bi-directional telecommunications services. The application and licensing procedures for authorizations to use the 6GHz, 11GHz and 23GHz frequencies are substantially the same as those described above. Although the Company expects that 6GHz, 11GHz and 23GHz frequencies will be available on its current paths and to meet its future needs, the Company has not commenced frequency coordination and there can be no assurance that the Company will be able to obtain licenses for these frequencies on the paths it desires. Recently the FCC, at the request of national defense agencies, restricted the use of 18GHz frequencies in the greater Denver and Washington, D.C. areas. This change could severely limit the Company's ability to use 18GHz microwave technologies in these two markets. The Company has, however, received assurances from the FCC that it will be permitted, subject to certain waiver and/or rulemaking procedures, to use 12GHz microwave as a medium to deliver multi-channel video programming and telecommunications services in Denver. The Company believes that 12GHz microwave paths are an acceptable substitute for 18GHz microwave paths and that the change will not materially adversely affect the Company's network plans in Denver. The 12GHz frequencies are not, however, generally available to private microwave licensees. Nonetheless, based on the assurances received from the FCC, the Company has commenced frequency coordinations for 12GHz paths on Denver and obtained special temporary authorization it to use 12GHz frequencies on selected paths in Denver. There can be no assurance that 12GHz paths will be available for the Company's future needs in Denver or the Washington, D.C. area. 61 64 To reduce the Company's reliance on 18GHz microwave and to take advantage of superior propagation characteristics of lower frequency microwave transmissions, the Company has initiated two proceedings at the FCC that would, if resolved in a manner satisfactory to the Company, make additional microwave bands available for use by the Company on a nationwide basis. First, the Company has filed a petition for rulemaking that proposes FCC rule changes to allow the Company and other private microwave licensees to use 12GHz frequencies nationwide for the delivery of video programming materials. These bands, which the Company has obtained limited authority to use in the Denver market, normally are not available for video distribution services by private microwave licensees. Second, the Company has sought a nationwide waiver of a restriction in the FCC's rules that prohibits non-common carrier microwave licensees from transmitting video entertainment material in the 11GHz microwave bands. Although the Company anticipates that one or both of these regulatory initiatives will be successful, there can be no assurance that either of these bands will be made generally available to the Company on a nationwide basis. Radio frequency ("RF") emissions from microwave equipment may pose health risks to humans. The FCC recently adopted new guidelines and methods for evaluating the environmental effects of RF emissions from FCC-regulated transmitters, including microwave equipment. The updated guidelines and methods generally are more stringent than those previously in effect. The Company expects that the microwave equipment to be provided by its vendors will comply with applicable FCC guidelines. Although private cable television operators are not subject to the full range of regulation applicable to Cable Systems, they are subject to the following federal regulations. First, private cable television operators are entitled to the compulsory copyright license described above. Second, private cable television operators benefit from the federal laws and regulations that require certain programming providers to make cable programming available to all multichannel video programming distributors on fair, reasonable and nondiscriminatory terms. Third, as noted above, private cable television operators are required to obtain retransmission consent from local broadcasters in order to retransmit their signals. Finally, private cable television systems are required to comply with the FCC's EEO rules and policies, although the continuing validity of these rules and policies has been called into question by a recent court of appeals decision overturning portions of the FCC's EEO rules applicable to broadcast stations. Because they are subject to minimal federal regulation, private cable television operators have significantly more competitive flexibility than do the franchised Cable Systems with which they compete. Private cable television operators have fewer programming restrictions, greater pricing freedom, and they are not required to serve any customer 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 May 31, 1998, the Company had a total of 597 full-time employees. The Company believes that its continued success will depend in large part on its ability to attract and retain highly skilled and qualified personnel. The Company has nondisclosure agreements with all of its senior executive officers. From time to time the Company also uses the services of contract technicians for installation and maintenance services. The Company relies principally on outside contractors for network construction. None of the Company's employees are currently represented by a collective bargaining agreement. The Company believes that its relationships with its employees are good. PROPERTIES The Company's executive offices are located in Dallas, Texas and house its national call center and its corporate, engineering, sales and marketing and corporate administrative services groups. The original lease provides for approximately 52,000 square feet of space and has a ten-year term expiring November 30, 2005. The Company has an option to extend the lease term for an additional five-year term at the then market rental rate. The Company recently leased an additional 17,000 square feet in the same building, for a term of one 62 65 year, to provide for needed expansion. The Company pays approximately $71,000 per month for the space in its headquarters building. The Company has the right to acquire additional space at its current location when such space becomes available. In light of the Company's rapid growth, the Company is currently evaluating relocating its executive offices to a new location within the Dallas-Fort Worth area. In October 1997, the Company purchased a building proximate to its executive offices in Dallas, Texas. The Company has installed the central office switch for the Dallas-Fort Worth market in the building and intends to relocate its Dallas regional operations to the same building by the end of calendar 1998. The Company also leases facilities in each of the fourteen cities in which it has established regional operations. The Company owns substantially all of the telecommunications and cable television equipment essential to its operations. The Company's major fixed assets are telecommunications switches, cable television head ends, microwave transmitters and receivers, SMATV receivers, PBX switches and coaxial fiber optic cable. Such properties do not lend themselves to description by character and location of principal units. Substantially all of this equipment (other than fiber optic cable laid under public rights of way) resides on or under the MDUs served by the Company or in leased facilities in various locations throughout the metropolitan areas served by the Company. LEGAL PROCEEDINGS 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 or results of operations. On April 27, 1998, the Civil Action was commenced against the Company in the United States District Court for the Northern District of California by Octel, charging the Company with trademark infringement, trade name infringement, trademark dilution, and unfair competition based on its use of the name "OpTel" and seeking to enjoin the Company from using the name "OpTel." The Civil Action follows a now-suspended administrative proceeding in the PTO, pending since November 7, 1995, 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. See "Risk Factors -- Use of the Name OpTel." On April 9, 1998, a purported class action complaint was filed in the District Court of Harris County, Texas by Gavin Stewart Clarkson, individually and on behalf of all cable subscribers in the U.S. that have paid late fees to either Phonoscope or the Company. The plaintiff, who formerly subscribed to cable television services provided by Phonoscope, alleges that Phonoscope's charging pre-established late fees for delinquent payments of cable subscription charges constitutes an illegal collection of a penalty and that cable service providers should only be entitled to their actual collection costs. The plaintiff seeks to enjoin Phonoscope and OpTel from collecting, or attempting to collect, such late fees. The case is in its very early stages and no assurance can be given as to its ultimate outcome or that any such outcome will not materially adversely affect the Company. OpTel believes that it will have meritorious factual and legal defenses, and intends to defend vigorously against these claims. See "Risk Factors -- Late Fees Class, Action Litigation." 63 66 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information regarding the directors and executive officers of the Company as of May 31, 1998:
NAME POSITION AGE ---- -------- --- Claude Chagnon................ Chairman of the Board and Director 43 Louis Brunel.................. Director; President and Chief Executive Officer 56 Christian Chagnon............. Director 42 William O. Hunt............... Director 65 Lynn McDonald................. Director 38 Alain Michel.................. Vice Chairman of the Board and Director 49 Bertrand Blanchette........... Chief Financial Officer 40 John Czapko................... Vice President, Sales 56 Stephen Dube.................. Vice President, Operations 42 James Greene.................. Vice President, Telephone 52 Michael E. Katzenstein........ Vice President, Legal Affairs and General Counsel 38 Thomas Watson................. Vice President, Engineering and Information Services 42 Lynn Zera..................... Vice President, Human Resources 50
Claude Chagnon has served as a Director since August 1996. Since October 1996, he has been the President and Chief Operating Officer of GVL. From January 1994 to October 1996, Mr. Chagnon was Vice Chairman of GVL. Prior to 1994, Mr. Chagnon held various positions at GVL and its subsidiaries including, from May 1988 to January 1994, President of Videotron Ltee, a Canadian cable television company and wholly-owned subsidiary of GVL. Louis Brunel has served as a Director since March 1995 and as President and Chief Executive Officer since April 1996. Since 1988, Mr. Brunel has held various positions at GVL and its subsidiaries, including, immediately prior to joining OpTel, Vice-Chairman and Chief Executive Officer of Videotron Holdings Plc ("VHP"), a recently divested United Kingdom based cable and telephone subsidiary of GVL. While at VHP, Mr. Brunel was the chief architect of VHP's cable television/telecommunications business. From 1988 to 1990, he served as Vice President, Corporate Development of GVL. In addition, he served as President of Videotron International Ltee from September 1994 through December 1996. Christian Chagnon has served as a Director since March 1997 and has been Senior Vice President, Strategic Planning and Technology of GVL since September 1994. Prior to August 1994, Mr. Chagnon was also President of Videotron Services Informatiques Ltee. Mr. Chagnon also serves as a Director of GVL. Mr. Christian Chagnon is the brother of Mr. Claude Chagnon. William O. Hunt was appointed as a Director in June 1998. Since December 1992, Mr. Hunt has served as Chairman of the Board, Chief Executive Officer and President of Intellicall, Inc., a manufacturer of network and customer premise equipment. From June 1986 to July 1992, Mr. Hunt was Chairman and Chief Executive Officer of Alliance Telecommunications Corporation, a wireless telecommunications company. Mr. Hunt also serves as a Director of The Allen Group Inc., American Homestar Corporation, DSC Communications Corporation and Dr. Pepper Bottling Company of Texas. Lynn McDonald was appointed as a Director in June 1998. Since 1996, Ms. McDonald has been a Manager with CDPQ, a subsidiary of Caisse that actively manages private placements in communications companies. Prior to joining CDPQ, Ms. McDonald worked at the Fonds de Solidarite des Travailleurs du Quebec, a leading venture capital fund. Previously, Ms. McDonald was a special situations equity analyst at BBN James Capel, a Canadian stock brokerage firm. Ms. McDonald is also a Director of Fundy Communications Inc., Telexis Corporation, Les Systemes Proxima Ltee and Regional Vision Inc. 64 67 Alain Michel has served as a Director since April 1997. Since July 1992, Mr. Michel has held various management positions at GVL, including, since July 1994, Senior Vice President and Chief Financial Officer. Mr. Michel is also a Director of NB Capital, Inc., a publicly traded Delaware real estate investment trust, Microcell Telecommunications Inc., a Canadian public company which provides telecommunications services and in which GVL holds a minority interest, and Groupe Goyette Inc., a Canadian private company which provides transportation and storage services. Bertrand Blanchette was appointed Chief Financial Officer in September 1996. From September 1995 to December 1996, Mr. Blanchette served as Chief Financial Officer of VHP. From June 1994 to December 1995, he was Vice President, Control of GVL. From October 1986 to May 1994, Mr. Blanchette was Vice President, Finance of Heroux, Inc., a Canadian public company which manufactures airplane parts. John Czapko was appointed Vice President, Sales in March 1997. From September 1993 to February 1997, Mr. Czapko was Director of Indirect Distribution of Metrocel Cellular Telephone Company ("Metrocel"). From June 1991 to September 1993, he was Director of Direct Distribution of Metrocel. Stephen Dube was appointed Vice President, Operations in March 1998. Prior to that date, Mr. Dube served as Vice President, Marketing and Corporate Development for OpTel from May 1997 to March 1998 and as Vice President, Acquisitions and Strategic Planning for OpTel from July 1995 to May 1997. From July 1995 to March 1997, Mr. Dube served as a Director of OpTel. From January 1992 to April 1995, Mr. Dube was Senior Vice President of Laurentian Financial Inc., a financial services company. James Greene was appointed Vice President, Telephone in April 1998. From June 1997 to April 1998, Mr. Greene was an independent consultant and advised the Company on the launch of its first central office switch in Houston, Texas and the commencement of CLEC services. Mr. Greene consulted for OpTel on an exclusive basis from November 1997 until his appointment as Vice President. From 1993 to November 1997, Mr. Greene was a consultant for several state and local regulatory bodies and worked principally with the State of Oregon. Michael E. Katzenstein was appointed Vice President, Legal Affairs and General Counsel in November 1995. Prior to joining OpTel, Mr. Katzenstein was a partner at Kronish, Lieb, Weiner and Hellman LLP. Mr. Katzenstein received his J.D. from Boston University School of Law in 1985. Thomas Watson was appointed Vice President, Information Services in September 1996. In August 1997, he also assumed the role of Vice President, Engineering. From January 1992 to September 1996, Mr. Watson held various positions at GTE Telephone Operations, an ILEC, including Group Product Manager, Group Manager Engineering and Senior Program Manager. Lynn Zera was appointed Vice President, Human Resources in November 1995. From July 1994 to October 1995, Ms. Zera was Executive Director of Keystone Consulting. From July 1993 to July 1994, she was Executive Director of Human Resources of Intellicall, Inc., a telecommunications company. From March 1978 to January 1993, she held various management and marketing positions with Oryx Energy, a company involved with the production and exploration of oil and gas. 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. 65 68 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth certain information concerning compensation awarded to or paid to the Company's Chief Executive Officer and the four most highly compensated executive officers (collectively, the "Named Executive Officers") for the fiscal years ended August 31, 1997, 1996 and the eight month period ended August 31, 1995.
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------ ------------------------------ SECURITIES FISCAL OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION(14) --------------------------- ------ -------- ------- ------------ ---------- ---------------- Louis Brunel........................ 1997 $269,623 -- $ 66,062(7) 16,034.79 -- President and Chief 1996 $ 35,095(2) -- -- -- -- Executive Officer 1995 -- -- -- -- -- Michael E. Katzenstein.............. 1997 $175,000 $57,500 $ 65,196(8) 9,137.61 $2,820 Vice President, Legal Affairs 1996 $135,346(3) $40,000 $103,756(9) -- $3,334 and General Counsel 1995 -- -- -- -- -- Rory Cole(1)........................ 1997 $163,654 $43,750 -- 9,406.36(13) $3,629(15) Vice President and 1996 $175,000 $36,500 -- -- $4,750 Chief Operating Officer 1995 $102,980 -- $ 22,405(10) -- -- Bertrand Blanchette................. 1997 $129,702(4) $ 5,000 $ 33,961(11) 4,373.12 -- Vice President and 1996 -- -- -- -- -- Chief Financial Officer 1995 -- -- -- -- -- Stephen Dube........................ 1997 $119,139 $15,000 $ 63,514(12) 3,381.88 $2,844 Vice President, Operations 1996 $ 36,542(5) -- -- -- -- 1995 -- -- -- -- -- Lynn Zera........................... 1997 $112,877 $21,040 -- 2,565.57 $2,809 Vice President, Human Resources 1996 $ 83,750(6) -- -- -- $2,513 1995 -- -- -- -- --
- --------------- (1) Mr. Cole resigned from the Company effective July 11, 1997. (2) During fiscal 1996, Mr. Brunel was paid primarily by GVL. Beginning June 1, 1996, a portion of Mr. Brunel's salary was allocated to the Company. Effective November 1, 1996, Mr. Brunel accepted the position of President and Chief Executive Officer on a full-time basis. (3) Mr. Katzenstein commenced employment with the Company in November 1995. (4) Mr. Blanchette commenced employment with the Company as Chief Financial Officer in September 1996. During the period September 1996 through December 1996, Mr. Blanchette continued to act as Chief Financial Officer of VHP, a subsidiary of GVL which was divested in December 1996. During such period, Mr. Blanchette's salary was paid by VHP and a portion of such salary was allocated to the Company. Mr. Blanchette commenced full-time employment with the Company effective January 1, 1997. (5) During fiscal 1996, Mr. Dube was paid primarily by GVL. Beginning June 1, 1996, a portion of Mr. Dube's salary was allocated to the Company. Effective January 1, 1997, Mr. Dube became a full-time employee of the Company. (6) Ms. Zera commenced employment with the Company in November 1995. (7) $39,790 represents relocation payments and $21,680 represents an automobile allowance. (8) $49,823 represents tax reimbursements resulting from relocation. (9) $93,706 represents relocation payments. (10) The entire amount represents an relocation payments. (11) $29,161 represents relocation payments. (12) $54,288 represents relocation payments. (13) In connection with the termination of Mr. Cole's employment, and in exchange for cancellation of the options granted to Mr. Cole under the Plan (as defined), a warrant (the "Cole Warrant") to purchase up to 9,406.36 shares of Class A Common Stock with an exercise price of $74.42 per share, subject to certain adjustments, was granted to Mr. Cole. The Cole Warrant is presently exercisable and expires on July 11, 2002. See "Certain Relationships and Related Transactions -- Cole Warrant." (14) Represents 401(k) matching fund contributions by the Company. (15) As part of a severance package, Mr. Cole was, among other things, paid a lump sum amount of $219,194 and reimbursed by the Company for the acquisition of an automobile valued at approximately $22,000 which was previously leased by the Company. All such amounts were paid during fiscal 1998. 66 69 OPTION GRANTS IN FISCAL 1997 The following table sets forth options to purchase shares of the Class A Common Stock granted to the Named Executive Officers during fiscal 1997. Prior to fiscal 1997, no options were granted by the Company.
POTENTIAL REALIZED VALUE AT ASSUMED NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION FOR UNDERLYING GRANTED TO OPTION TERM OPTIONS EMPLOYEES IN EXERCISE ----------------------- NAME GRANTED FISCAL YEAR PRICE EXPIRATION DATE 5% 10% ---- ---------- ------------ -------- --------------- --------- ----------- Louis Brunel...................... 16,034.79 18.40% $85.75 November, 2006 $758,067 $1,867,155 Rory Cole(1)...................... 9,406.36 10.80% $74.42 November, 2006 $551,273 $1,201,888 Michael E. Katzenstein............ 9,137.61 10.49% $74.42 November, 2006 $535,522 $1,167,549 Bertrand Blanchette............... 4,373.12 5.02% $85.75 November, 2006 $206,745 $ 509,224 Stephen Dube...................... 3,381.88 3.88% $85.75 November, 2006 $159,883 $ 393,800 Lynn Zera......................... 2,565.57 2.94% $85.75 November, 2006 $121,291 $ 298,745
- --------------- (1) In connection with the termination of Mr. Cole's employment, all of the options granted to Mr. Cole were exchanged for the Cole Warrant. See Note 13 to the Summary Compensation Table. AGGREGATED OPTION EXERCISES IN FISCAL 1997 AND FISCAL YEAR END OPTION VALUES The following table shows the values of options held by the Named Executive Officers as of the end of fiscal 1997. No options were exercised by the Named Executive Officers during fiscal 1997.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT FISCAL YEAR-END OPTIONS AT FISCAL YEAR-END 1997(#) 1997($)(1) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- Louis Brunel.......................... -- 16,034.79 -- -- Rory Cole(2).......................... -- -- -- -- Michael E. Katzenstein................ -- 9,137.61 -- $103,529 Bertrand Blanchette................... -- 4,373.12 -- -- Stephen Dube.......................... -- 3,381.88 -- -- Lynn Zera............................. 641.25 1,924.32 -- --
- --------------- (1) The value of the options at fiscal year-end 1997 is based on an assumed fair market value of $85.75 per share of Class A Common Stock. (2) In connection with the termination of Mr. Cole's employment, all of the options granted to Mr. Cole were exchanged for the Cole Warrant. See Note 13 to the Summary Compensation Table. At fiscal year-end 1997, the Cole Warrant was presently exercisable and, assuming a cashless exercise, had a value of $106,574 based on an assumed fair market value of $85.75 per share of Class A Common Stock. EMPLOYMENT AGREEMENTS Louis Brunel is employed as President and Chief Executive Officer of the Company pursuant to an at will employment agreement. Under the employment agreement, Mr. Brunel currently receives an annual base salary of $350,000, a Company automobile and a housing allowance. In addition, Mr. Brunel is entitled to participate in the Company's Incentive Stock Plan (as described below) and Bonus Plan (as described below). If Mr. Brunel's employment is terminated by the Company for other than cause, Mr. Brunel will receive a severance payment equal to two years base salary. Michael E. Katzenstein is employed as Vice President, Legal Affairs and General Counsel of the Company pursuant to an employment agreement expiring in November 2000. Under the employment agreement, Mr. Katzenstein currently receives an annual base salary of $182,000 and a Company automobile. In addition, Mr. Katzenstein is entitled to participate in the Company's Incentive Stock Plan and Bonus Plan. Bertrand Blanchette is employed as Vice President and Chief Financial Officer of the Company pursuant to an at will employment agreement. Under the employment agreement, Mr. Blanchette currently receives an 67 70 annual base salary of $158,000 and a Company automobile. In addition, Mr. Blanchette is entitled to participate in the Company's Incentive Stock Plan and Bonus Plan. Stephen Dube is employed as Vice President, Operations of the Company pursuant to an at will employment agreement. Under the employment agreement, Mr. Dube currently receives an annual base salary of $180,000 and a Company automobile. In addition, Mr. Dube is entitled to participate in the Company's Incentive Stock Plan and Bonus Plan. Lynn Zera is employed as Vice President, Human Resources of the Company pursuant to an at will employment agreement. Under the employment agreement, Ms. Zera currently receives an annual base salary of $124,000. In addition, Ms. Zera is entitled to participate in the Company's Incentive Stock Plan and Bonus Plan. Upon termination by the Company of any of its most senior executives without cause, the Company has in the past offered severance equal to one year's base salary. INCENTIVE STOCK PLAN In fiscal 1997, the Company adopted an Incentive Stock Plan. In fiscal 1998, the Company adopted 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"). Five percent of the Class A Common Stock outstanding, on a fully diluted basis, on the date the Offering is consummated, may be issued under the terms of the Plan. The number of shares issuable under the Plan will be adjusted on each January 1 to 5% of the then outstanding Class A Common Stock, on a fully diluted basis, if such adjustment would increase the number of shares. As of May 31, 1998, options to purchase 88,557.98 shares of Class A Common Stock have been granted under the Plan, none of which have been exercised, at a weighted average exercise price of $84.37 per share of Class A Common Stock. The Plan authorizes the Board to issue incentive stock options ("ISOs") as defined in Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"), stock options that do not conform to the requirements of that Code section ("Non-ISOs"), stock appreciation rights ("SARs"), restricted stock, stock awards, dividend equivalent rights, performance based awards and similar stock-based awards. The Plan shall terminate on the tenth anniversary of the date the Offering is consummated. Stock Options. The Board has discretionary authority to determine the types of options to be granted, the persons to whom options shall be granted (provided that options shall only be granted to directors, senior executives and other employees designated by the Board), the number of shares to be subject to each option granted (provided that no single participant in the Plan shall be entitled to receive more than 100,000 shares of Class A Common Stock pursuant to the Plan) and the terms of the stock option agreements. Unless otherwise specifically provided in the option agreement, (i) the exercise price of an option will not be less than the fair market value, as determined by the Board, of the Class A Common Stock on the date of the grant and (ii) the options shall become exercisable in equal installments on each of the second, third, fourth and fifth anniversaries of the effective date of grant; provided that if a participant owns 10% of the voting power or equity interests of all classes of the Company's stock, ISOs granted to such person (i) shall have an exercise price not less than 110% of the fair market value of the Class A Common Stock on the date of the grant and (ii) shall expire five years from the date of grant. In the event of a "change of control," all options shall vest and become immediately exercisable. The exercise price may be paid by personal check, bank draft, money order, or money transfers, through the delivery of shares of the Class A Common Stock, pursuant to a broker-assisted "cashless exercise" program if established by the Company or by such other method as the Board may deem appropriate. Stock Appreciation Rights. The Board may award SARs, which may or may not be granted together with options, under the plan. Generally, SARs permit the holder thereof to receive an amount (in cash, Class A Common Stock or a combination thereof) equal to the number of shares of Class A Common Stock with respect to which SARs are exercised multiplied by the excess of the fair market value of the Class A Common Stock on the exercise date over the exercise price. In general, the exercise of any portion of the 68 71 SARs or any related option will cause a corresponding reduction in the number of shares of Class A Common Stock remaining subject to such SARs and related option. Restricted Stock. Awards of Class A Common Stock granted under the Plan may be subject to forfeiture until such restrictions, terms and conditions as the Board may determine lapse or are fulfilled, as the case may be. The Board will determine how the price for the Class A Common Stock, if any, may be paid. Generally, a participant obtaining a restricted stock award will have all the rights of a stockholder while the Class A Common Stock is subject to restrictions, including the right to vote the Class A Common Stock and to receive dividends. Restricted Class A Common Stock will be issued in the name of the participant and held in escrow until any applicable restrictions lapse or terms and conditions are fulfilled, as the case may be. Until the restrictions are eliminated, restricted Class A Common Stock may not be transferred. Dividend Equivalent Award. The Board may grant an award that represents the right to receive a dividend or its equivalent with respect to any new or previously existing award, which will entitle the recipient to receive at the time of settlement an amount equal to the actual dividends paid on the Class A Common Stock delivered to the recipient, calculated from the date of award and accounted for as if reinvested in Class A Common Stock on the dividend payment dates. This type of award may be paid in the form of Class A Common Stock, cash or a combination of both. Performance-Based Awards. The Board may grant awards under the Plan upon the satisfaction of specified performance goals. The performance period for a performance based award shall be established prior to the time such award is granted and may overlap with performance periods relating to other awards granted under the Plan to the same recipient. Each award shall be contingent upon future performance and achievement of objectives described either in terms of Company-wide performance or in terms that are related to the performance of the recipient or of the division, subsidiary, department or function within the Company in which the recipient is employed. Such objectives shall be based on increases in share prices, operating income, net income or cash flow thresholds, sales results, return on common equity or any combination of the foregoing. Following the end of each performance period, the holder of each award shall be entitled to receive payment of an amount, not exceeding the maximum value of the award, based on the achievement of the performance measures for such performance period, as determined by the Board. Unless the award specifies otherwise, including restrictions in order to satisfy the conditions under Section 162(m) of the Code, the Board may adjust the payment of awards or the performance objectives if events occur or circumstances arise which would cause a particular payment or set of performance objectives to be inappropriate, as determined by the Board. Other Stock Based Awards. The Board may grant Class A Common Stock or other Class A Common Stock based awards that are related to or similar to the awards described above. STOCK PURCHASE PLAN In fiscal 1998, the Company adopted the 1998 Employee Stock Purchase Plan (the "Stock Purchase Plan") which is intended to qualify as an "employee stock purchase plan" under Section 423 of the Code. The Stock Purchase Plan will become effective, subject to stockholder approval, on the date the Offering is consummated. One percent of the Class A 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 Class A Common Stock at the end thereof. At the start of each Option Period, employees electing to participate in the Stock Purchase Plan are deemed to have been granted an option to purchase a number of whole shares of Class A Common Stock at an exercise price (the "Exercise Price") equal to eighty-five percent (85%) of the lower of the fair market value of one share of the Class A Common Stock on (i) the first day of the Option Period or (ii) the last day of the Option Period (the "Exercise Date"). The number of shares underlying such option is determined by dividing (i) the amount contributed by such employee to the Stock Purchase Plan during the Option Period by (ii) the Exercise Price. On each Exercise Date, each employee will automatically be deemed to have exercised his or her option to purchase at the 69 72 Exercise Price the largest number of whole shares of Class A Common Stock which can be purchased with the amount contributed by such employee to the Stock Purchase Plan less any amounts previously applied to option exercises under the terms of the Stock Purchase Plan; provided, however, no employee shall be permitted to purchase more than 4,000 shares of Class A Common Stock during any Option Period and subject to reduction in order to avoid issuance of more shares than are provided for under the terms of the Stock Purchase Plan. ANNUAL BONUS PLAN The Company has adopted an Annual Bonus Plan (the "Bonus Plan") pursuant to which the Board is authorized to grant cash bonuses to certain employees of the Company. Bonuses are payable only if the Company achieves certain performance targets approved by the Compensation Committee at the beginning of the fiscal year. 401(K) PLAN The Company has implemented an employee savings and retirement plan (the "401(k) Plan") covering certain of the Company's employees who have at least three months of service with the Company and have attained the age of 21. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 15% of such compensation or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The Company has made, and may in the future make, contributions to the 401(k) Plan on behalf of eligible employees. Employees become 100% vested in these Company contributions after one year of service. The 401(k) Plan is intended to qualify under Section 401 of the Code so that contributions by employees or by the Company to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by the Company, if any, will be deductible by the Company when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the 401(k) Plan employee salary deferrals in selected investment options. COMMITTEES OF THE BOARD OF DIRECTORS The Board has an Audit Committee and a Compensation Committee. The functions of the Audit Committee include recommending to the Board the retention of independent public accountants, reviewing the scope of the annual audit undertaken by the Company's independent public accountants and the progress and results of their work, and reviewing the financial statements of the Company and its internal accounting and auditing procedures. The Audit Committee is composed of Claude Chagnon, William O. Hunt, Lynn McDonald and Alain Michel. The chairman of the Audit Committee is Mr. Hunt. The function of the Compensation Committee is to supervise the Company's compensation policies, administer the employee incentive plans, review officers' salaries and bonuses, approve significant changes in employee benefits and consider other matters referred to it by the Board. The Compensation Committee is composed of Claude Chagnon, William O. Hunt, Lynn McDonald and Alain Michel. The Chairman of the Compensation Committee is Mr. Chagnon. COMPENSATION OF DIRECTORS Directors of the Company who are neither employees of the Company nor designees of the Company's significant stockholders will receive an annual fee of $15,000, a fee of $1,000 per meeting of the Board and an annual fee of $1,500 if they serve as the chairperson of a committee of the Board. Each such Director will also receive options to purchase shares of Class A Common Stock having an aggregate value of $150,000 upon consummation of the Offering (or, if such Director is not serving in such capacity upon consummation of the Offering, on the date of his or her election to the Board) with an exercise price equal to the initial public offering price (or the fair market value on the date of grant). The options will become exercisable in equal installments on each of the second, third, fourth and fifth anniversaries of the 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 70 73 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, Mr. Brunel served as a member of the Compensation Committee. Effective May 19, 1998, Mr. Brunel resigned from the Compensation Committee. LIMITATION OF LIABILITY; INDEMNIFICATION; INSURANCE The Company's Certificate of Incorporation provides that the Company shall, to the fullest extent permitted by the DGCL, indemnify all persons which it may indemnify pursuant thereto (i.e., directors and officers) and shall advance expenses incurred in defending any proceeding for which such right to indemnification is applicable, provided that, if the DGCL so requires, the indemnitee provides the Company with an undertaking to repay all amounts advanced if it is determined by a final judicial decision that such person is not entitled to indemnification pursuant to this provision. The Company's Certificate of Incorporation also contains a provision eliminating the personal liability of the Company's directors for monetary damages for breach of any fiduciary duty. By virtue of this provision, under the DGCL, a director of the Company will not be personally liable for monetary damages for breach of his fiduciary duty as a director, except for liability for (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) dividends or stock purchases or redemptions that are unlawful under the DGCL and (iv) any transaction from which a director derives an improper personal benefit. However, this provision of the Company's Certificate of Incorporation pertains only to breaches of duty by directors as directors and not in any other corporate capacity such as officers, and limits liability only for breaches of fiduciary duties under the DGCL and not for violations of other laws, such as the federal securities laws. As a result of the inclusion of such provision, stockholders may be unable to recover monetary damages against directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. The inclusion of this provision in the Company's Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Company and its stockholders. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling OpTel pursuant to the foregoing provisions, OpTel has been informed that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The directors and officers of the Company are insured (subject to certain exceptions and deductions) against liabilities that they may incur in their capacity as such, including liabilities under the Securities Act, under a liability insurance policy carried by GVL. Such policy provides coverage in an aggregate amount of $50 million (subject to a $250,000 deductible) and expires in October 1998. The Company expects that this insurance will be renewed in the ordinary course. 71 74 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 any class 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 sale of the Class A Common Stock in the Offering and the conversion of all of the outstanding shares of Non-Voting Common and Series B Preferred into Class A Common Stock and all of the outstanding shares of Series A Preferred into Multi-Vote Common in connection with the Offering.
PRIOR TO THE OFFERING ---------------------------------------- PERCENT OF AMOUNT AND PERCENT OF TOTAL NUMBER NATURE OF PERCENT OF TOTAL SHARES VOTING OF SHARES BENEFICIAL OWNER TITLE OF CLASS OWNERSHIP(1) CLASS(2) OUTSTANDING(2) POWER(2) OFFERED ---------------- -------------------- ------------ ---------- -------------- ---------- --------- Le Groupe Videotron Ltee.................. Multi-Vote Common (3) Caisse de depot et placement du Quebec... Multi-Vote Common (4) Interactive Cable Systems, Inc.......... Class A Common Stock (5) Nomura Holding America Inc................... Class A Common Stock --(5) MCI Telecommunications Corporation........... Class A Common Stock --(5) James A. Kofalt......... Class A Common Stock 24,992.00(6) Rory Cole............... Class A Common Stock 9,406.36(7) Louis Brunel............ Class A Common Stock 6,559.83(8) Michael E. Katzenstein........... Class A Common Stock 2,284.40(9) Bertrand Blanchette..... Class A Common Stock --(10) Stephen Dube............ Class A Common Stock 1,195.34(11) Lynn Zera............... Class A Common Stock 1,282.78(12) All directors and officers as a group (13 persons).......... Class A Common Stock 11,322.35(13) AFTER THE OFFERING(1) ------------------------------------------ PERCENT OF PERCENT OF TOTAL PERCENT OF TOTAL SHARES VOTING BENEFICIAL OWNER CLASS(3) OUTSTANDING(4) POWER ---------------- ---------- -------------- ------------ Le Groupe Videotron Ltee.................. Caisse de depot et placement du Quebec... Interactive Cable Systems, Inc.......... Nomura Holding America Inc................... MCI Telecommunications Corporation........... James A. Kofalt......... Rory Cole............... Louis Brunel............ Michael E. Katzenstein........... Bertrand Blanchette..... Stephen Dube............ Lynn Zera............... All directors and officers as a group (13 persons)..........
- --------------- (1) Except as otherwise indicated in the other footnotes to this table, each person named in the table has sole voting and dispositive power with respect to the shares of Common Stock beneficially owned by such person. (2) "*" indicates less than one percent. 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. All such shares are fully convertible into Class A Common Stock on a one-for-one basis upon the occurrence of a Conversion Event. See "-- Stockholders' Agreement" and "-- GVL Shareholders' Agreement" for the terms of certain agreements governing the voting and disposition of the shares of Common Stock held by VPC and GVL. GVL's address is 300 Avenue Viger East, Montreal, Quebec, H2X 3W4. (4) Such shares are owned by CDPQ, a wholly-owned subsidiary of Caisse. All such shares are fully convertible into Class A Common Stock on a one-for- one basis upon the occurrence of a Conversion Event. See "-- Stockholders' Agreement" and "-- GVL Shareholders' Agreement" for the terms of certain agreements covering the voting and disposition of the shares of Common Stock held by Caisse and CDPQ. In addition, Caisse holds $20.0 million of 1998 Notes which it purchased from the initial purchasers of the Notes Offering. 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's address is 1801 Pennsylvania Avenue, N.W., Washington, D.C. 20006. Includes shares currently held in escrow pending the consummation of the balance of the acquisition of the ICS Operations. (6) Represents a presently exercisable warrant to purchase 24,992 shares of Class A Common Stock. Mr. Kofalt's address is 50209 Manly, Chapel Hill, North Carolina 27514. (7) Represents a presently exercisable warrant to purchase 9,406.36 shares of Class A Common Stock. Mr. Cole's address is 4339 Beverly Drive, Dallas, Texas 75205. (8) Includes 6,559.83 shares of Class A Common Stock underlying presently exercisable options. Excludes 19,679.51 shares of Class A Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (9) Includes 2,284.40 shares of Class A Common Stock underlying presently exercisable options. Excludes 6,853.21 shares of Class A Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (10) Excludes 4,373.12 shares of Class A Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (11) Includes 1,195.34 shares of Class A Common Stock underlying presently exercisable options. Excludes 5,102.04 shares of Class A Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (12) Includes 1,282.78 shares of Class A Common Stock underlying presently exercisable options. Excludes 1,282.79 shares of Class A Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. (13) With respect to executive officers who are not Named Executive Officers, excludes 9,912.52 shares of Class A Common Stock underlying options which are not exercisable until at least 60 days after the date of this Prospectus. 72 75 As of May 31, 1998, all of the outstanding shares of the Multi-Vote Common were held by VPC and CDPQ and all of the outstanding shares of Common Stock were held by ICS. See "Risk Factors -- Control by GVL." ICS STOCKHOLDERS' AGREEMENT AND ICS REGISTRATION RIGHTS AGREEMENT In connection with the Company's acquisition of the ICS Operations, ICS, Nomura, MCI (ICS, Nomura, and MCI, together, the "ICS Group"), VPC, GVL and the Company entered into a Stockholders' Agreement (the "ICS Stockholders' Agreement") dated as of April 9, 1998 and the Company, ICS, Nomura and MCI entered into a Registration Rights Agreement (the "ICS Registration Rights Agreement") dated as of April 9, 1998. Under the ICS Stockholders' Agreement, (i) the transfer of the shares of Class A Common Stock and Series B Preferred owned by the ICS Group (collectively, the "ICS Shares") is restricted, subject to certain exceptions, and (ii) the ICS Shares are subject to drag-along rights if VPC (or GVL through the sale of its interests in VPC) elects to sell equity interests representing 50% or more of the voting power of the outstanding capital stock of the Company or 50% or more of the equity interests held by VPC. Pursuant to the ICS Registration Rights Agreement, following the consummation of the Offering, the ICS Group has piggyback registration rights, on three occasions, in registration statements filed by the Company for the sale of its equity securities, subject to certain conditions, including customary allocation and holdback provisions. STOCKHOLDERS' AGREEMENT In August 1997, CDPQ purchased the minority interest in the Company from Vanguard Communications L.P. ("Vanguard"). In connection with the sale by Vanguard of its minority stock position in the Company to CDPQ, the Company, VPC and CDPQ entered into the Stockholders' Agreement and the Company and CDPQ entered into a related Registration Rights Agreement (the "Registration Rights Agreement"), under which CDPQ has certain rights and obligations relating to the Company and VPC. CDPQ is also a party to the GVL Shareholders' Agreement described below. The following is a summary of certain provisions of the Stockholders' Agreement and the Registration Rights Agreement. Designation of Directors. Under the Stockholders' Agreement, for as long as CDPQ holds at least 5% of the Company's voting stock, CDPQ may designate a number of Directors of the Company and each of its subsidiaries, and each committee of the Board and each of its subsidiaries, which is proportionate (in relation to the total number of Directors or committee members) to CDPQ's percentage ownership of the Company's voting stock, but in no event less than one Director and one committee member. This agreement supersedes the rights of Caisse to designate a Director of the Company pursuant to the GVL Shareholders' Agreement; however, such rights are subject to reinstatement in the event CDPQ ceases to be a stockholder of the Company. Pursuant to the terms of the Stockholders' Agreement, 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 shares of Class A Common Stock issued to CDPQ upon the 73 76 conversion of the Multi-Vote Common. In addition, CDPQ has piggyback registration rights, on three occasions, to include such shares of Class A Common Stock held by it in registration statements filed by the Company for the sale of its equity securities, subject to certain conditions, including customary allocation and holdback provisions. GVL SHAREHOLDERS' AGREEMENT Caisse, CDPQ, Sojecci Ltee and Sojecci (1995) Ltee, the principal shareholders of GVL, and Andre Chagnon (the founder of GVL) are parties to an amended and restated shareholders agreement, dated as of May 10, 1995 (the "GVL Shareholders' Agreement"), which provides, among other things, that for so long as GVL controls the Company, Caisse will be allowed to select one of GVL's nominees to the Board and to have one representative on the Audit Committee of the Company. While this right has been superseded by the Stockholders' Agreement, it is subject to reinstatement in the event CDPQ ceases to be a stockholder of the Company or the Stockholders' Agreement ceases to be enforceable. See "-- Stockholders' Agreement." 74 77 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS CONVERTIBLE NOTES AND SERIES A PREFERRED The Company has financed a large portion of its capital needs by borrowing from its majority stockholder, VPC. The Company borrowed approximately $17.8 million, $73.4 million and $23.7 million from VPC in the form of the GVL Notes during the eight month period ended August 31, 1995, fiscal 1996 and fiscal 1997, respectively. The GVL Notes bore interest at a rate of 15% per annum, payable concurrently with the payment of principal. Interest was added to principal on an annual basis. Effective March 1, 1998, VPC exchanged all of the GVL Notes for 6,962.21365 shares of the Series A Preferred. VPC has advised the Company that it intends to convert all of its shares of Series A Preferred into Multi-Vote Common upon the consummation of the Offering. In addition, on July 26, 1995, VPC purchased from the Company (i) 311,652 shares of Multi-Vote 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 155,229 shares of Multi-Vote 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). 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 48,937 shares of Multi-Vote Common at an exercise price of $53.55 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 24,992 shares of Class A Common Stock at an exercise price of $53.55 per share, subject to adjustment. The Kofalt Warrant is presently exercisable and expires on August 31, 1999. In addition, pursuant to the terms of the Kofalt Warrant, Mr. Kofalt has piggyback registration rights in registration statements filed by the Company for the sale of its equity securities, subject to certain conditions, including customary allocation and holdback provisions. See "Description of Capital Stock -- Registration Rights of Certain Security Holders." MANAGEMENT FEES In connection with a negotiated settlement of certain disputes between the Company and Vanguard, in August 1996, VPC and Vanguard agreed to provide, at the specific request of the Board, such reasonable consultant, advisory and management services as the Company might reasonably require. These arrangements with Vanguard and VPC were terminated as of August 15, 1997, upon the sale of Vanguard's minority interest in the Company to CDPQ. The Company 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. LICENSE HOLDING COMPANY The Company has assigned substantially all of its frequency licenses to THI in exchange for a $1.0 million secured promissory note with interest at 8% due on February 14, 2007 (the "License Note"). The 75 78 License Note contains covenants which restrict THI from, among other things, incurring indebtedness other than to the Company or in the ordinary course of business, and merging or consolidating with another entity. Section 310(b) of the Communications Act prohibits any corporation of which more than one-fifth of the capital stock is owned or voted by non-U.S. citizens from holding a common carrier radio station license. In addition, under Section 310(b)(4) of the Communications Act, the FCC may, if it finds that it would serve the public interest, deny or revoke a common carrier license if the applicant or licensee is controlled directly or indirectly by any other corporation of which more than one-fourth of the capital stock is owned or voted by non-U.S. citizens. GVL, the Company's principal stockholder, is a Canadian corporation. Consequently, THI was created to permit the Company to use the Assigned Licenses, modified as necessary, to provide "common carrier" telecommunications services in the event that the Company should desire to do so in the future. Russell S. Berman, Henry Goldberg and Thomas Watson, each U.S. citizens, each own one-third of the outstanding equity interests in THI. Russell S. Berman is a partner at Kronish, Lieb, Weiner & Hellman LLP which represents both the Company and THI with respect to various legal matters. Henry Goldberg is a partner at Goldberg, Godles, Wiener & Wright which represents both the Company and THI with respect to certain federal regulatory matters. Mr. Watson is Vice President, Engineering and Information Services of OpTel. To establish the terms of the Company's continued and unencumbered use of the Assigned Licenses, the Company and THI entered into a license and services agreement (the "THI Agreement") pursuant to which THI 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. THI will obtain future licenses necessary to provide the Company with the transmission capacity it requires. The THI Agreement provides for payments from the Company to THI which are expected to approximate the monthly interest due on the License Note plus an allowance for the anticipated expenses of THI. The Company may also advance funds to THI to the extent necessary to enable THI to fulfill its obligations under the THI Agreement. All amounts of such advances will be added to the principal of the License Note. It is not expected that payments made by the Company to THI will have a material impact on the Company's cash flows or results of operations. In connection with the above described transaction, the Company received an option from THI (the "THI Option") to purchase all or, in certain circumstances, some of the assets of THI and a separate option from each stockholder of THI (each, an "Individual Option") to purchase all of such person's shares of capital stock of THI. The exercise price of the THI Option is equal to the current principal of, plus the accrued interest on, the License Note on the closing date, which may be paid by tendering to THI the License Note plus an amount equal to the lesser of (i) the book value of the assets being purchased or (ii) the initial capitalization of THI plus a 10% premium compounded annually. The exercise price of each Individual Option is equal to the lesser of (x) the book value of the shares being purchased and (y) the price paid for such shares plus a 10% premium compounded annually. The THI Option and the Individual Options are exercisable at any time prior to February 14, 2007, subject to FCC approval. In 1997, the United States agreed, in the context of the WTO Basic Telecom Agreement, to allow foreign suppliers from WTO member nations, including Canada, to provide a broad range of basic telecommunications services in the United States. Those commitments became effective in February 1998. In light of those commitments, the FCC has determined that it will adopt an "open entry standard" for suppliers of telecommunications services from WTO member nations. In conjunction with its new open entry policies, the FCC has adopted a presumption favoring grant of applications to exceed the 25 percent limit on non-U.S. ownership contained in Section 310(b)(4) of the Communications Act when the non-U.S. investment is from a WTO member nation. Accordingly, the Company is in the process of reevaluating whether it should hold FCC authorizations directly and, specifically, whether it should exercise its option to purchase the assets or stock of THI. 76 79 ACQUISITION OF CERTAIN ASSETS Effective as of July 31, 1996, the Company purchased certain assets from certain affiliates of VPC for an aggregate purchase price of approximately $3.9 million. The assets represented approximately 23,000 units passed. The operations of the acquired assets are located in the San Francisco, California and Tampa, Florida areas. The amounts paid represented the sellers' historical costs. At the time of the purchase, the Board received a valuation report which estimated the fair market value of such assets to be approximately equal to their historical cost. INSURANCE The Company purchases certain insurance coverage through GVL, including directors and officers liability insurance. The Company paid an aggregate of approximately $478,000 and $434,000 to GVL for this insurance coverage in fiscal 1996 and 1997, respectively. SERVICE AGREEMENTS Pursuant to the terms of the Stockholders' Agreement, VPC and certain of its affiliates provide certain strategic planning and treasury support services to the Company and perform internal audits of the Company's operations. Additional services may be provided as and when requested by the Company. The Company is charged for such services based on an estimate of the actual cost of the personnel engaged and materials used to provide such services (without an allowance for profit). The Company estimates that its costs for such services in fiscal 1998 will not exceed $310,000. In addition, OpTel provides certain customer support and billing services to certain affiliates of GVL which operate wireless cable systems using MMDS technology. OpTel charges such affiliates based on the actual cost of the personnel engaged and materials used to provide such services. SHARED LITIGATION EXPENSES GVL, the Company and certain other affiliates of GVL have been named as defendants in a lawsuit by a former employee of the Company. GVL and the Company have agreed to joint representation by a single law firm and to share the associated expenses. The Company does not believe the litigation (or the associated expenses) to be material. 77 80 DESCRIPTION OF CAPITAL STOCK GENERAL Following the Offering, the authorized capital stock of the Company will consist of shares of Class A Common Stock, shares of Multi-Vote Common, shares of Non-Voting Common and shares of preferred stock. All of the outstanding shares of Non-Voting Common will be converted into Class A Common Stock upon consummation of the Offering, all of the outstanding shares of Series B Preferred will be converted into Class A Common Stock promptly following the Offering and all shares of Series A Preferred will be converted into Multi-Vote Common upon consummation of the Offering. After giving effect thereto and assuming the exercise of all outstanding options and warrants to acquire Class A Common Stock, there will be shares of Class A Common Stock and shares of Multi-Vote Common outstanding on a fully diluted basis. Upon consummation of the Offering there will be no shares of Non-Voting Common 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 Each share of Multi-Vote Common is convertible, at the option of the holder and automatically and irrevocably upon the occurrence of a Conversion Event, into one share of Class A Common Stock. Upon consummation of the Offering, a "Conversion Event" will be defined as the occurrence of (i) the direct or indirect transfer by a holder of Multi-Vote Common of beneficial ownership of the Multi-Vote Common to a person or entity other than a Permitted Holder or (ii) any event or circumstance as a result of which a holder of Multi-Vote Common ceases to be a Permitted Holder. For purposes of this definition, "Permitted Holder" will be defined as (i) any of GVL or Caisse or any of their respective affiliates or (ii) Andre Chagnon, his spouse or any of his lineal descendants and their respective spouses (collectively, the "Chagnon Family"), whether acting in their own name or as one or as a majority of persons having the power to exercise the voting rights attached to, or having investment power over, shares of Common Stock held by others, or (iii) any affiliate of any member of the Chagnon Family or (iv) any trust principally for the benefit of one or more members of the Chagnon Family (whether or not any member of the Chagnon Family is a trustee of such trust) or (v) any charitable foundation a majority of whose members, trustees or directors, as the case may be, are persons referred to in (ii) above. For purposes of this definition, "lineal descendant" shall include at any time any person that is adopted, is treated as being adopted or is in the process of being adopted by any member of the Chagnon Family at such time. The rights of the holders of the Class A Common Stock and Multi-Vote Common are identical in all respects except that holders of the Class A Common Stock are entitled to one vote for each issued and outstanding share and the holders of Multi-Vote Common are entitled to 10 votes for each issued and outstanding share. Holders of Common Stock do not have cumulative 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. The holders of all of the outstanding shares of Multi-Vote Common have entered into a voting agreement pursuant to which they have agreed to vote their shares for certain nominees. See "Principal and Selling Stockholders -- Stockholders' Agreement" and "Risk Factors -- Control by GVL." Holders of the Class A Common Stock and Multi-Vote Common vote together as a single class on all matters submitted to a vote of the stockholders, other than certain matters which may adversely affect the rights of the individual class. The holders of Common Stock will be entitled to receive dividends and other distributions as may be declared thereon by the Board out of assets or funds of the Company legally available therefor, subject to the rights of the holders of any series of preferred stock and any other provision of the certificate of incorporation. The certificate of incorporation of the Company provides that if at any time a dividend or other distribution in cash or other property is paid on Class A Common Stock or Multi-Vote Common, a like dividend or other distribution in cash or other property will also be paid on Class A Common Stock or Multi-Vote Common, as the case may be, in an equal amount per share. In this connection, the certificate of incorporation specifically provides that if shares of Multi-Vote Common are paid on Multi-Vote Common and shares of Class A Common Stock are paid on Class A Common Stock, in an equal amount per share of Multi-Vote Common and Class A Common Stock, such payment will be deemed to be a like dividend or other distribution. In the 78 81 case of any split, subdivision, combination or reclassification of Multi-Vote Common or Class A Common Stock, the shares of Class A Common Stock or Multi-Vote Common, as the case may be, will also be split, subdivided, combined or reclassified so that the number of shares of Multi-Vote Common and Class A Common Stock outstanding immediately following such split, subdivision, combination or reclassification will bear the same relationship to each other as that which existed immediately prior thereto, unless a different basis has been consented to by the holders of a majority of the outstanding shares of each class adversely affected by such action. In the event of any corporate merger, consolidation, purchase or acquisition of property or stock, or other reorganization in which any consideration is to be received by the holders of the Class A Common Stock or the holders of Multi-Vote Common, the holders of the Class A Common Stock and the holders of Multi-Vote Common will receive the same consideration on a per share basis; except that, if such consideration shall consist in any part of voting securities (or of options or warrants to purchase, or securities convertible into or exchangeable for, voting securities), the holders of Multi-Vote Common may receive, on a per share basis, voting securities with ten times the number of votes per share as those voting securities to be received by the holders of the Class A Common Stock (or options or warrants to purchase, or securities convertible into or exchangeable for, voting securities with ten times the number of votes per share as those voting securities issuable upon the exercise of the options or warrants, or into which the convertible or exchangeable securities may be converted or exchanged, to be received by the holders of the Class A Common Stock). In the event of any liquidation, dissolution or winding up of the Company, the holders of the Common Stock will be entitled to receive the assets and funds of the Company available for distribution after payments to creditors and to the holders of any preferred stock of the Company that may at the time be outstanding in proportion to the number of shares held by them, respectively, without regard to class. There are no rights of redemption or sinking fund provisions with respect to outstanding shares of any class of capital stock. The Company, VPC and CDPQ have contractually agreed to certain preemptive rights with respect to any future issuances of capital stock. Subject to certain exceptions (including a public offering of the Company's equity securities), the Company is obligated to afford CDPQ preemptive rights to purchase equity securities which the Company proposes to sell in proportion to CDPQ's ownership of the total outstanding equity securities of the Company prior to the sale. See "Principal and Selling Stockholders -- Stockholders' Agreement." This description is intended as a summary and is qualified in its entirety by reference to the DGCL and the Company's Certificate of Incorporation and Bylaws. Copies of the Company's Certificate of Incorporation and Bylaws have been filed as exhibits to the Registration Statement of which this Prospectus is a part. PREFERRED STOCK The preferred stock may be issued at any time or from time to time in one or more series with such designations, powers, preferences, rights, qualifications, limitations and restrictions (including dividend, conversion and voting rights) as may be fixed by the Board, without any further vote or action by the stockholders. Although the Company has no present plans to issue any additional shares of preferred stock, the ownership and control of the Company by the holders of the Class A Common Stock would be diluted if the Company were to issue preferred stock that had voting rights or that was convertible into Class A Common Stock or Multi-Vote Common. In addition, the holders of preferred stock issued by the Company would be entitled by law to vote on certain transactions such as a merger or consolidation, and thus the issuance of preferred stock could dilute the voting rights of the holders of the Class A Common Stock on such issues. The issuance of preferred stock could also have the effect of delaying, deferring or preventing a change of control of the Company. The Company currently has outstanding two series of preferred stock. VPC has informed the Company that it intends to exercise its right to convert all of the outstanding shares of Series A Preferred into shares of Multi-Vote Common upon consummation of the Offering. The Company will cause all of the shares of Series B Preferred to be converted into shares of Class A Common Stock promptly following the Offering. Thereafter, there will be no outstanding shares of any series of preferred stock and the holders of the Common Stock and Multi-Vote Common will have all the equity voting rights in the Company. 79 82 The Series A Preferred is convertible into Multi-Vote Common, at the option of the holder, during the 180-day period following the receipt by the Company of the proceeds from the Offering (the "Series A Conversion Period"). Shares of Series A Preferred may be converted by the holder into Multi-Vote Common at the "conversion price" which is defined as the price per share which is the highest of (i) $82.18, (ii) the price per share at which the Common Stock is first sold to the public in the Offering, and (iii) the quotient of $225 million divided by the number of shares of Common Stock outstanding, on a fully diluted basis, subject to certain adjustments and exceptions. VPC has advised the Company that it intends to convert all of the Series A Preferred upon consummation of the Offering. The number of shares of Multi-Vote Common issuable upon conversion of each share of Series A Preferred will be determined by dividing the sum of (i) the liquidation preference ($20,000 per share) plus all accrued and unpaid dividends on such share by (ii) the conversion price. Based on an assumed initial public offering price of $ per share, a total of approximately shares of Multi-Vote Common will be issued upon conversion of all the outstanding shares of Series A Preferred. The Company will cause the conversion of all the outstanding shares of Series B Preferred into Class A Common Stock promptly after the consummation of the Offering by delivering a notice to each holder of Series B Preferred. Such notice will automatically become effective upon receipt thereof. The number of shares of Class A Common Stock issuable upon conversion of each share of Series B Preferred will be determined by dividing the sum of (i) the liquidation preference ($60,000 per share) plus all accrued and unpaid dividends on such share by (ii) the initial public offering price. Based on an assumed initial public offering price of $ per share, a total of shares of the Class A Common Stock will be issued upon conversion of all of the outstanding shares of Series B Preferred. As of May 31, 1998, the Company had outstanding 991.1039 shares of the Series B Preferred (having an aggregate liquidation preference $59,466,000). 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 and the Series B Preferred Certificate of Designation. OUTSTANDING OPTIONS AND WARRANTS As of May 31, 1998, there were outstanding options to purchase 85,557.98 shares of the Class A Common Stock pursuant to the Plan with a weighted average exercise price of $84.37 per share. See "Management -- Incentive Stock Plan." As of the same date, there are outstanding warrants to purchase 35,127.22 shares of the Class A Common Stock with a weighted average exercise price of $59.81 per share. Under the Kofalt Warrant, Mr. Kofalt has the right to purchase up to 24,992 shares of Class A Common Stock at an exercise price of $53.55 per share. The Kofalt Warrant is presently exercisable and expires on August 31, 1999. Under the Cole Warrant, Mr. Cole has the right to purchase up to 9,406.36 shares of Class A Common Stock at an exercise price of $74.42 per share. The Cole Warrant is presently exercisable and expires on July 11, 2002. Under the Hecht Warrant, Gordon Hecht has the right to purchase up to 728.86 shares of Class A Common Stock at an exercise price of $85.75 per share. 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. 80 83 REGISTRATION RIGHTS OF CERTAIN SECURITY HOLDERS Pursuant to the Registration Rights Agreement, nine months after the consummation of the Offering, CDPQ has the right, on two occasions, subject to certain conditions, to require the Company to register under the Securities Act shares of common stock issued to CDPQ upon the conversion of the Multi-Vote Common. Pursuant to the Common Stock Registration Rights Agreement among the Company, VPC, GVL, Salomon Brothers Inc, Merrill Lynch, Pierce Fenner & Smith Incorporated and U.S. Trust Company of Texas, N.A., dated as of February 14, 1997, holders of the Non-Voting Common have the right after the 90th day following the Offering, and subject to certain conditions, to require the Company to effect one demand registration of the Class A Common Stock to be issued upon conversion of the Non-Voting Common (the "Non-Voting Registration Shares"). Such demand registration rights only may be exercised upon the written request of holders of at least one-third of the Non-Voting Registration Shares. In lieu of filing and causing to become effective a demand registration, the Company may satisfy its obligation with respect to such demand registration by making and consummating an offer to purchase all of the Non-Voting Registration Shares at a price at least equal to the fair market value. The Company is party to several agreements pursuant to which certain holders of the Company's securities have the right, under certain circumstances, to require the Company to include their shares of Common Stock (or shares of Common Stock issuable upon exercise or conversion of certain outstanding warrants or convertible securities) in registration statements filed by the Company under the Securities Act. The rights cover an aggregate of shares of Common Stock. In addition, certain stockholders may exercise the right to include certain shares of Common Stock in the Registration Statement of which this Prospectus forms a part. TRANSFER AGENT The Transfer Agent and Registrar for the Class A Common Stock is American Securities Transfer & Trust, Inc. SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering, the Company will have outstanding shares of Class A Common Stock and shares of Multi-Vote Common. Of these shares, the Shares (and any additional shares of Class A Common Stock sold upon exercise of the Underwriters' over-allotment option) will be freely tradeable without restriction or further registration under the Securities Act. The remaining shares of Class A Common Stock held by the existing stockholders (including any shares of Class A Common Stock which may be issued upon conversion of the Multi-Vote Common) are "restricted securities" under the Securities Act. The restricted shares were issued and sold by the Company in private transactions in reliance upon exemptions from registration under the Securities Act and may not be sold except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, such as the exemption provided by Rule 144 under the Securities Act ("Rule 144"). In general, under Rule 144 as currently in effect, beginning 90 days after the conclusion of the Offering, a person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year, including persons who may be deemed "affiliates" of the Company, will be entitled to sell in any three-month period a number of shares of Class A Common Stock that does not exceed the greater of: (i) 1% of the then outstanding shares of Class A Common Stock (approximately shares after giving effect to the Offering) or (ii) the average weekly trading volume of the Class A Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are also subject to certain other requirements relating to manner of sale, notice and availability of current public information about the Company. A person who has beneficially owned restricted securities for at least two years and who is not, and has not been at anytime during the three month period immediately preceding the sale, an affiliate of the Company is entitled to sell restricted shares pursuant to Rule 144(k) without regard to the limitations described above. Because there has been no public market for shares of the Class A Common Stock of the Company, the Company is unable to predict the effect that sales made under Rule 144, pursuant to future registration statements or otherwise, may have on the market price for the shares of Class A Common Stock. 81 84 Nevertheless, sales of a substantial amount of Class A Common Stock in the public market, or the perception that such sales could occur, could adversely affect market prices. FUTURE SALES OF STOCK TO EMPLOYEES The Company plans to seek to attract and retain employees in part by offering stock options and other purchase rights for a significant number of shares of Class A Common Stock. These plans may have the effect of diluting the percentage of ownership in the Company of the then existing stockholders. See "Management -- Incentive Stock Plan" and "-- Stock Purchase Plan." CERTAIN PROVISIONS OF OPTEL'S CERTIFICATE OF INCORPORATION AND OF DELAWARE LAW General. The Certificate of Incorporation of OpTel and the DGCL contain certain provisions that could make more difficult the acquisition of OpTel by means of a tender offer, a proxy contest or otherwise. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of OpTel first to negotiate with OpTel. Although such provisions may have the effect of delaying, deferring or preventing a change in control of OpTel, the Company believes that the benefits of increased protection of OpTel's potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the Company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. See "Risk Factors -- Anti-Takeover Provisions." The description set forth below is intended as a summary only and is qualified in its entirety by reference to the Certificate of Incorporation of OpTel. Multi-Vote Common and Blank Check Preferred Stock. Upon consummation of the Offering, the Company will have outstanding shares of Multi-Vote Common. In addition, the Company's Certificate of Incorporation authorizes the issuance of up to 1,000,000 shares of preferred stock from time to time in one or more designated series. The approximately 6,962 outstanding shares of Series A Preferred and the approximately 991 outstanding shares of Series B Preferred will revert to authorized but unissued status upon their conversion into Multi-Vote Common and Class A Common Stock, respectively. See "-- Preferred Stock." The Board, without approval of the stockholders, is authorized to establish voting, dividend, redemption, conversion, liquidation and other provisions of a particular series of preferred stock. The outstanding Multi-Vote Common does, and the issuance of additional shares of Multi-Vote Common or preferred stock could, among other things, adversely affect the voting power or other rights of the holders of Class A Common Stock and, under certain circumstances, make it more difficult for a third party to acquire, or discourage a third party from acquiring, control of the Company. See "Risk Factors -- Control by GVL" and "-- Anti-Takeover Provisions." The Board has no present intention to authorize the issuance of any additional series of preferred stock. 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 82 85 (except proportionately as a stockholder) of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. Section 203 does not apply to a business combination if (i) before a person becomes an Interested Stockholder, the board of directors of the corporation approves the transaction in which the Interested Stockholder became an Interested Stockholder or approved the business combination, (ii) upon consummation of the transaction that resulted in the Interested Stockholder becoming an Interested Stockholder, the Interested Stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (other than certain excluded shares) or (iii) concurrently with or following a transaction in which the person became an Interested Stockholder, the business combination is (a) approved by the board of directors of the corporation and (b) authorized at an annual or special meeting of stockholders (and not by written consent) by the affirmative vote of the holders of at least two-thirds of the outstanding voting stock of the corporation not owned by the Interested Stockholder. 83 86 CERTAIN FEDERAL INCOME TAX CONSIDERATIONS The following discussion summarizes the material United States federal income tax considerations generally applicable to holders acquiring the Class A Common Stock on original issue but does not purport to be a complete analysis of all potential consequences. The discussion is based upon the Code, Treasury regulations, Internal Revenue Service ("IRS") rulings and judicial decisions now in effect, all of which are subject to change at any time by legislative, judicial or administrative action. Any such changes may be applied retroactively in a manner that could adversely affect a holder of the Class A Common Stock. The discussion assumes that the holders of the Class A Common Stock will hold it as a "capital asset" within the meaning of Section 1221 of the Code. The tax treatment of a holder of the Class A Common Stock may vary depending on such holder's particular situation or status. Certain holders (including S corporations, insurance companies, tax-exempt organizations, financial institutions, broker-dealers, taxpayers subject to alternative minimum tax and persons holding the Class A Common Stock as part of a straddle, hedging or conversion transaction) may be subject to special rules not discussed below. The following discussion does not consider all aspects of United States federal income taxation that may be relevant to the purchase, ownership and disposition of the Class A Common Stock by a holder in light of such holder's personal circumstances. In addition, the discussion does not consider the effect of any applicable foreign, state or local tax laws. PERSONS CONSIDERING THE PURCHASE OF CLASS A COMMON STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION. For purposes of this discussion, a "U.S. Holder" means a citizen or resident of the United States, a corporation, partnership or other entity created or organized in the United States or under the laws of the United States or of any political subdivision thereof, an estate whose income is includible in gross income for United States federal income tax purposes regardless of its source or a trust if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust. A "Non-U.S. Holder" means a holder that is not a U.S. Holder. TAX CONSEQUENCES TO U.S. HOLDERS Distributions on the Class A Common Stock A cash distribution on the Class A Common Stock will be taxable to the U.S. Holder as ordinary dividend income to the extent that the amount of the distribution does not exceed the Company's current or accumulated earnings and profits allocable to such distribution (as determined for United States federal income tax purposes). To the extent that the amount of the distribution exceeds the Company's current or accumulated earnings and profits allocable to such distribution, the distribution will be treated as a return of capital, thus reducing the holder's adjusted tax basis in the Class A Common Stock with respect to which such distribution is made. The amount of any such excess distribution that exceeds the U.S. Holder's adjusted tax basis in the Class A Common Stock will be taxed as capital gain and will be long-term capital gain if the U.S. Holder's holding period for the Class A Common Stock exceeds one year. There can be no assurance that the Company will have sufficient earnings and profits to cause distributions on the Class A Common Stock to be treated as dividends for United States federal income tax purposes. For purposes of the remainder of this discussion, the term "dividend" refers to a distribution paid out of current or accumulated earnings and profits, unless the context indicates otherwise. Dividends received by corporate U.S. Holders will generally be eligible for the 70% dividends-received deduction under Section 243 of the Code. There are, however, many exceptions and restrictions relating to the availability of the dividends-received deduction, such as restrictions relating to (i) the holding period of the stock on which the dividends are received, (ii) debt-financed portfolio stock, (iii) dividends treated as "extraordinary dividends" for purposes of Section 1059 of the Code and (iv) taxpayers that pay alternative minimum tax. Corporate U.S. Holders should consult their own tax advisors regarding the extent, if any, to 84 87 which such exceptions and restrictions may apply to their particular factual situations. A corporate holder must satisfy a separate 46-day (91-day, in the case of certain preferred stock dividends) holding period requirement with respect to each dividend in order to be eligible for the dividends-received deduction with respect to such dividend. Sale or Other Taxable Disposition of Class A Common Stock Upon a sale or other taxable disposition of the Class A Common Stock, the difference between the sum of the amount of cash and the fair market value of other property received and the holder's adjusted tax basis in the Class A Common Stock will be capital gain or loss. This gain or loss will be long-term capital gain or loss if the U.S. Holder's holding period for the Class A Common Stock exceeds one year. TAX CONSEQUENCES TO NON-U.S. HOLDERS Distributions on the Class A Common Stock Dividends paid to a Non-U.S. Holder of Class A Common Stock that are not effectively connected with the conduct of a trade or business within the United States by the Non-U.S. Holder (or, if certain tax treaties apply, attributable to a permanent establishment therein maintained by the Non-U.S. Holder) will be subject to United States federal income tax, which generally will be withheld at a rate of 30% of the gross amount of the dividends unless the rate is reduced by an applicable income tax treaty. Under currently applicable Treasury regulations, dividends paid to an address in a country other than the United States are subject to withholding (unless the payor has knowledge to the contrary). Dividends paid to a Non-U.S. Holder of Class A Common Stock that are effectively connected with a United States trade or business conducted by such Non-U.S. Holder will be taxed at the graduated rates applicable to United States citizens, resident aliens and domestic corporations (the "Regular Federal Income Tax") and will not be subject to withholding if the Non-U.S. Holder gives an appropriate statement to the Company or its paying agent in advance of the dividend payment. In addition to the Regular Federal Income Tax, effectively connected dividends (or dividends attributable to a permanent establishment) received by a Non-U.S. Holder that is a corporation may also be subject to an additional branch profits tax at a rate of 30% (unless the rate is reduced by an applicable income tax treaty). Sale or Other Taxable Disposition of Class A Common Stock A Non-U.S. Holder generally will not be subject to United States federal income tax or withholding on gain recognized upon a sale or other disposition of Class A Common Stock unless: (i) the gain is effectively connected with the conduct of a trade or business within the United States by the Non-U.S. Holder (or, if certain tax treaties apply, attributable to a permanent establishment therein maintained by the Non-U.S. Holder), in which case the branch profits tax also may apply if the Non-U.S. Holder is a corporation; (ii) in the case of a Non-U.S. Holder who is a non-resident alien individual and holds the Class A Common Stock as a capital asset, such holder is present in the United States for 183 or more days in the taxable year and certain other conditions are met; or (iii) the Class A Common Stock constitutes a United States real property interest by reason of the Company's status as a "United States real property holding corporation" ("USRPHC") for United States federal income tax purposes at any time within the shorter of the five-year period preceding such disposition or such Non-U.S. Holder's holding period for the Class A Common Stock. The Company does not believe that it is or will become a USRPHC for federal income tax purposes. If a Non-U.S. Holder falls within clause (i) or (iii) in the preceding paragraph, the holder will be taxed on the net gain derived from the sale under the Regular Federal Income Tax and may be subject to withholding under certain circumstances (and, in the case of a corporate Non-U.S. Holder, may also be subject to the branch profits tax described above). If a Non-U.S. Holder falls under clause (ii) in the 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. 85 88 Federal Estate Tax An individual Non-U.S. Holder who owns, or is treated as owning, Class A Common Stock at the time of his or her death or has made certain lifetime transfers of an interest in Class A Common Stock will be required to include the value of such Class A Common Stock in his or her gross estate for United States federal estate tax purposes, and therefore may be subject to United States federal 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) Class A Common Stock will be reported annually to holders of Class A Common Stock and to the IRS. A U.S. Holder of Class A Common Stock may be subject to backup withholding at the rate of 31% with respect to dividends paid on, or the proceeds of a sale or exchange of, the Class A Common Stock, unless such holder (a) is a corporation or comes within certain other exempt categories and, when required, demonstrates its exemption or (b) provides a correct taxpayer identification number, certifies as to no loss of exemption from backup withholding and otherwise complies with applicable requirements of the backup withholding rules. A U.S. Holder of Class A Common Stock that does not provide the Company with the holder's correct taxpayer identification number may be subject to penalties imposed by the IRS. A Non-U.S. Holder of Class A Common Stock may also be subject to certain information reporting or backup withholding if certain requisite certification is not received or other exemptions do not apply. Any amount paid as backup withholding with respect to a holder of Class A Common Stock would be creditable against such holder's United States federal income tax liability, provided that the required information is furnished to the IRS. 86 89 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 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 As of May 31, 1998, the Company had 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 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. 87 90 THE SENIOR CREDIT FACILITY On December 19, 1997, the Company obtained the Senior Credit Facility from a group of financial institutions. The Senior Credit Facility consists of a $125 million term loan (which was drawn on December 19, 1997) bearing interest at LIBOR plus 3.5% and a $25 million revolving credit commitment. The Senior Credit Facility was terminated on July 7, 1998. 88 91 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 Smith Barney Inc., Goldman, Sachs & Co., Bear, Stearns & Co. Inc. and CIBC Oppenheimer Corp. are acting as representatives (the "Representatives"), has severally agreed to purchase the number of shares of Class A Common Stock set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Smith Barney Inc............................................ Goldman, Sachs & Co......................................... Bear, Stearns & Co. Inc..................................... CIBC Oppenheimer Corp. ..................................... ---------- Total............................................. ==========
The Company 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 additional shares of Class A Common Stock from the Company at the Price to Public less the Underwriting Discounts and Commissions, each as set forth on the cover page of this Prospectus. If the Underwriters exercise such option in whole or in part, then each Underwriter will be committed, subject to certain conditions, to purchase such additional shares proportionate to such Underwriter's initial commitment. The Underwriting Agreement provides that the Company 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, officers and certain stockholders, including VPC and CDPQ, have agreed not to offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or announce the offering of any shares of Class A Common Stock, including any such shares beneficially owned or controlled by any such person, or any securities convertible into, or exchangeable or exercisable for, shares of the Class A Common Stock, for 180 days from the date of this Prospectus, without the prior written consent of Smith Barney Inc. The Underwriters will not confirm sales to any discretionary account without the prior specific written approval of the customer. At the Company's request, the Underwriters have reserved up to Shares (the "Directed Shares") for sale at the Price to Public to persons who are directors, officers or employees of, or otherwise associated with, the Company and its affiliates and who have advised the Company of their desire to purchase such Shares. The number of Shares available for sale to the general public will be reduced to the extent of sales of Directed Shares to any of the persons for whom they have been reserved. Any Shares not so purchased will be offered by the Underwriters on the same basis as all other Shares offered hereby. 89 92 During and after the Offering, the Underwriters may purchase and sell the Class A Common Stock in the open market. These transactions may include overallotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offering. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members of other broker-dealers in respect of the Shares sold in the Offering for their account may be reclaimed by the syndicate if such Shares are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Class A Common Stock which may be higher than the price that might otherwise prevail in the open market. The Underwriters are not required to engage in these activities and may end these activities at any time. Prior to the Offering, there has been no public market for the Class A Common Stock. The Price to Public was determined by negotiations between the Company and the Representatives. Among the factors considered in determining the Price to Public were prevailing market conditions, the market values of publicly traded companies that the Underwriters believed to be somewhat comparable to the Company, the demand for the Shares and for similar securities of publicly traded companies that the Underwriters believed to be somewhat comparable to the Company, the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods and other factors deemed relevant. There can be no assurance that the prices at which the Shares will sell in the public market after the Offering will not be lower than the Price to Public. Salomon Brothers Inc (an affiliate of Smith Barney Inc.), 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 225,000 shares of the Non-Voting Common, for which it received customary fees. From time to time, Smith Barney Inc. (or certain of its affiliates) has provided, and may in the future provide, financial advisory services to the Company for which it has received, and expects to continue to receive, customary fees. Canadian Imperial Bank of Commerce, an affiliate of CIBC Oppenheimer Corp., 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 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 Class A Common Stock or, if one develops after the completion of the Offering, that it will be sustained. See "Risk Factors -- Lack of Prior Public Market; Possible Volatility of Stock Price." The Company intends to apply for approval for quotation of the shares of Class A Common Stock through the Nasdaq National Market under the symbol "OTEL" upon the effectiveness of this Registration Statement of which this Prospectus is a part. 90 93 LEGAL MATTERS The validity of the Shares will be passed upon and certain other legal matters in connection with the sale of securities offered hereby will be passed upon for the Company by Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036. Certain federal regulatory matters related to the Offering or described herein will be passed upon for the Company by Goldberg, Godles, Wiener & Wright, 1229 Nineteenth Street, N.W., Washington, D.C. 20036, the Company's FCC counsel. Certain legal matters relating to the sale of the Shares will be passed upon for the Underwriters by Cahill Gordon & Reindel (a partnership including a professional corporation), 80 Pine Street, New York, New York 10005. Russell S. Berman of Kronish, Lieb, Weiner & Hellman LLP and Henry Goldberg of Goldberg, Godles, Wiener & Wright each hold one-third of the outstanding equity interests in THI. See "Certain Relationships and Related Transactions -- License Holding Company." EXPERTS The Consolidated Financial Statements of the Company for the year ended December 31, 1994, the eight month period ended August 31, 1995 and as of and for the years ended August 31, 1996 and August 31, 1997, and the Financial Statements of the Assets and Liabilities of ICS Communications, LLC, acquired by the Company as of and for the year ended December 31, 1997, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein and have been so included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Shares offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement or the exhibits and schedules thereto, certain portions having been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Shares offered hereby, reference is made to the Registration Statement, including the exhibits and financial statement schedules thereto, which may be inspected without charge at the public reference facility maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Seven World Trade Center, 13th Floor, New York, New York 10007 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. Such Web site is located at http://www.sec.gov. Statements made in this Prospectus concerning the contents of any document referred to herein are not necessarily complete. With respect to each such document filed with the Commission as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Company will provide without charge to each person to whom a copy of this Prospectus has been delivered, a copy of any or all of the documents (other than exhibits to such documents) which have been incorporated by reference in the Registration Statement, upon the oral or written request of such person to OpTel, Inc., 1111 W. Mockingbird Lane, Dallas, Texas 75247 (telephone (214) 634-3800), Attention: Andrew N. Jent. 91 94 APPENDIX A GLOSSARY Access Charges -- The charges paid by an IXC to an ILEC or CLEC for the origination or termination of the IXC's customer's long distance calls. CAP (Competitive Access Provider) -- A service provider that competes with local telephone companies for access traffic by providing to high-volume customers private line access to IXCs. Although traditional CAPs did not provide a complete package of local exchange services, some CAPs have begun to provide local exchange services following the passage of the Telecom Act. Central Office -- The switching center and/or central circuit termination facility of a local telephone company. CLEC (Competitive Local Exchange Carrier) -- A telephone service provider (carrier) offering services similar to those offered by the former monopoly local telephone company. A CLEC may also provide other types of telecommunications services (e.g., long distance). CLEC Certification -- Granted by a state public service commission or public utility commission, this certification provides a telecommunications services provider with the legal standing to offer local exchange telephone services in direct competition with ILECs and other CLECs. Such certifications are granted on a state-by-state basis. Communications Act of 1934 -- Federal legislation that established rules for broadcast and nonbroadcast communications, including both wireless and wire line telephone service which continues, as amended, to be in effect today. 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. ILEC (Incumbent Local Exchange Carrier) -- The local exchange carrier that was the monopoly carrier prior to the opening of local exchange services to competition. A-1 95 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. 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. A-2 96 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 97 INDEX TO FINANCIAL STATEMENTS OPTEL, INC. AND SUBSIDIARIES: Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of August 31, 1996 and 1997 and May 31, 1998 (unaudited).............................. F-3 Consolidated Statements of Operations for the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995, the years ended August 31, 1996 and 1997, and the nine months ended May 31, 1997 and 1998 (unaudited)............................................... F-4 Consolidated Statements of Stockholders' Equity for the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995, the years ended August 31, 1996 and 1997, and the nine months ended May 31, 1997 and 1998 (unaudited)............................................... F-5 Consolidated Statements of Cash Flows for the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995, the years ended August 31, 1996 and 1997, and the nine months ended May 31, 1997 and 1998 (unaudited)............................................... F-6 Notes to Consolidated Financial Statements.................. F-7 PRO FORMA FINANCIAL INFORMATION (UNAUDITED): Pro Forma Statements of Operations for the year ended August 31, 1997 and the nine months ended May 31, 1998........... F-26 Notes to Pro Forma Financial Information.................... F-28 ACQUIRED COMPANY: Assets and Liabilities Acquired of ICS Communications, LLC by OpTel, Inc.: Independent Auditors' Report.............................. F-29 Statements of Assets and Liabilities Acquired as of December 31, 1997 and March 31, 1998 (unaudited)....... F-30 Statements of Revenues and Direct Expenses for the year ended December 31, 1997 and the three months ended March 31, 1998 (unaudited)............................. F-31 Notes to Financial Statements............................. F-32
F-1 98 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc.: We have audited the accompanying consolidated balance sheets of OpTel, Inc. and subsidiaries (the "Company") as of August 31, 1996 and 1997 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995 and the years ended August 31, 1996 and 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of OpTel, Inc. and subsidiaries as of August 31, 1996 and 1997 and the results of their operations and their cash flows for the year ended December 31, 1994, the period from January 1, 1995 to August 31, 1995 and the years ended August 31, 1996 and 1997 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP - ------------------------------------ October 14, 1997 Dallas, Texas F-2 99 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
AUGUST 31, AUGUST 31, MAY 31, 1996 1997 1998 ---------- ---------- ----------- (UNAUDITED) Cash and cash equivalents................................. $ 1,677 $ 87,305 $ 99,704 Restricted investments (Notes 6 and 12)................... -- 67,206 55,294 Accounts receivable (Net of allowance for doubtful accounts of $542, $1,125 and $1,523, respectively)...... 3,064 4,044 7,249 Prepaid expenses, deposits and other assets............... 1,562 1,836 2,272 Property and equipment, net (Note 4)...................... 103,800 160,442 251,324 Intangible assets, net (Note 5)........................... 65,876 82,583 160,255 -------- -------- --------- TOTAL........................................... $175,979 $403,416 $ 576,098 ======== ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Accounts payable.......................................... $ 5,649 $ 7,927 $ 4,773 Accrued expenses and other liabilities.................... 10,507 13,969 26,304 Deferred revenue and customer deposits.................... 2,167 2,978 4,293 Convertible notes payable to stockholder (Notes 6 and 9)...................................................... 89,414 129,604 -- Notes payable and long-term obligations (Note 6).......... 2,443 221,653 348,633 Deferred acquisition liabilities (Notes 3 and 6).......... 6,520 6,920 5,153 Dividends payable......................................... -- -- 4,068 -------- -------- --------- Total liabilities............................... 116,700 383,051 393,224 Commitments and contingencies (Notes 3 and 7) Stockholders' equity (deficit) (Notes 9, 10 and 13) Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued and outstanding.............. -- -- -- Series A preferred stock, $.01 par value; 10,000 shares authorized; none and 6,962 issued and outstanding.... -- -- 139,244 Series B preferred stock, $.01 par value; 2,000 shares authorized; none and 991 issued and outstanding...... -- -- 59,466 Class A common stock, $.01 par value; 8,000,000 shares authorized; none issued and outstanding.............. -- -- 2 Class B common stock, $.01 par value; 6,000,000 shares authorized; 2,304,561, 2,353,498 and 2,353,498 issued and outstanding, respectively........................ 23 24 24 Class C common stock, $.01 par value; 300,000 shares authorized; 225,000 issued and outstanding........... -- 2 2 Additional paid-in capital................................ 88,065 97,683 113,780 Accumulated deficit....................................... (28,809) (77,344) (129,644) -------- -------- --------- Total stockholders' equity (deficit)............ 59,279 20,365 182,874 -------- -------- --------- TOTAL........................................... $175,979 $403,416 $ 576,098 ======== ======== =========
See notes to consolidated financial statements. F-3 100 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PERIOD FROM NINE MONTHS ENDED YEAR ENDED JANUARY 1, 1995 YEAR ENDED AUGUST 31, MAY 31, DECEMBER 31, TO AUGUST 31, ----------------------- --------------------------- 1994 1995 1996 1997 1997 1998 ------------ --------------- ---------- ---------- ------------ ------------ (UNAUDITED) REVENUES: Cable television.................... $ 240 $ 8,783 $ 25,893 $ 36,915 $ 26,915 $ 42,195 Telecommunications.................. 202 788 1,711 2,922 2,202 2,721 ------- -------- -------- -------- -------- -------- Total revenues.............. 442 9,571 27,604 39,837 29,117 44,916 OPERATING EXPENSES: Cost of services.................... 470 4,558 11,868 19,202 14,016 20,213 Customer support, general and administrative................... 7,733 12,055 19,636 28,926 19,842 25,044 Depreciation and amortization....... 117 2,420 8,676 14,505 9,934 18,432 ------- -------- -------- -------- -------- -------- Total operating expenses.... 8,320 19,033 40,180 62,633 43,792 63,689 ------- -------- -------- -------- -------- -------- LOSS FROM OPERATIONS.................. (7,878) (9,462) (12,576) (22,796) (14,675) (18,773) OTHER INCOME (EXPENSE): Interest expense on convertible notes payable to stockholder (Notes 4 and 9).................. -- (919) (5,342) (15,204) (10,671) (9,640) Other interest expense.............. (76) (349) (657) (16,210) (6,309) (26,276) Interest and other income........... 10 99 145 5,675 (13) 6,457 ------- -------- -------- -------- -------- -------- LOSS BEFORE INCOME TAXES.............. (7,944) (10,631) (18,430) (48,535) (31,668) (48,232) Income Tax Benefit (Note 8)........... -- 470 -- -- -- -- ------- -------- -------- -------- -------- -------- NET LOSS.............................. $(7,944) $(10,161) $(18,430) $(48,535) (31,668) (48,232) ======= ======== ======== ======== -------- -------- Dividends on preferred stock.......... -- (4,068) -------- -------- NET LOSS ATTRIBUTABLE TO COMMON EQUITY.............................. $(31,668) $(52,300) ======== ======== BASIC AND DILUTED LOSS PER COMMON SHARE (Notes 2 and 10).............. $ (6.89) $ (8.30) $ (19.98) $ (13.23) $ (20.04) ======== ======== ======== ======== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (Notes 2 and 10)................................. 1,475 2,220 2,430 2,393 2,610 ======== ======== ======== ======== ========
See notes to consolidated financial statements. F-4 101 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS AND SHARES IN THOUSANDS)
SERIES A SERIES B CLASS A PREFERRED STOCK PREFERRED STOCK COMMON STOCK ------------------------- ------------------------- ------------------- PARTNERSHIP SHARES LIQUIDATION SHARES LIQUIDATION SHARES PAR CAPITAL OUTSTANDING VALUE OUTSTANDING VALUE OUTSTANDING VALUE ----------- ----------- ----------- ----------- ----------- ----------- ----- BALANCE, JANUARY 1, 1994............... $ 689 -- $ -- -- $ -- -- $-- Contributions........................ 10,375 -- -- -- -- -- --.. Net loss of partnership.............. -- -- -- -- -- -- -- Reorganization from partnership...... (11,064) -- -- -- -- -- -- Net loss............................. -- -- -- -- -- -- -- -------- ----- -------- --- ------- --- --- BALANCE, DECEMBER 31, 1994............. -- -- -- -- -- -- -- Issuance of stock upon debt conversion, net of transaction costs.............................. -- -- -- -- -- -- -- Sale and issuance of stock........... -- -- -- -- -- -- -- Net loss............................. -- -- -- -- -- -- -- -------- ----- -------- --- ------- --- --- BALANCE, AUGUST 31, 1995............... -- -- -- -- -- -- -- Issuance of stock upon debt conversion......................... -- -- -- -- -- -- -- Contribution and cancellation of shares............................. -- -- -- -- -- -- -- Net loss............................. -- -- -- -- -- -- -- -------- ----- -------- --- ------- --- --- BALANCE, AUGUST 31, 1996............... -- -- -- -- -- -- Issuance of stock with senior notes offering........................... -- -- -- -- -- -- -- Stock options exercised.............. -- -- -- -- -- -- -- Net loss............................. -- -- -- -- -- -- -- -------- ----- -------- --- ------- --- --- BALANCE, AUGUST 31, 1997............... -- -- -- -- -- -- -- Preferred stock dividend (unaudited)........................ -- -- -- -- -- -- -- Issuance of stock upon debt conversion......................... -- 6,962 139,244 -- -- -- -- Issuance of stock to acquire the ICS operations......................... -- -- -- 991 59,466 164 2 Net loss (unaudited)................. -- -- -- -- -- -- -- -------- ----- -------- --- ------- --- --- BALANCE, MAY 31, 1998 (unaudited)...... $ -- 6,962 $139,244 991 $59,466 164 $ 2 -------- ----- -------- --- ------- --- --- -------- ----- --- --- CLASS B CLASS C COMMON STOCK COMMON STOCK ------------------- ------------------- ADDITIONAL SHARES PAR SHARES PAR PAID-IN ACCUMULATED OUTSTANDING VALUE OUTSTANDING VALUE CAPITAL DEFICIT ----------- ----- ----------- ----- ---------- ----------- BALANCE, JANUARY 1, 1994............... -- $-- -- $-- $ -- $ (307) Contributions........................ -- -- -- -- -- -- Net loss of partnership.............. -- -- -- -- -- (7,725) Reorganization from partnership...... 717 7 -- -- 3,024 8,032 Net loss............................. -- -- -- -- -- (219) ----- --- --- --- -------- --------- BALANCE, DECEMBER 31, 1994............. 717 7 -- -- 3,024 (219) Issuance of stock upon debt conversion, net of transaction costs.............................. 1,121 11 -- -- 59,194 -- Sale and issuance of stock........... 312 3 -- -- 16,684 -- Net loss............................. -- -- -- -- -- (10,160) ----- --- --- --- -------- --------- BALANCE, AUGUST 31, 1995............... 2,150 21 -- -- 78,902 (10,379) Issuance of stock upon debt conversion......................... 171 2 -- -- 9,163 -- Contribution and cancellation of shares............................. (16) -- -- -- -- -- Net loss............................. -- -- -- -- -- (18,430) ----- --- --- --- -------- --------- BALANCE, AUGUST 31, 1996............... 2,305 23 -- -- 88,065 (28,809) Issuance of stock with senior notes offering........................... -- -- 225 2 6,998 -- Stock options exercised.............. 48 1 -- -- 2,620 -- Net loss............................. -- -- -- -- -- (48,535) ----- --- --- --- -------- --------- BALANCE, AUGUST 31, 1997............... 2,353 24 225 2 97,683 (77,344) Preferred stock dividend (unaudited)........................ -- -- -- -- -- (4,068) Issuance of stock upon debt conversion......................... -- -- -- -- -- -- Issuance of stock to acquire the ICS operations......................... -- -- -- -- 16,097 -- Net loss (unaudited)................. -- -- -- -- -- (48,232) ----- --- --- --- -------- --------- BALANCE, MAY 31, 1998 (unaudited)...... 2,353 $24 225 $ 2 $113,780 $(129,644) ----- --- --- --- -------- --------- ----- --- --- --- -------- ---------
See notes to consolidated financial statements. F-5 102 OPTEL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS PERIOD FROM YEAR ENDED ENDED YEAR ENDED JANUARY 1, 1995 AUGUST 31, MAY 31, DECEMBER 31, TO AUGUST 31, ------------------- --------------------- 1994 1995 1996 1997 1997 1998 ------------ --------------- -------- -------- --------- --------- (UNAUDITED) OPERATING ACTIVITIES: Net loss......................................... $(7,944) $(10,161) $(18,430) $(48,535) $ (31,668) $ (48,232) Adjustments to reconcile net loss to net cash flow used in operating activities: Depreciation and amortization.................. 117 2,420 8,676 14,505 9,934 18,432 Deferred tax benefit........................... -- (488) -- -- -- -- Noncash interest expense....................... -- 1,147 5,661 15,107 10,968 10,583 Noncash interest earned on restricted investments.................................. -- -- -- (2,303) (1,167) (2,713) Increase(decrease) in cash from changes in operating assets and liabilities, net of effect of business combinations: Accounts receivable.......................... (58) (1,005) (1,370) (754) (1,613) (3,228) Prepaid expenses, deposits and other assets..................................... (1,008) 180 (126) (785) (742) (52) Deferred revenue and other liabilities....... 164 895 906 640 656 888 Accounts payable and accrued expenses........ 5,397 3,518 4,230 6,190 11,009 9,171 ------- -------- -------- -------- --------- --------- Net cash flows used in operating activities............................... (3,332) (3,494) (453) (15,935) (2,623) (15,151) ------- -------- -------- -------- --------- --------- INVESTING ACTIVITIES: Purchases of businesses.......................... (1,298) (49,974) (9,916) (6,717) (5,048) (41,285) Acquisition of intangible assets................. (3,211) (608) (7,904) (10,112) (7,710) (6,223) Purchases and construction of property and equipment...................................... (6,067) (21,562) (54,217) (61,393) (36,760) (55,792) Purchases of restricted investments.............. -- -- -- (79,609) (79,609) -- Proceeds from maturity of restricted investments.................................... -- -- -- 14,706 -- 14,625 ------- -------- -------- -------- --------- --------- Net cash flows used in investing activities............................... (10,576) (72,144) (72,037) (143,125) (129,127) (88,675) ------- -------- -------- -------- --------- --------- FINANCING ACTIVITIES: Proceeds from convertible notes payable.......... 15,000 62,823 73,438 33,700 33,700 -- Repayments on convertible notes payable.......... -- -- -- (10,000) (10,000) -- Proceeds from senior notes payable............... -- -- -- 218,000 218,000 -- Financing costs of senior notes payable.......... -- -- -- (5,738) (4,776) -- Proceeds from bank financing, net of transaction costs.......................................... -- -- -- -- -- 119,381 Proceeds from issuance of common stock........... -- 16,688 -- 9,620 7,000 -- Payment on notes payable and long term obligations.................................... (6,489) (6,856) (1,307) (894) (354) (1,679) Payment of deferred acquisition liabilities...... -- -- -- -- -- (1,477) Contributions received from partners............. 10,375 -- -- -- -- -- ------- -------- -------- -------- --------- --------- Net cash flows provided by financing activities............................... 18,886 72,655 72,131 244,688 243,570 116,225 ------- -------- -------- -------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................... 4,978 (2,983) (359) 85,628 111,820 12,399 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD... 41 5,019 2,036 1,677 1,677 87,305 ------- -------- -------- -------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD......... $ 5,019 $ 2,036 $ 1,677 $ 87,305 $ 113,497 $ 99,704 ======= ======== ======== ======== ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (Notes 3 and 9) Cash paid during the period for: Interest....................................... $ 39 $ 120 $ 290 $ 15,059 $ 249 $ 18,989 ======= ======== ======== ======== ========= ========= Taxes.......................................... $ -- $ 19 $ -- $ -- $ -- $ -- ======= ======== ======== ======== ========= ========= Increase in capital lease obligations............ $ -- $ -- $ 879 $ 1,630 $ 942 $ 1,634 ======= ======== ======== ======== ========= ========= Convertible debt issued for accrued interest..... $ -- $ -- $ 6,436 $ 16,490 $ -- $ 9,640 ======= ======== ======== ======== ========= ========= Conversion of convertible debt and partnership capital to common stock: Partnership capital............................ $(3,031) $ -- $ -- $ -- $ -- $ -- ======= ======== ======== ======== ========= ========= Convertible debt and accrued interest.......... $ -- $(60,792) $ (9,166) $ -- $ -- $ -- ======= ======== ======== ======== ========= ========= Common stock................................... $ 7 $ 11 $ 2 $ -- $ -- $ -- ======= ======== ======== ======== ========= ========= Additional paid-in capital, net of transaction costs........................................ $ 3,024 $ 59,194 $ 9,163 $ -- $ -- $ -- ======= ======== ======== ======== ========= ========= 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 ======= ======== ======== ======== ========= ========= Increase in dividends payable.................... $ -- $ -- $ -- $ -- $ -- $ 4,068 ======= ======== ======== ======== ========= =========
See notes to consolidated financial statements. F-6 103 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1. DESCRIPTION OF BUSINESS OpTel, Inc., a Delaware corporation, and subsidiaries (the "Company" or "OpTel") is the successor of the cable television and telecommunications operations of Vanguard Communications, L.P. ("Vanguard"). Vanguard commenced operations in April 1993. On December 20, 1994, Vanguard contributed its cable television and telecommunications operations to its wholly owned subsidiary, OpTel. The contribution to OpTel was recorded at Vanguard's historical cost. OpTel is a developer, operator and owner of private cable television and telecommunications systems that utilize advanced technologies to deliver cable television and telecommunications services to customers in multiple dwelling units ("MDUs"). The Company negotiates long-term, generally exclusive cable television service agreements and nonexclusive telecommunications service agreements with owners and managers of MDUs, generally for terms of up to 15 years. The company's primary markets are major metropolitan areas in Arizona, California, Colorado, Florida, Illinois and Texas. During the period from April 20, 1993 (date of inception) to March 31, 1995, the Company was wholly owned by Vanguard. On March 31, 1995, VPC Corporation ("VPC") (a wholly owned subsidiary of Le Groupe Videotron Ltee ("Videotron") -- a Quebec corporation), acquired a 66.75% interest in the Company. At August 31, 1997, VPC's interest in the Company was 74.62% (see Note 9). In 1995, the Company elected to change its year-end to August 31 from December 31 to conform to that of its new majority stockholder. 2. SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information -- The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of management, all adjustments (consisting only of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the nine month period ended May 31, 1997 and 1998, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. Principles of Consolidation -- The consolidated financial statements include the accounts of OpTel and its wholly owned and majority-owned subsidiaries and limited partnerships. All significant intercompany accounts and transactions have been eliminated. Amounts due to minority limited partners are included in notes payable and long-term obligations. Cash and Cash Equivalents -- Cash and cash equivalents of the Company are composed of demand deposits with banks and short-term investments with maturities of three months or less when purchased. Restricted Investments -- Restricted investments of the Company are composed of U.S. Treasury securities restricted for payment of interest on the Company's 1997 Notes. These investments are classified as held to maturity and are carried at amortized cost. Property and Equipment -- Property and equipment are stated at cost, which includes amounts for construction materials, direct labor and overhead, and capitalized interest. When assets are disposed of, the costs and related accumulated depreciation are removed, and any resulting gain or loss is reflected in income for the period. Cost of maintenance and repairs is charged to operations as incurred; significant renewals and F-7 104 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) betterments are capitalized. Depreciation is calculated using the straight-line method over the estimated useful lives of the various classes of property and equipment as follows: Headends............................................... 15 years Telephone switches..................................... 10 years Distribution systems and enhancements.................. 15 years Computer software and equipment........................ 4 years Other.................................................. 5 to 10 years
Management routinely evaluates its recorded investments for impairment 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 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 and are subject to impairment loss evaluation in accordance with SFAS No. 121. Federal and State Income Taxes -- Prior to August 2, 1996 the Company and its corporate subsidiaries filed a consolidated federal income tax return. Beginning August 2, 1996, in connection with VPC acquiring additional stock from Vanguard, the Company was included in VPC's consolidated federal income tax return. Effective February 14, 1997, as the result of issuing Class C Common (see Notes 6 and 9), the Company will again be required to file a separate consolidated federal income tax return. During the period in which the Company was consolidated with VPC, for purposes of financial reporting, the Company has recorded federal and state income tax as if it were filing a separate return. Deferred tax assets and liabilities are recorded based on the difference between the tax basis of the assets and liabilities and their carrying amounts for financial reporting purposes, referred to as temporary differences. Provision is made or benefit recognized for deferred taxes relating to temporary differences in the recognition of expense and income for financial reporting purposes. To the extent a deferred tax asset does not meet the criterion of "more likely than not" for realization, a valuation allowance is recorded. Revenue Recognition and Deferred Revenue -- The Company recognizes revenue as cable television programming and telecommunications services are provided to subscribers. OpTel typically bills customers in F-8 105 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) advance for monthly cable television services, which results in the deferral of revenue until those services are provided. Cost of Services -- Includes direct system operating costs which are generally variable in nature and are composed of programming, telecommunications service costs, revenue sharing with owners of MDUs for which OpTel provides cable television and/or telecommunications service, and franchise fees. Net Loss Per Common Share -- The computation of basic and diluted loss per common share is based on the weighted average number of common shares outstanding during the period (see Note 10). No loss per share information is presented for the period the Company was organized as a partnership. Common stock equivalents are included in the computation if they are material. Diluted earnings per share will continue to be calculated in a manner similar to the historical fully diluted calculation. The diluted loss per common share is considered to be the same as basic since the effect of the convertible notes payable to stockholder and common stock equivalents outstanding for each period presented would be antidilutive. For the period ended August 31, 1995, the years ended August 31, 1996 and 1997, and the nine month periods ended May 31, 1997 and 1998, the potential dilutive equivalent shares excluded from the diluted earnings per share calculation because of their antidilutive effect on the periods reported totaled 197,000, 983,000, 1,425,000, 983,000, and 122,000, respectively. 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 -- Acquisitions accounted for using the purchase method of accounting include results of operations of the acquired businesses in the accompanying consolidated financial statements from the dates of acquisition. Identifiable tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair value at the date of acquisition. The excess of the purchase price over the net assets acquired is recorded as goodwill. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reporting amounts of certain assets, liabilities, revenues and expenses. Actual results may differ from such estimates. The Company is in the initial stages of entering new markets and acquiring or constructing the infrastructure necessary to deliver cable television and telecommunication services. The Company's network upgrades and investment in central office switched telecommunications require significant investment, a portion of which will not be recovered unless the Company's customer base increases from current levels, as to which there can be no assurance because of possible changes due to competition, regulatory changes, technology changes, the ability to finance future expenditures or other unforeseen factors. The carrying value of property, equipment, and intangible assets will be subject to ongoing assessment. New Accounting Pronouncements -- On September 1, 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which did not have a significant impact on the Company's results of operations or financial position. In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share," which established new standards for computing and presenting earnings per share and F-9 106 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) was effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Prior periods presented have been restated to reflect the adoption of SFAS No. 128 which did not have a significant impact upon the Company's reported earnings per share. The FASB issued, in February 1997, SFAS No. 129, "Disclosure of Information about Capital Structure," which establishes standards for disclosing information about an entity's capital structure and is effective for financial statements for periods ending after December 15, 1997. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The FASB also issued, in June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way public companies disclose information about operating segments, products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. Reclassifications -- Certain reclassifications of prior year amounts have been made to conform to the current year presentation. 3. ACQUISITIONS On December 28, 1994, the Company acquired the stock of the operating subsidiaries of International Richey Pacific Cablevision, Ltd. ("IRPC") by assuming approximately $15,500 of liabilities, issuance of a note for $1,000, payment of approximately $1,300 in cash and issuance of a warrant for the right to purchase an ownership interest in Vanguard. The $1,000 secured note payable was due to IRPC one year after closing and was subject to adjustment based on the actual amount of assumed liabilities. In December 1997, the Company and IRPC reached an agreement with respect to the actual amount of liabilities assumed. Also in December 1997, IRPC exercised its right to put the warrant to OpTel. The obligations for the secured note payable and the warrant were satisfied by the Company by payment of approximately $1,477. The combined amounts due to IRPC were included on the accompanying August 31, 1996 and 1997 consolidated balance sheets in deferred acquisition liabilities. The Company, as a result of the acquisition from IRPC, is a general partner in limited partnership investments (the "Partnerships"). The operations of these Partnerships have been consolidated with those of the Company. The Company has the option to purchase the interest of each limited partner at defined amounts ranging from 110% to 140% of each limited partner's initial capital contribution for the first four years of the partnership agreements and is required to purchase the interests at the end of the fifth year at 150% of the initial capital contribution. From the date of initial capital contribution until the date the Company purchases the interest of a limited partner, each limited partner receives a guaranteed return equal to 10% per annum of their initial capital contribution paid quarterly. During the periods ended August 31, 1995, 1996 and 1997 OpTel paid $2,114, $392, and $0, respectively, to repurchase certain partnership obligations (see Note 6). The operations of the acquired subsidiaries and the partnerships are located in the San Diego, California, and Phoenix, Arizona areas. On January 11, 1995, the Company purchased the assets of EagleVision, a division of Nationwide Communications, Inc. ("NCI"). The purchase price consisted of $15,200 in cash, the assumption of approximately $110 of liabilities and a deferred payment due to NCI of not less than $6,000 and not more than $10,000 based on the profitability of OpTel's assets in the Houston, Texas market with certain adjustments. This deferred payment shall be payable at NCI's option, either (a) following the sale of all or substantially all of the EagleVision assets or the sale of a majority of the outstanding voting capital of the OpTel subsidiary F-10 107 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) which acquired EagleVision assets to a third party who is not an affiliate or (b) at the conclusion of the fifth or sixth year following the acquisition. This deferred payment is carried on the accompanying consolidated balance sheets in deferred acquisition liabilities at the net present value of the estimated final payment with an accretion of interest recorded to operations. As of the date of acquisition and as of August 31, 1997, the estimated payment due was $6,000 with a net present value at August 31, 1996 and 1997 of $4,503 and $4,903, respectively. EagleVision's operations are located in the Houston, Texas area. On June 30, 1995, the Company purchased the stock of Sunshine Television Entertainment, Inc. ("Sunshine") for $5,500 in cash and the assumption of approximately $350 of liabilities. Sunshine's operations are located in the Miami, Florida area. On July 31, 1995, the Company purchased the assets of Interface Communications Group, Inc. and certain related entities ("Interface") for $8,900 in cash and the assumption of approximately $30 of liabilities. The operations of Interface are located in the Denver, Colorado area. On August 31, 1995, the Company purchased the general and limited partnership interests of Triax Associates V, L.P. ("Triax"), for $15,200 in cash and the assumption of approximately $100 of liabilities. The operations of Triax are located in the Chicago, Illinois area. On January 30, 1996, the Company purchased the assets of Telecom Master L.P. and Telecom Satellite Systems Corporation ("Telecom") for approximately $5,700 in cash and the assumption of $100 of liabilities. The operations of Telecom are located in the Dallas, Texas area. On August 2, 1996, the Company purchased certain assets of certain subsidiaries of Wireless Holdings, Inc., and Videotron (Bay Area), Inc., companies that are 50% and 80% owned and controlled by Videotron, respectively, for approximately $3,880. The amount paid represents the sellers' historical cost which also approximates the acquired assets' estimated fair market value. The operations of the acquired assets are located in the San Francisco, California, and Tampa, Florida areas. On November 12, 1996, the Company purchased the assets of Malvey Cable Company ("Nor-Cal") for approximately $2,500 in cash. The operations of Nor-Cal are located in the San Francisco, California area. On March 14, 1997, the Company purchased the stock of Tara Communication Systems, Inc. ("Tara") for $2,450 in cash and the assumption of approximately $65 of liabilities. The operations of Tara are located in the Chicago, Illinois area. On August 1, 1997, the Company purchased certain assets of Northgate Communications, Inc. ("Northgate") for approximately $1,700 in cash. The operations of Northgate are located in the Los Angeles and San Diego, California areas. On October 27, 1997, the Company purchased the residential cable television and associated fiber optic network assets of Phonoscope Ltd. and the stock of several affiliated entities (collectively "Phonoscope"). The operations of Phonoscope are in Houston, Texas. The purchase price consisted of $36.5 million in cash and was recorded as a purchase acquisition. On March 3, 1998, the Company entered into a definitive purchase agreement to acquire certain cable television and telephone assets of Interactive Cable Systems, Inc. ("ICS"). The total purchase price is, including service agreements and customers, approximately $80.8 million and is comprised of approximately $4.5 million of cash, Series B Preferred with a liquidation preference of $59.4 million, and 164,272 shares of Class A Common plus assumed liabilities of $.8 million. As of May 31, 1998, the Company completed the F-11 108 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) acquisition of approximately 72% of the assets which are the subject of the aggregate acquisition. The Company expects the balance of the acquisition to be completed over the next few months as ICS meets certain conditions to the purchase of these remaining assets. Approximately 28% of the total purchase price is contingent upon ICS meeting these conditions. The assets being acquired are located in Houston, Dallas-Fort Worth, San Diego, Phoenix, Chicago, Denver, San Francisco, Los Angeles, Miami-Ft. Lauderdale, Tampa-Orlando, Atlanta, Indianapolis and greater Washington, D.C. At May 31, 1998, the allocation of the purchase price is recorded on a preliminary basis and is subject to adjustment. The pro forma effect of the 1996 and 1997 acquisitions would have an insignificant impact on the consolidated results of operations of the Company for the years ended August 31, 1996 and 1997. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
AUGUST 31, ------------------- MAY 31, 1996 1997 1998 -------- -------- ----------- (UNAUDITED) Headends............................................. $ 32,119 $ 53,088 $ 64,188 Telephone switches................................... 4,976 9,347 17,115 Distribution systems and enhancements................ 36,372 68,538 144,707 Computer software and equipment...................... 4,957 9,512 12,180 Other................................................ 5,813 8,762 10,088 Construction in progress............................. 25,434 26,177 29,954 -------- -------- -------- 109,671 175,424 278,232 Less accumulated depreciation........................ (5,871) (14,982) (26,908) -------- -------- -------- $103,800 $160,442 $251,324 ======== ======== ========
Interest expense of $1,849 and $2,256 was capitalized during 1996 and 1997 respectively. 5. INTANGIBLE ASSETS Intangible assets consisted of the following:
AUGUST 31, ------------------ MAY 31, 1996 1997 1998 ------- -------- ----------- (UNAUDITED) Goodwill.............................................. $47,344 $ 53,081 $111,743 Licensing fees and rights-of-entry costs.............. 22,174 30,833 51,406 Deferred financing costs.............................. -- 5,784 11,402 Other................................................. 1,650 3,243 2,392 ------- -------- -------- 71,168 92,941 176,943 Less accumulated amortization......................... (5,292) (10,358) (16,688) ------- -------- -------- $65,876 $ 82,583 $160,255 ======= ======== ========
The Company's right-of-entry agreements represent the Company's agreement to provide telecommunications service to multiple dwelling units ("MDU's") and typically have initial terms of ten to fifteen years. F-12 109 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) 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 term of the agreement. 6. NOTES PAYABLE AND LONG-TERM OBLIGATIONS Notes payable and long-term obligations consisted of the following:
AUGUST 31, ----------------- MAY 31, 1996 1997 1998 ------ -------- ----------- (UNAUDITED) 13% Senior Notes Due 2005, Series B, net of unamortized discount of $0, $6,526 and $5,870....... $ -- $218,474 $219,130 Senior credit facility bearing interest at LIBOR plus 3.5% per annum, payable quarterly, collateralized by substantially all of the assets of the Company...... -- -- 125,000 Installment notes payable bearing interest at rates ranging from 7.75% to 13% per annum, substantially all collateralized by certain transportation equipment or private cable television systems....... 511 280 178 Limited partner obligations (see Note 3).............. 633 714 773 Obligations under capital leases, net of amounts representing interest of $355 and $581 for 1996 and 1997, respectively.................................. 1,299 2,185 3,552 ------ -------- -------- $2,443.. $221,653 $348,633 ====== ======== ========
On February 14, 1997, the Company issued $225.0 million of 13% Senior Notes Due 2005 ("1997 Notes"). The 1997 Notes require semiannual interest payments due on August 15 and February 15 of each year until their maturity on February 15, 2005. The 1997 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 or a transfer by Videotron of its interest in VPC or an election by VPC to convert its Class B Common into shares of Class A Common may result in a change of control under the indenture, which could require the Company to purchase the 1997 Notes. The 1997 Notes are unsecured. In connection with the issuance of the 1997 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 1997 Notes. As a result of issuing the Class C Common, the Company will no longer be included in VPC's consolidated federal income tax return. Concurrent with the issuance of the 1997 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 1997 Notes. Such amount is reflected as restricted investments on the accompanying consolidated balance sheet. In December 1997, the Company, through subsidiaries, secured a $150 million senior secured credit facility (the "Senior Facility") from a syndicate of financial institutions. The Senior Facility consists of a term loan in the amount of $125.0 million (which was drawn on December 19, 1997) bearing interest at LIBOR plus 3.5% and a $25.0 million revolving credit commitment. The Senior Facility is secured by a first fixed and F-13 110 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) floating lien on substantially all of the assets of the Company and its subsidiaries. The Senior Facility contains financial maintenance requirements and certain limitations on the Company's ability to incur indebtedness, maximum capital expenditures, and pay dividends. The Company is in compliance with, or has obtained waivers for, all covenants of the Senior Facility. 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 has agreed to receive a variable rate equal to LIBOR and pay fixed rates ranging from 5.96% to 6.00%. The swap agreements expire March 31, 2001. At May 31, 1998, the fair value of the swap agreement is a net loss position of $600. The swap agreements were terminated on July 17, 1998 in exchange for cash payments of $578,000. Aggregate maturities of the Company's indebtedness are as follows as of August 31, 1997:
NOTES PAYABLE CONVERTIBLE DEFERRED AND NOTES PAYABLE ACQUISITION LONG-TERM TO STOCKHOLDER LIABILITIES OBLIGATIONS (NOTE 9) (NOTE 3) TOTAL ------------- -------------- ----------- -------- Fiscal year ending: 1998............................... $ 1,587 $ -- $2,017 $ 3,604 1999............................... 811 -- -- 811 2000............................... 530 -- 4,903 5,433 2001............................... 249 -- -- 249 2002............................... 2 -- -- 2 Thereafter........................... 218,474 129,604 -- 348,078 -------- -------- ------ -------- Totals..................... $221,653 $129,604 $6,920 $358,177 ======== ======== ====== ========
As of May 31, 1998, Notes Payable and Long-Term Obligations increased primarily due to $125 million of borrowings under the Senior Facility with an original maturity of August 2004. On July 8, 1998, the Company repaid the Senior Facility with proceeds from a private placement of $200 million 11.5% Senior Notes due 2008. On March 1, 1998, the Convertible Notes Payable to Stockholders were converted to Series A Preferred Stock. The Company leases office space and certain equipment under operating and capital leases. The leases generally have initial terms of 3 to 20 years. Equipment acquired under capital leases consists of the following:
AUGUST 31, --------------- 1996 1997 ------ ------ Amount of equipment under capital leases.................... $1,717 $3,069 Less accumulated amortization............................... (298) (470) ------ ------ $1,419 $2,599 ====== ======
F-14 111 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) Minimum future obligations on operating leases at August 31, 1997, consist of the following: Fiscal year ending: 1998............................................. $ 2,474 1999............................................. 2,285 2000............................................. 1,880 2001............................................. 1,546 2002............................................. 1,218 Thereafter......................................... 3,646 ------- Total minimum lease payments............. $13,049 =======
Rental expense under operating leases for the periods ending August 31, 1995, 1996 and 1997 was $616, $2,158 and $2,763, respectively. The company's rental expense under operating leases includes facility rentals as well as rental of roof top space for distribution purposes. 7. COMMITMENTS AND CONTINGENCIES Employment and Consulting Agreements -- Employment agreements with certain executive employees provide for separation payments ranging from 3 to 24 months of the employee's annual salary if employment is terminated due to change of control or without cause. However, stipulations for termination payment and payment terms vary. The Company paid or accrued approximately $1,590, $297 and $278 in severance during 1995, 1996 and 1997, respectively, related to such employment agreements. Legal -- The Company is a defendant in certain lawsuits incurred in the ordinary course of business. It is the opinion of the Company's management that the outcome of the suits now pending will not have a material, adverse effect on the operations, cash flows or the consolidated financial position of the Company. On April 9, 1998, a purported class action complaint was filed in the District Court of Harris County, Texas by Gavin Stewart Clarkson, individually and on behalf of all cable subscribers in the U.S. that have paid late fees to either Phonoscope or the Company. The plaintiff, who formerly subscribed to cable television services provided by Phonoscope, alleges that Phonoscope's charging pre-established late fees for delinquent payments of cable subscription charges constitutes an illegal collection of a penalty and that cable service providers should only be entitled to their actual collection costs. The plaintiff seeks to enjoin Phonoscope and OpTel from collecting, or attempting to collect, such late fees. The case is in its very early stages and no assurance can be given as to its ultimate outcome or that any such outcome will not materially adversely affect the Company. OpTel believes that it will have meritorious factual and legal defenses, and intends to defend vigorously against these claims. On April 27, 1998, a civil action was commenced against the Company in the United States District Court for the Northern District of California by Octel 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 F-15 112 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) 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. 8. INCOME TAXES The cumulative losses of Vanguard incurred prior to the transfer of its assets to the Company on December 20, 1994, have been reported in the individual income tax returns of Vanguard's partners. Upon transfer, the Company recorded deferred taxes for the difference between the tax and book basis of the assets, which was not material. Upon acquisition of the stock of the IRPC subsidiaries, a deferred tax liability of $489 was recorded to recognize the excess of the basis in the assets for financial reporting purposes over the tax basis of the net assets acquired. During the period from January 1, 1995, to August 31, 1995, the Company accumulated losses sufficient to offset these deferred liabilities; accordingly, a tax benefit was recorded in the statement of operations. Additionally, during the period ended August 31, 1995, the Company incurred $19 of federal and state income tax expense. Income tax expense (benefit) consists of the following for the period from January 1, 1995 to August 31, 1995 and the years ended August 31, 1996 and 1997:
1995 1996 1997 -------- ------- ------- Current: Federal.............................................. $ -- $ -- $ -- State................................................ 19 -- -- -------- ------- ------- Total current tax expense.................... 19 -- -- Deferred tax expense (benefit)......................... (3,452) (4,470) (13,213) Change in deferred tax valuation allowance............. 2,963 4,470 13,213 -------- ------- ------- Total income tax expense (benefit)........... $ (470) $ -- $ -- ======== ======= =======
F-16 113 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) A reconciliation of income taxes on reported pretax loss at statutory rates to actual income tax expense (benefit) for the period from January 1, 1995 to August 31, 1995 and the years ended August 31, 1996 and 1997, is as follows:
1995 1996 1997 ---------------- --------------- ---------------- Income tax at statutory rates.......... $ (3,614) (34)% $(6,266) (34)% $(16,502) (34)% State income taxes, net of federal tax benefit.............................. 12 0 (1) 0 8 0 Valuation allowance.................... 2,963 28 4,470 24 13,213 27 Expenses (deductible) not deductible for tax purposes..................... 169 2 1,797 10 (842) (2) Utilization of current loss by parent company in consolidated return....... -- -- -- -- 4,123 9 -------- --- ------- --- -------- --- Total income tax benefit..... $ (470) (4)% $ -- 0% $ -- 0% ======== === ======= === ======== ===
The net deferred tax assets consist of the tax effects of temporary differences related to the following:
AUGUST 31, --------------------------- 1996 1997 ------------ ----------- Allowance for uncollectible accounts receivable.......... $ 184 $ 381 Equipment, furniture and fixtures........................ (4,540) (10,694) Intangible assets........................................ 105 421 Accrued employee compensation............................ 183 214 Net operating loss carryforwards......................... 12,372 31,121 IRPC deferred tax liability.............................. (488) (480) Other.................................................... (16) 59 ------------ ----------- Deferred tax asset before valuation allowance.......... 7,800 21,022 Valuation allowance.................................... (7,800) (21,022) ------------ ----------- Net deferred tax asset......................... $ -- $ -- ============ ===========
Realization of deferred tax assets is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. The Company is unable to determine whether these accumulated losses will be utilized; accordingly, a valuation allowance has been provided. The following are the expiration dates and the approximate net operating loss carryforwards at August 31, 1997: Expiration Dates Through: 2010.......................................... $ 1,346 2011.......................................... 11,521 2012.......................................... 26,161 2013.......................................... 52,504
Certain of the Company's net operating losses were utilized by VPC while the Company was included in VPC's consolidated tax return. Such losses will not be available for future use by the Company, and, accordingly, the deferred tax benefit and valuation allowance were reduced. In connection with the revised F-17 114 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) shareholder agreement (see Note 9), subsequent to August 31, 1997, the Company will be reimbursed for any tax benefit generated by the Company and utilized by VPC. 9. CONVERTIBLE NOTES PAYABLE TO STOCKHOLDER, STOCK ISSUANCE AND OTHER TRANSACTIONS WITH STOCKHOLDERS From December 22, 1994 through March 31, 1995, the Company borrowed $60,000 from VPC under a Senior Secured Convertible Note Agreement. The note, with an original maturity of June 30, 1996, and the accrued interest of $792 for the period from December 22, 1994 until conversion on March 31, 1995, was converted to 1,120,985 shares of Class B Common of OpTel on March 31, 1995. Concurrently, VPC purchased 105,667 shares of OpTel's Class B Common from Vanguard. Additionally, the Company incurred $1,587 of costs related to this conversion of debt which was charged to additional paid-in capital. On July 26, 1995, VPC invested $25,000 in the Company, of which $16,688 represented VPC's purchase of an additional 311,652 shares of OpTel's Class B Common, and $8,312 represented a convertible note payable that bore interest at 15% and was convertible to 155,229 shares of Class B Common at the option of VPC on November 15, 1995 (extended to January 29, 1996). In connection with the July 26, 1995, equity call, Vanguard had the option to fund its portion to maintain its ownership interest at 33.25% by November 15, 1995 (extended to January 29, 1996). The Company was required to use the proceeds from any Vanguard contribution to repay the convertible note. On January 29, 1996, Vanguard elected to let the option expire without funding its portion of the equity call. On April 1, 1996, VPC converted the $8,312 note and accrued interest of $854 into 155,229 shares of Class B Common. From August 1995 through August 1997, the Company issued a total of $131,400 in convertible notes ("Convertible Notes") to VPC, all of which bear interest at 15%, generally with principal and interest due on demand. Under the terms of the Convertible Notes, any accrued interest on which there is no demand for payment as of each August 31, automatically converts to additional principal payable. As of August 31, 1997, $106,678 was advanced to OpTel under the Convertible Notes and a total of $22,926 of interest on the Convertible Notes has been converted to principal to date. As of February 28, 1998 an additional $9,640 of interest on the Convertible Notes has been converted to principle. The principal and interest on Convertible Notes were convertible into Class B Common after the earlier to occur of an initial public offering or April 30, 1999. As of 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. Videotron is party to an indenture which limits the aggregate amount of indebtedness which 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 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 receiving $2,620 in cash. F-18 115 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) 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. 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 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. Pursuant to the Registration Rights Agreement, nine months after the consummation of the Offering and, subject to certain conditions, CDPQ has the right, on two occasions, to require the Company to register under the Securities Act shares of Class A Common Stock issued to CDPQ upon the conversion of the Multi-Vote Common. In addition, CDPQ has piggyback registration rights, on three occasions, to include such shares of Class A 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. In September 1996, the Company entered into a consulting agreement with a former director of the Company who is a limited partner of Vanguard. In connection therewith, the Company granted him a warrant to purchase up to 24,992 shares of Class A Common at an exercise price of $53.55 per share, subject to adjustment, that is presently exercisable and expires on August 31, 1999. VPC and an affiliate of Vanguard had each agreed to provide consultant, advisory and management services for $350 per annum (plus travel expenses) per party. This arrangement terminated in August 1997 with the sale of Vanguard's interest in the Company. The Company purchases certain insurance coverage through Videotron, including directors and officers liability insurance. The Company paid an aggregate of approximately $478,000 and $434,000 to Videotron for this insurance coverage in fiscal 1996 and 1997, respectively. 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). In addition, OpTel provides certain customer support and billing services to certain affiliates of Videotron 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. F-19 116 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) 10. STOCKHOLDERS' EQUITY The Class A Common, Class B Common and Class C Common of the Company are identical in all respects and have equal powers, preferences, rights and privileges except that each holder of Class A Common is entitled to one vote for each share of Class A Common held, each holder of Class B Common is entitled to ten votes for each share of Class B Common held, and each holder of Class C Common does not possess any voting privileges. VPC and CDPQ are the only holders of Class B Common and, upon any transfer other than to a permitted holder, the Class B Common automatically converts to a like number of shares of Class A Common. On February 7, 1997 the Company approved a stock split effected in the form of a stock dividend. Each share of outstanding Class B Common (the only class of common stock then outstanding) received 17.3768 additional shares. The number of authorized shares of Class A Common and Class B Common was increased to 8,000,000 and 6,000,000, respectively. The financial statements have been restated to reflect the stock split as if it had occurred on December 20, 1994, the date the Company reorganized as a corporation. Additionally, the Company authorized the issuance of 300,000 shares of Class C Common. The Series B Preferred is convertible into Class A Common 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. 11. EMPLOYEE BENEFIT PLAN 401(k) Plan -- The OpTel 401(k) Plan (the "Plan"), established January 1, 1995, conforms to the provisions of the Employee Retirement Income Security Act of 1974. It is a contributory tax deferred 401(k) plan. All employees are eligible and may enter the Plan on the first day of the first full month of employment, provided that they have attained the age of 21. Each participant my elect to defer up to 15% of annual compensation up to the annual contribution limit of the Internal Revenue Code. The Company matching contribution is a discretionary amount to be annually determined by the Board of Directors of the Company. The Company determined that, for the plan years ended December 31, 1995, 1996 and 1997, it would match 50% of its employees' elective contribution (to a maximum Company contribution of 3% of the employees' compensation). For the periods ended August 31, 1995, 1996 and 1997, the Company's match of its employees' elective contributions was $81, $188 and $289, respectively. 12. RESTRICTED INVESTMENTS Concurrent with the issuance of the 1997 Notes, the Company was required to deposit in an escrow account $79.6 million in cash that was subsequently invested in U.S. Treasury securities. The securities are classified as held-to-maturity and, at August 31, 1997, have an amortized cost basis of $67,206, and aggregate fair value of $67,233, and gross unrealized holding gains of $27. The contractual maturity of the securities correspond to the semi-annual interest payment dates required under the 1997 Notes through February 15, 2000. 13. EMPLOYEE STOCK OPTIONS AND WARRANTS During the year ended August 31, 1997 the Company adopted a stock option and award plan for the benefit of officers and key employees. The plan is administered by a committee of the Board of Directors. The F-20 117 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) plan authorizes the Board to issue incentive stock options, as defined in Section 422A(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and stock options which do not conform to the requirements of that Code section. The Board has discretionary authority to determine the types of options to be granted, the persons to whom options shall be granted, the number of shares to be subject to each option granted and the terms of the stock option agreements. Unless otherwise specifically provided in the option agreement, (i) the exercise price of an option will not be less than the fair market value, as determined by the Board, of the Class A Common on the date of grant and (ii) the options vest in equal installments on each of the second, third, fourth and fifth anniversaries of the date of grant. The options issued as of August 31, 1997, expire ten years from the date of grant. In the event of a "change in control," all options shall vest and become immediately exercisable. The Board has authorized 95,137 shares of Class A Common to be issued under the plan. Stock option activity under the plan and warrants issued (see Note 9) for the year ended August 31, 1997, was as follows:
NUMBER OF WEIGHTED AVERAGE SHARES PRICE PER SHARE PRICE PER SHARE --------- --------------- ---------------- Options and warrants outstanding at August 31, 1996................................. -- -- -- Granted.................................... 112,115 $53.55 to $85.75 $76.70 Exercised.................................. -- -- -- Forfeited.................................. 22,078 $53.55 to $85.75 $80.92 ------- Options and warrants outstanding at August 31, 1997................................. 90,037 $53.55 to $85.75 $75.66 ------- Granted.................................... 42,984 $85.75 $85.75 Exercised.................................. -- -- -- Forfeited.................................. (9,336) $85.75 $85.75 ------- Options and warrants outstanding at May 31, 1998, (including 35,127 warrants)........ 123,685 $53.55 to $85.75 $78.40 ======= Options and warrants exercisable at August 31, 1997................................. 27,095 $53.55 to $85.75 $56.05 Options available for grant at August 31, 1997..................................... 30,092
The weighted average remaining contractual life of the stock options outstanding at August 31, 1997 is nine years. At August 31, 1997, the Company has reserved a total of 65,045 and 24,992 shares of Class A Common 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, the exercise price of each option granted was greater than or equal to the estimated fair value of the Company's stock on the date of grant. Accordingly, no compensation expense has been recognized under this plan. For the year ended August 31, 1997, the difference between actual net loss and loss per share and net loss and loss per share on a proforma basis as if the Company had utilized the accounting methodology prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," would have been $44 and $.02 per share, respectively. F-21 118 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) The estimated weighted average grant date fair value of options and warrants granted during 1997 was $1.10 per share. For purposes of determining fair value of each option, the Company used the minimum value method using the following assumptions: Risk-free interest rate..................... 6.18% -- 6.88% Expected life............................... 3 to 10 years
14. FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirement of SFAS No. 107, "Disclosure About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
AUGUST 31, 1996 AUGUST 31, 1997 ----------------------- ----------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE -------- ---------- -------- ---------- Assets: Cash and cash equivalents................... $ 1,677 $ 1,677 $ 87,305 $ 87,305 Restricted investments...................... -- -- 67,206 67,233 Accounts receivable......................... 3,064 3,064 4,044 4,044 Liabilities: Accounts payable............................ 5,649 5,649 7,927 7,927 Customer deposits and deferred revenue...... 2,167 2,167 2,978 2,978 Convertible notes payable to stockholder.... 89,414 89,415 129,604 129,605 Notes payable and long-term obligations..... 2,443 2,445 221,653 228,650 Deferred acquisition liabilities............ 6,520 6,525 6,920 6,920
The carrying amount of cash and cash equivalents, accounts receivable, accounts payable and customer deposits and deferred revenue approximates fair value. The fair values of convertible notes payable to stockholder, certain notes payable and long-term obligations and deferred acquisition liabilities are estimated based on present values using applicable market discount rates or rates that approximate what the Company could obtain from the open market. The fair value of restricted investments and the 1997 Notes are based on quoted market prices. The fair value estimates presented herein are based on pertinent information available to management as of August 31, 1996 and 1997. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since the date presented, and therefore, current estimates of fair value may differ significantly from the amounts presented herein. F-22 119 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) 15. QUARTERLY FINANCIAL DATA (UNAUDITED)
YEAR ENDED AUGUST 31, 1996 --------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- Revenues................................. $ 5,825 $ 6,463 $ 7,320 $ 7,996 Operating Expenses....................... $ 8,000 $ 9,395 $ 10,320 $ 12,465 Other Expense............................ $ 614 $ 1,522 $ 1,573 $ 2,145 Net Income (Loss)........................ $(2,789) $(4,454) $ (4,573) $ (6,614) Basic and diluted loss per common share.................................. $ (1.30) $ (2.07) $ (2.02) $ (2.86) Weighted average number of shares outstanding............................ 2,149 2,149 2,263 2,315
YEAR ENDED AUGUST 31, 1997 --------------------------------------------------------------- FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- ------------- -------------- Revenues................................. $ 9,076 $ 9,546 $ 10,495 $ 10,720 Operating expenses....................... $12,693 $14,096 $ 17,003 $ 18,841 Other expense............................ $ 3,277 $ 4,849 $ 8,867 $ 8,746 Net income (loss)........................ $(6,894) $(9,399) $(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
16. SUBSEQUENT EVENTS (UNAUDITED) On July 9, 1998, Optel consummated a private placement of $200.0 million of 11 1/2% Senior Notes Due 2008 (the "1998 Notes"). The 1998 Notes require semiannual interest payments on January 1 and July 1 of each year until their maturity on July 1, 2008. The 1998 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 1998 Notes, the Company was required to deposit in an escrow account $22.0 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 1998 Notes. 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 of an initial public offering (the "Offering") is consummated (as so amended, the "Plan"). Five percent of the Class A Common Stock outstanding, on a fully diluted basis, on the date the Offering is consummated, may be issued under the terms of the Plan. 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 Class A 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. 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 Class A Common Stock having an aggregate value of $150 upon consummation of the Offering (or, if such Director is not serving in such capacity upon F-23 120 OPTEL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994, THE PERIOD FROM JANUARY 1, 1995 TO AUGUST 31, 1995 AND THE YEARS ENDED AUGUST 31, 1996 AND 1997, AND THE NINE MONTHS ENDED MAY 31, 1997 AND 1998 (UNAUDITED), DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS -- (CONTINUED) consummation of the Offering, on the date of his or her election to the Board) with an exercise price equal to the initial public offering price (or the fair market value on the date of grant). The options will become exercisable in equal installments on each of the second, third, fourth and fifth anniversaries of the effective date of the grant. Following the consummation of the offering, all of the outstanding shares of the Company's Class C Common Stock, and Series A and B Preferred Stock will be converted to Class A Common Stock. F-24 121 PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The following unaudited pro forma information is based on the historical financial statements of the Company and the historical financial statements of the assets and liabilities of ICS Communications, L.L.C. (the "ICS Operations") acquired by the OpTel, Inc. ("Company"). The pro forma statements of operations for the year ended August 31, 1997 and the nine months ended May 31, 1998 have been prepared to illustrate the effects of the acquisition as if it had occurred on the first day of the periods presented. Pro forma balance sheet information is not included as the historical balance sheet of the Company as of May 31, 1998 reflects the consummation of the acquisition of the ICS Operations. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The pro forma financial information and accompanying notes should be read in conjunction with the consolidated financial statements and other financial information included elsewhere herein pertaining to the Company and the ICS Operations, including "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The pro forma financial information is not necessarily indicative of either future results of operations or the results that might have been achieved if such transactions had been consummated on the indicated dates. The acquisition of the ICS Operations was accounted for using the purchase method of accounting. The aggregate purchase price was allocated to the tangible and intangible assets and liabilities acquired based upon their respective fair values. The allocation of the aggregate purchase price reflected in the pro forma financial information is preliminary, the final allocation of the purchase price is contingent upon the final valuation of the acquired assets and the revision of other estimates; however, the allocation is not expected to differ materially from the preliminary allocation. F-25 122 OPTEL, INC. AND SUBSIDIARIES PRO FORMA STATEMENT OF OPERATIONS -- YEAR ENDED AUGUST 31, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
HISTORICAL ----------------------------------- PRO FORMA COMPANY COMPANY ICS OPERATIONS ADJUSTMENTS PRO FORMA --------------- ----------------- ----------- --------- (A) (B) REVENUES: Cable television.......................................... $ 36,915 $14,419 $ $ 51,334 Telecommunications........................................ 2,922 2,209 5,131 -------- ------- ------- -------- Total revenues..................................... 39,837 16,628 56,465 OPERATING EXPENSES: Cost of services.......................................... 19,202 8,947 28,149 Customer support, general and administrative.............. 28,926 5,518 1,086(E) 35,530 Depreciation and amortization............................. 14,505 8,089 3,358(F) 25,952 -------- ------- ------- -------- Total operating expenses........................... 62,633 22,554 4,444 89,631 LOSS FROM OPERATIONS........................................ (22,796) (5,926) (4,444) (33,166) Interest expense on -- Convertible Notes.................... (15,204) (15,204) Other interest expense...................................... (16,210) (142) (16,352) Interest and other income................................... 5,675 5,675 -------- ------- ------- -------- LOSS BEFORE INCOME TAXES.................................... (48,535) (6,068) (4,444) (59,047) INCOME TAXES................................................ -------- ------- ------- -------- NET LOSS.................................................... $(48,535) $(6,068) $(4,444) $(59,047) -------- ------- ------- -------- DIVIDENDS ON PREFERRED SHARES: Series B Preferred Stock 8.0%............................. (4,757)(G) $ (4,757) -------- -------- LOSS ATTRIBUTABLE TO COMMON EQUITY.......................... $(48,535) $(63,804) ======== ======== BASIC AND DILUTED LOSS PER SHARE............................ $ (19.98) $ (24.60) ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING......................... 2,430 2,594(D) ======== ========
- --------------- See notes to unaudited pro forma financial information. F-26 123 OPTEL, INC. AND SUBSIDIARIES PRO FORMA STATEMENT OF OPERATIONS NINE MONTHS ENDED MAY 31, 1998 (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
HISTORICAL ------------------------------------- PRO FORMA COMPANY COMPANY ICS OPERATIONS ADJUSTMENTS PRO FORMA ----------------- ----------------- ----------- --------- (A) (C) REVENUES: Cable television.......................................... $ 42,195 $ 9,613 $ $ 51,808 Telecommunications........................................ 2,721 1,089 3,810 -------- ------- ------- -------- Total revenues..................................... 44,916 10,702 55,618 OPERATING EXPENSES: Cost of services.......................................... 20,213 4,817 25,030 Customer support, general and administrative.............. 25,044 2,985 832(E) 28,861 Depreciation and amortization............................. 18,432 4,979 2,519(F) 25,930 -------- ------- ------- -------- Total operating expenses........................... 63,689 12,781 3,351 79,821 LOSS FROM OPERATIONS........................................ (18,773) (2,079) (3,351) (24,203) Interest expense on Convertible Notes....................... (9,640) (9,640) Other interest expense...................................... (26,276) (86) (26,362) Interest and other income................................... 6,457 6,457 -------- ------- ------- -------- LOSS BEFORE INCOME TAXES.................................... (48,232) (2,165) (3,351) (53,748) INCOME TAXES................................................ -------- ------- ------- -------- NET LOSS.................................................... $(48,232) $(2,165) $(3,351) $(53,748) -------- ------- ------- -------- DIVIDENDS ON PREFERRED STOCK:............................... (4,068) (2,894)(G) $ (6,962) -------- ------- -------- LOSS ATTRIBUTABLE TO COMMON EQUITY.......................... $(52,300) $(60,710) BASIC AND DILUTED LOSS PER SHARE............................ $ (20.04) $ (22.14) ======== ======== WEIGHTED AVERAGE SHARES OUTSTANDING......................... 2,610 2,742(D) ======== ========
See notes to unaudited pro forma financial information. F-27 124 NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) (UNAUDITED) (A) Represents the historical consolidated statement of operations of the Company for the period indicated which includes the results of the ICS Operations after the date of acquisition. (B) Represents the unaudited statement of revenues and direct expenses of the ICS Operations for the year ended November 30, 1997. Such presentation is made to conform to the Company's quarter ended November 30, 1997 and were derived from the financial records of ICS using the audited December 31, 1997, statement of revenues and direct expenses adjusted for the exclusion of total revenues of $1,394 and a net loss of $312 for the month ended December 31, 1997 and inclusion of total revenues of $1,335 and a net loss of $718 for the month ended December 31, 1996. The amounts include amounts representing allocated regional overhead attributable to the acquired operations. The statement of revenues and direct expenses include only the results of operations for the assets acquired and liabilities assumed and do not include any amounts representing corporate overhead of ICS or interest incurred on liabilities not assumed by the Company. Total revenues of $4,316 and net losses of $973 for the months ended November 31, 1997, October 31, 1997 and September 30, 1997 have been included in both the pro forma statement of operations for the year ended August 31, 1997 and the pro forma statement of operations for the nine months ended May 31, 1998. (C) Represents the unaudited statement of revenues and direct expenses of the acquired ICS Operations for the period from September 1, 1997 through the date of acquisition after which date, the ICS Operations are included in the historical statement of operations of the Company, and were derived from the financial records of ICS. The statement of revenues and direct expenses include only the results of operations for the assets acquired and liabilities assumed and do not include any amounts representing corporate overhead of ICS or interest incurred on liabilities not assumed by the Company. The amounts do include amounts representing allocated regional overhead attributable to the acquired operations. Total revenues of $4,316 and net losses of $973 for the months ended November 31, 1997, October 31, 1997 and September 30, 1997 have been included in both the pro forma statement of operations for the year ended August 31, 1997 and the pro forma statement of operations for the nine months ended May 31, 1998. (D) Represents the issuance of 164,272 shares of Class A Common, $.01 par value at an estimated price per share of $98 and total fair value of $16,099 to purchase the ICS Operations. (E) Represents incremental customer support, corporate and administrative expenses not included in the historical financial statements of the acquired ICS Operations. The amounts have been estimated based upon the Company's average historical cost per subscriber for the appropriate period applied to the expected number of subscribers added as part of the acquisition. (F) Represents an adjustment to depreciation expense for acquired property and equipment and to record amortization expense for the acquired intangible assets over 5 to 20 years. (G) Represents adjustment to reflect cumulative dividend accrued during the period presented, assuming issuance on the first day of the period presented, for the $59,466 of the Company's Series B Preferred issued to acquire the ICS Operations. The adjustment reflects the Series B Preferred dividend accrual rate of 8.0%. F-28 125 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc. We have audited the accompanying statement of assets and liabilities of ICS Communications, LLC acquired by OpTel, Inc. ("OpTel") as of December 31, 1997, and the statement of revenues and direct expenses of such assets and liabilities for the year then ended. These financial statements are the responsibility of OpTel's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the assets and liabilities of ICS Communications, LLC acquired by OpTel, Inc. at December 31, 1997 and the related revenues and direct expenses for the year ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ DELOITTE & TOUCHE LLP May 15, 1998 Dallas, Texas F-29 126 ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC ACQUIRED BY OPTEL, INC. STATEMENTS OF ASSETS AND LIABILITIES ACQUIRED ASSETS
DECEMBER 31, 1997 MARCH 31, 1998 ----------------- --------------- (UNAUDITED) Accounts receivable (Net of allowance for doubtful accounts of $737,000 and $333,000)................................. $ 1,181,677 $ 1,332,000 Prepaid expenses, deposits and other assets................. 295,639 290,233 Property and equipment, net (Note 2)........................ 21,824,123 21,084,342 Intangible assets, net (Note 3)............................. 9,241,488 8,166,744 ----------- ----------- Total assets...................................... 32,542,927 30,873,319 ----------- ----------- LIABILITIES Deferred revenues and customer deposits..................... 758,109 841,620 Capital lease obligations (Note 4).......................... 825,056 807,047 ----------- ----------- Total liabilities................................. 1,583,165 1,648,667 ----------- ----------- Net assets acquired............................... $30,959,762 $29,224,652 =========== ===========
See notes to financial statements. F-30 127 ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC ACQUIRED BY OPTEL, INC. STATEMENTS OF REVENUES AND DIRECT EXPENSES
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, 1997 MARCH 31, 1998 ----------------- -------------- (UNAUDITED) REVENUES: Cable television.......................................... $14,559,625 $4,028,128 Telecommunications........................................ 2,127,310 354,587 ----------- ---------- Total revenues.................................... 16,686,935 4,382,715 OPERATING EXPENSES: Cost of services.......................................... 8,747,441 1,909,037 Customer support, general and administrative.............. 5,371,634 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) ----------- ---------- NET LOSS.................................................... $(5,662,371) $ (765,799) =========== ==========
See notes to financial statements. F-31 128 ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC ACQUIRED BY OPTEL, INC. NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements include the accounts of ICS Communications, LLC (the "Company") only as they relate to the assets acquired and liabilities assumed by OpTel, Inc. ("OpTel") on April 9, 1998. The statement of revenues and direct expenses include only the results of operations for the assets acquired and liabilities assumed and do not include any amounts representing corporate overhead of the Company or interest incurred on liabilities not assumed by OpTel. In preparation of the statement of revenues and direct expenses, certain regional overhead costs were allocated to the assets acquired. Such allocations were based upon subscriber counts, cable passings or other criteria as considered appropriate. The Company's operations are in a single business segment, the providing of cable television and local and long distance telephone services to the high density residential market, including apartment complexes, condominiums and other multi-family residential properties (collectively "MDUs"). The Company provides these services generally under exclusive, long-term contracts with owners and managers of MDUs. The assets acquired include long-term contracts to provide cable television and telephone services to MDU properties, the property and equipment comprising the cable television and telephone delivery systems for each of the contracts, other prepaid assets specifically identified at the date of the purchase (generally prepaid rent on delivery equipment) and customer receivables. In connection with the purchase, certain liabilities were assumed, generally capital lease obligations related to the property and equipment used in telephone delivery systems. The primary markets of the assets acquired are major metropolitan areas in Arizona, California, Colorado, Florida, Georgia, Illinois, Indiana, Texas, and the greater Washington D.C. area. Interim Financial Information -- The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial information. In the opinion of management, all adjustments (consisting only of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the three month periods ended March 31, 1998, are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period. Property and Equipment -- Property and equipment, including equipment under capital leases, is stated at cost, which includes amounts for construction materials, direct labor and overhead and capitalized interest. Cost of maintenance and repairs is charged to operations as incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the various classes of property and equipment as follows: Installed cable and headend equipment............ 5-10 years Telephone switches and equipment................. 5-10 years
Intangible Assets -- Intangible assets includes costs associated with licensing fees, commissions and other direct costs incurred in connection with the execution of rights-of-entry agreements to provide cable television and telecommunications service to MDUs. Intangible assets are amortized using the straight-line method over the lesser of the term of the right-of-entry agreement or 5 years. Revenue Recognition -- Cable subscriber fees for basic monthly services and premium channels are billed in advance and recorded as revenue in the month the service is provided. Telecommunication service billings include residential service fees billed in advance plus amounts based on minutes of use billed in arrears. Telecommunications service revenues are recognized in the month the service is provided. F-32 129 ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC ACQUIRED BY OPTEL, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) Cost of Services -- System operating costs include programming, telecommunications service costs, revenue sharing with owners of MDUs and franchise fees. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates included in the accompanying financial statements include the allowance for doubtful accounts, the recoverability of the carrying value of property and equipment and intangible assets and the allocation of regional overhead as it relates to the assets acquired. Actual results could differ from those estimates. 2. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1997, including assets under capital lease, consist of the following: Installed cable and headend equipment.......... $ 30,051,718 Telephone switches and equipment............... 2,020,330 ------------ Sub-total............................ 32,072,048 Less accumulated depreciation................ (10,247,925) ------------ Property and equipment, net.......... $ 21,824,123 ============
Telephone switches and equipment at December 31, 1997 include $1,238,273 in net assets under capital lease. 3. INTANGIBLE ASSETS Intangible assets at December 31, 1997 consist of the following: Rights-of-entry costs.......................... $ 21,979,856 Less accumulated amortization................ (12,738,368) ------------ Intangible assets, net............... $ 9,241,488 ============
4. CAPITAL LEASE OBLIGATIONS During 1995 and 1996 the Company entered into capital leases for telephone equipment with five year terms. The leases are payable in monthly installments ranging from $1,267 to $2,121 bearing interest at rates ranging from 10.4% to 13.0%. Scheduled maturities on capital lease obligations are as follows: Year ending: 1998........................................... $ 379,980 1999........................................... 379,980 2000........................................... 243,440 Thereafter..................................... -- ---------- Total payments......................... 1,003,400 Less amounts representing interest............. (178,344) ---------- Capital lease obligation............... $ 825,056 ==========
F-33 130 ASSETS AND LIABILITIES OF ICS COMMUNICATIONS, LLC ACQUIRED BY OPTEL, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) 5. RELATED PARTY TRANSACTIONS The Company's largest shareholder is MCI Telecommunications Corporation ("MCI"). In the ordinary course of the Company's local and long distance telephone services, the Company purchases certain services from MCI under terms and rates that management believes are no more favorable to the Company than those arranged with other parties. F-34 131 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS A COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary...................... 3 Risk Factors............................ 11 Use of Proceeds......................... 24 Dividend Policy......................... 24 Capitalization.......................... 25 Dilution................................ 26 Selected Historical Consolidated Financial and Operating Data.......... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 30 Business................................ 41 Management.............................. 64 Principal and Selling Stockholders...... 72 Certain Relationships and Related Transactions.......................... 75 Description of Capital Stock............ 78 Certain Federal Income Tax Considerations........................ 84 Description of Certain Indebtedness..... 87 Underwriting............................ 89 Certain Market Information.............. 90 Legal Matters........................... 91 Experts................................. 91 Additional Information.................. 91 Glossary................................ A-1 Index to Financial Statements........... F-1
------------------ Until , 1998 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligations of dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ SHARES OPTEL, INC. CLASS A COMMON STOCK [LOGO] ------------ PROSPECTUS , 1998 ------------ SALOMON SMITH BARNEY GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC. CIBC OPPENHEIMER - ------------------------------------------------------ - ------------------------------------------------------ 132 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following statement sets forth the expenses payable in connection with this Registration Statement (estimated except for the registration fee and the NASD filing fee), all of which will be borne by OpTel: Securities and Exchange Commission filing fee............... $ 29,500 NASD filing fee............................................. $ 10,500 National Market listing fee................................. $ 50,000 Legal fees and expenses..................................... $200,000 Accountant's fees and expenses.............................. $150,000 Printing costs.............................................. $150,000 Miscellaneous............................................... $160,000 -------- Total............................................. $750,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company's Certificate of Incorporation provides that the Company shall, to the fullest extent permitted by the DGCL, indemnify all persons whom it may indemnify pursuant thereto (i.e., directors and officers) and shall advance expenses incurred in defending any proceeding for which such right to indemnification is applicable, provided that, if the DGCL so requires, the indemnitee provides the Company with an undertaking to repay all amounts advanced if it is determined by a final judicial decision that such person is not entitled to indemnification pursuant to this provision. The Company's Certificate of Incorporation also contains a provision eliminating the personal liability of the Company's directors for monetary damages for breach of any fiduciary duty. By virtue of this provision, under the DGCL, a director of the Company will not be personally liable for monetary damages for breach of his fiduciary duty as a director, except for liability for (i) any breach of the director's duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) dividends or stock purchases or redemptions that are unlawful under the DGCL, and (iv) any transaction from which a director derives an improper personal benefit. However, this provision of the Company's Certificate of Incorporation pertains only to breaches of duty by directors as directors and not in any other corporate capacity such as officers, and limits liability only for breaches of fiduciary duties under the DGCL and not for violations of other laws, such as the federal securities laws. As a result of the inclusion of such provision, stockholders may be unable to recover monetary damages against directors for actions taken by them that constitute negligence or gross negligence or that are in violation of their fiduciary duties, although it may be possible to obtain injunctive or other equitable relief with respect to such actions. The inclusion of this provision in the Company's Certificate of Incorporation may have the effect of reducing the likelihood of derivative litigation against directors, and may discourage or deter stockholders or management from bringing a lawsuit against directors for breach of their duty of care, even though such an action, if successful, might otherwise have benefitted the Company and its stockholders. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. 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 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 Smith Barney Inc.), Goldman, Sachs & Co. and CIBC Oppenheimer Corp. 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 II-1 133 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 initial closing of the acquisition of the ICS Operations and the payment of the purchase price thereof, the Company issued 164,271.54 shares of Class A Common Stock and 991.1039 shares of the Series B Preferred. Such issuances were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. All of the securities were acquired by the recipients thereof for investment and with no view toward the sale or redistribution thereof. The sales were made without any public solicitation; the stock certificates bear restrictive legends and appropriate stop transfer instructions have been or will be given to the transfer agent. 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 48,937 shares of the Multi-Vote Common at a price of $53.55 per share (aggregate consideration of $2,620,392). The issuance of the shares of Multi-Vote Common pursuant to 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 9,406.36 shares of Class A Common Stock at an exercise price of $74.42 per share, subject to adjustment, in consideration for Mr. Cole's separation agreement. The warrant is exercisable until July 11, 2002. On July 3, 1997, the Company issued to Mr. Hecht a warrant to purchase up to 728.86 shares of Class A Common Stock at an exercise price of $85.75 per share, subject to adjustment, in consideration for Mr. Hecht's settlement agreement. The warrant is exercisable until December 31, 2000. The issuance of these securities was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The securities were acquired by the recipients thereof for investment and with no view toward the sale or redistribution thereof. The securities were acquired without any public solicitation; the securities bear restrictive legends and appropriate stop transfer instructions have been or will be given to the transfer agent. During February 1997, the Company issued $225,000,000 principal amount of the 1997 Notes and 225,000 shares of the Non-Voting Common to qualified institutional buyers who purchased the securities in a private placement pursuant to Rule 144A and/or Regulation D. The gross proceeds of this private placement were approximately $220 million. In each instance, the offers and sales were made without any public solicitation; the 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 and fiscal 1998, the Company granted options to purchase a total of 119,971.71 shares of Class A Common Stock to certain employees of the Company as part of their compensation packages. Such issuances were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. All of the securities were acquired by the recipients thereof for investment and with no view toward the sale or redistribution thereof. The securities II-2 134 were acquired without any public solicitation; the securities bear restrictive legends; and appropriate stop transfer instructions have been or will be given to the transfer agent. On September 1, 1996, the Company issued to Mr. Kofalt a warrant to purchase up to 24,992 shares of Class A Common Stock at an exercise price of $53.55 per share in consideration for Mr. Kofalt's separation agreement. The warrant is exercisable until August 31, 1999. The issuance of this security was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering. The security was acquired by the recipient thereof for investment and with no view toward the sale or redistribution thereof. The security was acquired without any public solicitation; the security bears a restrictive legend; and appropriate stop transfer instructions have been or will be given to the transfer agent. In August 1996, in connection with a negotiated settlement of certain disputes between the Company and Vanguard, which at such time held a minority interest in the Company, the Company granted Vanguard an option to purchase 48,937 shares of Multi-Vote Common at an exercise price of $53.55 per share, subject to adjustment. The issuance of this security was made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering. The security was acquired by the recipient thereof for investment and with no view toward the sale or redistribution thereof. The Vanguard Option was subsequently 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) 311,652 shares of Multi-Vote 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 155,229 shares of Multi-Vote 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)
II-3 135
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.1 -- Amended and Restated Certificate of Incorporation of OpTel, together with all amendments thereto.* 3.2 -- Amended and Restated Bylaws of OpTel.* 4.1 -- See the Amended and Restated Certificate of Incorporation and the amendments thereto filed as Exhibit 3.1 and the Amended and Restated Bylaws filed as Exhibit 3.2. 4.2 -- Certificate of Designation of Voting Power, Designations, Preferences, Limitations, Restrictions and Relative Rights of the Series A Preferred.(4) 4.3 -- Certificate of Designation of Voting Power, Designations, Preferences, Limitations, Restrictions and Relative Rights of the Series B Preferred.(4) 4.4 -- 1997 Notes Purchase Agreement dated February 7, 1997 between OpTel and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith Incorporated.(1) 4.5 -- Registration Agreement, dated as of February 14, 1997, between OpTel and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith Incorporated.(1) 4.6 -- Common Stock Registration Rights Agreement, dated as of February 14, 1997, among OpTel, VPC, GVL and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith Incorporated and U.S. Trust Company of Texas, N.A.(1) 4.7 -- Registration Rights Agreement, dated as of August 15, 1997, between OpTel and CDPQ.(2) 4.8 -- Registration Rights Agreement dated as of April 9, 1998 between OpTel, ICS, Nomura and MCI.(4) 4.9 -- Warrant Agreement dated as of September 1, 1996 between OpTel and James A. Kofalt.(1) 4.10 -- Warrant Agreement, dated as of July 11, 1997, between OpTel and Rory O. Cole.(2) 4.11 -- Indenture, dated as of February 14, 1997, between OpTel and U.S. Trust Company of Texas, N.A., as Trustee.(1) 4.12 -- Form of 1997 Note (included in Exhibit 4.10).(1) 4.13 -- 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) 4.14 -- 1998 Notes Purchase Agreement dated as of June 29, 1998 between OpTel, Salomon Brothers Inc, Goldman, Sachs & Co. and CIBC Oppenheimer. 4.15 -- Registration Agreement dated as of July 7, 1998 between OpTel and Salomon Brothers Inc, Goldman, Sachs & Co. and CIBC Oppenheimer. 4.16 -- Indenture dated as of July 7, 1998 between OpTel and U.S. Trust Company of Texas, N.A., as Trustee. 4.17 -- Form of 1998 Note (included in Exhibit 4.16). 4.18 -- Escrow Agreement, dated as of July 7, 1998 between OpTel and U.S. Trust Company of Texas, N.A., as Trustee and Escrow Agent. 5.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP.* 8.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP re: Tax matters (included in Exhibit 5.1) 10.1 -- Stockholders' Agreement, dated as of December 22, 1994, between VPC, Vanguard, Vanguard Communications, Inc. ("General Partner") and OpTel.(1)
II-4 136
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.2 -- Registration Rights Agreement, dated as of December 22, 1994, between OpTel and Vanguard.(1) 10.3 -- Settlement Agreement, dated as of August 1, 1996, between Vanguard, General Partner, Pacific Capital Group, Inc. ("Pacific"), VPC, OpTel and GVL.(1) 10.4 -- Amendment, dated as of February 17, 1997, between Vanguard, General Partner, Pacific, VPC, OpTel and GVL.(1) 10.5 -- Form of Convertible Note (included as Exhibit B to the Amendment referenced as Exhibit 10.4 hereto) and a list of the issue dates and principal amounts of all outstanding Convertible Notes (included as Schedule 1 to the Amendment referenced as Exhibit 10.4 hereto).(1) 10.6 -- Stockholders' Agreement dated as of August 15, 1997 by and among VPC, CDPQ and OpTel.(3) 10.7 -- Stockholders' Agreement dated as of April 9, 1998 among OpTel, Nomura, MCI, GVL and ICS.(4) 10.8 -- Lease Agreement dated July 25, 1995 between Space Center Dallas, Inc. and OpTel.(1) 10.9 -- First Amendment to Lease Agreement dated August 8, 1996 between Space Center Dallas, Inc. and OpTel.(1) 10.10 -- Restated Incentive Stock Plan of OpTel.* 10.11 -- Annual Bonus Plan of OpTel.(1) 10.12 -- 1998 Employee Stock Purchase Plan of OpTel.* 10.13 -- Employment Agreement between Louis Brunel and OpTel dated November 15, 1996.(1) 10.14 -- Employment Agreement between Rory Cole and OpTel dated January 3, 1997.(1) 10.15 -- Employment Agreement between Michael Katzenstein and OpTel dated September 18, 1995.(1) 10.16 -- Separation and Consulting Agreement, dated as of September 1, 1996, between OpTel and James A. Kofalt.(1) 10.17 -- Separation Agreement dated as of July 11, 1997, between OpTel and Rory O. Cole.(4) 10.18 -- Assignment Agreement, dated as of February 14, 1997, among TVMAX, Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc., IRPC Arizona, Inc. and THI.(1) 10.19 -- Equipment License and Services Agreement, dated as of February 14, 1997, between TVMAX and THI.(1) 10.20 -- Form of Shareholders Option Agreement, dated as of February 14, 1997, between TVMAX and each of the shareholders of THI, together with a list of the shareholders of THI.(1) 10.21 -- Option Agreement, dated as of February 14, 1997, between TVMAX and THI.(1) 10.22 -- City of Houston, Texas, Ordinance No. 89-338 dated March 29, 1989 granting to PrimeTime Cable Partners I, Ltd. the right to operate for 15 years a Community Antenna Television System, and subsequent ordinances consenting to assignment of rights to EagleVision and to TVMAX Communications (Texas), Inc.(1)
II-5 137
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.23 -- City of Houston, Texas, Ordinance No. 97-285 dated March 19, 1997, granting TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network.(1) 10.24 -- City of Houston, Texas, Ordinance No. 97-1088 dated September 3, 1997, extending to TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network (originally granted pursuant to the permit referenced in Exhibit 10.23 hereto).(2) 10.25 -- City of Houston, Texas, Ordinance No. 97-1567 dated December 23, 1997, granting to TVMAX Communications (Texas), Inc. a franchise to operate a Telecommunications Network (superseding and replacing the temporary permits referenced in Exhibits 10.23 and 10.24 hereto).(4) 10.26 -- Amendment Number 001 to the Videotron/Lucent Agreement, dated August 28, 1997, among Videotron Telecom Ltee and Lucent Technologies Canada Inc. and TVMAX and Lucent Technologies Inc.(2) 10.27 -- Credit Agreement dated as of December 19, 1997 (the "Credit Agreement") among TVMAX, OpTel, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, Canadian Imperial Bank of Commerce, individually and as administrative agent, General Electric Capital Corporation, individually and as documentation agent, and the lenders party thereto from time to time (collectively, the "Lenders").(4) 10.28 -- First Amendment to the Credit Agreement dated as of April 29, 1998.(4) 10.29 -- Interconnection Agreement under Sections 251 and 252 of the Telecom Act by and between Southwestern Bell Telephone Company and OpTel (Texas) Telecom, Inc.(2) 10.30 -- Residential Reseller Agreement dated as of May 29, 1998 by and between Teleport Communications Group Inc. and TVMAX.(5) 10.31 -- Strategic Alliance Agreement dated as of March 10, 1998 between I&S, Inc. and TVMAX.(5) 21.1 -- List of Subsidiaries of the Company.* 23.1 -- Consent of Kronish, Lieb, Weiner & Hellman LLP.* 23.2 -- Consent of Deloitte & Touche LLP.
- --------------- (1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with the Commission on April 10, 1997. (2) Filed as an exhibit to the Company's 10-K filed with the Commission for fiscal year ended August 31, 1997. (3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for fiscal year ended August 31, 1997. (4) Filed as an exhibit to OpTel's registration statement on Form S-1 filed with the Commission on June 5, 1998. (5) Filed as an exhibit to Amendment No. 1 to OpTel's registration statement on Form S-1/A filed with the Commission on June 24, 1998. * To be filed by Amendment to this Registration Statement. (b) The financial statements and financial statement schedules filed as part of this Registration Statement are as follows: II-6 138 1. Financial Statements. See Index to Financial Statements on page F-1 of the Prospectus included in this Registration Statement. 2. Financial Statement Schedules. All schedules have been omitted as they are not required under the related instructions, are inapplicable, or because the information required is included in the financial statements and related notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by OpTel pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be initial bona fide offering thereof. (3) To provide to the Underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of OpTel pursuant to the foregoing provisions, or otherwise, OpTel has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by OpTel of expenses incurred or paid by a director, officer or controlling person of OpTel in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, OpTel will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-7 139 SIGNATURES Pursuant to the requirements of the Securities Act, the Company has duly caused this Amendment No. 2 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 20th day of July, 1998. OPTEL, INC. By: /s/ LOUIS BRUNEL ---------------------------------- Louis Brunel President and Chief Executive Officer Pursuant to the requirements of the Securities Act, this Amendment No. 2 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: /s/ LOUIS BRUNEL President and Chief Executive July 20, 1998 - ----------------------------------------------------- Officer Louis Brunel Principal Financial and Accounting Officers: * Chief Financial Officer July 20, 1998 - ----------------------------------------------------- Bertrand Blanchette * Controller July 20, 1998 - ----------------------------------------------------- Craig Milacek Directors: * Chairman of the Board July 20, 1998 - ----------------------------------------------------- Claude Chagnon * Vice Chairman of the Board July 20, 1998 - ----------------------------------------------------- Alain Michel /s/ LOUIS BRUNEL Director July 20, 1998 - ----------------------------------------------------- Louis Brunel * Director July 20, 1998 - ----------------------------------------------------- Christian Chagnon * Director July 20, 1998 - ----------------------------------------------------- William O. Hunt * Director July 20, 1998 - ----------------------------------------------------- Lynn McDonald
*By: /s/ LOUIS BRUNEL ------------------------------- Louis Brunel as attorney-in-fact II-8 140 INDEPENDENT AUDITORS' REPORT To the Board of Directors of OpTel, Inc.: We have audited the financial statements of OpTel, Inc. and subsidiaries as of August 31, 1997 and 1996, and for each of the years ended August 31, 1997 and 1996, the period from January 1, 1995 to August 31, 1995, and the year ended December 31, 1994; 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 Corporation'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. DELOITTE & TOUCHE LLP October 14, 1997 Dallas, Texas 141 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 Nine month period ended May 31, 1998........ $1,125 $1,722 $(1,324) $1,523 Year ended August 31, 1997.................. 542 1,788 (1,205) 1,125 Year ended August 31, 1996.................. 473 1,376 (1,307) 542 Period ended August 31, 1995................ 148 372 (47) 473 Year ended December 31, 1994................ 0 148 0 148
142 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 -- Amended and Restated Certificate of Incorporation of OpTel, together with all amendments thereto.* 3.2 -- Amended and Restated Bylaws of OpTel.* 4.1 -- See the Amended and Restated Certificate of Incorporation and the amendments thereto filed as Exhibit 3.1 and the Amended and Restated Bylaws filed as Exhibit 3.2. 4.2 -- Certificate of Designation of Voting Power, Designations, Preferences, Limitations, Restrictions and Relative Rights of the Series A Preferred.(4) 4.3 -- Certificate of Designation of Voting Power, Designations, Preferences, Limitations, Restrictions and Relative Rights of the Series B Preferred.(4) 4.4 -- 1997 Notes Purchase Agreement dated February 7, 1997 between OpTel and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith Incorporated.(1) 4.5 -- Registration Agreement, dated as of February 14, 1997, between OpTel and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith Incorporated.(1) 4.6 -- Common Stock Registration Rights Agreement, dated as of February 14, 1997, among OpTel, VPC, GVL and Salomon Brothers Inc and Merrill Lynch, Pierce, Fenner & Smith Incorporated and U.S. Trust Company of Texas, N.A.(1) 4.7 -- Registration Rights Agreement, dated as of August 15, 1997, between OpTel and CDPQ.(2) 4.8 -- Registration Rights Agreement dated as of April 9, 1998 between OpTel, ICS, Nomura and MCI.(4) 4.9 -- Warrant Agreement dated as of September 1, 1996 between OpTel and James A. Kofalt.(1) 4.10 -- Warrant Agreement, dated as of July 11, 1997, between OpTel and Rory O. Cole.(2) 4.11 -- Indenture, dated as of February 14, 1997, between OpTel and U.S. Trust Company of Texas, N.A., as Trustee.(1) 4.12 -- Form of 1997 Note (included in Exhibit 4.10).(1) 4.13 -- 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) 4.14 -- 1998 Notes Purchase Agreement dated as of June 29, 1998 between OpTel, Salomon Brothers Inc, Goldman, Sachs & Co. and CIBC Oppenheimer. 4.15 -- Registration Agreement dated as of July 7, 1998 between OpTel and Salomon Brothers Inc, Goldman, Sachs & Co. and CIBC Oppenheimer.
143
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.16 -- Indenture dated as of July 7, 1998 between OpTel and U.S. Trust Company of Texas, N.A., as Trustee. 4.17 -- Form of 1998 Note (included in Exhibit 4.16). 4.18 -- Escrow Agreement, dated as of July 7, 1998 between OpTel and U.S. Trust Company of Texas, N.A., as Trustee and Escrow Agent. 5.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP.* 8.1 -- Opinion of Kronish, Lieb, Weiner & Hellman LLP re: Tax matters (included in Exhibit 5.1) 10.1 -- Stockholders' Agreement, dated as of December 22, 1994, between VPC, Vanguard, Vanguard Communications, Inc. ("General Partner") and OpTel.(1) 10.2 -- Registration Rights Agreement, dated as of December 22, 1994, between OpTel and Vanguard.(1) 10.3 -- Settlement Agreement, dated as of August 1, 1996, between Vanguard, General Partner, Pacific Capital Group, Inc. ("Pacific"), VPC, OpTel and GVL.(1) 10.4 -- Amendment, dated as of February 17, 1997, between Vanguard, General Partner, Pacific, VPC, OpTel and GVL.(1) 10.5 -- Form of Convertible Note (included as Exhibit B to the Amendment referenced as Exhibit 10.4 hereto) and a list of the issue dates and principal amounts of all outstanding Convertible Notes (included as Schedule 1 to the Amendment referenced as Exhibit 10.4 hereto).(1) 10.6 -- Stockholders' Agreement dated as of August 15, 1997 by and among VPC, CDPQ and OpTel.(3) 10.7 -- Stockholders' Agreement dated as of April 9, 1998 among OpTel, Nomura, MCI, GVL and ICS.(4) 10.8 -- Lease Agreement dated July 25, 1995 between Space Center Dallas, Inc. and OpTel.(1) 10.9 -- First Amendment to Lease Agreement dated August 8, 1996 between Space Center Dallas, Inc. and OpTel.(1) 10.10 -- Restated Incentive Stock Plan of OpTel.* 10.11 -- Annual Bonus Plan of OpTel.(1) 10.12 -- 1998 Employee Stock Purchase Plan of OpTel.* 10.13 -- Employment Agreement between Louis Brunel and OpTel dated November 15, 1996.(1) 10.14 -- Employment Agreement between Rory Cole and OpTel dated January 3, 1997.(1) 10.15 -- Employment Agreement between Michael Katzenstein and OpTel dated September 18, 1995.(1) 10.16 -- Separation and Consulting Agreement, dated as of September 1, 1996, between OpTel and James A. Kofalt.(1) 10.17 -- Separation Agreement dated as of July 11, 1997, between OpTel and Rory O. Cole.(4) 10.18 -- Assignment Agreement, dated as of February 14, 1997, among TVMAX, Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc., IRPC Arizona, Inc. and THI.(1) 10.19 -- Equipment License and Services Agreement, dated as of February 14, 1997, between TVMAX and THI.(1) 10.20 -- Form of Shareholders Option Agreement, dated as of February 14, 1997, between TVMAX and each of the shareholders of THI, together with a list of the shareholders of THI.(1) 10.21 -- Option Agreement, dated as of February 14, 1997, between TVMAX and THI.(1)
144
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.22 -- City of Houston, Texas, Ordinance No. 89-338 dated March 29, 1989 granting to PrimeTime Cable Partners I, Ltd. the right to operate for 15 years a Community Antenna Television System, and subsequent ordinances consenting to assignment of rights to EagleVision and to TVMAX Communications (Texas), Inc.(1) 10.23 -- City of Houston, Texas, Ordinance No. 97-285 dated March 19, 1997, granting TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network.(1) 10.24 -- City of Houston, Texas, Ordinance No. 97-1088 dated September 3, 1997, extending to TVMAX Communications (Texas), Inc. a temporary permit to operate a Telecommunications Network (originally granted pursuant to the permit referenced in Exhibit 10.23 hereto).(2) 10.25 -- City of Houston, Texas, Ordinance No. 97-1567 dated December 23, 1997, granting to TVMAX Communications (Texas), Inc. a franchise to operate a Telecommunications Network (superseding and replacing the temporary permits referenced in Exhibits 10.23 and 10.24 hereto).(4) 10.26 -- Amendment Number 001 to the Videotron/Lucent Agreement, dated August 28, 1997, among Videotron Telecom Ltee and Lucent Technologies Canada Inc. and TVMAX and Lucent Technologies Inc.(2) 10.27 -- Credit Agreement dated as of December 19, 1997 (the "Credit Agreement") among TVMAX, OpTel, Goldman Sachs Credit Partners L.P., as arranger and syndication agent, Canadian Imperial Bank of Commerce, individually and as administrative agent, General Electric Capital Corporation, individually and as documentation agent, and the lenders party thereto from time to time (collectively, the "Lenders").(4) 10.28 -- First Amendment to the Credit Agreement dated as of April 29, 1998.(4) 10.29 -- Interconnection Agreement under Sections 251 and 252 of the Telecom Act by and between Southwestern Bell Telephone Company and OpTel (Texas) Telecom, Inc.(2) 10.30 -- Residential Reseller Agreement dated as of May 29, 1998 by and between Teleport Communications Group Inc. and TVMAX.(5) 10.31 -- Strategic Alliance Agreement dated as of March 10, 1998 between I&S, Inc. and TVMAX.(5) 21.1 -- List of Subsidiaries of the Company.* 23.1 -- Consent of Kronish, Lieb, Weiner & Hellman LLP.* 23.2 -- Consent of Deloitte & Touche LLP.
- --------------- (1) Filed as an exhibit to OpTel's registration statement on Form S-4 filed with the Commission on April 10, 1997. (2) Filed as an exhibit to the Company's 10-K filed with the Commission for fiscal year ended August 31, 1997. (3) Filed as an exhibit to the Company's 10-K/A filed with the Commission for fiscal year ended August 31, 1997. (4) Filed as an exhibit to OpTel's registration statement on Form S-1 filed with the Commission on June 5, 1998. (5) Filed as an exhibit to Amendment No. 1 to OpTel's registration statement on Form S-1/A filed with the Commission on June 24, 1998. * To be filed by Amendment to this Registration Statement. 145 (b) The financial statements and financial statement schedules filed as part of this Registration Statement are as follows: 1. Financial Statements. See Index to Financial Statements on page F-1 of the Prospectus included in this Registration Statement. 2. Financial Statement Schedules. All schedules have been omitted as they are not required under the related instructions, are inapplicable, or because the information required is included in the financial statements and related notes thereto. EX-4.14 2 PURCHASE AGREEMENT 1 EXHIBIT 4.14 ================================================================================ OPTEL, INC. $200,000,000 11-1/2% Senior Notes Due 2008 PURCHASE AGREEMENT Dated: June 29, 1998 ================================================================================ 2 OPTEL, INC. $200,000,000 11-1/2% Senior Notes Due 2008 PURCHASE AGREEMENT New York, New York June 29, 1998 SALOMON BROTHERS INC GOLDMAN, SACHS & CO. CIBC OPPENHEIMER CORP. c/o Salomon Brothers Inc Seven World Trade Center New York, New York 10048 Ladies and Gentlemen: OpTel, Inc., a Delaware corporation (the "Company"), proposes to issue and sell to Salomon Brothers Inc, Goldman, Sachs & Co. and CIBC Oppenheimer Corp. (collectively, the "Initial Purchasers") $200,000,000 principal amount of its 11-1/2% Senior Notes Due 2008 (the "Notes"). The Notes are to be issued under an indenture (the "Indenture") to be dated as of July 7, 1998 between the Company and U.S. Trust Company of Texas, N.A., as trustee (the "Trustee"). The holders of Notes, including the Initial Purchasers, will be entitled to the benefits of a Registration Agreement (the "Registration Agreement") to be dated as of July 7, 1998 between the Company and the Initial Purchasers. Approximately $22.0 million of the net proceeds from the sale of the Notes (the "Initial Escrow Amount"), representing funds that, together with the proceeds from the investment thereof, will be sufficient to pay the first two interest payments on the Notes, are to be placed in a collateral account and pledged to the Trustee, for the benefit of the holders of the Notes and the Trustee (in its capacity as such under the Indenture) and the holders of the Existing Notes (as defined) and the Existing Notes Trustee (as defined) (in its capacity as such under the Existing Notes Indenture (as defined)) pursuant to the Escrow Agreement, to be dated as of July 7, 1998 (the "Escrow Agreement") among the Company, U.S. Trust Company of Texas, N.A., as Escrow Agent (the "Escrow Agent"), and the Trustee. 3 The sale of the Notes to the Initial Purchasers will be made without registration of the Notes under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon exemptions from the registration requirements of the Securities Act. The Initial Purchasers have advised the Company that the Initial Purchasers will offer and sell the Notes purchased by them hereunder in accordance with Section 4 of this agreement (this "Agreement" or the "Purchase Agreement") as soon as they deem advisable. In connection with the sale of the Notes, the Company has prepared a preliminary offering memorandum, dated June 12, 1998 (including any and all exhibits thereto, the "Preliminary Memorandum") and a final offering memorandum, dated June 29, 1998 (including any and all exhibits thereto, the "Final Memorandum"). Each of the Preliminary Memorandum and the Final Memorandum sets forth certain information concerning the Company and the Notes. The Company hereby confirms that it has authorized the use of the Preliminary Memorandum and the Final Memorandum, and any amendment or supplement thereto, in connection with the offer and sale of the Notes by the Initial Purchasers. Unless stated to the contrary, all references herein to the Final Memorandum are to the Final Memorandum at the Execution Time (as defined below) and are not meant to include any amendment or supplement subsequent to the Execution Time. 1. Representations and Warranties. The Company represents and warrants to each Initial Purchaser as set forth below in this Section 1. (a) The Preliminary Memorandum, at the date thereof, did not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. The Final Memorandum, at the date hereof, does not, and at the Closing Date (as defined below) (as it may have been amended and supplemented at the Closing Date) will not (and any amendment or supplement thereto, at the date thereof and at the Closing Date, will not), contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representation or warranty as to the information contained in or omitted from the Preliminary Memorandum or the Final Memorandum, or any amendment or supplement thereto, in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of the Initial Purchasers specifically for inclusion therein. (b) Neither the Company nor any of its Affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act ("Regulation D")), nor (assuming that the representations and warranties of the Initial Purchasers contained in Section 4 are true, 2 4 correct and complete) any person acting on its or their behalf has, directly or indirectly, made offers or sales of any security, or solicited offers to buy any security, under circumstances that would require the registration of the Notes under the Securities Act. (c) Neither the Company, nor any of its Affiliates, nor (assuming that the representations and warranties of the Initial Purchasers contained in Section 4 are true, correct and complete) any person acting on its or their behalf has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Notes in the United States. (d) Assuming that the representations and warranties of the Initial Purchasers contained in Section 4 are true, correct and complete, and assuming that the representations and warranties deemed to be made by non-U.S. persons and "qualified institutional buyers" (as defined in Rule 144A(a)(1) under the Securities Act) purchasing Notes are true and correct as of the Closing Date, and assuming compliance by such persons with their agreements deemed made by the Final Memorandum, it is not necessary in connection with the offer, sale and delivery of the Notes to the Initial Purchasers in the manner contemplated by, or in connection with the initial resale of such Notes by the Initial Purchasers in accordance with, this Agreement to register the Notes under the Securities Act or to qualify any indenture in respect of the Notes under the Trust Indenture Act of 1939 (the "TIA"). (e) Each of the Company, each subsidiary of the Company (a "Subsidiary") and Transmission Holdings, Inc., a Delaware corporation (the "LHC"), 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 Final Memorandum. Each of the Company, the Subsidiaries and the LHC (x) has all necessary authorizations, approvals, orders, licenses and permits of and from regulatory or governmental officials, bodies and tribunals, to own or lease its properties and to conduct its businesses as now conducted as described in the Final Memorandum and (y) is duly qualified to do business as a foreign corporation and is in good standing in all other jurisdictions where the ownership or leasing of its properties or the conduct of its businesses requires such qualification, except, in the case of clauses (x) and (y), where the failure to have such authorizations, approvals, orders, licenses and permits or to be so qualified could not reasonably be expected to have a material adverse effect on the business, condition (financial or otherwise), assets, results of operations or prospects of the Company and the Subsidiaries taken as a whole (a "Material Adverse Effect"). 3 5 (f) The Notes and the Exchange Securities (as defined in the Registration Agreement) have been duly authorized by the Company, and the Company has all requisite corporate power and authority to execute, issue and deliver the Notes and the Exchange Securities and to incur and perform its obligations provided for therein. The Notes, when executed, authenticated and issued in accordance with the terms of the Indenture (assuming the due authorization, execution and delivery of the Indenture by the Trustee) and when delivered against payment of the purchase price therefor as provided in this Agreement, will constitute the valid and binding obligations of the Company, entitled to the benefits of the Indenture, enforceable against the Company in accordance with the terms thereof; and the Exchange Securities, when executed, authenticated, issued and delivered by the Company in exchange for the Notes in accordance with the terms of the Registration Agreement, will constitute valid and binding obligations of the Company, entitled to the benefits of the Indenture, enforceable against the Company in accordance with the terms thereof; subject, in the case of each of the foregoing, to (a) applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and similar laws affecting creditors' rights and remedies generally and (b) general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) (clauses (a) and (b) being referred to herein as the "Enforceability Limitations"). (g) This Agreement has been, and, as of the Closing Date, the Registration Agreement, the Escrow Agreement and the Indenture will have been, duly authorized, executed and delivered by the Company, and upon such execution by the Company (assuming the due authorization, execution and delivery by parties thereto other than the Company) this Agreement constitutes, and, as of the Closing Date, the Registration Agreement, the Escrow Agreement and the Indenture will constitute, the valid and binding obligations of the Company, enforceable against the Company in accordance with the terms hereof or thereof, subject only to the Enforceability Limitations. (h) Upon the satisfaction and discharge of and termination of all commitments under the senior secured credit facility dated as of December 19, 1997, by and among the Company, its principal operating subsidiaries, the Agents named therein and the lenders party thereto from time to time (the "Senior Credit Facility"), and upon the release of all collateral securing the Senior Credit Facility, no Lien (as defined in the Indenture) will exist upon the Collateral (as defined in the Escrow Agreement) and no right or option to acquire the same will exist in favor of any other person or entity, except for (A) the pledge and security interest in favor of the Trustee for the benefit of the holders of the Notes and the Trustee (in its capacity as such under the Indenture), and (B) the pledge and security interest in favor of the trustee (the "Existing Senior Notes Trustee") for the 4 6 benefit of the holders of the 13% Senior Notes Due 2005 of the Company (the "Existing Senior Notes") and the Existing Senior Notes Trustee (in its capacity under the indenture relating to the Existing Senior Notes (the "Existing Senior Notes Indenture")), in each case to be created or provided for in the Escrow Agreement, which pledges and security interests shall constitute first priority perfected pledges and security interests in and to all of the Collateral. (i) No consent, authorization, approval, license or order of, or filing, registration or qualification with, any court or governmental or regulatory agency or body, domestic or foreign, is required for the performance by the Company of its obligations under this Agreement, the Registration Agreement, the Escrow Agreement and the Indenture, or for the consummation of the transactions contemplated hereby or thereby except such as may be required (A) in connection with the registration under the Securities Act of the Notes or the Exchange Securities pursuant to the Registration Agreement (including any filing with the NASD), (B) for the qualification of the Indenture under the TIA or (C) by state securities or "blue sky" laws in connection with the offer and sale of the Notes or the registration thereof or of the Exchange Securities pursuant to the Registration Agreement. (j) The issuance, sale and delivery of the Notes and the Exchange Securities, the execution, delivery and performance by the Company of this Agreement, the Registration Agreement, the Escrow Agreement and the Indenture, the consummation by the Company of the transactions contemplated hereby, thereby, and as described in the Final Memorandum and the compliance by the Company with the terms of the foregoing do not, and, at the Closing Date, will not conflict with or constitute or result in a breach or violation by the Company or the Subsidiaries of (A) upon the satisfaction and discharge of and termination of all commitments under the Senior Credit Facility and upon the release of all collateral securing the Senior Credit Facility, 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), 5 7 (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. (k) The Notes, the Exchange Securities, the Registration Agreement, the Escrow Agreement and the Indenture will each conform in all material respects to the descriptions thereof in the Final Memorandum. (l) The audited consolidated financial statements (and the related notes) and schedules of the Company and the Subsidiaries included in the Final Memorandum present fairly the consolidated financial position, results of operations and cash flows of the Company and the Subsidiaries, at the dates and for the periods to which they relate, and have been prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis, and the unaudited historical consolidated financial statements (and the related notes) of the Company and the Subsidiaries included in the Final Memorandum present fairly the consolidated financial position, results of operations and cash flows of the Company and the Subsidiaries, at the dates and for the periods to which they relate, and have been prepared in accordance with GAAP, 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 Final Memorandum, is an independent public accounting firm with respect to the Company and the Subsidiaries as required by the Securities Act and the Exchange Act and the rules and regulations of the Securities Exchange Commission ("SEC") thereunder (the "Act Regulations") and Rule 101 of the American Institute of Certified Public Accountants (the "AICPA"). (m) Since the respective dates as of which information is given in the Final Memorandum, 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 or of the LHC, 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. 6 8 (n) At the Closing Date, the Company will have the authorized and issued and outstanding capitalization set forth in the Final Memorandum under the caption "Capitalization"; the outstanding capital stock of the Company and each Subsidiary 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); and except as set forth on Schedule II, all of the outstanding shares of the Subsidiaries are owned beneficially and of record by the Company or by another Subsidiary, in each case, free and clear of all liens, encumbrances, equities or claims of any kind whatsoever or restrictions on transferability or voting. (o) None of the Company or any of the Subsidiaries or the LHC is (A) in violation of its Organizational Documents, (B) in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan agreement, note, lease, license, authorization, permit, certificate or other agreement or document to which the Company or any Subsidiary or the LHC is a party or by which it or any of them may be bound, or to which any of the assets or businesses of the Company or any Subsidiary or the LHC is subject, or (C) in violation of any applicable law, rule or regulation, or any judgment, order or decree of any domestic or foreign court with jurisdiction over the Company or any Subsidiary or the LHC, or other governmental or regulatory authority with jurisdiction over the Company or any Subsidiary or the LHC which, in the case of (B) or (C), could have a Material Adverse Effect. (p) Except as described or reflected in the Final Memorandum and for matters not required to be described in the Final Memorandum were the Final Memorandum a registration statement on Form S-1 filed under the Securities Act and the Act Regulations, there is not pending or, to the knowledge of the Company, threatened, any action, suit, proceeding, inquiry or investigation to which the Company or any Subsidiary or the LHC is a party, or to which the rights of entry or assets of the Company or any of the Subsidiaries or the LHC is subject, before, or brought by, any court or governmental or regulatory agency or body with jurisdiction over the Company or any Subsidiary or the LHC. (q) Each of the Company and the Subsidiaries and the LHC owns or possesses, or can acquire on reasonable terms, adequate patents, patent rights, licenses, trademarks, inventions, service marks, trade names, copyrights and know-how (including trade secrets and other proprietary or confidential information, systems or procedures, whether patented or unpatented) (collectively, "intellectual property") necessary to conduct the business now or, to its belief, proposed to be operated by it as described in 7 9 the Final Memorandum, except as described in the Final Memorandum 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 Final Memorandum, neither the Company nor any of the Subsidiaries has received any notice of infringement of or conflict with (or knows of any such infringement of or conflict with) asserted rights of others with respect to any of such intellectual property which, if such assertion of infringement or conflict were sustained, would result in any Material Adverse Effect. (r) Each of the Company, the Subsidiaries and the LHC has obtained all consents, approvals, orders, certificates, licenses, permits, franchises and other authorizations (collectively, the "Licenses") of and from, and has made all declarations and filings with, all governmental or regulatory authorities, including, without limitation, the Federal Communications Commission (the "FCC"), and all courts and other tribunals necessary to own, lease, license and use its assets and to conduct its businesses in the manner described in the Final Memorandum except where the failure to obtain such Licenses and make such declarations and filings would not have a Material Adverse Effect. Neither the Company nor any of the Subsidiaries nor the LHC, has received any notice of proceedings relating to the revocation or modification of, or denial of any application for, any License which, if the subject of an unfavorable decision, ruling or finding, would, singly or in the aggregate, have a Material Adverse Effect; the Company and each of the Subsidiaries and the LHC, have fulfilled and performed all of their obligations with respect to all Licenses possessed by any of them, except where the failure to so fulfill and perform would not, singly or in the aggregate, have a Material Adverse Effect; and no event has occurred which allows, or after notice or lapse of time, or both, would allow, revocation or termination thereof or result in any other material impairment of the rights of the holder of any such License, except where such revocation or termination would not, singly or in the aggregate, have a Material Adverse Effect; and the Licenses referred to above, including, to the actual knowledge of the Company, those held by the LHC, contain no restrictions on the Company or any of the Subsidiaries or the LHC that are not described in the Final Memorandum, except where such restrictions would not, singly or in the aggregate, have a Material Adverse Effect. (s) There are no legal, governmental or regulatory proceedings affecting the business of the Company or any Subsidiary or the LHC, including, without limitation, before the FCC, actions, suits, inquiries or investigations which, if applicable, would be required to be described in the Final Memorandum were the Final Memorandum a registration statement on Form S-1 filed under the Securities Act and the Act Regulations that are not described, nor any laws, rules, regulations, contracts or other documents 8 10 which, under such circumstances, would be required to be described in the Final Memorandum by the Securities Act or by the Act Regulations that have not been so described. (t) Each of the Company and the Subsidiaries and the LHC has filed all necessary income, franchise and other tax returns, and has paid any taxes assessed by the due date for payment thereof, except where such taxes are being contested in good faith or where the failure to file and pay such taxes would not have a Material Adverse Effect. (u) Except as described in the Final Memorandum, 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. (v) Except as disclosed in the Final Memorandum, there are, and upon the satisfaction and discharge of and termination of all commitments under the Senior Credit Facility and upon the release of all collateral securing the Senior Credit Facility there will be, no mortgages, charges or security arrangements nor any consensual encumbrances or other arrangements which restrict the ability of any Subsidiary (i) to pay dividends or make any other distributions on such Subsidiary's shares or to pay any indebtedness owed to the Company or any other Subsidiary, (ii) to make any loans or advances to, or investments in, the Company or any other Subsidiary or (iii) to transfer any of its property or assets to the Company or any other Subsidiary. (w) Except as disclosed in the Final Memorandum, to the knowledge of the Company, there are no defaults under any Right of Entry (as defined in the Final Memorandum) by any party thereunder or notices of termination or non-renewal with respect thereto, except for such defaults or notices as, individually or in the aggregate, cannot reasonably be expected to have a Material Adverse Effect. (x) The market-related data and estimates included in the Final Memorandum are based on or derived from independent sources which the Company believes to be reliable and accurate. 9 11 (y) The Notes satisfy the eligibility requirements of Rule 144A(d)(3) under the Securities Act. (z) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf has engaged in any directed selling efforts with respect to the Notes, and each of them has complied with the offering restrictions requirement of Regulation S ("Regulation S") under the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S. (aa) The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "Investment Company Act"), without taking account of any exemption arising out of the number of holders of the Company's securities. (bb) The Company has not paid or agreed to pay to any person any compensation for soliciting another to purchase the Notes or Exchange Securities of the Company (except as contemplated by this Agreement). (cc) The information provided by the Company pursuant to Section 5(h) hereof will not, at the date thereof, contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Any certificate signed by any two or more officers of the Company and delivered to an Initial Purchaser or to Cahill Gordon & Reindel ("Counsel for the Initial Purchasers") pursuant to the terms of this Agreement shall be deemed a representation and warranty by such Company to each Initial Purchaser as to the matters covered thereby. 2. Purchase and Sale. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company agrees to sell to each Initial Purchaser, and each Initial Purchaser agrees, severally and not jointly, to purchase from the Company, at a purchase price of 97.25% of the principal amount of the Notes, the aggregate principal amount of Notes set forth opposite such Initial Purchaser's name in Schedule I hereto. 3. Delivery and Payment. Delivery of and payment for the Notes shall be made at 10:00 AM, New York City time, on July 7, 1998, or such later date as the Initial Purchasers shall designate, which date and time may be postponed by agreement between the Initial Purchasers and the Company or as provided in Section 9 hereof (such date and time of 10 12 delivery and payment for the Notes being herein called the "Closing Date"). Delivery of the Notes shall be made to the Initial Purchasers for the respective accounts of the Initial Purchasers against payment by the Initial Purchasers of the purchase price thereof to or upon the order of the Company by federal funds check or checks or wire transfer payable in same day funds or such other manner of payment as may be agreed by the Company and the Initial Purchasers. Delivery of the Notes shall be made at such location as the Initial Purchasers shall reasonably designate at least one business day in advance of the Closing Date and payment for the Notes shall be made at the office of Cahill Gordon & Reindel, Counsel for the Initial Purchasers, Eighty Pine Street, New York, New York 10005. Certificates for the Notes shall be registered in such names and in such denominations as the Initial Purchasers may request not less than three full business days in advance of the Closing Date. The Company agrees to have the Notes available for inspection, checking and packaging by the Initial Purchasers in New York, New York, not later than 1:00 PM on the business day prior to the Closing Date. 4. Offering of Notes. Each Initial Purchaser, severally and not jointly, represents and warrants to and agrees with the Company that: (a) It has not offered or sold, and will not offer or sell, any Notes except (i) to those it reasonably believes to be qualified institutional buyers (as defined in Rule 144A under the Securities Act) and that, in connection with each such sale, it has taken or will take reasonable steps to ensure that the purchaser of such Notes is aware that such sale is being made in reliance on Rule 144A, or (ii) in accordance with the restrictions set forth in Exhibit B hereto. (b) Neither it nor any person acting on its behalf has made or will make offers or sales of the Notes in the United States by means of any form of general solicitation or general advertising (within the meaning of Regulation D) in the United States. (c) Such Initial Purchaser is a QIB, with such knowledge and experience in financial and business matters as are necessary in order to evaluate the merits and risks of an investment in the Notes. (d) Each of the Initial Purchasers understands that the Company and, for purposes of the opinions to be delivered to the Initial Purchasers pursuant to Section 6 hereof, counsel to the Company and Counsel for the Initial Purchasers will rely upon the accuracy and truth of the foregoing representations and hereby consents to such reliance. 11 13 5. Agreements. The Company agrees with each Initial Purchaser that: (a) The Company will furnish to each Initial Purchaser and to Counsel for the Initial Purchasers, without charge, during the period referred to in paragraph (c) below, as many copies of the Final Memorandum and any amendments and supplements thereto as it may reasonably request. The Company will pay the expenses of printing or other production of the Preliminary Memorandum, the Final Memorandum and any amendments or supplements thereto. (b) The Company will not amend or supplement the Preliminary Memorandum or the Final Memorandum without the prior written consent of the Initial Purchasers. (c) If at any time prior to the completion of the sale of the Notes by the Initial Purchasers (as determined by the Initial Purchasers), any event occurs as a result of which the Final Memorandum, as then amended or supplemented, would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it should be necessary to amend or supplement the Final Memorandum to comply with applicable law, the Company will promptly notify the Initial Purchasers of the same and, subject to the requirements of paragraph (b) of this Section 5, will prepare and provide to the Initial Purchasers pursuant to paragraph (a) of this Section 5 an amendment or supplement which will correct such statement or omission or effect such compliance. (d) The Company will arrange for the qualification of the Notes for sale by the Initial Purchasers under the laws of such jurisdictions as the Initial Purchasers may designate and will maintain such qualifications in effect so long as required for the sale of the Notes. The Company will promptly advise the Initial Purchasers of the receipt by the Company of any notification with respect to the suspension of the qualification of the Notes for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. (e) The Company will not, and will not permit any of its Affiliates to, resell any Notes that have been acquired by any of them. (f) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf will, directly or indirectly, make offers or sales of any security, or solicit offers to buy any security, under circumstances that would require the registration of the Notes under the Securities Act. 12 14 (g) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf will engage in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with any offer or sale of the Notes or the Exchange Securities in the United States. (h) So long as any of the Notes are "restricted securities" within the meaning of Rule 144(a)(3) under the Securities Act, the Company will, unless it becomes subject to and complies with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), provide to each holder of such restricted securities and to each prospective purchaser (as designated by such holder) of such restricted securities, upon the request of such holder or prospective purchaser, any information required to be provided by Rule 144A(d)(4) under the Securities Act. This covenant is intended to be for the benefit of the holders, and the prospective purchasers designated by such holders, from time to time of such restricted securities. (i) Neither the Company, nor any of its Affiliates, nor any person acting on its or their behalf will engage in any directed selling efforts with respect to the Notes, and each of them will comply with the offering restrictions requirement of Regulation S. Terms used in this paragraph have the meanings given to them by Regulation S. (j) The Company will not, until 90 days following the Closing Date, without the prior written consent of the Initial Purchasers, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, any debt securities (excluding commercial loans, purchase money security interests or other customary commercial financial arrangements obtained in the ordinary course of business and excluding securities issued to the seller of any business to the Company or any of its Subsidiaries as consideration for such sale) issued or guaranteed by the Company (other than the Notes), other than in connection with the Exchange Offer (as defined in the Final Memorandum). (k) In connection with any disposition of Notes pursuant to a transaction made in compliance with paragraph 6 of Exhibit A, the Company will reissue certificates evidencing such Notes without the legend referred to in paragraph 5 of Exhibit A (provided, in the case of a transaction made in compliance with paragraph 6(f) of Exhibit A, that the legal opinion referred to therein so permits). (l) Pursuant to the Escrow Agreement, the Company will deposit the Initial Escrow Amount into a collateral account, representing funds that, together with the proceeds from the investment thereof, will be sufficient to pay the first two interest payments on the Notes, and will take all actions necessary to pledge, assign and set over to the Trustee, for the benefit of the holders of the Notes and the Trustee (in its capacity 13 15 as such under the Indenture), and irrevocably grant to (A) the Trustee for the benefit of the holders of the Notes and the Trustee (in its capacity as such under the Indenture), and (B) the Existing Senior Notes Trustee for the benefit of the holders of the Existing Senior Notes and the Existing Senior Notes Trustee (in its capacity as such under the Existing Senior Notes Indenture) a first priority perfected security interest in, all of its respective right, title and interest in such collateral account, all funds held therein and all other Collateral held by the Escrow Agent or on their behalf, in order to secure the obligations and indebtedness of the Company under the Indenture, the Escrow Agreement and the Notes. 6. Conditions to the Obligations of the Initial Purchasers. The obligations of the Initial Purchasers to purchase the Notes shall be subject to the accuracy of the representations and warranties on the part of the Company contained herein at the date and time that this Agreement is executed and delivered by the parties hereto (the "Execution Time") and the Closing Date, to the accuracy of the statements of the Company made in any certificates pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder and to the following additional conditions: (a) The Company shall have furnished to the Initial Purchasers the opinion of Kronish, Lieb, Weiner & Hellman LLP, counsel for the Company, dated the Closing Date, in form and substance reasonably acceptable to the Initial Purchasers to the effect that: (i) The Company has been duly incorporated and is validly existing under the laws of the State of Delaware, with corporate power and authority to own, lease and operate its assets and properties and conduct its business as described in the Final Memorandum and to enter into and perform its obligations under this Agreement, the Indenture, the Registration Agreement and the Escrow Agreement; (ii) The Company has all requisite corporate power and authority to issue the Notes; (iii) The authorized, and to the knowledge of such counsel based solely upon a review of either the Company's stock ledger and corporate records or a certificate of the transfer agent, the issued and outstanding capital stock of the Company is as set forth in the Final Memorandum under the caption "Capitalization"; 14 16 (iv) Each of this Agreement, the Registration Agreement, the Escrow Agreement, the Notes, the Exchange Securities and the Indenture has been duly authorized by the Company; (v) No consent, approval, authorization, license, qualification or order of or filing or registration with, any court or governmental or regulatory agency or body of the United States or the State of New York or under the General Corporation Law of the State of Delaware is required for the execution and delivery by the Company of this Agreement, the Registration Agreement, the Escrow Agreement or the Indenture or for the issue and sale of the Notes or the Exchange Securities or the consummation by the Company of any of the transactions contemplated herein or therein, except such as may be required (A) in connection with the registration under the Securities Act of the Notes or the Exchange Securities, pursuant to the Registration Agreement, (B) the qualification of the Indenture under the TIA in connection with the registration of the Notes or the Exchange Securities pursuant to the Registration Agreement, (C) under the "blue sky" laws of any jurisdiction in connection with the purchase and distribution of the Notes by the Initial Purchasers (as to which such counsel need express no opinion), (D) under the Rules and Regulations of the FCC ("FCC Rules") or under any rules or regulations of any State regulatory commissions ("State Rules") responsible for the regulation of cable/telecommunications services (as to which counsel need express no opinion) and (E) such as have been obtained or made, as the case may be; (vi) The issuance, sale and delivery of the Notes and the Exchange Securities, the execution, delivery and performance by the Company of this Agreement, the Registration Agreement, the Escrow Agreement and the Indenture (in each case assuming due authorization and execution by each party other than the Company) and the consummation by the Company of the transactions contemplated hereby and thereby and the compliance by the Company with the terms of the foregoing do not, and, at the Closing Date, will not, conflict with or constitute or result in a breach or violation by the Company or any of the Subsidiaries of (A) any provision of the Certificate of Incorporation or By-laws of the Company, (B) upon the satisfaction and discharge of and termination of all commitments under the Senior Credit Facility and upon the release of all collateral securing the Senior Credit Facility, 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 15 17 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 (except 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 Final Memorandum under the headings "Offering Memorandum Summary -- The Offering," "Description of the Notes," and "Exchange Offer; Registration Rights," insofar as such statements purport to summarize certain provisions of the Notes, the Exchange Securities, the Registration Agreement, the Escrow Agreement and the Indenture provide a fair summary of such provisions of such agreements and instruments; (viii) Each of the Indenture, the Registration Agreement and the Escrow Agreement (assuming due authorization and execution by each party thereto other than the Company) constitutes a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except (a) with respect to the Indenture and the Registration Agreement, the Enforceability Limitations, and (b) with respect to the Registration Agreement and the Escrow Agreement, that such counsel expresses no opinion regarding the validity or enforceability of the indemnification and contribution provisions contained in Sections 7 and 5, respectively, thereof; (ix) Each of the Notes, when executed and authenticated in accordance with the provisions of the Indenture and delivered and paid for in accordance with the terms of this Agreement, and the Exchange Securities when executed, authenticated and delivered in exchange for the Notes in accordance with the terms of the Indenture and the Registration Agreement, will be entitled to the benefits of the Indenture and will be valid and binding obligations of the Company, enforceable in accordance with its terms except as the enforceability thereof may be limited by the Enforceability Limitations; (x) The Escrow Agreement has been duly authorized, executed and delivered by the Company; 16 18 (xi) The Escrow Agreement creates a valid security interest in favor of the Trustee in all right, title and interest of the Company in and to the Escrow Account and the Collateral (such counsel need not express an opinion as to the perfection or priority of the security interest in the Collateral created by the Escrow Agreement); (xii) Assuming that the factual representations and warranties of the Company contained in Section 1(b) and 1(c) and that the representations and warranties of the Initial Purchasers contained in Section 4 of this Agreement are true, correct and complete, and assuming compliance by the Initial Purchasers with their covenants in Section 4 hereof, and assuming that the representations and warranties deemed made by "qualified institutional buyers" and non-U.S. persons purchasing Notes from the Initial Purchasers are true and correct as of the Closing Date, it is not necessary in connection with the offer, sale and delivery of the Notes to the Initial Purchasers under, or in connection with the initial resale of the Notes by the Initial Purchasers in accordance with, this Agreement for the Company to register the Notes under the Securities Act or to qualify the Indenture under the TIA; (xiii) Neither the Company nor any of the Subsidiaries is an "investment company" or a company "controlled by" or required to register as an investment company as such terms are defined in the Investment Company Act of 1940, as amended, and the rules and regulations thereunder; (xiv) When the Notes are issued and delivered pursuant to this Agreement, such Notes will not be of the same class (within the meaning of Rule 144A) as securities of the Company which are listed on a national securities exchange registered under Section 6 of the Exchange Act or quoted in a U.S. automated inter-dealer quotation system; and (xv) The statements in the Final Memorandum under the caption "Certain Federal Income Tax Considerations" provide a fair summary of the material tax consequences of owning Notes. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent certified public accountants of the Company and the Initial Purchasers and their representatives at which the contents of the Final Memorandum and related matters were discussed and, although 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 17 19 in the Final Memorandum (except as indicated above), on the basis of the foregoing, they have no reason to believe that at the Execution Time and the Closing Date the Final Memorandum contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the laws of the State of New York, the general corporate laws of the State of Delaware or the laws of the United States, to the extent they deem proper and specified in such opinion, upon the opinion of other counsel of good standing whom they believe to be reliable and who are satisfactory to Counsel for the Initial Purchasers, including Goldberg, Godles, Weiner & Wright and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials. All references in this Section 6(a) to the Final Memorandum shall be deemed to include any amendment or supplement thereto at the Closing Date. (b) The Company shall have furnished to the Initial Purchasers the opinion of Michael Katzenstein, Vice President, Legal Affairs and General Counsel of the Company, dated the Closing Date, in form and substance reasonably satisfactory to the Initial Purchasers, to the effect that: (i) The Company has been duly incorporated and each of the Company and the Subsidiaries and the LHC are 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 Final Memorandum, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification wherein it owns or leases material properties or conducts material business, except where the failure to so qualify would not have a Material Adverse Effect; (ii) All the outstanding shares of capital stock of the Company and the LHC and each Subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, upon satisfaction and discharge of and termination of all commitments under the Senior Credit Facility and the release of all collateral securing the Senior Credit Facility, all outstanding shares of capital stock of the Subsidiaries are owned by the Company either directly or through other Subsidiaries free and clear of any security interests, liens or encumbrances; 18 20 (iii) The issuance, sale and delivery of the Notes and the Exchange Securities, the execution, delivery and performance by the Company of this Agreement, the Registration Agreement, the Escrow Agreement and the Indenture (in each case assuming due authorization and execution by each party other than the Company) and the consummation by the Company of the transactions contemplated hereby and thereby and the compliance by the Company with the terms of the foregoing do not, and, at the Closing Date, will not, conflict with or constitute or result in a breach or violation by the Company or any of the Subsidiaries of (A) any provision of the Certificate of Incorporation or By-laws of the Company or any of the Subsidiaries, (B) upon satisfaction and discharge of and termination of all commitments under the Senior Credit Facility and the release of all collateral securing the Senior Credit Facility, any of the terms or provisions of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) by the Company or any of the Subsidiaries, or give rise to any right to accelerate the maturity or require the prepayment of any indebtedness under, or result in the creation of imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries under any material agreements or instruments known to such counsel or (C) any order, decree or judgment known to such counsel to be applicable to the Company or any Subsidiary, of any court or governmental or regulatory agency or body or arbitrator in the United States or the States of New York or Delaware; (iv) The statements in the Final Memorandum under the headings "Risk Factors -- Risks Associated with Rights of Entry", "-- Use of the Name OpTel" 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 or the LHC is a party or to which the business of the Company or any of the Subsidiaries or the LHC are subject that are not described or reflected therein as required, and no such proceedings have been threatened against the Company or any of the Subsidiaries or the LHC or with respect to any of their assets; and there is no material contract, agreement or other document not described or referred to in the Final Memorandum; 19 21 (vi) To such counsel's knowledge, (i) no application, action, complaint, investigation or proceeding is pending or directly threatened that is likely to result in the denial of any pending application for the renewal, modification or assignment of any of the licenses, special temporary authorizations, conditional licenses, construction permits and other authorizations issued by the FCC in favor of the Company and the Subsidiaries and the LHC (collectively, "FCC Authorizations") for the conduct of their business as described in the Final Memorandum, and (ii) except for proceedings of general applicability, there are no proceedings or actions pending that could result in the revocation, materially adverse modification or suspension of any of the FCC Authorizations, the issuance of a cease and desist order, or the imposition of any administrative or judicial sanction, including but not limited to a monetary forfeiture, except in each case as disclosed in the Final Memorandum 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 Final Memorandum or for such reports the non-filing or failure to timely file of which individually or in the aggregate would not have a Material Adverse Effect. In addition, such counsel shall state that he has no reason to believe that at the Execution Time and the Closing Date the Final Memorandum contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. In rendering such opinion, such counsel may rely as to matters involving the application of laws of any jurisdiction other than the laws of the State of New York or the laws of the United States, to the extent 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 Initial Purchasers. (c) The Company shall have furnished to the Initial Purchasers the opinion of Goldberg, Godles, Weiner & Wright, FCC counsel for the Company, dated the Closing Date, in form and substance reasonably satisfactory to the Initial Purchasers, to the effect that: 20 22 (i) To such counsel's knowledge, the Company and the Subsidiaries and the LHC are in compliance in all material respects with each of the FCC Authorizations for the conduct of their business as described in the Final Memorandum and all such FCC Authorizations represent all FCC Authorizations necessary for the conduct of the business of the Company and the Subsidiaries as presently conducted and described in the Final Memorandum; (ii) To 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, the Registration Agreement, the Escrow Agreement, the Indenture, the Notes, the Exchange Securities and the transactions contemplated therein, did not or will not result in a violation of the Communications Act, the Cable Acts and the Telecommunications Act or any order, rule or regulation of the FCC; (v) No consent, approval, authorization, order or registration of or with the FCC is required under the Communications Act, the Cable Acts, the Telecommunications Act or the rules and regulations of the FCC for the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement, the Registration Agreement, the Escrow Agreement, the Indenture, the Notes or the Exchange Securities; 21 23 (vi) Other than matters described in the Final Memorandum and except as to any other matters relating to the multichannel television and telecommunications industries in general, such counsel does not know of any proceedings threatened or pending before the FCC against or involving the properties, businesses or franchises of the Company which could reasonably be expected to have a Material Adverse Effect; and (vii) The statements in the Final Memorandum under the captions "Risk Factors -- Regulation" and "-- Risks Associated with Rights of Entry" and "Business -- Regulation" insofar as such statements summarize applicable provisions of the Communications Act, the Cable Acts and the Telecommunications Act and the published orders, rules and regulations of the FCC promulgated thereunder are accurate summaries in all material respects of the provisions purported to be summarized under such captions in the Final Memorandum; and the statutes and regulations summarized in such captions are statutes and regulations enforced or promulgated by the FCC that are material to the Company's business as described in the Final Memorandum. In rendering such opinion, 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 Initial Purchasers in all material respects and attached to such counsel's opinion. In addition, counsel may note that item (v) above is qualified by the requirement to file certain corporate and loan instruments with the FCC within 30 days of the Closing Date. (d) The Initial Purchasers shall have received from Counsel for the Initial Purchasers such opinion or opinions, dated the Closing Date, with respect to the issuance and sale of the Notes, the Final Memorandum and other related matters as the Initial Purchasers may reasonably require, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters. (e) The Company shall have furnished to the Initial Purchasers a certificate of the Company, signed by the Chairman of the Board or the President and the principal financial or accounting officer of the Company, dated the Closing Date, to the effect that the signers of such certificate have carefully examined the Final Memorandum, any amendment or supplement to the Final Memorandum and this Agreement and that: 22 24 (i) the representations and warranties of the Company in this Agreement are true and correct in all material respects on and as of the Closing Date with the same effect as if made on the Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date; and (ii) since the date of the most recent financial statements included in the Final Memorandum, there has been no material adverse change in the condition (financial or other), assets, results of operations, business or prospects of the Company and the Subsidiaries, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated by the Final Memorandum (exclusive of any amendment or supplement thereto). (f) At the Execution Time and at the Closing Date, Deloitte & Touche LLP shall have furnished to the Initial Purchasers a letter or letters, dated respectively as of the Execution Time and as of the Closing Date, in form and substance satisfactory to the Initial Purchasers, confirming that they are independent accountants within the meaning of the Securities Act and the Exchange Act and the applicable rules and regulations of the SEC thereunder and Rule 101 of the Code of Professional Conduct of the AICPA and stating in effect that: (i) in their opinion the audited financial statements included in the Final Memorandum and reported on by them comply in form in all material respects with the applicable accounting requirements of the Exchange Act and the related published rules and regulations thereunder; (ii) on the basis of a reading of the latest unaudited financial statements made available by the Company and the Subsidiaries; their limited review in accordance with the standards established by the AICPA of the unaudited interim financial information as indicated in their report included in the Final Memorandum; carrying out certain specified procedures (but not an examination in accordance with generally accepted auditing standards) which would not necessarily reveal matters of significance with respect to the comments set forth in such letter; a reading of the minutes of the meetings of the stockholders, directors and the audit and compensation committees of the Company and the Subsidiaries; and inquiries of certain officials of the Company who have responsibility for financial and accountings matters of the Company and the Subsidiaries as to transactions and events subsequent to August 31, 1997, nothing came to their attention which caused them to believe that: 23 25 (1) any unaudited financial statements included in the Final Memorandum do not comply in form in all material respects with applicable accounting requirements and with the published rules and regulations of the Securities and Exchange Commission with respect to financial statements included or incorporated in quarterly reports on Form 10-Q under the Exchange Act; and said unaudited financial statements are not, in all material respects, in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements included in the Final Memorandum; or (2) with respect to the period subsequent to February 28, 1998, there were any changes, at a specified date not more than five business days prior to the date of the letter, in the total long-term debt of the Company and the Subsidiaries or capital stock of the Company or decreases in the stockholders' equity of the Company as compared with the amounts shown on the February 28, 1998 consolidated balance sheet included in the Final Memorandum, or for the period from March 1, 1998 to such specified date there were any decreases, as compared with the period from comparable period of fiscal 1997, in net revenues or increases in loss before income taxes or in total net loss of the Company and the Subsidiaries, except in all instances for changes or decreases set forth in such letter, in which case the letter shall be accompanied by an explanation by the Company as to the significance thereof unless said explanation is not deemed necessary by the Initial Purchasers; or (3) the information included under the headings "Selected Historical Consolidated Financial and Operating Data" is not in conformity with the disclosure requirements of Regulation S-K; and (iii) they have performed certain other specified procedures as a result of which they determined that certain information of an accounting, financial or statistical nature (which is limited to accounting, financial or statistical information derived from the general accounting records of the Company and the Subsidiaries) set forth in the Final Memorandum, including the information set forth under the captions "Summary Consolidated Financial and Operating Data", "Capitalization" and "Selected Historical Consolidated Financial and Operating Data" in the Final Memorandum, agrees with the accounting records of the Company and the Subsidiaries, excluding any questions of legal interpretation; 24 26 (iv) in addition, they shall provide such additional statements with respect to any unaudited financial statements included in the Final Memorandum of persons other than the Company as shall reasonably be requested by the Initial Purchasers. All references in Section 6(f) to the Final Memorandum shall be deemed to include any amendment or supplement thereto at the date of the letter. (g) Subsequent to the Execution Time, or if earlier, the dates as of which information is given in the Final Memorandum, there shall not have been (i) any change or decrease specified in the letter or letters referred to in paragraph (d) of this Section 6 or (ii) any change, or any development involving a prospective change, in or affecting the business or properties of the Company and the Subsidiaries or the LHC the effect of which, in any case referred to in clause (i) or (ii) above, is, in the judgment of the Initial Purchasers, so material and adverse as to make it impractical or inadvisable to market the Notes as contemplated by the Final Memorandum. (h) Each of the Indenture, the Escrow Agreement and the Registration Agreement shall have been executed and delivered by each of the parties thereto. (i) The Company shall have taken any and all actions reasonably required to establish the Escrow Account with the Escrow Agent and to prepare to file appropriate financing statements in each of the offices where such filing is necessary or, in the opinion of the Initial Purchasers, desirable to perfect the lien in favor of the Trustee and the Existing Senior Notes Trustee created by the Escrow Agreement. (j) The Senior Credit Facility shall have been fully satisfied and discharged and all commitments thereunder terminated pursuant to the terms thereof, and all collateral securing the Senior Credit Facility shall have been released, in each case evidenced by a "payoff" letter satisfactory in form and substance to the Initial Purchasers. (k) Prior to the Closing Date, the Company shall have furnished to the Initial Purchasers such further information, certificates and documents as the Initial Purchasers may reasonably request. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Initial Purchasers and Counsel for the Initial Purchasers, this Agreement and all obligations of the Initial Purchasers hereunder may be cancelled at, or at any time prior to, the Closing Date by the Initial Purchasers. Notice of such cancellation shall be given to the Company in writing or by telephone or telegraph confirmed in writing. 25 27 The documents required to be delivered by this Section 6 will be delivered at the office of Counsel for the Initial Purchasers, at Eighty Pine Street, New York, New York 10005, a reasonable time prior to the Closing Date. 7. Reimbursement of Expenses. If the sale of the Notes provided for herein is not consummated because any condition to the obligations of the Initial Purchasers set forth in Section 6 hereof is not satisfied, because of any termination pursuant to Section 10 hereof or because of any refusal, inability or failure on the part of the Company to perform any agreement herein or comply with any provision hereof other than by reason of a default by any of the Initial Purchasers in payment for the Notes on the Closing Date, the Company will reimburse the Initial Purchasers severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the proposed purchase and sale of the Notes. 8. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless each Initial Purchaser, the directors, officers, employees and agents of each Initial Purchaser and each person who controls any Initial Purchaser within the meaning of either the Securities Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Securities Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Preliminary Memorandum, the Final Memorandum or any information provided by the Company to any holder or prospective purchaser of Notes pursuant to Section 5(h), or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Memorandum or the Final Memorandum, or in any amendment thereof or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Initial Purchasers specifically for inclusion therein; and provided further, that the Company will not be liable in any such case to 26 28 the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Preliminary Memorandum which is corrected or contained, as the case may be, in the Final Memorandum and the Initial Purchaser fails to deliver the Final Memorandum. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Initial Purchaser severally agrees to indemnify and hold harmless the Company, its directors, its officers, and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Initial Purchaser, but only with reference to written information relating to such Initial Purchaser furnished to the Company by or on behalf of such Initial Purchaser specifically for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any amendment or supplement thereto). This indemnity agreement will be in addition to any liability which any Initial Purchaser may otherwise have. The Company acknowledges that the statements set forth in the last paragraph of the cover page and in the fifth, eighth, tenth, eleventh and last paragraphs under the heading "Plan of Distribution" in the Preliminary Memorandum and the Final Memorandum constitute the only information furnished in writing by or on behalf of the Initial Purchasers for inclusion in the Preliminary Memorandum or the Final Memorandum (or in any amendment or supplement thereto). (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ one additional and separate counsel (and one additional and separate local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the 27 29 indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company and the Initial Purchasers agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company and one or more of the Initial Purchasers may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company and by the Initial Purchasers from the offering of the Notes; provided, however, that in no case shall any Initial Purchaser (except as may be provided in any agreement among the Initial Purchasers relating to the offering of the Notes) be responsible for any amount in excess of the purchase discount or commission applicable to the Notes purchased by such Initial Purchaser hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company and the Initial Purchasers shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and of the Initial Purchasers in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the offering (before deducting expenses), and benefits received by the Initial Purchasers shall be deemed to be equal to the total purchase discounts and commissions received by the Initial Purchasers from the Company in connection with the purchase of the Notes hereunder. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or the Initial Purchasers. The Company and the Initial Purchasers agree that it would not be just and equitable if contributions were determined by pro rata allocation or any other method of allocation which does not take account of the equitable 28 30 considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person who controls an Initial Purchaser within the meaning of either the Securities Act or the Exchange Act and each director, officer, employee and agent of an Initial Purchaser shall have the same rights to contribution as such Initial Purchaser, and each person who controls the Company within the meaning of either the Securities Act or the Exchange Act and each officer and director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). 9. Default by an Initial Purchaser. If any one or more Initial Purchasers shall fail to purchase and pay for any of the Notes agreed to be purchased by such Initial Purchaser hereunder and such failure to purchase shall constitute a default in the performance of its or their obligations under this Agreement, the remaining Initial Purchasers shall be obligated severally to take up and pay for (in the respective proportions which the aggregate principal amount of Notes set forth opposite their names in Schedule I hereto bears to the aggregate principal amount of Notes set forth opposite the names of all the remaining Initial Purchasers) the Notes which the defaulting Initial Purchaser or Initial Purchasers agreed but failed to purchase; provided, however, that in the event that the aggregate principal amount of Notes which the defaulting Initial Purchaser or Initial Purchasers agreed but failed to purchase shall exceed 10% of the aggregate principal amount of Notes set forth in Schedule I hereto, the remaining Initial Purchasers shall have the right to purchase all, but shall not be under any obligation to purchase any, of the Notes, and if such non-defaulting Initial Purchasers do not purchase all the Notes, this Agreement will terminate without liability to any non-defaulting Initial Purchaser or the Company. In the event of a default by any Initial Purchaser as set forth in this Section 9, the Closing Date shall be postponed for such period, not exceeding seven days, as the Initial Purchasers shall determine in order that the required changes in the Final Memorandum or in any other documents or arrangements may be effected. Nothing contained in this Agreement shall relieve any defaulting Initial Purchaser of its liability, if any, to the Company or any non-defaulting Initial Purchaser for damages occasioned by its default hereunder. 10. Termination. This Agreement shall be subject to termination in the absolute discretion of the Initial Purchasers, by notice given to the Company prior to delivery of and payment for the Notes, if prior to such time (i) trading in securities generally on the New York Stock Exchange shall have been suspended or limited or minimum prices shall have been established on such Exchange, (ii) a banking moratorium shall have been declared either by Federal or New York State authorities or (iii) there shall have occurred any outbreak or escalation of hostilities, declaration by the United States of a national emergency or war or other 29 31 calamity or crisis the effect of which on financial markets is such as to make it, in the judgment of the Initial Purchasers, impracticable or inadvisable to proceed with the offering or delivery of the Notes as contemplated by the Final Memorandum. 11. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of the Initial Purchasers set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Initial Purchasers or the Company or any of the officers, directors or controlling persons referred to in Section 8 hereof, and will survive delivery of and payment for the Notes. The provisions of Sections 7 and 8 hereof shall survive the termination or cancellation of this Agreement. 12. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to the Initial Purchasers, will be mailed, delivered or telegraphed and confirmed to them, care of Salomon Brothers Inc, at 388 Greenwich Street, New York, New York, 10013, Attention: General Counsel; or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 1111 W. Mockingbird Lane, Dallas, Texas 75247, Attention: Michael Katzenstein, Vice President, Legal Affairs and General Counsel. 13. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 8 hereof, and, except as expressly set forth in Section 5(h) hereof, no other person will have any right or obligation hereunder. 14. APPLICABLE LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW THEREOF. 15. Business Day. For purposes of this Agreement, "business day" means each Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in The City of New York, New York are authorized or obligated by law, executive order or regulation to close. 16. Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original, but all such counterparts will together constitute one and the same instrument. [Signature Pages Follow] 30 32 If the foregoing in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicate hereof, whereupon this Purchase Agreement and your acceptance shall represent a binding agreement between the Company and the Initial Purchasers. Very truly yours, OPTEL, INC. By: ------------------------------ Name: Title: By: ------------------------------ Name: Title: 31 33 The foregoing Purchase Agreement is hereby confirmed and accepted as of the date first above written. SALOMON BROTHERS INC GOLDMAN, SACHS & CO. CIBC OPPENHEIMER CORP. By: Salomon Brothers, Inc By: ------------------------------ Name: Title: 32 34 SCHEDULE I
Principal Amount Initial Purchasers of Notes ------------------ ---------------- Salomon Brothers . . . . . . . . . . . . . . . $140,000,000 Goldman, Sachs & Co. . . . . . . . . . . . . . 50,000,000 CIBC Oppenheimer Corp. . . . . . . . . . . . . 10,000,000 Total . . . . . . . . $200,000,000
33 35 EXHIBIT A Non-Distribution Letter for U.S. Purchasers [Date] Salomon Brothers Inc Goldman, Sachs & Co. CIBC Oppenheimer Corp. c/o Salomon Brothers Inc Seven World Trade Center New York, New York 10048 OpTel, Inc. 1111 W. Mockingbird Lane Dallas, Texas 75247 Re: Purchase of Notes (the "Notes") of OpTel, Inc. (the "Company") Ladies and Gentlemen: In connection with our purchase of the Notes we confirm that: 1. We understand that the Notes are not being and will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and are being sold to us in a transaction that is exempt from the registration requirements of the Securities Act. 2. We acknowledge that (a) neither the Company, nor the Initial Purchasers (as defined in the Offering Memorandum dated June 29, 1998 relating to the Notes (the "Final Memorandum")) nor any person acting on behalf of the Company of the Initial Purchasers has made any representation to us with respect to the Company or the offer or sale of any Notes and (b) any information we desire concerning the Company and the Notes or any other matter relevant to our decision to purchase the Notes (including a copy of the Final Memorandum) is or has been made available to us. 34 36 3. We have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the Notes, and we are (or any account for which we are purchasing under paragraph 4 below is) an institutional "accredited investor" (within the meaning of Rule 501(a)(1), (2), (3) or (7) or Regulation D under the Securities Act) able to bear the economic risk of investment in the Notes. 4. We are acquiring the Notes for our own account (or for accounts as to which we exercise sole investment discretion and have authority to make, and do make, the statements contained in this letter) and not with a view to any distribution of the Notes, subject, nevertheless, to the understanding that the disposition of our property will at all times be and remain within our control. 5. We understand that (a) the Notes will be in registered form only and that any certificates delivered to us in respect of the Notes will bear a legend substantially to the following effect: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE ISSUER THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE ISSUANCE HEREOF (OR A PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS AN AFFILIATE OF THE ISSUER AT ANYTIME DURING THE THREE MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE ISSUER, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A (AS INDICTED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (3) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), AND, IF SUCH TRANSFER IS BEING EFFECTED BY CERTAIN TRANSFERORS SPECIFIED IN THE INDENTURE PRIOR TO THE EXPIRATION OF THE "40 DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(c)(3) OF REGULATIONS S UNDER THE 35 37 SECURITIES ACT), A CERTIFICATE WHICH MAY BE OBTAINED FORM THE ISSUER OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE ISSUER AND THE TRUSTEE, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE 501(a)(1), (2) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM ATTACHED TO THIS SECURITY IS DELIVERED BY THE TRANSFEREE TO THE ISSUER AND THE TRUSTEE (PROVIDED THAT CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS SECURITY PURSUANT TO THIS CLAUSE (4) PRIOR TO THE EXPIRATION OF THE "40 DAY RESTRICTED PERIOD" (WITHIN THE MEANING OF RULE 903(c)(3) OF REGULATION S UNDER THE SECURITIES ACT)), (5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT, OR (6) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. AN INSTITUTIONAL "ACCREDITED INVESTOR" HOLDING THIS SECURITY AGREES IT WILL FURNISH TO THE ISSUER AND THE TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER THEREOF, BY PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE ISSUER THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN ACCREDITED INVESTOR AND THAT IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (o)(2) OF RULE 902) UNDER REGULATION S UNDER THE SECURITIES ACT. and (b) the Company has agreed to reissue such certificates without the foregoing legend only in the event of a disposition of the Notes in accordance with the provisions of paragraph 6 below (provided, in the case of a disposition of the Notes in accordance with paragraph 6(f) below, that the legal opinion referred to in such paragraph so permits), or at our request at such time as we would be permitted to dispose of them in accordance with paragraph 6(a) below. 36 38 6. We agree that in the event that at some future time we wish to dispose of any of the Notes, we will not do so unless such disposition is made in accordance with any applicable securities laws of any state of the United States and: (a) the Notes are sold in compliance with Rule 144(k) under the Securities Act; or (b) the Notes are sold in compliance with Rule 144A under the Securities Act; or (c) the Notes are sold in compliance with Rule 904 of Regulation S under the Securities Act; or (d) the Notes are sold pursuant to an effective registration statement under the Securities Act; or (e) the Notes are sold to the Company or an affiliate (as defined in Rule 501(b) of Regulation D) of the Company; or (f) the Notes are disposed of in any other transaction that does not require registration under the Securities Act, and we theretofore have furnished to the Company or its designee an opinion of counsel experienced in securities law matters to such effect or such other documentation as the Company or its designee may reasonably request. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Very truly yours, By: ----------------------------- (Authorized Officer) 37 39 EXHIBIT B Selling Restrictions for Offers and Sales Outside the United States (1)(a) The Notes have not been and will not be registered under the Securities Act and may not be offered or sole within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Securities Act or pursuant to an exemption from the registration requirements of the Securities Act. Each Initial Purchaser represents and agrees that, except as otherwise permitted by Section 4(a)(i) or (ii) of the Agreement to which this is an exhibit, it has offered and sold the Notes, and will offer and sell the Notes, (i) as part of their distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the offering and the Closing Date, only in accordance with Rule 903 of Regulation S under the Securities Act. Accordingly, each Initial Purchaser represents and agrees that neither it, nor any of its affiliates nor any person acting on its or their behalf has engaged or will engage in any directed selling efforts with respect to the Notes, and that it and they have complied and will comply with the offering restrictions requirement of Regulation S. Each Initial Purchaser agrees that, at or prior to the confirmation of sale of Notes (other than a sale of Notes pursuant to Section 4(a)(i) or (ii) of the Agreement to which this is an exhibit), it shall have sent to each distributor, dealer or person receiving a selling concession, fee or other renumeration that purchasers Notes from it during the restricted period a confirmation or notice to substantially the following effect: "The Securities covered hereby have not been registered under the U.S. Securities Act of 1933 (the "Securities Act") and may not be offered or sole within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution at anytime or (ii) otherwise until 40 days after the later of the commencement of the offering and [ ], 1998, except in either case in accordance with Regulation S or Rule 144 under the Securities Act. Terms used above have the meanings given to them by Regulation S." (b) Each Initial Purchaser also represents and agrees that it has not entered and will not enter into any contractual arrangement with any distributor with respect to the distribution of the Notes, except with its affiliates or with the prior written consent of the Company. (c) Terms used in this section have the meanings given to them by Regulation S. 38 40 (2) Each Initial Purchaser represents and agrees that (i) it has not offered or sold, and will not offer or sell, in the United Kingdom, by means of any document, any Notes other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or as agent (except in circumstances which do not constitute an offer to the public within the meaning of the Companies Act 1985 of Great Britain), (ii) it has complied and will comply with all applicable provisions of the Financial Services Act of 1986 of the United Kingdom with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issue of the Notes to a person who is of a kind described in Article 9(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1988 or is a person to whom the document may otherwise lawfully be issued or passed on. (3) The Notes are not being and may not be sold directly or indirectly in Canada or to residents of Canada except by way of a private placement in compliance with applicable securities laws. 39 41 Annex 1 [SALOMON BROTHERS INC LETTERHEAD] [ ], 1998 Deloitte & Touche LLP 2200 Ross Avenue Suite 1600 Dallas, Texas 75201 Ladies and Gentlemen: Reference is hereby made to the Purchase Agreement (the "Purchase Agreement") dated June 29, 1998 among the undersigned and the other parties named in Schedule I hereto (the "Initial Purchasers"), and OpTel, Inc. (the "Company") pursuant to which the Company will sell to the Initial Purchasers, and the Initial Purchases will purchase from the Company, $200,000,000 principal amount of the Company's [ ]% Senior Notes Due 2008 (the "Securities"). Pursuant to Section 6(f) of the Purchase Agreement, you are required to deliver certain letters, in form and substance satisfactory to us, setting forth the matters described in such Section (the "Auditor's Letters"). In connection with your delivery of the Auditor's Letters, we confirm to you that: (i) we are knowledgeable with respect to the due diligence review process that would be performed if this placement of Securities were being registered pursuant to the Securities Act of 1933, as amended (the "Act"); and (ii) we will be reviewing certain information relating to the Company that will be included or incorporated by reference in the Final Memorandum (as defined in the Purchase Agreement) and this review process, applied to the information relating to the Company, will be substantially consistent with the due diligence review process that we would perform if this placement of Securities were being registered pursuant to the Act. In accordance with the foregoing, we hereby request that you deliver to us the Auditor's Letters. 40 42 This letter is being furnished to you solely for the purpose of obtaining the Auditor's Letters and may not be relied upon or used by you for any other purpose, or given or shown to any other person, without our prior written consent. Very truly yours, SALOMON BROTHERS INC By: ------------------------------ Name: Title: 41 EX-4.15 3 REGISTRATION AGREEMENT 1 EXHIBIT 4.15 OPTEL, INC. 11-1/2% SENIOR NOTES DUE 2008 REGISTRATION AGREEMENT New York, New York July 7, 1998 SALOMON BROTHERS INC GOLDMAN, SACHS & CO. CIBC OPPENHEIMER CORP. c/o Salomon Brothers Inc Seven World Trade Center New York, New York 10048 Ladies and Gentlemen: OpTel, Inc., a Delaware corporation (the "Company"), proposes to issue and sell (such issuance and sale, the "Initial Placement") to you (the "Initial Purchasers"), upon the terms set forth in a purchase agreement dated as of June 29, 1998 (the "Purchase Agreement"), $200,000,000 aggregate principal amount of its 11-1/2% Senior Notes Due 2008 (the "Securities"). In satisfaction of a condition to your obligations under the Purchase Agreement, the Company agrees with you, (i) for your benefit and the benefit of the other Initial Purchasers and (ii) for the benefit of the holders from time to time of the Securities (including you and the other Initial Purchasers) (each of the foregoing a "Holder" and together the "Holders"), as follows: 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Affiliate" of any specified person means any other person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Closing Date" has the meaning set forth in the Purchase Agreement. 2 -2- "Commission" means the Securities and Exchange Commission. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Exchange Offer Registration Period" means the period ending on the earlier of (x) one (1) year following the consummation of the Registered Exchange Offer, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement or (y) when all Exchange Securities received by Exchanging Dealers have been sold or (z) if there are no Exchange Securities held by Exchanging Dealers on the date of consummation of the Exchange Offer. "Exchange Offer Registration Statement" means a registration statement of the Company on an appropriate form under the Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchange Securities" means debt securities of the Company identical in all material respects to the Securities (except that the cash interest and interest rate step-up provisions and the transfer restrictions will be modified or eliminated, as appropriate), to be issued under the Indenture or the Exchange Securities Indenture. "Exchange Securities Indenture" means an indenture between the Company and the Exchange Securities Trustee, identical in all material respects with the Indenture (except that the cash interest and interest rate step-up provisions will be modified or eliminated, as appropriate). "Exchange Securities Trustee" means U.S. Trust Company of Texas, N.A. or such other bank or trust company reasonably satisfactory to the Initial Purchasers, as trustee with respect to the Exchange Securities under the Exchange Securities Indenture. "Exchanging Dealer" means any Holder (which may include the Initial Purchasers) which is a broker-dealer, electing to exchange Securities acquired for its own account as a result of market-making activities or other trading activities for Exchange Securities. "Final Memorandum" has the meaning set forth in the Purchase Agreement. "Holder" has the meaning set forth in the preamble hereto. 3 -3- "Indenture" means the Indenture relating to the Securities dated as of July 7, 1998, between the Company and U.S. Trust Company of Texas, N.A., as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Initial Placement" has the meaning set forth in the preamble hereto. "Majority Holders" means the Holders of a majority of the aggregate principal amount of securities registered under a Registration Statement. "Managing Underwriters" means the investment banker or investment bankers and manager or managers selected by the Majority Holders to administer an underwritten offering. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Securities or the Exchange Securities, covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "Registered Exchange Offer" means the proposed offer to the Holders to issue and deliver to such Holders, in exchange for the Securities, a like principal amount of the Exchange Securities. "Registration Statement" means any Exchange Offer Registration Statement or Shelf Registration Statement that covers any of the Securities or the Exchange Securities pursuant to the provisions of this Agreement, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Securities" has the meaning set forth in the preamble hereto. "Shelf Registration" means a registration effected pursuant to Section 3 hereof. "Shelf Registration Period" has the meaning set forth in Section 3(b) hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 3 hereof which covers some or all of the Securities or Exchange Securities, as applicable, on an appropriate form under Rule 415 4 -4- under the Act, or any similar rule that may be adopted by the commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Trustee" means the trustee with respect to the Securities under the Indenture. "Underwriter" means any underwriter of Securities in connection with an offering thereof under a Shelf Registration Statement. "Underwritten Offering" means a registration and offering in which Securities are sold to an Underwriter for reoffering to the public. 2. Registered Exchange Offer; Resales of Exchange Securities by Exchanging Dealers; Private Exchange. (a) The Company shall prepare and, not later than 75 days following the Closing Date, shall file with the Commission the Exchange Offer Registration Statement with respect to the Registered Exchange Offer. The Company shall use its best efforts to cause the Exchange Offer Registration Statement to become effective under the Act not later than 135 days after the Closing Date. (b) Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder electing to exchange Securities for Exchange Securities (assuming that such Holder is not an affiliate of the Company within the meaning of the Act, acquires the Exchange Securities in the ordinary course of such Holder's business and has no arrangements with any person to participate in the distribution of the Exchange Securities) to trade such Exchange Securities from and after their receipt without any limitations or restrictions under the Act and without material restrictions under the securities laws of a substantial proportion of the several states of the United States. (c) In connection with the Registered Exchange Offer, the Company shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; 5 -5- (ii) keep the Registered Exchange Offer open for not less than 30 days (or longer if required by applicable law) after the date notice thereof is mailed to the Holders; (iii) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York; and (iv) comply in all respects with all applicable laws. (d) As soon as practicable after the close of the Registered Exchange Offer, the Company shall: (i) accept for exchange all Securities tendered and not validly withdrawn pursuant to the Registered Exchange Offer; (ii) deliver to the Trustee for cancellation all Securities so accepted for exchange; and (iii) cause the Trustee or the Exchange Securities Trustee, as the case may be, promptly to authenticate and deliver to each Holder of Securities Exchange Securities equal in principal amount to the Securities of such Holder so accepted for exchange. (e) The Initial Purchasers and the Company acknowledge that, pursuant to interpretations by the Commission's staff of Section 5 of the Act, and in the absence of an applicable exemption therefrom, each Exchanging Dealer is required to deliver a Prospectus in connection with a sale of any Exchange Securities received by such Exchanging Dealer pursuant to the Registered Exchange Offer in exchange for Securities acquired for its own account as a result of market-making activities or other trading activities. Accordingly, the Company shall: (i) include the information set forth in Annex A hereto on the cover of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, and in Annex C hereto in the underwriting or plan of distribution section of the Prospectus forming a part of the Exchange Offer Registration Statement, and include the information set forth in Annex D hereto in the Letter of Transmittal delivered pursuant to the Registered Exchange Offer; and (ii) use its best efforts to keep the Exchange Offer Registration Statement continuously effective under the Act during the Exchange Offer Registration Period for delivery by Exchanging Dealers in connection with sales of Exchange Securities 6 -6- received pursuant to the Registered Exchange Offer, as contemplated by Section 5(h) below. (f) In the event that any Initial Purchaser determines that it is not eligible to participate in the Registered Exchange Offer with respect to the exchange of Securities constituting any portion of an unsold allotment, at the request of such Initial Purchaser, the Company shall issue and deliver to such Initial Purchaser or the party purchasing Exchange Securities registered under a Shelf Registration Statement as contemplated by Section 3 hereof from such Initial Purchaser, in exchange for such Securities, a like principal amount of Exchange Securities. The Company shall seek to cause the CUSIP Service Bureau to issue the same CUSIP number for such Exchange Securities as for Exchange Securities issued pursuant to the Registered Exchange Offer. 3. Shelf Registration. If, (i) because of any change in law or applicable interpretations thereof by the Commission's staff, the Company determines upon advice of its outside counsel that it is not permitted to effect the Registered Exchange Offer as contemplated by Section 2 hereof, or (ii) if for any other reason the Registered Exchange Offer is not consummated within 165 days of the Closing Date, or (iii) if any Initial Purchaser so requests with respect to Securities not eligible to be exchanged for Exchange Securities in the Registered Exchange Offer, or (iv) upon request by such Holder, if any Holder (other than an Initial Purchaser) is not eligible to participate in the Registered Exchange Offer or (v) upon request by such Initial Purchaser, in the case of any Initial Purchaser that participates in the Registered Exchange Offer or acquires Exchange Securities pursuant to Section 2(f) hereof, such Initial Purchaser does not receive freely tradeable Exchange Securities in exchange for Securities constituting any portion of an unsold allotment (it being understood that, for purposes of this Section 3, (x) the requirement that an Initial Purchaser deliver a Prospectus containing the information required by Items 507 and/or 508 of Regulation S-K under the Act in connection with sales of Exchange Securities acquired in exchange for such Securities shall result in such Exchange Securities being not "freely tradeable" but (y) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of Exchange Securities acquired in the Registered Exchange Offer in exchange for Securities acquired as a result of market-making activities or other trading activities shall not result in such Exchange Securities being not "freely tradeable"), the following provisions shall apply: (a) The Company shall, as promptly as practicable (but in no event more than 30 days after so required or requested pursuant to this Section 3; it being understood that any delay by a Holder or Initial Purchaser in requesting a shelf registration pursuant to this Section 3 shall not in any way prejudice or impair such Holder's or Initial Purchaser's rights under this Agreement), file with the Commission and thereafter shall use its best efforts to cause to be declared effective under the Act by the 180th day after the Closing 7 -7- Date a Shelf Registration Statement relating to the offer and sale of the Securities or the Exchange Securities, as applicable, by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement; provided that with respect to Exchange Securities received by an Initial Purchaser in exchange for Securities constituting any portion of an unsold allotment, the Company may, if permitted by current interpretations by the Commission's staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Regulation S-K Items 507 and/or 508, as applicable, in satisfaction of its obligations under this paragraph (a) with respect thereto, and any such Exchange Offer Registration Statement, as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement. (b) The Company shall use its best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of two years from the date the Shelf Registration Statement is declared effective by the Commission or such shorter period that will terminate when all the Securities or Exchange Securities, as applicable, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of securities covered thereby not being able to offer and sell such securities during that period, unless (i) such action is required by applicable law, or (ii) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, so long as the Company promptly thereafter complies with the requirements of Section 5(k) hereof, if applicable. (c) The Holders of Securities may elect to sell their Securities pursuant to one or more Underwritten Offerings; provided, however, that in no event shall any Holder commence any such Underwritten Offering if a period of less than 180 days has elapsed since the consummation of the most recent Underwritten Offering hereunder. No Holder may participate in any Underwritten Offering hereunder unless such Holder agrees to sell such Holder's Securities on the basis provided in customary underwriting arrangements entered into in connection therewith and completes and executes all reasonable and customary agreements and documents required under the terms of such underwriting arrangements. 4. Liquidated Damages. (a) The Company and the Initial Purchasers agree that the Holders will suffer damages if the Company fails to fulfill its obligations under Section 2 or Section 3 8 -8- hereof and that it would not be feasible to ascertain the extent of such damages with precision. Accordingly, the Company agrees to pay, as liquidated damages, additional interest on the Securities ("Liquidated Damages") under the circumstances and to the extent set forth below: (i) if neither the Exchange Offer Registration Statement nor the Shelf Registration Statement has been filed on or prior to the 75th day after the Closing Date, then, commencing on the 76th day after the Closing Date, Liquidated Damages shall accrue on the Securities over and above the stated interest at a rate of 0.50% per annum of the principal amount of the Securities for the first 90 days immediately following the 75th day after the Closing Date, such Liquidated Damages rate increasing by an additional 0.25% per annum of the principal amount of the Securities at the beginning of each subsequent 90-day period; (ii) if the Exchange Offer Registration Statement is not declared effective by the Commission on or prior to the 135th day after the Closing Date, then, unless the applicable interpretations of the Commission do not permit the Company to effect the Registered Exchange Offer, commencing on the 136th day after the Closing Date, Liquidated Damages shall accrue on the Securities included or which should have been included in such Registration Statement over and above the stated interest at a rate of 0.50% per annum of the principal amount of the Securities for the first 90 days immediately following the 135th day after the Closing Date, such Liquidated Damages increasing by an additional 0.25% per annum of the principal amount of the Securities at the beginning of each subsequent 90-day period; and (iii) if (A) the Company has not exchanged Exchange Securities for all Securities validly tendered in accordance with the terms of the Registered Exchange Offer prior to the 165th day after the Closing Date or the Shelf Registration Statement has not been declared effective by the Commission on or prior to the 180th day after the Closing Date or (B) the Exchange Offer Registration Statement, or, if applicable, the Shelf Registration Statement, has been declared effective and such Registration Statement ceases to be effective at any time during the period specified in Section 2(c)(ii) hereof (in the case of the Exchange Offer Registration Statement) or during the Shelf Registration Period (in the case of the Shelf Registration Statement) (it being agreed that if such event occurs by reason of a post-effective amendment to such Registration Statement having been filed but not declared effective within 30 days of such Registration Statement ceasing to be effective, Liquidated Damages referred to below shall not be payable for such 30-day period; provided that if for any reason such post-effective amendment is not declared effective within the requisite 30-day period and Liquidated Damages thereafter become payable, the Liquidated Damages will be payable and calculated from the 9 -9- date the Registration Statement becomes ineffective), unless all the Securities have previously been sold or exchanged thereunder, as the case may be, then Liquidated Damages shall accrue (over and above any interest otherwise payable on the Securities affected thereby) at a rate of 0.50% per annum of the principal amount of such affected Securities for the first 90 days commencing on (x) the 166th day after the Closing Date with respect to the Securities validly tendered and not exchanged by the Company or the 181st day after the Closing Date with respect to the effectiveness of the Shelf Registration Statement, in the case of (A) above or (y) the day such Exchange Offer Registration Statement or Shelf Registration Statement ceases to be effective in the case of (B) above, such Liquidated Damages rate increasing by an additional 0.25% per annum of the principal amount of such affected Securities at the beginning of each such subsequent 90-day period (it being understood and agreed that, in the case of (B) above, so long as any Security is then covered by an effective Shelf Registration Statement, no Liquidated Damages shall accrue on such Security); provided, however, for the purposes of this Section 4(a), that the Liquidated Damages rate on any affected Security may not exceed at any one time in the aggregate 2.0% per annum of the principal amount of such affected Security; and provided, further, that (1) upon the filing of the Exchange Offer Registration Statement or a Shelf Registration Statement (in the case of clause (i) of this Section 4(a)), (2) upon the effectiveness of the Exchange Offer Registration Statement (in the case of clause (ii) of this Section 4(a)), (3) upon the exchange of the Exchange Securities for all Securities tendered or the effectiveness of the Shelf Registration Statement (in the case of clause (iii)(A) of this Section 4(a)), or (4) upon the effectiveness of the Exchange Offer Registration Statement or the Shelf Registration Statement which had ceased to remain effective (in the case of clause (iii)(B) of this Section 4(a)), Liquidated Damages on the affected Securities as a result of such clause (or the relevant subclause thereof), as the case may be, shall cease to accrue. (b) The Company shall notify the Trustee within one business day after each and every date on which an event occurs in respect of which Liquidated Damages are required to be paid (an "Event Date"). Any Liquidated Damages due pursuant to clauses (a)(i), (a)(ii) or (a)(iii) of this Section 4 will be payable to the Holders of affected Securities in cash semi-annually on each January 1 and July 1 (to the holders of record on the December 15 and June 15 immediately preceding such dates), commencing with the first such date occurring after any such Liquidated Damages commence to accrue. The amount of Liquidated Damages will be determined by multiplying the applicable Liquidated Damages rate by the principal amount of the affected Securities of such Holders, multiplied by a fraction, the numerator of which is the number of days such Liquidated Damages rate was applicable during such period (determined on the basis of a 360-day year comprised of twelve 30-day months and, in the case of a partial month, the actual number of days elapsed), and the denominator of which is 360. 10 -10- 5. Registration Procedures. In connection with any Shelf Registration Statement and, to the extent applicable, any Exchange offer Registration Statement, the following provisions shall apply: (a) The Company shall furnish to you, prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement and any Exchange Offer Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein and shall use its best efforts to reflect in each such document, when so filed with the Commission, such comments as you reasonably may propose. (b) The Company shall ensure that (i) any Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto complies in all material respects with the Act and the rules and regulations thereunder, (ii) any Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, if requested by you or any such Holder, confirm such advice in writing: (i) when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus included therein or for additional information. (2) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, in the case of an Exchange Offer Registration Statement, any Exchanging Dealer which has provided in writing to the Company a telephone or facsimile number and address for notices, and, if requested by you or any such Holder or Exchanging Dealer, confirm such advice in writing: 11 -11- (i) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (ii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (iii) of the happening of any event that requires the making of any changes in the Registration Statement or the Prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company shall use its best efforts to obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests, in writing, all exhibits (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of securities in connection with the offering and sale of the securities covered by the Prospectus or any amendment or supplement thereto. (g) The Company shall furnish to each Exchanging Dealer which so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements 12 -12- and schedules, any documents incorporated by reference therein, and, if the Exchanging Dealer so requests in writing, all exhibits (including those incorporated by reference). (h) The Company shall, during the Exchange Offer Registration Period, promptly deliver to each Exchanging Dealer, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as such Exchanging Dealer may reasonably request for delivery by such Exchanging Dealer in connection with a sale of Exchange Securities received by it pursuant to the Registered Exchange Offer; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by any such Exchanging Dealer, as aforesaid. (i) Prior to the Registered Exchange Offer or any other offering of securities pursuant to any Registration Statement, the Company shall register or qualify or cooperate with the Holders of securities included therein and their respective counsel in connection with the registration or qualification of such securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the securities covered by such Registration Statement; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (j) The Company shall cooperate with the Holders of Securities to facilitate the timely preparation and delivery of certificates representing Securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request prior to sales of securities pursuant to such Registration Statement. (k) Upon the occurrence of any event contemplated by paragraph (c)(2)(iii) above, the Company shall promptly prepare a post-effective amendment to any Registration Statement or an amendment or supplement to the related Prospectus or file any other required, document so that, as thereafter delivered to purchasers of the securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 13 -13- (l) Not later than the effective date of any such Registration Statement hereunder, the Company shall provide a CUSIP number for the Securities or Exchange Securities, as the case may be, registered under such Registration Statement, and provide the applicable trustee with printed certificates for such Securities or Exchange Securities, in a form eligible for deposit with The Depository Trust Company. (m) The Company shall use its best efforts to comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Act. (n) The Company shall cause the Indenture or the Exchange Securities Indenture, as the case may be, to be qualified under the Trust Indenture Act in a timely manner. (o) The Company may require each Holder of securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company in writing, within 20 Business Days after receipt of a request therefor, such information specified in item 507 of Regulation S-K under the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Securities shall be entitled to Liquidated Damages pursuant to Section 4 hereof unless and until such Holder shall have provided all such information required to be provided by such Holder for inclusion therein. Each Holder as to which any Shelf Registration Statement is being effected agrees to furnish on a timely basis to the Company, for so long as the Registration Statement is effective, all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially misleading. (p) The Company shall, if requested, promptly incorporate in a Prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters and Majority Holders reasonably agree should be included therein and shall make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (q) In the case of any Shelf Registration Statement, the Company shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition 14 -14- of the Securities, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 7 (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any, with respect to all parties to be indemnified pursuant to Section 7 by Holders of Securities or the Company). (r) In the case of any Shelf Registration Statement, the Company shall (i) make reasonably available for inspection by the Holders of securities to be registered thereunder, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by the Holders or any such underwriter, attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holders or any such underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) if requested by the Holders or the underwriters, if any, make such representations and warranties to the Holders of securities registered thereunder and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) if requested by the Holders or the underwriters, if any, obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and underwriters; (v) if requested by the Holders or the underwriters, if any, obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each selling Holder of securities registered thereunder and the underwriters, if any, in customary form and covering matters of the type customarily 15 -15- covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 5(k) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 5(r) shall be performed at (A) the effectiveness of such Registration Statement and each post-effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. (s) In the case of any Exchange Offer Registration Statement, the Company shall (i) make reasonably available for inspection by such Initial Purchaser, and any attorney, accountant or other agent retained by such Initial Purchaser, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by such Initial Purchaser or any such attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by such Initial Purchaser or any such attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) if requested by the Initial Purchasers, make such representations and warranties to such Initial Purchaser, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) if requested by the Initial Purchasers, obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to such Initial Purchaser and its counsel, addressed to such Initial Purchaser, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Initial Purchaser or its counsel; (v) if requested by the Initial Purchasers, obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to such Initial Purchaser, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary 16 -16- underwritten offerings, or if requested by such Initial Purchaser or its counsel in lieu of a "cold comfort" letter, an agreed-upon procedures letter under Statement on Auditing Standards No. 35,covering matters requested by such Initial Purchaser or its counsel; and (vi) deliver such documents and certificates as may be reasonably requested by such Initial Purchaser or its counsel, including those to evidence compliance with Section 5(k) and with conditions customarily contained in underwriting agreements. The foregoing actions set forth in clauses (iii), (iv), (v), and (vi) of this Section 5(s) shall be performed at the close of the Registered Exchange Offer and the effective date of any post-effective amendment to the Exchange Offer Registration Statement. 6. Registration Expenses. The Company shall bear all expenses incurred in connection with the performance of its obligations under Sections 2, 3, 4 and 5 hereof and, in the event of any Shelf Registration Statement, will reimburse the Holders for the reasonable fees and disbursements of one firm or counsel designated by the Majority Holders to act as counsel for the Holders in connection therewith. 7. Indemnification and Contribution. (a) In connection with any Registration Statement, the Company agrees to indemnify and hold harmless each Holder of securities covered thereby (including each Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 5(h) hereof, each Exchanging Dealer), the directors, officers, employees and agents of each such Holder and each person who controls any such Holder within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such Holder specifically for inclusion therein; and provided further, that the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged 17 -17- omission made in the Preliminary Memorandum which is corrected or contained, as the case may be, in the Final Memorandum and the Initial Purchaser fails to deliver the Final Memorandum. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company also agrees to indemnify or contribute to Losses of, as provided in Section 7(d), any underwriters of securities registered under a Shelf Registration Statement, their officers and directors and each person who controls such underwriters on substantially the same basis as that of the indemnification of the Initial Purchaser and the selling Holders provided in this Section 7(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 5(q) hereof. (b) Each Holder of securities covered by a Registration Statement (including each Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 5(h) hereof, each Exchanging Dealer) severally agrees to indemnify and hold harmless (i) the Company, (ii) each of its directors, (iii) each of its officers who signs such Registration Statement and (iv) each person who controls the Company within the meaning of either the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company to each such Holder, but only with reference to written information relating to such Holder furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any such Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 7 or notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 6, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ one additional and separate counsel (and one additional 18 -18- and separate local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 7 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Registration Statement which resulted in such Losses; provided, however, that in no case shall any Initial Purchaser or any subsequent Holder of any Security or Exchange Security be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Security, or in the case of a Exchange Security, applicable to the Security which was exchangeable into such Exchange Security, as set forth on the cover page of the Final Memorandum, nor shall any underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the securities purchased by such underwriter under the Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable 19 -19- considerations. Benefits received by the Company shall be deemed to be equal to the sum of (x) the total net proceeds from the Initial Placement (before deducting expenses) as set forth on the cover page of the Final Memorandum and (y) the total amount of additional interest which the Company was not required to pay as a result of registering the securities covered by the Registration Statement which resulted in such Losses. Benefits received by the Initial Purchasers shall be deemed to be equal to the total purchase discounts and commissions as set forth on the cover page of the Final Memorandum, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Securities or Exchange Securities, as applicable, registered under the Act. Benefits received by any underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 7 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors or controlling persons referred to in Section 7 hereof, and will survive the sale by a Holder of securities covered by a Registration Statement. 8. Miscellaneous. (a) No Inconsistent Agreements. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or 20 -20- supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of at least a majority of the then outstanding aggregate principal amount of Securities (or, after the consummation of any Exchange Offer in accordance with Section 2 hereof, of Exchange Securities); provided that, with respect to any matter that directly or indirectly affects the rights of any Initial Purchaser hereunder, the Company shall obtain the written consent of each such Initial Purchaser against which such amendment, qualification, supplement, waiver or consent is to be effective. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of securities being sold rather than registered under such Registration Statement. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (1) if to a Holder, at the most current address given by such holder to the Company in accordance with the provisions of this Section 8(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, with a copy in like manner to Salomon Brothers Inc; (2) if to you, initially at the respective addresses set forth in the Purchase Agreement; and (3) if to the Company, initially at its address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when received. The Initial Purchasers or the Company by notice to the other may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders of Securities and/or Exchange Securities. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Securities and/or Exchange Securities and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. 21 -21- (e) Counterparts. This agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. This agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in said State. (h) Severability. In the event that any one of more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. (i) Securities Held by the Company, etc. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities or Exchange Securities is required hereunder, Securities or Exchange Securities, as applicable, held by the Company or its Affiliates (other than subsequent Holders of Securities or Exchange Securities if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Securities or Exchange Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. [Signature Page Follows] 22 S-1 Please confirm that the foregoing correctly sets forth the agreement between the Company and you. Very truly yours, OPTEL, INC. By: ------------------------------ Name: Title: By: ------------------------------ Name: Title: The foregoing Agreement is hereby confirmed and accepted as of the date first above written. SALOMON BROTHERS INC GOLDMAN, SACHS & CO. CIBC OPPENHEIMER CORP. By: Salomon Brothers Inc By: ----------------------------- Name: Title: 23 ANNEX A Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Securities where such Exchange Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date (as defined herein) and ending on the close of business on the earlier of first anniversary of the Expiration Date or the date upon which all such Exchange Securities have been sold by such participating broker-dealer, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." 24 ANNEX B Each broker-dealer that receives Exchange Securities for its own account in exchange for Securities, where such Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. See "Plan of Distribution." 25 ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Securities. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Securities received in exchange for Securities where such Securities were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the earlier of the close of business on the first anniversary of the Expiration Date or the date upon which all Exchange Securities have been sold by such participating broker-dealer (the "Registration Period"), it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until ________, _____, all dealers effecting transactions in the Exchange Securities may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of Exchange Securities by broker-dealers. Exchange Securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such Exchange Securities. Any broker-dealer that resells Exchange Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such Exchange securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of Exchange Securities and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For the Registration Period, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the Letter of Transmittal. The Company has agreed to pay all expenses incident to the Exchange offer (including the expenses of one counsel for the holders of the Securities) other than commissions or concessions of any 26 2 brokers or dealers and will indemnify the holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. [If applicable, add information required by Regulation S-K Items 507 and/or 508.] 27 ANNEX D Rider A CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: -------------------------- Address: ----------------------- ----------------------- Rider B If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Securities. If the undersigned is a broker-dealer that will receive Exchange Securities for its own account in exchange for securities, it represents that the Securities to be exchanged for Exchange Securities were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Securities; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EX-4.16 4 INDENTURE 1 EXHIBIT 4.16 - -------------------------------------------------------------------------------- OPTEL, INC., as Issuer and U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee =================================== INDENTURE Dated as of July 7, 1998 =================================== $200,000,000 11-1/2% Senior Notes Due 2008 11-1/2% Senior Notes Due 2008, Series B - -------------------------------------------------------------------------------- 2 Reconciliation and tie between Trust Indenture Act of 1939, as amended, and Indenture, dated as of July 7, 1998
Trust Indenture Indenture Act Section Section - --------------- --------- Section 310(a)(1) . . . . . . . . . . . . . . . . . . . 6.09 (a)(2) . . . . . . . . . . . . . . . . . . . 6.09 (a)(3) . . . . . . . . . . . . . . . . . . . Not Applicable (a)(4) . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . . 6.08, 6.10 Section 311(a) . . . . . . . . . . . . . . . . . . . . . 6.05 (b) . . . . . . . . . . . . . . . . . . . . . 6.05 (c) . . . . . . . . . . . . . . . . . . . . . Not Applicable Section 312(a) . . . . . . . . . . . . . . . . . . . . . 7.01 (b) . . . . . . . . . . . . . . . . . . . . . 7.02 (c) . . . . . . . . . . . . . . . . . . . . . 7.02 Section 313(a) . . . . . . . . . . . . . . . . . . . . . 7.03 (b) . . . . . . . . . . . . . . . . . . . . . 7.03 (c) . . . . . . . . . . . . . . . . . . . . . 7.03 (d) . . . . . . . . . . . . . . . . . . . . . 7.03 Section 314(a) . . . . . . . . . . . . . . . . . . . . . 7.04 (a)(4) . . . . . . . . . . . . . . . . . . . 10.11 (b) . . . . . . . . . . . . . . . . . . . . . Not Applicable (c)(1) . . . . . . . . . . . . . . . . . . . 1.04, 4.04 (c)(2) . . . . . . . . . . . . . . . . . . . 1.04, 4.04 (c)(3) . . . . . . . . . . . . . . . . . . . Not Applicable (d) . . . . . . . . . . . . . . . . . . . . . 12.03(d) (e) . . . . . . . . . . . . . . . . . . . . . 1.04 Section 315(a) . . . . . . . . . . . . . . . . . . . . . 6.01(a) (b) . . . . . . . . . . . . . . . . . . . . . 6.02 (c) . . . . . . . . . . . . . . . . . . . . . 6.01(b) (d) . . . . . . . . . . . . . . . . . . . . . 6.01(c) (e) . . . . . . . . . . . . . . . . . . . . . 5.14 Section 316(a) (last sentence) . . . . . . . . . . . . 1.01 (a)(1)(A) . . . . . . . . . . . . . . . . . . 5.12, 5.13 (a)(1)(B) . . . . . . . . . . . . . . . . . . 5.13 (a)(2) . . . . . . . . . . . . . . . . . . . Not Applicable (b) . . . . . . . . . . . . . . . . . . . . . 5.08 Section 317(a)(1) . . . . . . . . . . . . . . . . . . . 5.03 (a)(2) . . . . . . . . . . . . . . . . . . . 5.04 (b) . . . . . . . . . . . . . . . . . . . . . 10.03 Section 318(a) . . . . . . . . . . . . . . . . . . . . . 1.08
- ------------------------ Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of this Indenture. 3 TABLE OF CONTENTS
Page ---- RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION . . . 1 Section 1.01. Definitions. . . . . . . . . . . . . . . . . . . . . . 1 Section 1.02. Other Definitions. . . . . . . . . . . . . . . . . . . 28 Section 1.03. Rules of Construction. . . . . . . . . . . . . . . . . 28 Section 1.04. Form of Documents Delivered to Trustee. . . . . . . . . 29 Section 1.05. Acts of Holders. . . . . . . . . . . . . . . . . . . . 30 Section 1.06. Notices, etc., to the Trustee and the Company. . . . . 30 Section 1.07. Notice to Holders; Waiver. . . . . . . . . . . . . . . 31 Section 1.08. Conflict with Trust Indenture Act. . . . . . . . . . . 31 Section 1.09. Effect of Headings and Table of Contents. . . . . . . . 32 Section 1.10. Successors and Assigns. . . . . . . . . . . . . . . . . 32 Section 1.11. Separability Clause. . . . . . . . . . . . . . . . . . 32 Section 1.12. Benefits of Indenture. . . . . . . . . . . . . . . . . 32 Section 1.13. GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . 32 Section 1.14. No Recourse Against Others. . . . . . . . . . . . . . . 32 Section 1.15. Independence of Covenants. . . . . . . . . . . . . . . 32 Section 1.16. Exhibits. . . . . . . . . . . . . . . . . . . . . . . . 33 Section 1.17. Counterparts. . . . . . . . . . . . . . . . . . . . . . 33 Section 1.18. Duplicate Originals. . . . . . . . . . . . . . . . . . 33 ARTICLE II SECURITY FORMS . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 2.01. Form and Dating. . . . . . . . . . . . . . . . . . . . 33 ARTICLE III THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 3.01. Title and Terms. . . . . . . . . . . . . . . . . . . . 34 Section 3.02. Registrar and Paying Agent. . . . . . . . . . . . . . . 35 Section 3.03. Execution and Authentication. . . . . . . . . . . . . . 35 Section 3.04. Temporary Securities. . . . . . . . . . . . . . . . . . 37 Section 3.05. Transfer and Exchange. . . . . . . . . . . . . . . . . 38 Section 3.06. Mutilated, Destroyed, Lost and Stolen Securities. . . . 38 Section 3.07. Payment of Interest; Interest Rights Preserved. . . . . 39 Section 3.08. Persons Deemed Owners. . . . . . . . . . . . . . . . . 40 Section 3.09. Cancellation. . . . . . . . . . . . . . . . . . . . . . 41 Section 3.10. Computation of Interest. . . . . . . . . . . . . . . . 41 Section 3.11. Legal Holidays. . . . . . . . . . . . . . . . . . . . . 41
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Page ---- Section 3.12. CUSIP Number. . . . . . . . . . . . . . . . . . . . . . 41 Section 3.13. Paying Agent to Hold Money in Trust. . . . . . . . . . 42 Section 3.14. Book-Entry Provisions for Global Securities. . . . . . . 42 Section 3.15. Special Transfer Provisions. . . . . . . . . . . . . . 43 ARTICLE IV DEFEASANCE OR COVENANT DEFEASANCE . . . . . . . . . . . . . . 46 Section 4.01. Company's Option to Effect Defeasance or Covenant Defeasance. . . . . . . . . . . . . . . . . . . . . 46 Section 4.02. Defeasance and Discharge. . . . . . . . . . . . . . . . 46 Section 4.03. Covenant Defeasance. . . . . . . . . . . . . . . . . . 47 Section 4.04. Conditions to Defeasance or Covenant Defeasance. . . . 47 Section 4.05. Deposited Money and U.S. Government Obligations To Be Held in Trust; Other Miscellaneous Provisions. . . . . . . . . . . . . . . . . . . . . 49 Section 4.06. Reinstatement. . . . . . . . . . . . . . . . . . . . . 50 ARTICLE V REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Section 5.01. Events of Default. . . . . . . . . . . . . . . . . . . 50 Section 5.02. Acceleration of Maturity; Rescission and Annulment. . . 53 Section 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee. . . . . . . . . . . . . . 54 Section 5.04. Trustee May File Proofs of Claims. . . . . . . . . . . 55 Section 5.05. Trustee May Enforce Claims Without Possession of Securities . . . . . . . . . . . . . . . . . . . . . . 56 Section 5.06. Application of Money Collected. . . . . . . . . . . . . 56 Section 5.07. Limitation on Suits. . . . . . . . . . . . . . . . . . 57 Section 5.08. Unconditional Right of Holders to Receive Principal, Premium and Interest . . . . . . . . . . . . . . . . . . . . . 58 Section 5.09. Restoration of Rights and Remedies. . . . . . . . . . . 58 Section 5.10. Rights and Remedies Cumulative. . . . . . . . . . . . . 58 Section 5.11. Delay or Omission Not Waiver. . . . . . . . . . . . . . 58 Section 5.12. Control by Majority. . . . . . . . . . . . . . . . . . 59 Section 5.13. Waiver of Past Defaults. . . . . . . . . . . . . . . . 59 Section 5.14. Undertaking for Costs. . . . . . . . . . . . . . . . . 59 Section 5.15. Waiver of Stay, Extension or Usury Laws. . . . . . . . 60 Section 5.16. Unconditional Right of Holders to Institute Certain Suits . . . . . . . . . . . . . . . . . . . . . 60 ARTICLE VI THE TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 6.01. Certain Duties and Responsibilities. . . . . . . . . . 60 Section 6.02. Notice of Defaults. . . . . . . . . . . . . . . . . . . 61 Section 6.03. Certain Rights of Trustee. . . . . . . . . . . . . . . 62 Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof. . . . . 64
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Page ---- Section 6.05. Trustee and Agents May Hold Securities; Collections; Etc. . . . . . . . . . . . . . . . . . . . 64 Section 6.06. Money Held in Trust. . . . . . . . . . . . . . . . . . 64 Section 6.07. Compensation and Indemnification of Trustee and its Prior Claim . . . . . . . . . . . . . . . . . . . . 64 Section 6.08. Conflicting Interests. . . . . . . . . . . . . . . . . 65 Section 6.09. Corporate Trustee Required; Eligibility. . . . . . . . 65 Section 6.10. Resignation and Removal; Appointment of Successor Trustee . . . . . . . . . . . . . . . . . . . 66 Section 6.11. Acceptance of Appointment by Successor. . . . . . . . . 67 Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession to Business . . . . . . . . . . . . . . . . 68 ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 7.01. Preservation of Information; Company to Furnish Trustee Names and Addresses of Holders . . . . . . . . 69 Section 7.02. Communications of Holders. . . . . . . . . . . . . . . 69 Section 7.03. Reports by Trustee. . . . . . . . . . . . . . . . . . . 70 Section 7.04. Reports by Company. . . . . . . . . . . . . . . . . . . 70 ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 8.01. Company May Consolidate, Etc., Only on Certain Terms . . 70 Section 8.02. Successor Substituted. . . . . . . . . . . . . . . . . 72 ARTICLE IX SUPPLEMENTAL INDENTURES AND WAIVERS . . . . . . . . . . . . . . . 72 Section 9.01. Supplemental Indentures, Agreements and Waivers Without Consent of Holders . . . . . . . . . . . . . . 72 Section 9.02. Supplemental Indentures, Agreements and Waivers With Consent of Holders . . . . . . . . . . . . . . . . . . 73 Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers . . . . . . . . . . . . . . . . . . . . . . . . 75 Section 9.04. Effect of Supplemental Indentures. . . . . . . . . . . 76 Section 9.05. Conformity with Trust Indenture Act. . . . . . . . . . 76 Section 9.06. Reference in Securities to Supplemental Indentures. . . 76 Section 9.07. Record Date. . . . . . . . . . . . . . . . . . . . . . 76 Section 9.08. Revocation and Effect of Consents. . . . . . . . . . . 76 ARTICLE X COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 Section 10.01. Payment of Principal, Premium and Interest. . . . . . 77
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Page ---- Section 10.02. Maintenance of Office or Agency. . . . . . . . . . . . 77 Section 10.03. Money for Security Payments to Be Held in Trust. . . . 78 Section 10.04. Corporate Existence. . . . . . . . . . . . . . . . . . 79 Section 10.05. Payment of Taxes and Other Claims. . . . . . . . . . . 79 Section 10.06. Maintenance of Properties. . . . . . . . . . . . . . . 80 Section 10.07. Insurance. . . . . . . . . . . . . . . . . . . . . . . 80 Section 10.08. Books and Records. . . . . . . . . . . . . . . . . . . 80 Section 10.09. Compliance Certificates and Opinions. . . . . . . . . 80 Section 10.10. Provision of Financial Statements. . . . . . . . . . . 81 Section 10.11. Change of Control. . . . . . . . . . . . . . . . . . . 81 Section 10.12. Limitation on Additional Indebtedness. . . . . . . . . 84 Section 10.13. Statement by Officers as to Default. . . . . . . . . . 84 Section 10.14. Limitation on Restricted Payments. . . . . . . . . . . 85 Section 10.15. Limitation on Transactions with Affiliates. . . . . . 88 Section 10.16. Disposition of Proceeds of Asset Sales. . . . . . . . 89 Section 10.17. Limitation on Liens Securing Certain Indebtedness. . . 93 Section 10.18. Escrow Account. . . . . . . . . . . . . . . . . . . . 93 Section 10.19. Limitation on Certain Guarantees and Indebtedness by Restricted Subsidiaries. . . . . . . . . . . . . . . . 93 Section 10.20. Limitation on Issuances and Sales of Preferred Stock of Restricted Subsidiaries. . . . . . . . . . . . 94 Section 10.21. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries . . . . . . . . . . . 94 Section 10.22. Limitation on Designations of Unrestricted Subsidiaries . . . . . . . . . . . . . . . . . . . . . 95 ARTICLE XI REDEMPTION OF SECURITIES . . . . . . . . . . . . . . . . . . . . 96 Section 11.01. Right of Redemption. . . . . . . . . . . . . . . . . . 96 Section 11.02. Applicability of Article. . . . . . . . . . . . . . . 96 Section 11.03. Election to Redeem; Notice to Trustee. . . . . . . . . 96 Section 11.04. Selection by Trustee of Securities to Be Redeemed. . . 96 Section 11.05. Notice of Redemption. . . . . . . . . . . . . . . . . 97 Section 11.06. Deposit of Redemption Price. . . . . . . . . . . . . . 98 Section 11.07. Securities Payable on Redemption Date. . . . . . . . . 98 Section 11.08. Securities Redeemed or Purchased in Part. . . . . . . 99 ARTICLE XII COLLATERAL AND SECURITY . . . . . . . . . . . . . . . . . . . . 99 Section 12.01. Escrow Agreement. . . . . . . . . . . . . . . . . . . 99 Section 12.02. Recording and Opinions. . . . . . . . . . . . . . . 100 Section 12.03. Release of Collateral. . . . . . . . . . . . . . . . 101 Section 12.04. Certificates of the Company. . . . . . . . . . . . . 102 Section 12.05. Authorization of Actions To Be Taken by the Trustee Under the Escrow Agreement . . . . . . . . . . . . . 102
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Page ---- Section 12.06. Authorization of Receipt of Funds by the Trustee Under the Escrow Agreement . . . . . . . . . . . . . 103 Section 12.07. Termination of Security Interest. . . . . . . . . . 103 ARTICLE XIII SATISFACTION AND DISCHARGE . . . . . . . . . . . . . . . . . 103 Section 13.01. Satisfaction and Discharge of Indenture. . . . . . . 103 Section 13.02. Application of Trust Money. . . . . . . . . . . . . 104
v 8 INDENTURE, dated as of July 7, 1998, between OpTel, Inc., a corporation incorporated under the laws of the State of Delaware (the "Company"), as issuer, and U.S. Trust Company of Texas, N.A., a national banking association, as trustee (the "Trustee"). RECITALS The Company has duly authorized the creation of an issue of 11- 1/2% Senior Notes Due 2008 (the "Series A Securities"), and an issue of 11-1/2% Senior Notes Due 2008, Series B (the "Series B Securities," and together with the Series A Securities, the "Securities"), of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary have been done to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligation of the Company and to make this Indenture a valid agreement of each of the Company and the Trustee in accordance with the terms hereof. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders (as hereinafter defined) of the Securities, as follows: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01. Definitions. "Acquired Indebtedness" means Indebtedness of a person existing at the time such person becomes a Restricted Subsidiary or assumed in connection with an Asset Acquisition of such person and not incurred in connection with, or in anticipation of, such person becoming a Restricted Subsidiary or such Asset Acquisition. "Affiliate" of any specified person means any other person which, directly or indirectly, controls, is controlled by or is under direct or indirect common control with, such specified person. For the purposes of this definition, "control" when used with respect to any person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise, and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Member" has the meaning set forth in Section 3.14. 9 -2- "Annualized Pro Forma Consolidated Coverage" means, as of any date of determination, the ratio of (1) Annualized Pro Forma Operating Cash Flow to (2) Consolidated Interest Expense for the four-quarter period immediately preceding the date of determination for which financial statements are available; provided, that (1) if the Company or any of the Restricted Subsidiaries has incurred any Indebtedness (whether through an Asset Acquisition, Asset Sale or otherwise) since the beginning of such period and through the date of determination that remains outstanding or if the transaction or series of transactions giving rise to the need to calculate such ratio involves an incurrence of Indebtedness, Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to (A) such Indebtedness as if such Indebtedness had been incurred on the first day of such period (provided that if such Indebtedness is incurred under a revolving credit facility (or similar arrangement or under any predecessor revolving credit or similar arrangement) only that portion of such Indebtedness that constitutes the one-year projected average balance of such Indebtedness (as determined in good faith by senior management of the Company) shall be deemed outstanding for purposes of this calculation, and (B) the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period; and (2) if since the beginning of such period any Indebtedness of the Company or any of the Restricted Subsidiaries has been repaid, repurchased, defeased or otherwise discharged (whether through an Asset Acquisition, Asset Sale or otherwise) (other than Indebtedness under a revolving credit or similar arrangement unless such revolving credit Indebtedness has been permanently repaid and has not been replaced), Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Indebtedness had been repaid, repurchased, defeased or otherwise discharged on the first day of such period. "Annualized Pro Forma Consolidated Operating Cash Flow" means Consolidated Operating Cash Flow for the latest two fiscal quarters for which consolidated financial statements of the Company are available multiplied by two. For purposes of calculating "Consolidated Operating Cash Flow" for any two fiscal quarter period for purposes of this definition, (i) any Subsidiary of the Company that is a Restricted Subsidiary on the date of the transaction (the "Transaction Date") giving rise to the need to calculate "Annualized Pro Forma Consolidated Operating Cash Flow" shall be deemed to have been a Restricted Subsidiary at all times during such two fiscal quarter period and (ii) any Subsidiary of the Company that is not a Restricted Subsidiary on the Transaction Date shall be deemed not to have been a Restricted Subsidiary at all times during such two fiscal quarter period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated Operating Cash Flow" 10 -3- shall be calculated after giving effect on a pro forma basis for the applicable two fiscal quarter period to, without duplication, any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of the Company or one of the Restricted Subsidiaries (including any person who becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness) occurring during the period commencing on the first day of such two fiscal quarter period to and including the Transaction Date (the "Reference Period"), as if such Asset Sale or Asset Acquisition occurred on the first day of the Reference Period. "Asset Acquisition" means (i) any capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) by the Company or any Restricted Subsidiary in any other person, or any acquisition or purchase of Capital Stock of any other person by the Company or any Restricted Subsidiary, in either case pursuant to which such person shall become a Restricted Subsidiary or shall be merged with or into the Company or any Restricted Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary of the assets of any person which constitute substantially all of an operating unit or line of business of such person or which is otherwise outside of the ordinary course of business. "Asset Sale" means any direct or indirect sale, conveyance, transfer or lease (that has the effect of a disposition and is not for security purposes) or other disposition (that is not for security purposes) to any person other than the Company or a Restricted Subsidiary, in one transaction or a series of related transactions, of (i) any Capital Stock of any Restricted Subsidiary, (ii) any material license or other authorization of the Company or any Restricted Subsidiary pertaining to a Cable/Telecommunications Business (other than the disposition to License Co. of the licenses and authorizations on terms identical to or at least as favorable to the Company and the Restricted Subsidiaries as those set forth in the License Co. Documents (provided such new documents shall also constitute License Co. Documents for all purposes hereunder) so long as the Company or a Restricted Subsidiary has the ability (pursuant to contract or otherwise) to fully exploit such license or authorization in a Cable/ Telecommunications Business), (iii) any assets of the Company or any Restricted Subsidiary which constitute substantially all of an operating unit or line of business of the Company and the Restricted Subsidiaries or (iv) any other property or asset of the Company or any Restricted Subsidiary outside of the ordinary course of business. For the purposes of this definition, the term "Asset Sale" shall not include (i) any disposition of properties and assets of the Company that is governed under Article Eight hereof, (ii) sales of property or equipment that have become worn out, obsolete or damaged or otherwise unsuitable for use in connection with the business of the Company or any Restricted Subsidiary, as the case may be, and (iii) for purposes of Section 10.16, any sale, conveyance, transfer, lease or other disposition of any property or asset, whether in one transaction or a series of related transactions occurring within one year, either 11 -4- (x) involving assets with a Fair Market Value not in excess of $250,000 or (y) which constitutes the incurrence of a Capitalized Lease Obligation. "Average Life to Stated Maturity" means, with respect to any Indebtedness, as at any date of determination, the quotient obtained by dividing (i) the sum of the products of (a) the number of years from such date to the date or dates of each successive scheduled principal payment (including, without limitation, any sinking fund requirements) of such Indebtedness multiplied by (b) the amount of each such principal payment by (ii) the sum of all such principal payments; provided that, in the case of any Capitalized Lease Obligation, all calculations hereunder shall give effect to any applicable options to renew in favor of the Company or any Restricted Security. "Bankruptcy Law" means Title 11, United States Code or any similar federal or state law relating to bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization or relief of debtors or the law of any other jurisdiction relating to bankruptcy, insolvency, receivership, winding- up, liquidation, reorganization or relief of debtors or any amendment to, succession to or change in any such law. "Bankruptcy Order" means any court order made in a proceeding pursuant to or within the meaning of any Bankruptcy Law, containing an adjudication of bankruptcy or insolvency, or providing for liquidation, receivership, winding-up, dissolution, "concordate" or reorganization, or appointing a Custodian of a debtor or of all or any substantial part of a debtor's property, or providing for the staying, arrangement, adjustment or composition of indebtedness or other relief of a debtor. "Board" or "Board of Directors" means the board of directors of the Company or any duly authorized committee of such board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York, State of New York are authorized or obligated by law, regulation or executive order to close. "Cable/Telecommunications Buildout Costs" means the cost (including the cost of design, development, site acquisition, construction, integration, installation, management, 12 -5- manufacture or direct or indirect acquisition (other than an Asset Acquisition to the extent that it is not an Existing Market Asset Acquisition)) of properties or assets (tangible or intangible) used or to be used, directly or indirectly, in a Cable/Telecommunications Business of the Company or any Restricted Subsidiary, including, without limitation, the cost of any Existing Market Asset Acquisition. "Cable/Telecommunications Business" means any business operating a cable and/or telephone and/or telecommunications system (delivered by any means, including, without limitation, cable, microwave, satellite or radio frequency) in the United States or otherwise delivering or expected to deliver services over the networks or systems of the Company and the Restricted Subsidiaries (including, without limitation, any business conducted by the Company or any Restricted Subsidiary on the Issue Date) and any business reasonably related to the foregoing (including, without limitation, any television programming, production and/or licensing business and any programming guide or telephone directory business). Any company holding a license or licenses to conduct any of the foregoing businesses that is not conducting any material business other than a Cable/Telecommunications Business shall also be considered a Cable/Telecommunications Business. A good faith determination by a majority of the Board as to whether a business meets the requirements of this definition shall be conclusive, absent manifest error. "Caisse" means Caisse de depot et placement du Quebec. "Capital Stock" means, with respect to any person, any and all shares, interests, participations, rights in or other equivalents (however designated and whether voting and/or non-voting) of, such person's capital stock, whether outstanding on the Issue Date or issued after the Issue Date, and any and all rights (other than evidence of Indebtedness), warrants or options exchangeable for or convertible into such capital stock. "Capitalized Lease Obligation" means any obligation to pay rent or other amounts under a lease of (or other agreement conveying the right to use) any property (whether real, personal or mixed, immovable or movable) that is required to be classified and accounted for as a capitalized lease obligation under GAAP, and, for the purpose of this Indenture, the amount of such obligation at any date shall be the capitalized amount thereof at such date, determined in accordance with GAAP. "Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of 365 days or less issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided that the full faith and credit of the United States of America is pledged in support thereof or such Indebtedness constitutes a general obligation of such country); (ii) deposits, certificates of deposit or acceptances with a maturity of 365 days or less of any financial institution that is a member of the Federal Reserve System, in each case, 13 -6- having combined capital and surplus and undivided profits (or any similar capital concept) of not less than $500,000,000 and whose senior unsecured debt is rated at least "A-1" by S&P or "P-1" by Moody's; (iii) commercial paper with a maturity of 365 days or less issued by a corporation (other than an Affiliate of the Company) organized under the laws of the United States or any State thereof and rated at least "A-1" by S&P or "P-1" by Moody's; and (iv) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the government of the United States of America or issued by any agency thereof and backed by the full faith and credit of the United States of America, in each case, maturing within 365 days from the date of acquisition. "Change of Control" means the occurrence of any of the following events: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) other than the Permitted Holders is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person will be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the Company; or (b) the Company consolidates with, or merges with or into, another person or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any person, or any person consolidates with, or merges with or into, the Company in any such event pursuant to a transaction in which the outstanding Voting Stock of the Company is converted into or exchanged for cash, securities or other property, other than any such transaction where (i) the outstanding Voting Stock of the Company is converted into or exchanged for (1) Voting Stock (other than Disqualified Stock) of the surviving or transferee corporation and/or (2) cash, securities and other property in an amount which could be paid by the Company as a Restricted Payment under this Indenture and (ii) immediately after such transaction no "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), excluding the Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 50% of the total Voting Stock of the surviving or transferee corporation; or (c) during any consecutive two-year period, individuals who at the beginning of such period constituted the Board (together with any new directors whose election to the Board or whose nomination for election by the stockholders of the Company was approved by a Permitted Holder or by a vote of a majority of the directors then still in 14 -7- office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason (other than by action of the Permitted Holders) to constitute a majority of the Board then in office; provided that (i) to the extent that either (x) one or more regulatory approvals are required for the consummation of one or more of the events or circumstances described in clauses (a) through (c) above to become effective under applicable law or (y) in the good faith judgment of the Board, one or more regulatory approvals are desirable prior to making one or more of the events or circumstances described in clauses (a) through (c) above to become effective under applicable law (provided, in the case of this clause (y), such approvals are sought on a reasonably prompt basis), then such events or circumstances shall be deemed to have occurred at the time such approvals have been obtained and become effective under applicable law, and (ii) any event or circumstance which would constitute a Change of Control solely by reason of the acquisition of "beneficial ownership" of securities of GVL shall not constitute a Change of Control with respect to the Company, unless it would result in a mandatory prepayment (by tender offer or otherwise) of Indebtedness, or an event of default under Indebtedness, of GVL or any of its Subsidiaries (other than the Company and its Subsidiaries). The good faith determination by the Board, based upon advice of outside counsel, of the beneficial ownership of securities of the Company within the meaning of Rules 13d-3 and 13d-5 under the Exchange Act shall be conclusive, absent contrary controlling judicial precedent or contrary written interpretation published by the Commission. "Collateral" shall have the meaning ascribed to such term in the Escrow Agreement. "Commission" means the Securities and Exchange Commission, as from time to time constituted, or if at any time after the execution of this Indenture such Commission is not existing and performing the applicable duties now assigned to it, then the body or bodies performing such duties at such time. "Common Stock" means, with respect to any person, any and all shares, interest or other participations in, and other equivalents (however designated and whether voting or nonvoting) of such person's common stock whether outstanding at the Issue Date, and includes, without limitation, all series and classes of such common stock. "Company" means the person named as the "Company" in the first paragraph of this Indenture, until a successor person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by any one of its Chairman of the Board, its Vice-Chairman, its 15 -8- Chief Executive Officer, its President or a Vice President, and by its Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and delivered to the Trustee. "Consolidated Income Tax Expense" means, with respect to any period, the provision for United States corporation, local, foreign and other income taxes of the Company and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Interest Expense" means, for any period, without duplication, the sum of (i) the interest expense of the Company and the Restricted Subsidiaries for such period as determined on a consolidated basis in accordance with GAAP, including, without limitation, (a) any amortization of debt discount attributable to such period, (b) the net cost under Interest Rate Obligations (including any amortization of discounts), (c) the interest portion of any deferred payment obligation, (d) all commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing and (e) all accrued interest, (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the Company and the Restricted Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP and (iii) the amount of dividends in respect of Disqualified Stock paid by the Company and the Restricted Subsidiaries during such period. Notwithstanding the foregoing, in no event shall Consolidated Interest Expense include interest expense arising under any Deeply Subordinated Shareholder Loans to the extent incurred prior to the Termination Date. "Consolidated Net Income" means, with respect to any period, the consolidated net income of the Company and the Restricted Subsidiaries for such period, adjusted, to the extent included in calculating such consolidated net income, by excluding, without duplication, (i) all extraordinary, unusual or nonrecurring gains or losses of such person (net of fees and expenses relating to the transaction giving rise thereto) for such period, (ii) income of the Company and the Restricted Subsidiaries derived from or in respect of all Investments in persons other than Subsidiaries of the Company or any Restricted Subsidiary, (iii) the portion of net income (or loss) of such person allocable to minority interests in unconsolidated persons for such period, except to the extent actually received by the Company or any Restricted Subsidiary, (iv) net income (or loss) of any other person combined with such person on a "pooling of interests" basis attributable to any period prior to the date of combination, (v) any gain or loss, net of taxes, realized by such person upon the termination of any employee pension benefit plan during such period, (vi) gains or losses in respect of any Asset Sales (net of fees and expenses relating to the transaction giving rise thereto) during such period and (vii) except in the case of any restriction or encumbrance permitted under clause (v) of the covenant "Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries," the net income of any Restricted Subsidiary for such period to the extent that the declaration of dividends or similar distributions by that Restricted Subsidiary of that income is not at the time permitted, directly or 16 -9- indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulations applicable to that Restricted Subsidiary or its stockholders. "Consolidated Operating Cash Flow" means, with respect to any period, the Consolidated Net Income of the Company and the Restricted Subsidiaries for such period increased, to the extent deducted in arriving at Consolidated Net Income for such period, by the sum of (i) the Consolidated Income Tax Expense of the Company and the Restricted Subsidiaries accrued according to GAAP for such period (other than taxes attributable to extraordinary gains or losses and gains and losses from Asset Sales); (ii) Consolidated Interest Expense for such period; (iii) depreciation of the Company and the Restricted Subsidiaries for such period; (iv) amortization of the Company and the Restricted Subsidiaries for such period, including, without limitation, amortization of capitalized debt issuance costs for such period, all determined on a consolidated basis in accordance with GAAP; and (v) for purposes of Section 10.12 only, other non-cash charges decreasing Consolidated Net Income. "consolidation" means, with respect to the Company, the consolidation of the accounts of the Restricted Subsidiaries with those of the Company, all in accordance with GAAP; provided that "consolidation" will not include consolidation of the accounts of any Unrestricted Subsidiary with the accounts of the Company. The term "consolidated" has a correlative meaning to the foregoing. "Corporate Trust Office" means the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office at the date of execution of this Indenture is located at 2001 Ross Avenue, Suite 2700, Dallas, Texas 75201, Attention: Corporate Trust Department. "Cumulative Available Cash Flow" means, as at any date of determination, the positive cumulative Consolidated Operating Cash Flow realized during the period commencing on the Issue Date and ending on the last day of the most recent fiscal quarter immediately preceding the date of determination for which consolidated financial information of the Company is available or, if such cumulative Consolidated Operating Cash Flow for such period is negative, the amount by which cumulative Consolidated Operating Cash Flow is less than zero. "Cumulative Consolidated Interest Expense" means, at any date on which a Restricted Payment is proposed to be made, the sum of the Quarterly Consolidated Interest Expense Amounts for each quarter after the Issue Date (with the first quarter commencing on the Issue Date and ending on November 30, 1998) through the most recent quarter immediately preceding such Restricted Payment for which consolidated financial statements of the Company are available. The "Quarterly Consolidated Interest Expense Amount" for any quarter (the "Subject Quarter") will be the product of (a) Consolidated Interest Expense for the Subject 17 -10- Quarter times (b) the Applicable Percentage for the Subject Quarter, where the "Applicable Percentage" for the Subject Quarter will be (1) 150% of the Consolidated Interest Expense of the Company for the Subject Quarter if Total Consolidated Indebtedness for each day of the Subject Quarter is less than 6.0 times the Annualized Pro Forma Consolidated Operating Cash Flow of the Company (based upon the two most recent quarters for which consolidated financial statements of the Company are available immediately preceding the Subject Quarter) or (2) 200% of the Consolidated Interest Expense of the Company for the Subject Quarter if Total Consolidated Indebtedness for any day of the Subject Quarter is equal to or greater than 6.0 times the Annualized Pro Forma Consolidated Operating Cash Flow of the Company (based upon the two most recent quarters for which consolidated financial statements of the Company are available immediately preceding the Subject Quarter). "Currency Agreement" means any foreign exchange contract, currency swap agreement or other similar agreement or arrangement designed to protect the Company against fluctuations in currency values. "Custodian" means any receiver, interim receiver, receiver and manager, receiver-manager, trustee, assignee, liquidator, sequestrator or similar official under any Bankruptcy Law or any other law respecting secured creditors and the enforcement of their security or any other person with like powers whether appointed judicially or out of court and whether pursuant to an interim or final appointment. "Deeply Subordinated Shareholder Loans" means any Indebtedness of the Company for money borrowed from either (x) a Permitted Holder or (y) another person whose obligations have been guaranteed by a Permitted Holder, provided such Indebtedness of the Company (i) has been expressly subordinated in right of payment and postponed as to all payments of interest (other than payment-in-kind interest) and principal to the Securities, (ii) provides for no payments of interest (other than payment-in-kind interest) or principal prior to the earlier of (a) the end of the sixth month after the final maturity of the Securities and (b) the indefeasible payment in full in cash of all Securities (or due provision therefor which results in the discharge of all Obligations under this Indenture); provided that the terms of the subordination agreement are in the form annexed to this Indenture as Exhibit F and the Company has received one or more Opinions of Counsel as to the validity and enforceability of such subordination agreement. "Default" means any event that is, or after notice or passage of time or both would be, an Event of Default. "Depository" means The Depository Trust Company, its nominees and successors. "Designation" shall have the meaning specified in Section 10.22 hereof. 18 -11- "Designation Amount" has the meaning specified in Section 10.22 hereof. "Disinterested Director" means, with respect to any transaction or series of related transactions, a member of the Board of Directors of the Company other than a director who (i) has any material direct or indirect financial interest in or with respect to such transaction or series of related transactions or (ii) is an employee or officer of the Company or an Affiliate that is itself a party to such transaction or series of transactions or an Affiliate of a party (other than the Company or any Restricted Subsidiary) to such transaction or series of related transactions. "Disqualified Stock" means, with respect to any person, any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is exchangeable for Indebtedness at the option of the holder thereof, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the final maturity date of the Securities; provided such Capital Stock shall only constitute Disqualified Stock to the extent it so matures or is redeemable or exchangeable on or prior to the final maturity date of the Securities. "Equity Offering" means an underwritten public offering of Common Stock of the Company which has been registered under the Securities Act. "Escrow Account" means an escrow account established under the Escrow Agreement for the deposit of a portion of the net proceeds from the sale of the Securities (the "Initial Escrow Amount"), and the proceeds from the investment thereof. "Escrow Agent" means U.S. Trust Company of Texas, N.A., as Escrow Agent pursuant to the Escrow Agreement until a successor escrow agent replaces it in accordance with the provisions of the Escrow Agreement and thereafter means such successor. "Escrow Agreement" means the Escrow Agreement dated as of July 7, 1998, among the Company, the Escrow Agent, the Trustee and the Existing Notes Trustee, in substantially the form set forth as Exhibit E hereto. "Event of Default" shall have the meaning specified in Section 5.01 hereof. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Securities" means the Series B Securities (the terms of which are identical to the Series A Securities except that the Exchange Securities shall be registered under the Securities Act, and shall not contain the restrictive legend on the face of the form of Series A Securities) issued pursuant to this Indenture. 19 -12- "Existing Market Asset Acquisition" means an Asset Acquisition of a Cable/Telecommunications Business to the extent subscribers or customers are located in the metropolitan areas of Houston, Texas; Dallas-Fort Worth, Texas; San Diego, California; Phoenix, Arizona; Chicago, Illinois; Denver, Colorado; San Francisco, California; Los Angeles, California; Miami-Ft. Lauderdale, Florida; Tampa, Florida; Austin, Texas; Atlanta, Georgia; Orlando, Florida; Indianapolis, Indiana; Las Vegas, Nevada; Corpus Christi, Texas; San Antonio, Texas; Daytona Beach, Florida; Tallahassee, Florida; and greater Washington, D.C. (it being understood that where a Cable/Telecommunications Business subject to an Asset Acquisition is conducted in more than one market, an allocation of Indebtedness being incurred pursuant to clause (c) of the definition of Permitted Indebtedness may be made on the basis of the latest 12 months of revenues of the Cable/Telecommunications Business immediately preceding the date of incurrence in a particular metropolitan area). "Existing Notes" means the Company's 13% Senior Notes Due 2005 and 13% Senior Notes Due 2005, Series B. "Existing Notes Indenture" means the indenture dated as of February 14, 1997 by and between the Company and the Existing Notes Trustee pursuant to which the Existing Notes were issued. "Existing Notes Trustee" means U.S.Trust Company of Texas, N.A. in its role as trustee under the Existing Notes Indenture. "Existing Senior Credit Facility" means the senior credit agreement dated as of December 19, 1997, by and among the Company, its principal operating subsidiaries, Goldman Sachs Credit Partners L.P., as Arranger and Syndication Agent, Canadian Imperial Bank of Commerce, as Administrative Agent, General Electric Capital Corporation, as Documentation Agent and the Lenders party thereto from time to time. "Fair Market Value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of which is under pressure or compulsion to complete the transaction. Unless otherwise specified in this Indenture, Fair Market Value will be determined by the Board of Directors of the Company acting in good faith evidenced by a Board Resolution thereof delivered to the Trustee. "Fiscal Year" shall mean the fiscal year of the Company, which ends on August 31 of each year. 20 -13- "GAAP" means, at any date of determination, generally accepted accounting principles in effect in the United States which are applicable as of the date of determination and which are consistently applied for all applicable periods. "Global Security" has the meaning provided in Section 3.03 hereof. "guarantee" means, as applied to any obligation, (i) a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect, in any manner, of any part or all of such obligation and (ii) an agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of all or any part of such obligation, including, without limiting the foregoing, the payment of amounts drawn down by letters of credit. "GVL" means Le Groupe Videotron Ltee. "Holder" or "Securityholder" means a person in whose name a Security is registered in the Security Register. "Indebtedness" means, with respect to any person, without duplication, (i) any liability, contingent or otherwise, of such person (A) for borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof) or (B) evidenced by a note, debenture or similar instrument or letter of credit (including a purchase money obligation) or (C) for the payment of money relating to a Capitalized Lease Obligation or other obligation relating to the deferred purchase price of property or (D) in respect of an Interest Rate Obligation or Currency Agreement; or (ii) any liability of others of the kind described in the preceding clause (i) which the person has guaranteed or which is otherwise its legal liability; or (iii) any obligation secured by a Lien (other than (x) Permitted Liens of the type described in clauses (b), (d), or (e) of the definition of the Permitted Liens; provided that the obligations secured would not constitute Indebtedness under clauses (i) or (ii) or (iii) of this definition, and (y) Liens on Capital Stock or Indebtedness of any Unrestricted Subsidiary) to which the property or assets of such person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such person's legal liability (the amount of such obligation being deemed to be the lesser of the value of such property or asset or the amount of the obligation so secured); (iv) all Disqualified Stock valued at the greater of its voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid dividends; and (v) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (i), (ii), (iii) or (iv). In no event shall "Indebtedness" include trade payables and accrued liabilities that are current liabilities incurred in the ordinary course of business, excluding the current maturity of any obligation which would otherwise constitute Indebtedness. For purposes of Sections 10.12 21 -14- and 10.14 and the definition of "Events of Default," in determining the principal amount of any Indebtedness to be incurred by the Company or a Restricted Subsidiary or which is outstanding at any date, (x) the principal amount of any Indebtedness which provides that an amount less than the principal amount at maturity thereof shall be due upon any declaration of acceleration thereof shall be the accreted value thereof at the date of determination and (y) the principal amount of any Indebtedness shall be reduced by any amount of cash or Cash Equivalent collateral securing on a perfected basis, and dedicated for disbursement exclusively to the payment of principal of and interest on, such Indebtedness. "Indenture" means this instrument as originally executed (including all exhibits and schedules hereto) and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Indenture Obligations" means the obligations of the Company and any other obligor under this Indenture or under the Securities to pay principal of, premium, if any, and interest on the Securities when due and payable, whether at maturity, by acceleration, call for redemption or repurchase or otherwise, and all other amounts due or to become due under or in connection with this Indenture or the Securities and the performance of all other obligations to the Trustee (including, but not limited to, payment of all amounts due the Trustee under Section 6.07 hereof), Paying Agent, Registrar, Escrow Agent and the Holders of the Securities under this Indenture, the Escrow Agreement and the Securities according to the terms thereof. "Independent Financial Advisor" means a United States investment banking firm of national standing in the United States (i) which does not, and whose directors, officers and employees or Affiliates do not have, a direct or indirect financial interest in the Company and (ii) which, in the judgment of the Board, is otherwise independent and qualified to perform the task for which it is to be engaged. "Initial Purchasers" means Salomon Brothers Inc, Goldman, Sachs & Co. and CIBC Oppenheimer Corp. "Institutional Accredited Investor" means an institution that is an "accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. "interest," when used with respect to any Security, means the amount of all interest accruing on such Security, including all additional interest payable on the Securities pursuant to the Registration Agreement and all interest accruing subsequent to the occurrence of any events specified in Sections 5.01(h), (i), (j) and (k) or which would have accrued but for any such event, whether or not such claims are allowable under applicable law. 22 -15- "Interest Payment Date" means, when used with respect to any Security, the Stated Maturity of an installment of interest on such Security, as set forth in such Security. "Interest Rate Obligations" means the obligations of any person pursuant to any arrangement with any other person whereby, directly or indirectly, such person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount and shall include without limitation, interest rate swaps, caps, floors, collars, forward interest rate agreements and similar agreements. "Investment" means, with respect to any person, any advance, loan, account receivable (other than an account receivable arising in the ordinary course of business), or other extension of credit (including, without limitation, by means of any guarantee) or any capital contribution to (by means of transfers of property to others, payments for property or services for the account or use of others, or otherwise), or any purchase or ownership of any stocks, bonds, notes, debentures or other securities of, any other person. Notwithstanding the foregoing, in no event shall any issuance of Capital Stock (other than Disqualified Stock) of the Company in exchange for Capital Stock, property or assets of another person constitute an Investment by the Company in such other person. "Issue Date" means the original date of issuance of the Securities. "License Co." means Transmission Holdings, Inc., a Delaware corporation. "License Co. Documents" means, collectively, (i) the Assignment Agreement dated as of February 14, 1997 among TVMAX Telecommunications, Inc. ("TVMAX"), Sunshine Television Entertainment, Inc., Richey Pacific Cablevision, Inc. and IRPC Arizona, Inc., as assignors, and License Co., as assignee, (ii) the Equipment License and Services Agreement dated as of February 14, 1997 between TVMAX and License Co. and the Promissory Note of License Co. in favor of TVMAX annexed thereto, (iii) the Option Agreements dated as of February 14, 1997 between TVMAX and License Co., (iv) the Shareholder Option Agreement, dated as of February 14, 1997 between each of Henry Goldberg and Russell S. Berman and TVMAX and the Shareholder Option Agreement dated as of September 17, 1997 between Thomas Watson and TVMAX, (v) the Subscription and Shareholders Agreement dated as of February 14, 1997 and as amended as of the Issue Date among Thomas Watson, Henry Goldberg and Russell S. Berman and License Co. and (vi) any other agreements identical to the foregoing in all material respects and entered into for the same purposes that the Company or any Restricted Subsidiary may enter into in the future, as each of the foregoing documents referred to in clauses (i) through (v) may be amended, modified or supplemented in compliance with Section 10.15. 23 -16- "Lien" means any mortgage, charge, pledge, lien (statutory or other), security interest, hypothecation, assignment for security, claim, or preference or priority or other encumbrance upon or with respect to any property of any kind. A person shall be deemed to own subject to a Lien any property which such person has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement. "Material Restricted Subsidiary" means any Restricted Subsidiary of the Company, which, at any date of determination, is a "Significant Subsidiary" (as that term is defined in Regulation S-X issued under the Securities Act), but shall, in any event, include (x) any Guarantor, (y) TVMAX or (z) any Restricted Subsidiary of the Company which, at any date of determination, is an obligor under any Indebtedness in an aggregate principal amount equal to or exceeding $10.0 million if another Material Restricted Subsidiary is also obligated in respect of such Indebtedness. "Maturity Date" means, with respect to any Security, the date specified in such Security as the fixed date on which the principal of such Security is due and payable. "Moody's" means Moody's Investors Service. "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds thereof in the form of cash (including assumed liabilities and other items deemed to be cash under the proviso to the first sentence of Section 10.16) or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (except to the extent that such obligations are financed or sold with recourse to the Company or any Restricted Subsidiary) net of (i) brokerage commissions and other fees and expenses (including fees and expenses of legal counsel and investment bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset Sale, (iii) amounts required to be paid to any person (other than the Company or any Restricted Subsidiary) owning a beneficial interest in or having a Permitted Lien on the assets subject to the Asset Sale and (iv) appropriate amounts to be provided by the Company or any Restricted Subsidiary, as the case may be, as a reserve required in accordance with GAAP against any liabilities associated with such Asset Sale and retained by the Company or any Restricted Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale all as reflected in an Officer's Certificate delivered to the Trustee. "Non-Global Purchasers" shall have the meaning specified in Section 3.03 hereof. "Offering Memorandum" means the Offering Memorandum dated June 29, 1998 pursuant to which the Series A Securities were offered, and any supplement thereto. 24 -17- "Officer" means, with respect to the Company, the Chairman of the Board, a Vice Chairman, the President, a Vice President, the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer. "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman, the President or a Vice President, and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer, of the Company and delivered to the Trustee. "Offshore Physical Securities" shall have the meaning specified in Section 3.03 hereof. "Opinion of Counsel" means a written opinion of counsel who may be counsel for the Company or the Trustee, and who shall be reasonably acceptable to the Trustee. "Other Senior Debt Pro Rata Share" means the amount of the applicable Excess Proceeds obtained by multiplying the amount of such Excess Proceeds by a fraction, (i) the numerator of which is the aggregate accreted value and/or principal amount, as the case may be, of all Indebtedness (other than (x) the Securities and (y) Subordinated Indebtedness) of the Company outstanding at the time of the applicable Asset Sale with respect to which the Company is required to use Excess Proceeds to repay or make an offer to purchase or repay and (ii) the denominator of which is the sum of (a) the aggregate principal amount of all Securities outstanding at the time of the applicable Asset Sale and (b) the aggregate principal amount or the aggregate accreted value, as the case may be, of all other Indebtedness (other than Subordinated Indebtedness) of the Company outstanding at the time of the applicable Asset Sale Offer with respect to which the Company is required to use the applicable Excess Proceeds to offer to repay or make an offer to purchase or repay. "Outstanding" means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company or any Affiliate thereof) in trust or set aside and segregated in trust by the Company or any Affiliate thereof (if the Company or Affiliate shall act as Paying Agent) for the Holders of such Securities; provided, however, that if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; 25 -18- Securities with respect to which the Company has effected defeasance or covenant defeasance as provided in Article Four, to the extent provided in Sections 4.02 and 4.03; and Securities in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands the Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities that a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. The Company shall notify the Trustee, in writing, when it repurchases or otherwise acquires Securities, of the aggregate principal amount of such Securities so repurchased or otherwise acquired. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. If the Paying Agent holds, in its capacity as such, on any Maturity Date or on any optional redemption date money sufficient to pay all accrued interest and principal with respect to such Securities payable on that date and is not prohibited from paying such money to the Holders thereof pursuant to the terms of this Indenture, then on and after that date such Securities cease to be Outstanding and interest on them ceases to accrue. Securities may also cease to be outstanding to the extent expressly provided in Article Eight. "Pari Passu Indebtedness" means any Indebtedness of the Company or any Subsidiary Guarantor ranking pari passu in right of payment with the Securities. "Paying Agent" shall have the meaning specified in Section 3.02 hereof. "Permitted Holder" means (i) any of GVL, Caisse or any of their respective controlled Affiliates, (ii) a Strategic Equity Investor that, prior to August 31, 1999, invests on a primary basis in Capital Stock (other than Disqualified Stock) representing not less than 15% of the fully diluted Common Stock of the Company at the time of issuance by the Company; provided that only the first such Strategic Equity Investor shall be a Permitted Holder, or (iii) Andre Chagnon, his spouse or any of his lineal descendants and their respective spouses 26 -19- (collectively, the "Chagnon Family"), whether acting in their own name or as one or as a majority of persons having the power to exercise the voting rights attached to, or having investment power over, shares of Capital Stock held by others, or (iv) any controlled Affiliate of any member of the Chagnon Family or (v) any trust principally for the benefit of one or more members of the Chagnon Family (whether or not any member of the Chagnon Family is a trustee of such trust ) or (vi) any charitable foundation a majority of whose members, trustees or directors, as the case may be, are persons referred to in (iii) above. For purposes of this definition, "lineal descendant" shall include at any time any person that is treated as being adopted or is in the process of being adopted by any member of the Chagnon Family at such time. "Permitted Indebtedness" means the following Indebtedness (each of which shall be given independent effect): Indebtedness under the Securities and this Indenture; Indebtedness of the Company and/or any Restricted Subsidiary (other than under the Existing Senior Credit Facility) outstanding on the Issue Date, including the Existing Notes; Indebtedness, including under any Senior Bank Facility or Vendor Credit Facility, of the Company and/or any Restricted Subsidiary to the extent that the proceeds of such Indebtedness are used to finance Cable/Telecommunications Buildout Costs of the Company or any of the Restricted Subsidiaries; provided that, to the extent that any such incurrence of Indebtedness is not pursuant to a Vendor Credit Facility, the aggregate principal amount of such incurred Indebtedness shall not exceed 80% of the Cable/Telecommunications Buildout Costs being financed with the proceeds thereof; Indebtedness of the Company such that, after giving effect to the incurrence thereof, the total aggregate principal amount of Indebtedness incurred under this clause (d) and any Refinancing thereof (whether initial or successive) incurred pursuant to and otherwise incurred in compliance with the Indenture would not exceed 200% of Total Incremental Invested Equity; Indebtedness of the Company and/or any Restricted Subsidiary under any Senior Bank Facility in an aggregate principal amount not to exceed $150.0 million at any time outstanding; (i) Indebtedness of any Restricted Subsidiary owed to and held by the Company or a Restricted Subsidiary and (ii) Indebtedness of the Company owed to and held by any Restricted Subsidiary; provided that an incurrence of Indebtedness shall be deemed to 27 -20- have occurred upon (x) any sale or other disposition (excluding assignments as security to financial institutions) of any Indebtedness of the Company or a Restricted Subsidiary referred to in this clause (f) to a person (other than the Company or a Restricted Subsidiary) or (y) any sale or other disposition of Capital Stock of a Restricted Subsidiary, or Designation of a Restricted Subsidiary, which holds Indebtedness of the Company or any Restricted Subsidiary such that such Restricted Subsidiary, in any such case, ceases to be a Restricted Subsidiary; Interest Rate Obligations of the Company and/or any Restricted Subsidiary relating to (i) Indebtedness of the Company and/or such Restricted Subsidiary, as the case may be (which Indebtedness (x) bears interest at fluctuating interest rates and (y) is otherwise permitted to be incurred under Section 10.12), and/or (ii) Indebtedness (which Indebtedness would bear interest at fluctuating interest rates) for which a lender has provided a commitment (subject to customary conditions) in an amount reasonably anticipated to be incurred by the Company and/or a Restricted Subsidiary in the following 12 months after such Interest Rate Obligation has been incurred, but only to the extent, in the case of either subclause (i) or (ii), that the notional principal amount of such Interest Rate Obligations does not exceed the principal amount of the Indebtedness (and/or Indebtedness subject to commitments) to which such Interest Rate Obligations relate; Indebtedness of the Company and/or any Restricted Subsidiary in respect of performance bonds of the Company or any Restricted Subsidiary or surety bonds provided by the Company or any Restricted Subsidiary incurred in the ordinary course of business in connection with the construction, implementation or operation of a Cable/Telecommunications Business; Indebtedness of the Company and/or any Restricted Subsidiary to the extent it represents a replacement, renewal, refinancing or extension (a "Refinancing") of outstanding Indebtedness of the Company and/or of any Restricted Subsidiary incurred or outstanding pursuant to clause (a), (b), (c) or (d) of this definition or the proviso of Section 10.12; provided that (1) Indebtedness of the Company may not be Refinanced to such extent under this clause (i) with Indebtedness of any Restricted Subsidiary and (2) any such Refinancing shall only be permitted under this clause (i) to the extent that (x) it does not result in a lower Average Life to Stated Maturity of such Indebtedness as compared with the Indebtedness being Refinanced and (y) it does not exceed the sum of the principal amount (or, if such Indebtedness provides for a lesser amount to be due and payable upon a declaration of acceleration thereof, an amount no greater than such lesser amount) of the Indebtedness being Refinanced plus the amount of accrued interest thereon and the amount of any reasonably determined prepayment premium necessary to accomplish such Refinancing and such reasonable fees and expenses incurred in connection therewith; 28 -21- Indebtedness of the Company under Deeply Subordinated Shareholder Loans to the extent incurred prior to the Termination Date; and in addition to the items referred to in clauses (a) through (j) above, Indebtedness of the Company and any Acquired Indebtedness of any Restricted Subsidiary having an aggregate principal amount not to exceed $50.0 million at any time outstanding. "Permitted Investments" means (a) Cash Equivalents; (b) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits; (c) loans and advances to employees made in the ordinary course of business; (d) Interest Rate Obligations; (e) bonds, notes, debentures or other securities received as a result of Asset Sales pursuant to and in compliance with Section 10.16; (f) Investments made in the ordinary course of business as partial payment for constructing a network relating principally to a Cable/Telecommunications Business; (g) Investments in License Co. contemplated by the License Co. Documents; and (h) Investments in companies owning or managing multiple dwelling units (or an Affiliate thereof) with which the Company or any Restricted Subsidiary have right of entry agreements ("Rights of Entry") in the ordinary course of business in lieu of (in whole or in part) other customary financial inducements to property owners. "Permitted Liens" means (a) Liens on property of a person existing at the time such person is merged into or consolidated with the Company or any Restricted Subsidiary or becomes a Restricted Subsidiary; provided that such Liens were in existence prior to the contemplation of such merger, consolidation or acquisition and do not secure any property or assets of the Company or any Restricted Subsidiary other than the property or assets subject to the Liens prior to such merger or consolidation; (b) Liens imposed by law, such as Carriers', warehousemen's and mechanics' Liens and other similar Liens arising in the ordinary course of business which secure payment of obligations not more than 60 days past due or are being contested in good faith and by appropriate proceedings; (c) Liens existing on the Issue Date; (d) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted; provided that any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor; (e) easements, rights of way, restrictions and other similar easements, licenses, restrictions on the use of properties, or minor imperfections of title that, in the aggregate, are not material in amount and do not in any case materially detract from the properties subject thereto or interfere with the ordinary conduct of the business of the Company or the Restricted Subsidiaries; (f) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (g) Liens securing any Senior Bank Facility or Vendor Credit Facility to the extent it would constitute "Permitted Indebtedness"; (h) Liens to secure any Refinancing of any Indebtedness secured by Liens referred to in clauses (a), (c) or (j) 29 -22- of this definition, but only to the extent that such Liens do not extend to any other property or assets and the principal amount of the Indebtedness secured by such Liens is not increased; (i) Liens to secure the Securities and the Existing Notes; (j) Liens on real property incurred in connection with the financing of the purchase of such real property (or incurred within 60 days of purchase) by the Company or any Restricted Subsidiary; and (k) Liens on the proceeds of Indebtedness to secure the payment of principal and interest of such Indebtedness and the Existing Notes. "person" means any individual, corporation, limited liability company, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Physical Security" shall have the meaning specified in Section 3.03 hereof. "Predecessor Security" means, with respect to any particular Security, every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 hereof in exchange for a mutilated Security or in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security. "Preferred Stock" means, with respect to any person, any and all shares, interests, participation or other equivalents (however designated) of such person's preferred or preference stock whether now outstanding, or issued after the Issue Date, and including, without limitation, all classes and series of preferred or preference stock of such person. "Private Placement Legend" shall mean the first paragraph of the legend initially set forth in the Securities in the form set forth on Exhibit A-1. "Publicly Traded Stock" means any Common Stock of an issuer that is listed and traded on either the New York Stock Exchange or the American Stock Exchange or the Nasdaq National Market System. "Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule 144A under the Securities Act. "Redemption Date" means, with respect to any Security to be redeemed, any date fixed for such redemption by or pursuant to this Indenture and the terms of the Securities. "Redemption Price" means, with respect to any Security to be redeemed, the price at which it is to be redeemed pursuant to this Indenture and the terms of the Securities. 30 -23- "Refinancing" shall have the meaning set forth in clause (i) of the definition of "Permitted Indebtedness." "Registered Exchange Offer" means the registration by the Company under the Securities Act of all Series B Securities pursuant to a registration statement under which the Company offers each Holder of Series A Securities the opportunity to exchange all Series A Securities held by such Holder for Series B Securities in an aggregate principal amount equal to the aggregate principal amount of Series A Securities held by such Holder, all in accordance with the terms and conditions of the Registration Agreement. "Registration Agreement" means the Registration Agreement dated as of July 7, 1998 by and between the Company and the Initial Purchasers, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms thereof. "Regular Record Date" means the Regular Record Date specified in the Securities. "Regulation S" means Regulation S under the Securities Act. "Responsible Officer" means, with respect to the Trustee, any officer with the Corporate Trust Office of the Trustee (or any successor group of the Trustee) or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer of the Trustee to whom any corporate trust matter is referred because of his or her knowledge of and familiarity with the particular subject. "Restricted Payment" means any of the following: (i) the declaration or payment of any dividend or any other distribution on Capital Stock of the Company or any payment made to the direct or indirect holders (in their capacities as such) of Capital Stock of the Company (other than dividends or distributions payable solely in Capital Stock (other than Disqualified Stock) of the Company or in options, warrants or other rights to purchase Capital Stock (other than Disqualified Stock) of the Company); (ii) the purchase, redemption or other acquisition or retirement for value of any Capital Stock of the Company (other than any such Capital Stock owned by the Company or a Restricted Subsidiary); (iii) the purchase, redemption, defeasance or other acquisition or retirement for value of any Subordinated Indebtedness (other than any Subordinated Indebtedness held by a Restricted Subsidiary); (iv) the making of any payment (whether of principal or interest (other than the payment of interest in the form of additional Deeply Subordinated Shareholder Loans)) in respect of the Deeply Subordinated Shareholder Loans; or (v) the making of any Investment (other than a Permitted Investment) in any person (other than an Investment by a Restricted Subsidiary in the Company or an Investment by the Company or a Restricted Subsidiary in either (x) a Restricted Subsidiary engaged principally in a Cable/Telecommunications Business or (y) a person engaged principally in a 31 -24- Cable/Telecommunications Business that becomes a Restricted Subsidiary as a result of such Investment). "Restricted Security" shall have the meaning specified in Rule 144(a)(3) under the Securities Act; provided that the Trustee shall be entitled to request and conclusively rely upon an Opinion of Counsel with respect to whether a Security is a Restricted Security. "Restricted Subsidiary" means any Subsidiary of the Company that has not been designated by the Board of Directors of the Company, by a Board Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in compliance with Section 10.22 hereof. Any such Designation may be revoked by a Board Resolution of the Company delivered to the Trustee, subject to the provisions of Section 10.22 hereof. "Restricted Subsidiary Indebtedness" means Indebtedness of any Restricted Subsidiary (i) which is not subordinated to any other Indebtedness of such Restricted Subsidiary and (ii) in respect of which the Company is not also obligated (by means of a guarantee or otherwise) other than, in the case of this clause (ii), Indebtedness under any Senior Bank Facility or Vendor Credit Facility to the extent constituting "Permitted Indebtedness." "Revocation" shall have the meaning specified in Section 10.22 hereof. "Rule 144A" means Rule 144A under the Securities Act. "S&P" means Standard & Poor's Corporation. "Securities" shall have the meaning specified in the recitals of this Indenture. "Securities Act" means the Securities Act of 1933, as amended. "Securities Register" shall have the meaning specified in Section 3.05 hereof. "Security Registrar" or "Registrar" shall have the meaning specified in Section 3.02 hereof. "Senior Bank Facility" means any senior commercial term loan and/or revolving credit facility (including any letter of credit subfacility) entered into principally with commercial banks and/or other financial institutions typically party to commercial loan agreements. "Series A Securities" has the meaning specified in the first recital of this Indenture. 32 -25- "Series B Securities" has the meaning specified in the first recital of this Indenture. "Special Record Date" means, with respect to the payment of any Defaulted Interest, a date fixed by the Trustee pursuant to Section 3.07 hereof. "Stated Maturity" means, with respect to any Security or any installment of interest thereon, the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable, and when used with respect to any other Indebtedness, means the date specified in the instrument governing such Indebtedness as the fixed date on which the principal of such Indebtedness, or any installment of interest thereon, is due and payable. "Strategic Equity Investor" means (i) any company (other than GVL and its affiliates) which is engaged principally in a Cable/Telecommunications Business and which has a rating from Moody's of Baa3 (or the equivalent thereof) or higher or from S&P of BBB- (or the equivalent thereof) or higher or (ii) any controlled Affiliate of any company referred to in the preceding clause (i). "Subordinated Indebtedness" means any Indebtedness of the Company or any Guarantor which is expressly subordinated in right of payment to any other Indebtedness of the Company or any Guarantor. "Subsidiary" means, with respect to any person, (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors shall at the time be owned, directly or indirectly, by such person, or (ii) any other person of which at least a majority of voting interest is at the time, directly or indirectly, owned by such person. "Termination Date" means the earlier to occur of (i) July 31, 1999 and (ii) an Equity Offering. "Total Consolidated Indebtedness" means, at any date of determination, an amount equal to the aggregate amount of all Indebtedness of the Company and the Restricted Subsidiaries outstanding as of the date of determination; provided that Total Consolidated Indebtedness shall exclude any Deeply Subordinated Shareholder Loans to the extent incurred prior to the Termination Date. "Total Incremental Invested Equity" means, at any date of determination, the sum of, without duplication, (a) the aggregate cash proceeds or Fair Market Value of non-cash consideration received by the Issuer either (x) as cash capital contributions to the Company after 33 -26- the Issue Date or (y) from the issue and sale (other than to a Restricted Subsidiary) of its Capital Stock (other than Disqualified Stock) on or after the Issue Date for cash or to effect an Asset Acquisition, plus (b) the aggregate net proceeds received by the Company from the issuance (other than to a Restricted Subsidiary) on or after the Issue Date of its Capital Stock (other than Disqualified Stock) upon the conversion of, or in exchange for, indebtedness of the Company, minus (c) the aggregate amount of all Restricted Payments made on or after the Issue Date and all Designation Amounts arising after the Issue Date, but only to the extent the amount set forth in this clause (c) would exceed the amount determined under subclause (A) of clause (iii) of Section 10.14(a), plus (d) in the case of the disposition or repayment of any Investment which has been deducted pursuant to clause (c) of this definition, an amount equal to the return of capital with respect to such Investment and the cost of such Investment, plus (e) in the case of any Revocation with respect to any Subsidiary that was made the subject of a Designation after the Issue Date and as to which a Designation Amount has been deducted pursuant to clause (c) of this definition, an amount equal to the lesser of such Designation Amount or the Fair Market Value of the Investment of the Issuer and the Restricted Subsidiaries in such Subsidiary at the time of Revocation. "Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939, as amended. "Trustee" means the person named as the "Trustee" in the first paragraph of this Indenture, until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unrestricted Subsidiary" means any Subsidiary of the Company designated as such pursuant to and in compliance with Section 10.22 hereof. Any such Designation may be revoked by a Board Resolution of the Company delivered to the Trustee, subject to the provisions of Section 10.22 hereof. "Vendor Credit Facility" means, collectively, any credit facility entered into with any vendor or supplier (or any financial institution acting on behalf of or for the purpose of directly financing purchases from such vendor or supplier) to the extent the Indebtedness thereunder is incurred for the purpose of financing the cost (including the cost of design, development, site acquisition, construction, integration, installation, management, manufacture or acquisition) of personal property (tangible or intangible) used, or to be used, in a Cable/Telecommunications Business. "VPC" means VPC Corporation. "Voting Stock" means any class or classes of Capital Stock pursuant to which the holders thereof have the general voting power under ordinary circumstances to elect at least a 34 -27- majority of the board of directors, managers or trustees of any persons (irrespective of whether or not, at the time, stock of any other class or classes will have, or might have, voting power by reason of the happening of any contingency). Section 1.02. Other Definitions.
Defined in Term Section ---- ---------- "Act" 1.05 "Asset Sale Offer" 10.16 "Asset Sale Offer Price" 10.16 "Asset Sale Purchase Date" 10.16 "Change of Control Date" 10.11 "Change of Control Offer" 10.11 "Change of Control Purchase Date" 10.11 "covenant defeasance" 4.03 "Defaulted Interest" 3.07 "defeasance" 4.02 "Defeased Securities" 4.01 "Excess Proceeds" 10.16 "Guarantor" 10.19 "incur" 10.12 "insolvent person" 4.04 "Offer Excess Proceeds" 10.16 "Replacement Assets" 10.16 "Surviving Entity" 8.01
Section 1.03. Rules of Construction. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; 35 -28- (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision; (e) all references to "$" or "dollars" shall refer to the lawful currency of the United States of America; and (f) the words "include," "included" and "including" as used herein shall be deemed in each case to be followed by the phrase "without limitation." Section 1.04. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such person, or that they be so certified or covered by only one document, but one such person may certify or give an opinion with respect to some matters and one or more other persons as to other matters, and any such person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated, with proper identification of each matter covered therein, and form one instrument. Section 1.05. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or 36 -29- instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution (as provided below in subsection (b) of this Section 1.05) of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01 hereof) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any person of any such instrument or writing may be proved in any manner which the Trustee deems sufficient, including the execution of such instrument or writing without more. (c) The ownership of Securities shall be proved by the Security Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind every future Holder of the same Security or the Holder of every Security issued upon the transfer thereof or in exchange therefor or in lieu thereof to the same extent as the original Holder, in respect of anything done, suffered or omitted to be done by the Trustee, any Paying Agent or the Company in reliance thereon, whether or not notation of such action is made upon such Security. Section 1.06. Notices, etc., to the Trustee and the Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with: (a) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed, in writing and mailed, first-class postage prepaid, to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Department or at any other address previously furnished in writing to the Holders and the Company by the Trustee and shall be effective upon actual receipt at such address; or (b) the Company by the Trustee or by any Holder shall be sufficient for every purpose (except as otherwise expressly provided herein) hereunder if in writing and mailed, first-class postage prepaid, delivered in person or sent by facsimile transmission to the Company addressed to it at OpTel, Inc., 1111 W. Mockingbird Lane, Dallas, Texas 75247, Attention: Chief Executive Officer, or at any other address previously furnished in writing to the Trustee by the Company. 37 -30- Section 1.07. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise expressly provided herein) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at the address of such Holder as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice when mailed to a Holder in the aforesaid manner shall be conclusively deemed to have been received by such Holder whether or not actually received by such Holder. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event as required by any provision of this Indenture, then any method of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. Section 1.08. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with any provision of the Trust Indenture Act or another provision which is required or deemed to be included in this Indenture by any of the provisions of the Trust Indenture Act, such provision or requirement of the Trust Indenture Act shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be. Section 1.09. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. Section 1.10. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its respective successors and assigns, whether so expressed or not. 38 -31- Section 1.11. Separability Clause. In case any provision in this Indenture or in the Securities issued pursuant hereto shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 1.12. Benefits of Indenture. Nothing in this Indenture or in the Securities issued pursuant hereto, express or implied, shall give to any person (other than the parties hereto and their predecessors and successors hereunder, any Paying Agent, any Registrar and the Holders) any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.13. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. Section 1.14. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Section 1.15. Independence of Covenants. All covenants and agreements in this Indenture shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or condition exists. Section 1.16. Exhibits. All exhibits attached hereto are by this reference made a part hereof with the same effect as if herein set forth in full. Section 1.17. Counterparts. This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. 39 -32- Section 1.18. Duplicate Originals. The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. ARTICLE II SECURITY FORMS Section 2.01. Form and Dating. The Securities and the Trustee's certificate of authentication with respect thereto shall be in substantially the forms set forth, or referenced, in Exhibit A-1 and Exhibit A-2, respectively, annexed hereto, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with any applicable law or with the rules of the Depository, any clearing agency or any securities exchange or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. The definitive Securities shall be printed, typewritten, lithographed or engraved or produced by any combination of these methods or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. Each Security shall be dated the date of its issuance and shall show the date of its authentication. The terms and provisions contained in the Securities shall constitute, and are expressly made, a part of this Indenture. ARTICLE III THE SECURITIES Section 3.01. Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $200,000,000 in aggregate principal amount of Series A Securities and Series B Securities, except for Securities authenticated and delivered upon 40 -33- registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 3.03, 3.04, 3.05, 3.06, 9.06, 10.11, 10.16 or 11.08. The Series A Securities shall be known and designated as the "11- 1/2% Senior Notes Due 2008" of the Company. The Series B Securities shall be known and designated as the "11-1/2% Senior Notes Due 2008, Series B" of the Company. The final Stated Maturity of the Series A Securities and the Series B Securities shall be July 1, 2008, and the Series A Securities and Series B Securities shall each bear interest at the rate of 11-1/2% per annum from the Issue Date or from the most recent Interest Payment Date to which interest has been paid, as the case may be, payable on January 1, 1999 and semi-annually thereafter on July 1 and January 1, in each year, until the principal thereof is paid or duly provided for. Interest on any overdue principal, interest (to the extent lawful) or premium, if any, shall be payable on demand. Series B Securities may be issued only in exchange for a like principal amount of Series A Securities pursuant to a Registered Exchange Offer. The Securities shall be redeemable as provided in Article Eleven and paragraph 3 of the Series A Securities and paragraph 2 of the Series B Securities. At the election of the Company, the entire Indebtedness on the Securities or certain of the Company's obligations and covenants and certain Events of Default thereunder may be defeased as provided in Article Four. Section 3.02. Registrar and Paying Agent. The Company shall maintain an office or agency (which shall be located in the Borough of Manhattan in The City of New York, State of New York) where Securities may be presented for registration of transfer or for exchange (the "Security Registrar" or "Registrar"), an office or agency (which shall be located in the Borough of Manhattan in The City of New York, State of New York) where Securities may be presented for payment (the "Paying Agent" or "Agent") and an office or agency where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" or "Agent" includes any additional paying agent. The Company may act as its own Paying Agent, except for the purposes of payments on account of principal on the Securities pursuant to Sections 10.11 and 10.16 hereof. The Company shall enter into an appropriate agency agreement with any Agent not a party to this Indenture, which shall incorporate the provisions of the Trust Indenture Act. The agreement shall implement the provisions of this Indenture that relate to such Agent. The Company shall notify the Trustee of the name and address of any such Agent. If the Company 41 -34- fails to maintain a Registrar or Paying Agent, or fails to give the foregoing notice, the Trustee shall act as such and shall be entitled to appropriate compensation in accordance with Section 6.07 hereof. The Company initially appoints the Trustee as the Registrar and Paying Agent and agent for service of notices and demands in connection with the Securities. Section 3.03. Execution and Authentication. Two Officers shall execute the Securities on behalf of the Company by either manual or facsimile signature. Securities bearing the manual or facsimile signature of individuals who were at any time the proper Officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices on the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities; and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities as provided in this Indenture and not otherwise. A Security shall not be entitled to any benefit under this Indenture or be valid or obligatory for any purpose until the Trustee manually signs the certificate of authentication on the Security. The Trustee's signature on such certificate shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Series A Securities for original issue in an aggregate principal amount not to exceed $200,000,000, upon receipt of a Company Order. In addition, on or prior to the date of the Registered Exchange Offer, the Trustee or an authenticating agent shall authenticate Exchange Securities which will be in the form of Exhibit A-2 (including any Securities held by the Initial Purchasers and registered according to the Registration Agreement, which will be in the form of Exhibit A-2 but which shall have the restrictive legend contained in Exhibit A-1) to be issued at the time of the Registered Exchange Offer in the aggregate principal amount of up to $200,000,000 upon receipt of a Company Order of the Company. In each case, the Company Order shall specify the amount of Securities to be authenticated, the names of the persons in which such Securities shall be registered and the date on which such Securities are to be authenticated and direct the Trustee to authenticate such Securities together with an Officer's Certificate certifying that all conditions precedent to the issuance of such Securities contained herein have been complied with. The aggregate principal 42 -35- amount at maturity of Securities Outstanding at any time may not exceed $200,000,000, except as provided in Section 3.04 hereof. The Trustee may appoint an authenticating agent reasonably acceptable to the Company to authenticate Securities on behalf of the Trustee. Unless limited by the terms of such appointment, an authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. Such authenticating agent shall have the same authenticating rights and duties as the Trustee in any dealings hereunder with the Company or with any Affiliate of the Company. The certificates representing the Securities will be issued in fully registered form, without coupons and only in denominations of $1,000 and any integral multiple thereof. Except as described below, the Series A Securities will be deposited with, or on behalf of, the Depository, and registered in the name of Cede & Co. as the Depository's nominee in the form of a global note certificate substantially in the form of Exhibit A-1 (the "Global Security") or will remain in the custody of the Trustee pursuant to the FAST Balance Certificate Agreement between the Depository and the Trustee. Series A Securities purchased by or transferred to (i) Institutional Accredited Investors who are not Qualified Institutional Buyers, (ii) except as described below, persons outside the United States pursuant to sales in accordance with Regulation S under the Securities Act or (iii) any other persons who are not Qualified Institutional Buyers (collectively, "Non-Global Purchasers") will be issued in registered form without coupons substantially in the form of Exhibit A-1 (the "U.S. Physical Securities"). Upon the transfer to a Qualified Institutional Buyer of U.S. Physical Securities initially issued to a Non-Global Purchaser, such U.S. Physical Security will be exchanged for an interest in the Global Security or in the Securities in the custody of the Trustee representing the principal amount of Securities being transferred. Series A Securities purchased by persons outside the United States pursuant to sales in accordance with Regulation S under the Securities Act will be represented upon issuance by a temporary global note certificate substantially in the form of Exhibit A-1 (the "Offshore Physical Securities" and, together with the U.S. Physical Securities, the "Physical Securities") which will not be exchangeable for U.S. Physical Securities until the expiration of the "40-day restricted period" within the meaning of Rule 903(c)(3) of Regulation S under the Securities Act. The Offshore Physical Securities will be registered in the name of, and be held by, an offshore physical security holder (the "Offshore Physical Security Holder") until the expiration of such 40-day period, at which time the Offshore Physical Securities will be delivered to the Trustee in exchange for Securities registered in the names requested by the Offshore Physical Security Holder. In addition, until the expiration of such 40-day period, transfers of interests in the Offshore Physical Securities can only be effected through the Offshore Physical Security Holder in accordance with the requirements of Section 3.15 hereof. 43 -36- Section 3.04. Temporary Securities. Until definitive Securities are prepared and ready for delivery, the Company may execute and upon a Company Order the Trustee shall authenticate and deliver temporary Securities. Temporary Securities shall be substantially in the form of definitive Securities, in any authorized denominations, but may have variations that the Company reasonably considers appropriate for temporary Securities as conclusively evidenced by the Company's execution of such temporary Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay but in no event later than the date that the Registered Exchange Offer is consummated. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 10.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall in accordance with a Company Order authenticate and deliver in exchange therefor a like principal amount of definitive Securities of like tenor and of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. Section 3.05. Transfer and Exchange. The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.02 being sometimes referred to herein as the "Securities Register") in which, subject to such reasonable regulations as the Securities Registrar may prescribe, the Company shall provide for the registration of Securities and of transfers and exchanges of Securities. The Trustee is hereby initially appointed Security Registrar for the purpose of registering Securities and transfers of Securities as herein provided. When Securities are presented to the Registrar or a co-Registrar with a request from the Holder of such Securities to register the transfer or exchange for an equal principal amount of Securities of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested; provided that every Security presented or surrendered for registration of transfer or exchange shall be duly endorsed or be accompanied by a written instrument of transfer or exchange in form satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. Whenever any Securities are so presented for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. No service charge shall be made to the Securityholder for any registration of transfer or 44 -37- exchange. The Company may require from the Securityholder payment of a sum sufficient to cover any transfer taxes or other governmental charge that may be imposed in relation to a transfer or exchange, but this provision shall not apply to any exchange pursuant to Section 3.09, 10.11, 10.16 or 9.06 hereof (in which events the Company will be responsible for the payment of all such taxes which arise solely as a result of the transfer or exchange and do not depend on the tax status of the Holder). The Trustee shall not be required to exchange or register the transfer of any Security for a period of 15 days immediately preceding the first mailing of notice of redemption of Securities to be redeemed or of any Security selected, called or being called for redemption except, in the case of any Security where public notice has been given that such Security is to be redeemed in part, the portion thereof not to be redeemed. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same Indebtedness, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Section 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If a mutilated Security is surrendered to the Trustee or if the Holder of a Security of any series claims that the Security has been lost, destroyed or wrongfully taken, the Company shall execute and upon a Company Order, the Trustee shall authenticate and deliver a replacement Security of like tenor and principal amount, bearing a number not contemporaneously outstanding, if the Holder of such Security furnishes to the Company and to the Trustee evidence acceptable to them of the ownership and the destruction, loss or theft of such Security and an indemnity bond shall be posted, sufficient in the judgment of both the Company and the Trustee, to protect the Company, the Trustee or any Agent from any loss that any of them may suffer if such Security is replaced. The Company may charge such Holder for the Company's expenses in replacing such Security (including expenses of the Trustee charged to the Company) and the Trustee may charge the Company for the Trustee's expenses in replacing such Security. Every replacement Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. 45 -38- Section 3.07. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the Regular Record Date; and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in subsection (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this subsection (a) provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company in writing of such Special Record Date. In the name and at the expense of the Company, the Trustee shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at its address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the persons in whose names the Securities (or their respective Predecessor Securities) are registered on such Special Record Date and shall no longer be payable pursuant to the following subsection (b). (b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such 46 -39- exchange, if, after written notice given by the Company to the Trustee of the proposed payment pursuant to this subsection (b), such payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. Section 3.08. Persons Deemed Owners. Prior to and at the time of due presentment for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name any Security is registered in the Security Register as the owner of such Security for the purpose of receiving payment of principal of, premium, if any, and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security shall be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. Section 3.09. Cancellation. All Securities surrendered for payment, redemption, registration of transfer or exchange shall be delivered to the Trustee and, if not already cancelled, shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly cancelled by the Trustee. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer or exchange, redemption or payment. The Trustee and no one else shall cancel all Securities surrendered for registration of transfer, exchange, payment, replacement or cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section 3.09, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of as directed by the Company in writing to the Trustee or in accordance with the Trustee's customary practice. The Trustee shall provide the Company a list of all Securities that have been cancelled from time to time as requested by the Company. Section 3.10. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. 47 -40- Section 3.11. Legal Holidays. In any case where any Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of principal, premium, if any, or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or at the Stated Maturity, as the case may be, and no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date, Redemption Date, date established for the payment of Defaulted Interest or Stated Maturity, as the case may be, to the next succeeding Business Day. Section 3.12. CUSIP Number. The Company in issuing the Securities may use a "CUSIP" number (if then generally in use), and if so, the Trustee may use the CUSIP numbers in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. The Company shall promptly notify the Trustee in writing of any change in the CUSIP number of either series of Securities. Section 3.13. Paying Agent to Hold Money in Trust. Each Paying Agent shall hold in trust for the benefit of the Securityholders or the Trustee all money held by the Paying Agent for the payment of principal of, premium, if any, or interest on the Securities, and shall notify the Trustee of any default by the Company in making any such payment. Money held in trust by the Paying Agent need not be segregated except as required by law and in no event shall the Paying Agent be liable for any interest on any money received by it hereunder. The Company at any time may require the Paying Agent to pay all money held by it to the Trustee and account for any funds disbursed and the Trustee may at any time during the continuance of any Event of Default, upon a Company Order to the Paying Agent, require such Paying Agent to pay forthwith all money so held by it to the Trustee and to account for any funds disbursed. Upon making such payment, the Paying Agent shall have no further liability for the money delivered to the Trustee. Section 3.14. Book-Entry Provisions for Global Securities. (a) The Global Securities initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends as set forth in Exhibit B. 48 -41- Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Security, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Security. (b) Transfers of Global Securities shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in the Global Securities may be transferred or exchanged for Physical Securities in accordance with the rules and procedures of the Depository and the provisions of Section 3.15. In addition, Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in Global Securities if (i) the Depository notifies the Company that it is unwilling or unable to continue as Depository for any Global Security and a successor Depository is not appointed by the Company within 90 days of such notice or (ii) an Event of Default has occurred and is continuing and the Registrar has received a written request from the Depository to issue Physical Securities. (c) In connection with any transfer or exchange of a portion of the beneficial interest in any Global Security to beneficial owners pursuant to paragraph (b), the Registrar shall (if one or more Physical Securities are to be issued) reflect on its books and records the date and a decrease in the principal amount of the Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Securities of like tenor and principal amount of authorized denominations. (d) In connection with the transfer of Global Securities as an entirety to beneficial owners pursuant to paragraph (b), the Global Securities shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in the Global Securities, an equal aggregate principal amount at maturity of Physical Securities of like tenor of authorized denominations. (e) Any Physical Security constituting a Restricted Security delivered in exchange for an interest in a Global Security pursuant to subparagraphs (b) or (c) of this Section 3.14 shall, except as otherwise provided by paragraphs (a)(l)(x) and (c) of Section 3.15, bear the legend regarding transfer restrictions applicable to the Physical Securities set forth in Exhibit A-1. 49 -42- (f) The Holder of any Global Security may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. Section 3.15. Special Transfer Provisions. (a) Transfers to Non-QIB Institutional Accredited Investors and Non-U.S. persons. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to any Institutional Accredited Investor which is not a QIB or to any non-U.S. person: (1) the Registrar shall register the transfer of any Security constituting a Restricted Security, whether or not such Security bears the Private Placement Legend, if (x) the requested transfer is not prior to the date which is two years (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act or any successor provision thereunder) after the later of the original Issue Date of such Security (or of any Predecessor Security) or the last day on which the Company or any Affiliate of the Company was the owner of such Security or any Predecessor Security or (y) (1) in the case of a transfer to a person purporting to be an Institutional Accredited Investor which is not a QIB (excluding non-U.S. persons), the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit C hereto or (2) in the case of a transfer to a person purporting to be a non-U.S. person, the proposed transferee has delivered to the Registrar a certificate substantially in the form of Exhibit D hereto; and (2) if the proposed transferor is an Agent Member holding a beneficial interest in a Global Security, upon receipt by the Registrar of (x) the certificate, if any, required by paragraph (1) above and (y) instructions given in accordance with the Depository's and the Registrar's procedures; whereupon (a) the Registrar shall reflect on its books and records the date and (if the transfer does not involve a transfer of Outstanding Physical Securities) a decrease in the principal amount of a Global Security in an amount equal to the principal amount of the beneficial interest in a Global Security to be transferred, and (b) the Company shall execute and the Trustee shall authenticate and deliver one or more Physical Securities of like tenor and principal amount of authorized denominations. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to a person purporting to be a QIB (excluding transfers to non-U.S. persons): 50 -43- (1) the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that the transfer has been made in compliance with the exemption from registration under the Securities Act provided under Rule 144A to a transferee who has signed the certification provided for on the form of Security stating, or has otherwise advised the Company and the Registrar in writing, that such transferee represents and warrants that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; and (2) if the proposed transferee is an Agent Member, and the Securities to be transferred consist of Physical Securities which after transfer are to be evidenced by an interest in the Global Security, upon receipt by the Registrar of instructions given in accordance with the Depository's and the Registrar's procedures, the Registrar shall reflect on the Security Register the date and an increase in the principal amount of the Global Security in an amount equal to the principal amount of the Physical Securities to be transferred, and the Trustee shall cancel the Physical Securities so transferred. (c) Private Placement Legend. Upon the registration of transfer, exchange or replacement of Securities not bearing the Private Placement Legend, the Registrar shall deliver Securities that do not bear the Private Placement Legend. Upon the registration of transfer, exchange or replacement of Securities bearing the Private Placement Legend, the Registrar shall deliver only Securities that bear the Private Placement Legend unless (i)(x) the circumstances contemplated by paragraph (a)(l)(x) of this Section 3.15 exist or (y) such Security has been sold or exchanged pursuant to an effective registration statement under the Securities Act and (ii) there is delivered to the Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (d) Other Transfers. If a Holder proposes to transfer a Security constituting a Restricted Security pursuant to any exemption from the registration requirements of the Securities Act other than as provided for by Section 3.15(a) and (b), the Registrar shall only register such transfer or exchange if such transferor delivers an Opinion of Counsel satisfactory to the Company and the Registrar that such transfer is in compliance with the Securities Act and the terms of this Indenture; provided that the Company may, based upon the opinion of its 51 -44- counsel, instruct the Registrar by a Company Order not to register such transfer in any case where the proposed transferee is not a QIB, non-U.S. person or Institutional Accredited Investor. (e) General. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 3.14 or this Section 3.15 for a period of two years at which time such letters, notices and other written communications shall be delivered to the Company. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable prior written notice to the Registrar. ARTICLE IV DEFEASANCE OR COVENANT DEFEASANCE Section 4.01. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time, with respect to the Securities, elect to have either Section 4.02 or Section 4.03 be applied to all of the Outstanding Securities (the "Defeased Securities"), upon compliance with the conditions set forth below in this Article Four. Section 4.02. Defeasance and Discharge. Upon the Company's exercise under Section 4.01 of the option applicable to this Section 4.02, the Company shall be deemed to have been discharged from its obligations with respect to the Defeased Securities on the date the conditions set forth below are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Defeased Securities, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 4.05 and the other Sections of this Indenture referred to in (a) and (b) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, and, upon Company Request, shall execute proper instruments acknowledging the same), except for the following, which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of Defeased Securities to receive, solely from the trust fund described in Section 4.04 and as more fully set 52 -45- forth in such Section, payments in respect of the principal of, premium, if any, and interest on such Securities when such payments are due, (b) the Company's obligations with respect to such Defeased Securities under Sections 3.04, 3.05, 3.06, 10.02 and 10.03, (c) the rights, powers, trusts, duties and immunities of the Trustee, the Paying Agent and the Registrar hereunder, including, without limitation, the Trustee's rights under Section 6.07, and (d) this Article Four. Subject to compliance with this Article Four, the Company may exercise its option under this Section 4.02 notwithstanding the prior exercise of its option under Section 4.03 with respect to the Securities. Section 4.03. Covenant Defeasance. Upon the Company's exercise under Section 4.01 of the option applicable to this Section 4.03, the Company shall be released from its obligations under any covenant or provision contained in Sections 10.06 through 10.22 (except Sections 10.09, the last sentence of 10.10, 10.13(b) and 10.18) and the provisions of Articles Eight and Eleven shall not apply, with respect to the Defeased Securities on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Defeased Securities shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Defeased Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or Article, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or Article or by reason of any reference in any such Section or Article to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 5.01(c) or (d), but, except as specified above, the remainder of this Indenture and such Defeased Securities shall be unaffected thereby. Section 4.04. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 4.02 or Section 4.03 to the Defeased Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 6.09 who shall agree to comply with the provisions of this Article Four applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (a) money in an amount, or (b) U.S. Government Securities which through the scheduled payment of principal, premium, if any, and interest in respect thereof in accordance with their terms 53 -46- will provide, not later than one day before the due date of any payment, money in an amount, or (c) a combination thereof, in any such case, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of, premium, if any, and interest on the Defeased Securities upon redemption or at the Stated Maturity of such principal or installment of principal, premium, if any, or interest; provided, however, that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Securities to said payments with respect to the Securities; (2) No Default shall have occurred and be continuing on the date of such deposit or, insofar as Sections 5.01(h), (i) or (j) are concerned, at any time during the period ending on the ninety-first day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (3) Neither the Company nor any Subsidiary of the Company is an "insolvent person" within the meaning of any applicable Bankruptcy Law on the date of such deposit or at any time during the period ending on the ninety-first day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period); (4) Such defeasance or covenant defeasance shall not cause the Trustee for the Securities to have a conflicting interest in violation of Section 6.08 and for purposes of the Trust Indenture Act with respect to any securities of the Company; (5) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other agreement or instrument to which the Company is a party or by which it is bound; (6) In the case of an election under Section 4.02, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since the date hereof, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred; 54 -47- (7) In the case of an election under Section 4.03, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (8) The Company shall have delivered to the Trustee an Opinion of Counsel to the effect that, immediately following the ninety-first day after the deposit, the trust funds established pursuant to this Article will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally (for the limited purpose of the Opinion of Counsel referred to in this clause (8), such Opinion of Counsel may contain an assumption that the conclusions contained in a customary solvency letter by a nationally recognized appraisal firm, dated as of the date of the deposit and taking into account such deposit, are accurate as of such date, provided, however, that such solvency letter is also delivered to the Trustee); (9) The Company shall have delivered to the Trustee an Officers' Certificate stating that the deposit made by the Company pursuant to its election under Section 4.02 or 4.03 was not made by the Company with the intent of preferring the Holders over the other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding creditors of the Company or others; and (10) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that (i) all conditions precedent (other than conditions requiring the passage of time) provided for relating to either the defeasance under Section 4.02 or the covenant defeasance under Section 4.03 (as the case may be) have been complied with as contemplated by this Section 4.04 and (ii) if any other Indebtedness of the Company shall then be outstanding or committed, such defeasance or covenant defeasance will not violate the provisions of the agreements or instruments evidencing such Indebtedness. Opinions required to be delivered under this Section may have such qualifications as are customary for opinions of the type required and acceptable to the Trustee. Section 4.05. Deposited Money and U.S. Government Obligations To Be Held in Trust; Other Miscellaneous Provisions. Subject to the proviso of the last paragraph of Section 10.03, all money and U.S. Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 4.05, the "Trustee") pursuant to 55 -48- Section 4.04 in respect of the Defeased Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (other than the Company) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee and hold it harmless against any tax, fee or other charge imposed on or assessed against the U.S. Government Securities deposited pursuant to Section 4.04 or the principal, premium, if any, and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Defeased Securities. Anything in this Article Four to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Securities held by it as provided in Section 4.04 which, in the opinion of an internationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance. Section 4.06. Reinstatement. If the Trustee or Paying Agent is unable to apply any money or U.S. Government Securities in accordance with Section 4.02 or 4.03, as the case may be, by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations of the Company under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 4.02 or 4.03, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money and U.S. Government Securities in accordance with Section 4.02 or 4.03, as the case may be; provided, however, that if the Company makes any payment of principal, premium, if any, or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money and U.S. Government Securities held by the Trustee or Paying Agent. 56 -49- ARTICLE V REMEDIES Section 5.01. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) default in the payment of an installment of interest on any of the Securities, when due and payable, and continuance of such default for a period of 30 days or more (provided such 30 day grace period shall be inapplicable to the first two Interest Payment Dates); or (b) default in the payment of the principal of or premium, if any, when due and payable, on any of the Securities (at its Stated Maturity, upon optional redemption, required purchase, scheduled principal payment or otherwise); or (c) the Company fails to comply with any of its obligations described under Article Eight or Sections 10.11 or 10.16 hereof; or (d) the Company fails to perform or observe any other term, covenant or agreement contained in the Securities, this Indenture or the Escrow Agreement (other than a default specified in (a), (b) or (c) above) for a period of 30 days after written notice of such failure requiring the Company to remedy the same and stating that such notice is a "Notice of Default" hereunder shall have been given (x) to the Company by the Trustee or (y) to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Securities then Outstanding; or (e) failure to perform any term, covenant, condition or provision of one or more classes or issues of Indebtedness in an aggregate principal amount of $5,000,000 or more under which the Company or a Material Restricted Subsidiary is obligated, and either (a) such Indebtedness is already due and payable in full or (b) such failure results in the acceleration of the maturity of such Indebtedness; provided that, in the case of a termination or expiration of an Interest Rate Obligation requiring that the monetary liability thereunder be paid, no Event of Default shall occur if such payment is made within 30 days after such payment is due; or (f) any holder of at least $5,000,000 in aggregate principal amount of Indebtedness of the Company or any Material Restricted Subsidiary shall commence judicial proceedings or take any other action to foreclose upon or dispose of assets of the Company or any Material Restricted Subsidiary having an aggregate Fair Market Value, individually or in the aggregate, of $5,000,000 or more or shall have exercised any right under applicable law or applicable security documents to take ownership of any such assets in lieu of foreclosure; provided that, in any such case, the Company or any 57 -50- Material Restricted Subsidiary shall not have obtained, prior to any such foreclosure or disposition of assets, a stay of all such actions that remains in effect; or (g) one or more judgments, orders or decrees of any court or regulatory or administrative agency for the payment of money of $5,000,000 or more, either individually or in the aggregate, shall have been entered against the Company or any Material Restricted Subsidiary or any of their respective properties and shall not have been discharged and there shall have been a period of 60 consecutive days during which a stay of enforcement of such judgment, order or decree, by reason of pending appeal or otherwise, shall not be in effect; or (h) the Company, any Material Restricted Subsidiary or License Co. pursuant to or under or within the meaning of any Bankruptcy Law: (i) commences a voluntary case or proceeding; (ii) consents to the making of a Bankruptcy Order in an involuntary case or proceeding or the commencement of any case against it; (iii) consents to the appointment of a Custodian of it or for any substantial part of its property; (iv) makes a general assignment for the benefit of its creditors; (v) files an answer or consent seeking reorganization or relief; (vi) shall admit in writing its inability to pay its debts generally; or (vii) consents to the filing of a petition in bankruptcy; or (i) a court of competent jurisdiction in any involuntary case or proceeding enters a Bankruptcy Order against the Company, any Material Restricted Subsidiary or License Co., and such Bankruptcy Order remains unstayed and in effect for 60 consecutive days; or (j) a Custodian shall be appointed out of court with respect to the Company, any Material Restricted Subsidiary or License Co. or with respect to all or any substantial part of the assets or properties of the Company, any Material Restricted Subsidiary or License Co.; or (k) the Company or License Co. is subject, voluntarily or involuntarily, to dissolution proceedings, provided that the voluntary or involuntary dissolution of License 58 -51- Co. after the acquisition by the Company or one of its Restricted Subsidiaries of the assets of License Co. pursuant to the terms of the License Co. Documents shall not be an Event of Default; or (l) failure by License Co. or its shareholders to perform any material term, covenant, condition or provision of the License Co. Documents; or (m) the Company shall have failed on the Issue Date to enter into the Escrow Agreement or pursuant thereto fail to place the Initial Escrow Amount (as defined in the Escrow Agreement) in the Escrow Account held by the Escrow Agent for the benefit of the Holders of the Securities and the Trustee and the Existing Notes and the Existing Notes Trustee, or the Company shall assert or acknowledge in writing that the Escrow Agreement is invalid or unenforceable. Section 5.02. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 5.01(h), (i), (j) or (k) with respect to the Company) occurs and is continuing then and in every such case the Trustee or the Holders of at least 25% in aggregate principal amount of the Securities then Outstanding may, and the Trustee upon the request of the Holders of not less than 25% in aggregate principal amount of the Securities then Outstanding shall, declare all principal of all the Securities to be due and payable immediately in an amount equal to the principal amount of the Securities, premium, if any, thereon plus accrued and unpaid interest, if any, to the date the Securities become due and payable by a notice in writing to the Company (and to the Trustee, if given by the Holders) and upon any such declaration such principal, premium, if any, and interest, shall become immediately due and payable. If an Event of Default specified in Section 5.01(h), (i), (j) or (k) with respect to the Company occurs and is continuing, then the principal of, premium, if any, and accrued and unpaid interest, if any, on all the Securities then Outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article, the Holders of a majority in aggregate principal amount of the Securities then Outstanding, by written notice to the Company and the Trustee, may rescind and annul such declaration of acceleration and its consequences if: (a) the Company has paid or deposited with the Trustee a sum sufficient to pay 59 -52- (i) all amounts due the Trustee under Section 6.07, including the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel, (ii) all overdue interest on all Securities, (iii) the principal of and premium, if any, on any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate then borne by the Securities, and (iv) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate then borne by the Securities; and (b) all existing Events of Default, other than the non-payment of principal of, premium, if any, and any accrued and unpaid interest on, the Securities which have become due solely as a result of such declaration of acceleration, have been cured or waived as provided in Section 5.13 and if the rescission of the acceleration would not conflict with any judgment or decree. No such rescission shall affect any subsequent Default or impair any right consequent thereon. Notwithstanding the foregoing, in the event of a declaration of acceleration in respect of the Securities because an Event of Default specified in Section 5.01(e) shall have occurred and be continuing, such declaration of acceleration shall be automatically annulled if the Indebtedness that is the subject of such Event of Default has been discharged or paid or the requisite Holders thereof have rescinded their declaration of acceleration in respect of such Indebtedness and written notice of such discharge or rescission, as the case may be, shall have been given to the Trustee by the Company and by the requisite holders of such Indebtedness or a trustee, fiduciary or agent for such holders, within 60 days after such declaration of acceleration in respect of the Securities and no other Event of Default has occurred which has not been cured or waived during such 60-day period. Section 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if: (a) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days or more (provided such 30 day grace period shall be inapplicable to the first two Interest Payment Dates), or 60 -53- (b) default is made in the payment of the principal of or premium, if any, on any Security when due and payable, including, when applicable, purchases made pursuant to Section 10.11 and 10.16 hereof, the Company will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal, premium, if any, and interest, with interest upon the overdue principal, premium, if any, and, to the extent that payment of such interest shall be legally enforceable, upon overdue installments of interest, at the rate then borne by the Securities; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may, but is not obligated under this paragraph to, institute a judicial proceeding for the collection of the sums so due and unpaid and may, but is not obligated under this paragraph to, prosecute such proceeding to judgment or final decree, and may, but is not obligated under this paragraph to, enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion, but is not obligated under this paragraph to, (i) proceed to protect and enforce its rights and the rights of the Holders under this Indenture by such appropriate private or judicial proceedings as the Trustee shall deem most effectual to protect and enforce such rights, whether for the specific enforcement of any covenant or agreement contained in this Indenture or in aid of the exercise of any power granted herein, or (ii) proceed to protect and enforce any other proper remedy. No recovery of any such judgment upon any property of the Company shall affect or impair any rights, powers or remedies of the Trustee or the Holders. Section 5.04. Trustee May File Proofs of Claims. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities, or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, 61 -54- (a) to file and prove a claim for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any Custodian, in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07 hereof. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 5.05. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture, the Escrow Agreement or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, fees, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. Section 5.06. Application of Money Collected. Any money collected by the Trustee pursuant to this Article, including such amounts held pursuant to the Escrow Agreement, shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: 62 -55- First: to the Trustee and any predecessor thereof for amounts due under Section 6.07; Second: to Holders for interest accrued on the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for interest; Third: to Holders for principal and premium, if any, amounts owing under the Securities, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and premium, if any; and Fourth: the balance, if any, to the Company. The Trustee, upon prior written notice to the Company, may fix a record date and payment date for any payment to Securityholders pursuant to this Section 5.06. Section 5.7. Limitation on Suits. No Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (a) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (b) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (d) the Trustee within 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture or any Security to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or 63 -56- preference over any other Holders or to enforce any right under this Indenture or any Security, except in the manner provided in this Indenture and for the equal and ratable benefit of all the Holders. Section 5.08. Unconditional Right of Holders to Receive Principal, Premium and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive cash payment of the principal of, premium, if any, and (subject to Section 3.07 hereof) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the respective Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. Section 5.09. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture or any Security and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case the Company, the Trustee and the Holders shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. Section 5.10. Rights and Remedies Cumulative. Except as provided in Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. Section 5.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Five or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. 64 -57- Section 5.12. Control by Majority. The Holders of a majority in aggregate principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided, however, that: (a) such direction shall not be in conflict with any rule of law or with this Indenture or the Escrow Agreement or any Security or expose the Trustee to personal liability; and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Section 5.13. Waiver of Past Defaults. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past Default hereunder and its consequences, except a Default (a) in the payment of the principal of, premium, if any, or interest on any Outstanding Security or (b) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Default or Event of Default or impair any right consequent thereon. Section 5.14. Undertaking for Costs. All parties to this Indenture agree, and each Holder of any Security by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the 65 -58- Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of, premium, if any, or interest on any Security on or after the respective Stated Maturities expressed in such Security (or, in the case of redemption, on or after the respective Redemption Dates). Section 5.15. Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the principal of, premium, if any, or interest on the Securities contemplated herein or in the Securities or which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 5.16. Unconditional Right of Holders to Institute Certain Suits. Notwithstanding any other provision in this Indenture or the Escrow Agreement and any other provision of any Security, the right of any Holder of any Security to receive payment of the principal of, premium, if any, and interest on such Security on or after the respective Stated Maturities (or the respective Redemption Dates, in the case of redemption) expressed in such Security, or after such respective dates, shall not be impaired or affected without the consent of such Holder. ARTICLE VI THE TRUSTEE Section 6.01. Certain Duties and Responsibilities. (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and the Escrow Agreement, and no implied covenants or obligations shall be read into this Indenture and the Escrow Agreement against the Trustee; and 66 -59- (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture or the Escrow Agreement; but in the case of any such certificates or opinions which by provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture or the Escrow Agreement. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and the Escrow Agreement, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person's own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that (i) no provision of this Indenture or the Escrow Agreement shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it and (ii) the Trustee shall not be liable with respect to any action taken, suffered or omitted to be taken by it with respect to the Securities in good faith in accordance with the direction of the Holders of a majority of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture or the Escrow Agreement. (d) Whether or not therein expressly so provided, every provision of this Indenture and the Escrow Agreement relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 6.01. Section 6.02. Notice of Defaults. Within 60 days after the occurrence of any Default, the Trustee shall transmit by mail to all Holders, as their names and addresses appear in the Security Register, notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of, premium, if any, or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as a trust committee of Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders. 67 -60- Section 6.03. Certain Rights of Trustee. Subject to Section 6.01 hereof and the provisions of Section 315 of the Trust Indenture Act: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors of the Company may be sufficiently evidenced by a Board Resolution thereof; (c) the Trustee may consult with counsel and any written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture or the Escrow Agreement at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by the Trustee in compliance with such request or direction; (e) the Trustee shall not be liable for any action taken or omitted by it in good faith and believed by it to be authorized or within the discretion, rights or powers conferred upon it by this Indenture or Escrow Agreement other than any liabilities arising out of its own negligence; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, approval, appraisal, bond, debenture, note, coupon, security, other evidence of indebtedness or other paper or document unless requested in writing so to do by the Holders of not less than a majority in aggregate principal amount of the Securities then Outstanding; provided, however, that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to proceeding; the reasonable expenses of every such investigation shall be paid 68 -61- by the Company or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Company upon demand; provided, further, the Trustee in its discretion may make such further inquiry or investigation into such facts or matters as it may deem fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the permissive right of the Trustee to act hereunder shall not be construed as a duty; (i) the Trustee shall not be required to take notice or deemed to have notice of any Event of Default hereunder, except failure by the Company to make any of the payments to the Trustee pursuant to Section 5.01(a) or Section 5.01(b) hereof, unless the Trustee shall be specifically notified in writing of such Event of Default by the Company or by one or more of the Holders; (j) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; and (k) except as specifically provided for in the provisions of this Indenture or the Escrow Agreement, the Trustee shall not be deemed to have notice or knowledge of any matter unless a Responsible Officer has actual knowledge thereof or unless written notice thereof is received by the Trustee at its Corporate Trust Office and such notice references the Securities generally, the Company or this Indenture. Section 6.04. Trustee Not Responsible for Recitals, Dispositions of Securities or Application of Proceeds Thereof. The recitals contained herein, in the Securities and in the Escrow Agreement, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities except that the Trustee represents that it is duly authorized to execute and deliver this Indenture and the Escrow Agreement, authenticate the Securities and perform its obligations hereunder and that the statements made by it in a Statement of Eligibility and Qualification on Form T-1, if any, to be 69 -62- supplied to the Company are true and accurate subject to the qualifications set forth therein. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. Section 6.05. Trustee and Agents May Hold Securities; Collections; Etc. The Trustee, any Paying Agent, Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities, with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent and, subject to Section 6.08 hereof and Sections 310 and 311 of the Trust Indenture Act, may otherwise deal with the Company and receive, collect, hold and retain collections from the Company with the same rights it would have if it were not the Trustee, Paying Agent, Security Registrar or such other agent. Section 6.06. Money Held in Trust. All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required herein or by law. The Trustee shall not be under any liability for interest on or to invest any moneys received by it hereunder. Section 6.07. Compensation and Indemnification of Trustee and its Prior Claim. The Company covenants and agrees: (a) to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (b) to reimburse the Trustee and each predecessor Trustee upon its request for all reasonable expenses, fees, disbursements and advances incurred or made by or on behalf of it in the administration of the trusts and the performance of its duties and obligations hereunder (including the reasonable compensation, fees, and the expenses and disbursements of its counsel and of all agents and other persons not regularly in its employ), except any such expense, disbursement or advance as may arise from its negligence or bad faith; and (c) to indemnify the Trustee and each predecessor Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Indenture or in respect of the Escrow Agreement or the trusts hereunder and its duties hereunder, including enforcement of this Section 6.07. The Trustee shall promptly notify the Company of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees and expenses of such counsel; provided that the Company will not be required to pay such fees and 70 -63- expenses if it assumes the Trustee's defense with counsel acceptable to and approved by the Trustee (such approval not to be unreasonably withheld) and there is no conflict of interest between the Company and the Trustee in connection with such defense. The Company need not pay for any settlement made without its written consent, which consent shall not be unreasonably withheld. The Company need not reimburse the Trustee for any expense or indemnify against any liability or loss of the Trustee to the extent such expense, liability or loss is attributable to the negligence, bad faith or willful misconduct of the Trustee. The obligations of the Company under this Section to compensate and indemnify the Trustee and each predecessor Trustee and to pay or reimburse the Trustee and each predecessor Trustee for expenses, fees, disbursements and advances shall constitute an additional obligation hereunder and shall survive the satisfaction and discharge of this Indenture. To secure the obligations of the Company to the Trustee and each predecessor Trustee under this Section 6.07, the Trustee and each predecessor Trustee shall have a prior Lien upon all property and funds held or collected by the Trustee as such, except funds and property paid by the Company and held in trust for the benefit of the Holders of the Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 5.01(h) or (i) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under any Bankruptcy Law. Section 6.08. Conflicting Interests. The Trustee shall be subject to and comply with the provisions of Section 310(b) of the Trust Indenture Act. Section 6.09. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be eligible to act as Trustee under TIA Sections 310(a)(1) and (2) and which shall have, or in the case of a corporation included in a bank holding company system the related bank holding company shall have, a combined capital and surplus of at least $100,000,000, and have a Corporate Trust Office in the Borough of Manhattan in The City of New York, State of New York. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of any Federal, state, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, the Trustee shall resign immediately in the manner and with the effect hereinafter specified in this Article. 71 -64- Section 6.10. Resignation and Removal; Appointment of Successor Trustee. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. (b) The Trustee, or any trustee or trustees hereinafter appointed, may at any time resign by giving written notice thereof to the Company at least 20 Business Days prior to the date of such proposed resignation. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument executed by authority of the Board of Directors of the Company, a copy of which shall be delivered to the resigning Trustee and a copy to the successor Trustee. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 20 Business Days after the giving of such notice of resignation, the resigning Trustee may, or any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper, appoint a successor Trustee. (c) The Trustee may be removed at any time by an Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of Section 310(b) of the Trust Indenture Act in accordance with Section 6.08 hereof after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 6.09 hereof and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose or rehabilitation, conservation or liquidation, then, in any case, (i) the Company by a Board Resolution may remove the Trustee, or (ii) subject to Section 5.14, the Holder of any Security who has been a bona fide Holder of a Security for at 72 -65- least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution of its Board of Directors, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders of the Securities and accepted appointment in the manner hereinafter provided, the Holder of any Security who has been a bona fide Holder for at least six months may, subject to Section 5.14, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee by mailing written notice of such event by first-class mail, postage prepaid, to the Holders of Securities as their names and addresses appear in the Security Register. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. Section 6.11. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee as if originally named as Trustee hereunder; but, nevertheless, on the written request of the Company or the successor Trustee, upon payment of amounts due it pursuant to Section 6.07, such retiring Trustee shall duly assign, transfer and deliver to the successor Trustee all moneys and property at the time held by it hereunder and shall execute and deliver an instrument transferring to such successor Trustee all the rights, powers, duties and obligations of the retiring Trustee. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a prior claim upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to the provisions of Section 6.07. 73 -66- No successor Trustee with respect to the Securities shall accept appointment as provided in this Section 6.11 unless at the time of such acceptance such successor Trustee shall be eligible to act as Trustee under this Article. Upon acceptance of appointment by any successor Trustee as provided in this Section 6.11, the successor shall give notice thereof to the Holders of the Securities, by mailing such notice to such Holders at their addresses as they shall appear on the Security Register. If the acceptance of appointment is substantially contemporaneous with the resignation, then the notice called for by the preceding sentence may be combined with the notice called for by Section 6.10. If the Company fails to give such notice within 10 days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be given at the expense of the Company. Section 6.12. Merger, Conversion, Amalgamation, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated or amalgamated, or any corporation resulting from any merger, conversion, amalgamation or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided such corporation shall be eligible under this Article to serve as Trustee hereunder. In case at the time such successor to the Trustee under this Section 6.12 shall succeed to the trusts created by this Indenture any of the Securities shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor Trustee and deliver such Securities so authenticated; and, in case at that time any of the Securities shall not have been authenticated, any successor to the Trustee under this Section 6.12 may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee; and in all such cases such certificate shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of the Trustee shall have been authenticated. 74 -67- ARTICLE VII HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY Section 7.01. Preservation of Information; Company to Furnish Trustee Names and Addresses of Holders. (a) The Trustee shall preserve the names and addresses of the Securityholders and otherwise comply with TIA Section 312(a). If the Trustee is not the Registrar, the Company shall furnish or cause the Registrar to furnish to the Trustee before each Interest Payment Date, and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of the Securityholders. Neither the Company nor the Trustee shall be under any responsibility with regard to the accuracy of such list. (b) The Company will furnish or cause to be furnished to the Trustee (i) semi-annually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date; and (ii) at such other times as the Trustee may request in writing, within 30 days after receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; provided, however, that if and so long as the Trustee shall be the Security Registrar, no such list need be furnished pursuant to this Subsection 7.01(b). Section 7.02. Communications of Holders. Holders may communicate with other Holders with respect to their rights under this Indenture or under the Securities pursuant to TIA Section 312(b). The Company and the Trustee and any and all other persons benefited by this Indenture shall have the protection afforded by TIA Section 312(c). Section 7.03. Reports by Trustee. Within 60 days after May 15 of each year commencing with the first May 15 following the date of this Indenture, the Trustee shall mail to all Holders, as their names and addresses appear in the Security Register, a brief report dated as of such May 15, in accordance with, and to the extent required under TIA Section 313. At the time of its mailing to Holders, a copy of each such report shall be filed by the Trustee with the Company, the Commission and with each stock exchange on which the Securities are listed. The Company shall notify the Trustee when the Securities are listed on any stock exchange. Section 7.04. Reports by Company. (a) The Company shall mail to each Holder of the Securities, and shall file with the Trustee within 15 days after it is required to file the same with the Commission, copies 75 -68- of the annual reports and quarterly reports and of the information, documents and other reports which it may be required to file with the Commission pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act. The Company shall also comply with the other provisions of TIA Section 314(a). (b) Whether or not the Company is required to file with the Commission such reports and other information referred to in Section 7.04(a), the Company shall furnish without cost to each Holder of the Securities and the Trustee and (following the effective date of the Registered Exchange Offer or Shelf Registration Statement (as defined in the Registration Agreement), as applicable) file with the Commission (i) within 135 days after the end of each Fiscal Year of the Company, the information required by Form 10-K (or any successor form thereto) under the Securities Act with respect to such period, (ii) within 60 days after the end of each of the first three fiscal quarters of each Fiscal Year of the Company, the information required by Form 10-Q (or any successor form thereto) under the Securities Act with respect to such period and (iii) within 15 days after it would be required to be filed with the Commission, the information required by Form 8-K (or any successor form thereto). ARTICLE VIII CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE Section 8.01. Company May Consolidate, Etc., Only on Certain Terms. The Company will not, in a single transaction or through a series of transactions, consolidate or combine with or merge with or into any other person or, directly or indirectly, sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its properties and assets to any other person or persons, or permit any of the Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in the sale, assignment, conveyance, lease, transfer or disposition of all or substantially all of the properties or assets of the Company and the Restricted Subsidiaries, on a consolidated basis, to any person or persons, unless: (i) either the Company shall be the continuing person or, if the Company is not the continuing person, the resulting, surviving or transferee person (the "Surviving Entity") shall be a corporation organized and validly existing under the laws of the United States of America or any State or territory thereof, and (2) the Surviving Entity shall expressly assume all the obligations under this Indenture, the Escrow Agreement and the Securities and shall, if required by law to effectuate such assumption, execute a supplemental indenture to effect such assumption which supplemental indenture shall be delivered to the Trustee and shall be in form and substance reasonably satisfactory to the 76 -69- Trustee, and in each case, this Indenture and the Escrow Agreement shall remain in full force and effect; (ii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Default shall have occurred and be continuing and the Company or the Surviving Entity (assuming such Surviving Entity's assumption of the Company's obligations under the Securities and this Indenture), as the case may be, after giving effect to such transaction or series of transactions on a pro forma basis, could incur $1.00 of additional Indebtedness under Section 10.12 hereof; (iii) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including without limitation, any Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction or series of transactions), no Default shall have occurred and be continuing; and (iv) the Company or the Surviving Entity, as the case may be, shall have delivered to the Trustee, in form and substance reasonably satisfactory to the Trustee, an Officers' Certificate stating that such transaction or series of transactions and, if a supplemental indenture is required in connection with such transaction or series of transactions to effectuate such assumption, such supplemental indenture complies with this Indenture and that all conditions precedent provided for in this Indenture relating to such transaction or series of transactions have been satisfied. Section 8.02. Successor Substituted. Upon any consolidation, combination or merger, or any sale, assignment, conveyance, transfer, lease or other disposition of all or substantially all of the properties and assets of the Company or a Restricted Subsidiary in accordance with Section 8.01 hereof in which the Company or such Restricted Subsidiary, as the case may be, is not the Surviving Entity, such Surviving Entity shall succeed to, and be substituted for, and may exercise every right and power of, the Company or such Restricted Subsidiary, as the case may be, under this Indenture, the Escrow Agreement and the Securities with the same effect as if such successor had been named as the Company or such Restricted Subsidiary, as the case may be, herein, in the Escrow Agreement and in the Securities and, thereafter, except in the case of (a) a lease or (b) any sale, assignment, conveyance, transfer, lease or other disposition to a Restricted Subsidiary of the Company, the Company shall be discharged from all obligations and covenants under this Indenture, the Escrow Agreement and the Securities. 77 -70- For all purposes of this Indenture and the Securities (including this Article Eight and Sections 10.12, 10.14 and 10.17 hereof) Subsidiaries of any Surviving Entity will, upon such transaction or series of related transactions described in this Article Eight, become Restricted Subsidiaries or Unrestricted Subsidiaries as provided pursuant to Section 10.22 and all Indebtedness, and all Liens on property or assets, of the Company and the Restricted Subsidiaries in existence immediately prior to such transaction or series of related transactions will be deemed to have been incurred upon such transaction or series of related transactions. ARTICLE IX SUPPLEMENTAL INDENTURES AND WAIVERS Section 9.01. Supplemental Indentures, Agreements and Waivers Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution of the Board of Directors of the Company, and the Trustee, at any time and from time to time, may amend, waive or enter into one or more indentures supplemental hereto, in form and substance satisfactory to the Trustee, for any of the following purposes: (a) to the extent permitted herein, to evidence the succession of another person to the Company, and the assumption by any such successor of the covenants of the Company herein and in the Securities; (b) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company, herein or in the Securities; (c) to cure any ambiguity or to correct or supplement any provision herein or in the Securities which may be defective or inconsistent with any other provision herein or to make any other provisions with respect to matters or questions arising under this Indenture or the Securities; provided, however, that, in each case, such provisions shall not materially adversely affect the interests or legal rights of any Holder and the Company has delivered to the Trustee an Opinion of Counsel stating that such change, agreement or waiver does not materially adversely affect the interests or legal rights of any Holders; (d) to comply with the requirements of the Commission in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act, as contemplated by Section 9.05 hereof or otherwise; 78 -71- (e) to add a Guarantor pursuant to the requirements of Section 10.19 hereof; (f) to evidence and provide the acceptance of the appointment of a successor Trustee hereunder; or (g) to mortgage, pledge, hypothecate or grant a security interest in any property or assets in favor of the Trustee for the benefit of the Holders as security for the payment and performance of this Indenture Obligations; provided, however, that the Company has delivered to the Trustee an Opinion of Counsel stating that such change, agreement or waiver does not materially adversely affect the interests or legal rights of any Holders. Section 9.02. Supplemental Indentures, Agreements and Waivers With Consent of Holders. With the written consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto satisfactory to the Trustee for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or the Securities or of modifying in any manner the rights of the Holders under this Indenture or the Securities. The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may waive compliance by the Company with any provision of this Indenture or the Securities. However, no such supplemental indenture, agreement or instrument, including any waiver pursuant to Section 5.13, shall, without the written consent or waiver of the Holder of each Outstanding Security affected thereby: (a) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, alter the redemption provisions of the Securities or this Indenture, or change the coin or currency in which any Security or any premium or the accrued interest thereon is payable, or impair the right to institute suit for the enforcement of any payment after the Stated Maturity thereof (or, in the case of either a redemption or a purchase pursuant to Sections 10.11 or 10.16 of this Indenture, on or after the applicable Redemption Date or purchase date, as the case may be); (b) reduce the percentage of the aggregate principal amount of the Outstanding Securities, the consent of whose Holders is required for any amendment or supplemental indenture, or the consent of whose Holders is required for any waiver or 79 -72- consent provided for in this Indenture, the Escrow Agreement or with respect to any Security; (c) modify any of the provisions of this Section 9.02 or Sections 5.13 and 5.16, except to increase any such percentage, if applicable thereto, or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Security affected thereby; (d) consent to the assignment or transfer by the Company of any of its rights and obligations under this Indenture or the Securities; (e) release any Liens created by the Escrow Agreement except in strict accordance with the terms of the Escrow Agreement; (f) following (i) either (x) the mailing of a notice of a Change of Control Offer or (y) the failure to mail such notice prior to the date set forth in the second paragraph of Section 10.11, in either case, following satisfaction of the condition precedent to the mailing of such notice set forth in the first paragraph of Section 10.11, or (ii) the occurrence of an Asset Sale, alter the Company's obligation to repurchase Securities in accordance with the provisions of Sections 10.11 or 10.16, as the case may be, or waive any default in the performance thereof; (g) adversely affect the ranking of the Securities in a manner adverse to any Holder; (h) release any Guarantee except in compliance with the terms of this Indenture; (i) waive a default in payment with respect to the Securities or impair the right to institute suit for the enforcement of any payment on or with respect to the Securities; or (j) amend or modify the provisions of Section 10.08. Upon the written request of the Company accompanied by a copy of a Board Resolution of the Board of Directors authorizing the execution of any such supplemental indenture or other agreement, instrument or waiver, and upon the filing with the Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture or other agreement, instrument or waiver. 80 -73- It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture or other agreement, instrument or waiver, but it shall be sufficient if such Act shall approve the substance thereof. Section 9.03. Execution of Supplemental Indentures, Agreements and Waivers. In executing, or accepting the additional trusts created by, any supplemental indenture, agreement, instrument or waiver permitted by this Article Nine or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01 hereof) shall be fully protected in relying upon, an Opinion of Counsel and an Officers' Certificate from each obligor under the Securities entering into such supplemental indenture, agreement, instrument or waiver, each stating that the execution of such supplemental indenture, agreement, instrument or waiver (a) is authorized or permitted by this Indenture and (b) does not violate the provisions of any agreement or instrument evidencing any other Indebtedness of the Company or any Subsidiary of the Company. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture, agreement, instrument or waiver which affects the Trustee's own rights, duties or immunities under this Indenture, the Securities or otherwise. Section 9.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article Nine, this Indenture and the Securities, if applicable, shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture and the Securities, if applicable, for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. Section 9.05. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article Nine shall conform to the requirements of the Trust Indenture Act as then in effect. Section 9.06. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Board of Directors of the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee upon a Company Order in exchange for Outstanding Securities. 81 -74- Section 9.07. Record Date. The Company may, but shall not be obligated to, fix, a record date for the purpose of determining the Holders entitled to consent to any supplemental indenture, agreement or instrument or any waiver, and shall promptly notify the Trustee of any such record date. If a record date is fixed those persons who were Holders at such record date (or their duly designated proxies), and only those persons, shall be entitled to consent to such supplemental indenture, agreement or instrument or waiver or to revoke any consent previously given, whether or not such persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. Section 9.08. Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same debt as the consenting Holder's Security, even if a notation of the consent is not made on any Security. However, any such Holder, or subsequent Holder, may revoke the consent as to his Security or portion of a Security if the Trustee receives the notice of revocation before the date the amendment or waiver becomes effective. An amendment or waiver shall become effective in accordance with its terms and thereafter bind every Holder. ARTICLE X COVENANTS Section 10.01. Payment of Principal, Premium and Interest. The Company will duly and punctually pay the principal of, premium, if any, and interest on the Securities in accordance with the terms of the Securities and this Indenture. Section 10.02. Maintenance of Office or Agency. The Company will maintain in the Borough of Manhattan in The City of New York, State of New York, an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The office of the Trustee at its Corporate Trust Office will be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time 82 -75- the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York, State of New York) where the Securities may be presented or surrendered for any or all such purposes, and may from time to time rescind such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York, State of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. Section 10.03. Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of, premium, if any, or interest on any of the Securities, segregate and hold in trust for the benefit of the Holders entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such persons or otherwise disposed of as herein provided, and will promptly notify the Trustee of its action or failure so to act. If the Company is not acting as Paying Agent, the Company will, on or before each due date of the principal of, premium, if any, or interest on, any Securities, deposit with a Paying Agent a sum in same day funds sufficient to pay the principal, premium, if any, or interest so becoming due, such sum to be held in trust for the benefit of the Holders entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. If the Company is not acting as Paying Agent, the Company will cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent will agree with the Trustee, subject to the provisions of this Section 10.03, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of, premium, if any, or interest on Securities in trust for the benefit of the Holders entitled thereto until such sums shall be paid to such Holders or otherwise disposed of as herein provided; (b) give the Trustee notice of any Default by the Company (or any other obligor upon the Securities) in the making of any payment of principal of, premium, if any, or interest on the Securities; 83 -76- (c) at any time during the continuance of any such Default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (d) acknowledge, accept and agree to comply in all aspects with the provisions of this Indenture relating to the duties, rights and liabilities of such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent will be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal, premium, if any, or interest has become due and payable shall be paid to the Company upon receipt of a Company Request therefor, or (if then held by the Company) will be discharged from such trust; and the Holder of such Security will thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, will thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in the New York Times and the Wall Street Journal (national edition), notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such notification or publication, any unclaimed balance of such money then remaining shall be repaid to the Company. Section 10.04. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory), licenses and franchises of the Company and each of the Restricted Subsidiaries; provided, however, that the Company will not be required to preserve any such right, license or franchise if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and the Restricted Subsidiaries as a whole and that the loss thereof is not adverse in any material respect to the Holders; provided, further, that the foregoing will not prohibit a sale, transfer or conveyance of a Subsidiary of the Company or any of its assets in compliance with the terms of this Indenture. 84 -77- Section 10.05. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all material taxes, assessments and governmental charges levied or imposed (i) upon the Company or any of its Subsidiaries or (ii) upon the income, profits or property of the Company or any of the Restricted Subsidiaries and (b) all material lawful claims for labor, materials and supplies, which, if unpaid, could reasonably be expected to become a Lien upon the property of the Company or any of the Restricted Subsidiaries; provided, however, that the Company will not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings properly instituted and diligently conducted. Section 10.06. Maintenance of Properties. The Company will cause all material properties owned by the Company or any of the Restricted Subsidiaries or used or held for use in the conduct of their respective businesses to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and will cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 10.06 will prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any of the Restricted Subsidiaries and is not disadvantageous in any material respect to the Holders. Section 10.07. Insurance. The Company will at all times keep all of its and the Restricted Subsidiaries' properties which are of an insurable nature insured, either with insurers believed by the Company in good faith to be financially sound and responsible or by maintaining reserves in amounts customarily maintained by corporations similarly situated, against loss or damage to the extent that property of similar character is usually and customarily so insured by corporations similarly situated and owning like properties. Section 10.08. Books and Records. The Company will, and will cause each of the Restricted Subsidiaries to, keep proper books of record and account, in which full and correct entries will be made of all financial transactions and the assets and business of the Company and each Restricted Subsidiary of the Company in accordance with GAAP. 85 -78- Section 10.09. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company and any other obligor on the Securities will furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenants compliance with which constitutes a condition precedent) relating to the proposed action have been complied with, and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents, certificates and/or opinions is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture will include: (i) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (iii) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether such covenant or condition has been complied with; and (iv) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. Section 10.10. Provision of Financial Statements. Whether or not the Company has a class of securities registered under the Exchange Act, the Company will supply, at its own expense, to each Holder of the Securities and file with the Trustee and (following the effective date of the Registered Exchange Offer or Shelf Registration Statement (as defined in the Registration Rights Agreement), as applicable) with the Commission within fifteen days after the Company is required to file the same with the Commission, copies of the annual reports and quarterly reports and of the information, documents and other reports which the Company may be required to file with the Commission pursuant to Section 13(a), 13(c) or 15(d) of the Exchange Act. The Company will also comply with the other provisions of Section 314(a) of the Trust Indenture Act. 86 -79- Section 10.11. Change of Control. In the event of a Change of Control (the date of such occurrence, the "Change of Control Date"), the Company will notify the Holders of Securities in writing of such occurrence and will make an offer to purchase (the "Change of Control Offer") on a Business Day (the "Change of Control Purchase Date") not more than 60 days following the Change of Control Date, all Securities then Outstanding at a purchase price equal to 101% of the principal amount thereof on any Change of Control Payment Date, plus accrued and unpaid interest, if any, to such Change of Control Purchase Date. Failure to mail the notice of a Change of Control Offer on the date specified below by the date that such notice is required to be mailed will constitute a covenant Default under Section 5.01(c). Notice of a Change of Control Offer shall be mailed by the Company not less than 25 days nor more than 45 days before the Change of Control Purchase Date to the Holders of Securities at their last registered addresses with a copy to the Trustee and the Paying Agent. The Change of Control Offer shall remain open from the time of mailing for at least 20 Business Days and until 5:00 p.m., New York City time, on the Change of Control Purchase Date. The notice, which shall govern the terms of the Change of Control Offer, shall include such disclosures as are required by law and shall state: (a) that the Change of Control Offer is being made pursuant to this Section 10.11 and that all Securities tendered into the Change of Control Offer will be accepted for payment; (b) the purchase price (including the amount of accrued interest, if any) for each Security, the Change of Control Purchase Date and the date on which the Change of Control Offer expires; (c) that any Security not tendered for payment will continue to accrue interest in accordance with the terms thereof; (d) that, unless the Company shall default in the payment of the purchase price, any Security accepted for payment pursuant to the Change of Control Offer shall cease to accrue interest after the Change of Control Purchase Date; (e) that Holders electing to have Securities purchased pursuant to a Change of Control Offer will be required to surrender their Securities to the Paying Agent at the address specified in the notice prior to 5:00 p.m., New York City time, on the Change of Control Purchase Date and must complete any form letter of transmittal proposed by the Company and acceptable to the Trustee and the Paying Agent; 87 -80- (f) that Holders of Securities will be entitled to withdraw their election if the Paying Agent receives, not later than 5:00 p.m., New York City time, on the Change of Control Purchase Date, a facsimile transmission or letter setting forth the name of the Holders, the principal amount of Securities the Holders delivered for purchase, the Security certificate number (if any) and a statement that such Holder is withdrawing his election to have such Securities purchased; (g) that Holders whose Securities are purchased only in part will be issued Securities of like tenor equal in principal amount to the unpurchased portion of the Securities surrendered; (h) the instructions that Holders must follow in order to tender their Securities; and (i) information concerning the business of the Company, the most recent annual and quarterly reports of the Company filed with the Commission pursuant to the Exchange Act (or, if the Company is not required to file any such reports with the Commission, the comparable reports prepared pursuant to Section 10.10), a description of material developments in the Company's business, information with respect to pro forma historical financial information after giving effect to such Change of Control and such other information concerning the circumstances and relevant facts regarding such Change of Control and Change of Control Offer as would, in the good faith judgment of the Company, be material to a Holder of Securities in connection with the decision of such Holder as to whether or not it should tender Securities pursuant to the Change of Control Offer. On the Change of Control Purchase Date, the Company will (i) accept for payment Securities or portions thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent money, in immediately available funds, sufficient to pay the purchase price of all Securities or portions thereof so tendered and accepted and (iii) deliver to the Trustee the Securities so accepted together with an Officers' Certificate setting forth the Securities or portions thereof tendered to and accepted for payment by the Company. The Paying Agent will promptly mail or deliver to the Holders of Securities so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security of like tenor equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Change of Control Offer not later than the first Business Day following the Change of Control Purchase Date. 88 -81- The Company will comply with all applicable tender offer laws and regulations, including, to the extent applicable, with the requirements of Section 14(e) and Rule 14e-1 of the Exchange Act, and any other securities laws or regulations in connection with the repurchase of Securities pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of this Section 10.11, the Company will comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under this Section 10.11 by virtue thereof. Any provision of this Section 10.11 to the contrary notwithstanding, if following any Change of Control, another Person makes the Change of Control Offer in compliance with the provisions of this Section 10.11 and purchases all Securities validly tendered and not withdrawn under such Change of Control Offer, the Company shall not be required to make a Change of Control Offer following such Change of Control. Section 10.12. Limitation on Additional Indebtedness. The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume, issue, guarantee or in any manner become directly or indirectly liable for or with respect to, contingently or otherwise, the payment of (collectively, to "incur") any Indebtedness (including any Acquired Indebtedness), except for Permitted Indebtedness; provided that (i) the Company may incur any Indebtedness and (ii) a Restricted Subsidiary may incur Acquired Indebtedness if, in either case, after giving pro forma effect to such incurrence (including the application of the net proceeds therefrom), the ratio of (x) Total Consolidated Indebtedness (as of the date of incurrence) to (y) Annualized Pro Forma Consolidated Operating Cash Flow (based upon the two most recent fiscal quarters for which consolidated financial statements of the Company are available preceding the date of such incurrence) would be less than or equal to 6.0 to 1.0. Section 10.13. Statement by Officers as to Default. (a) The Company will deliver to the Trustee, within 120 days after the end of each Fiscal Year of the Company ending after the date hereof, a written statement signed by the chairman or a chief executive officer, the principal financial officer or principal accounting officer of the Company, stating (i) that a review of the activities of the Company during the preceding Fiscal Year has been made under the supervision of the signing officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under this Indenture and the Escrow Agreement, and (ii) that, to the knowledge of each officer signing such certificate, the Company has kept, observed, performed and fulfilled each and every covenant and condition contained in this Indenture and the Escrow Agreement and is not in default in the performance or observance of any of the terms, provisions, conditions and covenants hereof or thereof (or, if a Default shall have occurred, describing all such Defaults of 89 -82- which such officers may have knowledge, their status and what action the Company is taking or proposes to take with respect thereto). (b) When any Default under this Indenture or a default under the Escrow Agreement has occurred and is continuing, or if the Trustee or any Holder or the trustee for the holder of any other evidence of Indebtedness or the holder of such Indebtedness of the Company or any Restricted Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Indebtedness (other than Indebtedness evidenced by the Securities) in the principal amount of less than $10,000,000), the Company will promptly notify the Trustee of such Default, notice or action and will deliver to the Trustee by registered or certified mail or by telegram, or facsimile transmission followed by hard copy by registered or certified mail an Officers' Certificate specifying such event, notice or other action within five Business Days after the Company becomes aware of such occurrence and what action the Company is taking or proposes to take with respect thereto. Section 10.14. Limitation on Restricted Payments. (a) The Company will not, and will not permit any of the Restricted Subsidiaries to, make, directly or indirectly, any Restricted Payment unless: (i) no Default shall have occurred and be continuing at the time of or upon giving effect to such Restricted Payment; (ii) immediately after giving effect to such Restricted Payment, the Company would be able to incur $1.00 of Indebtedness under the proviso of Section 10.12; and (iii) immediately after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments declared or made on or after the Issue Date and all Designation Amounts does not exceed an amount equal to the sum of (A) the difference between (x) the Cumulative Available Cash Flow determined at the time of such Restricted Payment and (y) Cumulative Consolidated Interest Expense determined at the time of such Restricted Payment, plus (B) the aggregate net cash proceeds received by the Company either (x) as capital contributions to the Company after the Issue Date or (y) from the issue and sale (other than to a Restricted Subsidiary) of its Capital Stock (other than Disqualified Stock) on or after the Issue Date, plus (C) the aggregate net proceeds received by the Company from the issuance (other than to a Restricted Subsidiary) on or after the Issue Date of its Capital Stock (other than Disqualified Stock) upon the conversion of, or in exchange for, Indebtedness of the Company, plus (D) in the case of the disposition or repayment of any Investment constituting a Restricted Payment made after the Issue Date (other than an Investment made pursuant to clause (v), (vi) or (vii) of the following paragraph), an amount equal to the lesser of the return of capital with 90 -83- respect to such Investment and the cost of such Investment, in either case, less the cost of the disposition of such Investment, plus (E) in the case of any Revocation with respect to a Subsidiary of the Company that was made subject to a Designation after the Issue Date, an amount equal to the lesser of the Designation Amount with respect to such Subsidiary or the Fair Market Value of the Investment of the Company and the Restricted Subsidiaries in such Subsidiary at the time of Revocation, less (F) 50% of the aggregate principal amount of outstanding Indebtedness included in the calculation of clause (d) of the definition of Permitted Indebtedness. For purposes of the preceding clauses (B)(y) and (C), as applicable, and for purposes of the definition of Total Incremental Invested Equity, the value of the aggregate net proceeds received by the Company upon the issuance of Capital Stock either upon the conversion of convertible Indebtedness or in exchange for outstanding Indebtedness or upon the exercise of options, warrants or rights will be the net cash proceeds received upon the issuance of such Indebtedness, options, warrants or rights plus the incremental amount received, if any, by the Company upon the conversion, exchange or exercise thereof. For purposes of determining the amount expended for Restricted Payments, cash distributed shall be valued at the face amount thereof and property other than cash shall be valued at its Fair Market Value. (b) The provisions of Section 10.14(a) shall not prohibit: (i) the payment of any dividend or other distribution within 60 days after the date of declaration thereof if at such date of declaration such payment would be permitted by the provisions of this Indenture; (ii) the purchase, redemption, retirement or other acquisition of any shares of Capital Stock of the Company in exchange for, or out of the net cash proceeds of the substantially concurrent issue and sale (other than to a Restricted Subsidiary) of, shares of Capital Stock of the Company (other than Disqualified Stock); provided that any such net cash proceeds are excluded from clause (iii)(b) of Section 10.14(a); (iii) so long as no Default shall have occurred and be continuing, the purchase, redemption, retirement, defeasance or other acquisition of Subordinated Indebtedness (other than Deeply Subordinated Shareholder Loans) made by exchange for, or out of the net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary) of (x) Capital Stock (other than Disqualified Stock) of the Company or (y) other Subordinated Indebtedness to the extent that its stated maturity for the payment of principal thereof is not prior to the 180th day after the final stated maturity of the Securities; provided that any such net cash proceeds are excluded from clause (iii)(b) of Section 10.14(a); 91 -84- (iv) the purchase, redemption, retirement or other acquisition of Deeply Subordinated Shareholder Loans to the extent made by exchange for (upon conversion in accordance with their terms or otherwise), or out of the net cash proceeds of, a substantially concurrent issue and sale (other than to a Restricted Subsidiary) of Capital Stock (other than Disqualified Stock) of the Company; provided that any such net proceeds or net cash proceeds, as applicable, shall be excluded from clause (iii)(b) of Section 10.14(a); (v) Investments by the Company or any Restricted Subsidiary in a person (including any Unrestricted Subsidiary) in an amount, at any time outstanding, not to exceed $50.0 million; (vi) the extension by the Company and the Restricted Subsidiaries of trade credit to Unrestricted Subsidiaries, represented by accounts receivable, extended on usual and customary terms in the ordinary course of business; (vii) any renewal or reclassification of any Investment in any Unrestricted Subsidiary outstanding on the Issue Date or subsequently made in accordance with the provisions described herein; (viii) purchases or redemptions of Capital Stock (including cash settlements of stock options) held by employees, officers or directors upon or following termination of their employment with the Company or one of its Subsidiaries, subject to any put arrangements, provided that payments not subject to such puts shall not exceed $1.0 million in any Fiscal Year in the aggregate; (ix) so long as no Default shall have occurred and be continuing, Investments in Unrestricted Subsidiaries to the extent promptly made with the proceeds of a substantially concurrent (1) capital contribution to the Company or (2) issue or sale of Capital Stock (other than Disqualified Stock) of the Company (other than to a Restricted Subsidiary); provided that any such proceeds are excluded from clause (iii)(b) of Section 10.14(a); (x) the payment of cash in lieu of fractional shares of Capital Stock in connection with any dividend or other distribution of Capital Stock, any conversion or exchange of any security for or into shares of Capital Stock or any merger, consolidation or other reorganization involving the Capital Stock of the Company; and (xi) the payment of management fees to VPC in an amount not to exceed $350,000 (plus out-of-pocket travel expenses relating to the management of the Company) in any Fiscal Year. 92 -85- In determining the amount of Restricted Payments permissible under this Section 10.14(b), amounts expended pursuant to clauses (i), (v), (viii), (x) and, to the extent not deducted in arriving at Cumulative Available Cash Flow, (xi) above shall be included as Restricted Payments. Section 10.15. Limitation on Transactions with Affiliates. The Company will not, and will not permit, cause or suffer any Restricted Subsidiary to, conduct any business or enter into any transaction (or series of related transactions which are similar or part of a common plan) with or for the benefit of any of their respective Affiliates or any beneficial holder of 10% or more of the Common Stock of the Company or any officer or director of the Company or any Restricted Subsidiary (each an "Affiliate Transaction"), unless the terms of the Affiliate Transaction are fair and reasonable to the Company or such Restricted Subsidiary, as the case may be, and to the extent the Affiliate Transaction involves aggregate payments or other Fair Market Value involving $250,000 or more, are set forth in writing. Each Affiliate Transaction (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other Fair Market Value in excess of $500,000 shall be approved by a majority of the Board, such approval to be evidenced by a Board Resolution stating that the Board has determined that such transaction or transactions comply with the foregoing provisions. In addition to the foregoing, each Affiliate Transaction involving aggregate consideration of $5,000,000 or more shall be approved by a majority of the Disinterested Directors; provided that, in lieu of such approval by the Disinterested Directors, the Company may obtain a written opinion from an Independent Financial Advisor stating that the terms of such Affiliate Transaction to the Company or the Restricted Subsidiary, as the case may be, are fair from a financial point of view. For purposes of this Section 10.15, any Affiliate Transaction approved by a majority of the Disinterested Directors or as to which a written opinion has been obtained from an Independent Financial Advisor, on the basis set forth in the preceding sentence, shall be deemed to be on terms that are fair and reasonable to the Company and the Restricted Subsidiaries, as the case may be, and, therefore, shall be permitted under this Section 10.15. Notwithstanding the foregoing, the restrictions set forth in this Section 10.15 shall not apply to (i) transactions with or among, or solely for the benefit of, the Company and/or any of the Restricted Subsidiaries, (ii) transactions pursuant to agreements and arrangements existing on the Issue Date, including payments of management fees to VPC in an aggregate amount not to exceed $350,000 (plus travel expenses incurred in providing management services) in any Fiscal Year of the Company, (iii) the making of Deeply Subordinated Shareholder Loans pursuant to and in compliance with Section 10.12, (iv) dividends paid by the Company pursuant to and in compliance with Section 10.14, (v) customary directors' fees, indemnification and similar arrangements, consulting fees, employee salaries, loans and bonuses or legal fees and (vi) transactions contemplated by the License Co. Documents. 93 -86- Notwithstanding any provision of this Indenture to the contrary, the Company will not, and will not permit any Restricted Subsidiary to, amend, modify or waive any provision of the License Co. Documents in a manner that is adverse, from the perspective of creditors of the Company and the Restricted Subsidiaries, in any material respect. Section 10.16. Disposition of Proceeds of Asset Sales. (a) The Company will not, and will not permit any Restricted Subsidiary to, make any Asset Sale unless (i) the Company or such Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the Fair Market Value of the shares or assets sold or otherwise disposed of and (ii) at least 75% of such consideration for any such Asset Sale consists of cash and/or Cash Equivalents; provided that the following shall be treated as cash for purposes of this provision: (x) the amount of any liabilities (other than Subordinated Indebtedness or Indebtedness of a Restricted Subsidiary that would not constitute Restricted Subsidiary Indebtedness) that are assumed by the transferee or purchaser of any such assets pursuant to an agreement that unconditionally releases the Company or such Restricted Subsidiary from further liability ("assumed liabilities"), (y) the amount of any notes or other obligations that within 30 days of receipt, are converted into cash (to the extent of the cash received) and (z) the amount (valued based upon the reported closing sale price or average of the closing bid and ask prices, as the case may be, on the principal securities or trading market on the date of the Asset Sale) of any Publicly Traded Stock received as consideration in such Asset Sale. The Company or the applicable Restricted Subsidiary, as the case may be, may (i) apply the Net Cash Proceeds from such Asset Sale within 365 days of the receipt thereof to repay an amount of Indebtedness (other than Subordinated Indebtedness) of the Company or any Guarantor in an amount not exceeding the Other Senior Debt Pro Rata Share and elect to permanently reduce the amount of the commitments thereunder by the amount of the Indebtedness so repaid, (ii) apply the Net Cash Proceeds from such Asset Sale to repay any Restricted Subsidiary Indebtedness and elect to permanently reduce the commitments by the amount of the Indebtedness so repaid or (iii) apply such Net Cash Proceeds within 365 days thereof, to an investment in properties and assets that will be used in a Cable/Telecommunications Business (or in Capital Stock and other securities of any person that will become a Restricted Subsidiary as a result of such investment to the extent such person owns properties and assets that will be used in a Cable/Telecommunications Business) of the Company or any Restricted Subsidiary ("Replacement Assets"). Any Net Cash Proceeds from any Asset Sale that are neither used to repay, and permanently reduce the commitments under, any Restricted Subsidiary Indebtedness as set forth in clause (ii) of the preceding sentence or invested in Replacement Assets within the 365-day period as set forth in clause (iii) shall constitute "Excess Proceeds". Any Excess Proceeds not used as set forth in clause (i) of the second preceding sentence shall constitute "Offer Excess Proceeds" subject to disposition as provided below. 94 -87- (b) When the aggregate amount of Offer Excess Proceeds equals or exceeds $10,000,000, the Company will be obligated to make an offer to purchase (an "Asset Sale Offer") from all holders of the Securities, on a day not more than 40 Business Days thereafter (the "Asset Sale Purchase Date"), the maximum principal amount (expressed as a multiple of $1,000) of Securities that may be purchased with the aggregate Offer Excess Proceeds at a price, payable in cash, equal to 100% of the principal amount of the Securities plus accrued and unpaid interest, if any, to the date of purchase (the "Asset Sale Offer Price"). An Asset Sale Offer will be required to be kept open for a period of at least 20 Business Days or such longer period as may be required by law. (c) Notwithstanding clauses (a) and (b) of this Section 10.16, the Company and the Restricted Subsidiaries will be permitted to consummate an Asset Sale without complying with such clauses to the extent (i) at least 75% of the consideration for such Asset Sale constitutes Replacement Assets, cash or Cash Equivalents (including obligations deemed to be cash under this Section 10.16) and (ii) such Asset Sale is for Fair Market Value; provided that any consideration constituting (or deemed to constitute) cash or Cash Equivalents received by the Company or any of the Restricted Subsidiaries in connection with any Asset Sale permitted to be consummated under this clause (c) shall constitute Net Cash Proceeds subject to the provisions of the foregoing clauses (a) and (b). (d) Whenever Offer Excess Proceeds received by the Company exceed $10,000,000, such Offer Excess Proceeds will, prior to the purchase of Securities, be set aside by the Company in a separate account pending (i) deposit with the depositary of the amount required to purchase the Securities tendered in an Asset Sale Offer or (ii) delivery by the Company of the Asset Sale Offer Price to the Holders of the Securities validly tendered and not withdrawn pursuant to an Asset Sale Offer. Such Excess Proceeds may be invested in Cash Equivalents, as directed by the Company, having a maturity date which is not later than the earliest possible date for purchase or redemption of Securities pursuant to the Asset Sale Offer. The Company will be entitled to any interest or dividends accrued, earned or paid on such Cash Equivalents. (e) Notice of an Asset Sale Offer will be mailed by the Company to all Holders of Securities not less than 20 Business Days nor more than 40 Business Days before the Asset Sale Purchase Date at their last registered address with a copy to the Trustee and any Paying Agents. The Asset Sale Offer will remain open from the time of mailing for at least 20 Business Days or such longer period as required by law and until at least 5:00 p.m., New York City time, on the Asset Sale Purchase Date. The notice, which will govern the terms of the Asset Sale Offer, will include such disclosures as are required by law and will state: (i) that the Asset Sale Offer is being made pursuant to this Section 10.16; 95 -88- (ii) the Asset Sale Offer Price (including the amount of accrued interest, if any) for each Security, the Asset Sale Purchase Date and the date on which the Asset Sale Offer expires; (iii) that any Security not tendered or accepted for payment shall continue to accrue interest in accordance with the terms thereof; (iv) that, unless the Company shall default in the payment of the Asset Sale Offer Price, any Security accepted for payment pursuant to the Asset Sale Offer shall cease to accrue interest after the Asset Sale Purchase Date; (v) that Holders electing to have Securities purchased pursuant to an Asset Sale Offer shall be required to surrender their Securities to the Paying Agent at the address specified in the notice prior to 5:00 p.m., New York City time, on the Asset Sale Purchase Date with the "Option of Holder to Elect Purchase" on the reverse thereof completed; (vi) that Holders shall be entitled to withdraw their election if the Paying Agent receives, not later than 5:00 p.m., New York City time, on the Asset Sale Purchase Date, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Securities the Holder delivered for purchase, the Security certificate number (if any) and a statement that such Holder is withdrawing his election to have such Securities purchased; (vii) that if Securities in a principal amount in excess of the Holder's pro rata share of the amount of Excess Proceeds are tendered pursuant to the Asset Sale Offer, the Company shall purchase Securities on a pro rata basis among the Securities tendered (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000 or integral multiples of $1,000 shall be acquired); (viii) that Holders whose Securities are purchased only in part shall be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; (ix) the instructions that Holders must follow in order to tender their Securities; and (x) information concerning the business of the Company, the most recent annual and quarterly reports of the Company filed with the Commission pursuant to the Exchange Act (or, if the Company is not required to file any such reports with the Commission, the comparable reports prepared pursuant to Section 10.10), a description of material developments in the Company's business, information with respect to pro forma 96 -89- historical financial information after giving effect to such Asset Sale and Asset Sale Offer and such other information as would be material to a Holder of Securities in connection with the decision of such Holder as to whether or not it should tender Securities pursuant to the Asset Sale Offer. (f) On the Asset Sale Purchase Date, the Company will (i) accept for payment, on a pro rata basis, Securities or portions thereof tendered pursuant to the Asset Sale Offer, (ii) deposit with the Paying Agent money, in immediately available funds, in an amount sufficient to pay the Asset Sale Offer Price of all Securities or portions thereof so tendered and accepted and (iii) deliver to the Trustee the Securities so accepted together with an Officers' Certificate setting forth the Securities or portions thereof tendered to and accepted for payment by the Company. The Paying Agent will promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the Asset Sale Offer Price, and the Trustee will promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted will be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Asset Sale Offer not later than the first Business Day following the Asset Sale Purchase Date. To the extent an Asset Sale Offer is not fully subscribed to by such Holders, the Company or any Restricted Subsidiary may retain such unutilized portion of the Offer Excess Proceeds for application to general corporate purposes. The Paying Agent will promptly deliver to the Company the balance of any such Offer Excess Proceeds held by the Paying Agent after payment to the Holders of Securities as aforesaid. Upon completion of such Asset Sale Offer, the amount of Offer Excess Proceeds shall be reset to zero. For purposes of this Section 10.16, the Trustee will act as Paying Agent. (g) The Company will comply, to the extent applicable, with the requirements of Section 14(e) and Rule 14e-1 of the Exchange Act and any other securities laws or regulations in connection with the repurchase of Securities pursuant to the Asset Sale Offer. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Section 10.16, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Section 10.16 by virtue thereof. Section 10.17. Limitation on Liens Securing Certain Indebtedness. The Company will not, and will not permit any Restricted Subsidiary to, create, incur, assume or suffer to exist any Lien of any kind, against or upon (i) any property or assets of the Company or any Restricted Subsidiary, whether now owned or acquired after the Issue Date, or any proceeds therefrom, which secures either (x) Subordinated Indebtedness unless the Securities are secured by a Lien on such property, assets or proceeds that is senior in priority to the Liens securing such Subordinated Indebtedness or (y) Indebtedness of the Company that is not Subordinated Indebtedness, unless the Securities are equally and ratably secured with the 97 -90- Liens securing such other Indebtedness, except, in the case of clause (x), Permitted Liens described under clause (k) of the definition thereof and in the case of clause (y), Permitted Liens or (ii) the Escrow Account. Section 10.18. Escrow Account. The Company shall, on the date of this Indenture, enter into the Escrow Agreement and, pursuant thereto, shall place the Initial Escrow Amount (as defined in the Escrow Agreement) in the Escrow Account held by the Escrow Agent for the benefit of the Holders of the Securities and the Trustee and the holders of the Existing Notes and the Existing Notes Trustee. Section 10.19. Limitation on Certain Guarantees and Indebtedness by Restricted Subsidiaries. (a) The Company will not permit any Restricted Subsidiary, directly or indirectly, to assume, guarantee or in any other manner become liable with respect to (i) any Subordinated Indebtedness or (ii) any Indebtedness of the Company that is not Subordinated Indebtedness (other than, in the case of this clause (ii), (x) Indebtedness under any Senior Bank Facility to the extent constituting Permitted Indebtedness or (y) Indebtedness under any Vendor Credit Facility to the extent constituting Permitted Indebtedness), unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture providing for the guarantee of payment of the Securities by such Restricted Subsidiary on a basis senior to any such Subordinated Indebtedness or pari passu with any such other Indebtedness referred to in clause (ii), as the case may be. Each guarantee created pursuant to such provisions is referred to as a "Guarantee" and the issuer of each such Guarantee, so long as the Guarantee remains outstanding, is referred to as a "Guarantor." (b) Notwithstanding the foregoing, in the event of the unconditional release of any Guarantor from its obligations in respect of the Indebtedness which gave rise to the requirement that a Guarantee be given, such Guarantor shall be released from all obligations under its Guarantee. In addition, upon any sale or disposition (by merger or otherwise) of any Guarantor by the Company or a Restricted Subsidiary of the Company to any person that is not an Affiliate of the Company or any of its Restricted Subsidiaries which is otherwise in compliance with the terms of this Indenture and as a result of which such Guarantor ceases to be a Subsidiary of the Company, such Guarantor will be deemed to be released from all obligations under its Guarantee; provided that each such Guarantor is sold or disposed of in accordance with Section 10.16. 98 -91- Section 10.20. Limitation on Issuances and Sales of Preferred Stock of Restricted Subsidiaries. The Company (i) will not permit any Restricted Subsidiary to issue any Preferred Stock (other than to the Company or a Restricted Subsidiary) and (ii) will not permit any person (other than the Company or a Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary. Section 10.21. Limitation on Dividends and Other Payment Restrictions Affecting Restricted Subsidiaries. The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create or enter into or cause to become effective any consensual encumbrance or restriction of any kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any other distributions on or in respect of its Capital Stock or any other interest or participation in, or measured by, its profits to the extent owned by the Company or any Restricted Subsidiary, (b) pay any Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make any Investment in the Company or any Restricted Subsidiary or (d) transfer any of its properties or assets to the Company or to any Restricted Subsidiary, except for (i) any encumbrance or restriction existing on the Issue Date, (ii) any encumbrance or restriction applicable to a Restricted Subsidiary at the time that it becomes a Restricted Subsidiary that is not created in contemplation thereof, (iii) any encumbrance or restriction existing under any agreement that refinances or replaces an agreement containing a restriction permitted by clause (i) or (ii) above; provided that the terms and conditions of any such encumbrance or restriction are not materially less favorable to the holders of Securities than those under or pursuant to the agreement being replaced or the agreement evidencing the Indebtedness refinanced, (iv) any encumbrance or restriction imposed upon a Restricted Subsidiary pursuant to an agreement which has been entered into for the sale or disposition of all or substantially of the Capital Stock or assets of such Restricted Subsidiary and (v) any customary encumbrance or restriction applicable to a Restricted Subsidiary that is contained in an agreement or instrument governing or relating to Indebtedness contained in any Senior Bank Facility or Vendor Credit Facility; provided that the provisions of such agreement permit the payment of interest and principal and mandatory repurchases pursuant to the terms of this Indenture and the Securities and other Indebtedness that is solely an obligation of the Company, but provided further that such agreement may nevertheless contain customary net worth, leverage, invested capital and other financial covenants, customary covenants regarding the merger of or sale of all or any substantial part of the assets of the Company or any Restricted Subsidiary, customary restrictions on transactions with affiliates, and customary subordination provisions governing indebtedness owed to the Company or any Restricted Subsidiary. 99 -92- Section 10.22. Limitation on Designations of Unrestricted Subsidiaries. The Company may designate any Subsidiary of the Company (other than a newly created Subsidiary in which no Investment has previously been made) as an "Unrestricted Subsidiary" under this Indenture (a "Designation") so long as: (i) no Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (ii) immediately after giving effect to such Designation, the Company would be permitted under this Indenture to incur $1.00 of additional Indebtedness pursuant to the proviso of Section 10.12 hereof; and (iii) the Company would be permitted under this Indenture to make an Investment at the time of Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the Fair Market Value of the net Investment of the Company or any other Restricted Subsidiary in such Restricted Subsidiary on such date. In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment pursuant to the covenant described in Section 10.14 hereof for all purposes of this Indenture in the Designation Amount. The Company shall not, and shall not permit any Restricted Subsidiary to, at any time, (a) provide credit support for, or a guarantee of, any Indebtedness of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Indebtedness); provided that the Company may pledge Capital Stock or Indebtedness of any Unrestricted Subsidiary on a nonrecourse basis such that the pledgee has no claim whatsoever against the Company other than to obtain such pledged property, (b) be directly or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (c) be directly or indirectly liable for any Indebtedness which provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity upon the occurrence of a default with respect to any Indebtedness of any Unrestricted Subsidiary (including any right to take enforcement action against such Unrestricted Subsidiary), except in the case of clause (a) or (b) to the extent permitted under the covenant described in Section 10.14 and Section 10.15 hereof. The Company may revoke any Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if: (i) no Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and (ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if incurred at such time, have been permitted to be incurred for all purposes of this Indenture. 100 -93- All Designations and Revocations must be evidenced by Board Resolutions of the Company delivered to the Trustee certifying compliance with the foregoing provisions. ARTICLE XI REDEMPTION OF SECURITIES Section 11.01. Right of Redemption. The Securities may be redeemed at the option of the Company, in whole or in part, on the bases and at the Redemption Prices specified in the forms of Security, together with accrued but unpaid interest to the Redemption Date. Section 11.02. Applicability of Article. Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. Section 11.03. Election to Redeem; Notice to Trustee. The election of the Company to redeem any Securities pursuant to Section 11.01 shall be evidenced by a Board Resolution and an Officers' Certificate. In case of any redemption at the election of the Company, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice period shall be satisfactory to the Trustee), notify the Trustee in writing of such Redemption Date and of the principal amount of Securities to be redeemed. Section 11.04. Selection by Trustee of Securities to Be Redeemed. If less than all the Securities are to be redeemed, the particular Securities or portions thereof to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption in compliance with the requirements of the principal national securities exchange, if any, on which the Securities being redeemed are listed, or, if the Securities are not listed on a national exchange, by such method as the Trustee shall deem fair and appropriate; provided that no Securities of a principal amount of $1,000 or less will be redeemed in part; provided, further, that any such redemption pursuant to the provisions relating to an Equity Offering and/or sales to a Strategic Equity Investor shall be made on a pro rata basis or on as nearly a pro rata basis as practicable (subject to the procedures of the Depository or any other depository). 101 -94- The Trustee shall promptly notify the Company and each Security Registrar in writing of the Securities selected for partial redemption and the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. Section 11.05. Notice of Redemption. Notice of redemption will be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at the address of such Holder appearing in the Security Register. All notices of redemption will state: (i) the Redemption Date; (ii) the Redemption Price; (iii) if less than all Outstanding Securities are to be redeemed, the identification of the particular Securities to be redeemed; (iv) in the case of a Security to be redeemed in part, the principal amount of such Security to be redeemed and that after the Redemption Date upon surrender of such Security, a new Security or Securities in the aggregate principal amount equal to the unredeemed portion thereof shall be issued; (v) that Securities called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (vi) that on the Redemption Date the Redemption Price shall become due and payable upon each such Security or portion thereof, and that (unless the Company shall default in payment of the Redemption Price) interest thereon shall cease to accrue on and after said date; (vii) the place or places where such Securities are to be surrendered for payment of the Redemption Price; (viii) the CUSIP number, relating to such Securities; and 102 -95- (ix) the paragraph of the Securities pursuant to which the Securities are being redeemed. Notice of redemption of Securities to be redeemed at the election of the Company will be given by the Company or, at the Company's written request, by the Trustee in the name and at the expense of the Company. The notice if mailed in the manner herein provided will be conclusively presumed to have been given, whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part will not affect the validity of the proceedings for the redemption of any other Security. Section 11.06. Deposit of Redemption Price. On or prior to any Redemption Date, the Company will deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money in same day funds sufficient to pay the Redemption Price of, and accrued interest on, all the Securities or portions thereof which are to be redeemed on that date. Section 11.07. Securities Payable on Redemption Date. Notice of redemption having been given as aforesaid, the Securities so to be redeemed will, on the Redemption Date, become due and payable at the Redemption Price therein specified and from and after such date (unless the Company shall default in the payment of the Redemption Price) such Securities will cease to bear interest and such Securities will cease to be outstanding. Upon surrender of any such Security for redemption in accordance with said notice, such Security will be paid by the Company at the Redemption Price; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such on the relevant Regular Record Dates according to the terms and the provisions of Section 3.07. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid, bear interest from the Redemption Date at the rate then borne by such Security. Section 11.08. Securities Redeemed or Purchased in Part. Any Security which is to be redeemed or purchased only in part shall be surrendered to the Paying Agent at the office or agency maintained for such purpose pursuant to 103 -96- Section 10.02 (with, if the Company, the Security Registrar or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to, the Company, the Security Registrar or the Trustee duly executed by the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver (at the Company's expense) to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder in aggregate principal amount equal to, and in exchange for, the unredeemed portion of the principal of the Security so surrendered that is not redeemed or purchased. ARTICLE XII COLLATERAL AND SECURITY Section 12.01. Escrow Agreement. (a) The due and punctual payment of the interest on the Securities and the Existing Notes when and as the same shall be due and payable on each interest payment date, at maturity or by acceleration, and interest on the overdue principal of and interest (to the extent permitted by law), if any, on the Securities and the Existing Notes and performance of all other obligations of the Company to the Holders or the Trustee under this Indenture and the Escrow Agreement or to the holders of Existing Notes or the Existing Notes Trustee under the Existing Notes Indenture and the Escrow Agreement with respect to the Securities and the Existing Notes, and the Securities and the Existing Notes, according to the terms hereunder or thereunder, shall be secured as provided in the Escrow Agreement which the Company, the Escrow Agent, the Trustee and the Existing Notes Trustee have entered into simultaneously with the execution of this Indenture. Upon the acceleration of the maturity of the Securities, the Escrow Agreement will provide for the foreclosure by the Trustee and the Existing Notes Trustee of the net proceeds of the Escrow Account. This lien equally and ratably secures the Existing Notes. Each Holder, by its acceptance of Securities, consents and agrees to the terms of the Escrow Agreement (including, without limitation, the provisions providing for foreclosure and disbursement of Collateral) as the same may be in effect or may be amended from time to time in accordance with its terms and authorizes and directs the Escrow Agent and the Trustee to enter into the Escrow Agreement and to perform its obligations and exercise its rights thereunder in accordance therewith. The Company shall deliver to the Trustee and the Existing Notes Trustee copies of the Escrow Agreement, and shall do or cause to be done all such acts and things as may be necessary or proper, or as may be required by the provisions of the Escrow Agreement, to assure and confirm to the Trustee and the Existing Notes Trustee the security interest in the Collateral contemplated by the Escrow Agreement or any part thereof, as from time to time constituted, so as to render the same available for the security and benefit of this Indenture with respect to, and of, the Securities, and the Existing Notes Indenture with respect to, and of, the Existing Notes 104 -97- according to the intent and purposes expressed in the Escrow Agreement. The Company shall take any and all actions reasonably required to cause the Escrow Agreement to create and maintain (to the extent possible under applicable law), as security for the obligations of the Company hereunder and under the Existing Notes Indenture, a valid and enforceable perfected first priority Lien in and on all the Collateral, in favor of the Trustee for the benefit of the Trustee, in favor of the Existing Notes Trustee for the benefit of the Existing Notes Trustee, predecessor trustees, and the Holders and holders of the Existing Notes, superior to and prior to the rights of all third Persons and subject to no other Liens. The Trustee shall have no responsibility for perfecting or maintaining the perfection of the Trustee's security interest in the Collateral or for filing any instrument, document or notice in any public office at any time or times. (b) The Escrow Agreement shall further provide that in the event a portion of the Securities has been retired by the Company, depending upon the amount available in the Escrow Account, funds representing the interest payments which have not previously been made on such retired Securities shall, upon the written request of the Company to the Escrow Agent, the Trustee and the Existing Notes Trustee, be paid to the Company upon compliance with the release of collateral provisions of the TIA and upon receipt of a notice relating thereto from the Trustee and the Existing Notes Trustee. Section 12.02. Recording and Opinions. (a) The Company shall furnish to the Trustee and the Existing Notes Trustee promptly after the execution and delivery of this Indenture an Opinion of Counsel either (i) stating that in the opinion of such counsel all action has been taken with respect to the recording, registering and filing of this Indenture, financing statements or other instruments necessary to make effective the Lien intended to be created by the Escrow Agreement and reciting with respect to the security interests in the Collateral the details of such action, or (ii) stating that in the opinion of such counsel no such action is necessary to make such Lien effective. (b) The Company shall furnish to the Escrow Agent, the Trustee and the Existing Notes Trustee on July 7, 1998, and on each July 7 thereafter until the date upon which the balance of Available Funds (as defined in the Escrow Agreement) shall have been reduced to zero, an Opinion of Counsel, dated as of such date, either (i) stating that (A) in the opinion of such counsel, action has been taken with respect to the recording, registering, filing, re- recording, re-registering and refiling of all supplemental indentures, financing statements, continuation statements and other instruments of further assurance as is necessary to maintain the Lien of the Escrow Agreement and reciting with respect to the security interests in the Collateral the details of such action or referring to prior Opinions of Counsel in which such details are given and (B) based on relevant laws as in effect on the date of such Opinion of Counsel, all financing statements and continuation statements have been executed and filed that are necessary as of 105 -98- such date and during the succeeding 12 months fully to preserve and protect, to the extent such protection and preservation are possible by filing, the rights of the Holders and the Trustee hereunder and under the Escrow Agreement and the rights of holders of the Existing Notes and the Existing Notes Trustee under the Existing Notes Indenture and under the Escrow Agreement with respect to the security interests in the Collateral or (ii) stating that, in the opinion of such counsel, no such action is necessary to maintain such Lien and assignment. Section 12.03. Release of Collateral. (a) Subject to subsections (b), (c) and (d) of this Section 12.03, Collateral may be released from the Lien and security interest created by the Escrow Agreement only in accordance with the provisions of the Escrow Agreement. (b) Except to the extent that any Lien on proceeds of Collateral is automatically released by operation of Section 9-306 of the Uniform Commercial Code or other similar law, no Collateral shall be released from the Lien and security interest created by the Escrow Agreement pursuant to the provisions of the Escrow Agreement, other than to the Holders pursuant to the terms thereof, unless there shall have been delivered to the Trustee and the Existing Notes Trustee the certificate required by Section 12.03(d) and Section 12.04. (c) At any time when a Default shall have occurred and be continuing and the maturity of the Existing Notes or of the Securities issued on the Issue Date shall have been accelerated (whether by declaration or otherwise), no Collateral shall be released pursuant to the provisions of the Escrow Agreement, and no release of Collateral in contravention of this Section 12.03(c) shall be effective as against the Holders and holders of the Existing Notes, except for the disbursement of all Available Funds (as defined in the Escrow Agreement) to the Trustee and the Existing Notes Trustee pursuant to Section 6(b) of the Escrow Agreement. (d) The release of any Collateral from the Liens and security interests created by this Indenture and the Escrow Agreement shall not be deemed to impair the security under this Indenture in contravention of the provisions hereof if and to the extent the Collateral is released pursuant to the terms hereof or pursuant to the terms of the Escrow Agreement. To the extent applicable, the Company shall cause TIA Section 314(d) relating to the release of property or securities from the Lien and security interest of the Escrow Agreement to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by an Officer of the Company except in cases where TIA Section 314(d) requires that such certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected or approved by the Trustee in the exercise of reasonable care. 106 -99- Section 12.04. Certificates of the Company. The Company shall furnish to the Trustee, prior to any proposed release of Collateral other than pursuant to the express terms of the Escrow Agreement, (i) all documents required by TIA Section 314(d) and (ii) an Opinion of Counsel, which may be rendered by internal counsel to the Company, to the effect that such accompanying documents constitute all documents required by TIA Section 314(d). The Trustee may, to the extent permitted by Section 6.01 and Section 6.03, accept as conclusive evidence of compliance with the foregoing provisions the appropriate statements contained in such documents and such Opinion of Counsel. Section 12.05. Authorization of Actions To Be Taken by the Trustee Under the Escrow Agreement. Subject to the provisions of Section 6.01 and Section 6.03, the Trustee may, without the consent of the Holders of Securities, on behalf of the Holders of Securities, take all actions it deems necessary or appropriate in order to (a) enforce any of the terms of the Escrow Agreement and (b) collect and receive any and all amounts payable in respect of the obligations of the Company hereunder. The Trustee shall have power to institute and maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation of the Escrow Agreement or this Indenture, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest hereunder or be prejudicial to the interests of the Holders of Securities or of the Trustee). Section 12.06. Authorization of Receipt of Funds by the Trustee Under the Escrow Agreement. The Trustee is authorized to receive any funds for the benefit of the Holders of Securities disbursed under the Escrow Agreement, and to make further distributions of such funds to the Holders of Securities according to the provisions of this Indenture. Section 12.07. Termination of Security Interest. Upon the earliest to occur of (i) the date upon which the balance of Available Funds (as defined in the Escrow Agreement) shall have been reduced to zero, (ii) the payment in full of all obligations of the Company under this Indenture and the Securities, (iii) legal defeasance pursuant to Article Four and (iv) covenant defeasance pursuant to Article Four, the Trustee shall, at the written request of the Company, release the Liens pursuant to this Indenture and the Escrow Agreement upon the Company's compliance with the provisions of the TIA pertaining to release of collateral. 107 -100- ARTICLE XIII SATISFACTION AND DISCHARGE Section 13.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to surviving rights or registration of transfer or exchange of Securities herein expressly provided for) and the Trustee, on written demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when either (a) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 hereof and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or (b) (i) all such Securities not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee as trust funds an amount of money in dollars sufficient to pay and discharge the entire Indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for the principal of, premium, if any, and accrued interest to the date of such deposit; (ii) the Company has paid or caused to be paid all other sums payable hereunder; and (iii) the Company has delivered to the Trustee (1) irrevocable instructions to apply the deposited money toward payment of the Securities at the Stated Maturities and the Redemption Dates thereof, and (ii) an Officers' Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.07 and, if money shall have been deposited with the Trustee pursuant to subclause (a)(ii) of this Section 13.01, the obligations of the Trustee under Section 13.02 and the last paragraph of Section 10.03 shall survive. 108 -101- Section 13.02. Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 13.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the persons entitled thereto, of the principal of, premium, if any, and interest on the Securities for whose payment such money has been deposited with the Trustee. [signatures on following pages] 109 S-1 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. OPTEL, INC. By: ------------------------------ Name: Title: By: ------------------------------ Name: Title: U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee By: ------------------------------ Name: Title: 110 EXHIBIT A-1 [FORM OF SERIES A SECURITY] THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN "ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS THREE YEARS (OR SUCH SHORTER PERIOD AS MAY BE PRESCRIBED BY RULE 144(K) UNDER THE SECURITIES ACT OR ANY SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY OR (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, () PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S, (E) TO AN ACCREDITED INVESTOR THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT A-1 111 OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. A-2 112 OPTEL, INC. ---------- 11-1/2 % SENIOR NOTES DUE 2008 CUSIP No. ---------- No. $ ----------- OPTEL, INC., a corporation incorporated under the laws of the State of Delaware (herein called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to _______________ or registered assigns, the principal sum of _______________ Dollars on July 1, 2008, at the office or agency of the Company referred to below, and to pay interest thereon on January 1 and July 1 (each an "Interest Payment Date"), of each year, commencing on January 1, 1999, accruing from the Issue Date or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 11-1/2% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on December 15 or June 15 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Security will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. A-3 113 Reference is hereby made to the further provisions of this Security set forth on the reverse hereof. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: July 7, 1998 OPTEL, INC. By: ------------------------------------ Name: Title: By: ------------------------------------ Name: Title: A-4 114 TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. Dated: ------------- U.S. Trust Company of Texas, N.A., as Trustee By: ---------------------------------- Authorized Signatory A-5 115 [REVERSE OF SERIES A SECURITY] 1. Indenture. This Security is one of a duly authorized issue of Securities of the Company designated as its 11-1/2% Senior Notes Due 2008 (herein called the "Series A Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $200,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of July 7, 1998, among the Company and U.S. Trust Company of Texas, N.A., as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. All capitalized terms used in this Series A Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. No reference herein to the Indenture and no provisions of this Series A Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the times, place, and rate, and in the coin or currency, herein prescribed. 2. Registration Rights. Pursuant to the Registration Agreement among the Company and the Holders of the Series A Securities, the Company will be obligated to consummate an exchange offer pursuant to which the Holder of this Security shall have the right to exchange this Security for 11- 1/2% Senior Notes Due 2008, Series B, of the Company (herein called the "Series B Securities"), which have been registered under the Securities Act, in like principal amount and having identical terms as the Series A Securities (other than as set forth in this paragraph). The Holders of Series A Securities shall be entitled to receive certain additional interest payments in the event such exchange offer is not consummated and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Agreement. The Series A Securities and the Series B Securities are together referred to herein as the "Securities." 3. Redemption. (a) Optional Redemption. The Securities are subject to redemption, at the option of the Company, in whole or in part, in principal amounts of $1,000 or any integral multiple of $1,000, at any time on or after July 1, 2003 upon not less than 30 nor more than 60 days' notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12-month period beginning July 1 of the years indicated below: A-6 116
Year Redemption Price ---- ---------------- 2003 . . . . . . . . . . . . . . . . 105.7500% 2004 . . . . . . . . . . . . . . . . 104.3125% 2005 . . . . . . . . . . . . . . . . 102.8750% 2006 . . . . . . . . . . . . . . . . 101.4375% 2007 and thereafter . . . . . . . . 100.0000%
(b) Optional Redemption Upon Equity Offering or Sales to Strategic Equity Investors. Prior to July 1, 2001, in the event that the Company consummates (i) one or more Equity Offerings and/or (ii) a sale or series of related sales by the Company of its Common Stock to one or more Strategic Equity Investors for aggregate gross proceeds of $100.0 million or more, the Company may redeem, at its option, up to a maximum of 35% of the initially outstanding aggregate principal amount of the Securities from the net proceeds thereof on a pro rata basis (or as nearly pro rata as practicable), at a redemption price equal to 111.50% of the principal amount of the Securities (determined at the redemption date), together with accrued and unpaid interest, if any, to the date of redemption; provided that not less than $130.0 million aggregate principal amount of Securities are outstanding immediately following such redemption. Any such redemption may only be effected once and must be effected upon not less than 30 nor more than 60 days' notice given within 30 days after the last such Equity Offering or sale to a Strategic Equity Investor, as the case may be, resulting in gross proceeds of $100.0 million or more. (c) Interest Payments. In the case of any redemption of Series A Securities, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. (d) Partial Redemption. In the event of redemption of this Series A Security in part only, a new Series A Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. 4. Offers to Purchase. Sections 10.11 and 10.16 of the Indenture provide that upon the occurrence of a Change of Control and following certain Asset Sales, and subject to certain conditions and limitations contained therein, the Company shall make an offer to purchase certain amounts of the Securities in accordance with the procedures set forth in the Indenture. 5. Defaults and Remedies. If an Event of Default occurs and is continuing, the principal of all of the Outstanding Securities, plus all accrued and unpaid interest, if any, to A-7 117 and including the date the Securities are paid, may be declared due and payable in the manner and with the effect provided in the Indenture. 6. Defeasance. The Indenture contains provisions (which provisions apply to this Series A Security) for defeasance at any time of (a) the entire indebtedness of the Company on this Series A Security and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. 7. Amendments and Waivers. The Indenture permits, with certain exceptions as provided therein, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past Defaults under the Indenture and this Series A Security and their consequences. Any such consent or waiver by or on behalf of the Holder of this Series A Security shall be conclusive and binding upon such Holder and upon all future Holders of this Series A Security and of any Series A Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Series A Security. 8. Denominations, Transfer and Exchange. The Series A Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Series A Securities are exchangeable for a like aggregate principal amount of Series A Securities of a different authorized denomination, as requested by the Holder surrendering the same. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Series A Security is registrable on the Security Register of the Company, upon surrender of this Series A Security for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Series A Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Series A Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. A-8 118 9. Persons Deemed Owners. Prior to and at the time of due presentment of this Series A Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Series A Security is registered as the owner hereof for all purposes, whether or not this Series A Security shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. 10. GOVERNING LAW. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. A-9 119 ASSIGNMENT FORM If you the holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to (Insert assignee's social security or tax ID number) ---------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint - -------------------------------------------------------------------------------- agent to transfer this Security on the books of the Company. The agent may substitute another to act for such agent. In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the date two years (or such shorter period of time as permitted by Rule 144(k) under the Securities Act or any successor provision thereunder) after the later of the original issuance date appearing on the face of this Security (or any Predecessor Security) or the last date on which the Company or any Affiliate of the Company was the owner of this Security (or any Predecessor Security), the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: A-10 120 [Check One] [ ] (a) this Security is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or [ ] (b) this Security is being transferred other than in accordance with (a) above and documents, including a transferee certificate substantially in the form attached hereto, are being furnished which comply with the conditions of transfer set forth in this Security and the Indenture. If none of the foregoing boxes is checked and, in the case of (b) above, if the appropriate document is not attached or otherwise furnished to the Trustee, the Trustee or Registrar shall not be obligated to register this Security in the name of any person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 3.15 of the Indenture shall have been satisfied. - -------------------------------------------------------------------------------- Date: Your signature: --------------------- ------------------------------ (Sign exactly as your name appears on the other side of this Security) By: --------------------------- NOTICE: To be executed by an executive officer Signature Guarantee: ------------------------------------ Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee) TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A (including the information specified in A-11 121 Rule 144A(d)(4)) or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ------------------ ---------------------------------------- NOTICE: To be executed by an executive officer [The Transferee Certificates (Exhibits C and D to the Indenture) will be attached to the Series A Security as appropriate] A-12 122 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 10.11 or 10.16 of the Indenture, check the appropriate box: Section 10.11 [ ] Section 10.16 [ ] If you wish to have a portion of this Security purchased by the Company pursuant to Section 10.11 or 10.16 of the Indenture, state the amount: $ ============== Date: Your Signature: ---------------------- ----------------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ------------------------------------ Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee) A-13 123 EXHIBIT A-2 [FORM OF SERIES B SECURITY] OPTEL, INC. --------------- 11-1/2% SENIOR NOTES DUE 2008, SERIES B CUSIP No. ----------- No. $ ------------- OPTEL, INC., a corporation incorporated under the laws of the State of Delaware (herein called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to ___________________ or registered assigns, the principal sum of _________________ Dollars on July 1, 2008, at the office or agency of the Company referred to below, and to pay interest thereon on January 1 and July 1 (each an "Interest Payment Date"), of each year, commencing on January 1, 1999, accruing from the Issue Date or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 11-1/2% per annum, until the principal hereof is paid or duly provided for. Interest shall be computed on the basis of a 360-day year of twelve 30-day months. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture referred to on the reverse hereof, be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on December 15 and June 15 (each a "Regular Record Date"), whether or not a Business Day, as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid, or duly provided for, and interest on such defaulted interest at the then applicable interest rate borne by the Securities, to the extent lawful, shall forthwith cease to be payable to the Holder on such Regular Record Date, and may be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such defaulted interest to be fixed by the Trustee, notice of which shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in such Indenture. Payment of the principal of, premium, if any, and interest on this Security will be made at the office or agency of the Company maintained for that purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the A2-1 124 Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the person entitled thereto as such address shall appear on the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed. Dated: , OPTEL, INC. By: ------------------------------ Name: Title: By: ------------------------------ Name: Title: A2-2 125 TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. Dated: -------------------- U.S. Trust Company of Texas, N.A., as Trustee By: ----------------------- Authorized Signatory A2-3 126 [REVERSE OF SERIES B SECURITY] 1. Indenture. This Security is one of a duly authorized issue of Securities of the Company designated as its 11-1/2% Senior Notes Due 2008, Series B (herein called the "Series B Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $200,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of July 7, 1998, among the Company and U.S. Trust Company of Texas, N.A., as trustee (herein called the "Trustee," which term includes any successor Trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitation of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. All capitalized terms used in this Series B Security which are defined in the Indenture and not otherwise defined herein shall have the meanings assigned to them in the Indenture. No reference herein to the Indenture and no provision of this Series B Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, premium, if any, and interest on this Security at the times, place, and rate, and in the coin or currency, herein prescribed. The Series B Securities were issued pursuant to an exchange offer pursuant to which 11-1/2% Senior Notes Due 2008 of the Company (herein called the "Series A Securities"), in like principal amount and having substantially identical terms as the Series B Securities, were exchanged for the Series B Securities. The Series A Securities and the Series B Securities are together referred to herein as the "Securities." 2. Redemption. (a) Optional Redemption. The Securities are subject to redemption, at the option of the Company, in whole or in part, in principal amounts of $1,000 or any integral multiple of $1,000, at any time on or after July 1, 2003 upon not less than 30 nor more than 60 days' notice at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest to the redemption date, if redeemed during the 12 month period beginning July 1 of the years indicated below:
Year Redemption Price ---- ---------------- 2003 . . . . . . . . . . . . . . . . . . . . . . 105.7500% 2004 . . . . . . . . . . . . . . . . . . . . . . 104.3125% 2005 . . . . . . . . . . . . . . . . . . . . . . 102.8750% 2006 . . . . . . . . . . . . . . . . . . . . . . 101.4375% 2007 and thereafter . . . . . . . . . . . . . . 100.0000%
A2-4 127 (b) Optional Redemption upon Equity Offering or Sales to Strategic Equity Investors. Prior to July 1, 2001, in the event that the Company consummates (i) one or more Equity Offerings and/or (ii) a sale or series of related sales by the Company of its Common Stock to one or more Strategic Equity Investors for aggregate gross proceeds of $100.0 million or more, the Company may redeem, at its option, up to a maximum of 35% of the initially outstanding aggregate principal amount of the Securities from the net proceeds thereof on a pro rata basis (or as nearly pro rata as practicable), at a redemption price equal to 111.50% of the principal amount of the Securities (determined at the redemption date), together with accrued and unpaid interest, if any, to the date of redemption; provided that not less than $130 million in aggregate principal amount of Securities are outstanding immediately following such redemption. Any such redemption may only be effected once and must be effected upon not less than 30 nor more than 60 days' notice given within 30 days after the last such Equity Offering or sale to a Strategic Equity Investor, as the case may be, resulting in gross proceeds of $100.0 million or more. (c) Interest Payments. In the case of any redemption of Series B Securities, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. (d) Partial Redemption. In the event of redemption of this Series B Security in part only, a new Series B Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. 3. Offers to Purchase. Sections 10.11 and 10.16 of the Indenture provide that upon the occurrence of a Change of Control and following any Asset Sale, and subject to further limitations contained therein, the Company shall make an offer to purchase certain amounts of the Securities in accordance with the procedures set forth in the Indenture. 4. Defaults and Remedies. If an Event of Default occurs and is continuing, the principal of all of the Outstanding Securities, plus all accrued and unpaid interest, if any, to and including the date the Securities are paid, may be declared due and in the manner and with the effect provided in the Indenture. 5. Defeasance. The Indenture contains provisions (which provisions apply to this Series B Security) for defeasance at any time of (a) the entire indebtedness of the Company on this Series B Security and (b) certain restrictive covenants and related Defaults and Events of Default, in each case upon compliance by the Company with certain conditions set forth therein. A2-5 128 6. Amendments and Waivers. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indentures and certain past Defaults under the Indenture and this Series B Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and their consequences. Any such consent or waiver by or on behalf of the Holder of this Series B Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Series B Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Series B Security. 7. Denominations, Transfer and Exchange. The Series B Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Series B Securities are exchangeable for a like aggregate principal amount of Series B Securities of a different authorized denomination, as requested by the Holder surrendering the same. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Series B Security is registrable on the Security Register of the Company, upon surrender of this Series B Security for registration of transfer at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in The City of New York, State of New York, or at such other office or agency of the Company as may be maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Series B Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. No service charge shall be made for any registration of transfer or exchange or redemption of Series B Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 8. Persons Deemed Owners. Prior to and at the time of due presentment of this Series B Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the person in whose name this Series B Security is registered as the owner hereof for all purposes, whether or not this Series B Security shall be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. A2-6 129 9. GOVERNING LAW. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAW. A2-7 130 ASSIGNMENT FORM If you the holder want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to (Insert assignee's social security or tax ID number) ---------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) and irrevocably appoint - -------------------------------------------------------------------------------- agent to transfer this Security on the books of the Company. The agent may substitute another to act for such agent. Date: Your signature: ------- --------------------------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ------------------------------------- Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee) A2-8 131 OPTION OF HOLDER TO ELECT PURCHASE If you wish to have this Security purchased by the Company pursuant to Section 10.11 or 10.16 of the Indenture, check the appropriate box: Section 10.11 [ ] Section 10.16 [ ] If you wish to have a portion of this Security purchased by the Company, state the amount: $ ============== Date: Your signature: ------- --------------------------------------------- (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: ------------------------------------- Participant in a recognized Signature Guarantee Medallion Program (or other signature guarantor program reasonably acceptable to the Trustee) A2-9 132 EXHIBIT B FORM OF LEGEND FOR BOOK-ENTRY SECURITIES Any Global Security authenticated and delivered hereunder shall bear a legend (which would be in addition to any other legends required in the case of a Restricted Security) in substantially the following form: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. B-1 133 EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors ___________, ____ U.S. TRUST COMPANY OF TEXAS, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Re: OpTel, Inc. (the "Company") 11-1/2% Senior Notes Due 2008 (the "Securities") and the related Indenture (the "Indenture") Ladies and Gentlemen: In connection with our proposed purchase of the Securities, we confirm that: 1. We have received such information as we deem necessary to make our investment decisions. 2. We understand that any subsequent transfer of the Securities is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Securities except in compliance with, such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). 3. We understand that the offer and sale of the Securities have not been registered under the Securities Act, and that the Securities may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of each account for which we acquire any Securities, that, prior to (x) the date which is two years after the later of the date of original issuance of the Securities (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act or any successor provision) C-1 134 and (y) such later date, if any, may be required by applicable laws, the Securities may be offered, resold, pledged or otherwise transferred only (a) to the Company or any of its subsidiaries, (b) inside the United States to a person whom we reasonably believe to be a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in compliance with Rule 144A under the Securities Act, (c) inside the United States to a person we reasonably believe to be an institutional "accredited investor" (as defined below) that, prior to such transfer, furnished to the Trustee a signed letter substantially in the form hereof, (d) outside the United States to persons other than U.S. persons in offshore transactions meeting the requirements of Rule 904 under Regulation S under the Securities Act, (e) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), (f) pursuant to an effective registration statement under the Securities Act or (g) pursuant to another available exemption from the registration requirements of the Securities Act, and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction, and we further agree to provide to any person purchasing Securities from us a notice advising such purchaser that resales of the Securities are restricted as stated herein. 4. We understand that, on any proposed resale of any Securities, we will be required to furnish to you and the Company such certification, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Securities purchased by us will bear a legend to the foregoing effect. 5. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment, as the case may be. 6. We are acquiring the Securities purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. C-2 135 You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By: ---------------------------------- Authorized Signature C-3 136 EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S ______________, ____ U.S. TRUST COMPANY OF TEXAS, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Re: OpTel, Inc. (the "Company") 11-1/2% Senior Notes Due 2008 (the "Securities") Ladies and Gentlemen: In connection with our proposed sale of $ aggregate principal amount at maturity of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Securities was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; D-1 137 (5) we have advised the transferee of the transfer restrictions applicable to the Securities; and (6) if the circumstances set forth in Rule 904(c) under the Securities Act are applicable, we have complied with the additional conditions therein, including (if applicable) sending a confirmation or other notice stating that the Securities may be offered and sold during the restricted period specified in Rule 903(c)(2) or (3), as applicable, in accordance with the provisions of Regulation S; pursuant to registration of the Securities under the Securities Act; or pursuant to an available exemption from the registration requirements under the Securities Act. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferee] By: ---------------------------------- Authorized Signature D-2 EX-4.18 5 ESCROW AGREEMENT 1 Exhibit 4.18 ESCROW AGREEMENT This ESCROW AGREEMENT (this "Agreement"), dated as of July 7, 1998, among U.S. Trust Company of Texas, N.A., as escrow agent (in such capacity, the "Escrow Agent"), U.S. Trust Company of Texas, N.A., as Trustee (in such capacity, the "Trustee") under the Indenture (as defined herein), U.S. Trust Company of Texas, N.A., as trustee (in such capacity, the "Existing Notes Trustee") under the Existing Notes Indenture and OpTel, Inc., a Delaware corporation (the "Company"). R E C I T A L S : A. Pursuant to the Indenture, dated as of July 7, 1998 (the "Indenture"), between the Company and the Trustee, the Company is issuing $200,000,000 aggregate principal amount of its 11-1/2% Senior Notes Due 2008 (the "Series A Securities") and authorizing the issuance of 11-1/2% Senior Notes Due 2008, Series B (the "Series B Securities", and together with the Series A Securities, the "Securities"). B. As security for its obligations under the Securities and the Indenture and the Existing Notes and the Existing Notes Indenture, the Company hereby grants to (i) the Trustee, for the benefit of the Trustee, any predecessor Trustee under the Indenture and the Securityholders (collectively, the "Beneficiaries") and (ii) the Existing Notes Trustee, for the benefit of the Existing Notes Trustee, any predecessor Existing Notes Trustee under the Existing Notes Indenture, and the holders of the Existing Notes (collectively, the "Existing Beneficiaries"), an equal and ratable security interest in and lien upon the Escrow Account (as defined herein). C. The parties have entered into this Agreement in order to set forth the conditions upon which, and the manner in which, funds will be disbursed from the Escrow Account and released from the security interest and lien described above. A G R E E M E N T : NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. DEFINED TERMS. All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Indenture. In addition to any other defined terms used herein, the following terms shall constitute defined terms for purposes of this Agreement and shall have the meanings set forth below: "Affiliate" of any specified person means any other person which, directly or indirectly, controls, is controlled by or is under common control with such specified person. For the purposes of this definition, "control" when used with respect to any person means the 2 -2- power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise and the terms "affiliated," "controlling" and "controlled" have meanings correlative to the foregoing. "Applied" means that disbursed funds have been applied (i) to the payment of interest on the Securities, (ii) pursuant to Section 3(c) or (iii) pursuant to Section 6(b)(iii). "Available Funds" means (A) the sum of (i) the Initial Escrow Amount and (ii) interest earned or dividends paid on the funds in the Escrow Account (including holdings of U.S. Government Securities), less (B) the aggregate disbursements previously made pursuant to this Agreement. "Beneficiaries" shall have the meaning given in the recitals hereto. "Collateral" shall have the meaning given in Section 6(a) hereof. "Escrow Account" means the escrow account established pursuant to Section 2. "Escrow Account Statement" shall have the meaning given in Section 2(f). "Existing Beneficiaries" shall have the meaning given in the recitals hereto. "Initial Escrow Amount" means $21,784,584.00. "Initial Instructions" shall have the meaning given in Section 2(d) hereof. "Interest Payment Date" means January 1 and July 1 of each year, commencing January 1, 1999 until the Securities are paid in full. "Payment Notice and Disbursement Request" means a notice sent by the Trustee to the Escrow Agent requesting a disbursement of funds from the Escrow Account, in substantially the form of Exhibit A hereto. Each Payment Notice and Disbursement Request shall be signed by an officer of the Trustee. "TIA" shall have the meaning given in Section 2(d) hereof. "U.S. Government Securities" means securities that are direct obligations of the United States of America for the payment of which its full faith and credit is pledged. 3 -3- 2. ESCROW ACCOUNT; ESCROW AGENT. (a) Appointment of Escrow Agent. The Company, the Trustee and the Existing Notes Trustee hereby appoint the Escrow Agent, and the Escrow Agent hereby accepts appointment, as escrow agent, under the terms and conditions of this Agreement. (b) Establishment of Escrow Account. On the Issue Date, the Escrow Agent shall establish an escrow account entitled the "Escrow Account pledged by OpTel, Inc. to U.S. Trust Company of Texas, N.A., as Trustee with respect to the 11-1/2% Senior Notes Due 2008" (the "Escrow Account") at its office located at 2001 Ross Avenue, Suite 2700, Dallas, Texas 75201. All funds accepted by the Escrow Agent pursuant to this Agreement shall be held for the exclusive and equal and ratable benefit of the Beneficiaries and the Existing Beneficiaries. All such funds shall be held in the Escrow Account until disbursed or paid in accordance with the terms hereof. The Escrow Account, the funds held therein and any U.S. Government Securities held by the Escrow Agent shall be under the sole dominion and control of the Escrow Agent for the benefit of the Beneficiaries and the Existing Beneficiaries. On the Issue Date, the Company shall deliver the Initial Escrow Amount to the Escrow Agent for deposit into the Escrow Account against the Escrow Agent's written acknowledgment and receipt of the Initial Escrow Amount. (c) Escrow Agent Compensation. The Company shall pay to the Escrow Agent such compensation for services to be performed by it under this Agreement as the Company and the Escrow Agent may agree in writing from time to time. The Escrow Agent shall be paid any compensation owed to it directly by the Company and shall not disburse from the Escrow Account any such amounts. The Company shall reimburse the Escrow Agent upon request for all reasonable expenses, disbursements, and advances incurred or made by the Escrow Agent in implementing any of the provisions of this Agreement, including compensation and the reasonable expenses and disbursements of its counsel. The Escrow Agent shall be paid any such expenses owed to it directly by the Company and shall not disburse from the Escrow Account any such amounts. (d) Investment of Funds in Escrow Account. Funds deposited in the Escrow Account shall be invested and reinvested only upon the following terms and conditions: (i) Acceptable Investments. All funds deposited or held in the Escrow Account at any time shall be invested by the Escrow Agent in U.S. Government Securities in accordance with the instructions annexed hereto as Schedule A (the "Initial Instructions") and thereafter, if necessary, the Company's written instructions 4 -4- from time to time to the Escrow Agent; provided, however, that the Company shall only designate investment of funds in U.S. Government Securities maturing in an amount sufficient to and/or generating interest income sufficient to, when added to the balance of funds held in the Escrow Account, provide for the payment of interest on the outstanding Securities on each Interest Payment Date beginning on and including January 1, 1999 and through and including the Interest Payment Date on July 1, 1999, provided, further, however, that any such written instruction shall specify the particular investment to be made, shall state that such investment is authorized to be made hereby and in particular satisfies the requirements of the preceding proviso and Section 2(d)(v), shall contain the certification referred to in Section 2(d)(ii), if required, and shall be executed by an Officer of the Company. All U.S. Government Securities shall be assigned to and held in the possession of, or, in the case of U.S. Government Securities maintained in book entry form with the Federal Reserve Bank (i.e., TRADES), transferred to a book entry account in the name of, the Escrow Agent, for the benefit of the Beneficiaries and the Existing Beneficiaries, with such guarantees as are customary, except that U.S. Government Securities maintained in book entry form with the Federal Reserve Bank shall be transferred to a book entry account in the name of the Escrow Agent at the Federal Reserve Bank that includes only U.S. Government Securities held by the Escrow Agent for its customers and segregated by separate recordation in the books and records of the Escrow Agent. The Escrow Agent shall not be liable for losses on any investments made by it pursuant to and in compliance with such instructions. In the absence of qualifying instructions from the Company that meet the requirements of this Section 2(d)(i), the Escrow Agent shall have no obligation to invest funds held in the Escrow Account. (ii) Security Interest in Investments. No investment of funds in the Escrow Account shall be made unless the Company has certified to the Escrow Agent, the Trustee and the Existing Notes Trustee that, upon such investment, the Trustee and the Existing Notes Trustee will have an equal and ratable first priority perfected security interest in the applicable investment. If a certificate as to a class of investments has been provided to the Escrow Agent, a certificate need not be issued with respect to individual investments in securities in that class if the certificate applicable to the class remains accurate with respect to such individual investments, which continued accuracy the Escrow Agent may conclusively assume. On the Issue Date, and yearly thereafter until the date upon which the balance of the Available Funds shall have been reduced to zero, each of the Trustee and the Existing Notes Trustee and the Escrow Agent shall receive an Opinion of Counsel to the Company, dated each such date as applicable, which opinion shall meet the requirements of Section 314(b) of the Trust Indenture Act of 1939, as amended (the "TIA") and shall comply with Section 12.02 of the Indenture. 5 -5- (iii) Interest and Dividends. All interest earned and dividends paid on funds invested in U.S. Government Securities shall be deposited in the Escrow Account as additional Collateral for the exclusive benefit of the Beneficiaries and the Existing Beneficiaries and, if not required to be disbursed in accordance with the terms hereof, shall be reinvested in accordance with the terms hereof at the Company's written instruction. (iv) Limitation on Escrow Agent's Responsibilities. The Escrow Agent's sole responsibilities under this Section 2 shall be (A) to retain possession of certificated U.S. Government Securities (except, however, that the Escrow Agent may surrender possession to the issuer of any such U.S. Government Security for the purposes of effecting assignment, crediting interest, or reinvesting such security or reducing such security to cash) and to be the registered or designated owner of U.S. Government Securities which are not certificated; (B) to follow the Company's written instructions given in accordance with Section 2(d)(i); (C) to invest and reinvest funds pursuant to this Section 2(d); and (D) to use reasonable efforts to reduce to cash such U.S. Government Securities as may be required to fund any disbursement or payment in accordance with Section 3. In connection with clause (A) above, the Escrow Agent will maintain continuous possession in the State of New York of certificated U.S. Government Securities and cash included in the Collateral and will cause uncertificated U.S. Government Securities to be registered in the book-entry system of, and transferred to an account of the Escrow Agent or a sub-agent of the Escrow Agent at, the Federal Reserve Bank of New York. Except as provided in Section 6, the Escrow Agent shall have no other responsibilities with respect to perfecting or maintaining the perfection of the Trustee's and the Existing Notes Trustee's security interest in the Collateral and shall not be required to file any instrument, document or notice in any public office at any time or times. In connection with clause (D) above and subject to the following sentence, the Escrow Agent shall not be required to reduce to cash any U.S. Government Securities to fund any disbursement or payment in accordance with Section 3 in the absence of written instructions signed by an Officer of the Company specifying the particular investment to liquidate. If no such written instructions are received, the Escrow Agent may liquidate those U.S. Government Securities having the lowest interest rate per annum or, if none such exist, those having the nearest maturity. (v) Manner of Investment. Funds deposited in the Escrow Account shall initially be invested in accordance with the Initial Instructions, which is in a manner such that there will be sufficient funds available without any further investment by the Company to cover all interest due on the outstanding Securities, as such interest becomes due, for each Interest Payment Date occurring from the Issue Date and ending on (and including) July 1, 1999, provided that such investments shall have such 6 -6- maturities and/or interest payment dates such that funds will be available with respect to each such Interest Payment Date no later than the time the Escrow Agent is required to disburse such funds to the Trustee pursuant to Section 3(a). The Escrow Agent shall have no responsibility for determining whether funds held in the Escrow Account shall have been invested in such a manner so as to comply with the requirements of this clause (v). (e) Substitution of Escrow Agent. The Escrow Agent may resign by giving no less than 20 Business Days prior written notice to the Company, the Trustee and the Existing Notes Trustee. Such resignation shall take effect upon the later to occur of (i) delivery of all funds and U.S. Government Securities maintained by the Escrow Agent hereunder and copies of all books, records, plans and other documents in the Escrow Agent's possession relating to such funds or U.S. Government Securities or this Agreement to a successor escrow agent mutually approved by the Company, the Trustee and the Existing Notes Trustee (which approvals shall not be unreasonably withheld or delayed) and (ii) the Company, the Trustee and the Existing Notes Trustee and such successor escrow agent entering into this Agreement or any written successor agreement no less favorable to the interests of the Beneficiaries and the Existing Beneficiaries than this Agreement; and the Escrow Agent shall thereupon be discharged of all obligations under this Agreement and shall have no further duties, obligations or responsibilities in connection herewith, except as set forth in Section 4. If a successor escrow agent has not been appointed or has not accepted such appointment within 20 Business Days after notice of resignation is given to the Company, the Escrow Agent may apply to a court of competent jurisdiction for the appointment of a successor escrow agent. (f) Escrow Account Statement. At least 30 days prior to each Interest Payment Date, the Escrow Agent shall deliver to the Company, the Trustee and the Existing Notes Trustee a statement setting forth with reasonable particularity the balance of funds then in the Escrow Account and the manner in which such funds are invested ("Escrow Account Statement"). The parties hereto irrevocably instruct the Escrow Agent that on the first date upon which the balance in the Escrow Account (including the holdings of all U.S. Government Securities) is reduced to zero, the Escrow Agent shall deliver to the Company, to the Trustee and the Existing Notes Trustee a notice that the balance in the Escrow Account has been reduced to zero. 3. DISBURSEMENTS. (a) Payment Notice and Disbursement Request; Disbursements. The Trustee shall, at least five business days prior to an Interest Payment Date, submit to the Escrow Agent a completed Payment Notice and Disbursement Request substantially in the form of Exhibit A hereto. 7 -7- The Escrow Agent's disbursement pursuant to any Payment Notice and Disbursement Request shall be subject to the satisfaction of the applicable conditions set forth in Section 3(b). Provided such Payment Notice and Disbursement Request is not rejected by it, the Escrow Agent, as soon as reasonably practicable on the Interest Payment Date, but in no event later than 12:00 Noon (New York City time) on the Interest Payment Date, shall disburse the funds requested in such Payment Notice and Disbursement Request by wire or book-entry transfer of immediately available funds to the account of the Trustee for the benefit of the Beneficiaries. The Escrow Agent shall notify the Trustee as soon as reasonably possible (but not later than two (2) business days from the date of receipt of the Payment Notice and Disbursement Request) if any Payment Notice and Disbursement Request is rejected and the reason(s) therefor. In the event such rejection is based upon nonsatisfaction of the condition in Section 3(b)(I) below, the Trustee shall thereupon resubmit the Payment Notice and Disbursement Request with appropriate changes. (b) Conditions Precedent to Disbursement. The Escrow Agent's payment of any disbursement shall be made only if: (I) the Trustee shall have submitted, in accordance with the provisions of Section 3(a) herein, a completed Payment Notice and Disbursement Request to the Escrow Agent substantially in the form of Exhibit A with blanks appropriately filled in and (II) the Escrow Agent shall not have received any notice from the Trustee or the Existing Notes Trustee that as a result of an Event of Default the indebtedness represented by the Securities or by the Existing Notes has been accelerated and has become due and payable (in which event the Escrow Agent shall apply all Available Funds as required by Section 6(b)(iii)). The Existing Notes Trustee hereby consents to the disbursement of funds from the Escrow Account for the payment of interest on the Securities as contemplated in this Agreement and in the Indenture, without notice. (c) Retired Securities. In the event a portion of the Securities has been retired by the Company and submitted to the Trustee for cancellation and there is no Default or Event of Default under the Indenture or the Existing Notes Indenture, funds representing the lesser of (A) any funds remaining in the Escrow Account that are in excess of the amount sufficient to pay interest through and including July 1, 1999 on the Securities not so retired and (B) the interest payments which have not previously been made on such retired Securities for each Interest Payment Date through the Interest Payment Date to occur on July 1, 1999 shall, upon the written request of the Company to the Escrow Agent, the Trustee and the Existing Notes Trustee, be paid to the Company upon compliance with the release of collateral provisions of the TIA and upon receipt by the Escrow Agent of a notice relating thereto from the Trustee and the Existing Notes Trustee. 8 -8- 4. ESCROW AGENT. (a) Limitation of the Escrow Agent's Liability; Responsibilities of the Escrow Agent. The Escrow Agent's responsibility and liability under this Agreement shall be limited as follows: (i) the Escrow Agent does not represent, warrant or guaranty to the Securityholders or the holders of Existing Notes from time to time the performance of the Company; (ii) the Escrow Agent shall have no responsibility to the Company or the Beneficiaries or the Existing Beneficiaries from time to time as a consequence of performance or non-performance by the Escrow Agent hereunder, except for any gross negligence or willful misconduct of the Escrow Agent; (iii) the Company shall remain solely responsible for all aspects of the Company's business and conduct; and (iv) the Escrow Agent is not obligated to supervise, inspect or inform the Company or any third party of any matter referred to above. No implied covenants or obligations shall be inferred from this Agreement against the Escrow Agent, nor shall the Escrow Agent be bound by the provisions of any agreement beyond the specific terms hereof. Specifically and without limiting the foregoing, the Escrow Agent shall in no event have any liability in connection with its investment, reinvestment or liquidation, in good faith and in accordance with the terms hereof, of any funds or U.S. Government Securities held by it hereunder, including without limitation any liability for any delay not resulting from gross negligence or willful misconduct in such investment, reinvestment or liquidation, or for any loss of principal or income incident to any such delay. The Escrow Agent shall be entitled to rely upon any judicial order or judgment, upon any written opinion of counsel or upon any certification, instruction, notice, or other writing delivered to it by the Company, the Trustee or the Existing Notes Trustee in compliance with the provisions of this Agreement without being required to determine the authenticity or the correctness of any fact stated therein or the propriety or validity of service thereof. The Escrow Agent may act in reliance upon any instrument comporting with the provisions of this Agreement or signature believed by it to be genuine and may assume that any person purporting to give notice or receipt or advice or make any statement or execute any document in connection with the provisions hereof has been duly authorized to do so. At any time the Escrow Agent may request in writing an instruction in writing from the Company, and may at its own option include in such request the course of action it proposes to take and the date on which it proposes to act, regarding any matter arising in connection with its duties and obligations hereunder; provided, however, that the Escrow Agent shall state in such request that it believes in good faith that such proposed course of action is consistent with another identified provision of this Agreement. The Escrow Agent shall not be liable to the Company for acting without the Company's consent in accordance with such a proposal on or after the date specified therein if (i) the specified date is at least 9 -9- two business days after the Company receives the Escrow Agent's request for instructions and its proposed course of action, and (ii) prior to so acting, the Escrow Agent has not received the written instructions requested from the Company. The Escrow Agent may act pursuant to the written advice of counsel chosen by it with respect to any matter relating to this Agreement and (subject to clause (ii) of the first paragraph of this Section 4(a)) shall not be liable for any action taken or omitted in accordance with such advice. The Escrow Agent shall not be called upon to advise any party as to selling or retaining, or taking or refraining from taking any action with respect to, any securities or other property deposited hereunder. In the event of any ambiguity in the provisions of this Agreement with respect to any funds or property deposited hereunder, the Escrow Agent shall be entitled to refuse to comply with any and all claims, demands or instructions with respect to such funds or property, and the Escrow Agent shall not be or become liable for its failure or refusal to comply with conflicting claims, demands or instructions. The Escrow Agent shall be entitled to refuse to act until either any conflicting or adverse claims or demands shall have been finally determined by a court of competent jurisdiction or settled by agreement between the conflicting claimants as evidenced in a writing, satisfactory to the Escrow Agent, or the Escrow Agent shall have received security or an indemnity satisfactory to the Escrow Agent sufficient to save the Escrow Agent harmless from and against any and all loss, liability or expense which the Escrow Agent may incur by reason of its acting. The Escrow Agent may in addition elect in its sole option to commence an interpleader action or seek other judicial relief or orders as the Escrow Agent may deem necessary. No provision of this Agreement shall require the Escrow Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. 5. INDEMNITY. The Company shall indemnify, hold harmless and defend the Escrow Agent and its directors, officers, agents, employees and controlling persons, from and against any and all claims, actions, obligations, liabilities and expenses, including defense costs, investigative fees and costs, legal fees, and claims for damages, arising from the Escrow Agent's performance or non-performance, or in connection with its acceptance or appointment as Escrow Agent, under this Agreement, except to the extent that such liability, expense or claim is solely and directly attributable to the gross negligence or willful misconduct of any of the foregoing persons. The provisions of this Section 5 shall survive any termination, satisfaction or discharge of this Agreement as well as the resignation or removal of the Escrow Agent. 10 -10- 6. GRANT OF SECURITY INTEREST; INSTRUCTIONS TO ESCROW AGENT. (a) The Company hereby irrevocably grants an equal and ratable first priority security interest in and lien on, and pledges, assigns and sets over to (i) the Trustee for the ratable benefit of the Beneficiaries and (ii) the Existing Notes Trustee for the ratable benefit of the Existing Beneficiaries, all of the Company's right, title and interest in the Escrow Account, and all property now or hereafter placed or deposited in, or delivered to the Escrow Agent for placement or deposit in, the Escrow Account, including, without limitation, all funds held therein, all U.S. Government Securities held by (or otherwise maintained in the name of) the Escrow Agent pursuant to Section 2, and all proceeds thereof as well as all rights of the Company under this Agreement (collectively, the "Collateral"), in order to secure all obligations and indebtedness of the Company under the Indenture, the Securities, the Existing Notes Indenture, the Existing Notes and any other obligation, now or hereafter arising, of every kind and nature, owed by the Company under the Indenture or the Existing Notes Indenture to the Beneficiaries or the Existing Beneficiaries. The Escrow Agent hereby acknowledges the Trustee's and the Existing Notes Trustee's security interest and lien as set forth above. The Company shall take all actions necessary on its part to insure the continuance of a first priority security interest in the Collateral in favor of the Beneficiaries and the Existing Beneficiaries in order to secure all such obligations and indebtedness. (b) The Company, the Trustee and the Existing Notes Trustee hereby irrevocably instruct the Escrow Agent to, and the Escrow Agent shall: (i) (A) maintain sole dominion and control over funds and U.S. Government Securities in the Escrow Account for the benefit of the Trustee and the Existing Notes Trustee to the extent specifically required herein, (B) maintain, or cause its agent within the State of New York to maintain, possession of all certificated U.S. Government Securities purchased hereunder that are physically possessed by the Escrow Agent in order for the Trustee and the Existing Notes Trustee to enjoy a continuous perfected first priority security interest therein under the law of the State of New York (the Company hereby agreeing that in the event any certificated U.S. Government Securities are in the possession of the Company or a third party, the Company shall use its best efforts to deliver all such certificates to the Escrow Agent), (C) take all steps specified by the Company pursuant to paragraph (a) of this Section 6 to cause the Trustee and the Existing Notes Trustee to enjoy a continuous perfected first priority security interest under any applicable Federal and State of New York law in all U.S. Government Securities purchased hereunder that are not certificated and (D) maintain the Collateral free and clear of all liens, security interests, safekeeping or other charges, demands and claims against the Escrow Agent of any nature now or hereafter existing in favor of anyone other than the Trustee and the Existing Notes Trustee; (ii) promptly notify the Trustee and the Existing Notes Trustee if the Escrow Agent receives written notice that any Person other than the Trustee and the Existing Notes Trustee has a lien or claim or security interest upon any portion of the Collateral; and (iii) in addition to disbursing amounts held in escrow pursuant to any Payment Notice and 11 -11- Disbursement Requests given to it by the Trustee pursuant to Section 3, upon receipt of written notice from the Trustee or the Existing Notes Trustee of the acceleration of the maturity of the Securities or of the Existing Notes, and direction from the Trustee and the Existing Notes Trustee to disburse all Available Funds to the Trustee and the Existing Notes Trustee, as promptly as practicable, after following, if it so chooses, the procedures set forth in the fourth paragraph of Section 4(a), disburse all funds held in the Escrow Account on an ratable basis to the Trustee and the Existing Notes Trustee based on the aggregate principal amounts of Securities and Existing Notes outstanding under the Indenture and the Existing Notes Indenture, respectively, and transfer title to all U.S. Government Securities held by the Escrow Agent hereunder to the Trustee and the Existing Notes Trustee on a corresponding basis. The lien and security interest provided for by this Section 6 shall automatically terminate and cease as to, and shall not extend or apply to, and the Trustee and the Existing Notes Trustee shall have no security interest in, any funds disbursed by the Escrow Agent to the Company pursuant to this Agreement to the extent not inconsistent with the terms hereof. If the Trustee, in accordance with the provisions of this Agreement and the Indenture, intends to take the actions necessary to cause the security interest in and lien on all or any portion of the Collateral to be released, the Trustee shall notify the Existing Notes Trustee of such intent and, upon receipt of such notice, the Existing Notes Trustee shall execute and deliver such instruments and documents as shall be reasonably necessary to effect the release (concurrently with the release of the security interest held by the Trustee) of its security interest in and lien on all or such portion of the Collateral as shall be specified by the Trustee. Notwithstanding any other provision contained in this Agreement, the Escrow Agent shall act solely as the Trustee's and the Existing Notes Trustee's agent for the equal and ratable benefit of the Beneficiaries and the Existing Beneficiaries in connection with its duties under this Section 6 or any other duties herein relating to the Escrow Account or any funds or U.S. Government Securities held thereunder. The Escrow Agent shall not have any right to receive compensation from the Trustee and the Existing Notes Trustee and shall have no authority to obligate the Trustee or the Existing Notes Trustee or to compromise or pledge their respective security interests hereunder. Accordingly, the Escrow Agent is hereby directed to cooperate with the Trustee and the Existing Note Trustee in the exercise of their respective rights in the Collateral provided for herein. (c) Any money and U.S. Government Securities collected by the Trustee pursuant to Section 6(b)(iii) shall be applied as provided in Section 5.06 of the Indenture. Any money and U.S. Government Securities collected by the Existing Notes Trustee pursuant to Section 6(b)(iii) shall be applied as provided in Section 5.06 of the Existing Notes Indenture. Any surplus of such cash or cash proceeds held by the Trustee or the Existing Notes Trustee, and remaining after indefeasible payment in full of all the obligations under the Indenture or the Existing Notes Indenture, respectively, shall be paid over to the Company or to whomsoever may be lawfully entitled to receive such surplus or as a court of competent jurisdiction may direct. 12 -12- (d) Upon demand by either of them, the Company will execute and deliver to the Trustee and the Existing Notes Trustee such instruments and documents as the Trustee and the Existing Notes Trustee may deem necessary or advisable to confirm or perfect their respective rights under this Agreement and their respective interests in the Collateral. The Trustee and the Existing Notes Trustee shall be entitled to take all necessary action to preserve and protect the security interest created hereby as a lien and encumbrance upon the Collateral. (e) The Company hereby appoints the Trustee and the Existing Notes Trustee each as its attorney-in-fact with full power of substitution to do any act which the Company is obligated hereto to do, and the Trustee and the Existing Notes Trustee each may exercise such rights as the Company might exercise with respect to the Collateral and take any action in the Company's name to protect the Trustee's and the Existing Notes Trustee's security interest hereunder. In addition to the rights provided under Section 6(b)(iii) hereof, upon an Event of Default and for so long as such Event of Default continues, the Trustee and the Existing Notes Trustee each may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party under the UCC or other applicable law, and the Trustee and the Existing Notes Trustee may also upon obtaining possession of the Collateral as set forth herein, without notice to the Company except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Trustee's or the Existing Notes Trustee's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Trustee or the Existing Notes Trustee, as the case may be, may deem commercially reasonable. The Company acknowledges and agrees that any such private sale may result in prices and other terms less favorable to the seller than if such sale were a public sale. The Company agrees that, to the extent notice of sale shall be required by law, at least ten (10) days' notice to the Company of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Neither the Trustee nor the Existing Notes Trustee shall be obligated to make any sale regardless of notice of sale having been given. The Trustee or the Existing Notes Trustee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor and such sale may, without further notice, be made at the time and place to which it was so adjourned. If, as a result of the exercise of the rights granted by this Section 6(e), the Trustee or the Existing Notes Trustee takes possession of any of the Collateral and/or the proceeds of the sale thereof, such Collateral or such proceeds shall be allocated and distributed, if necessary, to the Trustee and the Existing Notes Trustee on a ratable basis based on the aggregate principal amounts of Securities and Existing Notes outstanding under the Indenture and the Existing Notes Indenture. (f) To the extent applicable, the Company shall cause TIA Section 314(d) relating to the release of property or securities from the Lien and security interest of this Agreement to be complied with. Any certificate or opinion required by TIA Section 314(d) may be 13 -13- made by an Officer of the Company except in cases where TIA Section 314(d) requires that such certificate or opinion be made by an independent Person, which Person shall be an independent engineer, appraiser or other expert selected or approved by the Trustee and the Existing Notes Trustee in the exercise of reasonable care. 7. TERMINATION. This Agreement shall terminate automatically ten (10) days following disbursement of all funds remaining in the Escrow Account (including U.S. Government Securities), unless sooner terminated by agreement of the parties hereto (in accordance with the terms hereof and not in violation of the Indenture or the Existing Notes Indenture; provided, that the Trustee and the Existing Notes Trustee may not agree to terminate unless they have received the consent of 100% of the holders of all of the Securities and the Existing Notes, respectively, outstanding); provided, however, that the obligations of the Company under Section 2(c) and Section 5 (and any existing claims thereunder) shall survive termination of this Agreement and the resignation of the Escrow Agent; provided, further, however, that until such tenth day, the Company will cause this Agreement (or any permitted successor agreement) to remain in effect and will cause there to be an escrow agent (including any permitted successor thereto) acting hereunder (or under any such permitted successor agreement). 8. MISCELLANEOUS. (a) Waiver. Any party hereto may specifically waive any breach of this Agreement by any other party, but no such waiver shall be deemed to have been given unless such waiver is in writing, signed by the waiving party and specifically designating the breach waived, nor shall any such waiver constitute a continuing waiver of similar or other breaches. (b) Invalidity. If for any reason whatsoever any one or more of the provisions of this Agreement shall be held or deemed to be inoperative, unenforceable or invalid in a particular case or in all cases, such circumstances shall not have the effect of rendering any of the other provisions of this Agreement inoperative, unenforceable or invalid, and the inoperative, unenforceable or invalid provision shall be construed as if it were written so as to effectuate, to the maximum extent possible, the parties' intent. (c) Assignment. This Agreement is personal to the parties hereto, and the rights and duties of any party hereunder shall not be assignable except as set forth in Section 2(e) hereof, or, with respect to the Trustee and the Existing Notes Trustee, as allowed by the terms of the Indenture or the Existing Notes Indenture, as the case may be, or except with the prior written consent of the other parties. Notwithstanding the foregoing, this Agreement shall inure to and be binding upon the parties and their successors and permitted assigns. 14 -14- (d) Benefit. The parties hereto and their successors and permitted assigns, but no others, shall be bound hereby and entitled to the benefits hereof; provided, however, that the Beneficiaries (including holders of the Securities) and their assigns shall be entitled to the benefits hereof and to enforce this Agreement. (e) Time. Time is of the essence with respect to each provision of this Agreement. (f) Entire Agreement; Amendments. This Agreement and the Indenture contain the entire agreement among the parties with respect to the subject matter hereof and supersede any and all prior agreements, understandings and commitments, whether oral or written. This Agreement may be amended only in accordance with Article Nine of the Indenture and further by a writing signed by a duly authorized representative of each party hereto. (g) Notices. All notices and other communications required or permitted to be given or made under this Agreement shall be in writing and shall be deemed to have been duly given and received when actually received. To Escrow Agent: U.S. Trust Company of Texas, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Telecopy: (214) 754-1303 Telephone: (214) 754-1255 Delivery Instructions: The Chase NYC/Trust, ABA number 021000021 UST NY Account No. 9201073195 Further Credit U.S. Trust of Texas, account number 76510437 15 -15- To the Trustee: U.S. Trust Company of Texas, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Telecopy: (214) 754-1303 Telephone: (214) 754-1255 To the Existing Notes Trustee: U.S. Trust Company of Texas, N.A. 2001 Ross Avenue Suite 2700 Dallas, Texas 75201 Attention: Corporate Trust Department Telecopy: (214) 754-1303 Telephone: (214) 754-1255 To the Company: OpTel, Inc. 1111 W. Mockingbird Lane Dallas, Texas 75247 Attention: Chief Executive Officer Telecopy: (214) 634-3820 Telephone: (214) 634-3850 or at such other address as the specified entity most recently may have designated in writing in accordance with this Section. (h) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. (i) Captions. Captions in this Agreement are for convenience only and 16 -16- shall not be considered or referred to in resolving questions of interpretation of this Agreement. (j) Choice of Law. The existence, validity, construction, operation and effect of any and all terms and provisions of this Agreement shall be determined in accordance with and governed by the laws of the State of New York, without regard to principles of conflicts of laws, except to the extent United States federal law is applicable to the perfection and priority of security interests in U.S. Government Securities. The parties to this Agreement hereby agree that jurisdiction over such parties and over the subject matter of any action or proceeding arising under this Agreement may be exercised by a competent Court of the State of New York, or by a United States Court, sitting in New York City. The Company hereby submits to the personal jurisdiction of such courts, hereby waives personal service of process upon it and consents that any such service of process may be made by certified or registered mail, return-receipt requested, directed to the Company at its address last specified for notices hereunder, and service so made shall be deemed completed five (5) days after the same shall have been so mailed, and hereby waives the right to a trial by jury in any action or proceeding with the Escrow Agent. All actions and proceedings brought by the Company against the Escrow Agent relating to or arising from, directly or indirectly, this Agreement shall be litigated only in courts within the State of New York. (k) Representations and Warranties. (i) The Company hereby represents and warrants that this Agreement has been duly authorized, executed and delivered on its behalf and constitutes the legal, valid and binding obligation of the Company. The execution, delivery and performance of this Agreement by the Company does not violate any applicable law or regulation to which the Company is subject and does not require the consent of any governmental or other regulatory body to which the Company is subject, except for such consents and approvals as have been obtained and are in full force and effect. (ii) Each of the Escrow Agent, the Trustee and the Existing Notes Trustee hereby represents and warrants that this Agreement has been duly authorized, executed and delivered on its behalf and constitutes its legal, valid and binding obligation. 17 -17- IN WITNESS WHEREOF, the parties have executed and delivered this Escrow Agreement as of the day first above written. COMPANY: OPTEL, INC. By: ----------------------------------- Name: Title: By: ----------------------------------- Name: Title: ESCROW AGENT: U.S. TRUST COMPANY OF TEXAS, N.A., as Escrow Agent By: ----------------------------------- Name: Title: TRUSTEE: U.S. TRUST COMPANY OF TEXAS, N.A., as Trustee By: ----------------------------------- Name: Title: EXISTING NOTES TRUSTEE: U.S. TRUST COMPANY OF TEXAS, N.A., as Existing Notes Trustee By: ----------------------------------- Name: Title: 18 -1- EXHIBIT A Form of Payment Notice and Disbursement Request [Letterhead of the Trustee] [Date] - -------------- - -------------- - -------------- Attention: Corporate Trust Department Re: Disbursement Request No._____ [indicate whether revised] Ladies and Gentlemen: We refer to the Escrow Agreement, dated as of July 7, 1998 (the "Escrow Agreement") among you (the "Escrow Agent"), the undersigned as Trustee, and OPTEL, INC., a Delaware corporation (the "Company") relating to the 11- 1/2% Senior Notes Due 2008 of the Company (the "Securities"). Capitalized terms used herein shall have the meaning given in the Escrow Agreement. This letter constitutes a Payment Notice and Disbursement Request under the Escrow Agreement. [choose one of the following, as applicable] [The undersigned hereby notifies you that a scheduled interest payment in the amount of $__________ is due and payable on ____________, ____ and requests a disbursement of funds contained in the Escrow Account in such amount to the Trustee.] [The undersigned hereby notifies you that Securities equaling $__________ in aggregate principal amount have been retired and authorizes you to release $__________ of funds in the Escrow Account to the Company (to an account designated by the Company in writing), which amount represents the amount permitted to be released in accordance with Section 3(c) of the Escrow Agreement.] [The undersigned hereby notifies you that there has been an acceleration of the 19 -2- maturity of the Securities or of the Existing Notes. Accordingly, you are hereby requested to disburse all remaining funds contained in the Escrow Account to the Trustee and the Existing Notes Trustee on an equal and ratable basis and in accordance with the Escrow Agreement such that the balance in the Escrow Account is reduced to zero.] In connection with the requested disbursement, the undersigned hereby notifies you that: 1. [The Securities have not, as a result of an Event of Default (as defined in the Indenture), been accelerated and become due and payable.] 2. All prior disbursements from the Escrow Account have been Applied. 3. [add wire instructions] The Escrow Agent is entitled to rely on the foregoing in disbursing funds relating to this Payment Notice and Disbursement Request. , as Trustee By: -------------------------------- Name: Title: 20 -3- Schedule A [initial investment instructions] EX-23.2 6 INDEPENDENT AUDITOR'S CONSENT 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to the Registration Statement No. 333-56231 of OpTel, Inc. on Form S-1 of our reports dated October 14, 1997, on the financial statements of OpTel, Inc. and to the use of our report dated May 15, 1998 on the financial statements of the Assets and Liabilities of ICS Communications, LLC acquired by OpTel, Inc. as of and for the year ended December 31, 1997, each appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Summary Consolidated Financial and Operating Data", "Selected Historical Consolidated Financial and Operating Data" and "Experts" in such Prospectus. /s/ DELOITTE & TOUCHE LLC July 17, 1998 Dallas, Texas -----END PRIVACY-ENHANCED MESSAGE-----