AT&T Sale Prospectus

Cable Communications Cooperative of Palo Alto, Incorporated
3200 Park Boulevard
Palo Alto, California 94306

November 24, 1999

TO OUR MEMBERS:

You are cordially asked to consider and vote upon the following proposal:

To approve and adopt the asset purchase agreement, dated as of September 7, 1999, as amended as of November 24, 1999, between Cable Co-op and TCI Cablevision of California, Inc., d/b/a AT&T Cable ("AT&T Cable"), a subsidiary of AT&T Corp.; and to approve (a) the sale of Cable Co-opís principal assets comprising the cable television system to AT&T Cable on the terms and conditions and for the cash and non-cash consideration set forth in the asset purchase agreement and (b) the use of proceeds as set forth in such agreement and herein.
Your board of directors has determined that the sale is advisable, fair to and in the best interests of Cable Co-op. Accordingly, your board has approved the asset purchase agreement and recommends that you vote FOR the approval of the proposal on the enclosed ballot card.

The accompanying information statement explains the proposed sale and provides specific information concerning the vote on the proposed sale. Please read this material carefully.
 
 

We cannot complete the sale unless it is approved by the affirmative vote of a majority of the Members voting by submitting their written ballot cards by mail. We encourage you to sign and return your ballot card as soon as possible in the enclosed self-addressed envelope so that your vote will be recorded. All ballot cards must be submitted by mail. All ballot cards must be received at the address stated in the self-addressed envelope by the close of business on December 31, 1999; details are outlined on the enclosed ballot card. Ballot cards may not be delivered by other means. Please do not send or deliver your ballot card to Cable Co-op. Your vote is very important.

On behalf of Cable Co-opís board of directors, I thank you for your support and ask you to vote in favor of the asset purchase agreement, the sale transaction with AT&T Cable, and the use of proceeds as set forth in the asset purchase agreement and herein.

John Kelley
President of the Board of Directors

The written ballot card and information statement are dated November 24, 1999 and are first being mailed to Members on or about December 3, 1999. Members of record at the close of business on November 9, 1999 are entitled to notice of the vote and to vote by mail.

Table of Contents

QUESTIONS AND ANSWERS 1
SUMMARY 4
The Companies 4
The Proposed Transactions 5
Reasons For The Transactions 5
Cable Co-opís Recommendations to You 6
Record Date and Voting Power 6
Required Vote 6
Interests of Certain Persons in the Sale; Possible Conflicts of Interest 6
Tax Matters 7
Conditions to the Sale of Assets 7
THE VOTE 8
When to Vote 8
Purpose of the Vote 8
Record Date and Voting Power 8
Voting and Revocation of Written Ballot Cards 8
Required Vote 9
Recommendation of Cable Co-opís Board of Directors 9
Written Ballot Cards 11
THE TRANSACTION AGREEMENTS 12
The Asset Purchase Agreement 12
Asset Purchase Consideration 12
Asset Transfer and Assumption of Liabilities 13
Allocation of Purchase Price 14
Representations and Warranties 15
Covenants 16
Indemnification; Escrow Account 21
Conditions to Closing 22
Termination 25
Amendment and Waiver 26
Fees and Expenses 26
Other Transaction Agreements 26
Noncompetition Agreement 26
Charitable Pledge Agreement 27
SILICON VALLEY COMMUNITY COMMUNICATIONS 28
Vision Statement 28
Governance of SVCC 29
General Background of SVCC 30
Studio and Operations 30
Other SVCC Operations 30
Future Fund Development 31
BACKGROUND TO THE TRANSACTION 31
Business of Cable Co-op 31
Overview 31
Subscribers 31
Assets 31
Facilities 31
Employees 32
History Of Cable Co-op 32
Background 32
The Purchase of Pacific Bellís Cable Distribution System and Debt Restructuring 33
Collaboration with Heritage Cablevision 34
Industry Trends 34
Financial Condition of Cable Co-op 35
Strategic Alternatives 36
Debt Refinancing 37
Transaction with AT&T 38
REGULATORY COMPLIANCE 40
FAIRNESS OPINION 41
INTERESTS OF CERTAIN PERSONS IN THE SALE: POSSIBLE CONFLICTS OF INTEREST 45
General 45
Equity Ownership of Officers and Directors 46
Security Ownership Of Management 46
SVCC Board of Directors and Officers 46
Employment and Severance Agreements 47
MATERIAL FEDERAL INCOME TAX CONSEQUENCES 48
SELECTED FINANCIAL DATA OF CABLE CO-OP 49
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 50
Significant Events 51
Liquidity and Capital Resources 51
Year 2000 51
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 51
WHERE YOU CAN FIND MORE INFORMATION 52

QUESTIONS AND ANSWERS

Q: Why am I receiving these materials?
A: The board of directors of the Cable Communications Cooperative of Palo Alto, Incorporated ("Cable Co-op") is providing this information statement to help you determine how to vote in connection with the proposed sale of Cable Co-opís cable television system to AT&T Cable.
Q: What is the subject matter of the vote?
A: Whether to approve and adopt the asset purchase agreement, the sale of Cable Co-opís principal assets comprising its cable television system to AT&T Cable, and the use of proceeds of the sale as set forth in the asset purchase agreement and herein.
Q: What will happen in the sale transaction?
A: Following the sale of assets, AT&T Cable will, among other things, assume and provide cable television service and Internet services to the existing and future subscribers of the cable television system currently operated by Cable Co-op who choose to continue to receive cable television service. Cable Co-op will retain certain assets, including equipment and other assets related to local programming services, which will at the time of the completion of the sale be transferred to Silicon Valley Community Communications, Inc., a newly formed California public benefit non-profit corporation ("SVCC"). Cable Co-op will receive a $53 million cash payment at the time of the completion of the sale plus other non-cash consideration from AT&T Cable, including AT&T Cableís agreement to complete an upgrade of the cable system within 36 months. Additionally, AT&T Cable has agreed, as a condition to and at the time of the completion of the sale, to make a separate unconditional charitable cash gift of $17 million to SVCC. This $17 million is being given as an unrestricted charitable gift to SVCC and not paid as additional cash purchase price consideration to Cable Co-op. For a more detailed description of the sale of assets, please see "The Transaction Agreements Ė The Asset Purchase Agreement" beginning at page 12.
Q: Will I receive anything in connection with the sale of assets?
A: If the sale of assets is completed, the board of directors has authorized approximately $2.8 million of the cash proceeds to be distributed as patronage dividends to Cable Co-opís Members. $4 million of the cash proceeds has been set aside to satisfy potential indemnity claims by AT&T Cable and/or to pay federal and/or state taxes imposed on Cable Co-op in connection with the funds set aside in such escrow account. Once the time period for AT&T Cable to assert indemnity claims has expired, the board of directors of Cable Co-op may determine to declare additional patronage dividends based on any remaining cash and/or may authorize the use of such remaining cash for other purposes consistent with the bylaws of Cable Co-op and applicable laws.
The structure of the sale transaction, as approved by Cable Co-opís board of directors, contemplates the payment by AT&T Cable to SVCC of $17 million as an unrestricted charitable gift and not paid as additional cash purchase price consideration to Cable Co-op. If the $17 million gift had been structured as a cash purchase price payment to Cable Co-op, it potentially would have been available to be distributed to the Cable Co-op Members, subject to any applicable federal and state income taxes.
Q: Is the sale of assets taxable?
A: You should consult with your own tax advisors to fully understand the tax consequences to you, if any, of the sale of assets and the patronage dividend. Cable Co-op and AT&T Cable expect the sale of assets to be taxable to Cable Co-op. Patronage dividends paid by Cable Co-op to its Members generally will not be taxable to the Members. To review the tax consequences of the sale of assets in greater detail, see "Material Federal Income Tax Consequences" at page 48.
Q: When do you expect to complete the sale of assets?
A: Cable Co-op and AT&T Cable are working towards completing the sale of assets in March 2000. Cable Co-op must obtain Membership approval and intends to complete the sale of assets as soon as possible after December 31, 1999, the deadline by which your completed written ballot card must be received; provided that by the terms of the asset purchase agreement the sale may not be completed prior to February 1, 2000. The asset purchase agreement may be terminated by either party if the sale of assets is not consummated by April 1, 2000; however, if the only reason that the sale has not closed by April 1, 2000 is that the franchising authority has not yet approved the transfer of the cable system franchise to AT&T Cable, then this termination date is automatically extended to June 30, 2000.
Q: Who can vote?
A: All holders of Class A Membership Shares of Cable Co-op (each, a "Member," and collectively, "Members" or "Membership") of record as of the close of business on November 9, 1999.
Q: How do I vote?
A: Just mail your signed ballot card in the enclosed return envelope as soon as possible and, in any event, so that it is received on or before December 31, 1999.
Q: May I vote in person?
A: No. You may vote only by signing and returning the written ballot card by mail to the address noted on the self-addressed envelope enclosed with the written ballot card and this information statement. You may not deliver or mail your written ballot card to the offices of Cable Co-op.
Q: Can I change my vote after I have mailed in my written ballot card?
A: No. Once you have placed the written ballot card in the mail, you may not change your vote.
Q: How are votes counted?
A: You may vote "FOR" or "AGAINST." If you do not vote, it has no effect on the outcome of the vote, although it may affect whether we reach a quorum.
Q: What vote is required to approve and adopt the asset purchase agreement and to approve the sale of assets to AT&T Cable and the use of proceeds as described in the asset purchase agreement and herein?
A: For the sale of assets to occur, 250 voting Members must return a completed written ballot card to constitute a quorum, and a majority of the votes cast must be FOR adoption of the asset purchase agreement, approval of the sale of assets to AT&T Cable, and the use of proceeds as described in the asset purchase agreement and herein.
Q: What is the recommendation of the board of directors of Cable Co-op?
A: The board of directors of Cable Co-op recommends that you vote for the adoption and approval of the asset purchase agreement and for the approval of the sale of assets and the use of proceeds as described in the asset purchase agreement and herein.
Q: Whom can I call with questions?
A: If you have any questions about the sale of assets or any related transactions, please contact:
Ron Kirkeeng
CEO and General Manager
Cable Co-op
3200 Park Boulevard
Palo Alto, California 94306
(650) 856-3553, ext. 3100
Certain information regarding the sale of assets is also available on Cable Co-opís Home Page on the Internet at http://www.cableco-op.com.
 

SUMMARY

This summary highlights selected information from this information statement and may not contain all of the information that is important to you. To better understand the asset purchase agreement and the sale of assets to AT&T Cable, and for a more complete description of the legal terms of these transactions, you should read this entire document carefully, as well as those additional documents to which we refer you. (see "Where You Can Find More Information" beginning at page 52)

 The Companies

Cable Communications Cooperative of Palo Alto, Incorporated

3200 Park Boulevard

Palo Alto, CA 94306

(650) 856-3553

Cable Communications Cooperative of Palo Alto, Incorporated ("Cable Co-op") is a California consumer cooperative corporation. Cable Co-op is primarily engaged in the cable television business, consisting of the provision of cable television services, high-speed data services and FM services, all provided via its cable television reception and distribution system. Cable Co-opís cable television services include local origination programming and retransmission of local broadcast signals, selected cable networks, premium video and audio services, and pay-per-view services. Its FM services include the retransmission of certain local and distant FM stations. Cable Co-opís data services include high-speed Internet access, e-mail, file transfers and World Wide Web related activities, provided on a turnkey basis by an outside contractor. Cable Co-op operates its cable television system pursuant to a franchise agreement with the Joint Powers Authority, as represented by the City of Palo Alto, California on behalf of itself and the other local governments within the service area covered by the franchise. This service area encompasses the Cities of Palo Alto, East Palo Alto and Menlo Park, the Town of Atherton and portions of San Mateo and Santa Clara Counties, California.

TCI Cablevision of California, Inc., d/b/a AT&T Cable

1691 Bayport Ave.

San Carlos, CA 94070
 
 

TCI Cablevision of California, Inc., d/b/a AT&T Cable ("AT&T Cable"), is a subsidiary of Tele-Communications, Inc., d/b/a AT&T Broadband and Internet Services ("AT&T BIS"), which is a subsidiary of AT&T Corp. ("AT&T"). AT&T is among the worldís communications leaders, providing voice, data and video telecommunications services to large and small businesses, consumers and government entities. AT&T and its subsidiaries furnish regional, domestic, international, local and Internet communication transmission services, including cellular telephone and other wireless services. AT&T also provides billing, directory and calling card services to support its communications business.

AT&T was incorporated in 1885 under the laws of the State of New York and has its principal executive offices at 32 Avenue of the Americas, New York, NY 10013-2412 (telephone number 212-387-5400).

AT&T BIS, through its subsidiaries, including TCI Cablevision of California, Inc., d/b/a AT&T Cable, is a business unit of AT&T that provides cable television entertainment and information programming services to more than 10 million customers across the country. AT&T BIS also provides a host of advanced services, including its high-speed, content-enriched cable Internet service, and is actively developing competitive local cable telephone services.

The principal office for AT&T BIS is located at 9197 So. Peoria St., Englewood, CO 80112 (telephone number 720-875-5500).

Silicon Valley Community Communications, Inc.

Silicon Valley Community Communications, Inc. ("SVCC") is a newly formed California public benefit nonprofit corporation that has been formed in connection with the contemplated sale of Cable Co-opís cable television system to AT&T Cable. Upon the completion of the sale, Cable Co-op will transfer to SVCC its equipment and other assets relating to the production of local community programming and AT&T Cable will make an unconditional charitable gift to SVCC of $17 million. Following the completion of the sale, Cable Co-op anticipates that SVCC will, among other things, establish and operate a new Mid-Peninsula Community Media Center in accordance with SVCCís vision statement, set forth at page 28, and expand communication services on the Internet and World Wide Web, including the provision of training in the production and use of such services.
 
 

Set forth in this information statement is an assortment of Cable Co-opís understandings as to what actions SVCC will take on a going forward basis. Cable Co-op can make no assurance that SVCC will take any of the stated actions. SVCC is a corporation independent from Cable Co-op and Cable Co-op does not control SVCCís operations.
 
 

The Proposed Transactions

The transactions involve the following steps:

AT&T Cable will purchase substantially all of the assets of Cable Co-op;
AT&T Cable will pay a cash purchase price of $53 million to Cable Co-op;
AT&T Cable will make an unrestricted charitable gift of $17 million to SVCC;
Cable Co-op will use the cash proceeds of the sale to retire its debts and other liabilities, including tax liabilities, redeem its outstanding Sustaining and Preferred Shares and pay patronage dividends, among other things; and
Cable Co-op will transfer its local programming operations and assets to SVCC.

Reasons For The Transactions (See Page 9)

The board of directors believes that the transactions should be completed for a number of reasons, including, but not limited to, the following:

The ability of AT&T Cable to provide current and future customers expanded cable television and Internet service;
AT&T Cableís agreement to construct an upgrade of the cable television system to a level expected to provide services that the board of directors believes Members desire;
The opportunity to give control over local origination programming to SVCC, a locally-based non-profit corporation; and
A successful resolution for our Members to the increasing difficulty that we believe Cable Co-op will otherwise encounter in trying to compete effectively in the increasingly competitive and rapidly consolidating telecommunications industry.

Cable Co-opís Recommendations to You

The board of directors of Cable Co-op believes that the sale of assets is fair and in the best interest of Cable Co-op and its Members. The board of directors recommends that you vote "FOR" approval and adoption of the asset purchase agreement and approval of the sale of assets and the use of proceeds as set forth in the asset purchase agreement and herein.
 
 

Record Date and Voting Power (See Page 8)

You are entitled to vote if you were a Member on the close of business on November 9, 1999, the record date for the vote. You will have one vote. There are 29,691 Members entitled to vote in connection with the sale of assets.
 
 

Required Vote (See Page 9)

Provided that a quorum of 250 voting Members return completed written ballot cards by December 31, 1999, the approval and adoption of the asset purchase agreement and approval of the sale of assets and the use of proceeds as set forth in the asset purchase agreement and herein requires the affirmative vote of a majority of the votes duly cast by Members.
 
 

Interests of Certain Persons in the Sale; Possible Conflicts of Interest (See Page 45)

You should be aware that some of the directors and executive officers of Cable Co-op own Sustaining Shares and/or Preferred Shares of Cable Co-op and/or shares of AT&T Corp., the parent company of AT&T Cable, that give them interests in the sale of assets to AT&T Cable that may be different from other Members. In addition, certain senior management employees of Cable Co-op, along with other non-senior management employees, are entitled to a retention bonus and may be entitled to severance payments following the completion of the sale. Further, certain members of the board of directors of Cable Co-op also are currently members of the board of directors of SVCC and certain members of senior management of Cable Co-op also are members of senior management of SVCC.
 
 

Tax Matters (See page 48)

Cable Co-opís sale of its assets to AT&T Cable will be taxable to Cable Co-op. In addition, Cable Co-op expects to pay patronage dividends to its Members, which are expected to be deductible by Cable Co-op for federal income tax purposes. Patronage dividends will generally not be taxable to Cable Co-op Members. Tax matters can be complicated. You should consult your own tax advisers to fully understand the tax consequences to you, if any, of the sale of assets and the dividend distribution.

Conditions to the Sale of Assets

AT&T Cable and Cable Co-op will not complete the sale of assets unless the following conditions, among others, are satisfied or, in some cases, waived:

The continued accuracy of each partyís representations and warranties and the fulfillment of each partyís promises contained in the asset purchase agreement;
The approval and adoption of the asset purchase agreement and approval of the sale of assets by the Members of Cable Co-op;
The absence of any legal proceeding by any governmental entity with respect to the sale of assets that materially affects AT&T Cable or Cable Co-op;
Cable Co-opís material assets are Year 2000 compliant;
The City of Palo Alto has approved a new franchise agreement or an amendment and transfer of the existing franchise agreement to AT&T Cable, which new franchise agreement or amendment and transfer of the existing franchise agreement shall be in a form reasonably acceptable to AT&T Cable;
Cable Co-op has transferred its local programming assets to SVCC;
MPAC has entered into an amendment to the MPAC Agreement satisfactory to AT&T Cable;
Cable Co-op has no fewer than 26,000 full time equivalent subscribers to its basic cable service; and
The receipt of necessary approvals from governmental authorities.
In entering into the asset purchase agreement, Cable Co-op agreed that, prior to the closing of the sale of assets, it would not solicit or entertain offers from, negotiate with, or in any manner encourage, discuss, accept, or consider any proposal to acquire Cable Co-opís cable television system from any person, through purchase, merger, consolidation or otherwise (other than sales in the ordinary course of business). Despite this "no shop" provision, AT&T Cable agreed that Cable Co-op would have the right to consider unsolicited offers to purchase its cable television system prior to November 6, 1999, which was sixty days after the execution of the asset purchase agreement. If Cable Co-op had accepted such an offer, the asset purchase agreement would have automatically terminated, and Cable Co-op would have been obligated to pay $20 million to AT&T Cable. Cable Co-op did not receive any offers to purchase the cable television system during this sixty-day period.
 
 

THE VOTE



When to Vote

You may vote by mailing your signed ballot card in the enclosed return envelope at any time after your receipt of this information statement and the enclosed written ballot card; provided that your ballot card is received at the address set forth on the enclosed return envelope, as soon as possible and, in any event, so that it is received on or before December 31, 1999. You cannot return your completed ballot card to the offices of Cable Co-op.

Purpose of the Vote

We ask you please to consider and vote upon the following proposal:

To approve and adopt the asset purchase agreement, dated as of September 7, 1999, as amended as of November 24, 1999, between Cable Co-op and TCI Cablevision of California, Inc., d/b/a AT&T Cable ("AT&T Cable"), a subsidiary of AT&T Corp.; and to approve (a) the sale of Cable Co-opís principal assets comprising the cable television system to AT&T Cable on the terms and conditions and for the cash and non-cash consideration set forth in the asset purchase agreement and (b) the use of proceeds as set forth in such agreement and herein.
By voting in favor of this proposal, you will be approving, among other things, the structure of the sale transaction, as approved by the Cable Co-opís board of directors, by which $17 million is being given as an unrestricted charitable gift to SVCC and not paid as additional cash purchase price consideration to Cable Co-op. If the $17 million gift had been structured as a cash purchase price payment to Cable Co-op, it potentially would have been available to be distributed to the Cable Co-op Members, subject to any applicable federal and state income taxes.
 
 

Record Date and Voting Power

Only holders of Class A Membership shares of record at the close of business on the record date, November 9, 1999, are entitled to notice of the vote related to the sale transaction and to vote on such sale. There were 29,691 Members of record on the record date. Each Member is entitled to one vote.
 
 

Voting and Revocation of Written Ballot Cards

Each properly executed written ballot card will be counted in accordance with the vote reflected on such ballot card. A Member of Cable Co-op who has executed a written ballot card may not revoke such written ballot card after it has been deposited in the mail.
 
 

Required Vote

250 voting Members must return a completed written ballot card to constitute a quorum. The affirmative vote of a majority of the votes cast is required to approve and adopt the asset purchase agreement and approve the sale and the use of proceeds as described in the asset purchase agreement and herein.
 
 

Recommendation of Cable Co-opís Board of Directors

Recommendation to the Members

After careful consideration, the Cable Co-op board of directors has by a vote of 13-1-0 (with one director absent) approved the asset purchase agreement and recommends that you vote "FOR" approval and adoption of the asset purchase agreement and the approval of the sale of the cable television system to AT&T Cable. In reaching its decision to approve the asset purchase agreement, the Cable Co-op board of directors consulted with (a) its legal counsel regarding the legal terms of the transaction and the obligations of the Cable Co-op board in its consideration of the proposed transaction, (b) its financial advisor regarding the fairness from a financial point of view of the consideration to be received by Cable Co-op, and (c) the management of Cable Co-op. The Cable Co-op board analyzed several alternatives for upgrading the companyís cable television system. At the same time, the Cable Co-op board also reviewed the history of Cable Co-op and its current and expected future financial and competitive position. Cable Co-opís management also reviewed with the board of directors certain other prospects for the cable television system and its subscribers if the sale transaction were not completed. The factors that were examined as part of this analysis included, but were not limited to, the following:

a review of Cable Co-opís business, operations, capital structure, financial condition and earnings on a historical and prospective basis;
certain proceeds from the sale of assets to AT&T Cable will be used to retire the substantial debt and other obligations incurred by Cable Co-op in the aggregate amount of approximately $43.5 million and to pay other anticipated tax liabilities;
the efficacy of Cable Co-opís strategic plan under current competitive conditions;
the increasing competition in Cable Co-opís markets from both existing and potential competitors, most if not all of which have far greater assets and resources, in part as a result of the technological innovation, deregulation and consolidation taking place in the telecommunications industry;
the estimated inability of Cable Co-op to refinance its outstanding debt obligations and raise the capital necessary to finance an upgrade of the cable system without raising subscriber fees to levels higher than those Cable Co-opís management expected the market to bear in light of the expected competitive environment;
a review of potential benefits for Members from having services provided by a larger organization with greater financial resources and a stronger market position;
the potential for achieving certain long-term economies of scale, particularly in the purchase and distribution of certain programming, that would not have been readily achievable by Cable Co-op independently;
AT&T Cableís agreement that it will substantially complete an upgrade of the current cable television system to a hybrid fiber/coax telecommunications system capable of bringing local phone service, high-speed data access and multi-channel video service to the Mid-peninsula area currently served by Cable Co-op within three years of the closing of the proposed sale of assets;
opportunities to enhance local origination programming via the creation of SVCC in connection with the proposed sale of assets, i.e., pursuant to the asset purchase agreement, AT&T Cable has agreed to make an unrestricted charitable gift of $17 million cash to SVCC and to provide one additional basic service channel to SVCC for so long as AT&T Cable is the franchisee for the cable television system (see "Purpose of the Vote");
the belief of the Cable Co-op board and management that a sale of the cable television system to AT&T Cable would offer the potential for increased immediate and long-term value to the Members (including improved service and reliability) as subscribers of the cable television system;
AT&T Cableís agreement to honor the terms and conditions of Cable Co-opís existing contract with the ISP Channel, the current high-speed Internet service provider; and
the opinion of Kagan Media Appraisals, dated as of September 7, 1999, that, as of that date, based upon and subject to the matters stated in that opinion, the cash and non-cash consideration to be received by Cable Co-op pursuant to the asset purchase agreement was fair to Cable Co-op from a financial point of view.
The Cable Co-op board also considered potentially negative factors relating to the sale transaction, including, but not limited to:
the loss of local control over choices for commercial and other programming, rates for services and the provision of cable television services; and
the possibility that AT&T Cable will not rapidly and completely implement the proposed system upgrade.
The vote of the Cable Co-op board approving and adopting the asset purchase agreement and approving the sale of assets reflected the conclusion that these factors were outweighed by the potential benefits to be gained by the asset purchase agreement and the completion of the proposed sale transaction.

The above discussion of the material factors considered by the Cable Co-op board of directors is not exhaustive, but does set forth many of the principal factors considered by one or more members of the board. The Cable Co-op board collectively, by a 13-1-0 (with one director absent) vote, reached the conclusion to approve the asset purchase agreement and the sale transaction in light of the factors described above and/or other factors that each member of the Cable Co-op board felt were appropriate. In so voting, the Cable Co-op board did not assign relative or specific weights to any of the factors described above or other factors considered, and individual directors may have weighted the factors differently.
 
 

For the reasons set forth above, the Cable Co-op board has approved the asset purchase agreement as fair to and in the best interests of Cable Co-op, and recommends that the Members approve and adopt the asset purchase agreement and approve the sale of the cable television system to AT&T Cable.

Dissent of Board Member

Dissenting board member Dr. Thomas Passell voted against the approval of the asset purchase agreement and the sale of Cable Co-opís assets to AT&T Cable for several reasons, including the following:*

his belief that Cable Co-opís current debt can be refinanced without relinquishing control of its cable television system to a third party;
his belief that the proposed purchase price is a bargain for AT&T Cable, as certain other cable television systems have sold recently at almost twice the price per subscriber that AT&T Cable will pay under the terms of the asset purchase agreement;
the board has not asked for a ruling from the Internal Revenue Service ("IRS") that the proposed payment of $17 million by AT&T Cable to SVCC in connection with the sale of assets will constitute a tax-free transaction;
his belief that there is no practical provision for enforcing AT&Tís promise to upgrade the plant to a hybrid fiber/coax system, while Cable Co-op may have done so; and
his belief that the Cable Co-opís provisions regarding dissolution are being circumvented by the proposed transaction, which appears to leave Cable Co-op intact while selling or transferring all of its assets and terminating its purpose.
* These are the views of Dr. Passell. Some members of the board disagree with Dr. Passell concerning some or all of the above views. Cable Co-op and its officers and directors make no representation about the accuracy of his statements.

Written Ballot Cards

In addition to sending written ballot cards by mail, the directors, officers, employees and agents of Cable Co-op may solicit the vote from Members by personal interview, telephone, telegram or otherwise. Cable Co-op will bear the costs of the solicitation of votes from its Members. Cable Co-op has engaged the services of Chase Mellon Shareholder Services to distribute written ballot cards to Members and to assist in the solicitation of votes from Cable Co-op Members for a fee of approximately $60,000 plus reasonable out-of-pocket expenses.
 
 

THE TRANSACTION AGREEMENTS

The following is a brief summary of certain of the material terms of the asset purchase agreement, the noncompetition agreement, the charitable pledge agreement and certain other agreements contemplated thereby, copies of which are attached as attachments and are incorporated by reference in this information statement. The summary is qualified in its entirety by reference to these transaction agreements. We urge you to read the transaction agreements in their entirety for a more complete description of the terms and conditions of the transactions contemplated thereby.

The Asset Purchase Agreement (a copy of the asset purchase agreement, without exhibits or schedules, is attached to this information statement as Attachment B)

The asset purchase agreement provides that Cable Co-op will sell to AT&T Cable substantially all of Cable Co-opís assets used or useful in connection with the cable television business that Cable Co-op operates under its franchise agreement with the City of Palo Alto, on behalf of itself and the other local governments (collectively referred to as the "Joint Powers Authority") of the communities served by the cable television system. The service area, the parameters of which are set by the franchise agreement, encompasses the Cities of Palo Alto, East Palo Alto and Menlo Park, the Town of Atherton and portions of San Mateo and Santa Clara Counties, California. The asset purchase agreement provides that the completion of the asset sale (the "Closing" or the "Closing Date") will take place as soon as practicable after the satisfaction or waiver of the conditions set forth in the asset purchase agreement, but in no event prior to February 1, 2000. See "Conditions to Closing." We hope to complete the asset sale by the end of March 2000.

Asset Purchase Consideration
The asset purchase agreement provides that Cable Co-op will sell substantially all of its assets used or useful in connection with its cable television business to AT&T Cable in consideration of cash and non-cash consideration, consisting of:
a $53 million cash purchase price payment at Closing to Cable Co-op (see "Allocation of Purchase Price");
a $17 million cash payment at Closing in the form of an unrestricted charitable gift to SVCC (see "Purpose of the Vote" and "Silicon Valley Community Communications");
AT&T Cableís agreement to substantially complete within thirty-six months of the Closing Date an upgrade of the cable television system throughout the service area to a hybrid fiber/coax system with a minimum bandwidth of at least 750 MHz (unless the Joint Powers Authority, as the franchising authority, approves an alternative architecture);
the agreement by AT&T Cable to dedicate one additional basic program channel for the exclusive use of SVCC for so long as AT&T Cable retains the cable franchise for the service area;
the agreement by AT&T Cable to provide studio, editing, office and related space at Cable Co-opís current facility located at 3200 Park Boulevard, Palo Alto at no charge for eighteen months following the Closing Date, and to pay one-half the reasonable interconnect costs, up to $200,000, of connecting new studio facilities constructed by SVCC within the service area to the cable television systemís existing headend;
AT&T Cableís agreement to offer, free of charge, one drop per location for the highest level of basic video service and one drop per location for a two-way interactive data connection to all certified and credentialed schools at the K-12 level within the service area; and
AT&T Cableís agreement to donate $50,000 worth of cable modem equipment to public school districts within the service area and to use reasonable efforts to ensure that such schools have an opportunity to participate in any experiments or trials conducted by laboratories of AT&T and its affiliates within the service area, if any.
Asset Transfer and Assumption of Liabilities
Upon the Closing Date, if all conditions to Closing have been satisfied or otherwise waived, Cable Co-op has agreed to sell to AT&T Cable and AT&T Cable has agreed to purchase all of Cable Co-opís assets other than (a) the equipment and other assets associated with its local programming services (including equipment and other assets currently used by Mid-Peninsula Access Corporation, a California mutual benefit non-profit corporation and the "Community Access Organization" designated under the franchise agreement ("MPAC")), for the provision of public access and local programming services, (b) its trademarks and tradenames, (c) its insurance policies, (d) its rights and obligations under its existing agreements and other contractual arrangements that AT&T Cable does not expressly assume under the asset purchase agreement and (e) certain other assets specifically identified in the asset purchase agreement.

Cable Co-op has further agreed to assign, and AT&T Cable has agreed to assume and perform, (a) Cable Co-opís obligations to cable subscribers for advance payments held by Cable Co-op as of the Closing Date for cable services to be rendered after the Closing Date and the delivery of cable services after the Closing Date; (b) Cable Co-opís obligations under certain governmental permits (to the extent the permits are transferable) and certain of Cable Co-opís contracts, including its contract with the ISP Channel regarding the provision of Internet services; and (c) other obligations, including AT&T Cableís pro-rata share of property taxes, franchise fees and copyright fees after the Closing Date.

Cable Co-op will retain those liabilities not assumed by AT&T Cable, including (a) all debt for borrowed money, including all obligations owed to Bank of America, N.A., as the holder of Cable Co-opís bank indebtedness, (b) in respect of the redemption in full of and the payment of all accrued and unpaid dividends on Cable Co-opís outstanding Class B Shares (the "Sustaining Shares") and Preferred Shares (including the outstanding Series 1987, Series 1988A, Series 1988B, Series 1988C, Series 1989A and Series 1991A Preferred Shares), (c) for retention bonuses and severance obligations payable to employees of Cable Co-op upon the Closing, (d) accounts payable existing at Closing and in respect of subscriber deposits and other prepaid expenses, (e) federal and state income taxes and Cable Co-opís pro rata share of property taxes, franchise fees and copyright fees for the periods prior to the Closing Date, (f) in respect of environmental conditions existing prior to the Closing, and (g) transaction expenses incurred by Cable Co-op.

The management of Cable Co-op currently projects that as of March 31, 2000 the total amount of the foregoing obligations and liabilities, other than liabilities for federal and state income taxes, to be retained by Cable Co-op is expected to total approximately $43.5 million of which approximately $34 million represents the repayment of bank debt owed to Bank of America and approximately $6 million represents the redemption and the payment of accrued dividends on Cable Co-opís Sustaining Shares and Preferred Shares.

On the Closing Date, Cable Co-op will transfer the retained assets associated with its local programming services to SVCC.
 
 

Allocation of Purchase Price

On the Closing Date, AT&T Cable has agreed to make a cash payment of $53 million to Cable Co-op. In addition, Cable Co-op will retain all cash and cash equivalents existing at Closing. The base cash purchase price payment to be made by AT&T Cable will be subject to customary upward and downward adjustment for accounts receivable and payable, prepaid income and expenses, third party payments and prorated property taxes, franchise taxes and copyright fees on the principle that expenses and income attributable to the business prior to Closing belong to Cable Co-op and after the Closing belong to AT&T Cable.

The asset purchase agreement provides that of the cash consideration paid by AT&T Cable to Cable Co-op, $49 million will be paid on the Closing Date and $4 million will be deposited in an interest bearing account pursuant to an escrow agreement. (see "Indemnification; Escrow Account" at page 21) The funds in the escrow account will be available to pay AT&T Cable for losses, damages or liabilities resulting from, among other things, any breach of representations and warranties made in the asset purchase agreement by Cable Co-op to pay AT&T Cable for any roll-back mandated by the Joint Powers Authority in the subscriber rates charged by Cable Co-op within the year preceding the Closing Date. The funds in the escrow account will also be available to pay for any federal and/or state taxes imposed on Cable Co-op in connection with the payment of the escrow amount.

After allocation of the $4 million to the escrow account, the cash consideration paid by AT&T Cable to Cable Co-op will be used to pay and retire the obligations and liabilities retained by Cable Co-op, including Cable Co-opís outstanding obligations to Bank of America, the redemption and payment of accrued dividends on Cable Co-opís outstanding Sustaining Shares and Preferred Shares and the payment of federal and state income taxes. (see "Asset Transfer and Assumption of Liabilities" at page 13)

The board of directors of Cable Co-op, by a vote of 12-1-1 (with one director absent), has determined to allocate the balance of the cash consideration paid by AT&T Cable to Cable Co-op as follows:

Approximately $2.8 million to be paid to the Members who are Members of Cable Co-op as of a record date of November 9, 1999 in the form of a patronage dividend;
Approximately $300,000 to be paid to the non-senior management employees of Cable Co-op as an additional retention bonus for staying with Cable Co-op through the Closing; and
The remainder to fund ongoing operations of Cable Co-op, including, but not limited to, funding any costs associated with any disputes relating to indemnity claims against the escrow account. (see "Indemnification, Escrow Account" at page 21)
To the extent that any amounts are ultimately released to Cable Co-op from the escrow account, which is not anticipated to occur until at least one year after Closing, the board of directors of Cable Co-op may at such time determine to use such amounts by paying additional patronage dividends to Members, by making other charitable gifts, by continuing or establishing new business operations and/or by implementing other objectives consistent with Cable Co-opís bylaws and other applicable law. There can be no assurance that any amounts will ever be released to Cable Co-op, or, accordingly, to Cable Co-opís Members.

Members of Cable Co-op as of the Closing Date will continue to be Members of Cable Co-op after the Closing Date, subject to the terms of the bylaws, notwithstanding the fact that they shall have ceased to be subscribers of Cable Co-op and shall have become subscribers of AT&T Cable if they elect to continue receiving service from AT&T Cable.
 
 

Representations and Warranties

Cable Co-op and AT&T Cable have made representations and warranties in the asset purchase agreement relating to, among other things:

their corporate organization, standing and power to do business;
their power and authority to execute the transaction agreements;
the execution, delivery and enforceability of the transaction agreements; and
brokers and finders employed by either party.
Cable Co-op also has made representations and warranties in the asset purchase agreement relating to, among other things:
title to and condition of the assets it owns, leases or licenses;
the possession and validity of all necessary government permits;
the compliance with all applicable laws, including the Cable Television Consumer Act of 1996 and the Federal Communications Commission ("FCC") rules and regulations promulgated pursuant to the Act (the "Cable Act"), other applicable FCC rules and regulations and applicable environmental laws;
certain contracts, leasehold interests and understandings to which Cable Co-op is a party;
pending or threatened litigation;
patent, trademark and copyright issues;
accuracy of financial statements, including as to any undisclosed liabilities;
certain tax matters; and
compliance with applicable employment laws, including laws regarding Cable Co-opís employee benefit plans.

Covenants

Conduct of Business Prior to the Closing. Until the Closing, Cable Co-op has agreed to, among other things:

provide AT&T Cable access to its premises, books and records regarding its cable television business and the assets used in connection with such business;
carry on its cable television business in the ordinary course;
preserve its present business organization and its relationships with customers, suppliers and others with which it has business dealings; and
maintain its assets in good condition.
During the same period, Cable Co-op has agreed that it will not, without the consent of AT&T Cable and subject to certain exceptions specified in the asset purchase agreement, among other things:
change the rate charged for basic services or make any changes to the channel lineup except to the extent mandated by the Cable Act or other applicable legal requirements;
incur any indebtedness involving an expenditure in excess of $10,000;
enter into a new commitment with an Internet access or online service provider or any agreement regarding telephony or the receipt and use of signals in digital format; and
change the compensation or benefits of any employees other than in the ordinary course of business.

"No Shop"; Fiduciary Out. Cable Co-op agreed that, prior to the Closing, it will not solicit or entertain offers from, negotiate with, or in any manner encourage, discuss, accept, or consider any proposal to acquire Cable Co-opís cable television system from any person, through purchase, merger, consolidation or otherwise (other than sales in the ordinary course of business). Despite this "no shop" provision, AT&T Cable agreed that Cable Co-op would have the right to consider unsolicited offers to purchase its cable television system prior to November 6, 1999, which was sixty days after the execution of the asset purchase agreement. If Cable Co-op accepted such an offer, the asset purchase agreement would automatically terminate, and Cable Co-op would be obligated to pay $20 million to AT&T Cable. Cable Co-op did not receive any offers to purchase the cable television system during this sixty-day period.
 
 

Use of Cable Co-op Name. For a period of 90 days after the Closing, Cable Co-op has agreed that AT&T Cable may use the name Cable Co-op or Cable Communications Cooperative of Palo Alto, Incorporated, provided that by the end of the ninety-day period, AT&T Cable will have discontinued the use of and will have disposed of all items of stationery, business cards and literature bearing such names.
 
 

Noncompetition Agreement. Cable Co-op has agreed to sign and deliver a noncompetition agreement to AT&T Cable at the Closing. The noncompetition agreement prohibits Cable Co-op and SVCC from competing with AT&T Cable, directly or indirectly, in the distribution of data, audio and video signals for a period of 5 years. (see "Noncompetition Agreement" at page 26)
 
 

Employee Benefits. AT&T Cable has agreed that it will, among other things:

offer employment to all non-senior management employees of Cable Co-op, subject to routine background and drug tests, and use commercially reasonable efforts to locate such employees in positions in close proximity to Cable Co-opís service area; and
interview and make a good faith effort to hire all of Cable Co-opís senior management.
Although AT&T Cable has no obligation pursuant to the asset purchase agreement to assume or honor any of Cable Co-opís employee benefit plans or liabilities connected therewith, AT&T Cable has agreed that, with respect to each of Cable Co-opís employees that becomes an employee of AT&T Cable, it will:
credit each employee the amount of vacation time accrued by him or her prior to the Closing;
credit each employee for his or her past service with Cable Co-op for purposes of eligibility regarding AT&T Cableís welfare benefit plans and for purposes of eligibility and vesting in AT&T Cableís 401(k) plan; and
credit each employee for any deductible amount previously met by him or her under any group health plan for the year in which the transfer of employment occurs.
Cable Co-op and AT&T Cable have agreed that Cable Co-op will pay its employees all compensation, including salaries, commissions, bonuses, severance, insurance, pensions, profit sharing and sick pay, to which they are entitled for periods prior to the Closing. All obligations and claims pursuant to or in connection with any of its employee benefit plans incurred on or before the Closing remain the responsibility of Cable Co-op.
 
 

The Franchise Agreement. Cable Co-op has agreed to use its best efforts to obtain and to cooperate with AT&T Cable to obtain approval by the City of Palo Alto on behalf of the Joint Powers Authority of (a) a new franchise agreement to replace the existing franchise agreement or (b) the amendment and transfer of the existing franchise agreement to AT&T Cable. The terms of such new franchise agreement or amendment and transfer of the existing franchise agreement must be satisfactory to AT&T Cable in its reasonable discretion. Cable Co-op shall have received assurances reasonably satisfactory to AT&T Cable from the City of Palo Alto on behalf of the Joint Powers Authority that (i) the rates that AT&T Cable proposes to charge to subscribers for basic services and associated equipment upon the Closing are acceptable; (ii) it will forbear from regulating rates for at least twelve months after the Closing; and (iii) it will not take any action against AT&T Cable with respect to rates historically charged by Cable Co-op, including ordering a roll-back of the rates historically charged for cable service by Cable Co-op.
 
 

Mid-Peninsula Access Corporation Agreement. AT&T Cable has agreed, if requested by MPAC, to negotiate in good faith with MPAC to enter into an amendment to the existing agreement between Cable Co-op and MPAC (the "MPAC Agreement") and to honor and assume Cable Co-opís funding obligations under Section 6(a) of the MPAC Agreement totaling $115,000 per calendar year.
 
 

Community Programming. AT&T acknowledges and understands that SVCC intends to continue to produce and provide community programming (see "Silicon Valley Community Communications" beginning at page 28). AT&T Cable has agreed to provide a basic service channel to SVCC for the broadcast of non-commercial community programming free of cost for so long as AT&T Cable shall be the franchisee for the cable television system. Subject to certain conditions set forth in the asset purchase agreement, this dedicated channel will be, at SVCCís election, provided (a) pursuant to a commercial programming agreement between AT&T Cable (or an affiliate) and SVCC or (b) if the Joint Powers Authority permits, as an additional dedicated access, educational or governmental channel under the franchise agreement.
 
 

Studio/Office Space. Pursuant to the asset purchase agreement, the lease for Cable Co-opís administrative offices and headend facilities will be assigned to AT&T Cable. AT&T Cable has agreed to sublease to SVCC on a rent free basis the local programming studio, control room, edit suites, storage areas and programming suite and provide access to common area facilities for eighteen months or until SVCC relocates to a replacement studio, whichever occurs earlier. To the extent that the MPAC Agreement requires Cable Co-op to provide MPAC the use of studio space and equipment, SVCC will provide such studio space and equipment, provided such terms are reasonably acceptable to SVCC. AT&T Cable has agreed to pay one-half of the reasonable interconnect costs of connecting the replacement studio to the headend for the system, which costs to AT&T Cable may not exceed $200,000. (see "Studio and Operations" at page 30)
 
 

Upgrade Of System. AT&T Cable has agreed that it will agree, as part of the new franchise agreement or transfer of the existing franchise agreement, to substantially complete an upgrade of the current cable television system to a hybrid fiber/coax system with minimum bandwidth of at least 750 MHz within 36 months of the Closing, unless the Joint Powers Authority approves an alternate upgrade architecture.
 
 

Commitment to Schools. AT&T Cable has agreed that it will agree, as part of the new franchise agreement or transfer of the existing franchise agreement, to:

offer free of charge one drop of basic video service and a two-way interactive data connection to all certified and credentialed schools at the K-12 level within Cable Co-opís service area;
donate an aggregate of $50,000 worth of cable modem equipment to the Palo Alto Unified School District or other public school districts within Cable Co-opís service area to be used for education or demonstration projects within six months of the Closing; and
use reasonable efforts to ensure that such schools have an opportunity to participate in any experiment or trials conducted by laboratories of AT&T and its affiliates within the service area, if any.

SVCC Pledge. AT&T Cable has agreed to enter into the charitable pledge agreement with SVCC at the Closing and timely perform AT&T Cableís obligations under the charitable pledge. (see "Charitable Pledge Agreement" at page 27)
 
 

Best Efforts To Obtain Consent And Executed Multiple Unit Dwelling Agreements. Cable Co-op has agreed to use its best efforts to obtain, prior to the Closing Date, all approvals and consents of third parties required for:

Cable Co-op to transfer its cable television business and the assets used or usable in connection with that business to AT&T Cable;
AT&T Cable to conduct Cable Co-opís cable television business and operate the acquired assets on its own;
AT&T Cable to assume and perform all of Cable Co-opís contracts relating to the ownership, operation or use of the acquired assets or business; and
AT&T Cable to assume all of Cable Co-opís franchises, approvals, authorizations, permits, licenses and other similar rights obtained from any governmental authority applicable to Cable Co-opís cable television business.
Cable Co-op also has agreed to use its commercially reasonable efforts to:
obtain consent to assignment of its leasehold interests to AT&T Cable; and
deliver to AT&T Cable a fully executed agreement having a term of at least ten years for each multiple unit dwelling project that currently receives cable television service from Cable Co-op, if the term of the current agreement is less than two years or has expired or if the current agreement is oral.

Antitrust Matters. AT&T Cable and Cable Co-op have agreed to file any notification or report required under antitrust law and to use their reasonable best efforts to overcome or avoid any objections or impediments which may be raised under any applicable antitrust law, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"), by the Federal Trade Commission, the Antitrust Division of the Department of Justice or other governmental authority with respect to the proposed sale transaction. If AT&T Cable considers a request from a governmental agency for additional data and information in connection with the HSR Act to be unduly burdensome, it may terminate the asset purchase agreement. Cable Co-op will reimburse AT&T Cable for one-half of the filing fees payable by AT&T Cable in connection with such filing under the HSR Act.
 
 

1031 Exchange. At AT&T Cableís request, Cable Co-op has agreed to cooperate with AT&T Cable in order that the sale transaction contemplated by the asset purchase agreement may be accomplished as part of a tax-deferred exchange pursuant to Section 1031 of the Internal Revenue Code of 1986, as amended, and to permit AT&T Cable to assign any of its rights under the asset purchase agreement to a qualified intermediary for the purpose of qualifying the transactions as a tax-deferred exchange. AT&T Cable has agreed that Cable Co-op will not be liable for any expenses associated with qualifying the transactions as a tax-deferred exchange. Notwithstanding the possible structuring of the sale transaction as a tax-deferred exchange, AT&T Cable will continue to be obligated to perform all its obligations under the asset purchase agreement, including its post-Closing obligations.
 
 

Transfer And Management Of The System. AT&T Cable has agreed that it or its affiliate will remain the owner and manager of the current cable television system and will not grant an option or otherwise transfer the cable television system to a third-party or retain a manager of the cable television system unaffiliated with AT&T Cable or its affiliates for a period of two years after the Closing.
 
 

Indemnification; Escrow Account

Cable Co-op has agreed to indemnify AT&T Cable and its shareholders and its and their respective affiliates, and the shareholders, directors, officers, employees, agents, successors and assigns of such persons, against, among other things, all losses, damages or liabilities of AT&T Cable or any other indemnified person resulting from:

any breach of any of the representations and warranties contained in the asset purchase agreement made by Cable Co-op;
any breach of any covenant, agreement or obligation of Cable Co-op contained in the asset purchase agreement;
any act or omission by Cable Co-op related to the conduct of its cable television business or the ownership or operation of its assets used in connection with such business that occurred or existed prior to the Closing Date;
any rate refund ordered by the Joint Powers Authority or other governmental authority with respect to a roll-back of rates charged by Cable Co-op to subscribers within one year prior to the Closing Date;
any liability or obligation of Cable Co-op not assumed by AT&T Cable;
any claims that the transactions contemplated by the asset purchase agreement violate any bulk transfer or fraudulent conveyance laws;
any litigation brought against AT&T Cable by subscribers of Cable Co-op relating to the transactions contemplated by the asset purchase agreement;
environmental matters relating to Cable Co-opís cable television system or the assets used in connection with the system arising from conditions existing at or prior to the Closing Date; or
any claims, actions, suits, proceedings demands, judgments, assessment, fines, interest, penalties, costs and expenses incident or relating to or resulting from any of the foregoing.
AT&T Cable has agreed to indemnify Cable Co-op and its shareholders, directors, officers, employees, agents, successors and assigns, against, among other things, all losses, damages or liabilities of AT&T Cable or any other indemnified person resulting from:
any breach of any of the representations and warranties made in the asset purchase agreement by AT&T Cable;
any breach of any covenant, agreement or obligation of AT&T Cable contained in the asset purchase agreement;
the failure by AT&T Cable to perform any of its obligations with respect to the liabilities it assumes pursuant to the asset purchase agreement; or
any claims, actions, suits, proceedings demands, judgments, assessment, fines, interest, penalties, costs and expenses incident or relating to or resulting from any of the foregoing.

Limitations on Amount. Cable Co-op will have no liability with respect to the matters described above until the total of all damages incurred by the indemnified party with respect to such matters exceeds $100,000, provided that if the damages exceed $100,000, then Cable Co-op will be liable for the initial $100,000 as well.

AT&T Cable will have no liability with respect to the matters described above until the total of all damages incurred by the indemnified party with respect to such matters exceeds $100,000, provided that if the damages exceed $100,000, then AT&T Cable will be liable for the initial $100,000 as well. If AT&T Cable fails to perform any of its obligations with respect to the liabilities it assumes pursuant to the asset purchase agreement after the Closing Date, however, then the limitations on the amount of indemnification do not apply.
 
 

Escrow Account. Of the $53 million cash consideration paid by AT&T Cable to Cable Co-op at the Closing, $4 million will be deposited in an interest bearing escrow account pursuant to an escrow agreement. The sole source of satisfaction of AT&T Cableís claims made under the indemnification provisions described above is the escrow account, including, among other things, a rate refund or roll-back ordered by the Joint Powers Authority or other governmental authority.

The funds remaining in the escrow account, if any, one year from the Closing Date will be paid to Cable Co-op so long as the escrow agent has not received any claims for indemnification from AT&T Cable or if the claims received from AT&T Cable have been resolved. If the escrow agent has received a claim for indemnification that remains unresolved one year from the Closing Date, then the escrow agent will retain in the escrow account the amount of any such claim plus any interest accrued or income associated therewith. Concurrently with the release of the funds remaining in the escrow account to Cable Co-op, the escrow agent will pay any interest income that has not been used to satisfy a claim pro rata to Cable Co-op and AT&T Cable based upon the total funds paid to Cable Co-op and AT&T Cable as of the date of the release of funds. The funds in the escrow account will also be available to pay for any federal and/or state taxes imposed on Cable Co-op in connection with the payment of the escrow amount, subject to certain terms described in the asset purchase agreement.
 
 

Conditions to Closing

The obligations of AT&T Cable and Cable Co-op to close the transactions contemplated by the asset purchase agreement are subject to the satisfaction or waiver of certain conditions, including:

all filings under the HSR Act have been made and the applicable waiting period has expired or been terminated without objection or threat of litigation by a governmental authority of competent jurisdiction to restrain the consummation of the transactions contemplated by the asset purchase agreement;
AT&T Cable and Cable Co-op have entered into an escrow agreement as contemplated by the asset purchase agreement; and
no action, suit or proceeding is pending or threatened by or before any governmental authority and no statute, ordinance, law, rule, regulation, or legal decision has been enacted, promulgated or issued applicable to any of the transactions contemplated by the asset purchase agreement that would:
(a) prohibit AT&T Cableís ownership or operation of all or a material portion of Cable Co-opís cable television system, business or assets;
(b) compel AT&T Cable to dispose of or hold separate all or a material portion of Cable Co-opís cable television system, business or assets;
(c) materially impair the ability of AT&T Cable to realize the benefits of the transactions contemplated by the asset purchase agreement or have a material adverse effect on the right of AT&T Cable to exercise full rights of ownership of Cable Co-opís cable television system; or
(d) prevent or make illegal the consummation of any transactions contemplated by the asset purchase agreement.
The obligations of AT&T Cable to close the transactions contemplated by the asset purchase agreement also are subject to the satisfaction or waiver of certain other conditions, including:
the Members of Cable Co-op have approved the transactions contemplated by the asset purchase agreement by January 1, 2000;
the representations and warranties of Cable Co-op set forth in the asset purchase agreement are, if qualified by materiality, true in all respects, and if not so qualified, are true in all material respects on the Closing;
Cable Co-op in all material respects has performed and complied with each obligation, agreement, covenant and condition required by the asset purchase agreement to be performed at or prior to the Closing;
Cable Co-op has executed and delivered to AT&T Cable a bill of sale, an assignment and assumption of contracts, an assignment of leases, a noncompetition agreement and other transaction documents contemplated by the asset purchase agreement (see "Noncompetition Agreement" at page 26);
AT&T Cable has determined that the material assets of Cable Co-opís cable television system are Year 2000 compliant;
Cable Co-op has delivered to AT&T Cable evidence satisfactory to AT&T Cable that all approvals and consents required for Cable Co-op to transfer its business and assets to AT&T Cable, AT&T Cable to conduct the business and own, operate and use the assets, and assume and perform Cable Co-opís government permits and contracts have been obtained and are in full force and effect, except where failure to obtain such consents and approvals would not have a material adverse effect upon the cable television system and its continued operation by AT&T Cable after the Closing;
the City of Palo Alto on behalf of the Joint Powers Authority shall have approved a new franchise agreement or an amendment and transfer of the existing franchise agreement, which new franchise agreement or amendment and transfer of the existing franchise agreement must be satisfactory to AT&T Cable in its reasonable discretion;
MPAC has entered into an amendment to the MPAC Agreement satisfactory to AT&T Cable;
The lessor of Cable Co-opís facility located at 3200 Park Boulevard, Palo Alto, California, shall have consented to the assignment of the lease to AT&T Cable;
SVCC has filed a determination letter with the Internal Revenue Service ("IRS") seeking the IRSís determination of SVCCís qualification for tax-exempt status as a non-profit corporation under Section 501(c)(3) of the Internal Revenue Code;
AT&T Cable has received evidence that: (a) Cable Co-op has conveyed the agreed upon studio local programming assets to SVCC; (b) SVCC and AT&T Cable have entered into a sublease; and (c) SVCC has assumed all obligations to MPAC for studio space and equipment that have been conveyed to SVCC by Cable Co-op pursuant to the MPAC Agreement or an amended MPAC Agreement;
AT&T Cable has received a legal opinion from Cooley Godward, LLP, counsel to Cable Co-op, and Cole, Raywid & Braverman, LP, special regulatory counsel to Cable Co-op, dated the Closing Date; and
as of the Closing Date, Cable Co-op has no fewer than 26,000 full-time equivalent subscribers to its basic cable service.
The obligations of Cable Co-op to close the transactions contemplated by the asset purchase agreement are subject to the satisfaction or waiver of certain other conditions, including:
AT&T Cable has paid the purchase price in accordance with the asset purchase agreement;
AT&T Cable has entered into the charitable pledge agreement as contemplated by the asset purchase agreement (see "Charitable Pledge Agreement" at page 27);
The representations and warranties of AT&T Cable set forth in the asset purchase agreement are, if qualified by materiality, true in all respects, and if not so qualified, are true in all material respects on the Closing Date;
AT&T Cable has complied in all material respects with each obligation, agreement, covenant and condition required by the asset purchase agreement to be performed or complied with prior to the Closing;
AT&T Cable has executed and delivered an assignment and assumption of contracts;
Cable Co-opís shareholders have approved the sale transaction contemplated by the asset purchase agreement;
to the extent Cable Co-op would be directly affected, Cable Co-op has approved the specific terms of (a) the new franchise agreement or the amendment and transfer of the existing franchise agreement; (b) the amendment to the MPAC Agreement; and (c) any sublease or license agreement between AT&T Cable and SVCC related to the use of space at 3200 Park Boulevard, Palo Alto, California; and
Cable Co-op has received the opinion of the Associate General Counsel of AT&T Cable.
Termination

Termination By Either AT&T Cable Or Cable Co-op. The asset purchase agreement may be terminated prior to the Closing:

by the mutual consent of AT&T Cable and Cable Co-op; or
by either AT&T Cable or Cable Co-op if the transactions contemplated by the asset purchase agreement have not been consummated by April 1, 2000 for any reason other than a breach or default by such party or the failure of any representation or warranty of such party to be accurate; provided that if the transactions have not been consummated solely because of the failure of the Joint Powers Authority to approve a new franchise agreement or an amendment to the existing franchise agreement, the parties may only terminate the asset purchase agreement if the Closing has not taken place by June 30, 2000.

Termination By AT&T Cable. The asset purchase agreement may be terminated by AT&T Cable prior to the Closing:

within 30 days after it receives information from Cable Co-op concerning Cable Co-op, its assets, system or business, if the results and findings of AT&T Cableís investigation of Cable Co-opís business and assets are not satisfactory to AT&T Cable;
if AT&T Cable considers a request from a governmental agency for additional data and information in connection with its filing under the HSR Act to be unduly burdensome; or
if there is loss or damage to Cable Co-opís assets that is so substantial as to prevent normal operation of any material portion of the cable television system or the replacement or restoration of the lost property if such property is material to Cable Co-opís business.

Termination By Cable Co-op. The asset purchase agreement could have been terminated by Cable Co-op if Cable Co-op had accepted an unsolicited offer to purchase its cable television system within 60 days of the signing of the asset purchase agreement. If Cable Co-op had accepted such an offer, it would have been obligated to pay $20 million to AT&T Cable. Cable Co-op did not receive or accept such an offer during this sixty-day period, which ended November 6, 1999. (see "ĎNo Shopí; Fiduciary Out" at page 17)
 
 

Effect of Termination. The asset purchase agreement provides that in the event of termination of the asset purchase agreement, no party will be relieved of any obligation or liability based on a breach or default by such party of its representations, warranties, covenants or agreements.
 
 

Amendment and Waiver

The asset purchase agreement may be amended or modified only by a writing signed by both AT&T Cable and Cable Co-op. The asset purchase agreement and any of its provisions may only be waived in writing.
 
 

Fees and Expenses

Each party will pay all of its expenses, including attorneysí and accountantsí fees in connection with the negotiation of the asset purchase agreement, the performance of its obligations and the consummation of the transactions contemplated by the asset purchase agreement, unless the asset purchase agreement expressly provides otherwise. Cable Co-op has agreed to pay one-half of the filing fees payable by AT&T Cable in connection with AT&T Cableís filing under the HSR Act. In the event of any action based upon any alleged breach of representation, warranty, covenant or agreement contained in the asset purchase agreement, the prevailing party will be entitled to recover reasonable attorneysí fees and other costs from the other party.
 
 

Other Transaction Agreements

Noncompetition Agreement (a copy of the noncompetition agreement is attached to this information statement as Attachment C)

Cable Co-op has agreed to enter into a noncompetition agreement in connection with the sale of Cable Co-opís cable television system to AT&T Cable and the transfer of certain of Cable Co-opís assets to SVCC. Pursuant to that agreement, Cable Co-op will agree that for a period of five years from the date of the agreement, it will neither directly nor indirectly:

compete with AT&T Cable in the distribution of data, audio and video signals, by means of cable, microwave, fiber optics, satellite receivers or broadcasts, both terrestrial and spatial, to businesses, residences, multi-family dwellings, hotels, motels, trailers and other users, in Cable Co-opís current service area; nor
manage, operate, join, control, participate, or become interested in, or be connected with (as an employee, consultant, partner, officer, director, stockholder or investor) any such communications service that would compete with AT&T Cable in the provision of cable television service within any portion of Cable Co-opís current service area, except as a passive investor or shareholder holding less than five percent of the outstanding voting stock or equity interest in any corporation or other entity.
AT&T Cable is not obligated to close the transactions contemplated by the asset purchase agreement until Cable Co-op has executed and delivered the noncompetition agreement signed by SVCC to AT&T Cable. It is anticipated that the board of directors of SVCC will approve the noncompetition agreement.
 
 

Charitable Pledge Agreement (a copy of the charitable pledge agreement is attached to this information statement as Attachment D)
 
 

The Pledge. AT&T Cable has agreed to enter into at the Closing a charitable pledge agreement with SVCC in connection with the sale transaction contemplated by the asset purchase agreement. (see "Purpose of the Vote") Pursuant to the charitable pledge agreement, AT&T Cable will agree to pay as an unrestricted charitable gift of cash as follows: (a) $10,075,000 directly to SVCC and (b) $6,925,000 to an escrow account (pursuant to an escrow agreement between SVCC and Cable Co-op described below) on the Closing Date (the "pledge"). AT&T Cable has agreed that SVCC may make use of the pledge in any lawful manner, including payment of costs and expenses of SVCC.
 
 

Escrow Agreement. The escrow agreement between SVCC and Cable Co-op provides that the $6,925,000 paid by AT&T Cable into an escrow account pursuant to the charitable pledge agreement will be used to satisfy any liability of Cable Co-op for federal and/or state income taxes, including penalties and interest and legal, accounting and other costs incurred by Cable Co-op in contesting liability for any such taxes, to the extent imposed by any federal or state income tax authority on Cable Co-op arising from AT&T Cableís payment of the pledge to SVCC. The escrow fund will be the sole source of indemnification for any such taxes of Cable Co-op. The interest or other income attributable to the escrow amount will be allocable to SVCC. The escrow amount that remains in the escrow account as of the termination date of the agreement, if any, will be distributed to SVCC. The escrow agreement provides that the termination date will be determined by Cable Co-op and SVCC in accordance with the escrow agreement; however, the termination date will be a date that is at least 90 days after the date that a federal or state income tax authority is no longer entitled to assess Cable Co-op for any tax liability associated with the pledge.

As of the date of this information statement, neither Cable Co-op nor SVCC has sought an interpretative ruling from the IRS that the $17 million charitable gift from AT&T Cable to SVCC will constitute a tax-free transaction as to Cable Co-op nor has SVCC yet filed a determination letter with the IRS seeking the IRSís determination of SVCCís qualification for tax-exempt status as a non-profit corporation under Section 501(c)(3) of the Internal Revenue Code.
 
 

SILICON VALLEY COMMUNITY COMMUNICATIONS

Set forth in this information statement, generally, and in this section in particular, are certain of Cable Co-opís understandings as to what actions SVCC will take on a going forward basis. Cable Co-op can make no assurance that SVCC will take any of the stated actions. SVCC is a corporation independent from Cable Co-op, and Cable Co-op does not control SVCCís operations.

Representatives of Cable Co-op and MPAC have been working together to design a new community media center, which will be owned and operated by SVCC. The new community media center is tentatively named the Mid-Peninsula Community Media Center and known as the Media Center ("MC2"). SVCC, with input from MPAC, plans to build on MPACís public access efforts and Cable Co-opís local origination efforts, without duplicating the independent efforts of MPAC. In addition, SVCC plans to enhance and expand information services previously provided by both MPAC and Cable Co-opís local origination department into new areas. As envisioned, the cooperation between SVCC and MPAC eventually may result in the merger of the operations of MPAC with SVCC and/or MC2.

In connection with the transactions contemplated by the asset purchase agreement, at the Closing AT&T Cable will make an unrestricted charitable gift of $17 million cash to SVCC. The gift is unrestricted, and SVCC may use the gift for any lawful purpose and, accordingly, will have the ability to begin to implement its vision. $6,925,000 of the gift will be initially deposited directly into an escrow account and will not be immediately available to SVCC. In addition, there is a risk that some or all of the escrow amount may never be available to SVCC. (see "Charitable Pledge Agreement -- Escrow Agreement" at page 27)

In addition to funding from AT&T Cable, in connection with the transactions contemplated by the asset purchase agreement, Cable Co-op will transfer to SVCC certain video, programming and editing equipment, copyrighted materials and/or other assets currently used by Cable Co-opís local origination department.
 
 

Vision Statement

The following vision statement has been endorsed by Cable Co-op and MPAC and has been adopted by SVCC as SVCCís initial mission statement:

Vision For A New Community Media Center



Representatives of Cable Co-op and the Mid-Peninsula Access Corporation, contingent upon review of the available funding, have endorsed the creation of a new community media center, which would eventually replace MPAC and Cable Co-op as they are currently structured.

A new nonprofit corporation serves those who live or work in Atherton, East Palo Alto, Palo Alto, Menlo Park, Stanford, and unincorporated parts of San Mateo County. The Center will be housed in a new facility and will provide a variety of services to address the following goals:

Create and maintain a facility available to all members of the community at which people have access to resources that enable and enhance communication and expression.
Generate and maintain a public forum that promotes civic engagement, diversity awareness, a venue for arts and a forum for many voices, adhering to the guarantees of the First Amendment.
Produce quality programming of particular local interest, some of which will be produced by center staff and some by individuals and groups assisted by center staff.
Enhance access to government and the political process for all members of the community and enhance dialogue between government and members of the public.
Provide accessible and affordable training for community members in media production including but not limited to video, radio and website content.
Collaborate with schools, local government, nonprofits, and local arts organizations to produce and disseminate community communications.
Utilize any number of media as resources allow to accomplish the above goals.
The board governing the new nonprofit corporation would include representatives from each Mid-Peninsula community to ensure that all perspectives are represented and that the center remains a truly community institution. The board could also include additional elected members.

Governance of SVCC

SVCC is currently governed by a board of directors consisting of three members, two of whom are members of the board of directors of Cable Co-op and one of whom is an attorney who has represented Cable Co-op in connection with the asset sale and is familiar with non-profit and other corporate organizational issues. The current directors are Seth Fearey of Menlo Park, Professor Ted Glasser of Stanford University, and Peter Carson, a partner at Cooley Godward LLP. Mr. Fearey and Professor Glasser are members of the board of directors of Cable Co-op.

As the mission and responsibilities of SVCC evolve, the representatives of Cable Co-op and MPAC designing MC2 expect the composition of the SVCC board of directors to expand in order to meet the organizationís needs, with the expanded board to include representatives of the key constituencies served by the envisioned new Community Media Center. It is expected that the SVCC board will expand the number of directors prior to the Closing Date and that one or more of the current directors will not continue as directors following the Closing Date.
 
 

General Background of SVCC

SVCC is a California public benefit non-profit corporation. SVCC is in the process of developing a plan of operations consistent with its articles, by-laws, and the vision for a new Community Media Center. It is expected that SVCC, either directly or by contract or merger with the new Community Media Center, will assume all local origination functions of Cable Co-op. SVCC expects to produce some or all of the programs currently produced by the local origination department of Cable Co-op, and to facilitate the distribution of programming that can be carried on the local programming channels. Currently, SVCC has no paid employees and relies on volunteers to develop and initiate the implementation of its vision.

It is anticipated that some of SVCCís initial programming equipment will be transferred to SVCC by Cable Co-op. SVCCís facilities initially will occupy the space currently used by Cable Co-opís local origination department, which AT&T Cable has agreed to provide to SVCC free of charge for eighteen months, or until SVCC relocates to replacement facilities, whichever occurs first. SVCCís initial funding comes from AT&T Cableís unrestricted charitable gift of $17 million cash. In addition, AT&T has agreed to provide SVCC with a dedicated basic service channel free of charge within Cable Co-opís current cable television system for so long as AT&T Cable shall hold the system franchise in addition to the channel(s) already designated to carry local programming. (see "The Charitable Pledge Agreement" at page 27)
 
 

Studio and Operations

Upon the Closing, it is anticipated that SVCC or its designee will have the right to use certain equipment and the studio and production facilities of Cable Co-op located at 3200 Park Boulevard, Palo Alto, California for a limited time. Some of the existing facilities and equipment are shared with MPAC. (see "The Charitable Pledge Agreement" at page 27) Upon the Closing, both SVCC and MPAC are entitled to stay in the current facilities free of charge for eighteen months or until SVCC relocates to replacement facilities. Within eighteen months, Cable Co-op expects that SVCC will identify or locate and construct new studio facilities to replace the current facilities. The new studio facility will be the new Community Media Center.

Cable Co-op anticipates that the new Community Media Center will be able to provide at least the same level of community service and local programming as do Cable Co-op and MPAC currently. In addition, Cable Co-op understands that SVCC expects to support new broadcast and interactive communication services to the community as electronic media delivery systems evolve.
 
 

Other SVCC Operations

Cable Co-op understands that SVCC, like any advertiser, may insert cross-channel promotional segments in available time slots on some other channels of AT&T Cableís distribution system. Discussions are ongoing with AT&T Media Services, an affiliate of AT&T Corp., AT&T Cableís parent corporation, for discounted access to such segments for, among other things, public service announcements and program promotions.

Cable Co-op understands that SVCC also hopes to provide a significant variety of educational opportunities to the local community. In connection with such activities, Cable Co-op understands that SVCC may seek accreditation by appropriate institutions after it has developed a curriculum, faculty and facilities.
 
 

Future Fund Development

Cable Co-op understands that SVCC intends to seek additional funding from a variety of sources in support of its vision, including, among other things, federal and state support and charitable donations. At present, Cable Co-op understands that SVCC has not yet engaged in such fundraising activities.
 
 

BACKGROUND TO THE TRANSACTION

Business of Cable Co-op

Overview

Cable Co-op is engaged in the cable business, consisting of the provision of cable television services, high-speed data services and FM services, all provided via its cable television network. Cable television services include retransmission of certain local broadcast signals, selected cable networks, premium video and audio services and pay-per-view services. FM services include the retransmission of certain local and distant FM stations. Data services include high-speed Internet access, e-mail, file transfers and World Wide Web related activities, provided on a turnkey basis by ISP Channel, an outside contractor.

Subscribers
Cable Co-op had approximately 28,172 full-time equivalent basic subscribers as of October 21, 1999. Potential subscriber homes and businesses included within Cable Co-opís service area number approximately 56,100. Cable Co-opís market penetration of the potential market for cable television service is approximately fifty percent.
 
 

Assets

The assets of Cable Co-op include the physical plant and the reception and transmission equipment, located at 3250 Park Boulevard, Palo Alto California and throughout the service area, the vehicle fleet, the office equipment, the studio equipment and supplies located at 3200 Park Boulevard, Palo Alto, California, and other contract rights, intellectual property rights and intangibles.

Facilities
The administrative offices and headend facilities of Cable Co-op are located at 3200 and 3250 Park Boulevard, respectively. Cable Co-opís office facilities are approximately 22,000 square feet in size and house the executive offices, customer service center, technical operations center, studio and related control rooms and edit suites, and accounting offices.

Cable Co-opís headend location contains all the equipment currently needed by Cable Co-op to receive and retransmit cable and FM signals and houses the cable modem receive and transmit equipment.

Employees
Cable Co-op employs approximately forty employees on a full-time basis. In addition, Cable Co-op utilizes independent contractors in connection with the installation of cable services, construction and studio operations. All non-senior management employees will be offered employment with AT&T Cable, subject to routine background and drug tests. (see "The Transaction Agreements Ė The Asset Purchase Agreement Ė Employee Benefits" at page 17)
 
 

History Of Cable Co-op

Background

Cable Co-op was incorporated in 1981 as a California cooperative corporation. Pursuant to our articles of incorporation, as amended, we are authorized to issue three classes of shares:

Class A - Membership Shares
Class B - Sustaining Shares
Class C - Preferred Shares

Membership Shares. Originally, Cable Co-op issued and sold Class A Membership Shares at an original purchase price of $10.00 per share. Since 1987, we have granted Membership Shares either without charge to, or as part of installation charges incurred by, new subscribers in connection with the initial provision of cable service to such subscribers. As of November 9, 1999, the record date, there were 29,691 holders of Membership Shares.
 
 

Sustaining Shares. Cable Co-op has issued and sold Sustaining Shares to holders of Membership Shares at an original purchase price of $20 per share up to a maximum investment of $300. At various times throughout our existence, Cable Co-op has provided different levels of benefits to holders of Sustaining Shares, including among other things, an annual credit against the cost of service. As of the record date, there were approximately 8,500 Sustaining Shares outstanding.
 
 

Preferred Shares. Beginning in 1987, Cable Co-op has issued and/or offered to sell several series of Preferred Shares, including the Series 1987, Series 1988A, Series 1988B, Series 1988C and Series 1989A Preferred Shares at an original purchase price of $100 per share. Holders of shares of the Series 1987, Series 1988A, Series 1988B, and Series 1988C Preferred Shares are entitled to receive a cumulative annual dividend of $15 per share, which began to accrue as of January 1, 1989, June 30, 1988, September 30, 1988 and January 1, 1989, respectively. Holders of shares of the Series 1989A Preferred Shares are entitled to receive a cumulative annual dividend of $16.50 per share, which began to accrue as of March 31, 1989. As of January 1, 1995, the Series 1987, Series 1988A, Series 1988B, Series 1988C and Series 1989A Preferred Shares are redeemable at the option of Cable Co-op or the holders of such shares at the redemption price of $100 per share, plus any accrued but unpaid dividends.

In addition, Cable Co-op has issued and sold shares of Series 1991A Preferred at an original purchase price of $5,000 per share. As of October 1, 1998, the Series 1991A Preferred Shares were redeemable at the option of either Cable Co-op or the holders of such shares at a price equal to the greater of (a) a fixed value of $26,656 plus interest at the rate of 18% per annum compounded annually based upon a 365-day year after October 1, 1998 until the time of redemption, or (b) a variable value based upon the "net value of a share of Series 1991A" as described in Cable Co-opís bylaws.

As of the record date, there were 698 shares of Series 1987 Preferred, 40 shares of Series 1988A Preferred, 25 shares of Series 1988B Preferred, 1,990 shares of Series 1989A Preferred and 154 shares of Series 1991A Preferred. There are no outstanding shares of Series 1988C Preferred.

The Purchase of Pacific Bellís Cable Distribution System and Debt Restructuring
In March 1986, Cable Co-op entered into a cable franchise agreement with the Joint Powers Authority and entered into an agreement with Pacific Bell (the "Pacific Bell Lease") to lease cable distribution facilities from Pacific Bell in exchange for monthly use and maintenance fees.
 
 

Bank Debt. In February 1991, Cable Co-op purchased from Pacific Bell certain tangible and intangible assets (including rights of access to and use of certain tangible assets owned by Pacific Bell or other third parties) being used by Cable Co-op under the Pacific Bell Lease for a total of $18,670,000. In addition, we agreed to pay Pacific Bell $1,938,336 for past-due payments, construction charges and late charges. Of these amounts, Cable Co-op paid $4,778,818 in cash and issued a promissory note to Pacific Bell for $15,829,518 originally due February 28, 1999. No current interest was payable; instead all interest was added to the note and was due on maturity. On January 17, 1992, Pacific Bell sold this note plus $1,195,238 compounded interest to Bank of America, which amended certain terms of the note (the "Bank of America Note"). (see "Financial Condition of Cable Co-op" at page 35)

In connection with the purchase of the cable distribution facilities from Pacific Bell, Cable Co-op also entered into a loan agreement with CIBC dated as of February 28, 1991 (the "Senior Credit Agreement"). The Senior Credit Agreement provided for a $20,000,000 revolving credit facility until February 28, 1993. Cable Co-op received $17,700,000 in cash and a letter of credit of $300,000 in favor of the City of Palo Alto. The remaining $2,000,000 was originally reserved and to be advanced only upon prior consent of CIBC. In January 1993, the remaining $2,000,000 available under the Senior Credit Agreement was canceled by CIBC. On February 28, 1993, the outstanding principal balance converted to a term loan repayable in quarterly installments originally ending on August 31, 1998. Substantially all of the assets of Cable Co-op were pledged as first priority collateral to secure Cable Co-opís obligations under the Senior Credit Agreement.

In addition, Cable Co-op entered into a new $1,000,000 senior subordinated credit agreement dated as of February 28, 1991 (the "Senior Subordinated Credit Agreement") with National Cooperative Bank ("NCB") in order to refinance its then existing debt to NCB under a 1986 credit agreement. The Senior Subordinated Credit Agreement was sold to CIBC in April 1991 without changes in its terms. The amounts outstanding under the Senior Subordinated Credit Agreement became due in quarterly installments beginning in May 1994. Substantially all of the assets of Cable Co-op were pledged as second priority collateral to secure Cable Co-opís obligations under the Senior Subordinated Credit Agreement.

Substantially all of the assets of Cable Co-op were further pledged as third priority collateral to secure Cable Co-opís obligations under the Bank of America Note.
 
 

Participation Units. In connection with the payment of other outstanding debt obligations, Cable Co-op retired its obligations to a short term lender through the issuance of 140 participation units. The participation units, which were contract-based participations and did not represent a proprietary interest in Cable Co-op, were redeemable by Cable Co-op beginning in 1995 or could be converted to preferred stock at the holderís option. In November 1991, Cable Co-opís board of directors authorized the issuance of up to 200 shares of the Series 1991A Preferred Shares. During 1992, Cable Co-op redeemed 15 participation units at $5,000 per share. The remaining participation units were converted to 125 shares of the Series 1991A Preferred Shares at $5,000 per share. In addition, Cable Co-op issued 24 shares of Series 1991A Preferred Shares at $5,000 per share for cash and/or cancellations of previously issued preferred shares. Options for additional shares were subsequently granted to a former employee of Cable Co-op.

The proceeds of the Bank of America Note, the Senior Credit Agreement, the Senior Subordinated Credit Agreement and the participation units were used to pay the cash portion of the purchase price for Pacific Bellís cable distribution facilities, to repay or refinance existing debt, to finance transaction costs and to pay capital and operating expenditures and other obligations.
 
 

Collaboration with Heritage Cablevision

From 1985 through March 1998, Heritage Cablevision, Inc. ("Heritage") and, following Heritageís acquisition by Tele-Communications, Inc. (now AT&T BIS) or one of its affiliates ("TCI"), TCI provided certain management services to Cable Co-op pursuant to various agreements. In accordance with such agreements, Cable Co-op was able to purchase programming from Heritage and later from TCI at discounted prices. In March 1998, TCI exercised its right to terminate the then existing agreement and notified Cable Co-op that it would no longer be able to purchase programming from TCI at a discount.
 
 

Industry Trends

The cable television industry has undergone tremendous change and consolidation over the past several years. Some cable companies now provide competitive local and long distance telephone services and are placing an increasing importance on high-speed Internet service provisioning. Moreover, significant rapid technological changes have occurred. Some cable companies employ a hybrid fiber/coax architecture, designed to break the network into a series of fiber optic "nodes" serving 1000 or fewer homes. This type of network enhances overall reliability and provides much greater bandwidth, making it capable of providing a wide range of advanced digital services, data services, traditional video services and, in some instances, telephone services.

In addition to the technological capabilities of our competitors in the industry at large, Cable Co-op expects to be facing increased competition for subscribers in its own service area. In June 1998, RCN Corporation ("RCN") announced, among other things, that it had applied for regulatory authority to deliver its package of phone, cable and Internet services to California residents over its own network and that it intended to focus its network construction in California on the San Francisco to San Diego corridor. Management researched RCN and reported to the board of directors that RCN is a provider of "bundled services," providing video, telephone and high-speed Internet services at extremely competitive prices and that RCN has proven to be a strong competitor in the eastern regions of the United States, having an impact on the cable operations of Time Warner, AT&T BIS and other large cable operators. RCN subsequently has announced that it has received approval from, among others, the City of San Francisco, San Mateo and Daly City to construct its network. In addition, the Palo Alto Daily News has reported that the "Pacific Bell parent company SBC Communications, the nationís largest local phone company, plans to spend $6 billion to bring high-speed Internet service to nearly a third of Americaís homes."

Moreover, Cable Co-op continues to compete with direct broadcast satellite providers, such as Direct TV. Federal law currently prevents these competitors from offering local broadcast channels, a primary advantage of Cable Co-op. In the future, however, these laws may be amended to allow carriage of network programming on these satellite dish networks.

An increase of competition for subscribers would place Cable Co-op in a very difficult financial situation. The results of Cable Co-opís managementís investigation further suggested that a potential new competitor, such as RCN, with a new network and "bundled" service offerings, would have a substantial negative impact on Cable Co-opís ability to service its then outstanding bank debt, and that the loss of as few as ten percent of Cable Co-opís then subscribers would have a substantial adverse effect on the financial condition of Cable Co-op.

Currently, we are unable to offer the entire suite of telecommunications services to our Members that are available today. We do not expect to have the financial resources to pay our current debts and other obligations and to upgrade our system so as to provide all of these services while remaining competitive and independent and without having sold a substantial part of our assets and/or having given up substantial control over the system.

Financial Condition of Cable Co-op

Credit, Loan and Other Debt Obligations. Cable Co-op has accumulated significant debt obligations in connection with its purchase, construction and extension of its cable television system. Pursuant to the Bank of America Note, Cable Co-op was obligated to pay approximately $31,849,521 as of September 30. 1999. This obligation is expected to increase to approximately $34,100,000 as of the Bank of America Noteís July 31, 2000 maturity. Cable Co-op expects to have completed the full repayment of its senior and senior subordinated debt owing to CIBC before February 2000.
 
 

Losses from Operations. Cable Co-op has suffered recurring losses from operations. Operating losses were approximately $30,000 in 1997. Operating profits were approximately $60,000 in 1998. Operating losses were approximately $75,000 for the nine months ending September 30, 1999. Cable Co-opís accumulated deficit as of September 30, 1999 was approximately $27.98 million.
 
 

Redemption Value and Dividends of Shares. The following table sets forth the approximate redemption value and dividends accrued thereon due the holders of Preferred Shares of Cable Co-op as of December 31, 1999:



 
Rate
Number of Shares
Redemption Value*
Dividend*
1987
15%
698
$69,800
$10,470
1988A
15%
40
$4,000
$600
1988B
15%
25
$2,500
$375
1988C
15%
0
[N/A]
[N/A]
1989A
16.5%
1,990
$199,000
$32,835
1991A
 
154
$5,574,030
[N/A]
TOTAL:
   
$5,849,330
$44,280

 

* Represents an estimate. The actual amount to be paid will be paid in accordance with the bylaws of Cable Co-op.

Strategic Alternatives

In the face of recurring losses from operations, accumulated deficit and significant debt, Cable Co-op has considered several strategic alternatives, as described in greater detail below. In considering these alternatives, we have kept in mind Cable Co-opís long term goals, which the board of directors has reaffirmed at certain points throughout Cable Co-opís history: (i) assuring access to high-quality cable television programming and communications services by residents, businesses and institutions in Cable Co-opís service area at reasonable rates; (ii) assuring access to and providing high-quality local programming and other public benefits; and (iii) stimulating the development of advanced telecommunications services in Cable Co-opís service area.
 
 

Increase Revenue. Cable Co-op has worked to improve the amount of cash we receive from operations by increasing our subscriber base, controlling costs and modifying subscriber rates. For example, in September 1997, we increased the basic subscriber rate and, in an effort to attract more subscribers to our pay services, simplified the fee structure by charging a flat fee for most pay services. Moreover, we have changed our line-up and reduced the number of personnel at Cable Co-op in an effort to improve cash flow.
 
 

Strategic Partnerships. In March 1995, Cable Co-op retained Intellect Partners, a consulting firm, to produce a strategic plan for Cable Co-op. In 1996 and 1997, with the assistance of the investment bank CIBC Wood Gundy, Cable Co-op conducted discussions with several potential investors, including cable operators of various sizes and large telecommunication providers. In February 1997, after considering the proposals of the various investors, the board of directors adopted a resolution in favor of pursuing an offer from Sun Country Cable, which contemplated a three-way partnership among Cable Co-op, Sun Country Cable and the Carlyle Group. The discussions regarding the potential partnership were subsequently terminated by the Carlyle Group when the Carlyle Group withdrew its offer to provide Sun Country Cable with the capital necessary to finance the partnership.
 
 

Silicon Valley Communications Authority Plan. In January 1998, with the assistance of Salomon Smith Barney acting as a financial advisor in the potential sale of its assets, Cable Co-op released a "Telecommunications Plan for the 21st Century" (the "SVCA Plan"), which we subsequently submitted to the City of Palo Alto. Pursuant to the SVCA Plan, Cable Co-op proposed a new public-private partnership to lay fiber-optic cable and to build a modern telecommunications system to serve Palo Alto, Menlo Park, East Palo Alto, Atherton, and Stanford. The SVCA Plan proposed the creation of a new, independent government entity, the Silicon Valley Communications Authority ("SVCA"), which would own and operate Cable Co-opís cable television system. In the SVCA Plan, Cable Co-op envisioned the issuance and sale of non-recourse, partially tax-exempt bonds by SVCA, the proceeds of which would be used in part to purchase Cable Co-opís cable television system.

In February 1998, the City Council for the City of Palo Alto voted not to pursue the SVCA Plan. Representatives of Cable Co-op subsequently had discussions with representatives of one or more other local cities and the Palo Alto Unified School District concerning the SVCA Plan, but these discussions did not lead to a new formal presentation of the SVCA plan to the City of Palo Alto.

Debt Refinancing
Cable Co-op contacted CIBC and Bank of America as our existing lenders regarding the viability of refinancing our debt obligations due and payable in 1998. In June 1998, we negotiated an extension of our payment obligations to CIBC and Bank of America, to January and July 2000 respectively, which required us to agree to stricter restrictions on our ability to raise and use funds. Bank of America indicated in a letter dated February 5, 1999, that it had no interest in refinancing the debt then owed to it by Cable Co-op. Cable Co-op expects to repay its obligations to CIBC in full as of their January 2000 maturity.

Cable Co-op also approached other potential lenders in an attempt to refinance our debt obligations. To date, Cable Co-op has not identified a lender interested in lending money to Cable Co-op sufficient to retire its existing obligations and to finance an upgrade of the existing cable television system. Individual members of the board of directors also independently pursued other refinancing alternatives.

A member of Cable Co-opís board also contacted certain investment bankers to determine whether it was feasible to refinance Cable Co-opís debt, incur new debt to finance an upgrade of the system and incur new debt to pay the dividends due and payable on our Preferred Shares. Based upon the results of his inquiries, the board member concluded that it was unlikely that Cable Co-op would be able to borrow sufficient capital to refinance its debts without simultaneously increasing the rates charged its customers to such an extent that we would no longer remain competitive.

Beginning in March 1998, Cable Co-op began efforts to raise additional capital through the issuance of additional Sustaining Shares of Cable Co-op to our members. The board of directors hoped to raise at least $150,000 to install limited fiber in our network and to provide additional support to local schools, but this effort was not successful.

Transaction with AT&T
In the fall of 1998, Cable Co-opís management received an inquiry from AT&T Cable exploring the possibility of a purchase of Cable Co-op. Preliminary due diligence and discussions took place over the next several months.

Continuing into the first quarter of 1999, Cable Co-opís management and/or members of the board of directors had discussions with three companies, including AT&T Cable, that were interested in purchasing Cable Co-opís assets. Management received written proposals from each of the three interested parties. Management and/or members of the board of directors also had preliminary contacts with at least three other companies to determine whether they were interested in submitting proposals for Cable Co-opís consideration; none of these initial inquiries resulted in written proposals at that time.

Separately, management and several members of the Cable Co-op board of directors met with members of the Palo Alto City Council to determine the status of the SVCA Plan and whether any new interest existed on the part of the member cities to create SVCA. In the course of these meetings, Cable Co-op received a clear response from those council members that the City of Palo Alto had no interest in pursuing the development of SVCA.

In April 1999, following extensive discussion of the terms of the AT&T Cable proposal, as well as consideration of potential alternatives, Cable Co-opís board of directors authorized its management to execute a letter of intent with AT&T Cable setting forth the principal terms of the proposed sale of Cable Co-opís cable television system to AT&T Cable. On April 26, 1999, AT&T Cable and Cable Co-op issued a joint press release announcing the signing of a letter of intent. Negotiations with AT&T Cable took place over the next several months.

In May 1999, the then secretary of the board of directors led the board of directors in recounting the initiatives the board of directors and management had undertaken to explore various means of refinancing Cable Co-op, including, but not limited to: (a) rescheduling Cable Co-opís debt; (b) proposing municipal financing in partnership with the communities served by Cable Co-op; (c) revisiting conventional refinancing alternatives; and (d) requesting Members to purchase Sustaining Shares. The board of directors noted that these efforts to raise funds sufficient to repay Cable Co-opís debts and to upgrade the system had not been successful.

Pursuant to the letter of intent with AT&T Cable, Cable Co-op agreed not to directly or indirectly solicit or entertain offers or proposals from other persons regarding the purchase of Cable Co-opís cable television system. In June 1999, the board of directors was notified of certain preliminary inquiries that had been received from other parties interested in a possible purchase of Cable Co-opís assets and/or other relationship with Cable Co-op. To date, none of these parties has made a detailed offer to our management.

In June 1999, the board of directors approved a motion that if the proposed transaction with AT&T Cable was approved by the board of directors, then the proposed transaction would be submitted to a vote of the Membership of Cable Co-op for approval. In addition, the board of directors authorized management to explore the cost and feasibility of obtaining a fairness opinion that could be disclosed to Members concerning the proposed sale transaction with AT&T Cable.

In July 1999, the board of directors approved the creation of a committee to explore the needs of the community regarding public access and local origination programming, to investigate successful programs in other communities, and to analyze alternative missions for presentation to the board of directors. The board of directors also approved the creation of a two-person liaison committee to develop and maintain relations with MPAC. The board of directors also authorized the expenditure of certain additional funds for one or more financial analyses of the proposed sale of the business to AT&T Cable. In July 1999, the board of directors, by a vote of 13-1-0 (with one director absent), authorized Cable Co-opís management to commission a fairness opinion from Kagan Media Appraisals, Inc. that could be disclosed to members concerning the fairness to Cable Co-op of the proposed sale of assets to AT&T Cable. (see "Fairness Opinion" at page 41) In July 1999, Cable Co-op also issued two press releases expressing the board of directorsí views concerning the proposed sale of Cable Co-opís cable television system to AT&T Cable.

In August 1999, the board of directors received a report concerning certain communications with MPAC and a description of the work of the committee that had been formed to explore the needs of the community regarding public access and local origination.

On September 7, 1999, following several interim reports during the prior months from Cable Co-opís management, its counsel and/or certain members of the board of directors concerning the status of negotiations and reviews of certain drafts of certain portions of the proposed asset purchase agreement, Cable Co-opís management presented the asset purchase agreement to the board of directors for its consideration and approval. At that meeting, the board of directors received the verbal and written opinion from a representative of Kagan Media Appraisals, Inc., which rendered its written opinion that "the consideration to be received by Cable Co-op of Palo Alto for the assets of the Palo Alto cable television system is fair from a financial point of view". Cable Co-opís management then reported to the board of directors that (i) Cable Co-opís lenders were not interested in refinancing Cable Co-opís loans, (ii) Cable Co-opís members were asking for services that required a system upgrade, (iii) Cable Co-op was running a lean operation, providing a lower level of support than was desirable, and (iv) the expected arrival of new competition from RCN and from DBS satellite providers was provoking increasing concern. Following discussion, the board of directors, by a vote of 13-1-0 (with one director absent), approved and adopted the asset purchase agreement and approved the sale of Cable Co-opís assets to AT&T Cable, including, the concurrent unrestricted charitable gift to be made by AT&T Cable to SVCC; and to prepare and distribute materials regarding the transactions contemplated by the asset purchase agreement to the Members. By a vote of 12-1-1 (with one director absent), the board of directors approved an approximate allocation of the cash proceeds pursuant to the asset purchase agreement. (see "The Transaction Agreements Ė Allocation of Purchase Price" at page 14)
 
 

REGULATORY COMPLIANCE

The Franchise Agreement

AT&T Cable is not obligated to purchase Cable Co-opís assets unless the City of Palo Alto, on behalf of the Joint Powers Authority, approves a new franchise agreement with AT&T Cable or, in the alternative, an amendment to and transfer of the existing franchise agreement between the Joint Powers Authority and Cable Co-op to AT&T Cable. The public process should provide an additional forum where issues that concern residents of Palo Alto, Menlo Park, East Palo Alto, Atherton and those other portions of San Mateo and Santa Clara Counties located within the service area may be considered. The Joint Powers Authority has the authority to grant or deny a new franchise agreement or the transfer of the existing agreement, subject to the application of FCC regulations regarding the transfer of a franchise. Normally, the transfer of the franchise must be approved within 120 days of the submission of notification of an application for approval to the franchise authority. (see "The Transaction Agreements Ė Covenants Ė The Franchise Agreement" at page 18)
 
 

The HSR Act

The sale transaction is subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, under which a transaction cannot be completed until required information and materials are furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission and the waiting periods end or expire. AT&T Cable and Cable Co-op will make the required filings with the Department of Justice and the Federal Trade Commission promptly following December 31, 1999, the deadline for the return of the ballot cards by the Members, if the Members vote to approve and adopt the asset purchase agreement and approve the sale of the cable television system to AT&T Cable. The applicable statutory waiting period for both the Antitrust Division of the Department of Justice and the Federal Trade Commission is thirty days after the initial filing.

However, the Antitrust Division of the Department of Justice or the Federal Trade Commission may challenge the sale transaction on antitrust grounds either before or after expiration of the waiting period. Accordingly, at any time before or after the completion of the sale transaction, either the Antitrust Division of the Department of Justice or the Federal Trade Commission could take action under the antitrust laws as it deems necessary or desirable in the public interest. Other persons could also take action under the antitrust laws, including seeking to enjoin the sale transaction. Additionally, at any time before or after the completion of the sale transaction, whether or not the applicable waiting period expired or ended, any state could take action under the antitrust laws as it deems necessary or desirable in the public interest. There can be no assurance that a challenge to the sale transaction will not be made or that, if a challenge is made, we will prevail.

Cable Co-op is not aware of any other material governmental or regulatory approval required for completion of the sale transaction, other than compliance with applicable corporate law of California applicable to consumer cooperative corporations.
 
 

FAIRNESS OPINION

Cable Co-op engaged Kagan Media Appraisals, Inc. ("KMA") to evaluate the fairness to Cable Co-op, from a financial point of view, of the asset purchase agreement (the "Opinion"). (a copy of the fairness opinion is attached to this Information Statement as Attachment E)

Within the Kagan Group of companies, Paul Kagan Associates, Inc. publishes over 40 newsletters on various communications and media disciplines, including CABLE TV INVESTOR, WIRELESS CABLE INVESTOR, CABLE TV FINANCE and INTERACTIVE MULTIMEDIA INVESTOR. It has published CABLE TV INVESTOR, the only continuing publication analyzing the value of public and private cable TV companies, since 1969. Over the past 30 years, Kagan Media Appraisals, Inc. has appraised over $40 billion worth of media properties on contract assignment. In addition, the Kagan Newsletters have evaluated public and private companies, on at least a quarterly basis over a number of years, totaling hundreds of billions of dollars in market value. The Kagan Organization is nationally recognized for its analysis of strategic developments in the media and telecommunications industries and its comprehensive economic forecasts for the cable TV and related media and telecommunications industry sectors.

On September 7, 1999, KMA delivered an oral opinion and written Opinion to the board of directors of Cable Co-op that, as of such date, and based on and subject to the assumptions, limitations and qualifications as set forth in such Opinion, the transaction taken as a whole, including cash and non-cash consideration, was fair from a financial point of view to Cable Co-op.

In connection with rendering the Opinion, KMA reviewed among other things: (1) the financial terms and conditions of the asset purchase agreement; (2) unaudited financial and operating statements for Cable Co-op for the full year 1998 and interim monthly statements for January through June, 1999; (3) Cable Co-opís internal budget for 1999; (4) report on Form 10K for 1998 for AT&T, AT&T Cableís parent company; (5) public documents and published reports from AT&T, AT&T BIS and AT&T Cable and other industry sources relating to AT&Tís broadband plans and initiatives. KMA also conducted discussions with Cable Co-opís senior management related to financial and operating performance and business prospects for the cable television system. Further, KMA undertook other financial studies, analyses and investigations as it deemed relevant for the purpose of rendering the Opinion.

In rendering the Opinion, KMA relied upon the completeness and accuracy of the materials and information provided by Cable Co-op and available from other sources, but did not independently verify the information. The KMA Opinion was necessarily based on economic, market, financial and other conditions as they existed, and as they were made available to KMA, on the date that the Opinion was presented. KMA assumed the acquisition would be consummated on the terms described in the asset purchase agreement. Although subsequent developments could affect the KMA Opinion, KMA does not have any obligation to update, revise or reaffirm its Opinion.

KMAís Opinion was submitted to the Cable Co-op board of directors as an independent study of the fairness from a financial point of view to Cable Co-op of the consideration to be received for the sale of the cable television system assets. It is a result of KMAís independent conclusions based on assumptions and analyses described in more detail below. The Opinion does not purport to indicate the actual value or necessarily reflect the final price at which the property will be sold. In performing its analyses, KMA made numerous assumptions with respect to industry performance, economic conditions and other matters. Such analyses are inherently subject to uncertainty, being based upon numerous factors beyond the control of all parties involved. KMA, therefore, assumes no responsibility if future results or actual values are materially different from those forecasts or estimates contained in the analyses.

In conducting its evaluation, KMA used standard appraisal methodologies of an Income Approach and a Market Data (comparability) Approach.
 
 

Discounted Cash Flow Analysis

KMA prepared independent financial forecasts for Cable Co-op, estimating the net present value of the future stream of free cash flows the Cable Co-op cable television system would generate under the ownership of AT&T Cable. The value estimate under this Income Approach was developed by determining the current income level of the subject business, then projecting growth rates for that income stream and discounting future income by an imputed rate based on cost-of-money factors. The final valuation was yielded by the sum of the present values to be generated in each of the years counted.

In projecting the future operational performance for Cable Co-op, KMA focused on years 2000-2009 and incorporated assumptions that were patterned after publicly available industry expectations in general and publicly disclosed AT&T expectations in particular for the development of digital video, high-speed Internet access and cable telephony services. The following penetration assumptions were incorporated into the discounted cash flow ("DCP") forecast:


 

Percent (%) of
Homes Passed
 
2001
2009
Digital Video: 30% 66%
High Speed Access: 6% 31%
Cable Telephony: 0% 20%

For this analysis KMA used discount rates ranging from 12.5% to 13.5% and perpetuity growth rates in year 10 of 5% to 6%, applied to forecast free cash flow (earnings before interest and depreciation/amortization but after capital expenditures and imputed taxes). This analysis indicated a range of net present asset values for the Cable Co-op system of $77.7 million to $93 million, the average of which was $85.1 million. The analysis implied a range of valuation multiples of 10.7 to 12.8x projected year 2000 EBITDA (earnings before interest, depreciation, amortization and taxes, as determined in accordance with generally accepted accounting principles ("GAAP")), the average of which was 11.7x 2000 EBITDA.
 
 

Market Data (Comparable) Analysis

KMA reviewed cable television system sale transactions recorded by Paul Kagan Associates, for properties with less than 100,000 subscribers sold during the period January 1998 through August 1999. KMA did not compare the Cable Co-op/AT&T Cable transaction to recent, prominent sales of the largest system groups in the country. Those sales (including TCI/AT&T, Century/Adelphia, Charter/Paul Allen) involved multiple millions of subscribers and scale and scope economies that, KMA believed, render them not comparable to Cable Co-op. And those transactions, KMA believed, also carried valuation premiums related to their strategic significance to the buyers.

KMA reviewed 83 transactions for systems/groups of under 100,000 subscribers which sold in a broad multiple range of 5.5x-17.0x projected year one EBITDA. The weighted average sale multiple was 10.4x; the simple average multiple was 8.8x. Applying the weighted average sale multiple for this group of single market or small market group sales to the Cable Co-op system implied a possible comparable value of $78.7 million.

Within the broader group of comparable transactions, KMA reviewed four selected acquisitions or proposed acquisitions in markets that KMA deemed to be particularly comparable to Cable Co-opís :

56,000 subscriber system in Scranton, Pennsylvania from Verto Cable to Adelphia;
32,000 subscriber system in the Huntsville, Alabama area from Cable Alabama Corp. to Knology Holdings;
68,000 subscriber system in the Rancho Cucamonga and Victorville area of California from American Cable Entertainment to Booth American; and
19,000 subscriber system in Calvert and Anne Arundel Counties, Maryland from Cable TV Fund 14A to Jones Intercable.
They were chosen for elements of comparability including size, subscriber penetration, location, economic environment, level of system upgrade and services offered among other criteria. In particular, the Huntsville, Calvert and Ann Arundel Counties and the Southern California markets are prosperous, good growth areas. Huntsville is a high-tech center similar to Palo Alto. All but the Huntsville market had seen some level of upgrade prior to sale, positioning them more advantageously than Cable Co-op.

The range of sale multiples for the group of four was 9.9x-12.4x projected year one EBITDA, for an average sale multiple of 11.4x EBITDA. Applied to Cable Co-opís estimated 2000 EBITDA, the comparable sale multiples indicated a valuation range for Cable Co-op of $72.2-90.4 million, and a simple average of $83.1 million.

The range of values per subscriber indicated by the comparable sales was $1,924-3,540, with an average value per subscriber of $2,580. Applied to Cable Co-opís approximately 28,000 subscriber base at June 30, 1999, the comparable sale values per subscriber indicated a valuation range of $54.3-99.8 million, and a simple average of $72.8 million.
 
 

Valuation of Non-Cash Consideration

Because the asset purchase agreement involves cash and non-cash consideration and special tax-efficient allocations of the cash portion of the consideration, KMA reviewed the scope of these components of the asset purchase agreement and assigned a value to each to reflect the full worth of the transaction to Cable Co-op. These other considerations included:

(a) The requirement of AT&T Cable to implement a complete upgrade of the cable television system within the first three years of new ownership. The extraordinary capital expense underlies and predicates the assumptions for penetrations, revenues and cash flows forecast by KMA for the Cable Co-op system in its discounted cash flow analysis. Based on an engineering study commissioned by Cable Co-op, which estimated a cost of $16 million to fully upgrade the system and KMAís knowledge of industry cost benchmarks and AT&Tís published projections for its cost to upgrade systems to 750 MHz and above, KMA estimated a $12 million total cost for the upgrade project and assigned a present value of $10 million to the upgrade consideration in the asset purchase agreement.

(b) The cash payment of $17 million in the form of an unconditional charitable contribution to SVCC. Assuming the avoidance of a tax liability on these receipts at a 40% tax rate yields a tax benefit to Cable Co-op of approximately $6.8 million, to be included as a non-cash consideration in the transaction.

(c) The forgiveness of 18 months of lease payments by SVCC. Based on Cable Co-op management estimates, the availability of studio space for SVCC was valued by KMA at $300,000.

(d) The assignment of a single analog program channel for the exclusive use of SVCC. KMA calculated that this non-cash consideration might conservatively be valued at $3 million. The loss of future income to AT&T Cable from a third party programmer, assuming a ten year period with channel fee payments of 75 cents/subscriber/month and no escalation clause, yields an approximate $3 million present value. KMA did not forecast other revenue streams such as advertising or digital video streams that might further enhance the revenue generating ability of this gifted channel.

KMAís review of these four non-cash elements of the asset purchase agreement indicated an aggregate value of $20.1 million, which KMA deemed appropriate to add to the cash receipts of $70 million in calculating the full value to Cable Co-op of the asset purchase agreement.

Therefore, KMA assessed the full value to Cable Co-op of the transaction to be approximately $90.1 million. That derived value falls at the high end of the range of valuation results indicated by discounted cash flow and comparable sale analyses performed by KMA.
 
 

Miscellaneous

Pursuant to the terms of the engagement, Cable Co-op has agreed to pay KMA for its financial advisory and valuation services in connection with the asset purchase agreement between AT&T Cable and Cable Co-op an aggregate fee of $65,000, of which $25,000 was payable at the time of engagement, $25,000 was payable at the time of the oral delivery of the Opinion and $15,000 payable at the time of the delivery of the written Opinion. Cable Co-op also has agreed to reimburse KMA for reasonable out of pocket expenses incurred in performing its services.

In the past, KMA has provided financial services to Cable Co-op, including a long-term revenue analysis for the cable television system, developed in conjunction with the SVCA Plan, and a fair market value analysis for Cable Co-op. KMA was paid an aggregate $112,500 for those analyses, both completed in 1998.
 
 

INTERESTS OF CERTAIN PERSONS IN THE SALE:
POSSIBLE CONFLICTS OF INTEREST

General

When considering the recommendations of Cable Co-opís board of directors, you should be aware that some members of the Cable Co-op Board and executive officers have certain interests in the sale that may be different from or in addition to the interests of the Cable Co-op Members generally. These interests may create potential conflicts of interest. These additional interests relate to:

equity ownership interests in AT&T, the parent company of AT&T Cable and/or in Cable Co-op;
employee benefit plans and arrangements regarding change in control severance payments; and
Membership on the SVCC board of directors and/or service as a SVCC officer.

Equity Ownership of Officers and Directors.

The following table sets forth as of November 1, 1999, the Cable Co-op directors and executive officers who beneficially own AT&T common stock and the amount of shares of such common stock owned by them (excluding stock that may from time to time be indirectly owned by them through mutual funds):



 
Name
Cable Co-op Position
AT&T Shares Owned
Ken Allen
board member
100.82
Roland Finston
board member
75
Carolyn Hillman
board member
250

 
 
 

Security Ownership Of Management

The following table sets forth as of November 1, 1999, the number of Sustaining Shares and Preferred Shares of Cable Co-op beneficially owned by each of its directors, each executive officer and all directors and executive officers as a group:


 

Name 
Sustaining Shares Beneficially

Owned

Percentage of  Sustaining 
Shares (1)
Preferred Shares Beneficially

Owned

Percentage of  1991A Preferred 
Shares (2)
Ken Allen 15
*
2.4 shares of 1991A Preferred
1.6%
Linda Buckel
--
N/A
2 shares of 1991A Preferred
1.3%
Bob Casey --
N/A
--
N/A
Seth Fearey 15
*
5 shares of 1987 Preferred
N/A
Roland Finston 15
*
15 shares of 1987 Preferred
N/A
Ted Glasser --
N/A
--
N/A
Carolyn Hillman --
N/A
--
N/A
Jim Kaubisch --
N/A
--
N/A
John Kelley 14.5
*
2 shares of 1991A Preferred
1.3%
Sue Lubais 15
*
2.4 shares of 1991A Preferred
1.6%
Jillian Manus-Salzman --
N/A
--
N/A
Bob Moss 15
*
2.2 shares of 1991A Preferred
1.4%
Tom Passell 15
*
4 shares of 1991A Preferred
2.6%
Mark Rogowsky --
N/A
--
N/A
Stan Smith 15
*
1 share of 1991A Preferred
*
Ron Kirkeeng --
N/A
--
N/A
All executive officers, directors as a group (16 persons) 119.5
*
20 shares of 1987 Preferred, 16 shares of 1991A Preferred 
10.4%

 
 

* Less than 1%

(1) Based on approximately 8,500 Sustaining Shares outstanding on November 9, 1999.

Based on 154 shares of 1991A Preferred Shares outstanding on November 1, 1999.

SVCC Board of Directors and Officers

As of the date of this information statement, Professor Ted Glasser and Seth Fearey are members of the board of directors of both Cable Co-op and SVCC. In addition, Peter Carson, a partner of the law firm of Cooley Godward llp, is also a member of the board of directors of SVCC. The Cooley Godward law firm has represented Cable Co-op as its corporate counsel for over a decade, and Mr. Carson is representing Cable Co-op in connection with the sale transaction with AT&T Cable. Further, Ron Kirkeeng, Chief Executive Officer and General Manager of Cable Co-op, is currently serving as an officer of SVCC. It is expected that Mr. Kirkeeng will resign as an officer of SVCC prior to the Closing.
 
 

Employment and Severance Agreements

Cable Co-op has a Change in Control Benefit Plan, which entitles its employees to severance payments upon a termination of employment following a change of control of Cable Co-op and a retention bonus following a change in control.

In connection with the sale of assets, all non-senior management employees will be offered employment with AT&T Cable, subject to routine background and drug tests. Additionally, pursuant to the Change in Control Benefit Plan, in the event of a change of control, non-senior management employees are entitled to a retention bonus of three  times their respective monthly salaries, payable 60 days after the change of control. If a non-senior management employee is involuntary terminated within one year from the change of control, such employee is entitled to a severance package consisting of: (i) a lump sum payment of three times his or her respective monthly salary and (ii) three months medical insurance coverage.

Pursuant to the Change in Control Benefit Plan, in the event of a change of control, senior management employees (other than Ron Kirkeeng, Chief Executive Officer and General Manager of Cable Co-op) are entitled to a retention bonus of three times their respective monthly salaries plus 1% of their respective annual base salary for each one hundred thousand dollars ($100,000) over forty-five million dollars ($45,000,000) for which Cable Co-op is sold in connection with a change of control, up to a maximum of nine times their respective monthly salaries.

If one of such senior management employees is involuntary terminated within one year from the change of control, such employee is entitled to a severance package consisting of: (i) a lump sum payment of nine times his or her respective monthly salary and (ii) nine months medical insurance coverage.

Pursuant to the letter of employment between Cable Co-op and Ron Kirkeeng, Chief Executive Officer and General Manager of Cable Co-op, Mr. Kirkeeng is entitled to receive a bonus up to a maximum of $60,000 consisting of a lump sum payment of $15,000 in the event of a change of control plus $2,500 for each full month between January 1, 1999 and the Closing.

The asset sale will constitute a change of control for the purposes of the Change in Control Benefit Plan. Cable Co-op will make payments to the employees in accordance with the terms of the Change in Control Benefit Plan. At the present time, the total amount expected to be payable under the Change in Control Benefit Plan is approximately $600,000.

The board of directors of Cable Co-op has also approved an additional retention bonus to be paid to all non-senior management employees employed by Cable Co-op as of the Closing in connection with the asset sale to AT&T Cable, consisting of approximately $300,000 to be divided among them pro rata based on their respective salaries.
 
 


MATERIAL FEDERAL INCOME TAX CONSEQUENCES

Cable Co-opís sale of its assets to AT&T Cable will be a taxable transaction. Cable Co-opís taxable gain will generally equal the difference between the total purchase price paid by AT&T Cable for Cable Co-opís assets and Cable Co-opís adjusted tax basis in those assets.

Cable Co-op has substantial federal net operating loss carry forwards which will reduce Cable Co-opís taxable gain on the sale.

In addition, Cable Co-op expects to pay patronage dividends to its Members, which are expected to be deductible by Cable Co-op for federal income tax purposes and reduce its taxable gain. Patronage dividends will generally not be taxable to the Cable Co-opís Members.
 
 

Tax matters can be complicated. You should consult your own tax advisers to fully understand the tax consequences to you, if any, of the sale of assets and the patronage dividend.

SELECTED FINANCIAL DATA OF CABLE CO-OP

Our selected historical financial data set forth below for the three years ended December 31, 1998 has been derived from our audited consolidated financial statements. The financial data for the nine-month period ended September 30, 1999 has been derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting of normal recurring accruals, which we consider necessary for a fair presentation of the financial position and the results of operations for this period. The financial data should be read in connection with our financial statements and related notes. (see "Incorporation of Certain Documents by Reference" at page 51)
 
Nine Months Ended September 30,
Year Ended December 31,
 
1999
1998
1997
1996
Selected Operating Statement Data:        
Revenue $11,502,247 $14,394,919 $13,265,175 $12,182,979
Expenses        
System programming and maintenance  $4,318,450 $5,773,400 $4,899,251 $4,312,236
Selling, general and administrative  $3,496,432 $3,180,657 $2,914,112 $2,840,272
Depreciation and amortization  $1,648,268 $2,120,776 $2,090,345 $2,079,693
Total Expenses 
$9,463,150 $11,074,833 $9,903,708 $9,232,201
Operating Income  $2,039,097 $3,320,086 $3,361,467 $2,950,778
Interest Expense  ($2,114,915) ($3,214,540) ($3,190,680) ($3,232,738)
Other expense, net    ($45,104) ($200,867) ($173,248)
Net Income (loss)  ($75,818) $60,442 ($30,080) ($455,208)
Selected Balance Sheet Data:        
Total current assets  $1,465,159 $1,876,298 $1,768,845 $1,927,644
Property, cable television systems and equipment  $32,899,047 $31,590,557 $30,409,099 $29,171,063
Cable distribution system $30,717,805 $29,666,819 $28,574,428 $27,426,476
Leasehold improvements $1,009,892 $1,002,292 $1,002,292 $991,692
Furniture, fixtures and equipment  $1,171,350 $921,446 $832,379 $752,895
Less accumulated amortization and depreciation  $22,210,490 $20,635,941 $18,605,924 $16,619,452
Net property, cable television systems and equipment  $10,688,557 $10,954,616 $11,803,175 $12,551,611
Net intangible assets  $156,670 $287,353 $579,214 $935,338
Deposits and other assets  $41,518 $35,318 $35,318 $35,318
Total Assets 
$12,351,904 $13,153,585 $14,186,552 15,449,911
Current liabilities, including current portion of long-term debt  $35,225,471 $5,715,040 $9,624,224 $6,268,054
Long-term debt, net of current portion  $0 $30,234,700 $27,380,115 $31,900,314
Total Liabilities 
$35,225,471 $35,949,740 $37,004,339 $38,182,058
Shareholders Deficit        
Membership shares 
$6,105 $6,105 $6,105 $6,105
Sustaining shares 
$168,910 $170,410 $175,210 $183,310
Mandatory Redeemable Preferred Stock* 
$4,933,607 $4,408,520 $3,552,586 $2,870,391
Accumulated Deficit 
($27,982,188) ($27,381,190) ($26,551,668) ($25,791,953)
Total Shareholdersí Deficit
($22,873,566) ($22,796,155) ($22,817,787) ($22,732,147)

* Based on estimated fixed redemption prices as reflected in Cable Co-opís audited financial statements for the years ended December 31, 1996-1998 and unaudited financial statements for the nine months ended September 30, 1999. (See "History of Cable Co-op Ė Preferred Shares" at page 32). Estimated actual redemption value at Closing is anticipated to be greater. (See "Financial Condition of Cable Co-op Ė Redemption Value and Dividends of Shares" at page 35)
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Cable Co-op derives its revenues primarily from monthly subscriber billings of subscribers of its basic broadcast, cable and premium channels. Cable Co-op also generates revenues from monthly billings associated with purchases of movies and events on a pay-per-view basis and from advertising and monthly billing of subscribers to its cable modem services.
 
 

Results of Operations for the Fiscal Years ended December 31, 1997 and 1998

Revenues. Cable Co-opís revenues consist primarily of subscription fees, advertising, installation and service fees and cable modem fees. Cable Co-opís revenues grew from approximately $13.3 million in 1997 to approximately $14.4 million in 1998. The increase in revenues was primarily attributable to an increase of $3.00 per month in the basic rate charged to customers by Cable Co-op beginning in October 1997 and growth in cable modem revenues.
 
 

Cable Modem Service Revenues. Cable modem service revenues consist of cable modem fees and set-up fees paid by subscribers. Cable modem service revenues increased from approximately $0.1 million in 1997 to approximately $0.7 million in 1998. The increase was primarily attributable to a reduction in the price of cable modem services and an increase in cable modem subscribers.
 
 

System Programming and Maintenance Expenses. System programming and maintenance expenses consist primarily of programming fees and expenses related to upkeep of the cable plant. System programming and maintenance expenses were approximately $4.9 million in 1997 and approximately $5.8 million in 1998. This increase was primarily attributable to increases in costs of programming, increases in the cost of labor, and increases in the price of maintenance materials.
 
 

Selling, General and Administrative Expenses. Selling expenses consist primarily of compensation and benefits costs paid to sales representatives, advertising and promotional costs. General and administrative expenses consist primarily of compensation and benefit cost for management, finance, legal, human resources, business development and administrative personnel, professional fees, facilities cost and other general corporate expenses. Selling, general and administrative expenses were approximately $2.9 million in 1997 and approximately $3.2 million in 1998. This increase was primarily attributable to increases in printing costs, employee compensation and benefits costs, rent and utility increases and higher costs for subscriber acquisition.
 
 

Operating Results. Operating losses were approximately $30,000 in 1997 and operating profits were approximately $60,000 in 1998. The increase in operating profits from 1997 to 1998 was primarily attributable to increases in basic cable rates, cable modem service revenues and in the number of basic cable television service subscribers.
 
 

Significant Events

In March 1999, the board of directors authorized management to execute a letter of intent with AT&T Cable and to begin negotiations of an asset purchase agreement. Cable Co-op and AT&T Cable entered into the asset purchase agreement on September 7, 1999.
 
 

Liquidity and Capital Resources

Cable Co-opís cash position is limited. Without the infusion of additional capital resources, management is uncertain whether Cable Co-op will have sufficient cash to support future business operations and to repay debt obligations to Bank of America totaling approximately $34.1 million that will mature July 31, 2000.

Capital spending by Cable Co-op is limited by outstanding bank loan agreements to $1,500,000 per fiscal year. Management estimates that to upgrade Cable Co-opís cable television network, it will need to obtain approximately $16 million in new working capital.
 
 

Year 2000

Cable Co-op has tested mission critical systems for Year 2000 compliance. Accounting systems have been upgraded, tested and found to be materially compliant. Control systems for addressable converters have been upgraded, tested and found to be materially compliant. Cable Co-opís representations in the asset purchase agreement regarding Year 2000 compliance are based in part upon representations and warranties regarding Year 2000 compliance by Cable Co-opís outside vendors.
 
 

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents are attached to and incorporated into this information statement:

the audited financial statements for Cable Co-op for its fiscal year ended December 31, 1998, dated March 2, 1999, are attached as Attachment A;
the asset purchase agreement, dated as of September 7, 1999, as amended as of November 24, 1999, between Cable Co-op and AT&T Cable (without exhibits or schedules thereto) is attached as Attachment B;
the form of noncompetition agreement, which is Exhibit F to the asset purchase agreement, is attached as Attachment  C;
the form of charitable pledge agreement for the benefit of SVCC, which is Exhibit K to the asset purchase agreement, is attached as Attachment  D; and
the fairness opinion of Kagan Media Appraisals, Inc. dated September 7, 1999 is attached as Attachment E.
Cable Co-op hereby also incorporates by reference into this information statement the following documents which are available to each Member for review during normal business hours (8:30 a.m. to 5:00 p.m. Monday through Friday, excluding holidays) at the offices of Cable Co-op located at 3200 Park Boulevard, Palo Alto, California: (a) the audited financial statements for Cable Co-op for its fiscal year ended December 31, 1997, dated March 11, 1998; (b) the audited financial statements for Cable Co-op for its fiscal year ended December 31, 1996, dated March 14, 1997; (c) the unaudited financial statements of Cable Co-op for the nine month period ended September 30, 1999; and (d) the whole of the exhibits and disclosure schedules to the asset purchase agreement.

Any person receiving a copy of this information statement may obtain, without charge, upon written or oral request, a copy of any of the documents incorporated by reference except for the disclosure schedules to the asset purchase agreement which, due to confidentiality concerns and their voluminous nature, must be reviewed on location at Cable Co-opís offices. Requests should be directed to Cable Co-op, 3200 Park Boulevard, Palo Alto, California 94306, Attention: Ron Kirkeeng, Chief Executive Officer and General Manager (telephone number 650-856-3553, ext. 3100). A copy will be mailed by first class mail or other equally prompt means within approximately two business days after receipt of such request.
 
 

WHERE YOU CAN FIND MORE INFORMATION

AT&T Cable, and its parent AT&T, are subject to the informational requirements of the Securities Exchange Act of 1934. Each company files reports, proxy statements and other information with the SEC. You may read and copy such reports, proxy statements and other information at the SECís Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website, located at http://www.sec.gov, which contains reports, proxy statements and other information regarding registrants that file electronically with the SEC.

You may read reports and other information relating to Cable Co-op generally on the companyís Internet website, located at http://www.cableco-op.com.
 
 

We have authorized no one to give you any information or to make any representation about the proposed sale transaction or our company that differs from the information contained in this information statement and the documents incorporated herein. Therefore, if anyone should give you any different information, you should not rely on it.

The information contained in this information statement speaks only as of the date indicated on the cover of this information statement unless the information specifically indicates that another date applies.